European Central Bank

Yesterday's "leak" of Draghi's comments that it is not monetization if just the tip only bonds with a maturity of 3 years or less are monetized, aka, legitimate monetization does not cause inflation was so horribly handled that the ECB huffed and puffed in a desperate attempt to appear angry, even though it was absolutely delighted that it had even more ammo in its war against Germany. Today, the leakage continues only this time nobody cares that Draghi's desperation is hitting the headlines left and right. As a result, Draghi literally pulled a carbon copy of Hank Paulson, and while he did not have a three page term sheet in hand, threatened that the Euro would end unless he was allowed to monetize short-term bonds. Here's looking at your Germany. From Bloomberg: "European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival. Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union."

Oh, and France just nationalized its second largest mortgage lender. But don’t worry, the EU Crisis is definitely contained and Draghi and others have got everything under control. After all, when the US nationalized Fannie Mae and Freddie Mac in 2008 the financial crisis came to a screeching halt… didn’t it?

With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.

• Germans write off Greece, says poll (FT) - Only a quarter of Germans think Greece should stay in the eurozone
• As predicted here two months ago: ECB chief and Spanish PM on collision course (FT)
• Gold Wagers Jump To 5-Month High As Fed Spurs Rally (Bloomberg)
• Euro zone factories faltering as core crumbles (Reuters)
• Those who expected more China easing, beware: PBOC Has No Short Term Intention for Loose Money Policy (Financial Market News)
• French jobless tops three million, minister says (AFP)
• Spain Leads Europe’s $25 Billion Gamble Before ECB (Bloomberg)
• US investor is Ireland’s biggest creditor (FT)
• Draghi May See Silver Lining In Disappointing Investors (Bloomberg)
• China's steel traders expose banks' bad debts (Reuters)
• NY probes private equity tax strategy  (FT)

Several days ago we reported that Spanish financial institutions suffered the largest deposit outflow on record in the month of July when a whopping EUR74 billion, or 5% of the country's entire asset base, picked up and left, the bulk of it most likely taking the well-known path of least resistance to the safety of Swiss and German bank vaults. We showed how this looks visually, and as the chart below confirms it can be summarized in one word only: waterfall. And while in isolation this news was bad enough, a far more troubling implication arises when one considers that in Europe's financial Ice-9 world, in which the interbank market has been dead for over a year, and where the ECB is the shadow lender of only resort, providing funding via various repo channels to local banks to fund Spain's deficit by purchasing sovereign bonds in the primary market. To wit: since the entire financial system's liabilities (deposits) just declined by a record EUR74 in one month, since the consolidated balance sheet has to balance, either Spain's (thoroughly insolvent) banks had to generate EUR74 billion in shareholder equity in one month, i.e. profits - a prospect which is rather amusing considering Spain's banking system recently officially demanded a European bailout, or banks had to sell a like amount of assets in order to fund this outflow. Naturally, they chose the latter. The problem is that the security they sold is the one which only the banks have been buying recently in order to preserve the illusion that Spain is solvent. It was Spanish sovereign bonds.

• Romney Promises to 'Restore' U.S. (WSJ)
• Dirty Harry Makes Surprise Appearance (WSJ)
• It has always been about the gold: Time for eurozone to reach for the gold reserves? (FT)
• EU Plan Said to Give ECB Sole Power to Grant Bank Licenses (Bloomberg)
• More attempts to marginalize Germanty: Brussels pushes for wide ECB powers  (FT)
• Justice may be blind but it has geographic limits: Apple Loses Patent Lawsuit Against Samsung in Japan (BBG)
• ECB Said to Use Greek Myth for Security on New Euro Banknotes (Bloomberg)
• Alberta deficit set to triple on slumping oil prices (Globe and Mail)
• Reid's ties to China-Nevada solar plan draw ire (Reuters)
• Bernanke may hint at QE without boxing Fed in (Reuters)
• Berezovsky loses against Abramovich  (FT)
• Spain Considers Bankia Re-Capitalization Without EU Money (Bloomberg)

