"Two of the "helpers" in the Tifton Cotton Mill, Tifton, Georgia. They work regularly"
"My feet they are sore, and my limbs they are weary;
Long is the way, and the mountains are wild;
Soon will the twilight close moonless and dreary
Over the path of the poor orphan child."
The Automatic Earth
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Ilargi: More talks, more broken promises, more half-baked policies, more outright lunacy and most of all more crisis.
The picture that emerges from the reports on all of the emergency meetings goes something like this: The idea now is to make Greece an exception, in the sense that bondholders will be forced to accept a 50% loss (instead of the 21% agreed on in July) on their Greek debt holdings, but they will then be given the assurance that no other Eurozone country will be allowed to restructure its debt.
If you were in Portugal, you would do well to protest any such clause, since it could squeeze you into a spot where you can forced to sit back with your hands tied behind your back and watch yourself be bled dry.
If you were a citizen of any other Eurozone country, you’d also want to raise your voice, because if Portugal, Ireland, Italy, Spain, Belgium, the list is familiar by now, cannot restructure their debt, they're going to need money from the EU and ECB. There are renewed calls to pump more money into the IMF as well, so the rest of the world (USA) can be made to pay for the euro crisis. Not surprisingly, the US has said: no way.
Italy has €1.59 trillion ($ 2.21 trillion) in government bonds outstanding. The hope is that bondholders will accept a 50% cut on Greek debt in exchange for a guarantee that any and all losses on Italian debt will be covered by the EU and ECB. Let's don't forget that those bondholders are to a large extent European banks. Which under new proposals will be forced to increase their capital ratios, leading to demand for some €250 billion in new capital.
Who's going to lend it to them? US money market funds withdrew 44% of their loans to French banks in September; guess they're not going to play the white knight part. And seeing that just about every single bank in Europe has now been downgraded or soon will be, they will need to pay a lot more in interest, provided they even can get loans in the first place.
Individual countries can try to recapitalize their banks, but that only shifts the downgrade threat to them. Spain got another 'kick in the head' this week from S&P, and you'd have trouble finding anyone who doesn't think more countries will follow. And banks. Ratings agencies seem to be going through a wake-up phase, finally doing what they should have long ago.
All in all, there doesn't look to be any source of capital for the banks other than the EU, in the shape of the European Financial Stability Facility. But we've seen what a fight it was to lift it from €220 billion to €440 billion. Still, that will by no means be sufficient to guarantee Italian and/or Spanish debt, so even after all the fighting, which included the fall of the Slovakian government, nothing has been resolved. €440 billion is so passé; just like that 21% July haircut.
Talking about resolve, it took Angela Merkel less than a week to -at least seemingly- renege on her joint promise with Nicolas Sarkozy that they would "resolve" the euro crisis before the end of this month. The Deutsche Presse Agentur reports:
Merkel warns not to expect big change at October 23 EU summitGerman Chancellor Angela Merkel warned Friday there would be no dramatic course-changing decisions at an October 23 EU summit on the eurozone crisis. 'There isn't some clap of thunder and then it's all right,' she said Friday in a speech to a trade union conference.
Her remarks appeared to contrast with her joint statement this month with French President Nicolas Sarkozy that a package solution to the crisis was on the way and would be made public by the end of the month. She told members of the IG Metall labour group near the southern city of Karlsruhe that every step would have to be weighed carefully and only undertaken if it yielded more benefits than disadvantages.
Ilargi: Whatever we may think of this, weighing every step carefully no longer is possible if you have only two weeks left to make good on your promise. The idea then is probably that what can't be weighed carefully must be made whole with double or nothing bets involving taxpayer funds.
In that regard, here's a line that bears some contemplation; it comes from Philip Aldrick at the Telegraph:
G20 has three weeks to solve eurozone debt crisisHopes that Europe is edging towards a political solution helped lift markets.
Ilargi: Apparently, there still is an unquestioned assumption that the Eurozone crisis, or make that the entire global financial crisis, can be countered with political solutions. Another assumption closely linked to it is that this solution will and must involve handing out additional trillions of euros and dollars to states and financial institutions on the verge of default and bankruptcy.
In other words, more of the same. More of what has achieved absolutely nothing but an illusionary recovery that leaves increasing numbers of people destitute whose governments pledge money that could alleviate their misery to keeping banks standing whose real debts they have no knowledge of.
If these debts are many times higher than generally and officially presumed, and the very fact that mark-to-market is not even considered strongly suggests they are, present recapitalization policies will be not just moot, but giant money dumps into black holes. And bordering on criminal behavior to boot, since governments do have the means and the power to perform stress tests on banks that can actually figure out how deep in the hole they are, before handing them dozens or hundreds of billions each.
But no, nowhere in the news about the EU and G20 and other emergency meetings do we find the suggestion to mark assets to market across the board. Which would still be a viable political measure, if not a solution.
No, what we get is renegotiating a deal that is just three months old, the underlying notion being that no-one could have seen in July how much worse the Greek situation would get. To top off the nonsensical argumentation, this is all presented as a way to "restore confidence in the markets" (still a favorite among "leaders"). You restore confidence by throwing out deals before their ink is even dry?
I've said it before: this is what the Occupy movement, in my view, should focus on. Force governments to open bank books and vaults before another single penny in aid is handed out. And don’t be mistaken: if Europe agrees on a 50% Greek haircut, US banks, too, will be awfully close to needing another bailout. And as far as we know, they may be way too far gone to survive, no matter how much or our money they receive.
Obama can call on people like Bill Black and Elizabeth Warren to assemble a team to conduct investigations of Wall Street banks, and give them all the legal powers required.
Yes, he can.
But what are the chances he will? Right now, they are below zero. And it will take a lot of pressure to change that.
Thinking about that, the -apparent- endorsements of Occupy Wall Street by Obama, Nancy Pelosi, The New York Times, Mohamed El-Erian and other "leaders" make me cringe. These are the people you should be fighting, not get comfy with. That's just a way to make sure nothing changes.
Germany Backing Italy Seen as Key to Europe's Bank Crisis
by Christine Harper and Aaron Kirchfeld - Bloomberg
Italian media reported last month that Prime Minister Silvio Berlusconi had been caught on wiretaps making disparaging sexual comments about German Chancellor Angela Merkel. A diplomatic blunder at any time, the insults were especially inopportune when the question haunting investors these days is whether Germany will get into bed with Italy.
European bank stocks have fallen as borrowing costs climbed in recent months amid rising concern that they may have to take greater losses on debt issued by Greece, Italy, Ireland, Portugal and Spain. As policy makers seek to make lenders hold more capital to absorb potential losses, investors and analysts say the banking crisis can't be solved unless Germany, the region's richest country, shows it's willing to stand behind Italy and Spain, the two biggest debtors of the five countries.
"What needs to happen as part of this package is that the possibility, the discussion or even remote likelihood of haircuts on Spain and Italy needs to be killed and taken out of the market," Philippe Bodereau, a portfolio manager and global head of financial institutions credit research at Pacific Investment Management Co., said in an Oct. 12 interview with Bloomberg Television. "Bank recapitalizations are necessary but not sufficient."
Finding a way out of the European crisis will top the agenda at a meeting of G-20 finance ministers and central bankers in Paris this weekend. None of the proposed solutions -- whether they involve the European Central Bank or the 440 billion-euro ($606 billion) rescue fund known as the European Financial Stability Facility -- can work without Germany, and by proxy the ECB, offering blanket support to Italy, said former International Monetary Fund Chief Economist Simon Johnson.
"Does the ECB stand behind Italian debt like the Federal Reserve stands behind U.S. debt? That's the only question," said Johnson, now a professor at the Massachusetts Institute of Technology and a Bloomberg View columnist. "Everything else is derivative from that question. They won't tell you that, and they can't decide."
German and French leaders pledged at a meeting Oct. 9 to devise a plan to recapitalize banks, help Greece and strengthen Europe's economic governance. Merkel said after meeting with French President Nicolas Sarkozy that Europe will do "everything necessary" to ensure banks have enough capital.
All lenders judged by the region's top banking regulator to be systemically important should be required to hold "temporarily higher" amounts of capital, European Commission President Jose Barroso said on Oct. 12. The European Banking Authority discussed making the banks hold core capital equal to at least 9 percent of their assets, up from a 5 percent core Tier 1 capital requirement imposed in the stress tests carried out by the regulator earlier this year, according to a person familiar with the proposals.
That might not calm investors, said John Raymond, an analyst at research firm CreditSights Inc. in London. "You can't analyze banks' capital needs until you know what's going to happen to the sovereign debt, and they haven't told us," Raymond said. "That's the problem."
The European Union moves come after this month's breakup of Dexia SA, a Franco-Belgian lender, and a surprise 1.6 billion- euros in writedowns and provisions at Vienna-based Erste Group Bank AG illustrated the shortcomings of regulatory stress tests on about 90 of the region's banks in July. Both Dexia and Erste passed the tests, which were criticized for failing to take into account potential markdowns on the value of government debt.
A new review should assess "all sovereign debt exposure in full transparency," Barroso said. Government bonds will be valued more closely to current market prices than in the July stress tests, according to a person familiar with the matter.
Those new criteria would lead to a 220 billion-euro capital shortfall at 66 of the participating banks, with the biggest gaps at Edinburgh-based Royal Bank of Scotland Group Plc, Frankfurt-based Deutsche Bank AG and Paris-based BNP Paribas SA, according to a note published yesterday by Credit Suisse Group AG analysts.
The challenge is finding a source of capital. Requiring European governments to supply it would risk adding to the debt of countries already struggling with budget deficits, according to Alastair Wilson, chief credit officer for Europe, the Middle East and Africa at Moody's Investors Service.
"Concern about the banks is driven in part by the sovereigns, which may be weakened by putting money into the banks," Wilson said in an interview. "We have to recognize that there are consequences for sovereigns in recapitalizing the banking system."
Efforts by banks to raise capital from the private sector will be hampered unless investors can be sure there's a limit to potential losses on sovereign debt, Ralph Schlosstein, chief executive officer of Evercore Partners Inc., a New York-based investment bank, said in an interview.
"If you want to have any hope of getting money for the banks from private sources, you have to be able to tell them what these sovereign debt assets are worth," Schlosstein said. Europe has to show it's providing a convincing level of support to countries including Spain and Italy "as a precondition or simultaneous to a recapitalization of the banks."
Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS, have about 2.9 trillion euros of government bonds outstanding, according to data compiled by Bloomberg. Italy, the third-largest issuer of debt after the U.S. and Japan, accounts for more than half, or 1.59 trillion euros, the data show.
About 413 billion euros of GIIPS debt is held by 38 of Europe's largest lenders, according to an analysis of the stress-test results by Alberto Gallo, a strategist at RBS in London. Those holdings equal almost 40 percent of the banks' 1.1 trillion euros of equity, according to Gallo.
European banks, having agreed to a voluntary loss of about 21 percent, are bracing for further writedowns on Greece's 288 billion euros of government bonds, which carry Moody's second- lowest rating of Ca and an equivalent CC by Standard & Poor's. European officials are considering writedowns of as much as 50 percent on Greek bonds as part of a revamped strategy to combat the crisis, people familiar with the discussions said.
Such losses could be dwarfed by writedowns on Italy's debt.
"I can't imagine a fund that is big enough to also guarantee Italy in total," Martin Blessing, CEO of Frankfurt- based Commerzbank AG, said on Sept. 20, referring to the EU's rescue fund, the EFSF, approved yesterday by Slovakia, the last of the 17 euro zone countries to do so. "Italy is a whole other situation than Greece."
Berlusconi, the 75-year-old billionaire media tycoon and Italy's longest-serving prime minister, today won a confidence vote in Parliament that he called earlier this week after the lower house failed to rubber stamp a 2010 budget report on Oct. 11. Last month he won approval for a 54 billion-euro package of budget cuts, the country's second since July, which was adopted in exchange for ECB agreement to buy Italian bonds.
Mario Draghi, 64, the Bank of Italy governor who will become president of the ECB at the end of the month, said on Oct. 12 that Italy's austerity plan won't be sufficient because interest rates on the country's debt could rise and create "a spiral that may end up being ungovernable."
