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The European Death Spiral
Recently, we presented and discussed one of the biggest issues for European banks: the urgent need to delever substantially (to the tune of over €2.5 trillion) by selling assets, in order to placate various regulatory entities that banks are solvent, and, far more importantly, the market, which has so far proceeded not to short banks into oblivion only due to the ongoing short selling ban, and to the explicit backstop from the ECB (and, indirectly, the Fed). However, since deleveraging into an deflationary environment will certainly require bank bailouts due to collapsing asset prices, the question is what the impact of bailouts on banks will be. And here Bloomberg's Yalman Onaran explains all too vividly how not even in ponzinomic finance is there ever a free lunch... even if bought with free money. "If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. “Then the banks’ losses will rise because they hold the government debt. That’s a vicious cycle. It’s hard to know which one to stabilize first, the sovereign bonds or the banks.” And therein lies the rub, and the problem at the core of it all: when one is dealing with a continent and its insolvent financial system whose banks have underwater assets that amount to the size of the host nation's GDP, "It’s hard to know which one to stabilize first, the sovereign bonds or the banks." Recall that killing both birds with one silver bullet is what the failure that is the EFSF was supposed to do, by allowing sovereign debt rolls and fund bank nationalizations at the same time. Now that that hope is gone, all we have is the inevitable "death spiral."
The size of potential losses at European banks has scared away short-term creditors, squeezing the region’s lenders. The European Central Bank has stepped in to replace funds being withdrawn, providing unlimited cash and lowering requirements on the quality of collateral it will accept.
“We’re in a death spiral,” said Andy Brough, a fund manager at Schroders Plc in London. “As the yields on the peripheral bonds increase, value of the bonds decreases and the amount of capital the bank has to raise increases.”
And there you have it: a "bailout" of the insolvent banks by insolvent countries only shifts the balance, and redirects vigilante attention from either sovereigns to banks, and vice versa. Naturally, the longer there is no solution, absent wholesale defaults and massive losses by the status quo which is the only solution, the wider spreads for both entities will drift until finally neither Italy will be able to refinance, nor its banks, leading to an "out of control" freefall bankruptcy, that will have the most devastating consequences out of all possible options.
In the meantime, the only Hail Mary pass left is that someone will step in and buy the assets that are about to hit the market with the biggest Blue Light special since the winter of 2008, as suddenly every single bank rushes to market to catch the best bids into what will soon thereafter be a bidless market:
European banks have already announced 1.2 trillion euros of asset sales as they try to reach a 9 percent capital ratio by June, according to data compiled by Nomura Holdings Inc. The shrinking of bank balance sheets in the region may reach 3 trillion euros, Barclays Plc (BARC) estimates.
One European bank executive who requested anonymity because plans weren’t public said his company intended to comply with requirements of the stress tests by lending less in 2012. By giving the banks six months to comply, the EBA has provided a go-ahead for deleveraging, an EU official said, asking not to be identified to avoid interagency conflict.
The EU leaders’ agreement for tougher budgetary discipline coupled with banks cutting lending will cause a “huge recession” in Europe, AEI’s Lachman said. The result of the stress tests will be constrained lending, especially in the Southern countries, which will make their economic rut even worse, Lannoo said.
“North has fared well so far, but if the South derails further, then the North will trip too,” Lannoo said.
Needless to say, this one "death spiral" response leaves us quite skeptical, because try as hard as we may, we fail to see how one will find even a fraction of the €2.5 trillion in cash needed to purchase Eurobank assets without said banks, most of which are leveraged 30-40x, being forced to write down their entire equity tranche (very much the same way Dexia was one of the most successful banks in the most recent European stress test).
For those curious about the specifics of the upcoming devaluation, deleveraging, disposition and default wave, here is Morgan Stanley's recent analysis on just this topic.
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Time to take the pain Europe.
Does anyone here think that THEY don't have a plan for this shit? How many times has the US stock market sold off only to rise back again? This new guy at the ECB. He's an insider. He knows the game. He's going to print; just has to do it at the right time and in the right way.
There is no other way out except collapse. Are they going to let that happen?! Come on.
So the big question is what benefits? I think PM's are going to stay smacked down for some time. I think good quality stocks will benefit with more easing as owners will conclude their price will inflate with everything else.......assuming everything doesn't collapse.
Don't bet on catastrophy. There are some powerful forces at work here. And you can bitch and moan all day about right or wrong and how this all happened but at the end of the day....it doesn't matter. What matters is how they are going to save the system. Monetizing the debt.
Instead of only PMs, get yourself in some hard assets like rental proptery, productive land; hell any shit that people will need/want downt he road (e.g,. tractor, generators, steel, copper). That stuff will move up as the system inflates. Don't restrict yourself to "commodities" markets, paper, futures, etc. Buy real shit that will be useful down the road. If/when copper prices drop; buy some 12-2 wire (250' rolls at the big boxes). Store it and wait a few years for the price to rise and then sell it. Think that's stupid, okay, put all your money in gold. But be prepared for Central Bank smack down. They hate PM's...direct challenge to fiat. So consider buying other stuff that will inflate with the currency.