Confirming that the ECB soap opera must go on, German Bild reports overnight that Bundesbank head, and most vocal critic of Goldman's pro-inflationary European policy, conducted by the firm's Italian alum Mario Draghi, last week considered joining other such German luminaires as Axel Weber and Jurgen Stark in following the red Egress signs at the Bundesbank headquarters, ironically located in downtown Frankfurt. From Bild: "In recent weeks, Bundesbank President Jens Weidmann has repeatedly seriously considered his resignation." Citing unnamed sources, which is merely a polite way of denying the other side's just as credible "unnamed sources", Bild says Weidmann discussed the possible resignation with the Bundesbank's board. Bild condludes that Weidmann has decided against resignation for now because hwants to fight against the ECB’s bond-purchasing program at next week’s meeting, and that the German government has urged Weidmann to remain in post. In other words, just as has been expected all along Merkel may say this, or that, but in the end she will adamantly fight Goldman and its inflation spreading tentacles in Europe as long as she has to (with recent German data of accelerating inflation and unemployment merely helping her cause).

It's been a while since the ridiculous "China bails out Europe" rumor made the scene: in fact, the last time we can find with definitive confirmation was back in September of 2011, just before the bottom fell out of Europe, and when the FT, based on "anonymous sources" tripped over itself to report that "[insert European country] is in talks with China to buy bonds, assets." Sure enough, now that Merkel came, and saw, but hardly conquered Beijing, it is the turn of China's Wen Jiabao to add his 10 pips to the EURUSD rumormill: Reuters reports: "China is prepared to buy more EU government bonds amid a worsening European debt crisis that is dragging on the world economy, Premier Wen Jiabao said, in the strongest sign of support for its biggest trading partner in months." Naturally, considering how often this rumor (re)appeared in the past it will be excusable if nobody but the dumbest vacuum tubes fall for it this time, especially considering that the Chinese economy itself is going down in flames faster than the October Iron Ore contract. And lest there be any confusion, China's commitment is about as definitive as a Best Buy LBO "preunderwritten" with a Jefferies highly confident letter: "China is willing, on condition of fully evaluating the risks, to continue to invest in the euro zone sovereign debt market, and strengthen communication and discussion with the European Union, the European Central Bank the IMF and other key countries to support the indebted euro zone countries in overcoming hardships," [Wen] said after meeting Merkel." Ah, conditional aid. The kind that gets Mario Monti to break out the petulant ex-Goldman child act and refuse to leave the Belgian catered dining room until the beggees succumb to his technocratic platitudes. Needless to say, we'll believe China's "continued" investment in Europe when we see it.

The first shot in the fingerboning wars (a key step up from mere jawboning) has barely been fired following Draghi's earlier OpEd in Zeit (posted here in its entirety), when the Bundesbank already had its response ready for print in the form of yet another interview with its head, Jens Weidmann, who says nothing new or unexpected, but merely emphasizes that no matter how loud the chatter, how empty the promises, or how hollow the bluffing, Germany's response continues to be, especially after today's higher than expected inflation across the country, 9, 9 and once again, 9. Perhaps the most notable part of the interview is Weidmann's comparison between the ECB and the Fed, and why one is allowed to monetize bonds, while the other shouldn't be: "The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe....When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks." Of course, when the wealth of the status quo is at risk, such trivialities as democracies are promptly brushed by the sideline...

• Hurricane Isaac Whips Storm Surge on Path to New Orleans (Bloomberg)
• Republicans Vow to Transform Obama’s U.S. With Low Tax, Freedom (Bloomberg)
• Little-known Ryan to take center-stage at Republican convention (Reuters)
• An $800 billion stimulus tempest in a teapot: China State Researcher: Local Govt Investment Plans Largely Symbolic (WSJ)
• China Says Payment Delays, Defaults May Worsen (Dow Jones)
• G-7 Countries Call for Increased Oil Output to Meet Demand (Bloomberg)
• Creeping Socialism: Clegg calls for emergency tax on rich (FT)
• United Airlines computer problem delays 200 flights (Chicago Sun Times)
• Paulson, Investors Avoid Fireworks Despite Brutal Run (Bloomberg)
• Occupy Sets Wall Street Tie-Up as Protesters Face Burnout (Bloomberg)
• The nostalgic grass is always greener: Serbia Joblessness Swells as Milosevic-Era Leaders Return (Bloomberg)

