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On Contagion: How The Rest Of The World Will Suffer
Excess debt is causing global banking problems. Euro-Area debt is estimated to be 443% of GDP, third highest in the world, far above the US at 355% and completely unmanageable in a currency union burdened with a one-size-fits-none monetary policy and huge sovereign debt problems. Insolvent European banks sold many CDS, so counterparty risk is huge. A Greek or any other significant default will precipitate a European banking crisis in the foreseeable future. Markets are already speculating on Portuguese negotiations for haircuts and Ireland can’t be far behind, as it elected the current government to negotiate haircuts on private holdings of bank debt. The Lehman default occurred 13 months after the US TED spread crossed 100 basis points. The European equivalent crossed 100 basis points in September 2011, so its banking crisis would occur this autumn if a year or so is a normal incubation period.
Contagion to US (and global) banking systems is inevitable given counterparty risks, debt loads (and refi needs), and capital requirements (no matter how well hidden by MtM math), no matter how many times we are told net exposure is small or non-current loans are reserved.
Lombard Street Research: Contagion to the US
US interbank markets have also been showing the strain of problems in the EA, with the 3-month LIBOR-OIS spread tracking the upward trend in the cost of EA interbank lending (see chart 9).
US banks’ exposure to the EA through lending to governments and exposures to financial and nonfinancial institutions is significant. According to data from the BIS, US banks’ total claims on Club Med banks, plus Germany and France, and the UK banking system, comprise around 80% of US banks’ total equity (see chart 10). Bank claims on government and the private sector are reasonably transparent in the UK, but not in the US – so concerns over EA exposure are likely to resurface this year.
In addition to this exposure to the EA crisis, US banks must work through the remaining legacy of the domestically-generated subprime crisis. Falling loan loss provisions (see chart 11) have delivered practically all the sector’s net operating revenue growth over the last two years. Pre-provision net operating revenue has been flat.
Noncurrent real estate loans in the US remain elevated, at 6.5% of the total – compared with only 0.7% in the 2005-06 period – and stand to rise again if the US economy deteriorates in 2012. Banks’ quarterly rate of provisioning looks inadequate to cope with even current levels of noncurrent loans. Quarterly provisions are currently around one-third of their 2008 average, but noncurrent loans are down by only 20% since their Q1 2010 peak. Provisions were only $18.6 billion in Q3 2011, their lowest since 2007 Q3. Noncurrent loans would have to fall quite sharply to justify this level of provisioning, when in fact the opposite is the more likely outcome. Raising the loan loss allowance to 100% of total noncurrent loans would require an extra $112 billion of provisions, in addition to the amount needed to cope with current write-offs. Real estate net charge-offs are currently around $14 billion per quarter.
The banks are ill placed to absorb increased loan loss provisions and the subsequent pressure on overall profitability. 14% of US banks are still reporting negative quarterly net income – down from a peak of 35% in Q4 2009, but double the average of 7.5% in 2005-06. At the sector level, net interest income growth in particular has ground to a halt, falling on an annual basis for the last three quarters – the longest period of contraction on record (see chart 12). Indeed, the last time annual net income growth contracted outright was in Q4 1989, and that was only for one quarter.
Downward pressure on longer term yields from slow growth, low inflation and Fed interventions will continue to erode banks’ ability to generate net interest income growth. In addition, the Congressional Budget Office predicts the Treasury’s tax take will rise by an average of 1½ percentage points a year from fiscal 2011 to fiscal 2014, so growth will be minimal and defaults will rise.
US banks are in a poor position to withstand a European banking crisis. They appear well capitalised with assets 11.9 times net tangible equity. However, they need an estimated $400-$600 billion of capital to absorb the cost of marking their toxic assets to market, which raises their effective leverage to 19 to 28 times – too high to weather the recession and European banking crisis without significant failures. In addition, Professor Robert Reich of the University of California at Berkeley wrote that Wall Street’s total exposure to the EA totals about $2.7 trillion, not far short of triple the equity of American banks.
