Monday, May 23, 2011

May 23 2011: Right. Italy. Serious.


John Vachon Pit Stop July 1940
"Cherry pickers, Auto of migrant fruit worker at gas station, Sturgeon Bay, Wisconsin"


Ilargi: Oh boy, oh, just lovely. Where to begin? The Eurozone mess spreads faster than wildfire. We should start considering the possibility that it doesn't matter much who will next lead the IMF, because that person won't be in office until June 30 at the earliest, and who knows what the situation will be by then?

There's a lot of resilience left in Europe, it's rich and won’t blow up easily, but it still might do so fast. All it would seem to take is rifts, divisions, fights etc. to emerge. Already, the EU finance ministers and the ECB don't see eye to eye anymore, quarrels between countries can't be all that far off, and governments will start to fall at increasing rates too. Argentina had how many presidents in no time at all when its last major financial collapse hit?

After Greece, Ireland, Portugal and Spain, Italy is now joining the ranks of increasingly exposed economies. And as always, the denial levels are deafening. Don't forget Eurogroup head honcho Jean-Claude Juncker's recent words, though: "When it gets serious, you have to lie". Here's guessing Jean-Claude thinks this is serious.

Right. Italy. Serious. Here's Gavin Jones for Reuters:
S&P warning heralds tough times ahead for Italy
Standard & Poor's surprising decision to revise downward its outlook for Italy could mark the start of increased market scrutiny on the euro zone's third-largest economy, which faces tough challenges that it is probably unable to meet.

Italy has escaped the brunt of the euro zone debt crisis that has engulfed Greece, Ireland and Portugal, due largely to a prudent fiscal policy and low levels of private debt. But if markets begin to focus more on the country's appalling growth record, weak reform prospects and the grim implications for reducing its mountain of public debt, then Italian bond yields will rise and its situation could become untenable. [..]

Italy's public debt stood at 119 percent of gross domestic product at the end of 2010 -- second only to Greece in the euro zone. The government last month said it would remain above that level both this year and next. But the real and interlinked problem for Italy is growth. For well over a decade, when the rest of the euro zone goes into recession, Italy has gone into a deeper one, but when the rest of the euro zone recovers, Italy's rebound is weaker.

And the dismal story is not only in comparison with its European peers. According to International Monetary Fund data, Italy was the world's fourth most sluggish economy between 2000 and 2010, ahead of only Zimbabwe, Eritrea and Haiti.

Ilargi: It may sound reasonable to say that Italy's real problem is growth, but that's just -at least potentially- a nearsighted view. If Greece could still borrow at Germany's terms, for instance, it would obviously be in much better shape than it is today. It is precisely this sliding scale towards ever worse debt financing conditions that may well hit Italy too, and then it remains to be seen whether growth alone is its biggest problem.

The markets can, if they want, simply sit back and pick the weaker countries off one by one now. What is the EU, and the ECB, going to do about it? It takes -seemingly- forever just to arrange something, anything for Greece, and really, Greece isn't even anywhere near "the big problem". Joe Weisenthal at Business Insider dug up the graph below (I edited it somewhat for better quality). It's from an August 13, 2010 article by Emma Saunders in The Financial Times:
Banks’ exposure to Italy dwarfs risk from PIGS
Further jitters at the eurozone periphery today with Irish, Spanish and Greek sovereign yields higher, and news that Spanish banks tapped the ECB for €140bn during July.

Of particular interest, demand for Italian bonds dropped significantly. This matters because European banks are exposed very heavily to Italian sovereign debt – the top 91 banks own €100bn of the stuff in their trading books. This is quadruple the trading holdings of Spanish debt, and 22 times holdings of Irish debt. Indeed, Italian debt is held in the trading books of Europe’s banks more than any other European sovereign – even German-issued debt totals just $70bn.




Ilargi: Yes, that is scary. The take-away message is that all the denials concerning Greek debt restructuring, or reprofiling, or any name that's being attached to it, are directly aimed at one thing and one only: the very salvation of scores of banks. Greece is but a minor factor in the grand scheme of things, but fears of stepping stones and sliding scales are so all pervasive that politicians and bankers, given the chance, won't hesitate to throw another odd trillion euro's or so into this bottomless cesspool.

A little taste of things to come, when, not if, none of these trillions will suffice to prop up the system was given by Andrew Lilico in Friday's Telegraph (I thought I'd give you just about the whole list, it's hard to leave out some, even if it's largely hypothetical):
What happens when Greece defaults
It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:
  • Every bank in Greece will instantly go insolvent.
  • The Greek government will nationalise every bank in Greece.
  • The Greek government will forbid withdrawals from Greek banks.
  • [..] the Greek government will declare a curfew, perhaps even general martial law.
  • Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
  • The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting on 50 per cent or more of all Greek euro-denominated debts.
  • The Irish will, within a few days, walk away from the debts of its banking system.
  • The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
  • A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
  • The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
  • The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
  • They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
  • There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
  • This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
  • Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.
  • Attention will turn to the British banks. Then we shall see…

Ilargi: What I think is important is to connect the dots here. Greece is but a two-bit player relatively speaking, but the effects of a default in Athens, and the haircuts it would force upon financial institutions (and dare we even consider pensions funds?!), would -make that will- be felt across the world. For one thing, it would substantially weaken banks and economies pretty much around the globe. Just Greece alone.

It all comes back all the time to the dreaded mark-to-market theme. The last thing anyone wants is to let anyone else know what the paper they're holding is truly worth. But it will be done. You might even say help is on the way. David Enrich and Steve Eder report for the Wall Street Journal:

Buyers Battle for Soured European Bank Loans
As banks across Europe clean up their balance sheets, it is causing a feeding frenzy among hedge funds and private-equity firms hungry for their troubled assets.

Many marquee funds are flocking around the dozens of European lenders that recently have ratcheted up efforts to get rid of soured loans and other assets, a legacy of profligate lending and investing before the financial crisis. Banks from the U.K., Ireland, Germany, Austria, Greece, Italy, Portugal and Spain have been unloading tens of billions of dollars worth of assets—from loans to finance major U.S. construction projects and leveraged buyouts to slices of securities composed of risky residential mortgages.

The buyers are hedge funds and private-equity shops that are taking advantage of banks' desperation to sell, and are therefore able to grab the assets at bargain-basement prices. Among the buyers is Marathon Asset Management LP. Seeking to drum up interest in the strategy, the roughly $10 billion New York-based hedge fund recently produced a 135-page "white paper" outlining what it sees as the avenues to profit from the European banking crisis.

Marathon's recent bank-asset purchases include a batch of leveraged loans from the U.K.'s Lloyds Banking Group PLC; some European banks' holdings of subordinated debt in a troubled U.S. commercial real-estate company; and a German bank's portion of a revolving credit line to a major U.S. gambling company. Marathon has been buying bank assets, usually in batches of $25 million to $100 million, at discounts of as much as 50% of their face value, said Chief Executive Bruce Richards. "They're substantial positions." [..]

European banks are sitting on more than €1.3 trillion ($1.9 trillion) of loans that are considered "non-core" to their businesses [..]

In the U.S., a similar process has been going on for years. Even while the financial crisis was raging, banks such as Bank of America Corp. set up entire floors of their offices dedicated to getting rid of unwanted assets, partly in response to government pressure. Bargain-hunting investors swarmed. The process was painful, requiring the banks to absorb losses to reflect the diminished values of the assets they were selling. But by leaving banks with much cleaner balance sheets, it ultimately helped the industry put the crisis in its rearview mirror.




Ilargi: Sure, the word is that these is all "non-core", and it actually makes the banks healthier to sell their "assets" at 50 cents on the dollar. But we need to realize that what they sell at these discounts is by no means the worst they have in their vaults. That, no hedge-fund would touch with a ten foot pole for more than a few pennies on the buck. Just take one look at European banks' exposure to Greek debt. And Portuguese, Irish. And Spanish, Italian.

Driving up both the rates these countries must pay on their loans, and the CDS spreads to insure against them, will force ever larger sales at ever lower prices. Provided buyers can be found. Pumping in trillions in public funds is, and always was, futile and useless. The debts are simply too high, and these economies have effectively zero chance of reaching growth numbers that would be sufficient to pay off even the interest on their liabilities. That is, both the governments and the banks. When defaults come, they will come fast and furious, and in large numbers. All across the world. Defaults and haircuts won't be a pretty sight to behold, but they're a whole lot better than the alternative.

But before they come, a lot more of your money, whether you live in Europe or North America, or anywhere for that matter, will be thrown into the big black hole of gambling losses. Unless perhaps, like the Icelanders, you say "no mas". You'd better hurry with that one, though. There's no telling how much longer this ship can be kept afloat; it's leaking on all sides. And the leaks are getting bigger. Fast.













Buyers Battle for Soured European Bank Loans
by David Enrich and Steve Eder - Wall Street Journal

As banks across Europe clean up their balance sheets, it is causing a feeding frenzy among hedge funds and private-equity firms hungry for their troubled assets.

Many marquee funds are flocking around the dozens of European lenders that recently have ratcheted up efforts to get rid of soured loans and other assets, a legacy of profligate lending and investing before the financial crisis. Banks from the U.K., Ireland, Germany, Austria, Greece, Italy, Portugal and Spain have been unloading tens of billions of dollars worth of assets—from loans to finance major U.S. construction projects and leveraged buyouts to slices of securities composed of risky residential mortgages.

The buyers are hedge funds and private-equity shops that are taking advantage of banks' desperation to sell, and are therefore able to grab the assets at bargain-basement prices. Among the buyers is Marathon Asset Management LP. Seeking to drum up interest in the strategy, the roughly $10 billion New York-based hedge fund recently produced a 135-page "white paper" outlining what it sees as the avenues to profit from the European banking crisis.

Marathon's recent bank-asset purchases include a batch of leveraged loans from the U.K.'s Lloyds Banking Group PLC; some European banks' holdings of subordinated debt in a troubled U.S. commercial real-estate company; and a German bank's portion of a revolving credit line to a major U.S. gambling company. Marathon has been buying bank assets, usually in batches of $25 million to $100 million, at discounts of as much as 50% of their face value, said Chief Executive Bruce Richards. "They're substantial positions."

Other buyers include Fortress Investment Group LLC, OakTree Capital Management, York Capital Management, and Och-Ziff Capital Management, according to industry officials. Some experts say that virtually every major alternative-investment firm that bets on distressed debt is sniffing around. The glut of would-be buyers is fueling concerns among some hedge funds that the space is growing overcrowded. As a result, they are steering clear of the investment strategy. (The prices of the asset purchases are rarely disclosed.)

European banks are sitting on more than €1.3 trillion ($1.9 trillion) of loans that are considered "non-core" to their businesses and are likely to be put up for sale over the next decade, according to a recent PricewaterhouseCoopers study. The firm hosted a conference on the topic last month in London that attracted about 60 investor groups, along with executives from dozens of European banks. "We see a lot of investors who are interested," said Richard Thompson, a partner in PwC's Portfolio Advisory Group. "There's now an expectation that things are about to pick up and there's more stuff coming onto the market."

In the U.S., a similar process has been going on for years. Even while the financial crisis was raging, banks such as Bank of America Corp. set up entire floors of their offices dedicated to getting rid of unwanted assets, partly in response to government pressure. Bargain-hunting investors swarmed. The process was painful, requiring the banks to absorb losses to reflect the diminished values of the assets they were selling. But by leaving banks with much cleaner balance sheets, it ultimately helped the industry put the crisis in its rearview mirror.

Most European banks and regulators have been slower to act. That is partly because most of the sector wasn't as hard hit as many U.S. lenders. But plenty of European banks engaged in reckless lending and invested in exotic securities that turned toxic. Until recently, European regulators generally were content to let their banks work through their problems over time. But the continent's year-long sovereign-debt crisis has thwarted that strategy. Anxious about what is lurking on the banks' books, investors have shunned the sector, driving down stock prices and making it difficult for some companies to borrow money in the capital markets.



That crisis, along with new international capital rules, has pushed European banks and their regulators to accelerate the cleanup process. The result is a diverse menu of troubled assets for investors to sift through.= "We're seeing more [opportunities] now in the past several weeks. You can see the wave building," said Joe Giannamore, managing partner at AnaCap Financial Partners LLP, a London-based private-equity firm.

U.K. banks have been especially active. In the first quarter, Lloyds unloaded £20.7 billion ($33.6 billion) of non-core assets. Royal Bank of Scotland Group PLC sold €286 million of Spanish real-estate loans in March to subsidiaries of buyout firm Perella Weinberg. Barclays PLC has been dumping U.S. commercial real-estate loans, including selling a $530 million package to CreXus Investment Corp. in April. The giant British bank recently put on the block the St. Regis hotel in Washington, which Barclays had seized in foreclosure. "We have a number of opportunities in front of us," said Barclays finance chief Chris Lucas. "It's a range of asset classes, pretty much across the board."

In California, the San Bernardino County Employees' Retirement Association, which has about $6 billion, has been putting its money with managers such as Marathon and others that are investing in European banks' distressed assets. Donald Pierce, the retirement association's interim chief investment officer, said he prefers the bet to investing in emerging markets. "That's where we've been adding incremental money," he said, noting that there are "great opportunities for new capital to come in and make what we believe to be attractive risk-adjusted rates of return."




