"The next stage in the crisis will be blatant blackmail....
With their refusal to accept money from the bailout fund to recapitalize their banks, the Spanish are not far from causing the entire system to explode. They clearly figure that the Germans will lose their nerve and agree to rehabilitate their banks for them without demanding any guarantee in return that things will take a lasting turn for the better."
Fed governors regurgitate it time and again to rationalize their policies.
Deflation has effectively been abolished by central banking. But is it sustainable? The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects. Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — we think they will soon be smashed again.
What would the weekend be without at least one rumor that Europe is on the verge of fixing everything, or failing that, planning for a master fix, OR failing that, planning for a master plan to fix everything. Sure enough, we just got the latter, which considering nobody really believes anything out of Europe anymore, especially not something that has not been signed, stamped and approved by Merkel herself, is rather ballsy. Nonetheless, one can't blame them for trying: "The chiefs of four European institutions are in the process of creating a master plan for the euro zone, the daily Die Welt reports Saturday, in an advance release of an article to be published Sunday. Suggestions targeting a fiscal, banking, and political union, as well as structural reforms, are being worked out..." Less than credible sources report that Spiderman towels (which are now trading at negative repo rates) and cross-rehypothecated kitchen sinks are also key components of all future "master plans" which sadly are absolutely meaningless since the signature of Europe's paymaster - the Bundesrepublik - is as usual lacking. Which is why, "the plan may well mean that the euro zone adopts measures not immediately accepted by the whole of the European Union, the article adds." So... European sub-union? Hardly strange is that just as this latest desperate attempt at distraction from the complete chaos in Europe (which will only find a resolution once XO crosses 1000 as we and Citi suggested two weeks ago and when the world is truly on the verge of the abyss), none other than George Soros has just started a 3-month countdown to European the European D(oom)-Day.
The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.
We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later). But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world.
All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).
Time To Load Up On Denmark CDS - Moody's Cuts Nine Danish Financial Institutions: Luxor Thesis In PlaySubmitted by Tyler Durden on 05/30/2012 16:35 -0400
Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."
The man that called nearly every big bank collapse of the decade says EU nations don't stand a frozen raindrop's chance in hell of bailing out banking systems literally multiples of domiciles' GDP. So now what???
Back in February, as part of the latest Greek bailout of European banks, we noted that the most subversive part of the German-led proposal was nothing short of a gold confiscation scheme. Today, courtesy of The Telegraph, we learn that Germany is quietly reminding the world that the stealthy, but voluntary, accumulation of gold is what it is all about. As part of a newed push for quasi-Federalism, whereby Germany would fund a "European Redemption Pact", in which Berlin would, in the form of Germany-backed joint bonds, be responsible for any sovereign debt over the 60% Maastrtich limit, but with a big catch. The catch is that "a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said. Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal. In other words: a perfectly legitimate, and fully voluntary scheme in which sovereign gold is pledged to a German "pawn broker" until such time as the joint bonds are extinguished, and if for some "unpredictable" reason, a country fails to meet its obligations, read defaults, all the pledged gold goes to Germany!
But why Gold? Why not spam. After all gold is selling off, spam is stable, and the dollar is soaring. Couldn't Germany merely demand that broke countries simply pledge all their USD reserves, and keep their worthless, stinking yellow metal? Apparently not.
All you need to read and some more.
One of the problems with the Hispanic Pandora's box unleashed by a now insolvent Bankia, which as we noted some time ago, is merely the Canary in the Coalmine, is that once the case study "example" of rewarding terminal failure is in the open, everyone else who happens to be insolvent also wants to give it a try. And in the case of Spain it quite literally may be "everyone else." But before we get there, we just get a rude awakening from The Telegraph's Ambrose Evans-Pritchard that just as the bailout party is getting started, Spain is officially out of bailout money: "where is the €23.5 billion for the Bankia rescue going to come from? The state's Fund for Orderly Bank Restructuring (FROB) is down to €5.3 billion."... And in an indication of just how surreal the modern financial world has become, none other than Bloomberg has just come out with an article titled "Spain Delays and Prays That Zombies Repay Debt." We can only surmise there was some rhetorical humor in this headline, because as the past weekend demonstrated, the best zombies are capable of, especially those high on Zombie Dust, or its functional equivalent in the modern financial system: monetary methadone, as first penned here in March 2009, is to bite someone else's face off with tragic consequences for all involved. What Bloomberg is certainly not joking about is that the financial zombies in Spain are now everywhere.
The person who has caused global stock markets so much consternation by daring to play chicken with Germany until the bitter end conducts a no holds barred interview with Germany's Spiegel. There is little love lost between the Syriza leader and the Germans, who were quite surprised to find a political leader who is willing to play blink with Germany, with the ECB, and the developed world until the very end, or June 17, whichever comes sooner. Tsipras' bottom line: "We're trying to convince our European partners that it's also in their interest to finally lift the austerity diktat." Alas, the European "partners", as evidenced by Lagarde's Guardian interview this weekend, have an image of Greece as a bunch of lazy tax evaders, who only seek to mooch on the German teat, resulting in 60% of Germans now pushing for Greece to be kicked out of the Euro, consequences be damned. Nothing new there. What is curious is Tsipras' answer to the question everyone wants to ask: "If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?" His response: " I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit...we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts." Yet the line that will draw the most ire out of the already exhausted German taxpaying public is the following:
"if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel."
Well, in the US, it is all Bush's fault; in Greece, it appears to be Merkel's.
Europe continues to fight the wrong battle, and continues to spread contagion risk. It is clear that Greece has had a solvency issue now for over 2 years. The ECB and Troika chose to treat it as a liquidity problem. Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity. That is scary because if they fail to see the problem correctly now, they will fail miserably. Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any "solution" from the EU must now address that risk, and it is not the same as solvency. Programs that can protect against solvency may do nothing for the redenomination risk. We keep playing with scenarios and find it hard to find out where a Greek exit doesn't result in a steep sharp decline in the market. We could go through more ideas of ECB intervention, but in the end most will have flaws. Dealing with currency conversion risk is huge. Dealing with the contagion risk that has been created by the EFSF is huge. Will Europe force Greece out thinking they have a plan; that fails miserably and sparks the miserable series of consequences we’ve outlined? Sadly, yes.
In twenty or thrity years, I expect future monetary historians looking back on this period of history to frequently misquote Ernest Hemingway:
How did the dollar die? First it died slowly — then all at once.
The slow death began with the dollar’s birth as a global reserve currency. America was creditor and manufacturer to the world, and the capitalist superpower. People around the globe transacted overwhelmingly in dollars. Above all else, people needed dollars to conduct trade, and they were willing to pay richly for them, and for dollar-denominated debt