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.
While InTrade has the odds of Grexit by year-end at 40% (off from its 60% highs), when it comes to the professional money, it seems the odds are higher. In Citigroup's client survey of credit professionals, they find 62% of investors sure that Greece would not survive in the Eurozone until the end of next year. With 45% expecting Grexit this year and a further 17% expecting it by the end of next, that leaves a still remarkably hopeful 38% of managers who believe Greece will never leave. Are you a Grexican or a Grexican't?
Exit from the Euro would be very painful for Greece. Cut off from the ECB’s liquidity facilities, the Greek banking system would face collapse. And, as foreign lenders cut their credit lines to Greece and depositors struggled to extract their deposits ahead of the banks’ failure, the Greek financial system – and with it the Greek economy – would seize up. Given the costs of exit for both Greece and other Euro area countries, a powerful incentive exists for the two parties to reach a compromise that permits continued Greek membership of the Euro area but in the meantime the pan-European game of chicken continues and with each iteration of this game, the political cost to the two parties involved has increased. Goldman sees three key scenarios from this: Muddle Through (this is their 'Goldilocks' base case and implies continued Greek EMU membership, and ECB funding for Greek banks, but also continued pressure on Greece to reluctantly implement reforms while at the same time the remaining Eurozone countries very gradually deepen their policy integration) - which is modestly positive (though likely more range-bound) for equities and bonds with weak growth and Fed QE3 potentially pushing EURUSD up to 1.40; a Fast Exit (the least likely and most bearish scenario with Greece walking away unilaterally potentially knocking 2 percentage points of Euro-area GDP - even assuming substantial central bank counter-measures - and if the firewall were ineffective, a Euro-unraveling and an associated double-digit fall in Euro-area GDP); and a Slow Exit (Greece excluded once firewalls are in place - with pan-European deposit guarantees now front-and-center as opposed to simple banking bailouts to avoid the now-critical bank-run's contagion - which constitutes modest GDP impacts and compression in risk premia - and appears to what the market is discounting as likely). Simply put CB counter-measures are assumed to save any dramatic downside unless Greece surprises unilaterally.
All you need to read and some more.
A push by the ECB for the euro zone to stand behind banks suffering from bank runs is slowly gaining traction but the bloc has yet to build backstops to prevent, or cope with, a sudden collapse of confidence in banks and mass deposit withdrawals. Last week, European leaders discussed pan European means of supporting banks, measures the ECB hopes will include a bank resolution fund to deal with the fallout from the wind up or restructuring of a failing bank. But a wave of withdrawals by depositors - either for fear that their government is too weak to stand behind its banks or that their country will exit the euro and forcibly convert their savings into a vastly devalued national currency - would represent a crisis of completely new proportions. Greece’s exit and reversion to their national currency, the drachma, could precipitate electronic bank runs in other periphery nations. The risk is that even savers who may trust their bank as being safe, come to the conclusion that there is a risk that their euro deposits may, in the event of a sovereign crisis, be forcibly converted to drachmas, pesetas, liras, punts and escudos.
- JPMorgan dips into cookie jar to offset "London Whale" losses: firm has sold $25 billion to offset CIO losses (Reuters)
- Storied Law Firm Dewey Files Chapter 11 (WSJ)
- The European "Wire Run" - Southern Europeans wire cash to safer north (Reuters)
- Bankia Tapping Depositors for Bonds Leaves Spain on Bailout Hook (Bloomberg)
- Glitches halt new Goldman trade platform (FT) such as reporting prices and seeing trading spreads collapse?
- Japan, China To Launch Yen-Yuan Direct Trading June 1 (WSJ)
- Another fault line? Italy Quake Kills Nine in North of Country (Bloomberg) shortly following another Italian quake
- RIM Writedown Risked With $1 Billion Inventory (Bloomberg)
- China’s Wage Costs Threaten Foreign Investment, EU Chamber Says (Bloomberg)
- Dollar Scarce as Top-Quality Assets Shrink 42% (Bloomberg)
Despite closed US stock markets today, FaceBook stock still managed to decline, while Europe dipped yet once again on all the same fears: Greece, Spain, bank runs, contagion, etc. Shortly Europe will reopen, this time to be followed by the US stock market as well. While in turn will direct market participants' attention to a shortened week full of economic data, which as Goldman says, will likely shape the direction of markets for the near future. US payrolls and global PMI/ISM numbers are expected to show a mixed picture with some additional weakness already fully anticipated outside the US. On the other hand, consensus does expect a moderate improvement in most US numbers in the upcoming week, including labour market data and business surveys. As a reminder, should the Fed wish to ease policy at its regular June meeting, this Friday's NFP print will be the last chance for an aggressive data-driven push for more QE. As such to Zero Hedge it is far more likely that we will see a big disappointment in this week's consensus NFP print of +150,000. Otherwise the Fed and other central banks will have to scramble with an impromptu multi-trillion coordinated intervention a la November 30, 2011 as things in Europe spiral out of control over the next several weeks. Either way, risk volatility is most likely to spike in the coming days.
