Erste

Today (February 8) at 11:00 GMT, the ECB announced the LTRO funds returned to it through the (third) weekly put-back option. Banks repaid €5 bn, bringing the cumulative repayment to €146 bn or 14% of the initial take-up. The cumulative amount of LTRO cash left in the system now stands at €873 bn.

Turkey’s trade balance may turn on whether President Barack Obama vetoes more stringent sanctions against Iran after the U.S. Senate passed a measure targeting loopholes in gold exports to the Islamic Republic. Turkey’s gold trade with neighbouring Iran has helped shrink its trade deficit over the past year according to Bloomberg. Incredibly, precious metals accounted for about half of the almost $21 billion decline. That’s calmed investor concern over its current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994.  The U.S. Senate voted 94-0 on Nov. 30 to approve new sanctions against Iran, closing gaps from previous measures, including trade in precious metals. Obama, who opposes the move on the grounds it may undercut existing efforts to rein in the nation’s nuclear ambitions, signed an executive order in July restricting gold payments to Iranian state institutions. Turkey exported $11.9 billion of gold in the first 10 months of the year, according to the Ankara-based statistics agency’s website. A very large 85% of the shipments went to Iran and the United Arab Emirates. Iran is buying the gold with payments Turkey makes for natural gas it purchases in liras, Turkish Deputy Prime Minister Ali Babacan told a parliamentary committee in Ankara on Nov. 23.

On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio;  the renaissance of gold in finance;  "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.

Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal. From the report:  "The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side."

German lawmakers are to review Bundesbank controls of and management of Germany’s gold reserves.  Parliament’s Budget Committee will assess how the central bank manages its inventory of Germany’s gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.  The German Federal Audit Office has criticised the Bundesbank’s lax auditing and inventory controls regarding Germany’s sizeable gold reserves – 3,396.3 tonnes of gold or some 73.7% of Germany’s national foreign exchange reserves. There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany's central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves. The eurozone's central bank system is massively imbalanced after the ECB’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans. The concern is that were the eurozone to collapse, Bundesbank's losses could be half a trillion euros - more than one-and-a-half times the size of the Germany's annual budget. In that scenario, Germany’s national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.  The German lawmakers are following in the footsteps of US Presidential candidate Ron Paul who has long called for an audit of the US’ gold reserves. It is believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York.

The latest in a series of reports evaluating the future of the energy markets, especially in the context of the increasingly inevitable Iranian conflict, may just be the best and most comprehensive one (not just because it looks at the commodity from an "Austrian" angle). In 82 pages, Austrian Erste Group has extracted the key aspects and variables for the world oil market and come up with a simple conclusion: "nothing to spare." To wit: "We see the risks for the oil price heavily skewed to the upside. At the moment, the market is well supplied, but the smouldering crisis in the Persian Gulf could easily push oil prices to new all-time-highs should it escalate. We believe that new all-time-highs can be reached in H1, at which point we could see demand destruction setting in. We forecast an average oil price (Brent) of USD 123 per barrel between now and March 2013...The latently smouldering Iran crisis seems to be close to escalation. The most recent manoeuvres, ostentatious threats, sanctions, embargoes and the shadow war currently ongoing, have heated up the situation further. It seems we may soon see the last straw that breaks the camel's back. Even though Iran could probably only maintain a blockade of the Straits of Hormuz only for a very limited period of time, the consequences would still be dramatic. The oil price would definitely set new all-time-highs and could reach levels of up to USD 200." Enjoy those price dips while you can.

