Most Headlines Now Show French Bank Run Has Started, And It's Happening Precisely As Our Research Anticipated

Roughly two quarters ago, I warned subscribers that markets were overlooking a distinct concentration of risk in France. Interestingly enough, many believed France to be a stalwart, alongside fellow ECB boss Germany, as one half of the strongest economic duo in the EU. Our take was that France's exposure to Italy (and the other PIIGS states) through its highly leveraged and funding mismatched banking system was a house of cards waiting to happen. I also asserted that Italy was nowhere near as strong a credit as the media and the sell side has made it out to be. As a quick recap:

Subscriber document (click here to subscribe) from March 2010 (exactly 1 1/2 years ago): [PDF] Italy public finances projection, as excerpted from page one...

Did I have a point? Well, a full year and a half later, as per Moody's by way of ZeroHedge...

As usual, a corrupt and pathetic Moody's continues to boldly not go where everyone else has gone before. Luckily, S&P, which had the balls to cut the US, has just done so to Europe's next domino, by downgrading Italy from A+ to A, outlook negative. Then again, this was pretty much telegraphed 100% earlier today as noted in "Italy Expected To Cut Growth Forecasts Further." Anyway, those incompetents from Moody's are next.

Full report:

Italy Unsolicited Ratings Lowered To 'A/A-1' On Weaker Growth Prospects, Uncertain Policy Environment; Outlook Negative

Overview

• Italy's net general government debt is the highest among 'A' rated sovereigns. We have revised our projections of Italy's net general government debt and now expect it to peak later and at a higher level than we previously anticipated.
• In our view, Italy's economic growth prospects are weakening and we expect that Italy's fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges.
• In our view, weaker economic growth performance will likely limit the effectiveness of Italy's revenue-led fiscal consolidation program.
• We have revised our base-case medium-term projections of real GDP growth to an annual average of 0.7% between 2011 to 2014, compared with our previous projection of 1.3% (see "Credit FAQ: Why We Revised The Outlook On Italy To Negative," published May 23, 2011). As part of our ratings analysis, we have also prepared upside and downside macroeconomic scenarios that could drive our future rating actions on Italy.
• We are lowering our long- and short-term unsolicited sovereign credit ratings on Italy to 'A/A-1' from 'A+/A-1+'.
• The negative outlook reflects our view of additional downside risks to public finances related to the trajectory of Italy's real and nominal GDP growth, and implementation risks of the government's fiscal consolidation program.

We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges.

 So, what does this have to do with French banks?

Well, if you subscribed, you'd already know, but I'll spill the beans anyway. On Wednesday, 03 August 2011 I digitally penned "France, As Most Susceptble To Contagion, Will See Its Banks Suffer". Long story, short - France and French banks are uniquely and solely situated to suffer from excessive leveraged exposure to both Greece AND Italy. What an enviable position. Italy CDS seemed to be underpriced for quite some time, but not anymore. The cat is apparently out of the bag. Interested parties should have acted back when the origianal BoomBustBlog Italian Finances report was released: March 2010 (exactly 1 1/2 years ago): Italy public finances projection. According to ZH, Italy 5 Year hit 520 earlier, a new all time record.

And the run on Banques de Francais continues???

As per the FT.com:

Siemens/ECB: move hits confidence: ...peers. It is, therefore, hard to fault Siemens, which has reportedly pulled more than...the bloc’s banks) at their peril. Siemens is said to have lodged up to €6bn – almost...chosen few with banking licences. And Siemens acted with particular foresight when...

 

Siemens shelters up to €6bn at ECB: Siemens withdrew more than half-a-billion euros...matter told the Financial Times. In total, Siemens has parked between €4bn ($5.4bn) and...to deposit cash directly with the ECB. Siemens’ move demonstrates the impact of the eurozone... By Daniel Schäfer in London and Chris Bryant and Ralph Atkins in Frankfurt...

