The Plight Of Europe's Banking Sector, Its €650 Billion State Guarantee, And The "Urgent Need" To RecapitalizeSubmitted by Tyler Durden on 06/15/2013 12:37 -0400
Since the topic of quantifying how big the sovereign assistance to assorted banks - both in Europe and the US (which Bloomberg calculated at $83 billion per year) - has become a daily talking point, we are happy to read that Harald Benink and Harry Huizinga have reached the same conclusion as us in their VOX analysis, and further have shown that in Europe the implicit banking sector guarantee by the state is a whopping €650 billion. "Europe has postponed the recapitalisation of its banking sector for far too long. And, without such a recapitalisation, the danger is that economic stagnation will continue for a long period, thereby putting Europe on a course towards Japanese-style inertia and the proliferation of zombie banks... Banks are already saddled with ample unrecognised losses on their assets, estimated by many observers to be at least several hundreds of billions of euros and mirrored by low share price valuations, and an additional loss of their present funding advantage will be crippling."
This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, “serve as a model for dealing with future banking crises.”1 Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as ‘the template’; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits.
Nothing like the smell of a fresh Eurozone (thank you Greece!) crisis in the air, to remind everyone that in an insolvent world, where every counterparty is suddenly once again suspect (and collateral-free), there is only one asset class that has no counterparty risk (although the distinction between paper and physical gold is still a far too complicated lesson for most) - gold.
Five Eurozone countries now have loans for half a trillion Euros. These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. None of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public. There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors.
What assets will the core/Empire protect? Those of the core. What will be sacrificed? The periphery.
The lack of a centralized constitutional and monetary union has led to several years of inaction in the process of unification of the Euro-zone. While it was a "grand experiement" to run the Euro-zone under a single currency the underlying structure to make it effective long term was never achieved. There are currently many promises that have been made to the financial system by the ECB. The question is whether or not they can ultimately "cash the check." While we do not have certain answers as to the where, the who or the when - we are fairly confident that it will be sooner than many currently imagine. We do believe that the ECB will be able to skirt by the ratification of the ESM this coming week and get some limited funding into place, however, we still believe the bigger problem comes at the end of summer when the German voters begin to voice their concerns - after all it is their money that is being wasted.
"A brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed”
Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes. erhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar.
Looks like the sun has gone behind the clouds in China for a bit! Not only are the solar panels creating friction between China and the EU, but now it turns out that last month saw Chinese export growth unexpectedly decrease.
The uncertainty about when the Fed will begin tapering its programme of asset purchases has increased volatility, both pushing and pulling on global financial markets. “at this juncture, the markets are more concerned about tapering than about weak [US and global] growth,” says MIG Bank’s Chief Economist, Luciano Jannelli.
In November, NYU Professor Nouriel Roubini stated, “gold at $1,500 is utter nonsense.” In less than two years, gold was above $1,900. This week, the mad professor is back with his swiss-cheese logic and anti-gold rants.
The fact of the matter is, QE policies are really not so different from how central banks functioned back in the “old-normal” days of the earlier 2000s. They still just bought an asset and paid for it by increasing the money supply. One critical difference is that in order to increase the money supply by as much as they did, the central banks of the world had to change the scope of assets they were willing to buy. Herein lays the rub. By expanding its range of acceptable assets, the Fed created a market for these assets that did not exist. As a result it maintained their prices above which the market deemed necessary to clear – an essential occurrence in market economies. Instead, by expanding its asset purchases through quantitative easing policies, the effects we see are unreasonable prices among some financial assets, and a housing sector unable to sell its unsold inventory.
Another day, another sell off in Japan. The Nikkei index closed down 0.9%, just off its lows and less than 1% away from officially entering a bear market, but not before another vomit-inducing volatile session, which saw the high to low swing at nearly 400 points. Hopes that a USDJPY short-covering squeeze would push the Nikkei, and thus the S&P futures higher did not materialize. And while the weakness in Japan is well-known and tracked by all, what may come as a surprise is that the Chinese equities are down for the 6th consecutive session marking the longest declining run in a year. Elsewhere in macro land, the Aussie Dollar continues to get pounded on China derivative weakness, tumbling to multi-year lows of just above 94 as Druckenmiller, who called the AUDUSD short nearly a month ago at parity shows he still has it.
It never ceases to amaze that we vote people into positions. Those people that we have voted in elect in turn (or just go ahead and appoint without an election, making it all look very transparent) other people who are not as important but who will have the possibility of choosing (apparently in an “open, merit-based, and transparent manner”) someone who will be more important than they are, but less important than the first person that is in the voting/appointment chain.
The topic of the IMF's idiocy - unquestioned here following years and years and years of absolutely horrific forecasts, not to mention charts like this one courtesy of the Troika, of whom the IMF is a proud member has been widely covered in the past. However, while in the past we have attributed to stupidity all the faults of the Angela Mozilla Christine Lagarde-headed organization, we never had the factual backing to also invoke malice, lies and manipulation. Now, we can.