On Oct. 4, Moody's cut its assessment of the nation's long- term debt for the first time in almost two decades, lowering it three levels to A2 with a negative outlook, on concern that weak growth will hamper Berlusconi's efforts to balance the budget. Italy's debt is 119 percent of its gross domestic product, the second-highest in Europe behind Greece.
The downgrade meant Italy joined Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries whose credit rating has been cut this year. Unlike Ireland and Portugal, which followed Greece in seeking bailouts from the European Union and the International Monetary Fund, Italy had managed to skirt the worst of the fallout from the debt crisis until this year.
Italian growth, 0.8 percent in the second quarter, has lagged behind the euro-region average for the past decade. Berlusconi told legislators yesterday that austerity may slow the economy further, and he promised tax, constitutional and judicial reforms to boost the economy.
Italy's borrowing costs climbed and the value of its debt fell. The yield on the country's 10-year bonds has risen to 5.80 percent from 4.88 percent at the end of June. The yield surged as high as 6.19 percent on Aug. 4 before the ECB announced plans to start buying Italian and Spanish bonds.
"The real issue is that panicky markets treat the sovereign debt of big and solvent countries such as Italy and Spain as toxic assets," said Holger Schmieding, a London-based chief economist for Berenberg Bank. "If policy makers can convince markets that these assets are safe, there would be no need for banks to bolster their capital against an imaginary risk of an actual writedown on these assets."
Unlike the U.S. and Japan, Italy can't print money to buy its own debt when demand runs low. Instead, its central bank is a part of the ECB, whose strict mandate to combat inflation was influenced by Germany's pre-World War II experience with hyperinflation.
German Finance Minister Wolfgang Schaeuble said this week that Europe won't use loose monetary policy or "cheap money" to alleviate the region's debt burden and argued last month that financial institutions should be required to share the burden of helping the most troubled nations.
"The challenge to bring crisis-hit countries back on track must not be left to taxpayers alone," Schaeuble said in a Sept. 24 speech in Washington during the annual meeting of the Institute of International Finance.
Italian bonds are trading below face value because investors have determined the debt doesn't have the full backing of the ECB, said Kenneth Rogoff, a Harvard University economics professor and former chief economist at the IMF.
"It's clear that it doesn't, because if it did it wouldn't be selling at a discount," Rogoff said. "It's clear that it's not unambiguous how far the ECB would go and how far the EFSF would go."
Rules promulgated by the Basel Committee on Banking Supervision have encouraged banks to hold government bonds issued in their own countries' currency because they're treated as risk-free and highly liquid assets.
Rogoff, co-author of "This Time Is Different: Eight Centuries of Financial Folly," said there's a long history of governments creating rules designed to encourage banks to hold their own debt.
"Just think about it: If you're the government regulating the bank, what kind of government's going to say, ‘Don't hold too much of our debt, because you know you can't trust us'?" he said. "One of the arguments that proponents of bailouts often use is if we don't bail out the country and we let the government default, the banking system may not come back for a decade. This is an old story."
Josef Ackermann, 63, CEO of Deutsche Bank, Germany's biggest lender, said at a conference in Berlin yesterday that "it is not the capital funding of banks that is the problem, but rather the fact that government bonds have lost their status as risk-free assets." Even talking about the need to recapitalize banks is harmful, he said.
Jean-Claude Trichet, 68, a Frenchman who is stepping down as ECB president after eight years in the role, warned on Oct. 11 that the region's crisis "has reached a systemic dimension" because it has moved to some of Europe's larger countries from the smaller economies.
His successor's ability to pursue policies that would help Italy -- such as lower interest rates and ECB purchases of Italian debt -- will depend on whether Germany assents, said MIT's Johnson. Policies pursued by the EFSF, which draws on money from all 17 euro-zone countries, also will be influenced by Germany, the fund's largest contributor.
Asked in August if bailouts of euro-area nations unable to deal with widening budget deficits would be acceptable "even if they were necessary to keep the euro zone intact," 59 percent of Germans disagreed and 20 percent agreed, according to a Bloomberg/YouGov Plc poll.
Berlusconi's alleged remarks about Merkel haven't been confirmed by the Italian government or prosecutors, whose wiretaps were reportedly the source of the recording. They were blogged about and commented on widely, including in Bild, Germany's largest tabloid newspaper.
Berlusconi has never commented on reports of the remarks about Merkel and has condemned the use of wiretapping in investigations. Niccolo Ghedini, Berlusconi's defense lawyer, couldn't be reached on his mobile phone.
The Italian prime minister, who has been criticized for comments about women and diplomatic gaffes, faces four criminal charges, including one accusing him of paying for sex with a minor. Since entering politics, he has faced dozens of trials and investigations and, by his own count, has spent more than 400 million euros defending himself. He has said he is innocent of all charges and that Italian judges are out to destroy him.
"If you were a German taxpayer, how much would you be willing to pay to keep Silvio Berlusconi in the lifestyle to which he's become accustomed? Not much," Johnson said. "It's a perception factor."
Europe’s Other Bank Problem
by Macro Monitor
One would think the following chart has a data error. Not so.
Europe is way over banked and the chart illustrates the monumental task and cost of recapitalizing some of their largest banks. The size of the largest four banking institutions in France, for example, represents over 300 percent of the country’s GDP. The markets will monitor carefully the sovereigns’ incremental obligation of the new recapitalization plan. They need to be careful not to turn France into Ireland, for example, which will definitely be game over for the Euro. Stay tuned.
P.S. Long Swissie during a European banking crisis? No thanks!
U.S. Money Funds Reduced Lending to French Banks by 44% in September
by Radi Khasawneh - Bloomberg
The eight largest U.S. money-market funds reduced their lending to French banks by 44 percent last month as the European sovereign debt crisis worsened.
Holdings in BNP Paribas SA, Societe Generale SA, Natixis SA and Credit Agricole SA dropped to $23.2 billion at the end of September from $41.5 billion the previous month, according to filings compiled by Bloomberg and published in today’s Bloomberg Risk newsletter. The biggest falls were for Natixis, at 74 percent, and Credit Agricole, at 64 percent, the data showed.
The funds, which control $592.4 billion in assets between them, disclose their holdings every month. They are reducing loans to European banks on concern the sovereign-debt crisis has undermined lenders’ ability to access wholesale markets. EU banks are increasingly tapping the European Central Bank for emergency cash as short-term funding evaporates. The ECB last week reintroduced yearlong loans, giving banks unlimited access to cash through January 2013.
"There has been a substantial decrease in access to the wholesale funding markets whether for money market funds, debt security issuance or securitization," Huw van Steenis, an analyst at Morgan Stanley in London, wrote in an Oct. 10 report. "Banks expect that funding markets will continue to deteriorate albeit at a slower pace."
The reduction in U.S. money-market lending forced the ECB last month to reintroduce dollar funding through longer-term three-month repurchase agreements. The central bank said Oct. 12 that six lenders asked for a total of $1.35 billion of three- month dollar loans in the first of three operations. The banks will pay a fixed rate of 1.09 percent for the funds. Separately, one bank received a $500 million week-long dollar loan.
The ECB last introduced a three-month dollar loan in May 2010 to calm markets roiled by the threat of a Greek default. It has been lending banks as much euro cash as they need at its benchmark rate since October 2008, when the collapse of Lehman Brothers Holdings Inc. triggered a global recession.
The funds’ holdings in Societe Generale declined by 51 percent to $3 billion, and BNP Paribas (BNP) by 20 percent to $14.8 billion, the filings show. Over the last 12 months, there has been an 83 percent decline in Societe Generale funding from U.S. money market funds and a 40 percent fall in funding for BNP Paribas. Spokesmen for Paris-based Societe Generale, BNP Paribas and Credit Agricole declined to comment on the reduction. Officials at Natixis didn’t return calls for comment.
"Even if it were to go to zero, there would be no problem," Frederic Oudea, Societe Generale’s chief executive officer, said in a Sept. 13 interview. The bank could withstand an indefinite withdrawal of U.S. money market funding, he said.
European banks, including BNP Paribas and Societe Generale, have said they have reduced their reliance on U.S. money market funding. They are also increasingly using other sources of dollar funding to finance their U.S. operations.
The premium European banks pay to swap euro funding for dollar liabilities rose to within 4 basis points of the highest level since December 2008 earlier this month. The funds also reduced their holdings in KBC Groep NV (KBC), Belgium’s biggest lender, by 80 percent to $587 million. KBC spokesman Stephane Leunens declined to respond to a request for comment.
The money market data are based on the most recent portfolio disclosures from Fidelity Cash Reserves Fund, JPMorgan Prime Money Market Fund, Vanguard Prime Money Market Find, Fidelity Institutional Money Market Portfolio, Fidelity Institutional Prime Money Market Portfolio, BlackRock TempFund, Wells Fargo Advantage Heritage Money Markets Fund and Federated Prime Obligations Fund. The figures include repo loans that are backed by government collateral.
Federated Investors Inc. said that its funds would continue to invest in European banks. The use of "carefully selected" securities from major global European banks poses a "minimal credit risk," said Meghan McAndrew, spokeswoman at Pittsburgh- based Federated Investors.
The funds’ assets dropped 1.7 percent in the month. U.S. money funds held $2.61 trillion in assets as of Oct. 11, including $1.45 trillion in funds eligible to invest in non- government debt, according to research firm iMoneyNet in Westborough, Massachusetts.
Derivatives: The $600 Trillion Time Bomb That's Set to Explode
by Keith Fitz-Gerald - Money Morning
Do you want to know the real reason banks aren't lending and the PIIGS have control of the barnyard in Europe?
It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.
In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.
The four banks in question: JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc..
Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't.
Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.
Think I'm exaggerating?
The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.
The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.
Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.
To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.
Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.
A governmental default would panic already anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.
Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.
And that's why banks are hoarding cash instead of lending it.
The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they're doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.
What really scares me, though, is that the banks
think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000.
But haven't we heard that before?
Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.
According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy - the countries most at risk of default. But they've lent $275.8 billion to French and German banks.
And undoubtedly bet trillions on the same debt.
There are three key takeaways here:
- There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty - JPMorgan Chase & Co, BNP Paribas SA or the National Bank of Greece for example - let alone multiple failures.
- That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they've already made.
- And the fact that Wall Street believes it has the risks under control practically guarantees that it doesn't.
Seems to me that the world's central bankers and politicians should be less concerned about stimulating "demand" and more concerned about fixing derivatives before this $600 trillion time bomb goes off.
EU banks could get six months to boost capital
by Philipp Halstrick and John O'Donnell - Reuters
European banks could get up to six months to strengthen their capital under plans aimed at halting the region's debt crisis, giving them time to raise funds privately in the hope of averting another damaging credit crunch. EU officials said on Thursday that weak banks may get this time to bolster their balance sheets after a rapid health check concluded.
Euro zone leaders are insisting that banks recapitalise, in an attempt to halt the euro zone crisis and shore up investor confidence. "A three- to six-month deadline is being considered," said one EU official, speaking on condition of anonymity, saying that banks were being encouraged to tap private investors or sell assets rather than turn to governments. "No decision has been taken."
The plan means Deutsche Bank and other top European banks could have to raise billions of euros to meet a 9 percent core capital target and withstand hefty losses on sovereign bonds.
The European Banking Authority, which is assessing banks' capital needs, is likely to mark down the value of banks' holdings of sovereign debt to market value and require lenders to hold a 9 percent core Tier 1 capital ratio, an EU source told Reuters.
Deutsche Bank, Germany's flagship lender, would need 9 billion euros in fresh equity to reach that level, two people with direct knowledge of the bank's finances said on Thursday. Deutsche Bank declined to comment, but in separate remarks the bank's chief executive Josef Ackermann said it would do all it could to avoid a forced recapitalisation and added it had enough funds of its own to cope with a crisis.
Setting the bar at 9 percent would leave European banks with a capital shortfall of about 260 billion euros, based on a two-year recession and applying current market prices to holdings of Greek, Irish, Italian, Portuguese and Spanish government bonds, according to Reuters Breakingviews data. Royal Bank of Scotland , Unicredit , Deutsche Bank, BNP Paribas and Societe Generale would all need over 12 billion euros based on that data. Some 67 of 90 banks tested would need capital.