Let it be known that Siemens claims the FT piece contained factual innacuracies. That doesn't necessarily preclude the inclusion of actual factual accuracies, does it? Siemens is an institutional counterparty to French banks. Remember how I said modern day bank runs will be conducted? As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

  The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable. A more important concern appears to be the threat of short-term liquidity and funding difficulties for European banks stemming from said haircuts. This is the one thing that holds the entire European banking sector hostage, yet it is also the one thing that the Europeans refuse to stress test for (twice), thus removing any remaining shred of credibility from European bank stress tests. As I have stated many time before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!

The biggest European banks receive an average of US$64bn funding through the U.S. money market, money market that is quite gun shy of bank collapse, and for good reason. Signs of excess stress perceived in the US combined with the conservative nature of US money market funds (post-Lehman debacle) may very well lead to a US led run on these banks. If the panic doesn’t stem from the US, it could come (or arguably is coming), from the other side of the pond. The Telegraph reports: UK banks abandon eurozone over Greek default fears 

UK banks have pulled billions of pounds of funding from the euro zone as fears grow about the impact of a “Lehman-style” event connected to a Greek default.

 Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to euro zone banks, raising the prospect of a new credit crunch for the European banking system.

Standard Chartered is understood to have withdrawn tens of billions of pounds from the euro zone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.

Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.

In its interim management statement, published in April, Barclays reported a wholesale exposure to Spain of £6.4bn, compared with £7.2bn last June, while its exposure to Italy has fallen by more than £100m.

One source said it was “inevitable” that British banks would look to minimise their potential losses in the event the euro zone crisis were to get worse. “Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.

Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.

Make no mistake - modern day bank runs are now caused by institutions!

Make no mistake! And just for those who cannot catch the hint... Reuters reports:

Bank of China halts FX swaps with some European banks

The European banks include French lenders Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA), and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said.

Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.

The sources declined to be identified because they were not authorized to speak with the media.

Contacted about this move by the Chinese banks, spokespeople for Societe Generale, UBS and BNP Paribas declined comment. Credit Agricole was not reachable for comment.

One of the sources said that Bank of China's decision may apply across its branches, including the onshore foreign exchange market.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

Remember, I gave the warning on French banks and BNP Paribas in particular back in July. BNP is down nearly 70% from that point!

I will continue this theme in my next post. All readers and subscribers should review he tBNP Paribas "Run On The Bank" models available for download, free of charge - http://t.co/SDPUuNSy. See for yourself if France's 2nd biggest bank needs capital!

Just wait until the market catches on to our American bank exposed to this mess. It'll make a much bigger and more interesting story than the French bank run theme, that's for sure. Subscribers, see:

Actionable Note on US Bank/ French Bank Run Contagion, then peruse this bank's latest quarterly analysis in our subscription content area. Be prepared!.

Then there's the next ZH headline: IMF Cuts Global Growth Outlook, Says Europe May Worsen Outlook

Flurry of headlines following an unscheduled IMF release:

• IMF CUTS GLOBAL GROWTH ESTIMATE, SAYS EUROPE MAY WORSEN OUTLOOK
• IMF SAYS DOWNSIDE RISKS ARE GROWING
• IMF SAYS ECB SHOULD CUT INTEREST RATES IF DEBT TENSIONS PERSIST
• IMF CUTS U.S. 2011 GROWTH ESTIMATE TO 1.5% VS 2.5% SEEN IN JUNE
• IMF CUTS U.S. 2012 GROWTH ESTIMATE TO 1.8% VS 2.7% SEEN IN JUNE
• IMF CUTS 2012 EURO-AREA GROWTH PREDICTION TO 1.1% VS 1.7%/JUNE
• IMF CUTS 2011 WORLD GROWTH FORECAST TO 4% FROM 4.3% IN JUNE
• IMF CUTS 2012 WORLD GROWTH FORECAST TO 4% FROM 4.5% IN JUNE
• IMF SAYS ECB MUST KEEP INTERVENING `STRONGLY' IN DEBT MARKETS
• IMF CUTS SPANISH GROWTH FORECAST FOR 2012 TO 1.1%

