Bank Run

No matter how hard the ECB is trying to mask the fact that the only way to rescue Europe is through yet another ponzi scheme, which has a CDO in its foundation no less, depositors refuse to be fooled. According to the ECB, in December Irish banks lost deposits worth €40.3 billion, over 50% more than November, when €26.7 billion evacuated the banking system. The brings the total deposit flight from Ireland's 15 retail banks to a massive €110 billion, a number which if indexed to the US, would be well in the trillions. And as the Independent points out, "The most dramatic element of the latest data, however, is the sharp
acceleration in the fight of deposits from the so-called 'domestic
group' of banks." In other words, Irish banks are likely operating on liquidity fumes, and all of their operations continue to be funded on a day to day basis by the ECB and possible the IMF. And what is even worse, is that just like in the US, Irish consumer refuse to relever: "Yesterday's figures also show another contraction in banks' lending, as loans to households fell by 5.2pc and loans to non-financial companies fell 1.2pc in the year to December."

Following the publication of the monthly Central Bank of Ireland flow statistics for November, that the country's bank ended up borrowing another massive amount of capital from both Europe and the central bank itself, should not be surprising. After all it was in November that Ireland followed Greece into the insolvency abyss, a place where none other than Olli Rehn guarded the gates to feudal hell. However, one much more troubling factor is that the depositor run from Irish banks, a development which many have cited as potentially being the catalyst for the next major step down in the European house of cards tumble, is accelerating. From the report: "Deposits from the Irish resident private sector were 6.7 per cent lower on a year-to-year basis in November 2010. The annual rate of change in deposits from Irish households was minus 4.5 per cent, whereas deposits from Irish NFCs fell by 14.9 per cent on an annual basis in November." What this means simply said, is that as more deposit capital is withdrawn from Irish banks, the more they will need to rely on ECB and ICB funding, the more distressed they will be perceived as, the more capital will be withdrawn and so on... But that is a 2011 story. And just in case anyone is wondering what the source of all the capital is that is pushing the EURCHF to fresh all time highs day after day, not to mention spreads of PIIGS CDS closing 2010 at near all time wides, please refer to the chart above.

We traditionally enjoy the periodic letters by Guggenheim's CIO Scott Minderd. His latest piece, "The Opening Act to the Broader Crisis" is no exception. In it, the strategist dissects the European crisis, compares it to the subprime debacle and sees it as the precursor to the eventual downfall of the euro, a surge in the dollar, the "federalization" of Europe and the adoption of QE by the ECB. The key must read item in the current report is Minerd thought experiment of what a  wholesale bank run, first in Ireland, and then everywhere else in Europe, would look like. This is especially important as one could, as Scott claims, start at any moment. What does this mean for investments? "If we are on the brink of crisis in Europe, which I believe we are, then there are several expectations we can draw about the investment landscape. First and foremost, the dollar will strengthen rapidly against the euro; U.S. Treasuries will rally; equity prices in Europe will fall; and credit spreads will widen, at least temporarily. In general, risk assets will experience choppier waters, especially as the crisis intensifies." Yet somehow this is a disconnect with the Guggenheimer's recent Barron's round table bullish statements on stocks and high yield bonds: "Let me be clear, I am not changing my mind on any of these investment theses, but a crisis in Europe will likely interrupt, but not derail, certain bullish trends at some point in 2011." It is ironic that Minerd brings up subprime as an analogy to Europe: after all his response is precisely the same that everyone else who appreciated the gravity of the subprime contagtion used at the time, starting with The Chairman. To wit "it is contained." All else equal, and it never is, we fail to see how a surge in the world's funding currency, the USD, will not generate an all our rout in every single risk asset, The Chairman's gushing liquidity notwithdtanding, due to trillions in short dollar funding positions.