Global contagion
Global financial assets were only slightly greater than global GDP in 1980 but 3 3/8 times greater in 2010 with the increase in debt outstanding rising from a fraction of GDP to 2½ times accounting for the rise. The collapse of the credit bubble shows Ponzi debt had pervaded the credit structure, so deleveraging and a drop in asset prices to levels that incomes and production could sustain was necessary. Governments immediately engaged in an all-out battle to prevent this necessary correction. As a result, the People’s Bank of China balance sheet has expanded by an average rate of 43% a year over the last five years, the Fed’s by about one-third, the Bank of England’s by over one-fifth and the ECB’s by one-sixth. Printing money on his unheard of scale reversed a significant part of the 2008-09 losses in asset markets – but the cost has been the rising insolvency of governments and banks.
Insolvency will keep dragging the EA economy down until sovereign and bank balance sheets are repaired. Eliminating the Ponzi debt without fracturing the entire credit system is impossible. The next section will offer some ways of minimizing the damage and preventing recurrences but deleveraging is absolutely essential to restore optimum growth. Total industrial production in the OECD remains below the pre Great Recession peak and widespread falling real incomes show the lower income brackets are in a depression. Other developed nations are in less dire straits than the EA, but slow economic growth and deteriorating sovereign balance sheets are pushing many of them in the same direction. Banking problems are becoming more acute and Europe is the canary. The ECB didn’t prevent broad money from beginning to fall – even though it increased its balance sheet by almost half in the last seven months of 2011. The same is likely to happen in other developed nations.
The contagion will likely show up as a risk premium in the credit markets initially as we suggest the recent underperformance of both US and European bank credit relative to stocks is a canary to keep an eye on.
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thx
you have link to original anywhere?
I'm working on a new project and I need your help;
Protocols of the Learned Elders of Zero Hedge
1: When running for public office, Make your obligatory Israel ass licking statement over the top, but be sure not to mean a word you say.
Make sure it's the 1st thing you post on your candidate website.
Make it over the top something like BO did this past weekend at AIPAC but don't give away that you don't mean it.
Everyone knows the Zionist Jews own all the tv news stations and entertainment industry and will SheenBart your ass if you don't.
2:?
I'm guessing these are protocols for successfully running for office? If so,
2: Rant and rave about the Constitution, how awesome it is, how you will end all the unconstitutional stuff if you are elected... and then when you are elected, do the opposite.
3: Just lie your ass off about everything. Tell every group exactly what they want to hear. Make promises to everybody. When you are elected, those peons won't be able to kick you out of office, so none of that shit you said matters.
"Everyone knows the Zionist Jews own all the tv news stations and entertainment industry and will SheenBart your ass if you don't."
DUDE.... That's like SO 1980's. Do try to keep current.
TODAY'S major media is owned and run by GAYS. 58% of NBC News NY staffers are Bi, gay, lesbian, or transgendered. The Village Voice doesn't call the New York Times Editorial Board "The Gay Mafia" for nothing, every single one them is gay, and RADICAL gays. The locals don't call CNN Plaza "Queer Sqare" for nothing. You cannot get hired in most major media today without being gay, or admitting to being bi, as the FIRST requirement.
Wake up, and join those us in THIS centruy.
Well OF COURSE they're gay. Gay Jews.
Enjoy the show:
http://www.youtube.com/watch?v=kgJInVvJSZg
"...comprise around 80% of US banks’ total equity..."
U.S. banks have equity?
Tell us about homosexuals eclipsing the sacral soveriegnty of Judaism in the non-Muslim world when Canada and 17 European countries criminalize heterosexuality...people are jailed today for simply disbelieving in the West's highest religious icon known as "holocaustianty".
bring it!
spain just told the eu to fuck off
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100015432/sp...
"Merkel and the Commission should think hard before putting their hand into the sovereignty of this country – or any other – because it will be burned"
Church!
you listening ulster belfast dublin???
Mornie utulie, Mornie alantie!
and what about you Hollande?
Eliminating the Ponzi debt without fracturing the entire credit system is impossible
Pretty much sums up "extend & pretend"
Aren't the two really one and the same?
When France goes, we all go. Count on it. Buy gold.