I say to myself, what the Fongoozess? Is there still anybody listening to the IMF forecasts. Let's walk though a BoomBustBlog classic as a refresher as to whether you should follow a blog or the IMF. As excerpted from Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

The IMF and the EU have been consistently and overtly optimistic from the very beginning of this crisis. Their numbers have been dramatically over the top on the super bright, this will end pretty, rosy scenario side - and that is after multiple revisions to the downside!!! We can visit the US concept of regulatory capture (see How Regulatory Capture Turns Doo Doo Deadly and Lehman Brothers Dies While Getting Away with Murder: Regulatory Capture at its Best) for the EU, but due to time constraints we will save that topic for a later date. To make matters even worse, the sovereign states have taken these dramatically optimistic and proven unrealistic projections and have made even more optimistic and dramatically unrealistic projections on top of those in order to create the illusion of a workable "austerity" plan when in reality there is no way in hell the stated and published plans will come anywhere near reducing the debts and deficits as advertised - No Way in Hell (Hades/Tartarus/Anao/Uffern/Peklo/Niffliehem - just to cover some of the Euro states caught fudging the numbers)!

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic.

image018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

image013.pngimage013.png

What about the UK?

I'm glad you asked. We just finished our UK analysis (subscribers, see UK Public Finances March 2010 2010-03-24 09:32:01 617.23 Kb), and the Greek theme has continued into the land of the Brits.

uk_economic_estimtes.pnguk_economic_estimtes.png

... and in terms of government balance over-optimism???

And what about Italy???

Again, we're glad you inquired. Subscribers should download Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as the Italian Banking Macro-Fundamental Discussion Note and the Spanish Banking Macro Discussion Note in anticipation of our upcoming Spain analysis, which should be a doozy!

This is Italy's presumption of economic growth used in their fiscal projections:

italian_real_gdp_growth.pngitalian_real_gdp_growth.png

image006.pngimage006.png

For those that don't subscribe, there is still a lot of nitty gritty that I made publicly available on Italy here: Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?

Those who wish to subscribe to BoomBustBlog research, analysis and opinion should click here! You can follow my public comments via the following avenues....

Reggie Middleton Boom Bust Blog

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Next up I will reveal some more juicy tidbits about BNP Paribas, another home run hit by BoomBustBlog subscribers who caught this one months in advance!As per ZeroHedge this morning:BNP Freefalling

Well, as expected, the Chinese news finally filtered through to the vacuum tubes. It took them a few hours... But it is finally there. BNP is down 7.3% at last check and tumbling. Comments from the IMF, which is always behind the curve, are not helping.

Relevant subscriber documents:

• BNP Exposures - Professional Subscriber Download Version
  BNP Exposures - Retail Subscriber Download Version
• BNP Exposures - Free Public Download Version
• Trading Opinion and Analysis 9-14-2011
• Trading Opinion and Analysis 9-7-2011
• French Bank Run Forensic Thoughts - Addendum and Update

Comments

[falak pema]

RM : how was your Max Keiser show? The french banks now down to their underwear?

[LeonardoFibonacci]

good stuff dude!  I use to work for BNP in Montreal but this outfit has changed drastically over the last 10 years.

[tempo]

Based on objective analysis, Reggie is correct. But the US/EU/China/India/Japan represents about 80% of world GDP and 100++% of military power. As long as the giants make the rules, there will be no run. There is an infinite supply of liquidity if the giants want it.