What happens when Greece defaults
by Andrew Lilico - Telegraph

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:
  • Every bank in Greece will instantly go insolvent.

  • The Greek government will nationalise every bank in Greece.

  • The Greek government will forbid withdrawals from Greek banks.

  • To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

  • Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

  • The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting on 50 per cent or more of all Greek euro-denominated debts.

  • The Irish will, within a few days, walk away from the debts of its banking system.

  • The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

  • A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

  • The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

  • The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

  • They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

  • There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

  • This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

  • Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

  • Attention will turn to the British banks. Then we shall see…





Greek, Italian, Spanish Bonds Fall on Europe Sovereign Crisis; Bunds Rally
by Garth Theunissen and Keith Jenkins - Bloomberg

Italian and Greek bonds led declines amongst indebted euro-area nations while German bunds rallied as concern Europe’s sovereign-debt crisis may be spreading curbed demand for the assets of nations perceived as more risky.

Yields on 10-year Greek debt rose to a euro-era record, while those on Italian, Spanish and Portuguese bonds also rose. Italy’s credit rating outlook was revised to negative from stable by Standard & Poor’s on May 20. German benchmark bund yields sank to a four-month low before a report that may show European services and manufacturing growth slowed in May.

Greek 10-year yields jumped 19 basis points to 16.76 percent as of 9:23 a.m. in London while yields on two-year notes climbed 12 basis points to 25.58 percent. Italian 10-year yields rose six basis points to 4.84 percent. Spanish 10-year yields climbed 11 basis points to 5.59 percent.

“General risk-off sentiment still appears to have further to run,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There’s a general flight-to- quality into bunds, and that’s pushed yields close to 3 percent. Sovereign debt worries have driven money back to the core markets, and there appears to be no immediate resolution.”

Standard & Poor’s threat that it may lower Italy’s credit rating risks worsening Europe’s sovereign-debt crisis as investors demand higher interest payments in exchange for lending to debt-laden nations in the 17-member euro region. The concerns come as Greece fends off speculation that it will need to restructure its debt as it struggles to avoid default.

Spanish Election
Greek Prime Minister George Papandreou is set to brief his Cabinet today on additional budget cuts and asset sales required by an aid-package granted to the debt-stricken country. “Greece aside, the Italian outlook downgrade will raise concerns about Spain and possibly Belgium,” said Wand. “The political story in Spain also weighs on the peripherals.”

Spanish Prime Minister Jose Luis Rodriguez Zapatero led his Socialist party to its worst defeat in more than 30 years in regional elections held at the weekend. Voters punished the ruling party for soaring unemployment and spending cuts that are aimed at shielding the country from Europe’s debt crisis.

Belgian 10-year bonds fell, lifting yields by six basis points to 4.28 percent. The country plans to sell up to 3.5 billion euros ($4.9 billion) of bonds today. German 10-year yields fell by four basis points to 3.01 percent, the lowest since Jan. 17. The 3.25 percent security due July 2021 rose 0.375, or 3.75 euros per 1,000-euro face amount, to 102.02. Yields on two-year notes fell seven basis points to 1.70 percent.

European Industry
A composite gauge of euro-area manufacturing and services industries slipped to 55.4 from 57.8 in April, London-based Markit Economics said today. That was lower than the 57.3 median estimate of economists surveyed by Bloomberg. Euribor futures gained, pushing the implied yield on the March 2012 contract down seven basis points to 2.07 percent, as investors reduced bets that the European central Bank will raise interest rates.

The ECB left its benchmark rate at 1.25 percent on May 5 and signaled it may wait until after June before raising borrowing costs to contain inflation. The central bank raised the key rate from a record low of 1 percent in April, the first increase in almost three years. German government bonds have handed investors a loss of 0.5 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg, while Treasuries have returned 2.1 percent




S&P warning heralds tough times ahead for Italy
by Gavin Jones - Reuters

Standard & Poor's surprising decision to revise downward its outlook for Italy could mark the start of increased market scrutiny on the euro zone's third-largest economy, which faces tough challenges that it is probably unable to meet.

Italy has escaped the brunt of the euro zone debt crisis that has engulfed Greece, Ireland and Portugal, due largely to a prudent fiscal policy and low levels of private debt. But if markets begin to focus more on the country's appalling growth record, weak reform prospects and the grim implications for reducing its mountain of public debt, then Italian bond yields will rise and its situation could become untenable.

Those were precisely the weaknesses cited by S&P when it announced on Saturday it was revising its rating outlook for Italy to "negative" from "stable," while maintaining its A+ rating. S&P's move will not precipitate any immediate debt crisis for Italy, analysts said, but with euro zone developments so unpredictable it does make the country more vulnerable.

Analysts said yields on Italian government bonds would probably widen initially, and while this may prove short-lived, increased scrutiny on Italy's economic performance would be a more threatening problem in the medium term. "I'm afraid the reaction will be negative because this was a big surprise and it comes after a bad week for euro zone peripherals," said Banca BSI analyst Gianluigi Mandruzzato. "Monday won't be an easy day for Italian government bonds."

Raj Badiani, an economist with IHS Global Insight in London, said he expects "a moderate widening of spreads" on Italian bonds, and markets will hope to see in a second phase some sign of a policy response from the government.

No Lasting Sell-Off
But there is unlikely to be a long-lasting sell-off, considering S&P has not put Italy on a negative credit watch, implying a likely downgrade in the next three months, and its peer agencies Moody's Investors Service and Fitch Ratings are unlikely to follow suit.

Judging by recent history, Moody's, which has taken a far more benign view of Italy than its peers, is likely on Monday to repeat its basic confidence in the country's economy. "In our view, Italy's current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering," S&P said in its statement. It also said the fragility of Prime Minister Silvio Berlusconi's center-right coalition government meant such reforms were unlikely to be pushed through anytime soon. "Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy's prospects for reducing its general government debt have diminished," it said.

Italy's public debt stood at 119 percent of gross domestic product at the end of 2010 -- second only to Greece in the euro zone. The government last month said it would remain above that level both this year and next. But the real and interlinked problem for Italy is growth. For well over a decade, when the rest of the euro zone goes into recession, Italy has gone into a deeper one, but when the rest of the euro zone recovers, Italy's rebound is weaker.

And the dismal story is not only in comparison with its European peers. According to International Monetary Fund data, Italy was the world's fourth most sluggish economy between 2000 and 2010, ahead of only Zimbabwe, Eritrea and Haiti.

Wasting Disease
Italy has avoided the acute financial woes of Greece, Portugal and Ireland, but it is afflicted by a sort of long-term wasting disease which could eventually prove just as damaging. In the last 10 years, it has been the only advanced economy to see a contraction of per-capita GDP, and Italians' real purchasing power has fallen by 4 percent.

All this risks becoming a growing problem for markets and not just for Italy's hard-pressed citizens. If the economy does not grow then tax revenues are low and it is increasingly hard to reduce the national debt as a proportion of GDP. And as long as public debt remains high, huge resources are used up in interest payments, meaning taxes must stay high and nothing can be spent on stimulating the economy.

"To some extent it's a vicious circle, you can't cut the debt if the economy doesn't grow and the economy can't grow if you don't cut the debt," said Banca BSI's Mandruzzato. Fiscal austerity cannot be maintained indefinitely and only by adopting radical reforms to improve its growth potential can Italy put its finances on a sustainably sound footing.

And on this front the outlook is grimmer than ever. Some commentators, as well as Italy's Treasury, expressed surprise at S&P's move, saying nothing had changed in Italy's situation to warrant a change of outlook. Yet that is precisely the problem. Nothing has changed in Italy for far too long.

"When you look at what's been happening in Spain over the last year and a half, we've seen quite a full timetable of reform, but in Italy we've seen virtually nothing," said Badiani. For years economists and international bodies like the IMF and the Organization for Economic Research and Development have issued the same recipes for Italy, including liberalization of markets, a less rigid labor market, less red tape, lower spending on the public administration and more investment on research and infrastructures.

Yet the response has been too slow or non-existent as successive governments have lacked the courage or political strength to take on trade unions or numerous vested interests. And now, as S&P noted, reform hopes could hardly be weaker. An increasingly unpopular Berlusconi commands only a tiny and fragile majority in parliament and seems far more absorbed with his many legal problems than with any economic reform agenda. "I think the prospects for meaningful reform before the next election in 2013 are virtually zero," said Mandruzzato.




Italy’s Not So Bella Vita
by Alen Mattich - Wall Street Journal

Italy is in trouble.

Actually, Italy has been in trouble for years, but investors are only just starting to notice. Standard and Poor’s warned at the end of last week that Italy’s credit rating was at risk of being cut from A-plus. That’s because Italy’s lackluster economic growth makes it hard to see how it can reasonably reduce its massive public-sector debt load.

The International Monetary Fund estimates Italy’s gross government debt will hit more than 120% of GDP this year. Kenneth Rogoff, the Harvard professor and specialist on sovereign default, has estimated that countries become at risk when their debt-to-GDP ratios exceed 80%. Countries with big debt burdens can try to grow out of them, to inflate them away or to default. Italy can’t inflate because, as a member of the euro zone, it has relinquished its ability to control monetary policy and the European Central Bank is staunchly anti-inflationist.

At the same time, Italy’s growth prospects are distinctly drab. Even before the 2008 financial meltdown, Italy’s economy was only just grinding along. Between 1996 and 2007, the Italian economy grew by an average of just 1.5% a year. Stripping out a stellar 2000, when it grew 3.7%, that average was a mere 1.25%. And growth prospects look no better over the coming few years either.

Edward Hugh, who writes the influential Fistful of Euros economics blog, recently outlined the problems. Italy, he said, has an old and ageing population. Although it has had significant immigration, many of these immigrants are officially jobless and on benefits. Without significant public-sector reform, including welfare reform and reduction of red tape and corruption in order to encourage more of Italy’s large black-market economy into the taxable base, low growth will continue to predominate.

At the same time, Italy needs to become more competitive. It has shown minimal productivity growth during the past decade, at a time when wages were growing significantly. Italian workers can’t compete with Germany’s. And they won’t be able to unless Italian costs, particularly wages, deflate relative to Germany’s. This is all significant for the euro zone. That’s because without growth—which even with structural changes isn’t likely to come quickly—or inflation, the only avenue left open to Italy is default.

Mr. Hugh reckoned that the euro zone is split now between its core and the periphery, with France and Germany at the core and Ireland, Greece, Portugal and Spain on the fringes. Italy sits in-between, albeit with more of the characteristics of the latter than the former. “Italy forms part of the low-growth high-public-sector-debt economies on Europe’s periphery,” Mr. Hugh wrote. And that’s a worry for Europe’s policymakers. “Italy is in a key position to tip the balance between core and periphery, one way or the other.”

Italy’s economy, however, is very large relative to those of the other peripheral states. Greece, Portugal and Ireland represent just over 6% of the euro-zone economy. Throw in Spain and that’s 18%. Italy alone is 17%. Little wonder then that concerns are growing about Italian default. Italian 10-year government bonds have widened 10 basis points so far this session to stand at more than 1.8 percentage points above bunds, while the benchmark Italian equity index is down nearly 3%.

More crucially, Italy’s moves have infected other European markets. And, given the state of Italian politics and the Italian economy, will continue to do so.




Italy to bring forward deficit-cutting decree
by Giuseppe Fonte - Reuters

Italy will bring forward to next month plans for slicing 35-40 billion euros ($50-$56 billion) off its budget deficit, government sources said on Monday, moving to reassure markets after a credit rating warning. The measures aim to balance the budget in 2014.

One source told Reuters the center-right government was bringing forward the plan "to give a signal to the markets" after Standard & Poor's cut its outlook for Italy's A+ rating to "negative" from "stable" on Saturday. "The government will issue a decree (containing the deficit cutting plan) in June," a second source said on condition of anonymity.

The decree, designed to cut the deficit in 2013 and 2014, must be approved by parliament within 60 days. "(A decree before the summer) could contribute to reassuring the markets on Italy's public accounts," said one of the sources. According to the EU stability pact, Italy could have waited until September to announce the measures.

Only the timing of the deficit reduction plan has changed, as the size of the intervention was already penciled in by the government. Last year its rolling three-year deficit cutting plan was presented in July. The yield spread between Italian and German government bonds widened on Monday to its biggest since January after S&P's surprise move, though analysts said they expected the reaction would be relatively shortlived.

The cost of insuring Italian government debt against default also rose, with five-year credit default swaps (CDS) rising 15 basis points to 176 bps, according to data monitor Markit. "S&P's negative outlook should be regarded mostly as a wake-up call to the Italian government," Unicredit said in a research note to clients. It forecast that the outlook revision should be "not too detrimental" to auctions of Italian government bonds of various maturities due on Thursday.

Moody's, Fitch Unmoved
Fellow ratings agencies Moody's and Fitch both reiterated their stable outlook on Italy. Moody's declined any further comment, while Fitch analyst David Riley told Reuters that at present no change was envisaged in Fitch's stance. "There is no evidence Italy's budget position is deteriorating," he told Reuters. S&P said its decision was not due to a recent deterioration in the budget position but to Italy's chronically weak economic growth which, combined with a lack of reforms, undermines the prospects for significantly reducing its huge stock of debt.

