EuroTARP Cometh: Germany's Schauble To Pull A "Paulson" Will Force Banks To Take Bailout Funds, Handelsblatt SaysSubmitted by Tyler Durden on 12/07/2011 12:42 -0400
In yet another confirmation of just who is driving policy in Europe, Handelsblatt has broken news that 3 years after Hank Paulson "forced" US banks to take cash, Germany will follow suit next, and "bailout" the German banking sector by stuffing it to the gills with cash soon to be made even more worthless courtesy of persistent and relentless devaluation as it is used for no productive purposes but merely stave off the inevitable collapse of a financial system so broken it now requires not monthly but weekly bailouts. From the German publication: "the German bank rescue fund Soffin will force ailing banks to recapitalize next year. That's at least out of the draft bill, to be released by the Handelsblatt (Thursday edition), and the Cabinet is to decide the next week. Finance Minister Wolfgang Schäuble (CDU) is following the U.S. example: The US distressed banks were temporarily distressed during the 2008 financial crisis. The banks have since there is significantly more stable than the euro-zone in which the institutions were saved only at their own request the European Banking Eba by the banks of the euro-zone by mid-2012 its core capital to nine percent increase. Institutions that make this not your own to get guarantees from the Soffin." Simply said, because it worked (courtesy of an additional $1.6 trillion in excess reserves used fungibly by banks to plug capitalization holes) in the US, the forced bailout will work in Germany, where unlike the US, the top banks account for about 200% of German GDP. In other words, Germany is about to proceed with an implicit nationalization of its banking sector. Which means that while we thought yesterday that the German AAA-rating is the safest of all in the Eurozone, following this development we will certainly reevaluate.
Our framework centers on the idea that humanity is facing a set of predicaments quite unlike anything else in the history books. Because this time there are no borders to cross in search of safety; the entire world is involved. On a global basis, we've never experienced collective debt loads of this magnitude. Never before has an entire set of intertwined currency systems -- all debt-based money -- collectively been backed by nothing more than the hope of a larger future, and never before have this many people had to figure out how to move from more-concentrated to less-concentrated energy sources (from fossil fuels to sun- and wind-based alternatives). The convergence of exponential trends in population, energy depletion, debt accumulation, and an economic model that is hooked on growth will combine to produce quite an interesting, if not challenging and disruptive, future. The funny thing about complex systems is that they are unpredictable, and therefore preparing for what may come is a non-trivial (yet absolutely essential) task. The immediate question for most people is What should I do? We break down the intelligent responses into three big buckets: financial, physical, and emotional. In this report, I detail the financial steps that everyone should undertake right now to manage future risks using the framework that I use to assess and understand the financial world and markets. My approach is founded as faithfully as possible on facts and data. But my views on how the markets operate are formed from personal experience, observation, and connecting a few dots that rely on opinions and sometimes beliefs. Therefore, this financial and investing framework is something that you should only accept if it works for you -- and reject if it does not.
It seems everywhere we look, talking heads are arguing that they expect a positive resolution to the EU debacle and yet market positioning does not suggest this is the case at all. Of course we have seen snap-back rallies and sell-offs but the dissonance between the seeming consensus of unbridled optimism that European policy-makers 'get it' and the market's anxiety should be very worrisome - especially for the 'money-where-your-mouth-is' crowd. Morgan Stanley put it best recently as they noted their sense that most investors assume there will be some solution found (or put another way, very few assume that the alternative - a catastrophe of disorderly banking and sovereign defaults - is a base case) but few investors seem willing now to position for that benign outcome (most evidently seen in European Sovereign debt markets currently).
Deutsche's Jim Reid, like us, is less optimistic and notes the same disconnect as he argues that at this point: "Who can honestly say they know exactly what rescue plans the EU governments are still discussing...". Investors are rightly confused and we agree with Reid that we don't think there is any chance of a quick fix to all of this. Furthermore, we fear that any belief in a reversion to pre-crisis levels of sovereign risk on the back of a solution is a pipe-dream as it is clear that risk premia are embedded now (like skews in options prices post 1987) and it is far more likely that Europe stabilizes at much wider levels - more like other leveraged regions.
The stock and bond markets are gearing up to celebrate the EU's approval this Friday of "fiscal union," the necessary surrender of sovereignty that's needed to seal the bondage of the EU's hapless citizenry to the banks and the lapdog bureaucrats slavishly devoted to their dominance. "Fiscal union" is the code-phrase for the EU nation agreeing to automatic sanctions (penalties) should their borrowing exceed what is deemed prudent. In this sense, it's little different from the 3% deficit limit that the member states agreed to via the initial treaty but conveniently ignored. The "teeth" of automatic sanctions is supposed to force nations to "tighten up" their fiscal and tax policies (including collection)--"austerity" at the fundamental economic and governmental levels. In other words, "Oops, we borrowed too much, default looms, let's paper over the insolvency by really really really promising to borrow less from now on." The mechanisms of the overborrowing--overleveraged, politically dominant banks and the euro--are left untouched. Why? For the "obvious" reasons the mechanisms of EU governance has been captured by the banks and their apparatchiks, and as a result of the quasi-religious devotion of the Eurocrats to the single currency, a catastrophically wrong-headed fantasy that they cannot give up without losing face.
To overcome the current crisis, all necessary measures to stabilize the euro area as a whole will have to be taken. We are confident that we will succeed.
We are convinced that we need to reinforce the architecture of Economic and Monetary Union going beyond the indispensable measures which are urgently needed to cope with immediate crisis resolution. Those steps need to be taken now without further delay. We consider this as a matter of necessity, credibility and confidence in the future of Economic and Monetary Union.
