Trichet

As Bankia Bailout Costs Grow Exponentially, Is A Stealth Bank Run Taking Place... And What Happens To Ronaldo?

Note the following sequence of events, bolded numbers, and dates:

  • Bank Of Spain Formally Nationalizes Bankia, Says Insolvent Bank Is "Solvent", Adds There Is No Cause For Concern, Zero Hedge, May 9
  • Spain is taking over Bankia by converting its 4.5 billion euros of preferred shares in the group’s parent company into ordinary shares, BusinessWeek, May 21
  • Spain said on Wednesday its rescue of problem lender Bankia would cost at least 9 billion euros ($11 billion), as the government tries to clean up a banking system that threatens  to drag the country deeper into the euro zone crisis, Reuters, May 23   
  • Bankia SA will have to ask the Spanish government for more than 15 billion euros as part of its effort to restore its financial health, state-owned news agency EFE reported Thursday, citing financial sources, Dow Jones, May 24

Hopefully we aren't the only ones to notice how the bailout cost has oddly doubled almost on a daily basis.

RobertBrusca's picture

 

 

 

 

Bernanke’s legacy is still to be made. But he has put the US economy in a position from which it can succeed. If Europe falls apart, it will be more difficult. If we fall of the fiscal cliff we will have our own Thelma and Louise moment. The Fed Chairman has already said he can’t save us from that shock. It’s really time for fiscal policy makers to step up. As long as they refuse it makes Bernanke’s job all the harder. And the pressure on him is intense.

Bernanke is under a lot of pressure and is given little credit for what have been remarkable achievements. Do risks remain? They sure do. But that result is yet to be decided. Meanwhile risks elsewhere are at least as pressing. Look at his successes...

 

As Europe's Most Pathological Liar Departs, Questions About Europe's Band-Aid Union Reemerge

We doubt many tears will be shed over the now official departure of Europe's most embarrassing political figurehead: the head of the Euro-area finance ministers, one Jean-Claude Juncker, whose presence did more documented damage to the credibility of Europe than... well, we would say virtually anyone else, but then again since everyone else in the European pantheon is a shining example of DSM IV-level sociopathology, we are kinda stuck. But anyway: Juncker is finally gone "he’s tired of Franco-German interference in managing the region’s debt crisis." And while the decision was known for a while, the ultimate catalyst is rather unexpected, and exposes just how frail the entire Eurozone is: “They act as if they are the only members of the group,” Juncker said today at a podium discussion in Hamburg." If this is coming from the man who admittedly lies for a living, we can't imagine just how bad the truth about the internal fissures within the Eurozone must be. Actually, we can.

The Ugly Truth For Northern Europeans

As Europe's exuberance from the LTROs fades (with Italian banks now negative YTD, Sovereigns wider than LTRO2 levels, and financials desparately divided by the LTRO Stigma) Jefferies David Zervos uncovers the sad reality that faces peripheral creditors and Northern Europeans - as we noted a month ago here. The 'success' of the LTRO monetization scheme (as opposed to EFSF/ESM transfer dabacles) is what enabled the Greek restructuring, and as Zervos notes, the losses that the big boys (Spain and Italy) need to take will not be taken via a haircut but a monetization as the number 1 rule is we must always assume that losses will be taken in a way that protects the large northern banks, northern jobs and most importantly Northern politicians. If the loss realization is not managed correctly (and losses there will be), then the ugly truth will escape but the North's large-scale vendor-financing scheme with the periphery will have to continue - even in the knoweldge that the debt will never get paid back.

The income and savings of Northern workers must be ploughed (directly or indirectly) into the rest-of-Europe or the entire structure becomes insolvent and the breaking of that social contract (that they will be looked after when they are old) will inevitably lead to revolt and nasty nationalist political forces being unleashed. The hope to avoid this is the 'wealth illusion' as the workers of the north can never be allowed to realize they have only 50% of their worth in reality. Ireland will be next on the loss-realization-monetization path but as we move from relatively small and containable sovereigns to the big-boys, the idea that Spain and Italy will roll over and accept a decade of austerity in exchange for a haircut is pure folly. These countries hold too much clout in the Eurozone and their threat of exit is a material threat to the northern jobs and hence northern politicians. The only way the northern politicians will be able to save face when it comes to Spain and Italy is through massive monetary policy accommodation. Inflation will rebalance Europe; but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade.