The country's public debt reached 119 percent of gross domestic product at the end of last year -- second only to Greece in the euro zone. "In our view Italy's current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering," it said in its statement. Economy Minister Giulio Tremonti said on Monday that Italy has "kept things in order and the bases are all there for us to continue to do so."

S&P's move comes at a difficult time for Prime Minister Silvio Berlusconi, whose popularity has fallen sharply in recent months and whose center-right coalition fared badly in local elections on May 15-16. The incumbent center-right mayor of Milan, Berlusconi's home city, is lagging her opponent ahead of a run-off ballot next weekend which could take Milan to the left for the first time in 18 years and deal a huge blow to Berlusconi.

Civil Service Minister Renato Brunetta said the government would "adopt various measures to control accounts and help growth in the coming months," but the opposition said Berlusconi had lost all credibility. "In response to S&P's warning the ministers of this government, including Brunetta, indulge in propaganda without any substance, showing their inadequacy for the umpteenth time," said Marizio Zipponi, a lawmaker for Italy of Values party.

Milan's blue-chip FTSE Mib index was down almost 3 percent by midday, twice the downturn in the FTSEurofirst 300 index. However, traders said the drop was caused largely by ex-dividend trading in about 50 stocks. "There's almost no impact from the outlook cut. In fact the bourse is doing better than others in Europe" when the ex-dividend impact is discounted, a dealer said.




Cost of Insuring Euro-Zone Debt Rises
by Mark Brown - Wall Street Journal

The cost of insuring euro-zone sovereign debt against default using credit default swaps rose in early trading Monday, as ratings agency actions and political worries re-focused investors' attention on the single currency area's debt crisis.

Greece's five-year sovereign CDS widened 0.25 percentage point to 1350/1400, a trader said, after Fitch Ratings cut Greece three notches to single-B-plus on Friday. Italy was 0.07 percentage point wider at 168/173 after Standard & Poor's Corp. moved Italy's outlook to negative late Friday. Spain's five-year sovereign CDS were 0.11 percentage point wider at 270/277 after the country's ruling Socialist part suffered historic losses in Spanish municipal and regional elections.

Portuguese and Irish five-year CDS were 0.07 and 0.1 percentage point wider respectively, while CDS written on "core" euro-zone countries like Germany and France also widened by 0.03 percentage point. "Europe remains firmly in 'risk off' mode at this morning's open," said Richard McGuire, senior fixed income strategist at Rabobank in a note. "Spanish voters have... clearly signalled their austerity fatigue."

CDS are derivatives that function like a default insurance contract for debt. A widening of 0.01 percentage point in five-year CDS spreads equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years.




Peripheral yields rise on contagion fears
by David Oakley - Financial Times

The eurozone’s peripheral bond markets came under further pressure on Monday amid signs of contagion reaching the big economies of Spain and Italy. Greek, Irish and Spanish bond yields, which have an inverse relationship with prices, rose to fresh record highs, while the euro sank to a record low against the Swiss franc and a two-month low against the US dollar. One strategist said: “We could be seeing a new leg down in the eurozone debt crisis with contagion spreading to Spain and Italy. It is becoming clear that the problems of Greece are the problems of the rest of the currency region.”

Greek 10-year yields hit euro-era highs of 17.01 per cent, up about half a percentage point on the day and nearly 2 percentage points since the start of last week. Irish yields jumped to 10.86 per cent, also euro-era highs, while Spanish yields increased to 5.56 per cent – a record high since September 2000. Italian and Portuguese 10-year bond yields also rose to 4.82 per cent and 9.63 per cent respectively as the five countries suffered from selling pressure, while the perceived stronger economies of Germany and France, the so-called core eurozone countries, were bought on haven flows. The euro fell to $1.4033 against the dollar and to SFr1.2384 against the Swiss franc.

The market came under pressure as Standard & Poor’s put Italy’s A-plus credit rating on negative outlook late on Friday night, while the ruling Socialists in Spain suffered big losses in regional elections. There were also continuing worries that the International Monetary Fund may refuse to provide Greece with the next tranche of emergency loans because of the failure of Athens to hit economic targets.




Euro-Zone Growth Slows to 7-Month Low
by Nicholas Winning - Wall Street Journal

Growth in the euro zone's private sector eased more than expected to its weakest pace in seven months in May, led by a sharp slowdown in manufacturing, the preliminary results of a survey by financial-information firm Markit showed Monday.

The flash reading of the euro zone's composite-output index, a gauge of activity based on partial results of a survey of manufacturing and services firms, dropped to 55.4 in May from 57.8 in April. A reading above the 50 level indicates an expansion in activity. The level of activity is in line with the average of last year, but the fall in the main index was the sharpest since November 2008, Markit said. Economists were expecting the headline reading to drop to 57.4.

The manufacturing-purchasing-managers' index dropped much more than expected to 54.8 in May, from 58.0 the previous month, while the euro-zone services-business-activity index fell to a five-month low of 55.4, from 56.7 in April. Economists had predicted a manufacturing reading of 57.5 and an unchanged services reading of 56.7.




New Call to Greece to Sell Off Its Assets
by Bernd Radowitz and Geoffrey T. Smith - Wall Street Journal

Luxembourg Prime Minister Jean-Claude Juncker said that Greece should set up an agency to privatize state assets along the lines of the German institution that sold off East German enterprises in the 1990s. "I would very much welcome it if our Greek friends would set up a state-privatization agency after the model of the German Treuhandanstalt," Mr. Juncker said in an interview with Germany's Der Spiegel magazine set to run Monday.

Mr. Juncker, who is also chairman of the Eurogroup of euro-zone finance ministers, said such an agency should include foreign experts among its staff. "The European Union will accompany the privatization program as closely as if it were carrying it out itself," Mr. Juncker told the magazine, adding that Greece could gain more from privatizations than the €50 billion ($71 billion) it has estimated.

Mr. Juncker also said a so-called soft restructuring, or extending the maturities of Greek debt, could only be considered once Greece has consolidated its budget. "Then we can consider to extend the maturities of public and private loans, and lower interest rates," he is quoted as saying. Mr. Juncker also called on Greece's two biggest political parties to end their bickering. "The government and the opposition should declare jointly that they commit to the reform agreements with the EU," Mr. Juncker said.

Meanwhile, French Finance Minister Christine Lagarde signaled that Paris might support a rescheduling of Greek debt, warning that Greece is at risk of default if it doesn't do more to bring its public finances into order. The comments mark a shift in France's position in a debate that has pitted Germany and other euro-zone governments against the European Central Bank, which opposes any form of restructuring of Greek debt. French support for proposals of a soft restructuring would leave the ECB isolated in its opposition.

Germany and other euro-area states have warmed to the idea of extending maturities—which is technically considered a default by the credit-ratings agencies—given the size of Greece's debt burden and its bleak economic prospects. France previously sided with the ECB in opposing any form of restructuring, but Ms. Lagarde's comments suggest Paris is softening.

The standoff between the ECB and euro-area governments reflects how intractable the Greek crisis has become. A year after extending Athens a bailout, it has become clear the €110 billion Greece was promised by its euro-zone neighbors and the International Monetary Fund won't be enough to solve its financial crisis. Europe must now decide whether and how to keep Greece from defaulting. The ECB worries that a restructuring, in any form, would do irreparable damage to the euro-zone's reputation with investors. Germany and euro-area states, in turn, are concerned about the political cost of continuing to support Greece without forcing Athens and its creditors to make concessions.

The central bank kept up its insistence Friday that even a soft restructuring is unacceptable, and again threatened to withhold funding for Greek banks, with the warning this time coming from the newly installed head of Germany's central bank.

Changing Greek bond maturities "cannot substitute for fulfilling the adjustment program," undertaken by Greece, Bundesbank President Jens Weidmann said. A reprofiling in the current market environment "would make it impossible to accept them as collateral for refinancing operations under the existing rules of the Eurosystem's collateral framework, and consequently large parts of the Greek financial sector would be cut off from funding," he said. A bad week was topped off late Friday in Europe when Fitch Ratings downgraded Greece's senior debt by three notches to B-plus, on a par with Venezuela, Sri Lanka and the Caucasian republic of Georgia.

Meanwhile the IMF's executive board approved its €26 billion portion of a bailout package for Portugal. The IMF said the package, detailed earlier this month, would provide about €37.8 billion this year "to allow Portugal some breathing space from borrowing in the markets" while it takes steps to cut government spending and stabilize its banking system.




Greece suffers fresh blow as credit rating cut by Fitch
by Emma Rowley - Telegraph

Greece has had its creditworthiness slashed by Fitch, one of the world's top three ratings agencies, in another blow to efforts to get the country's finances back on track. Fitch said that the downgrade reflected the massive challenges the country faces in implementing cuts, tax rises and other reforms needed to secure its solvency.

Investors took flight as the rating of the Greek government's debt moved three notches further into 'junk' status, at 'B+'. The spread between 10-year Greek and German government bond yields, a gauge of the risk of holding Greek debt, touched a record 13.73 percentage points. Fitch said its revised rating assumes that Greece, already the recipient of a €110bn (£96bn) bail-out from the EU and International Monetary Fund (IMF) will receive "substantial new money", allowing it to avoid a debt restructuring – where bondholders are paid later or less than the amount owed.

However, more downgrades could follow if the country's international rescuers do not offer a credible plan for the country, the agency said. The warning came as the IMF urged Europe to offer more support to its struggling nations. "The countries cannot do it alone," said Ajai Chopra, the head of the IMF mission in Ireland.

But Jens Weidmann, the new head of Germany's central bank and a member of the European Central Bank's governing council, argued it was a nation's responsibility to sort out its own finances. "It is first and foremost up to Greece itself to take appropriate additional steps," he said. "If a country fails to do so, further support should no longer be taken for granted and the country should be prepared to bear the severe consequences that are likely to ensue once financial assistance is withdrawn."

Athens' lack of progress in shrinking the hole in its budget has seen EU officials start to float the idea of a "soft" restructuring of the debt. However the ECB is violently opposed to a restructuring, concerned about a possible chain reaction through Europe's financial system and the losses it would face on the up to €50bn of bonds on its own books. Officials are said to be now looking at a plan which would see bondholders encouraged to roll over their holdings, replacing new debt with old.

The debate in Europe about how best to deal with Greece underlines why the region's politicians are keen to keep one of their own at the helm of the IMF, since a candidate from outside the bloc might be less sympathetic to propping up struggling eurozone nations. Christine Lagarde, the French finance minister seen as the leading contender to take the job, said on Friday Athens must do more. But she stressed: "What we certainly don't want is a bankrupt state, a default in payments."

The Greek finance ministry complained the latest downgrade ignored the "additional commitments" that Athens has made to meet its fiscal reform targets and speed up its privatisation plans.




Greece worries markets on reform plan
by David Oakley, Kerin Hope and Ralph Atkins - Financial Times

The eurozone crisis deepened on Friday as Greek economic reform plans were delayed, sparking tension in the financial markets over the country’s ability to rein back its mounting public debt. The euro dropped against the dollar, Greek bond yields rose to euro-era highs and fears of contagion to Spain, the key economy, increased amid worries that Athens’ determination to implement its recovery plan was waning.

Fitch, the rating agency, also hit Greece with a multi-notch credit downgrade, warning that the country faced big challenges in turning round its reversing economy. Harvinder Sian, euro rates strategist at RBC, said: “The Greek crisis has ratcheted up this week because policymakers and central bankers cannot decide the way forward.” Gary Jenkins, head of fixed income at Evolution Securities, added: “It is a mess. Division among the politicians and central bankers is not helping. “The problems in Greece could spread to the larger economies.”

There is confusion over whether Greece will see a swift restructuring of its debt, a course some eurozone policymakers have backed but which the European Central Bank said would spark a banking crisis in Athens. The country missed its deadline on Friday for presenting a reform plan to parliament for approval following demands by its European partners and the International Monetary Fund for bolder spending cuts and a timetable for planned privatisations.

Eurozone politicians were also warned that even a so-called soft restructuring of Greek debt would lead to the ECB’s cutting off Greece’s banks from its liquidity, with possibly catastrophic consequences. Jens Weidmann, Germany’s new Bundesbank president and ECB governing council member, said extending bond maturities in a soft restructuring “would make it impossible to accept them as collateral for refinancing operations under existing rules”. He added: “Consequently large parts of the Greek financial sector would be cut off from funding.”

Experts from the European Commission, IMF and ECB have not yet set a new deadline for signing off the revamped Greek reform plans – the first step in a round of endorsements. According to some estimates it could be another 10 days before the Greek finance ministry discusses the plan with the EU-IMF team. That could cause further market uncertainty.

Spanish regional elections this weekend also created a stir in the markets amid worries that more details might emerge over the amount of debt building up in the country’s municipalities. José Luis Rodríguez Zapatero, the Socialist prime minister, said on Friday Spain would “very probably” have needed a bail-out by the EU last year without the government’s harsh austerity plan. The euro fell about 1 per cent to $1.4232 against the dollar, Greek 10-year yields jumped about half a percentage point to 16.57 per cent and Spanish yields rose to 5.48 per cent. Fitch cut Athens’ ratings by three notches to B plus, which is four notches below investment grade, and placed the country on rating watch negative.




