Just when one thought it was safe to come out of hiding from under the school desk after the latest nuclear bomb drill (because Europe once again plans on recycling the Euro bond gambit - just like it did in 2011 - so all shall be well), here comes David Rosenberg carrying the launch codes, and setting off the mushroom cloud.
Translating Germany's standard line on joiontly-backed European bonds is simple: "We don't want to pay" - it is as simple as that so you can ignore the rest of the rhetoric. France at the next EU summit is going to push for Eurobonds and Germany will resist in what may be a quite unpleasant stand-off. From Germany’s perspective we can easily understand their feelings about this matter because the consequences of Eurobonds are very negative for them. Eurobonds are quite clearly a “transfer union” where Germany is the primary source of funding then for the rest of Europe. If Eurobonds are ever enacted we would suggest selling any/all of the “AAA” countries and buying the periphery ones as the correct play in the intermediate term. In fact, Eurobonds are the crux where Federalism comes head to head with Nationalism and where the rhetoric gives way to actualization.
No one likes paying taxes. You’d think.
Michael Hudson argues that Mr. Krugman is a conservative in disguise.
“I don’t envisage, not even for one second, Greece leaving. This is nonsense, this is propaganda.”
– Jean-Claude Juncker, Chairman EuroGroup FinMin Committee
“When it becomes serious, you have to lie.’’
– Jean-Claude Juncker, Same guy
The Elephant In The Room: European Capital (Out)flows And Another €215 Billion In Spanish Deposit FlightSubmitted by Tyler Durden on 05/21/2012 15:19 -0400
Frequent readers know that Citi's Matt King is our favorite analyst from the bailed out firm. Which is why we read his latest just released piece with great interest. And unfortunately for our European readers, if King is right, things in Europe are going to get far worse, before they get better, if at all. Because while one may speculate about political jawboning, the intricacies of summit backstabbing, and other generic nonsense, the one most important topic as discussed lately, is that terminal event that any financial system suffers just before it implodes or is bailed out: full scale bank runs. It is here where King's observations, himself a member of a TBTF bank which would likely be dragged down in any cash outflow avalanche, are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows." That's right: according to Citi there is a distinct likelihood that, all else equal, the domestic bank sector in Spain will see another €215 billion in deposit outflows.
The policy responses and hints of policy responses are starting to come out. What will they be, how big will they be, and what will they accomplish remains to be seen, but the market is due to rally on almost anything. We expect some announcements out of Europe. A policy shift towards “growth” and some new ECB plans. We don’t think they will work well, especially if they don’t address the root of depositor fear in Spain, Ireland, Portugal, and Italy, but with so many indicators pointing to oversold conditions, the markets could snap back, and that is the way Peter Tchir of TF Market Advisors is leaning.
Taxation is theft. There is no denying this. If I and a few brutes appeared at the door of an unsuspecting individual and demanded monetary compensation less we drag him off to jail, this would be a clear cut case of robbery. It is a common tactic used by mobs or street gangs to offer protection with the barrel of a gun. The only difference between shakedowns by private thugs and those employed by the state is the badge. The badge legalizes extortion and imprisonment. With that being said, it has been three years since the financial crisis and governments around the world are still reeling in the lesser Depression. Tax collections are down while public expenditures have skyrocketed in a vain effort to stabilize the economy. Much of this mass orgy in spending has been financed by central banks printing money and the suppression of interest rates down to artificially low levels. This is the Keynesian remedy to recession. Spend what you don’t have via the printing press. Have central bankers create paradise on Earth through counterfeiting.
So far it hasn’t worked.