Presented with little comment, except to say reality is returning as credit markets are starting to price in some disappointment. Italy 5Y is underperforming as the basis trades we mentioned yesterday are unwound and Italy 10Y has broken back over 6% as their curve remains inverted. Spanish 10Y spreads are up over 35bps today and 50bps from yesterday's tight print as Belgium and Italy follow suit. The swing in Spanish 10Y spreads, on a percentage basis, is massive, empirically, from a 4.5 standard deviation compression on Monday to a 2.5 standard deviation decompression today as today's widening in the biggest relative jump since July 11th - more small doors and large crowds?
New Independent Research: Gold Is Crucial Diversification - Hedge Against Monetary and Systemic RiskSubmitted by Tyler Durden on 12/07/2011 10:39 -0400
More excellent independent research was released yesterday confirming gold's unique role as a diversifier and foundation asset in the portfolios of investors, especially at a time of heightened currency and investment risk. The independent research from highly respected New Frontier Advisors (NFA) confirms the importance of gold as a portfolio diversifier to investors in Europe and to investors exposed to the euro. During a period of extraordinarily serious economic uncertainty in the Eurozone, continued concerns about economic growth in the US heading into an election year, and the possibility of an economic slowdown in China, the World Gold Council (WGC) wanted to examine the relevance of gold as a strategic asset for euro-based investors to protect their portfolios and to mitigate the systemic risks being faced. The report, ‘Gold as a strategic asset for European investors’, commissioned by the World Gold Council, explores gold as a strategic asset across five sets of asset allocation studies, including four using historical data spanning 1986 to 2010, and one using the 1999 to 2010 time frame. The third party research builds on the now considerable research and academic literature showing that gold adds significant diversifying power due to its low or negative correlation with most other assets in an investment portfolio. Gold’s relevance as a strategic asset is continuing to grow. This will continue in a world facing the real risk of a global recession and even a Depression, poor investment returns, currency devaluations and wars and very high monetary and systemic risk. Put simply, when used as a foundation asset, gold has preserved wealth throughout history and again today.
Misquoting Shakespeare before the market open may seem like blasphemy but in a follow-up confirmation of a thesis we proposed back in July, Luxor Capital expands on the idea that something rotten is ahead for the state of Denmark. As with many of these crises, the heart of the Danish problems lie in a commercial and residential real estate boom and looming bust and with the capital/equity remaining so low in the Danish banking system (and a pitiful funding profile), it seems increasingly evident that public balance sheet support will become necessary (and perhaps not sufficient). How ironic that we pointed out, back in July, the probability that Germany will need two insolvency funds, a South-facing and now a North-facing one. Having traded in the mid 20s during H1 2011, CDS now stands at 106bps (off its September peak of 158bps) and given the interest we are seeing from hedge funds in this relatively lower cost short, we suspect this week's modest decompression will accelerate.
Yesterday we reported that the freeze in the Europe repo, asset backed paper and money markets is a broad indication that the shadow banking system - the primary conduit to broader disintermediated financial stability or in this case distress - on the continent has now locked up, which means that the three traditional bank transformations of risk, maturity and liquidity now have to be undertaken by the very non-shadow banks whose existence relies day to day on the ECB and the Fed, without any 3rd party market intermediaries (incidentally we are looking forward to tomorrow's quarterly update of the US shadow banking system and will post promptly). Today, the ECB has just confirmed our worst fears, in that the shadow situation is likely worse than expected.
Many EU leaders seem to actually believe that the Treaty changes are important. The reality is the market could care less about treaty changes. The market cares about only one thing, that the ECB will announce new, bigger, more aggressive sovereign purchases. That’s all the market cares about. The market believes that the treaty changes provide an excuse for the ECB and IMF to ramp up their efforts. The EU can do all the treaty changes it wants, but if it is not followed up with aggressive new printing policies, the markets will sell-off.
As the attached chart showing USD liquidity swap line usage by the ECB, or more specifically by European banks, we have now seen a surge to levels last seen in August 2009. However, more importantly this is where the usage was for the first time after the failure of Bear Stearns, and when everyone thought all had been fixed... until Lehman came. We are there now, in other words, we have just experienced a behind the scenes Bear-type event. What is disturbing is just how fast the rate of change was this time around compared to before, when it took months to get to $50 billion. Now, it was one week. When "Lehman v2.0" hits and it will hit, the next step function in the Fed's global bailout will be so big and so fast, it will induce vertigo.
- According to the FT, last-minute negotiations have commenced to create a much bigger financial "bazooka" to present at this week's EU summit that could include running ESM and EFSF together as well as winning increased support for the IMF. However, the report was later denied by a senior German government official
- According to a senior German government official, he is more pessimistic than last week on overall summit deal. He also said that he can't foresee running EFSF and ESM simultaneously, and he is not sure if the summit will reach conclusion on using IMF funds in the Eurozone crisis
- ECB funding to Italian banks rose to EUR 153.2bln at the end of November from EUR 111.3bln at the end of October
- Bund futures received a boost following a strong Bobl auction from Germany
- ECB allotted USD 50.685bln in its 3-month USD operation vs. Exp. USD 10bln
- CHF moved lower after the SNB slashed its 7-day USD repo rate, and weakened further after a Swiss minister said that Switzerland is still looking at negative rate options
- Euro zone leaders may raise ESM, EFSF capacity limit (Reuters) - since denied by Germany
- EU talks on doubling financial firewall (FT) - since denied by Germany
- Martin Wolf: Merkozy failed to save the Eurozone (FT)
- Ireland to seek cheaper bail-out (FT)
- Fast-track ‘fiscal compact’ drawn up (FT)
- Clarke rejects call for EU power grab (FT)
- Obama Sets Campaign Theme as ‘Make-or-Break Moment’ for the U.S. Economy (Bloomberg)
- Spain Weighing a Fast, Costly Cleanup of Banks (WSJ)