Peter Schiff on the IMF - 'They don't help the countries'






Problems pile up in the IMF in-tray
by Heather Stewart - Observer

Unless the bookies have got it very wrong, it looks as though French finance minister Christine Lagarde will be installed as the head of the International Monetary Fund before Dominique Strauss-Kahn has even stood trial for attempted rape.

With Angela Merkel publicly backing her, all the signs were there this weekend that Europe is close to stitching up international finance's top job, as it has done on every other occasion since the IMF was founded in 1945. The Italian prime minister, Silvio Berlusconi, described her as a "great choice", a view echoed by ministers from Austria and Sweden. The US is keeping its powder dry, but has refrained from critising Lagarde. Under a selection process agreed late on Friday, the IMF's executive committee will shortlist up to three candidates by 10 June and will hold a final vote on a successor by the 30th.

In addition to a "distinguished record in economic policymaking", the fund said its new boss should have demonstrated "the managerial and diplomatic skills to lead a global institution".

Lagarde was a 20-1 outsider last Wednesday, the day before Strauss-Kahn resigned. By Friday night, she was 6-4 on – eclipsing other European rivals such as Gordon Brown – after the German chancellor signalled her support, and Turkey's Kemal Dervis, seen as a developing-country alternative, said he was not in the running.

Unless the developing world unites behind its own candidate, and quickly, the IMF looks likely to have its fifth French boss within weeks. Lagarde is a big enough hitter to ensure she will not be challenged by Washington, even though the appointment of yet another European will go down less well in Beijing, New Delhi and Brasilia.

Ken Rogoff, a former chief economist at the IMF, said: "It's high time we had a non-European at the fund, just as it's high time we had a non-American running the World Bank, but if the Americans go along with a European choice because they want to keep hold of the bank, I'm not sure there's a lot that can be done about it."

The gentleman's agreement dictating that the Europeans pick the IMF boss while the Americans choose who runs the World Bank was meant to have been torn up. But the new "open and transparent" selection system still threw up Strauss-Kahn in 2007, and the Europeans put forward a high-profile candidate this time as well.

The ostensible reason was the need to have a managing director who was sensitive to the sovereign debt crisis battering the weaker countries of the eurozone. Strauss-Kahn was arrested en route to crisis talks about the plight of Greece, which is on the brink of being forced to accept a second EU/IMF bailout.

Those expecting Lagarde to give France's European partners an easy ride may be disappointed – insiders say hers has been one of the harshest voices demanding austerity from Greece and Portugal in exchange for financial aid.

A straight-talking former corporate lawyer who spent years in the US, Lagarde has a reputation for charming her way round the international circuit. She will need all that charm if she is to tackle the challenges facing the IMF. First, she will have to mend fences with developing countries exasperated at the old world powers' stranglehold over the Bretton Woods institutions.

Simon Johnson, a former economist at the IMF, warns that if Lagarde does get the job, it will jeopardise the IMF's ability to act as a neutral guardian of the global economy. "The emerging markets have been pushing very hard on this, very politely in my view," he says. "Will they walk out of the room? No. Will they refuse to co-operate with the IMF for the forseeable future? They might."

But that's just the immediate challenge. Strauss-Kahn, who arrived at the fund just as the financial tsunami was breaking in the autumn of 2007, had begun the process of making the IMF adapt to the complex, modern global economy.

He ditched some of the neoliberal orthodoxy that had been made redundant by the downturn, and sought to focus the IMF's energies on tackling unemployment and inequality. "He presided over an IMF that didn't exactly throw the rulebook out of the window but at least tore a few pages from the really neoliberal chapter," said Max Lawson, policy adviser at Oxfam.

But while Strauss-Kahn was a man of the left, Lagarde is Nicolas Sarkozy's right-hand woman. She may push the IMF back to its traditional course in the many urgent challenges listed below.

Global imbalances
The imbalances that created the financial crisis – yawning trade deficits, out-of-kilter currencies and eye-watering debts – have never gone away. A 'currency war' between China and the US is looming, with Beijing keeping the yuan cheap against the dollar; and the rich world's commitment to globalisation is increasingly being questioned, as the Doha round of international trade talks runs into the sand.

The IMF is the only organisation with the global scope to tackle problems like these, and its new boss will have to hold the ring between competing interests and try to prevent frictions turning into all-out economic war.

Unemployment
Although most major economies have now emerged from the deepest recession since the second world war, recovery has been hamstrung by the bad debts built up in the boom years, and nervous companies remain reluctant to hire.

Ensuring that job creation – not misplaced fiscal masochism – is at the heart of the IMF's prescriptions for the economies it tries to help will be an important goal for the new managing director. Strauss-Kahn had recently begun putting inequality at the heart of the fund's mission. It is not clear that Lagarde, if she is to be his successor, shares that view.

Regulation
The IMF failed to predict the catastrophic consequences of some of the financial innovations of the past decade – and indeed supported the creation of derivatives and other complex financial assets in the belief that they would reduce financial instability. Its role is to put together a list of internationally agreed standards for central banks to follow in constraining their domestic financial institutions and preventing another meltdown.

France has demanded new curbs on hedge funds and attacked speculators for exacerbating the crisis; Sarkozy even suggested the French model could offer an alternative to rapacious Anglo-Saxon capitalism.

Europe's debt crisis
Yields on Greek debt hit yet another high on Friday as investors continued to speculate that it will need a fresh bailout, on top of the €110bn it has already been promised. Strauss-Kahn was said to have intervened to soften some of the toughest conditions imposed by creditor countries such as Germany and France; whoever takes over will have to get involved almost immediately.

Germany and the European Central Bank are already at loggerheads about how to resolve the crisis, and the IMF will have to act as a broker between warring eurozone countries. Lagarde took a tough line on Friday, saying Greece was at risk of default, and must take even tougher action.

Governance and reform
Under Strauss-Kahn, the IMF took a series of baby-steps towards giving its developing-country members, such as China and India, more of a say in how it is run, and reflecting the new balance of power in the global economy.But America still has a veto over policy decisions, and if the Americans and Europeans gang up, they can silence the rest of the world.

Campaigners say that without much more radical reform the IMF risks becoming irrelevant, sidelined by regional bodies such as the Chiang Mai initiative, under which Asian countries are discussing pooling currency reserves to avoid having to turn to the Bretton Woods institutions for help.

Development
In the 1990s, the initials IMF became synonymous with a brand of development that involved financial liberalisation, privatisation and fiscal austerity, with sometimes devastating consequences for the countries concerned. More recently, the fund has softened its 'Washington consensus', providing more scope for governments to build social safety nets to protect the poor from the pain of economic adjustment.

The IMF, as well as the World Bank, has a responsibility to fight poverty. But France's aid to Africa fell last year and it has failed to live up to the promises it made at the Gleneagles summit in 2005, so Lagarde's record here is shaky.




Joseph Stiglitz: the IMF cannot afford to make a mistake with Strauss-Kahn's successor
by Joseph Stiglitz - Telegraph

The IMF will soon be confronted with the difficult decision of choosing a new head. If these were ordinary times, it might be of little moment. But these are not ordinary times.

Europe faces a financial crisis and good leadership of the IMF will be essential to finding its way out. As the world focuses its attention on the allegations against Dominique Strauss-Kahn and we think about who might replace him, it is important not to lose sight of the IMF's crucial role.

Europe has decided it cannot or will not manage the crisis on its own and has turned to the IMF. But Europe is in an awkward position. Its own Central Bank is at the centre of managing the very crisis that was helped into being by the flawed economic philosophy and policy to which it and the US Federal Reserve adhered.

Those who thought that all that was needed for the euro to succeed was fiscal discipline should have learned their lesson – Ireland and Spain had surpluses before the crisis.

Behind the scenes there is a battle – between those who put the interests of the banks first and those who put the interests of the people first. Debt restructuring would affect the balance sheet of the banks. The longer restructuring is postponed, the more debt moves onto the books of the public, the more the banks are protected.

But there is a high cost of this strategy: the citizens of the country suffer enormously in the interim and taxpayers pay the price in the long run. Even after all this, there are likely to be more crises, especially given the reluctance of those in the US and European Union to adopt adequate financial regulations.

An effective and fair IMF is essential – an institution that looks not just after creditors in the lending countries but after the well-being of all. And whatever the result of the case against Strauss-Kahn, this much is clear - he was an impressive leader of the IMF and he re-established the credibility of the institution.

He breathed fresh air into the IMF as he re-examined old doctrines such as those concerning capital controls. He raised new issues as he emphasized the critical role of employment and inequality for stability. He reasserted the role of economic science, including Keynesian economics, over the mishmash of long-discredited Wall Street doctrines, which had been central to the IMF's failures in East Asia, Latin America, and Russia.

He also listened to the increasingly vocal and informed voices of those in emerging markets. He supported the movement for reforms in the institution, including voting rights and governance.

As the IMF transitions, it is important to maintain the reforms, and carry them forward. But the hard-fought gains of the institution could easily be lost. That's why the choice of the head – and the process by which the choice is made – is so important.

It should go without saying that this implies that the head should be chosen on the basis of merit in an open and transparent process, and indeed the G20 has agreed that the old boys' system, in which Europe was entitled to head the IMF (with an American the second-in-command) has to go.

The understanding was that the next head would come from the emerging markets. To renege on that commitment would be a disaster for the IMF and the world. If the emerging world had no one to offer, that would be one thing. But there is an ample and impressive supply of qualified individuals.

The required mix of skill and experience is, to be sure, unusual. The head must have a knowledge of economic science. (As we learned in the crisis, the leading bankers not only didn't understand systemic risk; they couldn't even manage their own risk.)

The person must also have the ability to manage a complex international organization, have familiarity with the international players and the ability and credibility to deal with them forcefully. The person must also have a sense of fairness and a demonstrated competency in crisis management.

This last criterion shouldn't be difficult to meet: the world has had an ample supply of crises – Argentina, Brazil, Russia, Korea, Mexico, Indonesia, Malaysia – and out of these some stars have emerged, such as Arminio Fraga in Brazil and Zeti Akhtar Aziz in Malaysia.

How the appointment is handled will be a true test of the IMF, especially because its governance has been widely viewed as flawed and opaque, with problems of revolving doors hardly even recognized.

Reforms giving the emerging markets more voice are moves in the right direction, but they have greatly lagged the truly enormous changes that have occurred in the global balance of economic power, illustrated by the fact that the US is still the only country with a veto.

The disparity between how the West responded to its crisis and the demands imposed on East Asia during their crisis 10 years ago have opened the IMF up to charges of hypocrisy. Not surprisingly, there is a lingering lack of confidence in the institution, and this hampers the ability of the international community to address basic global issues.

A large build up of reserves by emerging markets and developing countries (in the trillions of dollars) – motivated by countries' obvious desires to protect themselves against economic volatility – contributes to weak global demand, undermining recovery.

If they had confidence in the IMF, these countries could turn to that institution rather than self-insurance. This would be more globally efficient – but developing countries are reluctant to rely on the IMF. Will it be there for them when they need it? Will it impose onerous conditions in return for its help, as it did in the past?

The response to the IMF's major change of course on capital controls is more evidence of the lack of confidence in the institution. A decade ago, the IMF tried to change its Articles of Agreement to allow it to force countries to liberalize their capital markets. Now, it recognizes that at times, capital controls may be desirable.

Rather than responding enthusiastically to this long overdue change, emerging markets and developing countries have said: "Keep out of this. Today, you may be open, but at any moment you can be recaptured by Western financial markets that have done so well by these unstable capital flows, making money as funds flow in, and making more money in the aftermath of the havoc created as funds flow out."

In the age of globalization, international cooperation is essential, and there is a vital role for the IMF to play. It failed in the run-up to the current crisis – it promoted the deregulation and liberalization policies that led to the crisis and its rapid spread around the world.

But it seems to have learned at least some of the lessons. The Institution seems well on the way to recovering a better reputation. The gains, however, are fragile. The election of a new head will be a test the IMF can ill afford to flunk .

But at this critical time the stakes are especially high. The world needs a credible and effective International Monetary Fund.




Protecting the housing market means a lost generation of buyers
by Patrick Collinson - Guardian

Too many people have too much to lose from a falling housing market, but it means excluding a generation

Rents have risen to an all time high after the "strongest" April on record, crowed the biggest letting agency in the country this week. Great if you're a greedy landlord, but yet another dollop of misery for tenants, few of whom are enjoying pay rises, and all of whom are seeing food and fuel bills rise relentlessly. Rents are now 4.4% higher than a year ago across the UK, according to LSL Property Services, which owns Your Move and Reeds Rains. The picture is worst in London where rents are now 7.9% higher than a year ago.

The Jenga tower that is the British property market (economy rubbish, real incomes falling, house prices remaining at near record levels and rents rising) wobbles but just won't fall over. There are simply too many interests – from the banks and existing homeowners through to landlords – determined to keep it standing at any cost.

But they are protecting something that is, viewed globally, uniquely dysfunctional. A report from the Joseph Rowntree Foundation this week said that, on current trends, it won't be long before only one in four couples will be able to afford a home. Three-quarters will be forced to rent (or as one particularly disingenuous buy-to-let lender called it last week, the new "tenure of choice" for young adults).