Unless they hyperinflate... Gold would still be good.
Any thing tangible, Food, antibiotics, water, Cheap bourbon, tampons.small silver coins, smokes TP....you name it. Make your own list! Trade lists amongst yer friends...it's fun!!
Been there and doing that! Problem is, except for maybe three people I know, no one wants to hear it...
The average person doesn't want to rock the boat because someday they hope to climb aboard it.
DoChenRollingBearing- I have been meaning to tell you that I just love your name! Just slides around in my head late at night when I am pouring over holographic physics articles in Scientific American... I wonder if you think I am kidding...
Anyway, it has certainly occured to me that the internet will have to be maintained - perhaps by corpgov censors requiring the go-'round, or maybe by - The Geeks. Do not know. But it will be- by wireless or by tin foil. It's that first few months of chaos. That is the greatest worry.
Wonder how robust the ZH system is. Because these are the people who are "hearing it."
Keep on Rolling.
if we are trading antibiotics for tampons I assure you there will be no internet...
There you have it. I'm reading The Shock Doctrine by Naomi Klein right now. Interesting so far, but just getting into it. It talks about how it's in the immediate aftermath of a crisis, while people are still reeling, that sweeping changes are implemented. In an economic or financial system implosion that results in wide-scale civil unrest, I would expect control of the internet to be the first thing seized by the gubmint.
They will not do it for any considerable length of time as it may shave several points off the GDP.
Think about smart phones, credit card charges, On-line shopping, banking, on and on.
The only time it will go down is when O'bummer pulls a Chavez on AmeriKa under the pretext of national security and declares martial law. Prepare yourselves. Put some cash in your mattress and some gold and silver coins.
Yeah, I was making the assumption it would be under a martial law scenario, if the shit hits the fan.
Very kind of you Illyia. gmail me at my name if you like.
"Do Chen" means rolling bearing in Mandarin a Chinese-Peruvian guy told me down there (I did not catch the toning as I do not know Chinese).
I went to college to major in Physics. After my freshman year, I realized it was just too hard, and I was too lazy to do that. So, I majored in Geology instead, LOL...
Dunno, "DoChen" sounds like "more money".
But meh, whatever works. Dunno my Mandarin in nonpinying... Not that I'd know it in regular pinying anyways.
"Excess debt is causing global banking problems."
Bankers excessive debt lending is causing all the global problems
Fixed it
Methinks the canary will be the declaration of martial law in the US; just before the criminals have wrung the last dollar out of the economy.
how the fuck is that a canary? Wouldn't that be a coal mine collapse or am I missing something?
LOL Nice. The canary will be long dead by that time. Martial law would be the equivalent of shutting the mine with the miners still inside.
My ears are burning.
You guys are out of touch. Right now, as of NDAA on January 1, the highest law in the land is the military. That is the definition of martial law. The US military can now seize you without charges and hold you indefinitely if they think you might commit a crime in the future. Look it up.
Stopping SNAP benefits is the coal mine collapse. Martial law is ok if I can get to mall wort and Family Balla. Martial law isn't too fa from what we have right now, the TSA is ready to sniff yo britches bitches!
I don't disagree with any of this at all, but you have some insanely cheap equity valuations (on an earnings basis) in Europe already. Seems like the deleveraging + recession is already priced in. Lehman caught the world by surprise, and the result was multiple compression. Not sure if there is tremendous downside for European corporates from here cause there ain't much multiple over there.
All multiples, foreign and domestic, must be viewed through the lens of mispriced asset valuation fraud. Therefore, useless information methinx.
Like I continue to tell a broker pal, forget numbers and charts, follow the CBs.
I do see your point Rainman, and you are smart enough to not need my advice.
I really do see your POV, and I'm not trying to rain on anyone's parade here. But there is a global company domiciled over there that only gets about 50% of revenue (back of envelope calc) from European operations. It is trading around 3.5X trailing 12m. This company is a global brand and HUGE.
That is freaking cheap.
I am a firm believer in tail risk, and I think these risks seldom bid at fair value. They are either under estimated OR OVERESTIMATED. We need to consider that it is overestimated at times. If you get it right, that is where the money is.
