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Eric Sprott: The Real Banking Crisis, Part II

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Here we go again. Back in July 2011 we wrote an article entitled "The Real Banking Crisis" where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.... Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what's left of European citizens' confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people's growing distrust of the banking system - and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe.

The Monster Has Awakened

The most significant event of yesterday was not the Spanish banking system unlocking the door to the horror chamber and clicking the melt-down button that it found on the wall but what happened at the European Union. Brussels turned, and looking Berlin squarely in the eye, it used impolite words and gestures and essentially said: "Stick it." Brussels has now called for Eurobonds, has called for the ESM to fund the European banks and it a sign of their new felt independence, has thrown all of this squarely in the face of Germany, the Netherlands, Finland et al who are providing the money. The game has changed. It will no longer be push and shove and muddle through but convictions and ideology that are in stark opposition so that surprises and inflamed statements will become the order of the day and not the exception. If it is to be either Germany for the Germans or Germany for the citizens of Athens, make no mistake in your thinking; Berlin will prevail regardless of the outlying costs to either the nation or to the future of the Union that theoretically governs Europe.

Spain Is The Most 'Over-Banked' Nation In Europe

Between headlines of Bankia's demise and the growing deposit outflows from Spanish banks, perhaps the market is doing its job. According to the EC's Stability Report, via UBS, one measure of bank sector capacity and efficiency (population per bank branch) shows Spain in a dismal worst place with the least efficiency (or highest over-capacity). Of course, we would suspect that whatever state-funded reach-around bailout the Spanish government comes up with next will not contain a 'revert staff/branch levels to European norms' provision - better to pay up for mis-allocation of capital. Nonetheless, the large number of local bank branches in countries like Germany, France, Italy and Portugal indicates a potential for further consolidation and restructuring there also.

As Draghi Fiddles And Madrid Burns, China Buys

At this point it is no longer interesting to recap the ever-growing list of problems facing Spain - we all know the country needs billions and billions in aid to merely contain its implosion, let alone grow. And while as of as of minutes ago we just got another rumor of "Accelerated Kinetic Action In Close Proximity To Cash Dispensing Machines" which is the proper nomenclature, as the B-R word is not in good form these days it appears, the real news is that as the ECB fiddles, and Madrid burns guess who is buying? Why China of course.

And Back To The Inferno

You know the something is really, really wrong when the best rapper is a white guy, the best golfer is a black guy, the tallest guy in the NBA is Chinese, the Swiss hold the America's Cup, the Pope is German, Europe's central banker is Italian, France is accusing the U.S. of arrogance and Germany doesn't want to go to war.

ECB's Refusal To Play Ball Means Spain Has To Foot A €350 Billion Bailout Bill Alone

Moving away from baseless (or is that faceless?) European bailout rumors, and moving into cold hard math territory, we hear from JPM's David Mackie that "If a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." This may be a problem since as pointed out on Tuesday, the Spanish Fund for Orderly Bank Restructuring (FROB) is down to... €5.3 billion.

Germany Has A Generous Proposal To The Broke PIIGS: "Cash For Gold"

Back in February, as part of the latest Greek bailout of European banks, we noted that the most subversive part of the German-led proposal was nothing short of a gold confiscation scheme. Today, courtesy of The Telegraph, we learn that Germany is quietly reminding the world that the stealthy, but voluntary, accumulation of gold is what it is all about. As part of a newed push for quasi-Federalism, whereby Germany would fund a "European Redemption Pact", in which Berlin would, in the form of Germany-backed joint bonds, be responsible for any sovereign debt over the 60% Maastrtich limit, but with a big catch. The catch is that "a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said. Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal. In other words: a perfectly legitimate, and fully voluntary scheme in which sovereign gold is pledged to a German "pawn broker" until such time as the joint bonds are extinguished, and if for some "unpredictable" reason, a country fails to meet its obligations, read defaults, all the pledged gold goes to Germany!

But why Gold? Why not spam. After all gold is selling off, spam is stable, and the dollar is soaring. Couldn't Germany merely demand that broke countries simply pledge all their USD reserves, and keep their worthless, stinking yellow metal? Apparently not.

The Buyers Have Left The House

Slowly, surely the largest investors in the world are no longer buying the debt of Europe. Recently the Chinese sovereign wealth fund, China Investment Corp., said that they were done and would no longer be buying European debt. The risks are just too great and the way Europe does business is also having a serious effect. You see, Europe does not count any contingent liabilities, sovereign guaranteed debt, derivatives, bank guaranteed debt, regional guaranteed debt or promises to pay for various entities as part of their calculation for their debt to GDP ratios. What can clearly be said then is that the numbers we are given, the data that is flouted day in and day out as accurate is nothing short of a con game built on a Ponzi scheme that rests on the back of a financial system that has been purposefully designed to distort the truth. Regardless of your opinion about all of this there are consequences to this type of manipulation that are in the process of becoming realized. Eventually, when hopes and prayers give way to reality, losses are taken and I submit that we are just at the beginning, just at the start, of seeing realized losses begin to hit balance sheets. The European nations and banks have performed a neat new trick, nailing themselves to the Cross, and it is now only for Pontius Pilate to pick up the spear and begin.

