The New Con: Three-Card-Mario

 

 

 

Sometimes you look at different stories and your focus is on the particular tilt of the headline. Recently there have been posts about the declining exports in both China and Japan and the slant has been on these two countries; some further consideration, however, also tells another story.

 

 

 

The exports by China to Europe were down almost 18% last month and, in some cases such as Italy, the decline was almost 38%. Today Japan reported out its export numbers and their shipments to Europe declined by 28% with Germany off 18% and the UK off 42%. These are quite steep declines and not insignificant numbers from two of the major economies in the world. Then if you consider the recent contractions in Europe, which are fairly minor, you begin to add up numbers that do not jibe. The discrepancy cannot be defended based upon internal demand or demand from other European nations or from America so, unless there is a significant lag time which would mean that the upcoming GDP numbers in Europe are going to horrid, something is amiss. While, in the past, I have calculated more accurate debt to GDP figures for a number of countries in Europe including all of their liabilities, current and contingent; I have never questioned the accuracy of their GDP data before and I have accepted it prima facie as provided. Now, however, I am beginning to wonder if that was a mistake.

 

 

 

Each nation in Europe compiles their own GDP figures and it is checked by no one. This data is accepted by Eurostat and the BIS as given. This only changes when the EU and/or the IMF lends some country money and then they are audited by outside sources. It is my opinion, such as with Spain that this is one of the primary reasons that Spain and also Italy are so reluctant to ask for funding.  They want the capital no doubt but without a full blown bailout; they are scared to death of the audit and the actual numbers becoming public. Spain, we already know, engages in “dynamic provisioning” so that their data is highly suspect as they publically admit to making changes in the national ledger and their banks’ ledgers as they see fit. In the case of Spain, I pointed out a year ago that the property values in Spain did not match with the valuations of property on the books of the Spanish banks and that eventually came to public attention. In the case of the export fall-off from China and Japan to Europe I suspect the same type of thing; European GDP’s not exactly as stated and perhaps way overblown in an attempt to mollify investors.

 

 

 

 

 

 

 

 

 

                                       -The Wizard

 

 

 

 

 

There was the usual fluff this morning concerning the Spanish bond auction and the yields were down almost one full percent for their ten year. Many are attributing this to the recent action of the ECB with their “conditional” no cap and unlimited language. This is likely part of the story but certainly not all of it as we size up what is going on. Data published Tuesday by the Spanish Central Bank showed that non-performing loans rose to 169.33 billion euros ($222.13 billion) in July, or 9.9% of outstanding loans, from EUR168.37 billion in June. The data also showed that July deposits stood at EUR1.287 trillion, down 7.8% from a year earlier. Given this data I am forced to wonder how is it then that their funding rate has declined so dramatically and the answer is beyond the recent jawboning of the ECB in my opinion.

 

 

 

In August the Spanish banks borrowed $531.77 billion from the ECB which compares to $520 billion a month earlier and $106 billion just one year ago. This is a new record high and it represents 34% of all of the borrowings at the European Central Bank. So the game becomes apparent; the Spanish banks borrow from the ECB, they buy the sovereign debt of Spain and we have “Euroloans” which is the approved replacement for Eurobonds. I submit this morning that “Euroloans” are the strategy, the mechanism, and even the “con” if you will that is taking place in Europe. Germany is accountable for 22% of the ECB and they make their case for no Eurobonds on the basis of not assuming the liabilities of other nations but this is not an accurate statement; they have substituted, along with the ECB, “Euroloans” for Eurobonds while denying liability which is, in fact, incorrect. The banks borrow from the ECB, they buy the debt of their country, they submit the sovereign debt as collateral at the ECB or to Target2 for more funding and they receive the cash back on their balance sheets. Utilizing this circle of borrowing, buying debt, use of it as collateral and then receiving their money back they have replicated Eurobonds and have just employed a different strategy to accomplish it.