Fail

The farce continues: Moody's predicted 26 failures, Eurostat gives us 8. EBA says 5 Spanish, 2 Greek, 1 Austrian Bank fail as of April 30; EBA says 7 Spanish, 2 German, 2 Greek, 2 Portuguese barely pass. EBA says 16 of 90 banks had core capital of 5% to 6% and will have to take action to improve capital buffers. EBA says EU banks average CT1 7.7% in adverse Scenario, as of April 30. Looking forward to next year's Stress Test. As expected, risk is broadly on in the EUR, as the "sell the farce" moment approaches. The reason why the bank rollover is so urgently pushed is because two thirds of all Greek debt is held by Greek banks who then pledge it back to the ECB at par. Specifically, 67% of Greek debt is held by Greek banks, 9% by German banks, and 8% by French banks. Then these same Greek banks that "roll" their Greek sovereign debt receive even more cash handouts from the Greek central Bank, which in turn is funded from the ECB, while at the same time providing collateral to the standalone banks. Biggest Ponzi clusterfuck ever.

Willem Buiter, Citigroup's chief economist and former BOE policy maker, told reporters in London today that "the ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting." To anyone who watched the sharp move in Italian sovereigns, so reminiscent of central bank FX intervention overnight, Buiter's conclusion is all too obvious. As we reported, there were extensive rumors, and certainly validated by trading activity, that either the ECB or the PBOC or both, intervened in the Italian bond market to make sure today's Bill auction priced, which it did, but absent the reinforcement of the central banks could have very likely failed. What is amusing is that it was just last week that reporters were querying Trichet why the ECB's SMP bond purchasing operation had been all but abandoned. Well, here's your answer: JCT was simply preserving his dry powder for all the upcoming contagion casualties, such as Italy first, then everyone else.

Not like it matters much, because any bank that is found to be insolvent following the second consecutive European stress test will merely receive more taxpayer funds concealed as an SPV or a CDO or some other "complex" instrument, but for what it's worth Moody's has released a list of banks that it believes will either fail the farce, pardon, test outright, or will be "candidates for additional support going forward." As a reminder, the European Banking Authority (EBA) is about to publish the results of an EU-wide stress test involving 91 banks from 21 countries. The purpose of this exercise was to assess banks’ resilience to adverse external circumstances and to identify vulnerable banks, defined by EBA as banks whose Core Tier 1 (CT1) ratio falls below 5% under at least one of the scenarios included in the stress test. Moody's splits the sample into 4 Groups as follows: Group 1 : investment grade banks (at or above D+/Baa3 ) : 54 banks, Group 2 : non investment grade banks from peripheral countries (Ireland, Greece, Portugal, Spain) : 17 banks, Group 3 : non investment grade banks from other countries (Germany, Slovenia, Hungary, Austria, Cyprus) : 9 banks, and Group 4 : unrated: 11 banks. It is Groups 2 and 3 that are the focus of the analysis and which will be benchmarked against the test to determine credibility. As for the fact that all European banks are insolvent if just one is, just as all of Europe is bankrupt if Greece were to go under, that's a completely separate point.

The very critical, and very insufficient 5th bailout tranche to Greece, has now been approved. From Reuters: "Euro zone finance ministers agreed on Saturday to disburse a further 12 billion euros to Greece and said the details of a second aid package for Athens would be finalised by mid-September. After a conference call, the 17 euro zone ministers agreed that the fifth tranche of the 110-billion-euro bailout agreed with Greece in May 2010 would be paid by July 15, as long as the IMF's board signs off on the disbursement. The IMF is expected to meet on July 8 to approve it. The payment will allow Greece to avoid the immediate threat of default, but the country still needs a second rescue package, which is also expected to total around 110 billion euros and which will now likely only be finalised in September. Between now and then, finance ministers will work on the "precise modalities and scale" of the private sector's involvement in the second aid package, which Germany hopes will eventually total around 30 billion euros. Greece said it expected a final decision on a second bailout programme by mid-September to keep the country financed. Eurogroup decided through a teleconference today to work out a new programme on time, before mid-September," Greek Finance Minister Evangelos Venizelos said shortly after the finance ministers approved the 12 billion euro disbursement." More importantly, "The 12 billion euro payment will help Athens cover a 5.9 billion euro bond redemption in August, but the government still has a monumental hill to climb if it is to return to debt sustainability, with its debt-to-GDP ratio above 150 percent."