As a reminder today is the day when Europeans are supposed to withdraw money from their bank, not necessarily in a beneficial manner. And maybe the action is already having an impact with the Bank of Ireland apparently the first casualty. BBC reports: "Customers of one of Ireland's largest banks have been unable to access their cash accounts through ATMs or online. The Bank of Ireland said it became aware at 1000 GMT on
Tuesday that ATMs were not working and customers were unable to make
online transactions. A spokesperson said the fault lay with the bank's internal system and engineers were working to restore normal services." And by bank's internal system presumably one meant lack of money...Perhaps Eric Cantona will have the last laugh after all.

The European / IMF bail-out package for Ireland – announced one week ago – was somewhat smaller than expected at €85 bn and failed to calm market jitters spreading to other Euro zone periphery countries early in the week, most alarmingly to Spain and Italy. It was only with the ECB’s announcement that full allotment liquidity operations would continue through Q1 2011 and with a jump in ECB purchases of Portuguese government bonds on Thursday that stress in the Euro zone periphery abated somewhat...Following last week’s turbulence on the periphery, this week’s key event will be the Irish parliament vote on the 2011 budget, which is scheduled for Dec 7. A failure to pass the budget could quickly exacerbate tensions across the Euro zone periphery, by highlighting the political costs of needed budget cuts.

If ever there were a sign of the times, one can clearly see the desperation of the establishment upon reading Andrew Clark's "Eric Cantona's bank protest isn't very wise". After reading the article and comments it becomes painfully clear that most people, the author included have no idea how the monetary system works. How does Mr. Clark propose with that "There's nothing evil about the concept of banks – they exist to look after our savings and to provide investment for businesses", given that banks create money out of thin air based on deposits as a multiplier. One cannot say (with a straight face) they are looking after our savings as the very purchasing value of those savings is being diluted through legalized counterfeiting known as leverage and or the money multiplier. I do not think Mr. Cantona is arguing against the concept of banking, but rather organizing the end of the current predatory casino model paraded around as capitalism. Calling this model capitalism is an insult to capital, as it is after all savings. True capitalism cannot exist in a system where money is based on debt, not value; a printing press and not from savings. On the point that the concept of banking is not evil, one concedes that an idea cannot posses any characteristics of a living entity as it is an idea. That said debt based monetary systems utilizing a fiat currency, are historically used by oppressive régimes as the system itself is a giant wealth transfer and consolidation mechanism.

Some may recall how the very contentious topic of Greek deposit bank runs was arguably the key catalyst to push Greece (and its banks) to accept a bailout from Europe, after the country realized it had little cash left (and the associated SNAFU in which RBS proved it really has no clue about anything). Well, it is now Ireland turn, and as the below chart shows, the Irish bank run has already commenced, with locals not even bothering to wait until the December 7 coordinated "pull your money" pan-European D (for default)-Day. Bank of America brings attention to this issue, which will likely be the last liquidity event before not only a full bailout of Ireland has to be implemented, full terms be damned, but becomes the catalyst for ongoing CHF strength as European deposits once again rush to the relative safety of the last remaining relatively stable European currency (and of course gold). The result will be an ongoing squeeze in Switzerland, which we now believe may be one of the first countries from the core to feel the vigilantes' wrath shortly after Spain is bailed out, some time in Q1 2011.

Impotence defined - 1.3240 is the new EURCHF level at which the Swiss National Bank can only stare, dread and do nothing about. At least the USDCHF has slowed it descent to parity as all of Europe is scrambling to shift its deposits out of local banks and into those of Switzerland. Patience - there are two more days before the LTRO termination, and we may see some real fireworks in the next couple of days as we may witness an unprecedented rush to relocate bank assets. We would not be surprised to see a 1.2x handle in the pair. Elsewhere, there is a true bloodbath in European CDS again, not so much in the usual whipping boy Greece, but Spain, Hungary, and Italy. The shotgunning of risky credits, er, sovereigns has begun. Oh. and remember that "stress test" that was supposed to restore credibility? According to reports Deutsche Bank, Commerzbank, and BayernLB, whose combined assets are likely multiples of Germany's GDP, have passed the stress tests. And nobody gives a rat's ass. Geithner's credibility restoring propaganda plan has now suffered massive failure.