Over the weekend, we pointed out that the old mechanism for the People’s Bank of China to expand its balance sheet and create base money has been broken by new funds flow pattern, and it will sooner or later require some sort of large scale asset purchases programme a.k.a. quantitative easing to offset the impact of the broken mechanism (after other tools such as cutting RRR reach their limits). However, we also mentioned that as the private sector is currently quite overstretched and will start the deleveraging process (if they have not already started), and that would render traditional monetary tools useless, and quantitative easing ineffective. And that would necessitate deficit spending at both local and central government levels. If we have read the social mood correctly that China might be more pro-austerity than pro-Keynesian, and if policymakers indeed share that view, then the consequence in the near term could be rather grim. The delay in stimulus as well as the small size of it so far has already done damage, if you like. The economy is already on course to a hard landing.

Greece’s climb towards solvency is steep and the underlying question remains; can the country return to growth and reduce its debt before it’s too late?

The data out from Spain this morning should be one serious wake-up call for anyone exposed to Europe. The fourth largest economy in the Eurozone is getting hammered and for anyone that has doubted that they will need a full scale bailout; think again. The numbers are a disaster. One year ago the Central Bank of Spain was borrowing $71.53 billion from the European Central Bank. In the last figures available, July, the Central Bank of Spain was borrowing $530.8 billion (an increase of 86.5%) from the ECB either directly or through the Target2 funding which impacts the Bundesbank and Germany quite directly. In other words Germany is now at a huge risk which is not just their 22% ownership of the ECB but a direct and full risk of impairment or default by Spain in the Target2 funding provided by the Bundesbank.

• Ringing endorsement: Lithuania to Adopt Euro When Europe Is Ready, Kubilius Says (Bloomberg)
• Credit Agricole net plunges 67% on losses in Greece and a writedown of its stake in Intesa Sanpaolo SpA (Bloomberg)
• Europe finally starting to smell the coffee: ECB Urging Weaker Basel Liquidity Rule on Crisis Concerns (Bloomberg)
• Japan Cuts Economic Assessment (Reuters)
• France’s Leclerc Stores to Sell Fuel at Cost, Chairman Says (Bloomberg)
• China Eyes Ways to Broaden Yuan’s Use (WSJ)
• Berlin and Paris forge union over crisis (FT)
• Brezhnev Bonds Haunt Putin as Investors Hunt $785 Billion (Bloomberg)
• Republicans showcase Romney as storm clouds convention (Reuters)
• ECB official seeks to ease bond fears (FT)
• German at European Central Bank at Odds With Country’s Policy Makers (NYT)

Yesterday, Spain was kind enough to advise those who track its economy, that things in 2010 and 2011 were in fact worse than had been reported, following an adjustment to both 2010 and 2011 GDP "historical" data. Today, we learn that Q2 data (also pending further downward adjustments), contracted by 0.4% sequentially in Q2, in line with expectations, but somehow, and we have to figure out the math on this, the drop on a Year over Year basis was far worse than expected, printing at -1.3% on expectations of just a -1.0% decline. However, while its economic collapse is well known by all, the surprise came in the deposits department which imploded by a whopping 5% in July, plunging to 1.509 trillion euros at end-July from 1.583 trillion in the previous month. Keep in mind this is after the June 29 European summit which supposedly fixed everything. Turns out it didn't, and the people are no longer stupid enough to believe anything Europe's pathological liar politicians spew.The good news: Greek deposits saw a dead cat bounce after collapsing by ridiculous amounts in the past several years: at this point anyone who puts their money in Greek banks must surely realize that the probability of getting even one cent back is equal odds with going to Vegas and at least having a good time while watching one's money burn.