The first piece of red herring news out of Europe is already on the tape, after Reuters reports that 15 out of 91 banks are expected to fail the second round of stress tests: "Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. Euro zone sources said the European Banking Authority is set to announce within weeks that between 10 and 15 of the 91 banks being tested had failed the tests, with casualties expected in Greece, Germany, Portugal and Spain. In the drive to ensure the credibility of the bank assessments, the European Banking Authority (EBA), which runs the tests and the European Central Bank, which sets the macroeconomic scenarios, are pushing for a higher number of banks to fail than last year's seven. "How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source." Of course, the reason why this is total non-news is that while the EBA will huff and puff, the end result, just like last year, will be absolutely no failures, as Europe has no failsafe mechanisms to deal with the aftereffects of a bank failure chain reaction. Expect futures, which dipped briefly on this news to more than rebound, as this merely confirms that the ECB will inject even more money to keep the SS Ponzi afloat for a few more months.

By the time the "too big to fail" banks and their lobbyists get through with the rules, banks will be relatively free to pursue lending practices that existed before the crash.

This morning, amidst news of Moodys cutting Greece's debt rating to Caa1, I came across a phrase I wish I'd thought of first, reading through a friend's morning commentary. The phrase? "Too Stupid to Stop". According to Bill Blain, Senior Director at Newedge in London, and self-professed Euro skeptic, "'Too Stupid to Stop' is based on politicians behaving as rational maximisers of their electoral objectives." He was referring to the real reason behind all the bank-demanded bailout loans for austerity measures throughout Europe. In the United States, that mantra can be extended to include appointed officials, like Treasury Secretary, Tim Geithner (still not admitting our record debt increase came directly from the $4 trillion worth of Treasury issuance and other forms of assistance extended to our banking system since late 2008, as we endure his stomach-churning 'show-begging' to the GOP for a debt cap raise) and Fed Chairman, Ben Bernanke (ditto). It also, of course, applies to congress people whose political survival depends on corporate and bank contributions and financial support, the ones that believe the Dodd-Frank bill changes anything. Rather than considering how governments have systematically done, and continue to do, the wrong (as in immoral, unfair, and uneconomically sound) thing by trying to preserve banks, any politicians possessing the ability to think independently (an oxymoron, I know) should be asking themselves instead, how clever they could be about closing them down. Take a cue from Iceland. But, the 'Too Stupid to Stop" behavior, prevents this from occurring.

Debt is slavery… or at least indentured servitude of the worst kind. That looming mortgage, the high interest credit card debt, the short-term car loan– these are the forces that keep people from breaking free and taking action. Ironically, debt begets more debt. According to FinAid, the average US student loan debt for a four-year private university graduate is nearly $36,000, and $24,000 for public. Throw in that first car loan and maybe a mortgage, and suddenly you’re staring at hundreds of thousands of dollars in demoralizing claims on your future income. At this point, most people figure… ‘hey, I’m already in debt up to my nose, might as well get in up to my eyeballs and buy a new plasma screen on credit.’ Debt is an enormous psychological burden that influences life’s major decisions. It’s why so many people stay committed to jobs that are unfulfilling in cities they detest under conditions they find disheartening. Nobody wants to rock the boat too much… take too many risks and you could lose your job, and hence the ability to make those monthly payments. This familiar story has been playing out across the developed world for years. This is not an ill, however, that exclusively affects individuals and families. Even at the macro level, debt has the power to subjugate entire nations to the whims of their creditors. Enter the IMF.

Asked about the fate of the economic "recovery", which incidentally is nothing more than a $2 trillion dollar dilution-funded blip on the depressionary downtrend commenced in December 2007, Greg Peters, the head of fixed income research, at Morgan Stanley, the firm whose other fixed income strategist Jim Caron will now have been proven wrong three years in a row following his annual broadly bullish call for a jump in rates (not based on bearish considerations such as those postulated by Bill Gross... bullish), tells Tom Keene that the recovery is "Too Young To Die." Yep. That's the justification. Alas there was no mention that the 98 year old ponzi scheme perpetrated by the Fed since 1913 is now "Too Obvious To All." And when that fails, many of the same people who get paid huge sums of recycled taxpayer money to come up with catchy four word slogans while spouting flawed economic projections will suddenly find themselves "Too Pitchforked To Fly Away (To Non Extradition Countries)"

Reuters reports that following the anticipated meeting of Greek political leaders, absolutely nothing has been achieved, and, dramatic pause, no consensus was reached on the debt crisis. Expect more protests, more violence, more boosts to GDP expectations following Keynesian logic that the greater the destruction the higher the bounce, etc.