The property-owning democracy is turning into a rotten borough, said the report's author, Professor Mark Stephens of the University of Glasgow. The only ones able to afford the deposit on a home will be those who can turn to rich parents for a leg-up, which will "increasingly entrench the economic privilege of the children of the better off." The report calls for radical action, although its proposals are couched so as not to scare the type of chumps who lost all sanity over inheritance tax and who in turn voted for yet another tax break for the super-rich.

One proposal is for a steep increase in house building. A big increase in new-build, in areas of excess demand (which must mean building on the green belt), will help quell UK prices. But we also have to recognise that in Ireland new-build was almost entirely unconstrained, yet the housing market there went as bonkers as ours.

The real lesson of the disastrous housing booms around the world (viz Britain, Ireland, the US, and currently the worst, Australia and New Zealand) is that house prices are purely a function of the amount of finance that can be raised against a property. The crippling cycle of boom and bust is a consequence of financial deregulation, so beloved of Anglo Saxon economies and so destructive. Forget supply and demand. Hose money over the housing market and prices will go up; turn the hose off and prices will come down.

We have seen in recent weeks an easing of mortgage availability, with an upward creep in the number of 90% loans. But, in reality, banks' total lending will remain constrained for years to come, while young adults who put themselves through strict new "affordability" criteria will find they don't qualify for a mortgage, even at 90%.

The result? With less money lent against property, prices will gradually fall in real terms. But, while that happens, there will be a lost and increasingly angry generation of thwarted buyers.




UK mortgage lending slumps by 14%
by Mark King - Guardian

Mortgage lending plummeted in April to £9.8bn, down 14% from the £11.4bn advanced in March and 5% below the £10.3bn lent in April 2010, according to latest data from the Council of Mortgage Lenders (CML). The organisation admitted that "taken at face value, the underlying picture is one of considerable weakness – revisiting levels seen briefly at the start of 2010". But it blamed the "slight seasonal decline" on Easter falling in April this year, coupled with the extra bank holiday for the royal wedding.

CML chief economist Bob Pannell said: "Statistical noise, associated with extended holidays and the royal wedding, makes it harder to read the immediate market situation. This represents an unfortunate temporary loss of signal at a time when it would be useful to gauge the resilience of house purchase demand to economic uncertainties and the pressure on household incomes. "Levels of activity look set to remain broadly flat over the near term. It now seems unlikely that interest rates will rise much, if at all, this year, and this should help keep the market on an even keel. Nothing immediately suggests that housing demand is waning."

Pannell also acknowledged the average house price figures from Halifax and Nationwide – showing 1.4% and 0.2% falls in April respectively – are consistent with the UK "experiencing a modest downwards drift of house prices. We would not be surprised if interest in remortgaging wanes a little as expectations of higher interest rates fade and, as a result, activity tails off over the next few months."

Brian Murphy, head of lending at independent mortgage broker the Mortgage Advice Bureau, also said the April lending data should not be taken seriously. "Before the country packed up and went on an extended break, mortgage activity in the earlier part of April was actually running at February and March levels. But then it went off a cliff," he explained. "In May, to date, activity has picked back up and is running at the levels seen in March and the first half of April."

But Howard Archer, chief economist at IHS Global Insight, said there was "little doubt" that housing market activity remains very weak compared to long-term lows, even if it has edged up slightly. "This fuels our belief that house prices are headed lower over the coming months," he said. "We suspect that further modest falls in house prices are more probable than not over the coming months as tighter fiscal policy and the possibility of gradually rising interest rates before the end of 2011 maintains pressure on the housing market."

Murphy said he had seen an extraordinary period of repricing among lenders, who are vying with each other to attract new business: "This is good news for buyers and there are some very competitive rates coming out, even at higher loan-to-values."

Nationwide building society has reduced the rate on its two-year fixed mortgages by 0.3 percentage points, and its three- and five-year fixed mortgage rates by 0.1 percentage points. This takes its best-buy three-year fixed-rate mortgage to 3.69% (up to 70% loan-to-value), but there is a £400 product fee (rising to £900 for those remortgaging) and a £99 booking fee.

Santander, meanwhile, has launched a two-year fixed-rate mortgage at 90% loan-to-value at 5.29% with a £495 fee, although homebuyers must be a Santander First Home Saver account customer. This pays 5% to non-homeowners aged between 16 and 35 who deposit between £100 and £300 a month by standing order.

Newcastle building society recently expanded its mortgage range with the addition of a new five-year fixed-rate mortgage at 4.99% available up to 80% loan-to-value for first-time buyers and re-mortgage customers, with a completion fee of £499 and a £195 reservation fee.

Louise Holmes at Moneyfacts said the rate on the Santander product was competitive. "Higher loan-to-value mortgages have begun to make a return to the market recently – however, this is certainly one of the best overall short-term fixed package for rate, fees, borrowing amounts and incentives to grace the mortgage market this year."




Families face budget squeeze for 'some time', Bank of England chief economist says
by Andrew Hough - Telegraph

Families will face tough times for “the next year or so”, a senior Bank of England official, Spencer Dale, warned as he signalled an imminent rise in interest rates.

The central Bank’s chief economist, braced households of significant financial pressures “for some time”, bringing further pain for families. In an interview on Saturday, Mr Dale admitted interest rates needed to rise from the current record levels to tackle the growing inflation threat, and the sharp spike in the cost of living, or risk damaging long-term economic prospects.

Last month a former senior BoE colleague, Andrew Sentance, predicted interest rates quadrupling within a year, adding more than £100 a month to a typical household mortgage, in a bid to thwart the rising inflation. Mr Dale, appointed to his position in July 2008, admitted pressures on household finances would “likely to persist for some time”, or for at least “the next year or so”. Mr Dale, a member of the Bank’s nine-member Monetary Policy Committee, which is tasked with setting interest rates, warned the first rise should occur immediately despite the fragile nature of the economic recovery.

“I’m not particularly happy about voting to raise interest rates and doing it for nasty reasons,” he told the Financial Times. "I don't take lightly the impact this could have on some families. “But I think the cost to our economy as a whole – were inflation to persist for longer and our credibility start to be eroded – would be even worse.”

The Bank this week unveiled a sharp rise in the annual rate of inflation, as measured by the Consumer Prices Index (CPI), which rose to 4.5 per cent in April. The figures, currently at more than double the bank's two per cent target rate, took many economists by surprise. Mervyn King, the BoE governor, this week warned inflation would likely to continue to hit consumers for many months, possibly well into next year. The governor admitted this would further hit workers' standard of living, particularly as a majority of employees have been forced to accept a pay freeze or very modest pay increases over the past 18 months.

Mr Dale has been at odds with his boss since February, about raising interest rates. While he has wanted to raise them from their historic low of 0.5 per cent, Mr King has been vocal in his opposition. In his interview Mr Dale, 44, warned of little growth in household incomes in the foreseeable future, which had grown at their slowest rate since the 1920s. He said the squeeze on household incomes was necessary to rebalance the economy.

He said he was not confident the British economic recovery had taken hold but raised fears that inflation was too high. Some commentators said his remarks were the first time the Bank had provided specific guidance to households on interest rates. This, they said, would help families decide whether to sign fixed interest rate mortgages or gamble on the Bank’s monthly rate-setting meetings.

While Mr Dale lay part of the economic blame on the lack of household growth, he admitted that prudent savers had been unfairly hit by the economic crisis. “They were saving before the financial crisis,” he said. “They weren’t in any way contributing to the factors, which led to that build-up, and they’ve been affected very substantially by the very substantial reductions in interest rates.”




Tens of thousands defy Spain's pre-election protest ban
by Charlotte Chelsom-Pill - AFP, Reuters

A pre-election protest ban in Spain has proved unsuccessful as tens of thousands attend nationwide rallies. Defiant protesters have taken to the streets on the eve of local elections to demand social and economic reform. Furious Spanish youths were undeterred by a government imposed protest ban on Saturday, vowing that they were "here to stay."
 
With local elections due to take place on Sunday, tens of thousands of people gathered in city centers across the county for the seventh day of nationwide protests against soaring unemployment. Hundreds of protesters, known as "los indignados," (the indignant) camped out in a ramshackle protest village in Madrid's central Puerta del Sol Square. Protests also continued in other Spanish cities including Barcelona, Valencia, Sevilla and Bilbao. "We intend to continue, because this is not about Sunday's elections it's about social cutbacks," said Carmen Sanchez, a spokeswoman for the organizers at the protest village in Madrid.
 
In the build up to the local election, Spain's electoral commission announced the 48-hour ban on Thursday, asserting that protests planned for Saturday and Sunday were illegal. The commission proclaimed that they "go beyond the constitutionally guaranteed right to demonstrate."
 
Day of reflection?
Saturday was declared "a day of reflection," meaning political activity was forbidden. Yet fearing violent clashes, the socialist government has not strictly enforced the ban and the protests have remained peaceful. Following the announcement of the ban, the number of protesters across Spain soared. Spain's leading daily newspaper, El Pais, estimated that around 60,000 people took part in demonstrations on Friday night.
 
As the ban came into force at midnight, some 25,000 protesters in Madrid's Puerta del Sol Square began to whistle and cheer, shouting "now we are all illegal." But in spite of the apparent festivities, the predominately young crowd clearly expressed their frustrations.
 
Spanish PM sympathetic
Spain's ruling Socialist Party is facing defeat on Sunday, with devastating losses expected. Polls suggest that voters will punish the party for their handling of the economic crisis. Spanish Prime Minister Jose Luis Rodriguez Zapatero voiced sympathy for the protesters on Friday, however, saying they were reacting to unemployment and the economic crisis "in a peaceful manner."
 
The economic crisis pushed Spain's unemployment rate to 21.19 percent in the first quarter of this year, the highest figure in the industrialized world. In February unemployment for under-25s, stood at 44.6 percent. Spain is currently experiencing the biggest protest movement since the country was first plunged into a recession in 2008.




Matt Taibbi: 'U.S. politics - reality show sponsored by Wall Street'
by RT

RT's Anastasia Churkina sits down with Matt Taibbi - journalist, author and contributing editor to Rolling Stone magazine.






Was LinkedIn Scammed?
by Joe Nocera - New York Times

If there’s one thing we’ve all learned in the aftermath of the financial crisis, it’s that stiffing your client is not a crime. Not if you’re an investment bank.

Deutsche Bank, according to a recent report by the Senate Permanent Subcommittee on Investigations, sold its clients subprime mortgage bonds that one of its own traders at the time described as “pigs.” Goldman Sachs took unseemly advantage of unsuspecting clients to offload its most toxic assets in 2007 and 2008. During the subprime bubble, this kind of behavior was par for the course.

It still is, apparently. On Thursday, LinkedIn, an Internet company that connects business professionals, became the first major American social media company to go public. The company had hired Morgan Stanley and Bank of America’s Merrill Lynch division to manage the I.P.O. process. After gauging market demand — which is what they’re paid to do — the investment bankers priced the shares at $45. The 7.84 million shares it sold raised $352 million for the company. For this, the bankers were paid 7 percent of the deal as their fee.

For a small company with less than $16 million in profits last year, $352 million in the bank sounds pretty wonderful, doesn’t it? But it really wasn’t wonderful at all. When LinkedIn’s shares started trading on the New York Stock Exchange, they opened not at $45, or anywhere near it. The opening price was $83 a share, some 84 percent higher than the I.P.O. price. By the time the clock had struck noon, the stock had vaulted to more than $120 a share, before settling down to $94.25 at the market’s close. The first-day gain was close to 110 percent.

I have no doubt that most everyone at LinkedIn was thrilled to see the run-up; most executives at start-ups usually are. An I.P.O. is an important marker for any company. And, of course, the executives themselves are suddenly rich. But, in reality, LinkedIn was scammed by its bankers.

The fact that the stock more than doubled on its first day of trading — something the investment bankers, with their fingers on the pulse of the market, absolutely must have known would happen — means that hundreds of millions of additional dollars that should have gone to LinkedIn wound up in the hands of investors that Morgan Stanley and Merrill Lynch wanted to do favors for. Most of those investors, I guarantee, sold the stock during the morning run-up. It’s the easiest money you can make on Wall Street.

As Eric Tilenius, the general manager of Zynga, wrote on Facebook: “A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one. Bankers are rewarding their friends and themselves instead of doing their fiduciary duty to their clients.”

There is nothing wrong with a small “pop” in the aftermath of an I.P.O.; investors, after all, don’t want to buy a stock that is going to go down immediately. But during the Internet bubble of the 1990s, the phenomenon of investment bankers wildly underpricing I.P.O.’s so that money could be diverted to favored investors got completely out of hand — stocks would sometimes rise 500 percent on the first day. It was obscene.

Indeed, most business journalists writing about the LinkedIn deal focused on the first-day run-up as evidence that we’ve entered another Internet bubble. But over at the Business Insider blog, Henry Blodget — who knows a thing or two about bad behavior on Wall Street — had the perfect analogy for what the banks had done to LinkedIn.

Suppose, he wrote, your trusted real estate agent persuaded you to sell your house for $1 million. Then, the next day, the same agent sold the same house for the new owner for $2 million. “How would you feel if your agent did that?” he asked. That, he concluded, is what Merrill and Morgan did to LinkedIn.