Hasn't it occurred to you that when it all hits the fan they will confiscate everything essential like farmland, generators, etc.?
No, 'they' will not. Thats preposterous to state. Do you OWN FARM LAND? If YES, would you not defend it? If I were your friend, I would help you. There will be no confiscations of farmland or generators for that matter.
Cut off your access to diesel = useless genny's.
Cut the electrical umbilical cord now. No genny neeeded.
Consider that printing instantly destroys the currency in question, permanently removing all power from the CB. Why would they do that? They can't just print to re-capitalize banks or it hastens the collapse. So what, they print and give us peons great big blocks of crisp Bennies? I'm skeptical.
And CBs certainly don't hate gold. They love that shit so much they're gobbling it up by the ton. Why would they be afraid of a gold standard when they own hundreds or thousands of times more than the average gold bug?
Sorry, off topic, but I just had to post this piece of incredible naiveness here:
President Barack Obama has said the US government has requested that Tehran return the surveillance drone captured by Iran's military earlier this month.
Hahaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa
Our statements so far:
What drone?
Whereabouts unknown
Not in/over Iran
Probably destroyed
...further denials...
Can we please hat our toy back? Our country is being run by the 3 Stooges.
If I sent a nice letter to Iran's leader Mamadoobiejob will they at least take the predator circling over North Dakota?
http://www.latimes.com/news/nationworld/nation/la-na-drone-arrest-20111211,0,324348.story
Modern finance is based upon catholicism. It believes growth is forever, breed and bleed, and they will take your money if you are warm or cold.
Meanwhile back in Britain
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8952241/Fears-grow-over-the-future-of-5500-high-street-shops.html
Blimey!
So the 100+ drop in GOLD over the last 5 days is becusae why??
I've been trying to decide on what to do with some spare cash, and I cant get behind gold in the face of this round of deleveraging. I just dont see how causing massive asset prices to increase via inflationary policy is going fly. wages will stagnate, creating more civil unrest.... Thoughts?
With all the negativity, anti EU-EuroZone bloggers and the msm (s)pin heads.
If I were a betting man (which I am not),
I bet that Europe will succeed in becoming a united federalist state, (United States of Europe) either with or without the UK, as planned.
Grossly inaccurate/skewed article. Firstly, the assets that are being sold by European banks will be primarily international loans. The US and Asia are not suffering from deflation. Nor is the UK. Selling into a "deflationary" environment is a bit dramatic. Furthermore, private equity and credit funds are licking their lips to root through these assets. A lot of sales are already happening and the proceeds are being repatriated into euros. Hence the surprising strength of the euro. Even Bank of Ireland has surprised on its ability to offload its RE book. It will take a number of years. The bigger problem is the sovereign bond market. Although you can see that a lot of banks have sold down their PIGS bonds if they are not local to them. The bigger problem is Italy. The banks own 500bn euro of the 2 trn in issue. They have been busy selling these into the ECB ahead of year end. It will take a few years to get leverage back to an acceptable level in the global system. In Europe I suspect it can be done in 3-5 years depending on the growth trajectory and whether sovereign restructurings/haircuts are allowed.
Remember if the banks recapitalise the 3 trn euro asset deleverage could be a lot lower. 200bn euro is not a lot of equity and on an asset to tangible equity that is meaningful. Remember that the underweight in banks in Europe is the largest in recorded history. They are 15% of the market. They are not owned by active managers. That would mean 1.5trn euro of assets having to close it's underweight. Not a lot. You start adding up fidelity, blackrock, allianz, Swiss insurers, us asset managers....
The website is becoming slightly comical, tabloid. You will lose good readers/contributors.
The website is becoming slightly comical, tabloid. You will lose good readers/contributors.
ZH is a web business, which means that it sells stats on clicks on its articles to advertisers. You either stay small and quirky, like FOFOA, or you scale up. If you scale up you are in the business of attracting viewers; anyone dispensing deep thoughts and insight will be charging for it.
Few good things last for long. I've already abandoned Naked Capitalism, which I followed for years, but for now ZH is still my first port of call in the morning.
Grossly inaccurate/skewed article. Firstly, the assets that are being sold by European banks will be primarily international loans. The US and Asia are not suffering from deflation. Nor is the UK. Selling into a "deflationary" environment is a bit dramatic. Furthermore, private equity and credit funds are licking their lips to root through these assets. A lot of sales are already happening and the proceeds are being repatriated into euros. Hence the surprising strength of the euro. Even Bank of Ireland has surprised on its ability to offload its RE book. It will take a number of years. The bigger problem is the sovereign bond market. Although you can see that a lot of banks have sold down their PIGS bonds if they are not local to them. The bigger problem is Italy. The banks own 500bn euro of the 2 trn in issue. They have been busy selling these into the ECB ahead of year end. It will take a few years to get leverage back to an acceptable level in the global system. In Europe I suspect it can be done in 3-5 years depending on the growth trajectory and whether sovereign restructurings/haircuts are allowed.