In what should come as a surprise to nobody, German banks have announced that they will accept the terms of the Greek PSI whose outcome is due on Thursday. Because as Reuters points out, German banks already have had the time and opportunity to park the bulk of their Greek exposure with the failed German bad bank, which is explicitly funded by the government (thus making the cost to the German government even higher): "While Greek sovereign debt owned by German lenders has a face value of roughly 15 billion euros ($20 billion), in most cases they have already written down that value in their books by about three quarters. FMS Wertmanagement, the biggest creditor with an exposure of nominally more than 8 billion euros, will accept the deal, a person close to the lender said on Monday. FMS, the bad bank set up to hold the toxic assets of bailed-out former bluechip lender Hypo Real Estate, is to formally decide on accepting the debt cut later this week, the person said." German banks... German banks... where else have we seen this today? Oh yes: "Die Welt said that more than half of the 800 lenders that tapped the ECB's 3Y LTRO last week were German, consisting mainly of small savings and cooperative banks." Thank you Jim Reid - so while Bundebank's Jens Weidmann huffs and puffs about the LTRO, it is his own banks are the biggest beneficiaries, in no small part to hedge against Greek exposure. But yes - at least following the absorption of tens of billions in intermediary capital via a variety of channels, German banks can now accept a 70%+ haircut, even if they continue to complain about it in the process: "Commerzbank, which had originally invested almost 3 billion euros in Greek sovereign bonds but has written down its exposure to 800 million, said last month it had little choice but to take part in the bond swap. At the time, chief executive Martin Blessing said: "The voluntariness (of the Greek debt swap) is about as voluntary as a confession at a Spanish inquisition trial."" The Spanish Inquisition appears to have won yet again.

Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a "positive." We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is "fade", at least until the next major crisis.

The good people at Knight put together a comprehensive list of potential ratings for banks in Europe after Moody's came out with their outlooks. We agree that banks getting shifted to non-investment grade is a big deal.  We saw the impact for Portugal once it got taken out of the indices, and we think for banks it will be an even bigger deal to lose that investment grade status.  Sure, they can still go to the LTRO, but it is hard to function as anything other than a zombie bank once you lose that rating...

Why anyone thinks that any one of a group of highly interlinked and interdependent countries heavily reliant on EU trade & toursim in a severe economic downturn facing harsh auterity measures may be doing well in the near to medium term is beyond me!

Take all you know about the formation of equity prices... and throw it out of the window, at least according to the following paper out of (fittingly Austrian) Erste Group, which applies Austrian theory to stock "valuation", by looking at a world in which the only determining factor for "fair value" is credit money creation. Indeed, the 2011 market, in which cross-asset correlations broke all records, and in which fundamentals were cremated once and for all, showed that the only thing that matters is who prints first, and more importantly, who frontruns said printing (it also means that most hedge fund analysts will soon be redundant). Here is Erste with a slightly less jaded view: "We come to the conclusion that it makes sense for equity investors to track monetary and, especially, debt developments closely. We believe that the changing dynamics of monetary as well as debt aggregates are often a good leading indicator for equity markets. Historic data shows that accelerating money and credit growth drives equity prices, while decelerating growth in the money and credit supply generally puts pressure on equity prices...Financial history shows that equity markets are ‘addicted’ to new money and credit creation. To keep rallies going, the equity markets need ever more fuel (faster rate of change in the money and credit supply). As soon as the rate of change is negative (decelerating money and credit supply) markets tend to become sluggish and lose momentum, even though in absolute terms the money and credit supply is still rising." And while this is not telling Zero Hedge regulars something they didn't know already, with the fiscal pathway of creating new money blocked in a (mock) austere world, the only other way to generate M1-X is by printing. Summary - much more currency debasement and devaluation ahead, only this time with a $100 base in WTI. Which most certainly means that very soon the world will need to find an extended source of cheap energy (read oil). And everyone knows what that will be...

While we will get into the nuances of why the Austrian AAA rating is the next to go (just after Hungary is downgraded in a matter of weeks if not days, following the country's request for IMF help earlier today) an event which we described ten days ago when the news that Austria's shaky rating was about to be downgraded first broke via the FTD and has since resulted in a major spike in Austrian credit spreads and bond yields, first we wanted to show readers the one ad which explains why the seeds of Austria's credit perfection collapse were sown back in 2007. In the ad, the second biggest Austrian bank, Raiffeisen Bank, explains precisely what its "selection" criteria were to get a loan in Hungary at the peak of the credit bubble (and yes, the ad is real). The ad explains the follow up news, which is namely that Austrian bank supervisors were today told to limit their lending to Eastern Europe. Unfortunately, the horses are out of the barn, and the biggest banks in Austria are about to be at the mercy of the markets, especially once the rating agencies do the inevitable and cur the country by at least 2 notches.