European banks fell sharply on Thursday to halt a strong rebound over the past six trading days. The Stoxx 600 bank index was down 3.7 percent at 1610 GMT, with UniCredit shares down 12 percent, BNP Paribas down 5.7 percent and Societe Generale down 6.7 percent. Banks are already attempting to sell assets and shrink their loan books to lift capital. They could also be told to cut pay for staff and dividends for investors to preserve cash.
Officials in Brussels are also aware that the call for capital risks hurting lending and the economy. "We need to find the right balance between stricter regulation of the financial sector and the impacts these have on the economy as a whole," Ackermann said.
All banks will be looking to cut back on lending that uses a lot of capital and costly funding such as asset finance, unsecured consumer finance, trade finance and some business lending, analysts at Morgan Stanley said. "The risks of a big credit squeeze are very real, and we hope the methodology and process looks to limit this," said Huw van Steenis, analyst at Morgan Stanley.
Private Funds... Then Taxpayers
European officials said banks should first turn to private investors rather than governments to improve capital, signalling that they needed time to do this. "The timeline is very important," said one official. "The current market circumstances are not ideal. At the same time, we need to (regain) confidence as soon as possible."
There is likely to be limited private funding available for banks, leaving many at risk of needing taxpayer funds or the new euro zone EFSF rescue fund as a last resort. Greece's banks could have to raise over 30 billion euros under the plan, as they face big losses on their holdings of domestic bonds.
Banks are facing losses of 39 percent on their Greek bonds under a private sector rescue plan agreed in July, above the original estimate of a 21 percent hit, due to a rise in Greece's risk profile. Greek banks could endure a loss of up to 30 percent on the bonds but could not stand significantly bigger haircuts, which would also hurt the economy, Greek banking sources said.
European leaders are still discussing the recapitalisation plans, with many details still subject to change, and face intense lobbying from banks and some countries who say it is too harsh. Proposals are expected to be presented to a meeting of European leaders on Oct. 23. The new standard is likely to be a 9 percent core tier 1 ratio, a key measure of a bank's financial health, based on a tighter definition of capital than used now, although not as strict as that under new Basel III rules when in full force
Analysts at Credit Suisse said a 9 percent capital level would leave banks in need of 220 billion euros, with RBS, Deutsche Bank and BNP Paribas most in need. Ackermann, Germany's most high-profile banker, said it was doubtful whether a blanket recapitalisation of European banks -- a measure being considered by politicians in Germany and France -- would help solve the sovereign debt crisis.
"It is not the capital position which is the problem, but the fact that sovereign debt as an asset class has lost its risk-free status," Ackermann told a conference in Berlin. "The key to the solution is therefore in the hands of governments, to restore confidence in the solidity of state finances."
Fitch Sends Out A Huge Warning On Banks
by Joe Weisenthal - Business Insider
Big noise out of Fitch this evening, as the ratings agency just threatened downgrades across the global banking system.
More important, perhaps, than the specific ratings is the broader commentary from Fitch:
Fitch Ratings-New York-13 October 2011: In conjunction with a broad assessment of the ratings for the largest banking institutions in the world, Fitch Ratings is conducting a review of the global trading and universal banks in its rating portfolio. As part of that review, Fitch has placed the Viability Ratings (VRs) of seven and the long-term Issuer Default Ratings (IDRs) of six global trading and universal banks on Rating Watch Negative. At the same time, Fitch has placed the short-term IDRs of four of the banks on Rating Watch Negative.
The banks impacted by these rating actions are as follows:
--Barclays Bank plc
--Credit Suisse AG
--Deutsche Bank AG
--The Goldman Sachs Group, Inc.
Fitch expects to resolve the Rating Watch Negative within a short time frame and to take corresponding rating actions where warranted.
A list of each bank's key impacted ratings follows at the end of this release. Full lists of impacted ratings are contained in the individual rating action commentaries on each of these firms, which are available at 'www.fitchratings.com'. Barclays Bank plc's rating action was addressed earlier today; for details see 'Fitch Lowers UK Support Rating Floors; Downgrades Lloyds, RBS to 'A''.
Fitch expects that any downgrades of these banks' VRs would in most cases be one notch and at maximum two notches. Most actions on the long-term IDRs will be limited to one notch as IDRs will not fall below the banks' Support Rating Floors when applicable. Short-term IDR implications will also likely be a one-notch downgrade for those banks whose ratings are on Rating Watch Negative. It also possible that certain banks could have their ratings affirmed at current levels. Fitch also expects that many of these ratings should revert to Stable Outlooks upon resolution of the Rating Watches.
In a separate, but related report called Rating Banks in a Changing World, Fitch asks the trillion-dollar question.
Can a Bank Be ‘AAA’?
In addition to a small number of multilateral development banks, only 15 banks have a ‘AAA’ IDR, many fewer than 20-30 years ago. It is important to note that all of these top ratings are now achieved only due to close government ties with a ‘AAA’ state or sovereign and an expectation that support would be forthcoming if required.
The absence of any bank rated as ‘AAA’ based on its own financial profile (no banks have been assigned a ‘aaa’ viability rating) reflects the inherent risks associated with the banking business model. These risks include high levels of leverage, significant correlations between credit risks and due in large part to the maturity transformation that banks perform, a significant vulnerability to confidence effects. Given these inherent characteristics, Fitch considers that it is unreasonable to expect banks to be rated ‘aaa’.
As for what a good bank can expect:
What are the Attributes of an ‘AA’ Bank?
The strongest and most creditworthy banks are able to attain ‘aa’ viability ratings although given inherent bank risks noted above, such firms would need to demonstrate particularly strong features. In particular, Fitch’s expectations for such banks would typically include very tight lending standards and extremely high asset quality throughout the economic cycle, a leading franchise with sufficient scale and diversity to avoid risk concentrations, together with very high levels of capitalisation relative to risks, and very strong corporate governance and risk management. The agency would expect few, if any, qualitative or quantitative weaknesses in any of the agency’s main metrics.
Given the additional risks associated with the pure play investment banking business model, Fitch regards an ‘aa’ category viability rating as highly unlikely for such institutions.
The bottom line, says, fitch, due to sovereign debt woes, macro-economic uncertainty, and changing regulatory regimes, mostly associated with governments less inclined to support banks, all of the big players have to be seen as less safe than they were not too long ago.
BNP Paribas Joins The Downgrade Party As S&P Slashes Rating One Notch
by Agustino Fontevecchia - Forbes
As the slew of credit downgrades continues, Standard & Poor’s decided to downgrade BNP Paribas on Friday after reviewing the ratings of the country’s five largest banks. The decision was based on the vulnerability of their funding and liquidity profiles given weaker economic growth in Europe.
S&P slashed BNP Paribas’ credit rating one notch to AA-, with a stable outlook. The credit rating agency reaffirmed its lower A+/A-1 rating on France’s next four largest banks: BPCE, Credit Agricole, Caisse Centrale du Credit Mutuel, Banque Federative du Mutuel, and Societe Generale.
French banks have been in the eye of the storm for their exposure to peripheral debt, particularly to Greek sovereigns. According to S&P, BNP Paribas and SocGen are the most exposed to Greek sovereigns via their insurance subsidiary Hellenic Republic.
The continued deterioration in the European sovereign debt crisis has spurred a flurry of credit rating actions the last couple of days. Late Thursday, S&P downgraded Spain’s sovereigns after lowering its rating on the banking industry as a whole.
While Banco Santander, Spain’s largest bank, escaped a downgrade on Thursday, Fitch couldn’t resist and put seven banks on ratings watch, including: Goldman Sachs, Morgan Stanley, Credit Suisse, Deutsche Bank, Barclays, SocGen, and BNP Paribas.
The logic behind Friday’s downgrade of BNP was its funding and liquidity position. French banks have suffered from a bout of risk aversion from U.S. money market funds, a prime source of short-term dollar funding. French banks have been forced to shift to more expensive wholesale funding, "because their loan books exceed their customer deposits and because their presence in corporate and investment banking activities."
These have already moved to strengthen their capital and funding position, but will face lower earnings given a slower economy in Europe. Banks across the world have been suffering as the global economy continues to muddle through. On Thursday, JPMorgan Chase, one of the U.S.’s more healthy banks, disappointed investors with its earnings, causing a broad based decline in financial sector stocks and fueling speculation that this will be a negative earnings season for Wall Street.
G-20 Seeks Crisis Fix as Europe Mulls 50% Greek Debt Writedown
by James G. Neuger and Svenja O'Donnell - Bloomberg
Global finance chiefs will today focus on ways to fix Europe's sovereign debt crisis as the region's officials consider writing down Greek bonds by as much as 50 percent and establishing a backstop for banks.
Finance ministers and central bankers from the Group of 20 will conclude talks in Paris, after people familiar with the matter said yesterday that euro-area governments are revamping their strategy to combat the debt turmoil which marks its second anniversary next week.
"The world is waiting for solutions to the European problems that have now become the world's problems," Brazilian Finance Minister Guido Mantega told reporters yesterday in Paris. "I am more optimistic. They are advancing."
Worldwide stocks yesterday gained, extending the biggest weekly rally since July, on optimism officials are ramping up their crisis-fighting. There was some discord among G-20 officials as those from rich nations such as the U.S. and Germany questioned proposals to expand the resources of the International Monetary Fund to help it contain Europe's woes.
"I don't think we ought to be asking the IMF to do a great deal more," Canadian Finance Minister Jim Flaherty said. U.S. Treasury Secretary Timothy F. Geithner told CNBC that the lender already has "very substantial resources that are uncommitted."
The G-20 policy makers are meeting to prepare for a Nov. 3- 4 summit of leaders in Cannes, France. Today's talks will end with the release of a statement and a press conference scheduled for 4:15 p.m.
The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people, who declined to be identified because the negotiations will run for another week.
In the works is a five-point plan foreseeing a solution for Greece, bolstering of the European Financial Stability Facility rescue fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.
Political, technical and legal constraints cloud the crisis-resolution strategy, due to be hammered out at an emergency Oct. 23 euro-area summit in Brussels under mounting pressure from markets and politicians around the world. "We need to have at that point a plan," Natacha Valla, an economist at Goldman Sachs Group Inc. in Paris, told Bloomberg Television. "We need to have something that is big enough to solve a systemic crisis."
The crisis raged yesterday through France, the 17-nation euro area's second-largest economy and co-anchor with Germany of the European Union. French bonds slumped, pushing the 10-year yield up 17 basis points to 3.13 percent. The week's rise of 38 basis points was the most since the euro's debut in 1999.
G-20 policy makers maintained pressure on European counterparts to deliver a remedy. While Europe is weighing a "much more forceful package," Geithner said on CNBC that "the hard part is still ahead." Australian Treasurer Wayne Swan told reporters that "the first priority" for the G-20 "is for Europe to put their own house in order."
Europe's strategy hinges on putting Greece on a viable path, as two years of austerity plunge it deeper into recession and provoke civil unrest that threatens political stability. Greece forecasts its debt to reach 172 percent of gross domestic product in 2012 as the economy shrinks for a fifth year.
Options include tweaking a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, the people said.
Under a more aggressive proposal, investors would exchange Greek bonds for new debt at a lower face value collateralized by the euro area's AAA-rated rescue fund, the people said. The ultimate option is a restructuring involving writedowns without collateral, they said.
The constraint is how to cut Greece's debt without leading rating companies to declare the country in default. Such a "credit event" triggered by a forced restructuring could unleash a cascade of losses through markets.
The bank-aid model under discussion is to set up a European-level backstop capitalized by the 440 billion-euro ($609 billion) EFSF rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities. Such ideas are controversial in Germany, Europe's dominant economy, which so far has called for bank recapitalization on a country-by-country basis.
French Finance Minister Francois Baroin said on Europe 1 radio yesterday that it may be "good" to force banks to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July's stress tests.
Nations from China to Brazil are considering increasing the IMF's lending power, a month after Managing Director Christine Lagarde said her $390 billion war chest may not suffice to meet all loan requests should the global economy worsen. Additional funds could be used to help shelter Italy and Spain with precautionary lending, according to IMF and G-20 officials.
Talks are in preliminary stages as potential contributors wait to see what measures Europeans take first. Resistance from rich nations may also stymie them, with German Finance Minister Wolfgang Schaeuble echoing Geithner by saying the Fund has enough cash to meet its commitments.