Europe: "€1 Trillion May Not Be Enough"

A core piece of last week's European newsflow was that following much pushback, Angela Merkel, who understands the underlying math all too well, finally dropped her opposition to expanding the European "firewall" in the form of a combined EFSF and ESM rescue mechanisms, to bring the total "firepower" to €800 billion (ignoring for a moment that when the true dry powder of the combined vehicle is just about €500 billion net as explained here, hardly enough to rescue Spain, let alone Italy). Yet as has been explained here repeatedly, and as Merkel has figured out, this is easily the most symbolic expansion of a rescue facility ever. Because while the ECB's agreement to allow Eurobanks to abuse its €1 trillion discount window for three years (which is what the LTRO is), following the replacement of JC Trichet with a Goldman apparatchik, at least infused the system with $1.3 trillion in new fungible liquidity (and resulted in a stock market performance boost for the ages, one which is now unwinding), the 'firewall" does not represent new money, nor is a "firewall" to begin with - it is merely one massive contingent liability which will remain unfunded in perpetuity. Slowly the German media is waking up, and in an article in Der Spiegel, the authors observe that "Even a 1-Trillion Euro Firewall wouldn't be enough." And they are correct, because the size of the firewall is completely irrelevant, as explained later. All the "firewall" does is shift even more backstop responsibility on the only true AAA-country left in the Eurozone, Germany. However, the main cause of problems in Europe - a massive debt overhang which can at best be rolled over but never paid down due to the increasingly lower cash flow generation of Europe's (and America's) assets, still remains, and will do so until the debt is finally written down. However, it can't because one bank's liability is another bank's asset. And so we go back to square one, which is that the system is caught in the biggest Catch 22, as we explained back in 2009. We are glad to see that slowly but surely this damning conclusion is finally being understood by most.

Mario Draghi Is Becoming Germany's Most Hated Man

Back in September, before the transition from then ECB head J.C. Trichet to current Goldman plant and uber printer Mario Draghi we asked whether "Trichet will disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months." Sure enough, following a whopping €1 trillion in incremental liquidity released by the ECB in the three shorts months since Draghi's ascension on November 1, all under the guise that the ECB is not printing when it most certainly is, albeit "hidden" by the idiotic claim that it accepts collateral for said printing (what collateral - Italian and Spanish bonds, which will become worthless the second even more printing is required in a few short months? This is run time collateral that can be issued "just in time" to convert it to even more cash as UniCredit did again today), the answer is becoming clear. Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect.

A Breather And Some Time To Sort Through Some Greek Details

After months (it seems like years) of trying to avoid a CDS Credit Event, it looks like one is inevitable.  The Greek 5 year CDS is at least 70 bid which may be the highest ever.  The game plan seems to be that Greece will put in retroactive CAC laws.  The PSI will come in below 100%.  Greece will trigger the CAC clauses on the Greek bonds, and we will get 100% participation in all those bonds, and we will get a Credit Event.  The interesting part is that depending on what they manage to do with English law bonds, the only bonds outstanding (not in the hands of the central bank only bonds, and troika loans) will be the new bonds.  If they start CAC’ing each bond, it is possible that there will be no existing bonds outstanding left.  Settlement would be based on the new bond (yes, ISDA has a Sovereign Restructured Deliverable Obligation clause – Section 2.16 of the definitions).  With the amortization schedule in place (and not including any value attributable to the GDP strippable warrants), I get that the new bonds would trade at 30% of par with a yield of just over 13%.  I would be careful paying up for CDS here, because settlement will be against these new bonds, not existing bonds if every old bond is CAC’d.  And given the attitude out of Greece late yesterday, and harsh IMF demands, we may well see that. 