[max2205]

Weeeeeeeeeeeeeee

[511quad]

Vote up!
Vote down!-1

I am nearly done selling all my physical gold. I bought it years ago and will be done with it soon. I am also negative on GLD and some equities like AMZN (as of yesterday). HOWEVER I do believe that physical gold will do very well in the long run and plan to buy back in down the road. My thinking is that this is all an acute $ liquidity crisis right now as opposed to an immediate US solvency crisis.  

the FED is loaning a gazillion $ to European banks for 3 months because they have no $. And after 3 months they are supposed to pay us back in $ that they will not have because the sov bonds they have are in default and are not collatoralized.  However, the one asset that the Euro banks and their sovereigns can readily be converted into $ is gold.  Plus many a hedge fund are leveraged long with gold gains with serious losses on the rest of their portfolios. Thus if there is an unwind in Europe and hundreds of billions of $ come due from the FRX hedging (there is a MASSIVE position against the Euro), equity losses, defaults, CDOs, CDSs, etc. methinks that there will be a need for liquidity thus I am not long on anything. The thing with the current meltdown is that the magnitude has the potential to be WAY bigger than 2008 so I expect the downdraft to be very severe. If I am right I lock in some gold gains now, cash in some puts and if I am wrong and I will buy into gold at $2,500+ but who cares because in the end gold will be $5 - 10K/oz. Plus a 16% 15 treasury will be a really easy way to pay off a fixed 4.3% 30 year mortgage.  Flame away.......

[MsCreant]

I am considering doing something similar, but may not have the nerve to really do it (or is it that I don't have the nerve to not do it). Can't figure which one is my fear play.

[topcallingtroll]

Only one set of banks and one hegemon per planet. The French thought they could make up for the midget economy they have by having a small number of hugely concentrated over leveraged banks.

The usa banking system and fiat will still rule the world a long time. Last banking system to implode doesnt. It becomes the center of the universe. Bow to your masters, froggies!

[Smiddywesson]

Reggie, great work.  Once again, a touchdown.

However, there is a flag on the field for excessive caffein-induced raving and bold faced 20 pt. fonts.  :-)

[vamoose1]

HISTORY

    For 3 years naked short algos have owned the gold and silver stocks, shorting the stocks kaked by the hundreds of millions per issue.

    They are now utterly   fucked,  we  took their shit for 36 months of  blatant sanctioned market manipulation.

    Yesterday  Newmont new highed in an appalling market by announcingg a commodity based dividend policy, if,   eg,  gold trades   at  2500,  Newmonts dividend is 4. 70,  and the stock  is an easy quad.

    And two  hours ago  Hecla Silver  emulates with a 12 cent starter, with the same leverage to  silver, and the rest will follow,  so  this algo trade just met its waterloo. The rest will follow.

    I haave 45 years of history in this market,  there has never been a security,  where you  have a precious metals long with  dividend hedge, its utterly unprecedented, and there are billions of metal  shares short. Most naked.

    About ever decade the bell rings,   well,  cock  a fucking ear.

[newworldorder]

Watch your back Reggie and stay out of houses of ill repute, - like banks, government entities like the DOJ, SEC, CFTC, FED, Treasury, etc.

[New_Meat]

and high-priced hotel suites with the Chicago folks proposing a replacement in the wings.

[ZeroPoint]

So when do the plebs run en masse to the banks to try to get their euros out and get tear gassed instead?

It's not a bank run until someone gets trampeled or run over by an urban assault vehicle.

[Spirit Of Truth]

Surprised you are still "out there" telling the truth, Reggie.  There's banking authorities who deal with folk like yourself, and they are watching closely: http://www.youtube.com/watch?v=pjpXBrG8Xk0

[PulauHantu29]

Solid reporting...thank you!

[ceilidh_trail]

As an ex-fellow New Yorker, ya make me proud...

[The Limerick King]

An ode to a hero named Reg

Who offers his thoughts at the Hedge

What Power conceals

His genius reveals

We're quickly approaching the edge

[Mad Max]

Reggie - I like your posts, but you really blow your own horn WAY too much.  The above post might be a reasonable occasion for you to do an "as I predicted" post like this, but there's a lot of fatigue from how many of your posts have the same attitude.