I'm cool with selective picks when the diligence is correct on the numbers and accurate ( sounds easy, but isn't ). A 3 1/2 is a low bar for a reason, and probably one that is not seen in the numbers. Otherwise, Pigmen would be all over it. They hardly ever miss out on cheap. But who knows ? Could be a pile up into overboughts and ignored.
All good. I'm just chatting now.
There's some stink on my pick. It carries a lot of LT debt to capitalization. But revenue has been up, up and away even last quarter.
But there's other stuff. The Ho Chi Minh index was trading around 4X composite about a month ago. Not anymore though. Handlesbanken was thrown out with everything else. This is a solid, solid enterprise.
When all the leverage is squeezed out and it is just laying there like a whore in the street. That's when to step in.
Take apart LT debt to find out how it is categorized....those furrners have a different viewpoint on long term. If you're in, please send progress report if it works. If it doesn't we'll drop the subject !!
I once hit the number 25 two in a row on a roulette table. Sometimes you walk around lucky and don't know it unless you're betting on something.
Fair enough. Six month horizon.
Sometimes you walk around lucky and don't know it unless you're betting on something.
I love that. Heard it before, a long time ago, but can't remember who said it. Sounds like something Yogi Berra would say.
I always loved this one:
"If the world was perfect, it wouldn't be."
In casino terms it's called, eco ball . The table next to you propably hit 25 a few seconds later also.
It happens way more often tha it should , especially on full moons.
What stock please jm?
Telefonica. If there is something totally effed about it, I all ears.
that's easy. the service sucks.
FTE way better.
TED spread is so manipulated.
How often has this site declared the Eurozone won't last for another 3 months over the past two years? You must be getting desperate. It's getting ridiculous. Some experts you are.
I dont believe tylers have ever said that the e zone had three six or x months to live.
Gotta link to prove me wrong, eurobitch?
LOL. So much for deficient memory. For example, in late fall 2011 one commentator declared "as for the Eurozone lasting until 01/01/2012, let alone March, good luck". Handle the search function yourself.
As for you knowing no better than to insult me - tells a lot more about yourself than about me. Can't stand criticism of your vaunted heroes, can you? Keep whining. I could go on about their mistakes.
Whining? Whining ? You don't know whinig. Euroville will fall in mid-August.
He's just desparate to promote his union, wholly ignorant of the fact that it's an inescapable trap.
It would be cute if it wasn't so fucking sad.
Silly statists...
LOL what are you babbling about? I'm not even European. I happen to be on a work stay there. It gives you some perspective. Something this site is seriously lacking. The hilarious google translation links are telling me all I need to know. If you can't get someone reasonably skilled in a European language so s/he can at least read it correctly, then just scrap it. Google translations are barely readable and it's nigh impossible to get accurate information out of them.
But you suck up every bit of "information" holy ZH "reprints" from European media via "google translation". No matter how much of a load of crap the result of said translation is.
How dare I point out holy ZH's deficiencies and errors. Gosh! Sacriledge!!!
So what about his fundamental anaylsis is wrong? Please state an opinion
Or is your point that Tyler cannot predict the exact day of default?
I don't think they've tried, as that would be folly.
I suspect your hindsight bias hinders you.
Oh wait, you don't have it. One of them. God Bless you.
My point is that the doomsday and armageddon predictions are getting ridiculous. What's fundamentally wrong about the analysis is that somehow reality keeps disproving it. In particular, the various elaborations on What "Ze Germans" Really Want And Are Secretly Planning are way off base. This person obviously has little understanding of the disagreements and infighting and the political tensions in Berlin, nor of what kind of person Merkel is. Might be a result of google translations I'm afraid. And what's with that endless "why isn't the ECB just blatantly printing money, when will the Buba stop being so stubborn" debate. Every child in Europe knows that the ECB and the Buba are constitutionally forbidden from doing this.
At some point one should start learning from mistakes. Especially when one is busy painting those who don't chime in that the end of the world is upon us, as stupid and ignorant and what not, while the world just won't cease to exist. "How we will all suffer...." A little less hysterics might be appropriate. But the doomsday predictions and the hysterics are drawing too many visitors here.