Officials are considering seven ways of getting more firepower out of Europe's temporary rescue fund. The options break down into two broad categories: enabling it to borrow from the European Central Bank or using it to provide bond insurance.
The ECB has all but ruled out the first method, making bond insurance more likely, the people said. EFSF guarantees of new bonds sold by distressed euro-area governments might range from 20 percent to 30 percent, a person familiar with those deliberations said.
Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified "interim" period, the people said. ECB President Jean-Claude Trichet, whose eight-year term ends Oct. 31, has expressed reluctance to maintain the policy with his institution having bought 163 billion euros of bonds.
A consensus is also emerging to accelerate the setup of a permanent aid fund planned for July 2013, the European Stability Mechanism. Next week's discussions will focus on creating it a year earlier, in July 2012, and easing unanimity rules that permit solitary countries to block bailouts.
One proposal is to enable aid to proceed when backed by countries representing 95 percent of the fund's capital on the basis of an assessment by the EU and ECB, the people said. Another proposal would set an 85 percent threshold.
Revisions to the voting rules would prevent local politics in smaller countries from stopping measures deemed necessary by Germany and France. Slovakia, for example, stayed out of Greece's first aid package. Finland spent three months negotiating a tailor-made collateral arrangement as its price for contributing to the next one.
Greece's plight and dwindling investor confidence in the bonds of Italy, the world's fourth-largest debtor, have triggered a reconsideration of bondholder loss-sharing provisions as part of the permanent fund, the people said. Germany was the main driver behind the provisions for "private sector involvement." The July accord on a second Greek bailout threw that into question by declaring Greece's case "exceptional and unique."
G20 has three weeks to solve eurozone debt crisis
by Philip Aldrick - Telegraph
Germany and France were under pressure on Friday night to step up their efforts to resolve the eurozone debt crisis as finance ministers from across the world met in Paris.
At a working dinner of the G20 deputies, Germany's finance minister Wolfgang Schaeuble and Francois Baroin of France were reminded they have just three weeks left to unveil a credible solution, or risk deepening the global slowdown.
The renewed pressure came as German Chancellor Angela Merkel said there was no "big bang" miracle cure for the eurozone's problems, and once again rejected the idea of eurobonds. "As this crisis didn't arise overnight, it won't be fixed overnight," she said, arguing that structural reforms to improve nations' competitiveness are necessary.
Greece's private sector creditors may need to accept deeper losses than the 21pc already agreed, she added. However, she accepted the "haircuts" would only be tolerated "to avert worse and bring about structural reforms". A deeper haircut now seems inevitable. Mr Baroin said on French radio on Friday: "It will be more, that's more or less certain."
Despite the public attacks on Europe's leadership, Chancellor Merkel came out fighting on Friday. As a quid-pro-quo for devising a comprehensive eurozone solution, she suggested, the US and the UK should back plans for a Financial Transaction Tax. "It can't be that those - in particular outside the euro area - who repeatedly ask us for sweeping action to deal with the debt crisis, at the same time completely refuse the introduction of a financial transaction tax," she said.
The UK has said it will only adopt a so-called Tobin tax if it is introduced internationally. At present, the US is against the idea. Despite the differences, talk at the summit focused on the "positive momentum" gathering among eurozone members to address their problems.
Speaking ahead of the meeting, Chancellor George Osborne, who is attending with the Governor of the Bank of England, said: "The countdown to the [November 3] Cannes summit begins this weekend. "The biggest boost to global and British growth would be a resolution to the eurozone crisis. Momentum is now finally building towards that. We should use this weekend to keep up the pressure and step up the pace."
The French finance ministry confirmed the focus remains steadfast, three weeks after the Washington summit that fired up the sense of global urgency. It said the "absolute priority" in the run-up to the G20 in Cannes was to take measures to stabilise the eurozone, which was "the epicentre" of the crisis. But it said the co-ordination of the whole G20 was needed to contain a slowdown in the global economy.
Hopes that Europe is edging towards a political solution helped lift markets. The shape of a solution is beginning to emerge. As well as greater haircuts for the private sector, Europe's banks will be recapitalised - probably through state-backed guarantee or insurance schemes set up nationally across the single currency area.
France has been pushing for a central recapitalisation pool, funded through the €440bn (£386bn) European Financial Stability Facility (EFSF) bail-out fund. However, that looks unlikely.
Christophe Frankel, the EFSF's finance director and deputy chief executive, said recapitalisations should first be sought from the private sector, then from governments, before coming to the fund "If you consider the three-step approach - private sector, national level and then European - as the EFSF would come in last, the amounts required may actually be reasonably limited," he said.
Leading nations also pledged to ensure the International Monetary Fund (IMF) would play a role as a financial backstop if required. But it was made clear that any grand plan to restore confidence in the euro area would have to be led by member states.
On his way to Paris, US Treasury Secretary Tim Geithner said that Europe "has enough resources of its own to deal with debt crisis". He added: "If Europe has a comprehensive strategy in place that looks like it makes sense, and is using the very ample financial resources of Europe, we're happy to see the IMF play a continuing role in supporting what the Europeans are doing,"
Although the eurozone crisis will weigh heavily on talks this weekend, no official statement is expected as only three single currency members sit on the G20 – Germany, France and Italy. Eurozone ministers meet next weekend. Top of the G20 agenda are issues of financial regulation, including how to deal with too-big-to-fail banks, and the imbalances in the global system, with China and the US likely to square up over the protectionist trade tariff that the US has proposed if China does not start allowing its currency to appreciate.
Investor threat to second Greek bail-out
by Peter Spiegel - FT
The lead negotiator for private holders of Greek debt has said that investors are unwilling to accept greater losses on their bonds than the 21 per cent agreed in July, jeopardising eurozone plans to finalise a second Greek bail-out by the end of next week.
Charles Dallara, managing director of the Institute of International Finance, criticised European leaders on Friday for failing to allow the July deal to proceed. He said any greater losses imposed on Greek bondholders could prompt investors to sell the sovereign debt of other eurozone countries, destabilising the single currency. "We do not see that a compelling case has been made to reopen the deal," Mr Dallara told the FT. "A deal is a deal."
Securing a voluntary "haircut" from Greek bondholders has been the centrepiece of the second €109bn ($150bn) Greek bail-out after a German-led group of creditor countries demanded private investors bear more of the rescue burden so eurozone taxpayers would not be saddled with the entire bill, as in previous bail-outs.
At the urging of Germany, other European leaders have in recent weeks agreed to reopen the July haircut deal, arguing that changed economic circumstances in Greece – including a plummeting in value of Greek bonds – meant bondholders should take a bigger hit. "We have to make sure that banks and other investors share the costs of overcoming the crisis," said Angela Merkel, Germany’s chancellor. German officials have pushed for haircuts as big as 50-60 per cent, according to senior European officials.
But a group led by France and the European Central Bank has insisted that any new "haircut" must be voluntary, since forced writedowns would constitute a full-scale Greek default, triggering insurance policies, known as credit default swaps, and potentially reigniting investor panic. Without agreement of the IIF, the consortium of international banks that negotiated the July bail-out deal, it would be impossible to avoid a so-called "credit event", making further haircuts risky and politically infeasible.
Other top bank executives have hinted they are willing to move away from the 21 per cent deal, meaning Mr Dallara’s hardline stance may be a negotiating tactic. Still, it signals an already fraught process may grow only more contentious.
Mr Dallara acknowledged that economic conditions had worsened since the July deal. But he argued Athens’ recent agreement with the "troika" of international lenders – the International Monetary Fund, European Commission, and ECB – had put the Greek rescue plan back on target, making further haircuts unnecessary.
"Circumstances have changed for everyone, but the Greek programme is back on track with the IMF," said Mr Dallara, adding that the more tenuous economic situation was a reason not to create more uncertainty by starting fresh negotiations. "The broader environment has become more complicated for any case to reopen."
The IIF’s views has some sympathetic ears within European policy circles, particularly at the ECB, which earlier this week warned that any further haircuts could "put at risk the financial stability of the single currency as a whole". Mr Dallara said the IIF calculates the July deal still has the potential to decrease Greece’s debt load significantly, from about 155 per cent of gross domestic product today to 97 per cent in 2020.
He said that if the plan was given time to work it, along with Greek commitments to get to a primary budget surplus next year and to sell off €50bn in state assets, could restore market confidence in the eurozone’s ability to tackle the crisis.
"It’s premature to declare the debt sustainability of the July 21 deal in adequate since it hasn’t been put to a market test yet," he said. "This is not physics. None of us knows exactly where the tipping point is for Greece. So much depends on overall market confidence."
Merkel warns not to expect big change at October 23 EU summit
by Deutsche Presse Agentur
German Chancellor Angela Merkel warned Friday there would be no dramatic course-changing decisions at an October 23 EU summit on the eurozone crisis. 'There isn't some clap of thunder and then it's all right,' she said Friday in a speech to a trade union conference.
Her remarks appeared to contrast with her joint statement this month with French President Nicolas Sarkozy that a package solution to the crisis was on the way and would be made public by the end of the month. She told members of the IG Metall labour group near the southern city of Karlsruhe that every step would have to be weighed carefully and only undertaken if it yielded more benefits than disadvantages.
Merkel attributed the debt crisis in a band of eurozone nations to too much borrowing and a lack of economic competitiveness, both of which had built up over decades, she said, adding that the solutions could not be found overnight. The chancellor called for EU leaders to discuss at subsequent summits how they will deal with big banks. She said the option of letting a bank fail had to be available without the whole financial system being endangered and the taxpayer footing the bill.
Will Finland be the mouse that roars and be the first to leave the euro?
by Damian Reece - Telegraph
Markets rallied today on the hope that Europe was edging closer to paying the appalling cost of underwriting its debtor nations and recapitalising its banks to allow a Greek default. Strange times. So strange that the pressure to leave the single currency will mount for some as the continuing, sticking-plaster approach to the crisis continues. But who?
Greece can't survive outside the eurozone and Germany, an obvious candidate, knows the economic devastation of its exit would be too much. But if you were small enough and economically strong enough to stand alone, and therefore escape the escalating costs of saving the euro, then why not?
Step forward Finland. As Matthew Lynn argues in a paper for Strategy Economics, Finland enjoys a current account surplus of €3.3bn and its overseas assets exceed liabilities by €28bn. Its 2012 public sector deficit is forecast to be just 0.9pc of GDP with total debt just 50pc of GDP which itself is forecast to grow 1.8pc next year. It can stand alone.
By leaving the euro it could become richer too. An appreciating markka would reduce the price of imports and its overseas assets would rise in value. It would also avoid the escalating costs of one eurozone rescue after another.
We've already seen political opposition growing in Finland to the euro. The triple-A rated Finland has thrown its weight around already by demanding collateral before extending more loans to Greece and the True Finns party won 20pc of the vote. As the bailouts mount, opposition will grow.
A Finnish exit would not represent the same seismic event as Germany quitting but would be politically explosive, setting a precedent that others could follow. The clearly unhappy Slovakia perhaps? Lynn's paper highlights the 1959 Peter Sellers film The Mouse That Roared which showed how the actions of small states can sometimes have big consequences. Listen out. You might just hear it happening.
Mario Draghi fears Italian debt spiral
by Ambrose Evans-Pritchard - Telegraph
Italy risks a debt spiral without "drastic" steps to cut spending and restore confidence in public finances, the country's central bank governor has warned.
"We must act fast. The sorts of interest rate rises seen over the last three months, if protracted, could lead to an uncontrollable spiral," said Mario Draghi, who takes over as head of the European Central Bank next month. Mr Draghi said austerity measures must be enacted "immediately" and warned that Italy's €54bn austerity package is "not enough".
Yields on 10-year Italian bonds surged above the danger level of 6pc in August on recession fears. Intervention by the ECB saved the day but yields have been creeping back up again as the ECB steps back. Yields rose to 5.71pc yesterday. Germany's Bundesbank is adamantly opposed to further ECB bond purchases.
Mr Draghi hinted that ECB help is nearing its political limits, evoking Italy's "atavistic temptation" of waiting for an army to cross the Alps to sort out its problems. "It is not going to happen. All our citizens must be are aware of this. It would be a tragic illusion to think that the help will come from outside," he said. The warning came amid turmoil in Rome where premier Silvio Berlusconi is braced for a vote of confidence after failing to secure enough votes to clear the budget accounts on Tuesday night.