[Savyindallas]

Blow away Reggie  - It's hard to be modest when you are usually right. The good guys need to toot their own horn  -the liars in the mainstream media certainly will not.

[AustriAnnie]

Just part of his style.  Some people can pull off cocky.

[Smiddywesson]

Max,

Without the promotional component, who is going to pay for all the Red Bull and Hot Pockets he consumes during the wee hours of the morning while dredging up all this interesting stuff?

You are truely mad, report yourself to the Great Humungous for disciplining.

[Mad Max]

You've got it backwards.  I discipline the Ayatollah of Rock and Rolla.  You need to study the sacred texts more closely.

[11b40]

Don't listen to him, Reggie.  He's Mad!

You just keep right on being Reggie.

....and thanks, again, for all you do and all you share.

[SilverRhino]

Well done. 

Bank of China halts FX swaps with some European banks  : That's gotta sting a bit.  :)

[Ahmeexnal]

Excellent again, Mr. Middleton!

[Richard Whitney]

Reggie, you are consistently amazing!

[JW n FL]

A Warm Up! before Reggie goes on with Max today!

http://www.youtube.com/watch?v=5Bf5Frx1lZk

Uploaded by RussiaToday on Aug 12, 2010

This week Max Keiser and co-host Stacy Herbert look at Tier Terra and future crimes. In the second half of the show, Max talks to former banking regulator William K. Black about rackets and fraud in the financial sector.

[Robslob]

This is BULLISH!

[Jumbotron]

Reggie's a brick.....

HOOUUSSE !!!

He's mighty mighty...

Just lettin' all hang out !

[JW n FL]

Score

1 - Out Sourcing to India

0 - Robbery in plain sight

or??

wait..

1 - Robbery in Plain Sight

0 - Out Sourcing to India (for stopping the on going Robbery)  

[Hook Line and S...]

Given the opportunity, I'd slide through your open window and steal your crystal ball.

[Dick Darlington]

Thanks for the analysis Reggie. You should dig into the french housing market bubble and the main instruments the banks are using to finance it ie. covered bonds under different legislations. Would love to see your take on the subject. Keep up the good work.

[Tekrunner]

I'm really not sure the French housing market is in a bubble. Well, maybe in Paris, where prices are just crazy, but even then... there is an actual dearth of houses and apartments pushing prices higher.

[StychoKiller]

Once large-scale rioting commences, large cities such as Paris will no longer be the place to live...

http://www.youtube.com/watch?v=6butfe1f9Hg&feature=youtu.be

[Coldfire]

Another stellar call, Reggie. You rock.

[the grateful un...]

The biggest European banks receive an average of US$64bn funding through the U.S. money market, money market that is quite gun shy of bank collapse, and for good reason.

now i get it, M2 has been exploding, why? The Bernank has been parking funds in MM accounts. I never had been able to figure out how or why the Japanese BOJ did this during their lost decade(s), but assumed that if we are in Japanese style deflation then it follows. In this case the MM is in Euro Banks, US taxpayer money I might add, and certainly not as likely to go rabbit on them as mere institutional money. Take as evidence of what I suggest, the history of the 2008 crash. Where did it first manifest itself? In the NAV of MM funds which were constructed from other than UST investments.

We're shoring up these banks, with UST money, although their risk is a great deal higher than it ought to be. Ouch

[csmith]

QEII was all about supporting European banks.

70% of the money created in QEII ended up on the balance sheets of European banks.

[Reggie Middleton]

Hmmmm. Young Grasshopper!

[StychoKiller]

It's obvious what your problem is:  You simply don't "care enough" and/or don't believe hard enough that this is the best of all possible rosy scenarios!  C'mon big guy, dust off those rose-colored shades -- the IMF likes you, after all. :>D