It’s worth remembering that most of the young Internet companies with those eye-popping I.P.O.’s back in the day are long gone. With their flawed business models, maybe they were doomed from the start — but the cash they left on the table at the I.P.O. might have allowed at least a few of them to survive.

Similarly, LinkedIn is still a fragile enterprise. Its business model remains unproved. It is going to have to grow awfully fast to justify its stock price. Its executives may yet rue the day they let themselves be sold down the river by their investment bankers. LinkedIn is supposed to be the client, but it was treated like the mark.

Ever since the financial crisis, investment bankers have been constantly questioned about whether they have any larger social purpose besides making money. What they invariably say is that they play a critical role in capital formation, meaning that they help companies raise the money they need to grow and prosper. The LinkedIn deal suggests something darker. The crisis hasn’t changed them a bit. They’re still just in it for themselves.




Short sellers set to target LinkedIn
by Michael Mackenzie and Telis Demos - Financial Times

Shares in LinkedIn are expected to come under downward pressure this week, as they attract the attention of aggressive traders who are prepared to bet on a fall in the business network’s stock price. On Tuesday, restrictions on short selling the stock will be lifted. A short sale involves borrowing stock and selling it, in the hope that the price falls and it can be bought back more cheaply – generating a profit.

“Brokers are forecasting, in the near term, that the stock is way overbought and that we should see a price decline as soon as the stock is available to short next Tuesday,” said Timothy Murphy, of youDevise, which runs Trade Monitor Idea, a platform that connects brokers’ trading recommendations with more than 170 hedge and quant funds, as well as “long-only” asset managers. Mr Murphy said sell recommendations on LinkedIn are based on a short time horizon of five to 20 days. “People think it’s a good business with good prospects, but the valuation is stretched and the stock price is overdone,” he said.

Nicole Sherrod, managing director of the trading group at retail brokerage TD Ameritrade, said shorting the shares was a trending discussion topic among day traders. In the past, technology companies, notably Amazon, have been big targets for short sellers betting that lofty valuations sparked by bullish growth prospects are too high.

However, complicating the picture for short sellers of LinkedIn is the small size of its float: just 9m shares, as the group sold only 10 per cent of its stock in the initial public offering. “There’s no way you can find a borrow, there was such a limited amount of stock sold. It would be prohibitively costly to put on a short,” said Doug Martin, a trader at Kitano Capital, a private investment firm. LinkedIn’s share price rose 109 per cent to $94.25 on Thursday, but fell to $93.09 on Friday.




LinkedIn Shares Getting Pounded
by Shira Ovide - Wall Street Journal

LinkedIn stock is taking a big breather after its gangbusters IPO and meteoric stock rise. Shares of the social networking company are down about 9.4% in early market trading, to $84.35. That’s still nearly twice the IPO price of $45 a share, but well off the $122.69 high price since LinkedIn’s stock market debut last week. The decline takes LinkedIn’s stock market value down from as much as $11.6 billion to a more pedestrian but still lofty $8 billion.

At least two factors are weighing on the stock right now.
  1. The valuation debate continues. Over the weekend, we had a continuing wave of debates about whether LinkedIn is crazy overheated. Pick your poison. We’re biased, of course, but Deal Journal’s favorite tongue-in-check stat is this one we unearthed: Based on LinkedIn’s 2010 profits and its market value last week, on a comparable basis Exxon would have a stock value of $19.8 trillion, more than the U.S.’s annual gross domestic product.

  2. Let the shorting begin! This week, investors will get their first shot at shorting — or borrowing shares to bet against — LinkedIn’s stock. “Brokers are recommending to their clients to short it,” Timothy Murphy of youDevise Ltd., told our colleague Brendan Conway. “Even if you think it’s a great business model, the feeling is that the valuation is way beyond what even the most bullish guys were hoping for.”


There are only 8 million or so LinkedIn shares floating around — a very small number — making the options market one of the few, relatively inexpensive ways to bet against LinkedIn stock. Those options are beginning to list this week.




What's actually in deflation?
by Matt Busigin - Macrofugue

There is a tremendous fixation on the inflationary components of CPI.  The most obvious driver of headline CPI is gasoline, as per the fantastic Monetary Trends piece.  Without it, even the rate of headline inflation keeps dropping, and the largest risk is clearly falling inflation.How can that be!!, you say.  What consumer prices have declined over the past few years?

Let's start with new cars:


New_cars



There definitely has been a substantial move off the bottom.  The initial bottom was put in by Cash For Clunkers, and it was widely viewed as policy which would only temporary boost spending with future demand theft.  This clearly is holding untrue through present.  There is no doubt, however, that new cars are cheaper and better than most of the past 15 years.

Used cars:

Moz-screenshot-2


There was a substantial bump after Cash For Clunkers as supply was destroyed.  The Manheimm Used Car Index which measures wholesale value (rather than consumer prices, which is what CPI measures) is at an all-time, but the end-prices are not close to their previous highs.


Clothing:

Moz-screenshot-3


Despite the cotton move from $40 in January 2009 to $220 this year, the end-price of clothing has cratered.  This is reflective of a few realities:  a) inputs aren't a large portion of US end-prices  and  b) substitutes work.

Home Energy:

Moz-screenshot-4


What do you know - the guys knocking on your door in 2008 trying to sell you fixed rate natural gas contracts marked the top in that market....

Hotel stays:

Moz-screenshot-5


Furniture & appliances:

Moz-screenshot-6


This is clearly also coincident to new housing construction falling to a very low rate in nearly every developed economy, so there is plenty of slack in manufacturing these goods.


iPods, TVs, speakers:


Moz-screenshot-7


At the same time, the retail flows for these goods are near all-time highs.

Recreation:

Moz-screenshot-8


Recreational spending has certainly fallen due to the recession, but prices haven't responded much to the substantial ex-transfer income rebound in the past year.When the prices of two largest components of consumer expenditures (housing, 33.8% and transportation, 17.6%) drop so dramatically, inflation will remain subdued.  There's no grand conspiracy to keep the headline number down.




The Real Fear For The Muni Market Isn't The Default Rate
by Tim Lee - U.S. News & World Report

The potential for mounting debt and falling tax receipts to lead to huge defaults by state, regional, and local governments has precipitated many conference calls and webinars focusing on "setting the record straight" or "busting the myths" for municipal bonds.

In each of these conversations I've heard a similar message: The default rate for municipal bonds is incredibly low, and while it may spike relative to recent history, there is still a shockingly low probability of real pain for muni investors from defaults.

There is actually a much larger and less-discussed issue facing the municipal bond market. To set the stage, let's rewind and review a couple of key points about how and why municipal bonds have been a great investment in the past:
  • Favored tax status. Because these bonds are issued by government entities, generally they offer investors tax-free interest income. For high-net-worth individuals this can be a huge benefit.

  • Interest-rate sensitivity. The price and yield of a bond move inversely, meaning that as interest rates fall, bond prices rise and vice versa.

  • Falling-rate environment. Interest rates have generally been dropping since the last major peak in the early 1980s.

Because of the three factors above, the real fear for the municipal bond market will arise when the primary pool of muni-bond holders (high-net-worth individuals) begin to see the previously rising values of their bond accounts begin to drop quickly.

Due to falling interest rates, most of these investors have only experienced ever-growing bond prices—and thereby reasonable total rates of return after tax—their entire investing lives. Very few have ever lived through a meaningful rising interest-rate environment. When these generally conservative investors begin to see sharp drops of 10 percent or more in their "safe" accounts over short periods of time, history tells us they are likely to panic, and sell fast.

With the downturn of the stock market in 2008, huge amounts of cash have flowed into bond mutual funds over the past 36 months. The fact that very few large institutional investors and hedge funds have any desire for tax-free interest, and you can see an inordinately large group of sellers with very few buyers. Add in the fear and potential panic selling, and we could be in for a very difficult muni market. As an investor, I've been looking for good prices to get out of the bonds I hold, and finding smart, inflation-hedged investments to rotate into, such as floating rate bonds and real estate.




State Bank of India Profit Slumps 99%
by Nupur Acharya and Sourav Mishra - Wall Street Journal

State Bank of India posted a 99% drop in fourth-quarter net profit, as provisions and tax expenses surged, warning it would continue to set aside substantial funds, mainly for potential bad loans, in the next couple of quarters. "This is a quarter we would like to forget," SBI Chairman Pratip Chaudhury said at a news conference.

The poor results don't necessarily spell trouble for all Indian lenders. SBI, India's largest bank by assets, was particularly hurt by a rise in provisions to 41.57 billion rupees ($921 million) from 23.49 billion rupees, including 32.64 billion rupees set aside against possible bad loans. Tax expenses also soared to 19.02 billion rupees from 9.78 billion rupees. Rivals ICICI Bank Ltd. and HDFC Bank Ltd. had much stronger quarters because they didn't have to set aside such large amounts against possible bad loans. Analysts say that they expect bad loans will likely remain steady in coming quarters for most banks.

SBI's provisions jumped after it recently ended a highly popular mortgage program that involved what the central bank called "teaser loans," which charged borrowers below-market rates in the initial years, before rising later. The program was launched after the global economic crisis hit in late 2008, crimping demand for housing and other loans. State-run SBI was flooded with cash as investors sought to park their funds with the bank, perceiving it to have an implicit guarantee from the government, making the bank eager to lend.

After about a year, the Reserve Bank of India became concerned that teaser loans, which were attracting great demand, would lead to delinquencies once interest rates rose. Several other lenders launched programs similar to SBI's, but discontinued them after the central bank raised the provisioning requirement on such loans to 2% from 0.4%. SBI initially resisted the requirement to increase provisions, arguing that its mortgages weren't covered by the rules. It set aside the entire 5 billion rupees required by the central bank in the latest quarter. For the January-March quarter, SBI's net profit plunged to 208.8 million rupees from 18.67 billion rupees a year earlier. A survey of 13 analysts yielded an average forecast of 28.91 billion rupees.

The unwelcome surprise spooked investors, who punished the stock, sending it to an intraday low of 2,401. SBI provisionally closed down 8.2% at 2,403 rupees in a Bombay Stock Exchange market that was 1.1% lower. SBI's provisions also included funds set aside to create a so-called countercyclical buffer—a cushion of money the Reserve Bank of India requires banks to build up in good times to cover losses when the economic tide turns. For the fiscal year ended March 31, the bank's countercyclical provision totaled 23.30 billion rupees.

"It definitely looks like a cleaning up of the books by setting aside a large amount," said Vaibhav Agrawal, vice president, Angel Broking Ltd. "The negative surprise is not just on provisions, but also on operating parameters." The bank's net interest income--the difference between interest earned and interest paid—rose 20% to 80.58 billion rupees, lower than the 91.19 billion rupees analysts expected.

Mr. Chaudhury, SBI's chairman, conceded that asset quality was a "challenge" in the just-ended year and said that the bank had appointed a senior executive to rein in bad debts. The bank's gross bad loans jumped to 253.26 billion rupees from 195.35 billion rupees a year earlier. For the fourth quarter, gross bad loans as a percentage of total loans rose to 3.28% from 3.05% a year earlier. SBI Chief Financial Officer Diwakar Gupta said the bank needs to provide an additional 11 billion rupees to meet countercyclical buffer requirements over the next two quarters. He said the fact that the RBI has raised loan-loss provisioning requirements for all lender will mean further provisions in the months of come.

In the just-ended year, the bank also took a charge against capital of 79.27 billion rupees to cover rising costs for pensions and wages. That reduced its capital adequacy ratio to 11.98% at the end of March, from 13.39% a year earlier. "This is a key negative as this has shaved off the bank's net worth by nearly 80 billion rupees, leaving little capital to steer business growth," Angel Broking's Mr. Agrawal said. He added that the house may reduce the bank's target price by 10%-12%.

Still, Mr. Chaudhury said the capital adequacy ratio is good enough for 20% growth in loans outstanding this fiscal year. For the fourth quarter, the net interest margin—broadly the difference between yields on loans and cost of funds—was 3.07%, compared with 2.96% a year earlier. Mr. Chaudhury said a net interest margin of 3.5% seems feasible because the bank has recently raised its lending rates. The chairman also said the government, the bank's largest shareholder, is committed to keeping it well capitalized and will fully subscribe to its proposed rights issue of 200 billion rupees. The rights issue is around the corner, he said, without specifying an exact date.




TEPCO President Steps Down After Nuclear Crisis
by Hiroko Tabuchi - New York Times

The president of Tokyo Electric Power resigned on Friday, shouldering responsibility for the crisis at the company’s Fukushima Daiichi nuclear plant as the utility booked a $15 billion annual loss, the largest by a nonfinancial company in Japanese history.

At a news conference in Tokyo, the departing president, Masataka Shimizu, also said the company had decided to decommission the four most heavily damaged of the plant’s six reactors and to cancel plans to add two more. But his choice of an insider to succeed him could prompt further criticism of the company’s handling of the crisis at the plant, which was ravaged in the March 11 earthquake and tsunami and continues to release radiation.

Mr. Shimizu, 66, will step down and be succeeded by Toshio Nishizawa, 60, a senior executive, Tokyo Electric said. “I take responsibility for this accident, which has undermined trust in nuclear safety and brought much grief and fear to society,” Mr. Shimizu said. “Whatever happens, there must be change,” he said.