Professor Nouriel Roubini from New York University told Stern that the eurozone is a "ticking timebomb" and that only Germany can now save the system. He called for €2 trillion firewall to protect Italy and Spain from contagion, fearing that the EU's €440bn rescue fund (EFSF) will run out of money by the end of the year. "We need a military weapon a bazooka, and we need it in weeks," he said.
Veteran financier George Soros headed a letter to The Financial Times signed by Europe's luminaries calling for EU leaders to "fix the faults" of monetary union rather than letting it "perhaps destroy the global financial system." The group proposed an EU Treasury to take charge of fiscal policy, ignoring a ruling by Germany's top court last month any such move would breach the country's Basic Law.
Lingering hopes that Greece might struggle through were dashed yesterday when Athens said Greece's budget deficit had jumped by 15pc from a year ago despite austerity cuts. It blamed the shortfall on deepening recession, which has eaten into the tax base and raised dole costs. The grim figures validate criticisms that IMF-style austerity – without the usual IMF-cure of debt relief and devaluation – is self-defeating.
Greek premier George Papandreou told a cabinet meeting yesterday that talks are underway to free Greece from its debt-compound trap. "We are negotiating in every way to lighten this debt," he said.
Former German Chancellor Helmut Schmidt said the "condescending" policies imposed on Greece had pushed the country into a slump. " I am reluctant to reproach the Greeks for not cutting enough since the austerity is itself a causes of their depression." Mr Schmidt reminded those demanding yet tougher terms for Greece that post-War recovery in Germany and the D-Mark currency stabilisation in 1948 were made possible only by the willingness of the US to take an enlightened view and relaunch growth with the Marshall Plan.
Even a Slovak 'Yes' will make no difference
by Ambrose Evans-Pritchard - Telegraph
Slovakia’s "Nie" last night will not stop the approval of Europe’s revamped bail-out fund (EFSF).
The ultimate outcome has never been in doubt. As in Germany, the opposition backs the bill. In any case, Slovakia’s political class knows that their country will pay a fearful diplomatic price if this drama in the Národná Rada drags on for much longer. What the Slovak debate has shown us yet again – as if the political storm in Germany over the last two months has not been enough – is that escalating bail-outs are nearing their political limits.
The traumatic affair almost brought down the German government. It has in fact brought down the Slovak government. You can’t keep doing this. Democracies are not to be toyed with. This political revolt matters a great deal because Europe will soon have to come back for more money and bigger bail-outs. The revamped EFSF was overtaken by events two months ago.
It was agreed by EU leaders in July before Italy and Spain were drawn into the maelstrom. (Lest we forget, Italian and Spanish 10-year yields punched above 6pc in early August on mounting fears of a global double-dip, which would play havoc with debt dynamics.) Only bond purchases by the ECB stopped a spiralling debt crisis at that moment. The apparent calm today is entirely artificial.
The EFSF’s €440bn firepower – or €300bn after Greece, Ireland, and Portugal have taken their bites – is not enough. We can argue over headlines. Willem Buiter at Citigroup has called for €2.5 trillion, RBS and the European Parliament have called for $2 trillion.
So even when the Slovaks fall on their sword, nothing will have been resolved. A reluctant ECB will remain the only credible lender-of-last resort standing behind EMU, in breach of the Lisbon Treaty. Its actions already face a challenge at the European Court.
No doubt German finance minister Wolfgang Schäuble is plotting all kinds of schemes to leverage the EFSF into the stratosphere, perhaps by using it to guarantee the first 20pc of losses on Club Med bonds (ie the sort of CDO alchemy of structured credit used to disguise risk in the US subprime conspiracy). He has allies in Brussels, Paris, Rome and elsewhere.
However, he was forced to give categorical assurances to the Bundestag that the bail-out fund will not be enlarged further. Most people understood him to mean that it will not be "leveraged". Pledges to parliaments have consequences. And as Mr Schäuble himself said, the September ruling by the German Constitutional Court has blocked off any possibility of eurobonds.
Slovakia’s cry of defiance has not been entirely pointless. Richard Sulik – the speaker of parliament – has caught a mood of popular disgust that goes far beyond his own country. His objections are unanswerable. How can there be any justification for a state of affairs where a poor but rule-abiding EMU state must bail out a serial violator with twice the per capita income, and triple the level of the pensions – a country which is in any case irretrievably bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?
But he also touched on the most neuralgic issue, reminding everybody that the EFSF is "mainly for saving foreign banks". These are French, German, British, Dutch, and Belgian banks, of course.
Mr Sulik is right. The EU-IMF rescue loans have not helped Greece pull out of its downward spiral. They have pushed the country further into bankruptcy. Greek public debt will rise from around 120pc of GDP to 160pc under the rescue programme, and the IMF is pencilling in figures above 180pc.
The rescue loans have rotated into the hands of creditor banks, life insurers, pension funds, and even a few hedge funds. ECB bond purchases have allowed to investors to dump their holdings at reduced loss, shifting the risk to EMU taxpayers. It is a racket for financial elites. A pickpocketing of taxpayers, including poor Slovak taxpayers.
"I’d rather be a pariah in Brussels than have to feel ashamed before my children," he said. Bravo.
UK rating downgrade 'unavoidable'
by Philip Aldrick - Telegraph
A downgrade of Britain's top notch credit rating is potentially unavoidable because the country can not grow out of its debts, a leading asset manager has claimed.
Legal & General Investment Management said "the UK's credit rating is likely to be reviewed in the coming years" as it becomes clear that the Government will miss its growth forecasts and fall back into recession. The warning will come as a blow to George Osborne, who has staked his reputation on the UK retaining its AAA rating despite emerging from the recession with the biggest budget deficit in the G20.
James Carrick, economist at LGIM, said that stimulus spending of about £17bn a year would help lift growth but "hasten" any ratings action. "Under all scenarios, we think the Chancellor will miss his projections," he said. "We expect the debt-to-GDP ratio to remain on an explosive path no matter what the Government does. [As a result] ratings agencies might negatively review the UK's AAA sovereign rating in coming years."
Mr Carrick said the Government can not meet its growth targets because they require the "biggest private sector boom ever". To compensate for the largest fiscal squeeze since the Second World War, the private sector will have to grow "not just at its fastest rate in one year, but for four in a row". Singling out the stricken banking sector, he said: "It's very difficult to get a boom when credit is restrained."
The Government currently expects growth of 2.5pc next year and almost 3pc for the three subsequent years. According to LGIM, growth is more likely "to be around 0.5pc" a year. Mr Carrick added: "A recession appears likely." He expects the economy to contract in either the final three months of this year of the first three of 2012, with a high chance of two negative quarters running.
The Government will miss both its targets of eliminating the structural deficit and having the debt-to-GDP ratio falling by 2015 because tax receipts will decline as unemployment remains high. LGIM's analysis jars with Standard & Poor's. The rating's agency reaffirmed Britain's AAA rating earlier this month despite acknowledging that growth will be slower than forecast. It warned against abandoning austerity.
Portugal government warns of severe cuts, tax hikes
by Barry Hatton, AP
Portugal's prime minister warned his country Thursday to prepare for deepening hardship next year as the government expands its austerity plan of pay cuts and tax increases to slash the national debt.
Portugal is one of three eurozone countries that have needed financial rescue because of an unsustainable debt load. It took a €78 billion ($108 billion) bailout in May, but Europe's debt crisis has endured as ailing countries like Portugal struggle to ease their debt burden and find sources of economic growth. Despite a series of tax hikes and pay and welfare cuts, Portugal is coming up short on debt reduction targets it agreed in return for the bailout.
Prime Minister Pedro Passos Coelho said that 70 percent of the permitted budget deficit this year was used up by the end of June. "We are living through a national emergency," Passos Coelho said in a televised address. "We have to do more, a lot more, than we expected" to bring down the deficit, he said.
The deficit was 8.3 percent in the first half of the year — down from 9.6 percent last year but way off this year's goal of 5.9 percent. Portugal must meet the target to qualify for the bailout funds. The government is transferring the pension funds of private banks to the state treasury to help lower this year's deficit.
Passos Coelho announced that civil servants will next year lose their Christmas bonus and vacation pay — each equal to a month's salary. They are already subject to a pay freeze. There will also be "very substantial" cuts in health care and education, Passos Coelho said.
At the same time, more goods will be moved into the top 23 percent bracket of sales tax, and earners will be allowed fewer tax deductions. Legally permitted working hours are also to be extended and the number of public holidays cut. If the center-right government doesn't take tough and unpopular steps, Portugal will be "under intense pressure" to leave the 17-nation eurozone, Passos Coelho said. "This is how we get our credibility back," he said of the expanded austerity program.
He appealed to the Portuguese to stand together through difficult times. Portugal has not so far witnessed any of the unrest seen in Greece, which also took a bailout and adopted austerity. "We have targets to meet and we must meet them," Passos Coelho said.
The new measures are to be included in the 2012 budget, due to be unveiled next week. A double-dip recession, which is forecast to continue next year, has made it harder for the four-month-old government to reduce debt levels because tax revenue has fallen while the jobless rate has risen to more than 12 percent.
When No. 1 Financial-Strength Ranking Spells Doom
by Jonathan Weil - Bloomberg
Less than three months ago the European Banking Authority said Dexia SA had passed its so- called stress test with ease. The French-Belgian lender’s July 15 news release carried this headline: "2011 EU-wide Stress Test Results: No Need for Dexia to Raise Additional Capital."
Then last weekend, 86 days after getting its clean bill of health, Dexia took a government bailout to avoid collapsing. Nobody was surprised this happened. Nor should anyone have been.
The stress-test exercise was a charade, just as it was a year earlier when Bank of Ireland Plc and Allied Irish Banks Plc passed their tests and collapsed soon after. Once again the rules were rigged so only a handful of unimportant banks would flunk. Everyone who was paying attention understood this.
The European Union’s banking authority went through with the farce anyway, presumably aware that in all likelihood some big bank was bound to get a passing grade and quickly implode, the same as last year, causing embarrassment for everyone involved. All of which leads to the important question: Why?
Why would any self-respecting regulator participate in this sort of reputational suicide? Is the problem mass corruption? Is it mass stupidity? Assuming it’s both, where on the stupidity- corruption continuum does one begin and the other end? Whatever the case, the European Banking Authority is making even U.S. regulators look good. That’s no small feat.
Balance Sheet Star
Consider Dexia’s balance sheet as of Dec. 31, which is the date the banking authority used for its tests of 90 banks in 21 EU countries. Dexia’s tangible common shareholder equity was 6.7 billion euros, compared with 564.5 billion euros of tangible assets. (Both figures exclude goodwill and other intangible assets.) That gave it a 1.18 percent ratio, meaning Dexia had little hard capital available to absorb future losses.
Dexia nonetheless managed to show a capital ratio of 12.1 percent, based in part on its calculation that it had 17 billion euros of what the regulators call core Tier 1 capital. Dexia pointed to this figure in its latest annual report as proof that it "enjoys robust solvency."
Dexia got that ratio mainly by excluding the bulk of its assets -- a process speciously referred to as risk-weighting -- along with billions of euros of pent-up losses on soured holdings such as Greek government bonds. The denominator in the ratio got smaller, the numerator got bigger, and Dexia wound up looking like one of Europe’s safest banks.
Using Dexia’s regulatory math as a starting point, the European Banking Authority then generously estimated Dexia’s core Tier 1 ratio would fall to 10.4 percent in 2012 under the "adverse scenario" it contemplated. The details of the scenario don’t matter now because Dexia is toast.
The takeaway here is you can’t believe anything about regulatory capital benchmarks, in Europe or elsewhere, stressed or not. (Citigroup Inc. (C) was classified as "well capitalized" in late 2008 when it got its second U.S. bailout.) It’s a lesson the world should have learned long ago, yet keeps relearning.
In a way, by blowing its job so spectacularly, the European Banking Authority may have done the public a favor. Now that we have a clear point of reference, all you need to do to see what other European banks we should be worried about is look up which ones were sporting capital ratios similar to Dexia’s.