A rare moment of optimism from David Rosenberg: "I've said it once and I'll say it again. And believe me, this is no intent to wrap myself up in stars and stripes. But there is a strong possibility that I see a flicker of light come November. The U.S. has great demographics with over 80 million millennials that will power the next bull market in housing, likely three years from now. After an unprecedented two straight years of a decline in the stock of vehicles on the road, we do have pent-up demand for autos. I coined the term "manufacturing renaissance" back when I toiled for Mother Merrill and this is happening on the back of sharply improved cost competitiveness. Oil production and mining services are booming. Cheap natural gas is a boon to many industries. A boom in Chinese travel to the U.S. has triggered a secular growth phase in the tourism and leisure industry. The trend towards frugality has opened up doors for do-it-yourselfers, private labels and discounting stores.... Few folks saw it at the time. But it's worth remembering, especially now as we face this latest round of economic weakness and market turbulence. It is exactly in periods of distress that the best buying opportunities are borne...and believe it or not, when new disruptive technologies are formed to power the next sustainable bull market and economic expansion. Something tells me that we are just one recession and one last leg down in the market away from crossing over the other side of the mountain. And believe me, nobody is in a bigger hurry to get there, than yours truly. At the risk of perhaps getting too far ahead of myself, but you may end up calling me a perma-bull (at that stage, I must warn you, folks like Jim Paulsen will have thrown in the towel)."
Name the plunging bond shown on the left. If you said some sovereign or corporate issue based out of Spain, Italy, Ireland, Portugal, or even Greece you would be close... but no cigar. No - the bond in question is an issue of Caisse Centrale du Credit Immobilier de France (3CIF), which together with its sister entity CIF Euromortgage (CIFE), is a 100% subsidiary of Credit Immobilier de France Development (CIFD), which as Fitch describes it, is a French "housing loans specialist, with business exclusively directed to France." CIFD is in turn owned by Procivis Group, which just happens to be France's second largest full-service real estate group.
While all eyes are focused on Greece (and contagiously Spain), they have forgotten that two far weaker countries still exits - and combined have the power to do as much (if not more) damage than Spain. Portugal and Ireland have moved back into the Red-Zone of risk in Europe's credit markets. Ireland back over 700bps and Portugal back over 1200bps reflects both their idiosyncratic issues (that we have discussed at length) or the systemic issues (which we discussed most recently this morning here). In the case of Portugal, it appears the Dan Loeb trade (we said to fade it) is now being unwound en masse as the reality of the fundamental risks we discussed here seem to be realized. In the case of Ireland, not only is there a rising chance of a 'no' vote at the forthcoming referendum (discussed here) but as Deutsche Bank notes today, via Bloomberg, that Irish banks may face a further $5.1 billion capital call to cover loan losses as "A new, even modest, increase in capital requirements could deter sovereign investor participation and tip the balance in favor of the sovereign requiring a second loan program." Of course the CDS reflect not just the chance of these nations restructuring but also the probability of a EUR devaluation (since the instruments are denominated in USD) but still - we thought Ireland was the template for the success of austerity?
There's a big, fat "I told you so" coming down the pike.
We may already be in Fimbulvetr, the winter of winters, and it is a cold wind that whips across the European plains blown in from the Southern climes high up into the Alps and then down into the cities of man. In Norse mythology this was a three year event and the creaking of the ice can be distinctly heard if only you listen. Many will not listen, this one can predict, and the clothes that will be worn will not protect the unhearing from the freeze which will surely come. But you and me, we have gazed long for the riders of the North and seeing them; we are prepared.
- Inside J.P. Morgan's Blunder (WSJ) - Where we learn that Jamie Dimon did not inform his regulator, the Fed, where he is a board member of the massive JPM loss even as he was fully aware of the possible unlimited downside
- Euro Attempted Recovery Countered By Asian Sovereigns (MNI)
- Santander, BBVA Among Spanish Banks Downgraded by Moody’s (Bloomberg)
- Defiant Message From Greece (WSJ)
- G-8 Leaders to Discuss Oil Market as Iran Embargo Nears (Bloomberg)
- Spain hires Goldman Sachs to value Bankia (Reuters)
- China to exclude foreign firms in shale gas tender (Reuters)
- Fed Board Nominees Powell, Stein Win Senate Confirmation (Bloomberg)
- Defiant Message From Greece (WSJ)
- Fitch Cuts Greece as Leaders Spar Over Euro Membership (Bloomberg)
- Madrid Hails Moves by Regions to Cut Spending (WSJ)
As was leaked earlier today, so it would be:
- MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
- MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
- MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE
In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.