Key Events In The Shortened Week

Despite closed US stock markets today, FaceBook stock still managed to decline, while Europe dipped yet once again on all the same fears: Greece, Spain, bank runs, contagion, etc. Shortly Europe will reopen, this time to be followed by the US stock market as well. While in turn will direct market participants' attention to a shortened week full of economic data, which as Goldman says, will likely shape the direction of markets for the near future. US payrolls and global PMI/ISM numbers are expected to show a mixed picture with some additional weakness already fully anticipated outside the US. On the other hand, consensus does expect a moderate improvement in most US numbers in the upcoming week, including labour market data and business surveys. As a reminder, should the Fed wish to ease policy at its regular June meeting, this Friday's NFP print will be the last chance for an aggressive data-driven push for more QE. As such to Zero Hedge it is far more likely that we will see a big disappointment in this week's consensus NFP print of +150,000. Otherwise the Fed and other central banks will have to scramble with an impromptu multi-trillion coordinated intervention a la November 30, 2011 as things in Europe spiral out of control over the next several weeks. Either way, risk volatility is most likely to spike in the coming days.

Spiegel Interviews Tsipras: "If Greece Is Destroyed, It Would Be Merkel's Fault"

The person who has caused global stock markets so much consternation by daring to play chicken with Germany until the bitter end conducts a  no holds barred interview with Germany's Spiegel. There is little love lost between the Syriza leader and the Germans, who were quite surprised to find a political leader who is willing to play blink with Germany, with the ECB, and the developed world until the very end, or June 17, whichever comes sooner. Tsipras' bottom line: "We're trying to convince our European partners that it's also in their interest to finally lift the austerity diktat." Alas, the European "partners", as evidenced by Lagarde's Guardian interview this weekend, have an image of Greece as a bunch of lazy tax evaders, who only seek to mooch on the German teat, resulting in 60% of Germans now pushing for Greece to be kicked out of the Euro, consequences be damned. Nothing new there. What is curious is Tsipras' answer to the question everyone wants to ask: "If Greece ultimately exits the euro, you will also bear some of the blame. You promised your voters the impossible: retaining the euro while breaking Greece's agreements with the rest of Europe. How can such a plan find success?" His response: " I don't see any contradiction in that. We simply don't want the money of European citizens to vanish into a bottomless pit...we think these resources should also be put to sensible use: for investments that can also generate prosperity. Only then will we in fact be able to pay back our debts." Yet the line that will draw the most ire out of the already exhausted German taxpaying public is the following:

"if our economic foundation is completely destroyed and the decisions of an elected Greek government are not responsible for it but, rather, certain political forces in Europe. Then they too will be guilty, for example Angela Merkel."

Well, in the US, it is all Bush's fault; in Greece, it appears to be Merkel's.

Frontrunning: May 28

  • Merkel Prepares to Strike Back Against Hollande (Spiegel)
  • China to subsidise vehicle buyers in rural areas (Reuters) - what could possibly go wrong
  • Bankia’s Writedowns Cast Doubts on Spain’s Bank Estimates (Bloomberg) - unpossible, they never lie
  • Shares in Spain's Bankia plunge on bailout plan (AP) - oh so that's what happens when a bank is bailed out.
  • SNB’s Jordan Says Capital Controls Among Possible Moves (Bloomberg)
  • Greeks Furious Over Harsh Words from IMF and Germany (Spiegel)
  • Tehran defiant on nuclear programme (FT)
  • Finally they are getting it: Greece needs to go to the brink (Breaking Views) - of course, Citi said it a week ago, but it is the MSM...
  • OTC derivatives frontloading raises stability concerns (IFRE)
  • Wall Street Titans Outearned by Media Czars (Bloomberg)

Complete European Calendar Of Events: May - July

There are still 3 weeks until the next so very critical Greek elections (which if we are correct, will have an outcome comparable to the first, and not result in the formation of a new government absent Diebold opening a Santorini office), meaning the power vacuum at the very top in Europe will persist, and while the market demands some clarity about something, anything, nothing is likely to be implemented by a Germany which is (rightfully, as unlike the US, Europe does not have the benefit of $16 trillion in inflation buffering shadow banking) concerned by runaway inflation if and when the global central banks announce the next latest and greatest global bailout, which this time will likely by in the $3-5 trillion ballpark. However, none of this will happen before the market plummets as Citi explained last weekend, and Europe has no choice but to act. Luckily, as the events calendar below from Deutsche Bank shows through the end of July there are more than enough events which can go horribly wrong, which ironically, is precisely what the market bulls need to happen for the central-planning regime to once be given the carte blanche to do what it usually does, and believe it can outsmart simple laws of Thermodynamics, regression to the mean, and all those other things central bankers believe they can simply overrule.

Europe Is Fighting the Wrong Battles Again

Europe continues to fight the wrong battle, and continues to spread contagion risk. It is clear that Greece has had a solvency issue now for over 2 years.  The ECB and Troika chose to treat it as a liquidity problem.  Maybe, they could have argued that in early 2010, but by the summer of 2011 it was obvious to any credit observer that the problem was solvency, yet they continued to treat it as one of liquidity.  That is scary because if they fail to see the problem correctly now, they will fail miserably.  Not only is the problem clearly solvency, but now forced currency conversion has been added to the mix. Any "solution" from the EU must now address that risk, and it is not the same as solvency.  Programs that can protect against solvency may do nothing for the redenomination risk. We keep playing with scenarios and find it hard to find out where a Greek exit doesn't result in a steep sharp decline in the market.  We could go through more ideas of ECB intervention, but in the end most will have flaws.  Dealing with currency conversion risk is huge.  Dealing with the contagion risk that has been created by the EFSF is huge. Will Europe force Greece out thinking they have a plan; that fails miserably and sparks the miserable series of consequences we’ve outlined?  Sadly, yes.