Eurozone

It was only a matter of time... Needless to say, this is obviously so wrong on so many levels, but what can you do. At this point the endgame is in play so at least we can all laugh about it.

Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.

In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things,  and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.

Looking at this Friday's n^th European summit, one could be forgiven to forget that so far in 2011 there have been no less than 10 Eurozone finance minister meetings and summits. TEN. And courtesy of Reuters we have an annotated overlay of the MSCI Eurozone bank index' performance so far in 2011. Unfortunately, one quick glance at the chart leads us to two very sad conclusions: i) the time will not be different, and ii) a "favorable" market response will require an hourly barrage of FT/Guardian/La Stampa/Nikkei rumors just to get the ES green, if only for a few minutes. So without further ado, here is the interactive annotated superimposed analysis showing the Eurozone historical meetings/summits and the reaction in bank stocks, Greek and Italian bonds, and the all important Euro.

Three months ago, Zero Hedge presented the first of many narratives that started the thread of explaining the "unmitigated disaster" that would ensue should the Euro break up, which in the words of authors Stephane Deo and Larry Hatheway, would leads to such mutually assured destruction outcomes as complete bank failure and/or civil war or far worse. Because if there is one thing the banks have learned in the aftermath of Hank Paulson, is that scaremongering when bonuses are at stake is the only to get taxpayer money to fund exorbitant lifestyles.,, Today, Larry Hataway has released yet another sequel to the original piece, focusing on this so very critical week for Europe, which as Olli Rehn said, must find a solution by Friday or see the EU "disintegrate", in which the vivid imagery, loud warnings and level of destruction are even greater than before. In other words, Europe has 4 more days, something which S&P tried it best to remind Europe of, as the alternative is "or else." And here comes UBS to remind everyone that anything but a "fix" to a system that was broken from the very beginning, would be a catastrophe, captured probably the best in Hatheway's recommendations of assets to be bought as a hedge to a Euro collapse: "I suppose there might be some assets worthy of consideration—precious metals, for example. But other metals would make wise investments, too. Among them tinned goods and small calibre weapons." But even that is nothing compared to the kicker: "Break-up runs the risk of becoming one wretched scenario. Sadly, however, it can’t be ruled out, just as it would have been improper to rule out the horrors of the first half of the 20th century before they happened." And there you have it: a reversion by Europe to the perfectly stable system from a decade ago, is now somehow supposed to result in World War. And with that the global banking cartel has official jumped the shark, just like the FT's latest rumor earlier today did the same by indicating that the well of European "bailout" ideas has officially run dry.

Why bother with the one true barbarous relic - democracy - when good ole' fascism will suffice. As The Telegraph's Bruno Waterfield reports, "EU to avoid any votes - parliamentary or popular on treaty change - via obscure Lisbon Treaty 'passerelle' clause, Art. 126 (14) via protocol 12. "This decision does not require ratification at national level. This procedure could therefore lead to rapid and significant changes," says confidential Van Rompuy text. Funnily enough, only Britain will have to have a parliamentary vote under the Tories recent Sovereignty Act even though it is eurozone only changes." And that is how a bunch of corrupt kleptocratic incompetent eurocrats usurp all power in a regime now entirely controlled by Goldman Sachs. Unless, of course, the UK once again stops the insurgent takeover of the insolvent continent by the squid.

Looking back at the year it is amazing to think that just how much has already happened in the year that was, and still has at least one month left, unless of course the accountants have something to say about it and the calendar is cut short by a month or so to allign with Jefferies Fiscal Year End. Hopefully without jinxing any fireworks, we present one of the best lookbacks at what has transpired in Europe, courtesy of this interactive timeline from Reuters. Also hopefully without spoiling too much, here is the not so surprising ending - the Titanic sinks in the end.

Gold is lower in all major currencies today except euros with euro gold having risen 0.25% to EUR 1,263/oz. The euro came under pressure due to the surprise collapse in new Eurozone industrial orders which led to Germany failing to get bids for 35% of bunds offered. The German 10-year bund yield rose sharply from 1.92% to over 2.06%. This is one of Germany's worst auctions since the launch of the Euro with the Bundesbank having to pick up nearly 40% of the 6 billion euros on offer. The German auction in turn led to further weakness in European equity markets. Asian equity indices followed US equities lower after news of a new US bank stress test and then the poor Chinese manufacturing data. Gold will be supported at these levels as the euro zone debt crisis continues to degenerate with the periphery increasingly affecting the core – leading to contagion. The bond auction in Germany is a disaster. If Germany has to buy its own bonds, it is frightening to think how other European nations, including France, will fare at bond auctions in the coming weeks. Gold remains possibly the most under-owned asset in the world, and definitely the most infrequently and poorly covered in the mainstream media.

