Portugal

Germany remains vehemently opposed to any euro-wide deposit guarantee scheme as the head of the association of savings banks believes it: "would lead to a spreading of risks to the detriment of German financial institutions" and that this would "increase the burden for national protection schemes, which is not in the interest of German banking clients". Not exactly encouraging and along with the fact that Goldman notes that Germany's 'growth plan' (which includes increasing EIB capital and redirecting existing funds to the periphery) with which it will attempt to bolster its opposition to soaking up more peripheral risk, contains 'nothing really new in it'. For this reason Goldman is far less sanguine heading into the ECB meetings as they hope for the best and prepare for the worst. They expect Draghi's forward-looking statements on being ready to act, conditional on events in the periphery, will be the most important headlines but expect him to remain stoic in his position on governments contributing to the solution. Goldman's view remains that, at least for the time being, the ECB has to play a leading role in stabilising the system (though SMP remains marginalized given its potential to sit outside of the ECB mandate) given that it can operate more quickly and more effectively, given the many political constraints governments face. A genuine long-term solution, however, falls once again in the domain of governments.

We will get a test once again as to the effectiveness of the central bank/MoT confidence game.

The Fed and the ECB have successfully concealed the fact that many of the big money center-like banks are truly zombified to the nth degree. What do you think happens when secondary shocks rumble through the system and banks are expected to show an prove?

We have recently witnessed a boom-and-bust cycle in Real Estate in Europe that overcame the banks of several nations including Ireland and Portugal. Now Spain is about to show up to be counted in my view. The issue all across Europe is that the sovereign does not have enough assets or capital to bailout their banks and many European banks are impaired; make no mistake. The first move was to lay off a lot of non-performing assets in securitizations at the ECB but the price always gets paid which will either be severe losses at the ECB requiring re-capitalization or the ECB handing back the collateral to the various banks which would probably bankrupt some of them especially in Spain, France and Italy. The ECB maneuver brought early success but now, as loans become due and as non-performance builds and losses must be recognized; the real truth forces itself upon balance sheets. There is a day when the auditors say, “Show me the money” and when it isn’t there the infamous “Oh My God” moment begins. Now Bubba, when you use the screwdriver and release the air from the tires it causes all of those little lights on the dashboard to begin to flash and then if you try to drive the car it goes “bump-bump” down the road. No Bubba, get off of your knees and get your mouth off of the thingy; you cannot blow air back into the tires that way.

The absence of the UK from today’s trade is particularly evident, with volumes remaining particularly light across all asset classes. Nonetheless, European equities are largely seen drifting higher with the exception of the DAX index, which is yet to move over into positive territory. News flow remains light with the highlight of the day so far being comments from the Troika, confirming that Portugal remains on track with its bailout program, and have confirmed that the country will receive the next EUR 4.1bln tranche in July. FX moves remain in a tight range, with EUR/USD looking relatively unchanged, with the USD index slightly weaker as the US comes to market. Looking ahead in the session, participants can look forward to US ISM New York and Factory Orders data as the next risk events of the session.

The past two weeks it was Spain, now it is back to Portugal, which overnight announced it is bailing out three banks to the tune of €6.65 billion. If at this point who is bailing out whom is becoming a confusing blur - fear not: that is the whole point. From AAP: "Portugal will inject more than 6.65 billion euros ($A8.49 billion) into private banks BCP and BPI, and the state-owned CGD to meet criteria established by the European Banking Authority. "In all, the state will inject more than 6.65 billion euros in these banks," though five billion euros is to come from an envelope worth 12 billion included in a financial rescue plan drawn up in May 2011, the finance ministry said. Portugal last year became the third eurozone country after Greece and Ireland to be bailed out, receiving an EU-IMF package worth up to 78 billion euros in return for a commitment to reform its economy and impose austerity measures." And surely that will be it, and Portugal will be fixed. Just like Spain was fixed, until someone actually did some math and found a hole up to €350 billion out of left field. Funny how those big undercapitalization holes just sublimate into existence, usually moments before client money is vaporized.

All you need to read.

We have reached a point where the shepherd has shouted “wolf” one too many times, where the theatre goer has shouted “fire” one too many times and the crowd no longer believes the jargon and is standing pat. From one politician to the next in Europe the words are strikingly the same; “bold actions, courageous decisions, decisive plans” which are meant to stoke the propaganda machine and assure the world that all is well. We have had the bank stress tests; the first pockmarked by inaccurate data checked by no one and the second humiliated by an inaccurate construct which discredited it by its own shameless manipulation. We face a world where contingent liabilities, promises to pay and guarantees of debts are NOT counted and where asset guarantees, illusionary firewalls and unfunded rescue programs ARE counted and in some cases counted more than once. Europe has, in fact, provided a complex system of hoaxes, inaccurate data and false financial reports that have been for the most part believed but that belief system is now crumbling as every quarter presents new data that proves the inaccuracy of what we have been told.

Dodge City, Kansas is a lovely place. The home to 26,101 people regularly enjoy old west casinos, old west rodeos and old west movies. Like we say – it is a lovely place. Yet years ago when it was still cool to be a cowboy, cowboys of all types were getting’ out of Dodge. And who could blame them - bullets flew around town on a regular basis. As we look across the globe today, Dodge City’s are popping up all over the place across America, Europe and Asia. However, within the World of financial markets, government sponsored economic policies are desperately trying to keep everyone in the 2012 financial version of Dodge. Today’s question of the century is which market is the equivalent of Dodge? One thing is for sure, financial bullets are flying fast and furious these days forcing every sane investor to keep their head down. For all other investors, be a good cowboy and be sure to have an exit plan – you never know when you’ll need it.

The ECB has €50 billion of GGB bonds still on their books.  Those would not get paid at par by Greece if this is an amicable breakup, but this is quickly heading to a pots and pans thrown in the kitchen sort of break-up.  Why would Greece pay the ECB if they feel like the ECB drove them out?  Don’t forget, not for a second, that most of the money Greece now gets goes to pay back the ECB and IMF.  The EFSF is totally out of luck.  The ECB might be able to offer something to a post drachma Greece, but the EFSF offers nothing.  The IMF has more negotiating power, as their direct loans had more protection in the first place and they are likely to provide additional funds post exit, but quite simply Greece won’t be able to pay them in full on existing loans. With the ECB, EFSF, and IMF all taking big losses, their credibility is hurt.  Worse than that, they have exposure to Portugal, Ireland, Spain and Italy and the markets (if not the politicians) will become very concerned about those exposures.  The IMF may see its alleged firewall crumble before it is ever launched.  The ECB, integral to any plan to protect Europe will have lost credibility and many will question their solvency.  The EFSF will be hung out to dry and immediately the market will attach all their risk to Germany and France, not making people in those countries particularly happy.

We finally get to continue what we started in 2008. Becuase the TPTB insisted on kicking the can down the road, the resulting pain will be excruciatingly devastating versus simply horrible! Alas, once you get you short positions/puts/futures in before the inevitably ill-informed short ban, money can still be made. 

“Gear up!” That is what I say to you this morning. Open your closet door, drag out the flak jacket from 2009, lace up your boots, unlock your guns, bring out the ammo and get ready to go at it one more time because the placid fields of Verdun, long silent, finds the Germans and the French at it once again and we are all about to be dragged back into it; like it or not. There is quite serious business afoot and, just like in war, the political statements made are nothing more than propaganda to mislead the enemy and the enemy is YOU.

All you need to read.

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.

Just in case there's somebody left who still believes so, Spain is not going to make it. In addition, Spain will crack the EU and bring the art of true fundamental analysis back into the fold.  Here's mucho evidence!