While America may be experiencing the occasional zombie apocalypse breakout, probably due to the absence of easily available edible iPads, Greek retailers are preparing for the retail version. "British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot. The planning, says Dixons chief Sebastian James, may look alarmist but it's good to be prepared." Why Dixons? "Europe's No 2 electrical retailer Dixons owns Greece's market leading but loss-making Kotsovolos chain, which has a 25-percent market share selling iPads and laptops as well as washing machines, televisions and air conditioning units." There we go: Bill Dudley's edible iPads. The question is what happens when this easily digestable piece of plastic is thoroughly looted after local rioters dispense with the "shutters" supposedly protecting their wares. What will be on the menu next? Sadly not booze: "Diageo, the world's biggest spirits group and the name behind Johnnie Walker whisky and Smirnoff vodka, has reacted by slashing its marketing spend in Greece, reducing stock levels and pulling cash quickly out of the country after it saw its Greek sales halve in the last three years to less than 100 million pounds." So: no food, no booze, no cheap 99 cent iPad aps: this is the way the world's most miserable monetary experiment ends.
With all of the talk of Greece leaving the Eurozone and forfeiting the Euro as its currency; what if it does not? That, my friends, is now the question. The current estimation of Greece’s GDP is $308.3 billion. All of the debt of Greece, direct, derivatives and guaranteed is $1.3 trillion giving the country an actual debt to GDP ratio of 421.67%. You may recall all of the talk, all of the pandering words spit out by the IMF and the European Union that the new austerity measures would take the Greek debt to 120%; all nonsensical and a nonfactual expression of a very fantastic and fairy tale imagination. If someone has actually stepped through the looking glass I suspect it is Christine Lagarde. Perhaps she is Alice’s granddaughter? In my estimation she must have eaten some of the cake because her reputation has dwindled as she and Greece fell down the rabbit’s hole.
A reminder of the sharp increase in demand for gold and silver, particularly store of wealth demand, in recent years was seen in the figures released by the China Nonferrous Metals Industry Association in Shanghai today. China’s gold consumption rose 33% to 761 tons in 2011 and China’s silver consumption rose 6.8% to 6,088 tons last year. China’s gold consumption rose 190 metric tons last year to 761 tons, Wang Shengbin, China Gold Association Vice Chairman, said in a speech in Shanghai as reported by Bloomberg. China’s jewelry consumption jumped 28 % to 456.7 tons last year, gold bar consumption surged 51% to 213.9 tons and gold coin consumption gained 25% to 20.8 tons, Wang said. China’s silver consumption, including industrial use, jewelry and coins, rose 6.8% to 6,088 metric tons last year, the vice chairman said. The amount shows a surplus given China’s output of 12,348 tons last year, which gained 6.3%, Wang said.
The US may be closed today but Europe sure is open. And while the general sentiment may be one of modest optimism in light of four highly meaningless Greek polls which fluctuate with a ferocious error rate on a daily basis, now showing New Democracy in the lead (and soon to show something totally different - after all Syriza had a 4 point leads as recently as Friday according to one of the polls), pushing equity futures higher, Spain has so far failed to benefit from either this transitory spike in optimism driven by record number of EUR shorts forced to cover (more below), with its yields touching a fresh record overnight, the 10 year hitting 6.50% and 450 bps in the spread to bunds, while re-re-nationalized Bankia, now with explicit ECB support plunging nearly 30% only to make up some of the losses and trade down 20% at last check. An earlier 2 year bond auction out of Italy did not help: the country raised the maximum €3.5 billion in zero coupon bonds, however the OID was high enough to send the yield soaring to 4.037% average compared to 3.355% just a month ago, while the Bid to Cover dropped from 1.80 to 1.66. In summary: Europe is walking on the edge right now, and the only thing preventing it from imploding this morning is some short covering as well as a furious statement out of Germany, which has to understand that its precious ECB is now directly funding nationalized banks: something Merkel and BUBA's Weidmann have said in the past is dealbreaker.
At François Hollande’s “growth” policies, Greece, the ECB, the Fed, Paul Krugman....
For all its rhetoric, the current situation in the Eurozone should be very familiar to most Americans: after all it is merely a Federalist organization just missing one key feature: Federalism. At least for now. Whether Europe will succeed in reversing 20 centuries of nationalist pride, a multitude of languages, religions, cultures, histories, and superficial solidarity and friendliness covering generations of broad-based enmity, blood feuds and hatred, which is precisely what will be required (because the monetary union was merely half of the game) remains to be seen. It is likely that the stock market will force this resolution sooner than most expect. Then the question becomes: will Europe truly become the United States of Europe. And if so, what would the current Greek travails look like if they were transplanted to the state of California: another place which may soon be in dire need of a bailout. Luckily Jefferies' David Zervos has performed just the thought experiment: "let's assume the European monetary system structure was in place in the US. And then imagine that a US "member state" were to head towards a bankruptcy or a restructuring of its debts - for example California." The results are below.