Through Japan in there too with the their $3 trillion in debt refi's this year and 265% debt to GDP.
Party while you can ...
Just stash some shinnys and Load 6 in the pump
lol
Lock in volatility end 2011 style...before eveything falls apart. Next major protests will be outside central banks that have f*cked eveything up.
"However, they need an estimated $400-$600 billion of capital to absorb the cost of marking their toxic assets to market, which raises their effective leverage to 19 to 28 times – "
Correct me if I am wrong they stopped marking to market a long time ago! So, I think they will continue to lie their way through this.
No biggie, the market wont crash bail out or no qe. It is fake.
So what prevents banks from saying, "I don't care if you say I am bankrupt, I am still going to open my doors." Isn't an open bankrupt bank better than no bank? Can't they just ask Uncle Bennie for some more candy?
Again, this is why I read ZH. Great article.
hey! check this out!
there may have been some fringe internet rumors about a quid pro quo deal where the US & EU got libyan oil and china, russia, india and other got iran's oil
the problem w/ this nefarious rumor, of course, was that it made these arab states of libya and iran look like the playthings of TPTB and thier armies and air power
so now, it appears these fringe rumors may have been false, all along, BiCheZ!
we have news of libya signing oil contracts w/ chinese companies for about 140K bpd for 2012 via reuters over the weekend
however, these are contract whcih cover deliveries starting january, 2012
i can't find exactly when the deals were signed on either reuters, which carried the original news, or theTripoliPost which picked it up from there, today
ain't it funny how the night moves...
either there was no quid pro quo, or perhaps it is just pretty flexible, as needed!
these contract were very carefully explained, however, whenever they were inked (paste, my emphases): Unipec's 100,000 bpd contract is tiny compared with China's total crude imports of more than five million bpd, but it adds to Unipec's increased supplies secured through similar term deals with Saudi Arabia and Iraq.
Together, they will help cover the cuts Unipec made in term Iranian crude imports, estimated by a senior Chinese trade executive to be up to 54,000 bpd for 2012.
so china's down 50 here, up 100 there, and is it just slewie, or do these number seem farcicly unimportant to others, too?
libya was estimated to have been producing 1.3 mil bpd in january and exporting 800K bpd
estimates are great, tho, aren't they?
here [Libya awards oil supply in 2012 to major traders | Libya Business News] we have news from december, 2011, of 2012 contracts w/ Glencore, Gunvor, Trafigura and Vitol, but no mention of china; but now, china has contracts which "cover" oil from january, too!
i'm not making this up, either! reuters might be, but not slewie!
so, with all this "news", so far no mention of when these contracts were struck and signed
maybe it's a...secret? Hahaha!
The Trifecta Theory at work here, Slewie.
Now O-Bahma & Edom (I mean, Israel) are talking about 'peace talks' with Iran. Coincidence?
+1
(I'd give you + 7 if I could).
Anyone critical of Rush does not listen. He is right.
MARINE CORPS AIR STATION NEW RIVER, NC (AP) -- The military's big expansion in North Carolina continues as the Marine Corps builds a $140 million mega-hangar to hold four squadrons of a revolutionary aircraft.
http://www.wwaytv3.com/2012/03/05/nc-marine-corps-air-base-big-expansion...
excellent article...whatI get out of it is that the CBs have only two ways out:
1. default fast like many countries (Grece included) have historically done; or
2. slow Default via controlled inflation and continuous steady devaluation of their debt (currency) as the USA did (for example) post WWII.
The second method has been openly endorsed by Larry Summers since he has repeatedly said, "only way out is a weak dollar to increase exports."
‘The liquidation of government debt’, a research piece by Carmen Reinhart and M. Belen Sbrancia, describes how the CBs will devalue ...which you can read in its entirety here in pdf form from the web:
http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf
----------
By Dan Denning
03/05/12 – In today’s Daily Reckoning, we’ll do something we can barely stand to do: we’re going to write one more time about Greece. If you can stand to read it, you may come to the same conclusion we reached.