The crisis has raised serious questions over cozy ties between the Japanese nuclear industry and the regulators charged with overseeing safety at the country’s 55 reactors. It has also prompted a rethinking of Japan’s energy policy, which had sought to raise the country’s dependence on nuclear energy to one-half of its electricity needs, from the current one-third.

The Japanese government has also been saddled with the task of aiding Tokyo Electric as it starts to pay out what is expected to be trillions of yen in compensation claims even as it continues desperate efforts to stabilize the Fukushima plant. The Japanese government has announced a plan that could tap public money to save Tokyo Electric from financial collapse and also help it compensate victims of the disaster. But the plan would require the company to eventually repay in full all the money owed to victims of the accident. The company had hoped that payouts might be capped.

Speaking in a grave monotone, Mr. Shimizu said Tokyo Electric had booked a net loss of 1.25 trillion yen, or $15.3 billion, for the fiscal year that ended in March, hit by the punishing costs of bringing the Fukushima plant under control. The company booked a special loss of $5.2 billion for costs associated with cooling the Fukushima reactors, he said, and $2.5 billion more for shutting down the four most heavily damaged reactors.

But its losses so far do not include compensation claims. Tens of thousands of people have been forced to relocate from the area around the plant, and the livelihoods of nearby farmers and fishermen have been threatened. Tokyo Electric said it would sell off at least $7.3 billion in assets — including real estate and a stake in one of Japan’s largest telecommunications companies — to help meet compensation payments. The company’s board promised to take no pay, and other executives will return 40 to 60 percent of their paychecks. The company also said it would not pay dividends for this fiscal year. Still, it was impossible to forecast earnings for the year, the company said.

Moody’s Japan has warned that it could downgrade its debt rating for Tokyo Electric to junk bond status. Speaking after Tokyo Electric’s announcement, Yukio Edano, the top government spokesman, called for the company to increase efforts to squeeze out funds for compensation payments. “This is just the start. There must be more scrutiny and more effort,” Mr. Edano said.

During the crisis at the Fukushima Daiichi plant, it became clear that Mr. Shimizu would have to go as the nuclear complex was exposed as woefully unprotected against tsunami risks. Tokyo Electric has also come under intense criticism for its handling of the accident. Revelations this month that three of the plant’s reactors may have suffered meltdowns in the early days of the crisis have added to the furor.

Mr. Shimizu had been particularly criticized for largely disappearing from the public eye just as the crisis worsened. He checked himself into a hospital for a week after the disaster, and has rarely appeared at news conferences since. But the company deferred a decision on new management as it focused on battling the disaster at the Fukushima plant. Workers at the plant, about 225 kilometers, or 140 miles, north of the capital, are racing to install cooling systems at the six reactors and to stem leaks of highly contaminated water.

On paper, Mr. Nishizawa, who headed the planning department at Tokyo Electric, will take the helm at the company. In his previous post he was central to efforts to work with the Japanese government to bring the Fukushima plant under control. “I feel tremendous responsibility in taking over as president during the biggest crisis in our company’s history,” he said Friday. “But I felt it was my fate to stand up and take the lead in this time of difficulty.”

Under the government rescue plan, however, management at Tokyo Electric will effectively be taken away from the company and placed in the hands of an independent supervisory body, to make sure that profits are set aside for victims.

The head of Tokyo Electric’s nuclear division, Vice President Sakae Muto, will also resign, the company said. But Tsunehisa Katsumata, the chairman and former president, kept his post, a move intended to provide some continuity in the company’s time of crisis, but which could raise questions over how serious the company is about accountability after what has become the world’s worst nuclear accident since Chernobyl.

Mr. Shimizu said he would stay on indefinitely as an adviser at Tokyo Electric, without pay. The appointments must be approved at a shareholders’ meeting in June, the company said.

Before Friday, the largest loss ever posted by a nonfinancial Japanese company was one of 834 billion yen, or $10.2 billion, reported by the struggling communications giant Nippon Telegraph and Telephone in 2002. In Japan’s troubled banking industry, however, losses have soared as high as the 2.4 trillion yen, or $29.3 billion, reported by Mizuho Financial Holdings in 2003.


49 comments:

p01 said...

Here is the Spiegel interview with Jun(c)k(er) referenced in the WSJ article. A good laugh, but not very funny. Enjoy (or not).

Shamba said...

About Stoneleigh's stop in Prescott, AR in June 20. I think you need to change the state to AZ for Arizona. I could be wrong, there might be a Prescott in Arkansas!

AR is for Arkansas, AL for Alabama, AK for Alaska and AZ for Arizona.

I'm waiting for more details so I can see if I can make it to Prescott, 2 hrs from here, to hear and see the Stonelady!

peace, Shamba

jal said...

Who can and is benefitting from deflation?

"The buyers are hedge funds and private-equity shops that are taking advantage of banks' desperation to sell, and are therefore able to grab the assets at bargain-basement prices...
at discounts of as much as 50% of their face value..."

Reset can be profitable if you have cash.

jal

I. M. Nobody said...

It's a bargain unless those assets prove to be worth less than 50% of face value. In which case the banksters have done it again.

VK said...

On Italy, the story can be told by the numbers.

- Since 1960 the Italian population has risen from 50 odd Million to about 60.6 Million people today.

- The number of people employed in Italy (full time + part time) has risen from slightly less than 20 Million people in 1960 to 22.87 Million people in 2011.

- So note, population rose by more than 10 Million in the last 41 years but total employment rose only by 2.87 Million people.

- The Labor force participation rate for men has dropped dramatically from close to 74pc in 1970 to 59.1pc in 2010. Think about that, 40.9pc of Italian men DO NOT participate in the labor force...

- Real GDP is about the same it was a decade ago at about $1.92 Trillion. And real GDP per capita is back to where it was in 1997 at around $31,800.

- As of now more than 28pc of Italian youth are unemployed.

- The Em - pop ratio for women in Italy is about 34.5pc, this is up from 25pc in 1970!

Mama Mia, a struggling, sluggish economy. Thank the blue cheese in the sky for Berlusconi, TV and Ferrari! Oh and Inter Milan.

seychelles said...

More collusion between big banks and rating agencies? Are rating agency downgrades of sovereign credit and resulting usurious loan interest rates ultimately based upon certainty that reinsurer solvencies will be AIG-ed?

Good summary from a recent Mish: The disease is inflation; the cure is deflation.

"The art of governing a country is founded on thrift." Kenko

PeakVT said...

Why should anyone care what S&P thinks about some bond or another?

Ash said...

PeakVT said...

"Why should anyone care what S&P thinks about some bond or another"

Because credit markets are largely driven by investor perception, and perceptions are significantly influenced by sociopolitical policies and/or propaganda, and those things largely feed off of and into the underlying financial reality, especially at this point in time... so, ipso facto, the S&P downgrade is reflective of the deteriorating material conditions, and that's something to care about.

Go Hokies! (or Vermont!)

I. M. Nobody said...

Fifty years ago TPTB worried themselves silly about communist revolutionaries toppling weak Southeast Asian nations like a string of dominoes. What better proof that the cosmos has a subtle sense of humor than that TPTB are about to topple the supposedly stronger dominoes of Europe. Presumably without having intended to do so. Could we say that TPTB is a lethal social development?

I. M. Nobody said...

I think Fred has just now given us a useful and better yet usefully simple explanation of why it is the way it is.

On Patriotism

Patriotism is everywhere thought to be a virtue rather than a mental disorder. I don’t get it.

If I told the Rotarians or an American Legion hall that “John is a patriot,” all would approve greatly of John. If I told them that patriotism was nothing more than the loyalty to each other of dogs in a pack, they would lynch me. Patriotism, they believe, is a Good Thing.

Of course the Japanese pilots who attacked Pearl Harbor were patriots, as were the German soldiers who murdered millions in the Second World War. The men who brought down the towers in New York were patriots, though of a religious sort. Do we admire their patriotism?

Of course not. When we say “John is a patriot,” we mean “John is a reliable member of our dog pack,” nothing more. The pack instinct seems more ancient, and certainly stronger, than morality or any form of human decency.

seychelles said...

I. M. Nobody said


Patriotism is everywhere thought to be a virtue rather than a mental disorder. I don’t get it.

Nobody who comments here gets it. And everyone who comments here understands that there is no political mechanism in the USA to change our current course (until the people start to feel "enough" pain) since, as Taibbi points out, on the important issues, red equals blue.
Perhaps things are cratering a little sooner than the one-worlders would like and the military will step in (if our politicians allow our economic primacy to be seriously threatened) and in the name of protecting us against political incompetency, flex their muscles to bring a little order to the US and to keep the rest of the world in its place.

el gallinazo said...

I. M. Nobody said...

The men who brought down the towers in New York were patriots, though of a religious sort. Do we admire their patriotism?

===========

I don't know. I always suspected that Cheney and Rummy were closet atheists. They can't afford a just God.

I. M. Nobody said...

I just want to remind seychelles and Squadron Leader Gallinazo that I didn't say those things, Fred Reed said them and good on him for doing so.

It doesn't matter whether Rummy and Cheney believe in doG. The question is, does doG believe in them and what sense of humor does it have?

As Lewis Black put it, the Old Testament God probably loves those guys. The New Testament God probably not so much. Strange what having a kid will do to your sensibilities. ;)

I wouldn't count on our military instilling much order or sparking a renewal of our exceptionality. As fred pointed out, we will not necessarily be recognized as part of their pack. Which nut-job General was it that said it was fun to kill people? Not that it matters, they probably all think pretty much the same way. It will be no different than Egypt or Bahrain.

Ash said...

We're all "patriots", just at different scales. Some of us have blind allegiances to our family and friends, no matter how ignorant and/or destructive they are. Others take it to the next level, claiming loyalty to their tribe, race, city, football team, state or country. The scale of patriotism tends to reflect just how much we stand to materially gain from maintaining that loyalty... when the perceived costs outweigh the perceived benefits, today's patriots could quickly become tomorrow's radical activists.

I. M. Nobody said...

Ash,

I'm not quite sure whether you haven't read the article I linked or you are expressing an alternative view about it.

Family is usually the pack to which a person has the strongest bonds, but certainly not always. I don't think it can really be called patriotism until it becomes loyalty to a pack of unrelated people. Patriotism certainly can't be attributed to expectations of material gain. I invite you to listen to this ballad and tell me what you think was behind the patriotism of Ira Hayes.

Metanis said...

You can sense Johnny Cash's outrage in his song. He obviously sees Ira's life as a tragedy. But I think that sells Ira's choices short. If nothing else Ira earns a small measure of immortality. That's a helluva lot more than most of us will get. Think not? Name any odd dozen of the men who died on Iwo Jima. Or on the streets of your own city this year.

Johnny Turquoise said...

Max Keiser works for Iran....and Russia!

Press TV is sponsored by the Iranian Mullahs

RT stands for Russia today.

There's the rationale for his crazed anti-dollar standpoint.

He knows who butters his bread.

I. M. Nobody said...

JT,

You just now figured out where Press TV and RT are HQed??? I might as well break it to you that those were not exactly big mysteries. Have you discovered yet that Max resides in France? How many negatives can a man have?

BTW, Matt Taibi and Arnie Gundersen have been interviewed on RT. Does that make their words suspect as well?

Alonya Minkovski also broadcasts on RT. I think she's HOT and I'd watch no matter what she says. But, maybe that's just me.

Oh, one more thing. Squadron Leader Gallinazo AKA The Red Buzzard has identified me as expressing myself sharpishly this evening. So, while I'm in that mood, tell Cass I said to go to Hell!

davecydell said...

Kudos, Ilragi,

Another excellent post, and with no help from mumble jumble Ashvin.

This is why we read you.

skilo said...

@ el g,

IMHO, it wasn't Rummy and Cheney that gave the order to "pull it" on those towers, but their Big Capital bosses.

You know, the same bosses that own the military, security, pharma, agra, chemical, etc... complexes.

They poison the troops with DU, they use government to force their fraudulent vaccines (no double blind studies showing efficacy - are you kidding me????) onto the population, they poison the water with radioactive isotopes in the name of putting an industrial waste (fluoride - no double blind studies showing efficacy when ingested, either) in the water.

IMHO, Cheney and Rummy and Obama and Clinton and Bush I & II are the front men... for Big Capital. The work together, they have a continuity of agenda, all the while selling adversarial "competition."

skilo said...

@ Board,

Ash gets some heat from some posters, but I enjoy his input. I also enjoy Ilargi's and Stoneleigh's input, too.

Keep up the good work.

Ilargi, I asked a while back, but I don't think I received an answer. You mentioned that a UN report said about 1000 families own about half the world's wealth. I'm very interested in sourcing that statement at the UN. Can you guide me in the right direction?

TIA...

I. M. Nobody said...

davecydell,

Are you sayin' the only reason "we" (how many are there of you in there?) read Ilargi is because he can write without help from Ashvin? How do you know that? Are you readin' his mail?

Ilargi said...

"skilo said...

Ilargi, I asked a while back, but I don't think I received an answer. You mentioned that a UN report said about 1000 families own about half the world's wealth. I'm very interested in sourcing that statement at the UN. Can you guide me in the right direction?"


I'm afraid you'd have to guide me first. Any idea when and in which post that was?