2012: The Year Of Hyperactive Central Banks

Back in January 2010, when in complete disgust of the farce that the market has become, and where fundamentals were completely trumped by central bank intervention, we said, that "Zero Hedge long ago gave up discussing corporate fundamentals due to our long-held tenet that currently the only relevant pieces of financial information are contained in the Fed's H.4.1, H.3 statements." This capitulation in light of the advent of the Central Planner of Last Resort juggernaut was predicated by our belief that ever since 2008, the only thing that would keep the world from keeling over and succumbing to the $20+ trillion in excess debt (excess to a global debt/GDP ratio of 180%, not like even that is sustainable!) would be relentless central bank dilution of monetary intermediaries, read, legacy currencies, all to the benefit of hard currencies such as gold. Needless to say gold back then was just over $1000. Slowly but surely, following several additional central bank intervention attempts, the world is once again starting to realize that everything else is noise, and the only thing that matters is what the Fed, the ECB, the BOE, the SNB, the PBOC and the BOJ will do. Which brings us to today's George Glynos, head of research at Tradition, who basically comes to the same conclusion that we reached 2 years ago, and which the market is slowly understand is the only way out today (not the relentless bid under financial names). The note's title? "If 2011 was the year of the eurozone crisis, 2012 will be the year of the central banks." George is spot on. And it is this why we are virtually certain that by the end of the year, gold will once again be if not the best performing assets, then certainly well north of $2000 as the 2009-2011 playbook is refreshed. Cutting to the chase, here are Glynos' conclusions.

Frontrunning: January 27

  • Greek Debt Wrangle May Pull Default Trigger (Bloomberg)
  • Italy Sells Maximum EU11 Billion of Bills (Bloomberg)
  • Romney Demands Gingrich Apology on Immigration (Bloomberg)
  • China’s Residential Prices Need to Decline 30%, Lawmaker Says (Bloomberg)
  • EU Red-Flags 'Volcker' (WSJ)
  • EU Official Sees Bailout-Fund Boost (WSJ)
  • EU Delays Bank Bond Writedown Plans Until Fiscal Crisis Abates (Bloomberg)
  • Germany Poised to Woo U.K. With Transaction Tax Alternative (Bloomberg)
  • Ahmadinejad: Iran Ready to Renew Nuclear Talks (Bloomberg)
  • Monti Takes On Italian Bureaucracy in Latest Policy Push to Revamp Economy (Bloomberg)

European Credit Crunch Hits Broad Economy As M3, Private Loans Collapse

The primarily sovereign credit crunch in Europe, which has resulted in part due to the ECB's disastrous, and since reversed decision just like in 2008, to hike rates early in the year, only to go ahead and not only cut but expand its balance sheet by a record EUR 800 billion in the past six months, has finally started trickling down to the corporate, and more importantly financial levels, where as was just reported today, the broadest monetary aggregate, the M3, rose by a only 2.0% in November, dropping by a whopping 60 bps from October (keep in mind this is a huge amount on a number that is in the tens of trillions), which happened to be the biggest annualized contraction change since 2009. What is worse, and what confirms that the daily "near default" state Europe finds itself in every single day has sent shockwaves of uncertainty around the continent, is that the loans to private businesses grew at just a 1.7% rate in November, a plunge from October's 2.7% and missing expectations of 2.6% by a wide margin. Said otherwise, corporate credit (far more important than its sovereign equivalent) is being turned off. And as has been widely discussed without credit flowing, there is not only no growth, but the threat of imminent economic depression. Lastly, that this has happened even as the ECB's balance sheet has risen from EUR 1.9 trillion to $2.7 trillion in 6 months is truly humiliating from Trichet as none of the money he injected into the banks has made it to the broader public, and instead all has been used to prop up Europe's failing banks, something we know all too well here in the US.

Pivotfarm's picture

 

Harvard University Professor Martin Feldstein, who predicted in 1998 that the euro would prove an “economic liability,” said the single currency will survive for now, even as he bets Greece quits within a year.

“With the exception of Greece leaving, I don’t think the whole thing is going to fall apart anytime soon,” Feldstein said in a Nov. 14 telephone interview. “The Greek situation is impossible.”

 

Europe Gets It

The stock market seems to be the last group still buying into the Europe "gets it" argument. The credit markets now seem to be fully diverging from equities, and offer more opportunities here than stocks.  In credit, Europe is starting to look attractive versus the US.  Sovereign credit looks better than bank credit in Europe.  High Yield may not be bad here, but we think HYG/JNK definitely got ahead of themselves at these prices.