For instance, as of Dec. 31, four other European banks that passed this year’s stress tests had Tier 1 capital ratios of more than 10 percent while showing tangible common equity ratios of less than 2 percent, according to data compiled by Bloomberg. France’s Credit Agricole SA (ACA) was one. The others were Germany’s Commerzbank AG (CBK), Landesbank Berlin AG and Deutsche Bank AG. (DBK)
Alternatively, if you want a larger sample, click here for a chart the Italian bank Intesa Sanpaolo SpA (ISP) showed at an Oct. 6 investor meeting in London, comparing its stress-test results with those of 20 of its peers. (This was one day after news broke that government intervention at Dexia was imminent.) Touting its fourth-place finish, Intesa said its "core Tier 1 ranks among the best under the adverse scenario."
And who was No. 1? Dexia, of course. So at least we can thank Intesa for the warning should the rest of Europe’s banks crater. Bottom line, if Europe’s leaders want to further undermine public confidence in the region’s banks, then they should keep doing exactly what they’ve been doing the past couple of years. A few more put-ons like the last two rounds of stress tests and we’ll have the global financial crisis back to peak form in no time. Dexia’s demise is only the start.
Chinese Banks’ Bad Debt May Hit 60% of Equity Capital, Credit Suisse Says
by Belinda Cao and Michael Patterson - Bloomberg
Loan losses at Chinese banks may climb to levels equivalent to 60 percent of their equity capital as real-estate companies and local governments fail to repay debts, according to Credit Suisse Group AG.
Nonperforming loans will probably increase to 8 percent to 12 percent of total debt in the "next few years," causing losses amounting to 40 percent to 60 percent of Chinese banks’ equity, Hong Kong-based analysts led by Sanjay Jain at Credit Suisse wrote in a research report dated Oct. 12. Jain cut 2012 and 2013 profit estimates by as much as 25 percent and maintained an "underweight" rating on the industry.
Chinese bank stocks have tumbled this year, sending the MSCI China Financials Index down as much as 43 percent, amid growing concern that slower economic growth will spur bad debts after a three-year credit boom. The retreat sent price-to- earnings ratios on bank stocks to record lows and prompted the government to begin buying shares in the four biggest lenders this week. The MSCI gauge gained 9 percent in the past two days.
"Any sustained outperformance will be likely only after banks effectively tackle issues related to asset quality," Jain wrote. Lending to real estate companies, manufacturers, local governments and small and medium enterprises may cause more than four fifths of the total bad debt, the analyst said.
Jain had previously estimated that Chinese banks’ bad debt ratio would be 4.5 percent to 5 percent. The projection compares with a "base case" forecast of 5 percent to 8 percent by Moody’s Investors Service in July. Nonperforming loans were 1 percent of total debt as of June, according to the People’s Bank of China.
Central Huijin Investment Ltd., an arm of China’s sovereign wealth fund, said Oct. 10. it began buying shares of the four biggest Chinese banks and that it will continue with "related market operations," without providing details on how much it will buy. Huijin’s purchases haven’t changed the bearish outlook for the industry, said Jim Chanos, founder of New York-based hedge fund Kynikos Associates, who has been short-selling Chinese banks, property developers and construction companies.
"The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating," Chanos, who bet on a decline in Enron Corp. shares before the company filed for bankruptcy in 2001, said in an interview with Bloomberg Television Oct. 11.
ICBC, China Construction
Credit Suisse has given "outperform" recommendations on Industrial & Commercial Bank of China (601398) Ltd. and China Construction Bank Corp. (939), the world’s two biggest lenders by market value. Agricultural Bank of China Ltd. (601288), the nation’s third-biggest lender, China Minsheng Banking Corp. and Chongqing Rural Commercial Bank (3618) Co. were rated "underperform."
Shares of ICBC gained 1.2 percent in Hong Kong trading yesterday. The increases in the past five days have helped trim its loss this year to 25 percent. China Construction rose 2.5 percent yesterday, after it reached the lowest level in 29 months on Oct. 4. Stocks in the MSCI China Financials Index traded at 6.8 times earnings yesterday, according to Bloomberg data, after the multiple plunged to a record low of 5.6 on Oct. 4.
China’s banking watchdog ordered "systemically important" lenders to have bad-loan provisions that are no less than 2.5 percent of total outstanding credit by the end of 2013, or 150 percent of non-performing debt, according to a statement on the agency’s website Oct. 8. The nation’s lenders increased their provision coverage ratio for bad loans to 249 percent in the second quarter from 124 percent for the three months ended March 2009, China Banking Regulatory Commission data showed.
Agricultural Bank said bad debts accounted for 1.67 percent of total loans at the end of June in its semi-annual report, the highest non-performing loan ratio among the biggest lenders, compared with ICBC’s 0.95, Bank of China’s 1 percent and Construction Bank’s 1.03. The banking regulator told lenders in July to tighten lending for real estate to guard against the risk of bad loans should government efforts to cool the market cause property prices to fall, a person with knowledge of the matter said.
China’s property market is in the "first parts of a very serious pullback," Chanos said. "The property market is what investors ought to be watching, because that drives everything in China." Home transactions in the world’s second-largest economy fell during last week’s public holidays after residential prices posted their first monthly decline in a year, according to Soufun Holdings Ltd. (SFUN), China’s biggest real estate website owner.
'Younger people can't live within their means'
by John Henley: Guardian
Jon Henley is travelling through Portugal, Spain, Italy and Greece to hear the stories behind the European debt crisis. Here he talks to a woman who believes the young will fare worst
In Loule, a biggish market town in the Algarve, I met Helena Martins, a friend of a friend. She's retired now and felt that although the more generous pensions – upwards of €1,000 a month – were about to be pruned in Portugal, most people of her age would fare better than younger generations.
"We grew up in a different age," she said. "Portugal was poor then. We know how to live simply, and economise. Lots of older people around here, particularly in the countryside, still grow their own vegetables. We shop very sparingly and can live on very little. The younger ones aren't the same. They don't know how to live within their means, that's the problem."
Helena said that in Loule and neighbouring Quarteira, apartments were being repossessed by banks and sold off cheap at auctions held almost weekly: "Flats that a few years ago would have cost €120,000 or €130,000 are selling for less than a third of that. Those people who have money, they're going to do very well out of this, very well indeed."
The inland revenue, similarly, is confiscating luxury cars bought at the height of the boom by people who find they can no longer pay their taxes. "It's going to get worse before it gets better," she said. "In a year's time, it really doesn't bear thinking about, with the tax rises and price increases that are coming. Some people already do two, even three part-time jobs."
Young couples in particular are really struggling, Helena said. One of her neighbours runs an unofficial cut-price creche, less expensive than the state-regulated nurseries, to make a bit of extra money. "People are so desperate to cut costs wherever they can, she has no shortage of customers," she said. "But they're also so desperate that sometimes they don't pay her. And because she's unofficial, there's nothing she can do."
Comparable horror stories abound, she added, about what goes on in unregulated and unofficial care homes that have sprung up for the elderly: "Everyone is looking to spend less any way they can; there aren't enough approved care home places and those there are are unaffordable."
Portugal's far-reaching austerity drive is hitting people in unexpected and unfair ways, she says. "Everything to do with the council tax – the form you have to fill in, the way you pay – now has to be done on the internet," she said. "That's all very well, but what about people like me, who don't even have a computer? Our only solution is to go to a private company that will do it for you – for €20. So now paying our taxes costs us €20."
New Jersey Pension Fund Assets Drop 9.9% in First 3 Months of Year
by Elise Young - Bloomberg
New Jersey’s pension-fund assets dropped 9.9 percent to $66.4 billion in the first three months of this fiscal year as global stocks declined, according to a report presented to the State Investment Council.
Assets as of the June 30 end of last fiscal year were $73.7 billion, after an 18 percent gain during the 12-month period. Since July 1, the fund for government workers has withdrawn $1.8 billion for benefit payments, according to a summary from the state Division of Investment.
The funds returned less than 1 percent in July before declining 2.9 percent in August and an estimated 4.2 percent in September, according to the report. International equity investments lost 22.8 percent during the three months while domestic stocks declined 15.9 percent. Fixed income returned about 9 percent. The Standard & Poor’s 500 Index dropped 14.3 percent in the July-September quarter. The Division of Investment manages funds for seven public retirement systems that provide benefits for more than 780,000 current and future retirees.
Hedge-fund investments dropped 3 percent for the quarter and commodities, with an estimated $100 million invested in gold and gold mining, were down 5 percent. The pension pool intends to invest as much as $1.29 billion in alternative investments, which include hedge funds and real estate, to diversify beyond stocks and bonds, according to memos from Timothy Walsh, director of the investment division. As of June 30, about $13.2 billion, or 17.9 percent, of the fund’s portfolio was in alternatives.
The largest of the new investments is $200 million in Elliott Associates LP, a New York-based hedge fund founded by Paul Singer that focuses on distressed credit. Walsh also plans to invest as much as $200 million in Brevan Howard LP, a London- based hedge fund that manages an estimated $34 billion, including $26.1 billion in its flagship Brevan Howard Master Fund Ltd.
The pension system also will put $110 million in London- based AnaCap Credit Opportunities II LP, which buys credit-card debt, residential and commercial mortgages and liens with a focus on the U.K., Ireland, Portugal and Spain.
Pension fund assets down sharply for some
The pension funds of U.S. state and local government employees dropped 22.7 percent from 2008 to 2009, the Census Bureau reported Thursday. The dramatic drop of $726.1 billion came after a drop of $176.7 billion from 2008 to 2009, a survey of state and local government retirement systems found.
The Census Bureau said the pension funds covered in the report lost $633.4 billion on investments, nearly $600 billion more then the previous year. Employee and government contributions to pension funds increased 7 percent and 4.5 percent, respectively. In 2009, employees ponied up $39.5 billion. Governments added in $86.12 billion. Contributions by local governments rose 10 percent, while state government contributions fell 2.6 percent in the year.
Spain Credit Rating Cut by S&P on Weak Outlook
by Emma Ross-Thomas - Bloomberg
Spain had its credit rating cut one level by Standard & Poor’s, which cited a likely deterioration of the nation’s bank assets and weaker economic growth prospects that will keep unemployment elevated.
S&P lowered its rating to AA- from AA, the company said in a statement, and the outlook is negative. Spain’s rating by S&P has been lowered three times since it lowered the nation from AAA in 2009. A jobless rate as high as 21 percent may weigh on private consumption, it said.
"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects," S&P said in the statement. "The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further."
Spain is paying yields of more than 5 percent on its 10- year bonds even after the European Central Bank stepped in to prop up its bond market on Aug. 8. The gap between Spanish and German 10-year borrowing costs was 310 basis points yesterday, compared with 325 basis points on Sept. 30.
The euro declined for a second day against the dollar and yen after the ratings cut. The common currency declined 0.3 percent to $1.3743 as of 8:20 a.m. in Tokyo and fell 0.2 percent to 105.73 yen. The decision comes two months after S&P stripped the U.S. of its AAA credit rating for the first time. While the Aug. 5 move roiled global markets, bond investors ignored S&P’s warnings about U.S. creditworthiness and piled into Treasuries. The yield on the benchmark U.S. government bond fell to a record 1.6714 on Sept. 23.
The reduction of Spain’s rating also comes after Moody’s Investors Service on Oct. 4 warned "all but the strongest euro- area sovereigns" that they are likely to see further downgrades, as it cut Italy’s debt for the first time in almost two decades. Moody’s said that the increased funding risks caused by fallout from the region’s debt crisis meant that "all but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings."
Spain’s Socialist government, which faces a general election on Nov. 20, has said the country may miss its 2011 growth forecast of 1.3 percent as the recovery slows. Unemployment rose in August to a record 21.2 percent and the manufacturing industry contracted the most in more than two years in September. Regional governments, which are responsible for health and education and hire half of Spain’s public workers, are behind schedule to meet deficit targets, preliminary data showed Sept. 8.
The People’s Party, which polls indicate may win an outright majority in the vote, has pledged a stricter budget law, spending limits for regional governments, and tax breaks to encourage companies to hire workers and become more competitive. PP leader Mariano Rajoy said on Sept. 15 he would send a "strong signal" to markets and wouldn’t deviate from the budget-deficit goal of 4.4 percent of gross domestic product in 2012 "under any circumstances."