That conclusion is simple: what’s going on Europe has nothing to do with solving a debt crisis and everything to do with preserving a corrupt system based on limitless debt and growing government power. The sooner you understand that fact, the sooner you’ll be able to prepare for what happens next. There are two options for what happens next, and we’ll get to those shortly.
First, though, doesn’t it strike you as strange that all of Europe can be brought to its knees by tiny little Greece? Greek GDP is just 2.4% of Europe’s GDP. In economic terms, Greece doesn’t matter. Its lack of growth or economic competitiveness shouldn’t be factors that can destroy Europe’s 13-year single currency experiment. Yet, Greece obviously does matter; otherwise the European financial markets wouldn’t be celebrating the latest €130 billion bailout that’s on its way to Athens.
So here’s our question: Why do Greek finances matter to anyone outside of Greece? If you rule out the obvious things that don’t matter, that leaves everything else. Or as Sherlock Holmes was fond of saying, “when you have eliminated the impossible, whatever remains, however improbable, must be the truth.”
First, let’s see why the possible explanations for Greece’s importance to the world are actually impossible. Take the issue of debt reduction. As we wrote last week, the deal before Europe would reduce Greek debt to 120% of GDP by 2020. The IMF says that level is sustainable.
Back in a universe where common sense prevails, you can see that the plan is a joke, at least in terms of debt reduction. A plan to reduce Greek’s debt to 120% of GDP…EIGHT YEARS FROM NOW…is not a serious plan about debt. Therefore, the plan cannot be about debt reduction.
Will the plan make Greece more competitive in the long run? Well, probably not. In order to get more money by March 20th, the Greek Parliament had to agree to certain structural reforms. Some of those reforms might even be a good idea. But cutting the minimum wage isn’t going to be popular. And with Greek GDP shrinking by 7% in the fourth quarter, years of austerity won’t make Greece more competitive. The lifestyle of the Greeks will be destroyed and the debt will remain. Therefore, the plan cannot be about making Greece more competitive.
Does saving Greece save the euro? Not at all. The euro would be better off without Greece and Greece would be better off without the euro. The Germans are even planning for a euro that doesn’t include Greece. With its own currency, Greece could default, devalue, inflate and start over. Argentina did it in the last 10 years. It’s not rocket science. Therefore, saving Greece is not about saving the euro.
If saving Greece is not about saving the euro, and if it’s not about reducing Greek debt, and if it’s not about making Greece a more competitive economy…then just what IS it about? Well, now that we’ve rule out what’s impossible, let’s look at what’s left.
Saving Greece means preventing a technical default…even though Greece has already defaulted in a real-world sense. So why is avoiding a technical default so important to the European Central Bank (ECB) and the International Monetary Fund (IMF)? The current plan certainly looks like a default. Under the plan, €100 billion worth of Greek debt would disappear, thanks to a debt swap agreement with private sector investors. The ECB has twisted enough arms to get creditors to accept a 70% haircut on their current Greek debt without actually calling it a default.
And yet, bizarrely, Greece’s creditors could be forced to accept this not-a-default default losses recourse to the credit default insurance they purchased. That’s right; they might lose 70% of their capital and still be denied a payout on the default insurance they purchased. That would be like an insurance company refusing to honor a fire insurance policy because only 70% of your house burned to the ground.
It gets kind of wonky here. But really, it’s about who gets to make the rules. To you and me and everyone else in the universe where common sense prevails, a non-voluntary 70% loss on your government bonds is a default. But you and I don’t get to decide what constitutes a credit default. That honour belongs to the International Swaps Derivatives Association (ISDA). The important thing to keep in mind here is that the ISDA is a trade group made up of banks and financial firms. Those are the firms that have the most to lose if Greek bonds default. It’s in the interest of the members of the ISDA that a non-voluntary credit event in Greece NOT be called a default.
It gets even murkier here. The ISDA essentially represents the global banking system. In Europe, the banking system is full of government bonds. Those bonds are nominally assets. If Greece defaults, it sets a precedent for how other countries might deal with unsustainable debt levels. This imperils the collateral of Europe’s entire banking system.