Remember if the banks recapitalise the 3 trn euro asset deleverage could be a lot lower. 200bn euro is not a lot of equity and on an asset to tangible equity that is meaningful. Remember that the underweight in banks in Europe is the largest in recorded history. They are 15% of the market. They are not owned by active managers. That would mean 1.5trn euro of assets having to close it's underweight. Not a lot. You start adding up fidelity, blackrock, allianz, Swiss insurers, us asset managers....
The website is becoming slightly comical, tabloid. You will lose good readers/contributors.
If they sold off half their islands the greeks coyld probably be debt free.
Turkey might be interested in a few, so would germany, russia, and the united states.
Seriously it could be a veritable united nations there. Saudi Arabia might want a couple. Israel is for sure in for three or four if that nuclear thingy with iran goes bad. The kurds could have one and buy their own nation. Dalai Lama needs one too, but just a small one.
Why don't they sell one big island to the UN. That way we can revoke the lease on their current land and kick those worthless bastards out of the US. Tactical strikes on them will then be far less messy. Only a few goats, maybe a goatherd or two in the collateral damage department.
Here's the problem. A lot of the world's wealth is an electron fantasy.
The world's net worth is $70T or so. Derivatives are $700T or so. $20T is a rounding error in a panic. Yes twenty trillion.
I think the net worth fantasy is closer to 50-70% rather than 30% as I quickly described as a 3% adverse move in derivatives. We really are living in a fantasy world.
Being able to join a select and seemingly prestigious club is a wonderful thing at first blush, until one realizes the initiation and membership fee is one's first born son.
Everyone is slowly coming to terms with the fact that EU club membership means relinquishing national automony and having minimal domestic flexibility. The devil is in the details.
Members cannot print on their own, so any help to domestic banks means a worsening national fiscal position. Banks cutting assets by refraining from making new loans means lower growth and thus lower tax receipts for member governments. That worsens the national fiscal position. The ECB is hesitant to print (so far) and nobody---not in Europe, not in China, not anywhere---has any spare wealth to put to work buying anybody's assets, even if the assets had value.
All roads lead to the same place. The Euros are stuck on the ground. They need some way to jump over the rough terrain. A helicopter might help. Who do they know who has a helicopter? Who is the Igor Sikorsky of global financial authorities?
Actually, I think "RQ-170 Ben" was going to secretly bail out Europe until the Iranians blew the cover off his plan.
Hey ebven Robert Rubin has climbed out of his Jon Corzine like hole, and on BBG's Charlie Rose tonight - now recognizes that the European sovereign debt issue is a crisis !
Great work BoB! I uess when Jeffreys talks about clawbacks that gets the other rat criminals nervous. Could pension funds now start clawback losses from the largest CDO underwriter - Citi? Could Sandy Weill and his DC insider henchman Rubin be feeling a bit nervous?
Otherwise why would this crook be on BBG w/ Charlie Rose?
from the English Der Spiegel (bold added my me). In other words, it's OK for high officials to flout the rules if it's in their personal interest. And to think that we look down on 3rd-world countries where petty officials take bribes.
http://www.spiegel.de/international/europe/0,1518,803097-2,00.html
"Because of its independent position -- so the thinking goes -- the ECB could provide any financial institution with cash in return for collateral. Besides, it still makes its own decisions on the quality of collateral. Consequently, it would be easy for the ECB to provide capital for the bailout funds, even without them having a banking license. If necessary, the central bank could also become directly involved in the bond markets and buy up securities on a massive scale to rescue the euro.
Saving Their Own Jobs
In the opinion of government officials, this approach would be in the ECB's own interest. The argument is that the monetary watchdogs in Frankfurt would never go so far as to put their principles and concerns over their own future. If the euro were to fail because they refused to provide assistance, they would be making themselves redundant. Hence, officials at Berlin's ministries are assuming, the heads of the ECB will do everything to ensure the continued existence of the euro -- and, with it, their jobs."
It's disgusting, the way officials treat BANKS as somehow sacrosanct. Why should citizenry pay for the irresponsibility of sociopathic paper pushers? Leave the institutions twisting in the breeze! The next person who mentions "austerity" is gonna get hit!
This is bullish, right?
Time for some edumakating. This is not a mistake. This is not an accident. This was planned. By this I mean the risk-shifting to sovereigns from the big banks and inevitably, sovereign stress. "Oh, how shall we deal with this", say the sovereigns. "Sell!" say the vultures. Wait for it folks, vultures will be holding sovereign debt they bought for pennies on the dollar. Then, because "keeping the system afloat", has sold to the public as as necessary as air to breathe, sovereigns will do whatever is necessary to avoid a crash, including the sale of sovereign assets (ports, parks, water systems, etc.), again, for firesale prices. If you would prefer that your country not be parted out, you will have to default on your debts and take your lumps. Please explain this carefully to your countrymen so they can respond accordingly - as sheep - or humans. The choice is clear. The time is near.