In the early hours of yesterday morning European Union politicians struck a deal on legislation to create a single agency to handle failing banks and bail-ins in the Eurozone. It is important to realise that not just the EU but also the UK, the U.S., Canada, Australia, New Zealand and most G20 nations all have plans for bail-ins. Prepare accordingly ...
Why Mainstream Economists Like Krugman Are So WRONG and So DANGEROUS
With The White House proclaiming Russian stocks a "sell" today (and in the meantime Russian stocks and the Ruble strengthening), it is clear, as Citi's Steven Englander notes, that the Russia/Ukraine crisis may be the first major political conflict that is played out in international financial markets. The difference, Englander points out, between this and standard imposition of sanctions is that both sides have some options that can inflict damage on the other side; and this has significant implications for investors in the short- and medium-term.
- Lost Jet’s Path Seen as Altered via Computer (NYT)
- Fed Links Low Rates to “Persistent Headwinds” in Economy (Hilsenrath)
- Top German Court Clears Euro-Zone Bailout Fund (WSJ)
- U.S., EU set sanctions as Putin recognizes Crimea "sovereignty" (Reuters)
- Indian wealth effect: Sensex, Nifty hit life highs as domestic-focused firms rally (Reuters)
- China bond default has positive effect on local government groups (FT) - unless it's negative
- Russia tensions risk higher gas prices (FT)
- China Home-Price Growth Slows in Big Cities on Tight Credit (BBG)
- ECB's Weidmann says German surpluses "here to stay" (Reuters)
- Microsoft Office for iPad (AAPL) to be introduced this month (The Verge)
A few days ago, copper prices and the Chinese stock market were roiled by speculation that another - the second in a row - Chinese bond default may be imminent, in the shape of Baoding Tianwei Baobian Electric (TBE) a maker of electrical equipment and solar panels, whose bonds and stock were suspended from trading a week ago after reporting massive losses. A few days later, TBE "promised" not to default when its next interest payment is due in July (although how the insolvent company can see that far into the future is just a little confusing). And yet the market shrugged and contrary to its recent idiotic euphoria to surge on even the tiniest of non-horrible news, barely saw a rise. Today we may know the reason: overnight Bloomberg reports that second Chinese corporate bond default may be imminent after the collapse and arrest of the largest shareholder of closely held Chinese real estate developer Zhejiang Xingrun Real Estate Co, which just happens to be saddled with 3.5 billion yuan ($566.6 million) of debt.
German banks are not heavily exposed to the Ukraine. Germany’s main vulnerability is natural gas.
While the sight of Russian flags, pro-Russian troops, and Russian navy ships in Crimea is now a day-to-day thing; this morning brings a new normal for the eastern Ukraine region - long lines at bank ATMs as the bank runs have begun. We noted last night the dreaded inversion of Ukraine's yield curve, the greater-than-50% yields on 3-month Ukraine government debt, and the pressures on local bank debt maturities as the ability to garner dollars cost-effectively was becoming a problem but on the heels of concerns by the head of the central bank that moving cash in Crimea was difficult, ATM withdrawal limits have been cut. People in long ATM lines are reported to be concerned because "banks are closing" but it is Deutsche Bank's comments this morning that raised many an eyebrow as they suggest that Ukraine's debt is pricing in a "burden-sharing" haircut for bondholders (which as we have seen in the past - in Cyprus - can quickly ripple up the capital structure and become a depositor haircut).
"Europe faces 25 years of Japan-style stagnation," warns George Soros in this brief Bloomberg TV interview, adding that without deeper integration, "it’s an incomplete association of nations and it may not survive." While claiming that the financial crisis may be over they now "face a political crisis," with the voluntary association cracking due to the creditors (Germany) being in charge. However, he hopes "Ukraine is a wake-up call to Europe, because Russia has emerged as a rival to the European Union." Putin, Soros worries, "has a very different idea of what a society should be like... he has a blind spot - he believes people can be manipulated and cannot resist." That's not the case according to Soros, who exclaims "people do believe in freedom."
At the onset of the derivatives collapse in 2007/2008 it would have been easy to assume that most of America was receiving a valuable education in normalcy bias. As much as we are for people waking up to the nature of the crisis, there comes a point when those who are going to figure it out will figure it out, and the rest are essentially hopeless. The cultism surrounding the U.S. economy and the U.S. dollar is truly mind boggling, and by “cultism” we mean a blind faith in the fiat currency mechanism that goes beyond all logic, reason and evidence.
President Barack Obama has recently released his budget in which he calls for an “end of austerity.” This is an amazing statement from a president whose government has spent the highest percentage of GDP in history and added more to the national debt than all past presidents combined. What must he mean by austerity? The president’s rejection of austerity represents the Keynesian view which completely rejects austerity in favor of the “borrow and spend” — increase aggregate demand — approach to recession. What he really is rejecting is the infinitesimal cutbacks in the rate of spending increases and the political roadblocks to new spending programs. President Obama and Congress should get busy doing what is best for the economy and the American public instead of enriching themselves and those who feed at the public trough.
Wall Street can clean up junk well enough, but it can't make it go away.
Two years ago, the mega law firm Dewey and LeBeouf shocked the legal world when it announced, out of the blue, it would be filing for bankruptcy following an exodus of employees as the money had run out. However, as usually happens in cases like these, it was not just gross incompetence that was at fault: one must usually add major act criminality to explain such a rapid fall from grace. Such was the case in the Dewey bankruptcy too. Moments ago former top executives from bankrupt U.S. law firm Dewey & LeBoeuf were criminally charged for "cooking the books" at the once prestigious firm and defrauding investors and lenders. So for those curious, here is how a law firm - and here we can only assume Dewey is hardly alone - can cook the books for 4 years thinking it can get away with it.
The move towards "bail-ins" and away from government "bailouts" continues to evolve and yesterday credit rating agency, Standard and Poor's (S&P) warned that this could lead to credit ratings for European banks being slashed by one or two notches. It is important that one owns physical coins and bars, legally in your name, outside the banking system. Paper or electronic forms of gold investment should be avoided as they could be subject to bail-ins.
- High Stakes Limit Bid to Cow Putin (WSJ)
- Russia says can't control Crimea troops ahead of U.S. talks (Reuters)
- Crimea Crisis Haunted by Ghosts of Bungled World War I Diplomacy (BBG)
- Putin’s Ukraine Gambit Hurts Economy as Allies Lose Billions (BBG)
- Germany Says It Provided Equipment and Training to Ukraine's Riot Police (WSJ)
- China signals focus on reforms and leaner, cleaner growth (Reuters)
- China Shares in Hong Kong Decline Amid Default Concern (BBG)
- Beijing Signals New Worry on Growth (WSJ)
While everyone was focusing on the threat of tumbling debt dominoes in China's shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate - as well as shadow banking - bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.