If you want to put it in simpler terms, let’s say that Europe’s banking system is full of rotting meat. Some investors bought that meat thinking they were going to get prime rib. But they can smell the stink of the meat from a mile away. They want to be compensated for the bad meat. The ISDA, which owns the freezer in which the meat went bad, says, “Well, we’ve decided the meat isn’t bad after all. And you have less of it than you thought anyway, as of now.”
This is a crude analogy. But this is exactly what happened last week. A “determinations committee” of the ISDA ruled that Greece’s default is not a default. The committee determined that “no credit event has yet occurred” for holders of credit default protection on Greece.
You can see the basic problem: everyone else knows that if Greece defaults (officially), the value of other government bonds in Spain and Italy and Portugal will plummet too. A Greek default wouldn’t be important because of the size of the default (although French and German banks would stand to lose a fair bit). It would be important because it would begin the process of blowing up bank balance sheets all over Europe.
When you realize that the ISDA and the ECB and the EU are in league to save their financial skins, you realize that the Greek rescue plans is about preventing other countries from realizing that default is an option. In fact, it’s not even about preventing the realization. It’s about making it impossible for a country to default on its obligations…even if it means erasing the word “default” from the English language.
If the centralized European Welfare State model is to survive, banks must not take losses on their government bond holdings. Individual and private investors, on the other hand, will be forced to take losses through a “collective action clause.” This clause allows your securities to be revalued without your consent if a majority of other bondholders agree to it.
Now we’re coming to the real nuts and bolts of what’s at stake. The technocrats in Europe are at war with private investors. The members of the ISDA are in league with the technocrats to preserve their system. That part is easy to understand.
The technocrats are employed by government and get to spend your money. This system is good for them. It’s good for the members of the ISDA too. Loaning money to the government is good business. Collecting rent off the expansion of credit is easy money. They want the system to last as well.
Who is the system not good for? Everybody else who’s on the outside looking in. Investors who want their capital to be productive are out of luck. And taxpayers who question the value of austerity measures and debt reduction plans that don’t really reduce debt are also out of luck. No wonder they are angry.
We’ve come a long way, then. Greece isn’t about saving Greece. The only reason something so small and insignificant could matter so much is that it matters in a way no one is willing to say. It’s about the subversion of sovereignty and democratic processes by removing decisions from people and giving them to trans-national financial elites. It’s about preserving a global system that’s based on the accumulation of debt and growing government power because there are two groups of people who benefit tremendously from that system, even if most people don’t.
This is simply the latest example of corrupt government operatives colluding with the financial elite to steal money, liberty and big chunks of “the pursuit of happiness” from “we, the people.”
Regards,
Dan Denning,
for The Daily Reckoning
Read more: What the Greek Rescue is Really About http://dailyreckoning.com/what-the-greek-rescue-is-really-about/#ixzz1oIJroJSz
Great article, Rocky. Thanks for sharing.
Basically correct, although last week's ISDA ruling was merely the opening round. Pretty soon they will have to talk their way around some genuine default issues, and it is going to be quite a show. They'll do it of course, but it will not be without consequences in the CDS market. Of course, I could be wrong. After all, we are in a House of Mirrors and nothing is what it seems to be.
The relentless upchurning of US equities is disturbing - better that it was stable, instead of rising on no news, The ceaseless quantum jitters of the HFT/algo programs cause it to drift higher every day, with occasional "reality" breaks. The Ponzi is showing cracks, but it can go for a long time with the CBs printing.
The assumption that the Troika actually want to prevent a technical default by Greece is quite simply wrong. If the Troika were really interested in preventing a technical Greek default and the triggering of CDS, the Troika would not be placing the determination of whether or not Greece eventually defaults in the hands of private creditors vis a vis the PSI. Rather the Troika would simply step in and guarantee Greek debt without continually trying to bleed private creditors. It's obvious that all of the current machinations are simply a set up to put the blame for pushing Greece over the edge onto those nasty, greedy hedge funds. All that the ISDA has decided is that the actions of the ECB in subordinating all private sovereign debt holders will not be considered the trigger for the CDS.