A few months ago we drew the ire of RBS for suggesting that Greek savers are pulling their deposits out of Greek banks and expatriating assets, in other, less polite words, consummating a bank run. Today we risk that anger again, by taking the very same logic we used logic to the next degree, namely that there could well be a capital flight out of the entire continent of Europe. Some pundits have already suggested this, by looking at March and April TIC data, which however is sufficiently delayed to be irrelevant as the real European festivities only started in May. A far better proxy is the surge in Swiss FX reserves, which took these from 28% to 43% of GDP in one month! Obviously, this was due to intervention actions meant to moderate the rate of increase in the CHF, due to conversion of Euros into Francs as foreigners were depositing tens of billions into the country's banking system. With the EURCHF now back to 1.3743, or a level below all previous interventions, either the SNB has thrown in the towel or, as we wrote yesterday, another round of EUR buying is due any minute. In either case, the underlying problem continues - the broader public is buying CHF and selling EUR in droves, threatening to push the EURCHF to fresh all time lows, certainly signifying a capital flow out of the so-called European core, and into the little country by the alps with lots of cheese, chocolates and bank vaults. Below are Goldman's relatively more moderately noted, but just as troubling, thoughts on the matter.

Yesterday we disclosed that the reason for numerous SNB interventions in the EURCHF was due to billions in deposits rushing out of Germany and seeking the relative stability of Swiss neutrality. A quick look at the trading pattern of the GBPCHF shows that it is now UK depositors who are panicking and shifting their money to unnamed (not so much anymore) Zurich bank vaults. The result: a 300 pip move in the GBPCHF as the SNB rushes to put out this particular capital flight fire. Too bad it only succeeded for about 12 hours. The run on the bank (to another bank) in Europe is now on.

Sorry, we just can't resist. It's just too easy when dealing with the best and most erudite, if only just massively nationalized, bank in the world. Ever. Yet what is much more relevant, this story explains just why the US is taking the capital flight control measures we discussed recently. Too bad Greece did not have the foresight to institute comparable controls when it had the chance.

A month ago Zero Hedge was ridiculed by RBS' Head of European Rates Harvinder Singh for daring to suggest that Greece was experiencing a bank run. Surely, RBS, with its stash of Greek bonds that it desperately needed to offload, did not need any additional bad news spooking the more timid elements. After all someone would need to buy the endless toxic assets that RBS had managed to accumulate over the years before it needed to be bailed out by its government. Alas, as so often happens when banks gets involved (we would say big, but RBS is a third tier toxic asset repository at best) and refute Zero Hedge, things don't quite work out their way, and yesterday none other than Greek newspaper Eletherotypiha confirmed that "there had been a rush to
withdraw funds from banks." Oops.

We were pleasantly surprised earlier today when we discovered that the "head of European rates" at RBS, or as it is better known in the US as CRT LLC (see here, here and here), Harvinder Sian, not only sends out mollifying notes to clients with extended references to "excitable" blogs such as Zero Hedge, but that apparently cost-cutting measures have forced RBS to cancel their over-budget Dow Jones wire service.

And you thought the FDIC had its hand full in the US (even though the ominous "lack" of failures this past Friday prompted many to ask whether or not the FDIC has any funds left to even take over the hundreds of upcoming bank failures). As of this morning, well-known Dutch bank DSB Bank, which gives loan to lower-income people, has been put into "curatorship" (another words for taken over by its respective central bank), after its clients staged a full-blown bank run. This is probably not good news for the former secretary of finance Gerrit Zalm, who was previously CFO of DSB and is currently CEO of ABN/AMRO.

Alan Grayson, the not-so-caped crusader who has a penchant for irreverently exposing weapons grade stupidity especially when it is manifested by such systemic cogs as FHFA's Jim Lockhart, who is "supposed" to know what it was that caused the implosion of the GSEs he currently presides over, continues his rampage, and this time takes on Fannie Mae.