And while the US is no longer allowed to auction off debt, in China the PBoC appears to be no longer able to auction off debt. As Business China reports, "the central bank scheduled the auction of RMB 20 billion worth of
one-year treasury bonds and RMB 10 billion in six-month bonds on the
country’s interbank bond market for May 13. But banks, faced with tight
liquidity, only purchased RMB 11.71 billion worth of one-year bonds and
RMB 9.63 billion worth of six-month bonds, the report said." In other words, there was a nearly 50% miss on the 3 month auction. The key reason: "The reference yield of one-year treasury bonds was raised to 3.0246% from the previous issuance, while the bond yield of 182-day discounted treasury bonds was 2.91%, the paper said." It appears investors don't agree with the central planners that 3% is an appropriate rate to compensate them for surging inflation. That, and also the fact that banks suddenly have no liquidity: "Tighter liquidity was behind the under-subscription, as the central bank resumed selling three-year notes on May 12 after a hiatus of more than five months, a bank analyst who was not named was cited as saying. The central bank also raised banks’ RRRs by 0.5 percentage points on the same day, effective May 18, the fifth consecutive month its has raised RRRs this year." And so the Catch 22 emerges: the more China fights inflation through RRR or rate hikes, the lower the purchasing power of domestic banks to purchase bonds (and yes, the US deficit is just a few hundred billions dollars too wide for it to come to China's rescue). Should the "15 minute" inflationary conundrum continue to express itself, and China be forced to rise rates even longer, very soon the country, just like the US to which it is pegged monetarily, will also be unable to raise any incremental capital.

Don't worry, your "investment" is safely protected by "contractual arrangements..."

Original piece here.

TEPCO continues to be stuck between a rock and a liquid place. Following recent efforts to stop the spillage of radioactive water into the ocean, the pseudo-nationalized utility is now experiencing the aftermath of radioactive water retention. From Kyodo: "The concentration levels of radioactive iodine and cesium in groundwater
near the troubled Nos. 1 and 2 reactors at the Fukushima Daiichi
nuclear power plant have increased up to several dozen times in one
week, suggesting that toxic water has seeped from nearby reactor turbine
buildings or elsewhere, Tokyo Electric Power Co. said Thursday. According to the latest findings, a groundwater sample taken April 6
near the No. 1 reactor turbine building showed radioactive iodine-131 of
72 becquerels per cubic meter, with the concentration level growing to
400 becquerels as of Wednesday. The concentration level of cesium-134
increased from 1.4 becquerels to 53 becquerels." Conventional thought is that this is due to contaminated water used to cool down overheating reactors: "A total of around 60,000 tons of contaminated water is believed to be flooding the basements of the Nos. 1 to 3 reactor turbine buildings as well as trenches connected to them, and the water is hampering work to restore the cooling functions of the reactors lost since the March 11 earthquake and ensuing tsunami." Yet the most troubling news once again comes from the plutonium containing Reactor 3 where the temperature rose suddenly. Not to worry though: "TEPCO officials said the data were likely due to a glitch in a measuring instrument." And with that we have another data reader which indicates unpleasant information being thrown away (this follows the halt of readings from the Drywell radiation counter in Reactor 1 following a reported surge).

And so the great decade + old eurozone game theory project of Europe is about to come crashing down. Following Europe's decision to leave Ireland out in the cold, due to the country's ongoing unwillingness to pander with unilateral concessions to the global banking syndicate, the Emerald Isle has apparently decided to call the EU's bluff. Reuters reports: "Ireland's government wants to impose losses on some senior bondholders in Irish lenders to reduce the burden on taxpayers from a prolonged banking crisis, a senior minister said on Sunday...Analysts widely expect the government to impose losses on senior
bondholders in nationalized lenders Anglo Irish Bank and Irish
Nationwide because they have sold their deposits and are being wound
down. Hitting any unsecured unguaranteed senior bonds in Bank of
Ireland and Allied Irish Banks (AIB), which amount to over 11 billion
euros, would be more controversial." Yet most controversial would be the fact that the Eurozone is now unable to control its wayward son, which seems set on actually following the will of its people than that of the plutocrats. And just like Tunisia set a precedent to the MENA region with an act many thought was unthinkable, should Ireland follow through with this near-revolutionary act of a debt impairing chain-reaction, most other countries are set to follow suit, leading not only to the inevitable end of the one currency block, expected for so long by many euroskeptics, but yet another US taxpayer funded bailout, as was revealed on Thursday of last week, when we observed the upcoming "threat to the international monetary system" as predicted by the IMF.