This is a truly lame ass analysis.
I'm glad the article got your juices stirring. Thinking is what it's all about, so my posting the article was successful. Reasoned opinions are always appreciated.
Rocky, the whole 'crisis' comes down to not spending more than you have coming in, and if that begins to be corrected, you get this;
Current Eurozone Unemployment Rates
From MISH - http://globaleconomicanalysis.blogspot.com/
That is the real crisis.
Everyone, especially Govts had been warned for decades this would occur, if deficits were over ~3% of GDP. But even then, why were so many employed by Govt., or else reliant on the state budget remaining in obviously unaffordable deficits, in the first place?
The BANKER bailouts have simply and unjustifiably come to dominate the whole issue, but they're very much the absurd sideline the MSM focuses on. It's only about ensuring Banks don't experience the austerity as well. But of course they will, because banks go broke when their clients go broke.
But the banks made their clients go broke!
The Great Depression market bottomed and bounced again only AFTER many thousands of banks suddenly went broke.
"It's a slow day in the small town of Pumphandle and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit. A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.
(Stay with this.....and pay attention) The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op. The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit. The hooker rushes to the hotel and pays off her room bill with the hotel Owner. (Almost done...keep reading) The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything. At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything. However, the whole town now thinks that they are out of debt and there is a false atmosphere of optimism and glee."Your analogy of a false sense of optimism and glee is wrong. There were accounts payable and accounts receivable in each step of the food chain. That money had previously been earned by the respective providers. In the example of the prostitute, she had provided a service previously for which she was owed money. She then used her money to pay off her liability for a service the hotel had provided.
In other words, everyone had a $100 liability and a $100 asset on the books. In the end, they also cancel out each other. The only difference is the original $100 provided liquidity to the town. You have now just made the case for central banking providing needed liquidity with no negative effects. Needless to say, this will be an unpopular view on ZH.
If only it were that simple in real life.
Similarly it only takes one old scrooge who "owes nothing" and can simply pocket the 100 dollars and the whole " liquidity plan" falls apart....
That's why you are not encouraged to "save money" in a Keynesian central banking environment.
major selling out of Asia, USD bids, risk trades selling.
and oil is bid. China will slam the that price down i.e growth forecasts slashed, unless Iran plays games.
Major market correction is kicking in.
This statement appears to be wrong: "According to data from the BIS, US banks’ total claims on Club Med banks, plus Germany and France, and the UK banking system, comprise around 80% of US banks’ total equity (see chart 10)."
I believe the chart is saying, "Out of all public, private and bank exposure in the US against Club Med, 30% of that comes from banks, which comprises 2.6% of their total equity. Out of all public, private and bank exposure in the US against Germany & France, ..."
The author appears to be missing the percentages within the bars. US banks' total claims on all the regions appears to be only 21.3%, which is more consistent with press releases and plain ole' common sense. (How could they possibly have only 20% of their equity in American interests e.g. real estate, loans, stock market, etc.)
Unless I am the one who is reading this wrong.
contagion to the banks will be the first step.
http://www.jinrongbaike.com/
http://www.cnhedge.com/
I like this Tyler's style. Very readable and sentence length is excellent. I hate to be ungrateful but I read almost everything on ZH and occasionally (some of) Tyler's writing gives me brain cramps. I have to re-read for comprehension until I need to drink for sanity. Thank you 'shorter sentences and succinct' Tyler.
For all those who 'fear the jew' and the 'jew banker' consider: you could kill all the jews and all the bankers and gobs of others; until the folks understand the power of giving ANY entity the ability to say what is money and the power to command its use, it will not matter. It will just keep happening. Hopefully there will be real leaders who understand money and can articulate its proper use and function. These leaders must understand (I can honestly say not ONE politician has discussed money at a fundemental level in my life) money and speak to the people. I see no leader with such insight and ability at this time. Our leaders who may understand lie, most do not seem to understand... translation... we are screwed and I'm sorry to say as in post HI Weimar the rank and file Jewish doctor and businessman will probably be blamed. For the perceived sins of Dr. Rudy Havenstein many died.