Remember Austria: that "other" AAA-rated country, whose megabank Erste recently made headlines for covering up its sovereign CDS exposure? It appears that AAA rating, which means Austria is still eligible to fund the EFSF, may soon be cut, putting even more pressure on Germany and, of course, France, and thus concerns for ratings downgrades there, to bear the brunt of what is an increasingly impossible bail out plan for Europe. It also means that the market will now be fearing not only a kneejerk reaction to the perpetual French downgrade terror threat courtesy of S&P and Moody's, but can now add not only Hungary and Belgium but also Austria to the list of countries due for some inverse rating agency love trim. As for the catalyst: "In two weeks, Moody's analysts to come to Vienna to assess the situation on the ground. Felderer considers it possible that Austria would put on negative outlook in this review." Alas, it appears that the Grinch is about to steal AAAustria's vaunted rating for Christmas, and push the direction of contagion into a whole new direction.

Before MF Global went bankrupt due to European sovereign exposure, the smart money was that Austria's Erste would be "it." After all, recall from our October 10 post "that Erste disclosed some major losses on its €5.2 billion CDS portfolio, consisting of "EUR 2.4 billion related to financial institution exposures, and EUR 2.8 billion related sovereign exposures". Why is this a surprise? UK-based financial advisory Autonomous explains: "The fact that Erste had a sovereign CDS portfolio which was not marked-to-market has left many investors scratching their heads. As a reminder the EBA stress test data showed Erste to have zero sovereign CDS exposure within its sovereign mix compared to the €2.8bn it now appears to have ‘fessed up’ to (taking a cumulative €460m hit). They also have €2.4bn exposure to banks via writing of CDS. The bulk is non-PIIGS but banks spreads have moved in the same manner as sovereigns (albeit wider and more volatile)." And there you have it: the bogeyman that everyone has been warning about, yet nobody has seen, CDS written (as in sold) in bulk against other sovereigns and other banks which up until now were only mythical, as they, to quote the EBA (which had Dexia as its safest bank) simply did not exist. Oh, they exist all right, and what they do is create a toxic spiral of accentuating losses whenever the risk situation deteriorates, creating positive feedback loops of ever increasing losses until the next Dexia appears... and then the next... and the next. Expect the market to latch on to this dramatic revelation like a rabid pitbull once the hopium high from today's EURUSD short covering squeeze wears off." Of course, the market ignored this loud warning bell, and next hting you know MF was under. This time it won't be so easy, especially since Moody's just announced it is about to downgrade Erste precisely for this reason. This move also explains why the market is suddenly rife with rumors of a broad Austria downgrade.

Yesterday was one of the strangest days in awhile - and that is from a long list of strange days. The most confusing part is that over the weekend Dexia went through some form of nationalization - the details of which and the need for which remain sketchy. Erste decided to take some big write-downs on CDS positions it had written, and Merkel and Sarkozy yet again held a joint press conference to announce that now they were really serious about saving everything and everyone. European stocks and credit had a relatively muted reaction. Stocks were up small. The Dax for example was drifting from slightly down to up less than 1%. SOVX was a touch wider and MAIN was a few bps tighter. Then the US came along and told Europe that they didn't realize how good they had. Yes, US equity players came along and told Europeans they didn't understand what had happened in their own backyard. The US stock market dragged Europe higher and tighter with it. Investors who were short IG17 or HY17 were hitting bids in MAIN, XOVER, and buying JNK, LQD, and HYG, along with SPX. Today, Europe was basically treading water and tried to do better at 7am as the US opened for business. Since then we have started to drift wider and lower. Part of this is going to be funds getting their positions squared away as they can now sell some IG17 and buy back their other hedges. Credit traders who are left scratching their heads about how things were "fixed" over the weekend are back and fading this rally.