Still, the PP voted against Zapatero’s measures to cut public wages and freeze pensions, and has pledged to bring pensions "up to date" if it wins the election. Zapatero’s austerity measures aim to slash the shortfall to 6 percent of GDP this year from 11 percent in 2009. The government forecasts the debt burden will grow to 67 percent this year, almost twice the 36-percent level in 2007.
Spain attacks S&P as debt costs rise after downgrade
Spain attacked Standard & Poor's as its borrowing costs jumped after a downgrade, saying the credit rating agency failed to appreciate the depth of measures taken to cut its debt.
S&P cut the country's credit rating on Friday, citing high unemployment, tightening credit and high private-sector debt among reasons for cutting the nation's long-term rating to AA- from AA. Spain's Treasury said in a statement: "S&P underestimates the scope of the unprecedented structural reforms undertaken, which will obviously take time to bear fruit."
However, yield on 10-year Spanish government bonds widened further of Friday - up 9 basis points to 5.258pc - despite reports that the European Central Bank was buying the bonds. The rising yields, while still below highs of 6.2pc reached in August before the ECB agreed to step in and buy Spanish and Italian bonds, points to increasing fears that Spain could be the next eurozone economy to need a bailout.
Despite an unpopular austerity programme that has led to social unrest, doubts remain that Spain will meet its deficit target of 6pc of GDP this year. Spanish unemployment in around 21pc - the highest in the European Union - as a result of stagnant growth, the collapse of the country's housing boom and deep cuts to reduce a public sector deficit that hit 11.1pc of GDP in 2009.
S&P said: "Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain's main trading partners."
The rating agency pointed to botched labour market reforms last year the did little to create jobs and likelihood of further deterioration in the assets of Spain's banks. It downgraded its forecast for Spanish economic growth in 2012 to about 1pc, from the 1.5pc it forecast in February. S&P's downgrade mirrored that by fellow ratings agency Fitch last week.
Like Fitch, which also now rates Spain at AA-, S&P signalled further possible downgrades for Spain, saying there was still a risk the euro zone's fourth-largest economy could slip into recession next year, with a 0.5pc contraction.
RBS the 'most vulnerable' bank in Europe, say Credit Suisse analysts
by Harry Wilson - Telegraph
Royal Bank of Scotland is the "most vulnerable" bank in Europe and could be forced to raise £17bn in new money to shore up its capital ratios, more than any other major European lender, according to analysts at Credit Suisse.
The state-backed bank is already 83pc owned by the taxpayer and would likely face full nationalisation under the scenario set out by Credit Suisse, which estimates RBS might face a capital shortfall of £16.9bn in a new round of Europe-wide industry stress tests. "RBS appears to be the most vulnerable although the company has said that the methodology, especially the calculation of trading income, is especially harsh for them," said Credit Suisse. RBS declined to comment on the Credit Suisse note.
Last week, the bank hit back at a press report that there were fears within the Government that it might require a second bailout on the back of new losses related to its exposure to peripheral European countries. A source close to RBS described the Credit Suisse report as an "outlier" and other analysts say the bank is unlikely to need a new capital injection. "The simple conclusion was, and remains, that, unlike their European peers, no UK bank needs to raise a penny of additional capital through fresh issuance," said Ian Gordon, a banks analyst at Evolution Securities.
On Thursday night, 90 banks across Europe, including RBS, Lloyds Banking Group and Barclays, handed over updated stress test forms to the European Banking Authority as part of a new round of tests. Credit Suisse estimates that about 66, or two-thirds, of the banks taking part could fail the latest test and said the lenders' combined capital shortfall based on a new minimum capital Tier 1 capital threshold of 9pc could be €220bn (£193bn).
Josef Ackermann, chief executive of Deutsche Bank, attacked plans outlined on Wednesday by European Commission president Jose Manuel Barroso to force banks to raise new money. "It cannot be in the interests of stabilising the financial markets to fabricate an imaginary weakness of the European banking industry through the artificial tightening of capital requirements," Mr Ackermann was reported to have told Wolfgang Schäuble, according to a leaked copy of a letter sent by him to the German finance minister.
Fears of a new round of capital injections weighed heavily on bank share prices on Thursday. RBS closed down 6.4pc at 24.16p, while Barclays fell 7.4pc to 173.2p and Lloyds was down 5.5pc at 34.26p. The falls were in part driven by the announcement from Fitch of its decision to downgrade the major UK banks, citing the expectation that they could expect a lower level of government support in future.
Lloyds and RBS had their long-term default ratings cut from AA- to A and Barclays' "viability rating" was put on negative watch by the US agency. On Thursday night, Fitch also placed Bank of America, Morgan Stanley and Goldman Sachs on review for possible downgrades. It also downgraded Swiss bank UBS while putting 12 other major European and US banks on negative ratings watches.
"The banking system is not only large relative to the UK economy, but there is also more advanced political will to reduce the implicit support for the country's banks, building on The Banking Act 2009 and, more recently the various policy recommendations of the Independent Commission on Banking [ICB]," said Fitch.
The downgrades follow the decision by rival agency Moody's last week to cut the ratings of 12 UK banks for similar reasons. Sir John Vickers, chairman of the ICB, told MPs on Monday that the downgrade was "benign" and that he was not concerned by it. Separately, JP Morgan on Thursday reported flat year-on-year earnings for the third quarter after a downturn in investment banking.
Fitch downgrades UBS, puts other banks on review
by Lauren Tara LaCapra - Reuters
Fitch Ratings downgraded UBS AG on Thursday and placed seven other U.S. and European banks on credit watch negative, citing challenges in the economy and financial markets, as well as the impact of new regulations. The ratings agency lowered UBS's long-term issuer default rating to A from A+.
Fitch is also reviewing ratings for Barclays Bank Plc , BNP Paribas , Credit Suisse Group AG , Deutsche Bank AG , Societe Generale , Bank of America Corp , Morgan Stanley and Goldman Sachs Group Inc for further possible downgrades. The cuts would in most cases be one notch and in some cases two notches, Fitch said. A lower bond rating can make debt more expensive to issue and lead to higher collateral requirements.
Earlier on Thursday, Fitch also lowered its ratings on Royal Bank of Scotland and Lloyds Banking Group two notches to A from AA-. Exposure to the European debt crisis and concern about the business model of pure-play investment banks were catalysts for most of the ratings actions, Joo-Yung Lee, a managing director in Fitch's financial institutions group, told Reuters.
"Some of these banks have greater reliance on wholesale funding and greater reliance on what we view as volatile trading earnings," Lee said. "That's particularly true of Goldman Sachs and Morgan Stanley in the U.S. They are less diverse than their global universal bank peers."
In the case of Bank of America, its exposure to mortagage-related litigation was a driver for Fitch's review. Competitors like Wells Fargo & Co and JPMorgan Chase & Co were not targeted because they have diverse business models, steady funding streams and no company-specific issues that put them at serious risk, Lee said. Fitch does not have a specific deadline to finish its review, but Lee said it hopes to resolve the matter quickly to reduce market uncertainty.
Europe's grand plan risks slow death by a thousand cuts
by Jeremy Warner - Telegraph
Is Europe's planned programme of banking recapitalisations going to work? It depends how it is done, but the omens aren't good. The message from bankers at the Association for Financial Markets in Europe (AFME) annual dinner in London this week was a concerning one.
This was not because of the reference by the guest speaker, Jean-Claude Trichet, to just how close the world has come to a repeat of the Great Depression. Even the European Central Bank president would no doubt admit that's still very much a real and present danger. Rather, it was because there seemed to be scarcely a person in the room who thought the grand plan to recapitalise the European banking system would do the trick. Indeed, many took the same view as Josef Ackermann, chief executive of Deutsche Bank, that it's likely to be outright counter-productive.
The overwhelming message was: We don't need this new capital. And if regulators really are going to force us to mark sovereign debt to market and backstop capital to 9pc, then we'll be doing it by shrinking the balance sheet, not by raising new equity at today's penalty rates. Thanks very much, but no thanks.
Now, in itself, this is obviously not a particularly helpful attitude. With many banks once again struggling to find market funding, something plainly has to be done. We seem to stand on the brink of another Lehman's moment. Some way of plugging the dam must be found before it's too late. But if the response of leading European banks to the forced march to higher capital ratios is to squeeze credit even further, then the prospect of sudden death though cascading default is only replaced by slow death by a thousand cuts.
Bankers are angry about the fix they are in, and in this regard at least, with reason. The root of the problem this time around is not the reckless lending, of sub prime mortgage fame, that sparked the original banking crisis, but sovereign lending, often imposed on banks by regulatory requirements. As Mr Trichet pointed out at the AFME dinner, if the eurozone were a single country, it would actually look like a model economy, with a small current account surplus, a primary budget deficit of less than half that of the UK and the US, subdued household debt, low inflation and a little growth.
But of course that is rather the nature of the problem. In fact it is a collection of 17 fiscally sovereign nations. The AAA credit rating that most advanced economies used to command is the banking sector's gold standard. It is the "risk free" capital that gives depositors confidence in the safety of their money. Once it goes, the banking system cannot function properly any longer.
One of the effects of monetary union was that previously well-calibrated levels of sovereign credit risk were arbitraged away. Greek and Portugese sovereign debt became, ridiculously in most respects, the same as German and Dutch debt, if only because it was assumed that in extremis, the strong would bailout the weak..
That assumption has been challenged, causing old credit risks, buried by the advent of the single currency, to re-emerge and the banking system to seize up for fear of the potential losses. Recapitalisation worked well in stemming the UK and US banking crises back in 2008, so there has been a natural tendency to regard it as the silver bullet that will get the banking system functioning again.
Unfortunately, what worked for UK and US banks suffering from a largely conventional crisis in banking solvency may not act in the same way in circumstances where the underlying problem is of sovereign solvency. Such bailouts risk an Alice through the Looking Glass world where sovereigns are borrowing money to prop up banks that only need propping up because the sovereign has borrowed too much money. There's a self-defeating circularity about it which raises the obvious question of "who bails out the bailer-outer".
The hope among European policymakers is that most banks will be able to raise the required new capital privately, and will indeed choose to do this rather than shrink the balance sheet to fit. Dream on.
With share prices even for the more solvent banks trading at little more than half book value, no bank would willingly raise fresh capital on the terms likely to be demanded. Again, there is a chicken and egg aspect to these valuations, since in part they are driven by concerns over likely dilution from enforced recapitalisation. Until investors know precisely what they are dealing with, the sector will continue to be regarded as essentially "uninvestable".
In any event, the cost of raising capital greatly has come to far exceed any likely return. If forced to raise capital on such terms, banks would shed less profitable lines of business in order to bring returns up to the required level. Some banks might choose to exit small and medium-sized enterprise (SME) lending altogether – either that or significantly increase its costs.
If you think about the row this would cause in Britain, it would be magnified 20 times over in Germany, where the essentially subsidised "mittelstand" is the backbone of the economy. If it is both unnecessary and potentially very damaging to be forcing banks to raise capital, why are policymakers doing it? Mainly, it's a confidence thing. American money market funds, once a chief sources of wholesale funding for European banks, no longer trust European balance sheets, and for some reason, French ones in particular.
On the face of it, this is odd because using "risk weighted" Basel III yardsticks, European banks are as well capitalised as American ones, with easily enough capital to absorb Greek, Portugese and Irish defaults. Italy would be a different matter, but nobody yet seriously believes Italy is going to default, and in any case, if a sovereign as big as Italy were to fail, the spillover consequences for American banks would be just as bad as for European ones.
Yet as Barclays Capital pointed out on Thursday, using the blunter, leverage measure of capital adequacy favoured in the US, the comparison is far less flattering. In terms of nominal balance sheet leverage, European banks look much weaker than American counterparts. In any case, the European plan – which is to give banks nine months to absorb the sovereign write-downs and rebuild capital – seems to be the worst of all possible worlds, risking as it does economically crippling credit contraction.
What Sir Fred Goodwin once characterised as "a drive-by shooting" - forcing public money on the banks - may not be much better. The more promising approach would be for governments and the European Financial Stability Facility to provide the insurance of contingency capital - capital which is only called if needed. What's achieved is a conjuring trick whereby dilution and government money are avoided. However banking capital is shored up, it can't provide a lasting cure until underlying sovereign concerns are answered.