Below we present the note from Nomura which is making the rounds today following the WSJ article referencing it and which touches upon a topic discussed by Zero Hedge way back before even the second Greek bailout from July 21, namely that the statutory law governing the sovereign bond indenture (i.e., whether bonds are issued under Greek or English law) should have major implications for trading dynamics due to the defatul fallback currency in the case of a currency collapse. In a nutshell: "Bonds issued under local law, such as Greek law, would likely be converted from euros into a new local currency—a blow to any investors left holding the paper. "New" currencies, such as a new drachma, could rapidly fall in value by as much as 50%, according to most estimates. Foreign-law debt, on the other hand, would be more likely to remain in euros, assuming a smaller euro still existed at all, the bank said." That Nomura and the WSJ is only half a year late with this discussion is not surprising. What is surprising is that the discussion has appeared in the first place: needless to say this is another rhetorical escalation in the push to get Merkel on the "same page" as it being telegraphed all too loudly that investors are now actively gearing up for a Eurozone collapse. Then again Nomura bankers are people too and deserve to be well paid for being part of the detested 1%. How else will this happen unless they too join the onslaught by the global banking syndicate which now consists of Deutsche Bank, JP Morgan, Barclays, Credit Suisse, and virtually everyone else, expect for Goldman of course, which appears quite happy with the chips falling as they may. After all, it already has Europe by the political short hairs. Now it just needs to take charge financially too. If in the process a few not so good banks are converted into omelette, so be it.

It's official - Germany has become just like China (or, rather, has always been like it): the more it is pushed to do something (let ECB print), the more it will do the opposite. Half a year ago we discussed that the weakest point of the European bailout language was its reliance on Collective Action Clauses which imply that any resolution which does not have 100% backing of all bondholders would potentially push a country into default. In essence, this took control out of the hands of the Eurozone head, Germany, and put it to the bondholders. Well, according to a preliminary draft released by the Telegraph and FT, as part of the new bailout 'indenture' contained in the ESM, "under a section headed “The establishment of a procedure for an orderly default as part of the ESM”, Berlin makes clear that countries which are deemed to be insolvent – rather than just suffering a temporary loss of access to the financial markets – would be allowed, in effect, to declare bankruptcy and default on their bonds: If [a debt sustainability review] is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared. In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europe-wide rules on bank restructuring." And as we discussed previously, the voluntary language will likely be taken out from the final draft, effectively giving Germany the unilateral ability to kick countries out. Which explains why the market is about to plunge: according to just released information from DPA, "the German Foreign Ministry on Friday confirmed that Germany was considering the possibility of more eurozone "orderly defaults" beyond that of Greece, as suggested by a paper leaked by the British press." In essence, what this means is that instead of relenting on the ECB issue, which as every investment bank has said would be the end of the world unless massive printing is permitted, Germany would rather kick countries out of the Eurozone instead of entering a hyperinflationary collapse. Perhaps it is now time for the banks to start toning down their language on the imminent destruction that would ensue if the ECB does not print, as this is apparently not happening...

Just hitting the tape... and the EURUSD:

• MERKEL'S CDU VOTES TO ALLOW EXITS FROM EURO AREA

This should not be news: this was reported last week, and the only question is whether or not the "voluntary" language would be embedded in the phrasing. Either way, risk is off.

When dealing with the daily barrage of headlines from Europe, it is easy to get lost in the trees and forget what the forest looks like. That's perfectly understandable - after all, it is precisely the intention of the Eurocrats to confound everyone with noise, so any track of the fact that the big picture is unfixable is if not lost then promptly forgotten, with reactionary newsflow dominating the flawed decision-making process. Luckily, the fact remains that no matter what, no matter the scale of lies out of Europe, the problem still remains: the math just does not make any sense. Conveniently reminding us precisely of this, we present to our readers the must read presentation by Swiss private bank Pictet titled "Decision time for monetary union" which puts the forest right back into focus, and explains why all attempts to kick the can down the street will be met with a prompt and furious response by the bond vigilante crowd, which has now officially been thawed out of cryogenic stasis. Because, all noise aside, the Eurozone has two options - continue the current course which is catastrophic: "Current response to the crisis has created conditions leading the euro area towards depression" or accept the reality and do something about it, yet "things are going to get worse before European authorities decide to wheel out their heavy artillery." Said otherwise: lose-lose. So without further ado, let's dig in...

China has a list of demands. German industry refuses to cede ground. People shudder at becoming dependent on money from the communist regime. Clearly, the debt crisis isn’t deep enough yet.

And there they go again with that word out of place. Just out of Reuters:

• SLOVAKIA'S PRIME MINISTER SAYS EURO ZONE SPLIT MAY BE NECESSARY, DE FACTO SPLIT ALREADY EXISTS

Expect Barroso and Van Stock Ramp to come out with denials and allegations of nuances lost in translation shortly.

Yesterday we wrote that according to a Handeslblatt report, Angela Merkel is "investigating ways to enable countries to leave the Euro." Today Handelsblatt has a follow up with some very critical clarifications which change the equations of the European bailout all over again. Yesterday, the Handelsblatt reported that the CDU "wants to make it possible for European Union members to exit the euro area....A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper." In other words, the transition out would be "voluntary." So it is somewhat surprising that in under 24 hours we discovery that this proposal has just escalated substantially: according to the just released Handelsblatt update, "The CDU wants to change the EU treaties to not allow the departure of a debt-ridden country from the euro zone, but also their expulsion. From the request for the party on Sunday evening at Leipzig, by the Handelsblatt (Friday edition), the crucial word "voluntary" was deleted."