.

Ash said...

IM,

I'd say that growth in material complexity and inter-dependency ultimately drives our feelings of increased patriotism (loyalty/pride) in larger and larger groups, while also retaining the loyalty to the smaller groups we are a part of.

The immediate and extended family is a scale of material complexity itself, if you think about it. It creates a system of inter-dependencies and provides various benefits from maintaining or growing it. I read the article you linked, and I didn't think my views really contradicted his at all:

"The pack instinct seems more ancient, and certainly stronger, than morality or any form of human decency. Thus, once the pack—citizenry, I meant to say—have been properly roused to a pitch of patriotism, they will, under cover of the most diaphanous pretexts, rape Nanking, bomb Hiroshima, kill the Jews or, if they are Jews, Palestinians. We are animals of the pack. We don’t admire patriotism. We admire loyalty to ourselves."

I think it's clear though that if the benefits from complexity are not outweighing the costs (i.e. utterly aligning yourself with a country, via its military for ex., is not perceived to help you or your family survive in any way that's better than the alternative), then its much less likely you will continue to be a patriot. In a time of systemic deterioration, that's exactly the trend we should see.

It will be much more beneficial to stay loyal to your community or family, and forget about everything else. But the US may be the last place on Earth where that really takes hold, due to the sheer size of the national propaganda machine...

Ash said...

Skilo,

Thanks for the vote of confidence, but you may change your mind when you see Part II of that gold series I'm writing... ;-)

I expect if Dave's still around to read it, his brain may explode out of pure anger and frustration, scattering tiny bits of gold and silver out into the stratosphere.

jal said...

Headline
New home sales increased.

New Home Sales in April at 323 Thousand SAAR, Ties Record low for April

With all the flooding, hurricanes, and twisters destroying homes it should be no surprise that there will be and increase,

Its part of the new normal.

Two steps back one step forward.
jal

jal said...

Here is a different point of view on the future of Greece.

http://www.nakedcapitalism.com/2011/05/greece-must-restructure.html

Some points.


Greece needs a strategic plan. At a minimum, a soft restructuring – that is to say, a voluntary reduction of interest rates and an extension of maturities – will happen sooner than later under the EFSF facility. While this is necessary, it will certainly not be enough. Eventually, principal reduction will occur.

Bank capital must be protected from immediate losses. Principal reduction has to be done with timing and in a way that considers the stress to Greek and foreign bank balance sheets. The problem with an involuntary default is that it would trigger immediate losses and panic. Europe’s banks are still undercapitalised; so such a default must be avoided at all costs.

It is unclear whether the move to principal reduction will be messy. An involuntary default would clearly be messy. I don’t see this scenario as likely, and it certainly won’t happen in 2011. Instead, I anticipate a soft restructuring followed by a certain amount of political dithering, which will create contagion that forces a hard restructuring (aka ‘soft default’) down the line. This will be “somewhat messy”.

Neither Marc nor I mentioned a euro zone break-up. My view is still that some combination of monetisation and a voluntary default, hard restructuring package is the most likely scenario for Europe. When I handicapped scenarios after the Irish stress tests in late March, I felt this way. I still do now. This means that when you look at the three options for the euro zone, monetisation, default, or break-up, I see break-up as by far the least likely. Again, a hard restructuring/soft default is much more likely.

Credit default swaps triggers can be avoided. My view is that a restructuring that involves maturity extension, interest rate and principal reduction via an exchange of bonds or a roll off of maturing issues does not necessarily have to involve a technical default that triggers credit default swap payments. If a strategic plan is properly conceived via bond exchanges, investors will lose money but actual default can be avoided. Obviously, a reduction of principal is still a loss of money for investors. But, it is key that this loss take place with as little unwanted negative consequences for other euro zone debtors and the banking system.

el gallinazo said...

Skilo

It was I who made that comment some time ago, and referencing the source came up about a 6 weeks ago with Nassim. You can tell Ilargi and I apart because I am older, shorter, and uglier.

From my memory, which is becoming more faulty by the day, it was from a UN report circa 1995. I read it as a large footnote in the back of a book titled

The Road to 9/11: Wealth, Empire, and the Future of America by Peter Dale Scott (Jul 31, 2008)

a rather academic work. My copy is a few thousand miles away from me at the moment. It is available from Amazon in the Kindle version for $9. The back 20% of the book is footnotes and they make interesting reading on their own.

re Rummy and Cheney. No argument. They were just the hitmen, The orders came from "above."

Johnny Turquoise

You forgot to mention that Rudolf's nose glows red because he is an alcoholic. I hope you don't work for Cass. As our nation's foremost Constitutional scholar, one would hope he has more discernment and would hire more upscale.

el gallinazo said...

jal said...
Headline
New home sales increased.

New Home Sales in April at 323 Thousand SAAR, Ties Record low for April

===============

How can you have an increase which ties the record low? Is this the new math?

Ruben said...

@IMNobody

"So, while I'm in that mood, tell Cass I said to go to Hell!"

You made me LOL and ROTFLMAO.

However, with all respect for your clear and present loathing for Sunstein, I did enjoy his book Nudge. Granted it is a simplification, but many parts of it are still very important.

I. M. Nobody said...

el g,

Might be New Math, but I'm thinking maybe they are shyly saying that the record low April sales were a bit higher than what was probably record low March sales. Just a guess.

el gallinazo said...

After a brief foray into the financial markets, George Washington of Zero Hedge continues his controlled demolition of the boxcutter conspiracy theory.

http://www.zerohedge.com/article/arguments-regarding-collapse-world-trade-center-evaporate-upon-inspection

Rototillerman said...

A brief query for those in the Pacific Northwest: who among you is going to want to attend a social dinner in Portland with Stoneleigh (and last year's attendees)? We're looking at a purely social evening on Sunday, June 5th, followed by her presentation on June 6th. If there are a lot of people interested in the dinner we'll do it twice, once each day (the second dinner would then be right before her presentation at Multnomah Friends Meeting Hall).

Send your opinions to this disposable email address: tae.20.klieb at spamgourmet com. Thanks, Kurt

Nassim said...

Egyptian pyramids found by infra-red satellite images

It is possible that only one percent of the wonders of Ancient Egypt have been discovered ...

Egypt's Lost Cities

The Ancient Egyptians never cease to amaze me, they are perhaps the society that came closest to being truly sustainable - can't say the same about the Egypt I knew.

I. M. Nobody said...

Just finished watching Mad Max's latest On The Edge from PressTV.ir and it is easy to see why Cass dispatched one of his sock puppets in the dark of the night to try and scare us away. They undoubtedly intercepted the interview.

In a two-part interview, Dr. Paul Craig Roberts tells Max that Usanistan is unsavable. Like we didn't already know THAT.

Max's interview of Nomi Prins via RT.com won't do anything to make Sunstein's life easier either. Damn glad I'm not him.

A Walk in the Woods said...

I've been planting onions all day and came in to breeze through the world news after dinner and saw this
Agricultural Disaster in China: Exploding Watermelons

At first I thought it was The Onion but no, it's 'a happening' right here on the Late Great Planet Earth.

Chinese farmers dousing watermelons with Frankenstein growth accelerator hormones to 'push the envelope' on agri-biz's Time-Space Productivity Continuum.

The farmers had to feed the deformed misshapen exploding watermelons to their pigs and fish, no one else in China wanted them.(Hmmm, who ate the pigs & fish).

I'll bet they could have sold them at Wal-Mart as a crazy zany action adventure product placement Disney Fruit and turned a handsome profit.

The Wal-Martians would have easily reached the conclusion that it cost extra to produce a 'food stuff' with such bizarre characteristics and that they were getting it at bargain prices kinda like the food version of CDSs and MBSs.

Human Ingenuity really is the product of Lethal Mutant Intelligence.

I'm wondering if I can make my onions grow faster? I need a break.

Smoke 'em if You Got 'em
_

el gallinazo said...

IMN

Second your recommendation of the new Mad Max interview with Paul Craig Roberts, Depressing but clear and succinct. And Max actually interviews for once. That is, he asks a question and lets the person answer.

I. M. Nobody said...

Sqdn Ldr Gallinazo,

Maybe it's just me, but I find that when PCR speaks or writes he always gets my attention. IMHO, he tells it like it is. His suggestion that China may actually be more democratic than any western nation stands as a powerful indictment of the whole deceitful cheating mess. Ouch!

On another front, methinks the colonial crusaders (I believe that is what the Gaddafi government is calling the NATOens) are getting a little desperate. The French and British are sending in attack helos and it looks like the bomber force may be working their way up to doing a Belgrade/Baghdad on Tripoli. Attack helos stand a good chance of being shot down.

Funny how warfare has a way of not working out the way it was intended. Some people are just not easily cowed. I got a feeling Europe is going to pay a significant price for this little adventure.

A Walk in the Woods said...

Excellent Paul Craig Roberts interview.

Duhmerica, stick a fork in it, it's done.

It's like the old taxidermists who would put a carcass in an ant farm to clean the skeleton right to the bone.

The Owners have tossed, as Ronald Reagan emphasized, the Shining City upon a Hill whose beacon light guides freedom-loving people everywhere on the anthill of history.

The U.S. is now devoid of substance and heft like a Freeze Dried Country.

The Astronaut Ice Cream of nations.

Get out your Blade Runner ~Director's Cut~ and behold the future. (Blade Runner always struck me as a mashup of King Lear, Frankenstein and the Hunchback of Notre Dame all rolled into one.)

Instead of Reptiles Masquerading as Humans we get synthetic humanoids masquerading as genuine hominids.

Picture Uncle Sam as the Nouveau Noire Quasimodo turning the tables and hunting down the last of humanity. Living too fast but burning oh so bright.

The Latin words "quasi" and "modo" can mean "almost" and "the standard measure".

As such, Quasimodo is "almost the standard measure" of a human person.

America, as such, is "almost the standard measure" of a real Democracy.
_

skilo said...

@ Ash,

i'm curious on your take. i have no emotional attachment to old yeller, so i don't have a dog in the hunt.

demand destruction in the greatest depression should drive prices down.

there should be some support as some of the wealthy try and get what resources they have left out of the system.

IMHO, demand destruction will outweigh the wealthy.

we'll see.

I. M. Nobody said...

AWitW,

I offer my humble admiration. You have emerged as a strong and no holds barred voice. Funny you should recommend Blade Runner. It was my late wife's favorite movie. I think she saw it as a foreshadowing of the future.

Quoting Reagan was a nice touch as well. His election represented foreclosure on all the possible alternative futures. That was the day that definitely doomed us. How ironic that PCR was on the team then. Too bad his redemption can not yield an Aniken Skywalker outcome. But this ain't actually Hollywood, is it?

TAE Summary said...

* Laughing at something doesn't make it funny; Reset is profitable for those with cash; Italy's job market hasn't kept up with its population; The disease is inflation/The cure is deflation; You should care deeply about S&P bond ratings

* Domino theory was invented by commmunists but perfected by capitalists; Cheney and Rumsfield can't afford justice; Johnny Cash bestows immortality; Greece needs a strategic plan; Rudolf was an alkie

* Patriotism = Loyalty; The best patriots are pack animals; Everybody is on the patriot scale somewhere; Nobody's morality is greater than his patriotism; The richer you are the farther your patriotism extends

* When Paul Craig Roberts talks, people listen; Max Keiser is a Ruskie agent; Ilargi writes good; Ashvin's essay on gold may blow some minds

* TPTB are silly and will kill us all; They own everything, wreck everything, poison everything; Captains and Kings are their front men

* Egypt was sustainable until it wasn't; Attacking Libya could be costly; The USA is well done; Chinese farmers pass peak watermelon

I. M. Nobody said...

Khomeini is dead. JT has self identified as a PTM. Loving wrong is morally reprehensible and a worse mental disorder than patriotism.

Did Cass get my message?

I. M. Nobody said...

Paranoid Truculent Male

Alexander Ac said...

And regarding North Africa, oil is gone, debt remained, money are needed:

Egypt and Tunisia to get $6bn from World Bank

...

cjinvt said...

Nassim said...

The Ancient Egyptians never cease to amaze me, they are perhaps the society that came closest to being truly sustainable - can't say the same about the Egypt I knew.

Sustainable? Not if they had to use slaves.

Plus,I'm quite sure they had few boom/bust cycles of their own.

I think the Chinese were closest to sustainable, at least till they switched to western style agriculture. Farmers of Forty Centuries is a great read for all the doomsteaders out there & is available as a free download via GoogleBooks.

Frank said...

@cjinvt Agreed, the East Asian paddy rice culture (Indonesia and Malaysia go back almost as far as China) have a sustainability record thousands of years longer than any other culture.

The slavery thing on the Egyptians is largely a bum rap however: the pyramid laborers are now pretty much accepted as farmers picking up some extra cash in the off season.

Egypt is probably number two however, although if you look at the archeological record, the European mixed grain/animal model started later but lasted into the 20th century. And they didn't collapse, but got suckered by synthetic fertilizer.

ogardener said...

Blogger A Walk in the Woods said...

I'm wondering if I can make my onions grow faster?

Try some Actively Aerated Compost Tea - AACT.

Ilargi said...

New post up.



The Future of Physical Gold, Part II - The Evolution of Value



.