The Protests Are The Result Of 'Bought And Paid-For Politics, Criminals, And Morons'
by Aaron Task - Yahoo! Finance
After a month in lower Manhattan, 'Occupy Wall Street' is going global. Having already spread to other major cities in the U.S. and Europe, major protests are expected Saturday "around the globe from New Zealand to Alaska via London, Frankfurt, Washington and, of course, New York," Reuters reports.
"Social unrest goes with bought and paid for politics, which is what we have," says Howard Davidowitz of Davidowitz & Associates. "Everybody is a bold-faced liar — Republicans and Democrats." The always outspoken Davidowitz joined Henry and me to discuss Occupy Wall Street, which — even as it grows in size and strength — remains the object of much discussion, confusion, and occasional ridicule in the press.
On Friday, protesters briefly stormed a Goldman Sachs office in Milan. Meanwhile, the original 'Occupy Wall Street' protesters avoided a potential showdown with the NYPD when the planned cleanup of Zuccotti Park was postponed.
The real cleanup needs to be in and of Washington D.C., Davidowitz says. "If we can only get these guys to do a little bit of honest work, I'm telling you this mess can be cleaned up," he says, suggesting America could once again use a man like Ross Perot — a third party candidate who focused the nation's attention on the deficit.
Indeed, one goal of the movement I've observed, which has been under-reported to date, is campaign finance reform. "Personally I am here to tell these big corporations to get their money out of my politicians' pockets so my politicians can work for me and for my family and my friends like we elected them to do," as one protester told me when we first reported from Zuccotti Park last month.
No fan of the movement — which he compares unfavorably to the Tea Party — Davidowitz believes 'Occupy Wall Street' is a reaction to a corrupt, dysfunctional political system and "a massive unfairness and criminality in everything we're doing."
Personally, I believe the Tea Party and 'Occupy Wall Street' have, at their core, a lot in common: frustration with our political system and a fear the 'American Dream' is slowly dying. Henry, meanwhile, believes the problem is more fundamentally about economics, as detailed in a recent post on Business Insider:
"The problem in a nutshell is this," he writes. "Inequality in this country has hit a level that has been seen only once in the nation's history, and unemployment has reached a level that has been seen only once since the Great Depression. And, at the same time, corporate profits are at a record high." "In other words, in the never-ending tug-of-war between 'labor' and 'capital,' there has rarely — if ever — been a time when 'capital' was so clearly winning."
Clearly there's no "one" reason why people are coming out in support of 'Occupy Wall Street'. What's significant is they're coming out in greater numbers to support a movement that may indeed be just getting started.
Why big-money men ignore world’s biggest proble
by Paul B. Farrell - MarketWatch
We’re not dealing with the overpopulation disaster
Last year Bill Gates said if he had "one wish to improve humanity’s lot over the next 50 years" he would pick an "energy miracle," some magical "new technology that produced energy at half the price of coal with no carbon-dioxide emissions," says CNN editor Fareed Zakaria in the New York Times.
And he said "he’d rather have this wish than a new vaccine or medicine or even choose the next several American presidents."
Energy miracle? But that’s not where he’s giving his billions. In fact, since 1994 the Gates Foundation has spent over $26 billion on philanthropic projects, ventures and innovations, lots in vaccines and medicines that extend life, increase mortality rates and encourage population growth. Yes, all good stuff, but ultimately undermining the possibility of discovering a magical energy miracle.
Worse, if that energy miracle is discovered anywhere its value could easily be wiped out by the world’s out-of-control population growth, forecast to reach 10 billion by 2050 from 7 billion today, one brief generation. So why is Gates not focusing solely in his energy miracle? Better yet, why is he ignoring what he agrees is the world’s biggest problem? Even undermining the solution?
Warren Buffett: Don’t ‘play safe’ with my billions, hit a home run
What happened to Gates and his $26 billion mission? When Warren Buffett added more than $30 billion to Gates’s foundation a few years back, Buffett said: "Don’t just go for safe projects. Take on the really tough problems." Well, to put it bluntly folks, the Gates Foundation is not spending the money on the "really tough problems." It is indeed playing it safe.
So what does Gates see as the world’s other "biggest problem?" Not global warming. Nor poverty. Not peak oil. The absolute biggest? One like the trigger mechanism on a nuclear bomb? One that could throw a monkey wrench into global economic growth, end capitalism, even destroy civilization? The one that if not solved soon renders all efforts to solve all the other global problems — including global warming, poverty and fossil fuel depletion — irrelevant, futile and impossible ever to solve?
Overpopulation. That was the consensus "biggest problem" when a group of billionaires that included Gates got together at a secret meeting in Manhattan a couple of years ago. Get it? Out-of-control population is the world’s No. 1 problem. Yet, governments with their $65 trillion global GDP aren’t even trying to solve the world’s overpopulation problem. They’re clueless. Can these philanthropists and their billions stop the coming disaster? No. In fact, their billions are accelerating the problem.
So what will shock the world awake? A catastrophe. Only a major disaster, a massive global collapse bigger than anything in world history is needed to alter the inevitable.
2 billion past Peak Population
Scientists estimate that the Earth’s natural resources can reasonably support about 5 billion people. We already have 7 billion. Get it? We’re 2 billion over Earth’s carrying capacity. Plus we’re racing headlong to 10 billion by 2050, adding over 50 million more each month.
Simple math, high school economics and minimal psychological common sense tells us we’re deep in denial and headed into a disaster. And still, no adults are dealing with overpopulation, the "toughest of all problems." Instead, they’re dealing with "safe projects" that make them feel good in the moment, short-term solutions that ironically make the long-term problem worse not better.
The truth is that Gates and his billionaire buddies are in denial, trapped in what Mother Jones columnist Julia Whitty calls "The Last Taboo." She says population is hidden in a "conspiracy of silence" that "unites the Vatican, lefties, conservatives and scientists" and now the world’s richest philanthropists have joined this "conspiracy of silence."
Scientific American also warned that population is "the most overlooked and essential strategy for achieving long-term balance with the environment." Why? Politicians ignore this "last taboo," denying the fact that if all nations consumed resources at the same rate as America, we’d need six Earths just to survive today.
Check the math: First World citizens now consume 32 times more resources such as fossil fuels, and put out 32 times more waste, than do the inhabitants of the Third World. Now they want what we have. By 2050, with a population of 10 billion, including 1.4 billion each in China and India, we are in effect committing suicide.
How Gates efforts ripple, undermining the future of the planet
"One of the disturbing facts of history is that so many civilizations collapse," warns Jared Diamond, an environmental biologist and author of "Collapse: How Societies Choose to Fail or Succeed." Many "share a sharp curve of decline," that often begins "only a decade or two after it reaches its peak population, wealth and power." Some warn: "It’s already too late." "We’re past the point of no return."
Gates billionaire buddies should reexamine the effect of the world’s out-of-control population problem as it ripples through the lens of Diamond’s "collapse equation." It’s very simple: "More people require more food, space, water, energy, and other resources … There is a long built-in momentum to human population growth."
So take a moment and ask yourself how the world’s explosive population growth from seven to 10 billion in one short generation, plus their increasing demand for more resources per capita, will ripple through Diamond’s other 10 key variables:
Oil, natural gas, coal: They’re all near or past their tipping points. With costs accelerating, new technologies and alternatives, biofuels, solar, nuclear power, will never be enough. Unfortunately, by 2050 demand for fossil fuels will still be 80% for 10 billion.
Two billion global poor live on $2 a day, depend on fish and wild foods that are dying off for protein. Increasing food prices make matters worse. Green revolution failing: United Nations study says new production technologies have not improved food access.
Water problems destroyed many earlier civilizations: Today a million lack safe drinking water. By 2015 two-thirds of the world will live in water-stressed countries.
Water, wind eroding crop soils many times faster than new formation.
We’re losing rain forests and protective timber reserves at accelerating rates.
Our air, soil, oceans, lakes and rivers are dying from toxic chemicals.
- Solar energy
Sunlight’s limited. By 2050 we’ll use 100% photosynthetic capacity.
- Ozone layer
Our CO2 is destroying our ozone protection, reducing solar energy.
Wild species, populations, genetic diversity, lost, rest out of balance.
- Alien species
Transferring species to new lands destroying native species.
Diamond’s historical research tells us that leaders are myopic, motivated more by self-interest, expediency and money than by courage, convictions and long-term thinking. They fail to act in time. Unprepared, their worlds crumble fast. They may respond to a catastrophe. But in the end, history tells us over and over that most leaders live in denial, avoiding timely decisions, failing even in time of crises, till it’s too little, too late.
Gates’s Billionaire Philanthropist Club probably knows in their hearts the truth. They’re not in denial. They’ve given up. The problem will never be solved. So they’re not even trying to fix the overpopulation problem, instead, focusing on short-term feel-good efforts, knowing that in the not-too-distant future the planet, our civilization and the human species will fade to black.
Let’s pray that Uncle Warren gets back into the game demanding they "don’t just go for safe projects. Take on the really tough problems."
Soaring Suburban Poverty Catches Communities Unprepared
by Peter Goodman - Huffington Post
Before the unraveling, Selena Blanco and her family felt secure in their hold on middle class life in this bedroom community just west of Denver. She and her husband both held professional jobs in industries that seemed sheltered from trouble, his in technology, hers in health care. Together they brought home $100,000 a year, enough to allay concerns about paying the bills, let alone having to ask for help.
But over the last two years, both have lost their jobs. Her unemployment check ran out in the spring, leaving them to subsist on his jobless benefits alone, about $1,500 a month. The Blanco's shattered fortunes have supplied them an unwanted new status, one they share with millions of suburban households in a nation previously accustomed to thinking of suburbia in upwardly mobile terms: They are poor.
They are officially so according to the federal government's definition, which sets the poverty line for a family of five at an annual income of $26,023 or less. It is viscerally true when one sees how Blanco, 28, now spends her day. She takes her four-year-old son to a county-operated Headstart program, free preschool for the poor. She forages for clothes at thrift stores. She scrounges for coupons to keep her family fed.
"We were doing well," Blanco says, dabbing at reddening eyes with a tissue, trying to make sense of events that contradict her understanding of what is supposed to happen to people who work, save and provide for their children. "My husband and I would go out to eat without even thinking about it. We bought shoes. When I needed a bra, I went to Victoria's Secret. Now we're like, 'Which Goodwill is having a sale?'"
They have applied for food stamps and the cash assistance program familiarly known as welfare, crossing a previously unimaginable threshold: For the first time in her life, Blanco -- a self-possessed, confident, intelligent woman who still carries herself like someone who used to work in an office -- has entered the ranks of those in need of public assistance. "It's a horrible feeling," she says, tears staining her face. "There's pride. I don't show my kids that we're hurting, but it hurts me. It makes me feel like I'm failing as a parent. It's embarrassing."
Despite the typically urban associations evoked by talk of poverty in America, Blanco is the face of an emerging segment of the nation's poor now growing faster than any other. Though cities still have nearly double the rate of poverty as suburban areas, the number of people living in poverty in the suburbs of major metropolitan areas increased by 53 percent between 2000 and 2010, as compared to an increase of 23 percent among city-dwellers, according to a Brookings Institution analysis of recently released census data. In 16 metropolitan areas, including Atlanta, Dallas and Milwaukee, the suburban poor has more than doubled over the last decade.
The swift growth of suburban poverty is reshaping the sociological landscape, while leaving millions of struggling households without the support that might ameliorate their plight: Compared to cities, suburban communities lack facilities and programs to help the poor, owing to a lag in awareness that large numbers of indigent people are in their midst. Some communities are wary of providing services out of fear they will make themselves magnets for the poor.
In the suburbs, getting to county offices to apply for aid or to food banks generally requires a car or reliance on a typically minimal public transportation network. The same transportation constraints limit working opportunities, with many jobs potentially beyond reach and would-be employers reluctant to hire people who lack their own vehicles.
These basic difficulties are now exacerbated as states and local governments cut services and lay off staff in the face of budget shortfalls. Growing numbers of the new suburban poor face the risk of slipping through the cracks, sinking into a state of dependence on public assistance just as aid is diminishing.
"You're seeing communities that have seen really rapid increases in their poor populations, and they don't have the infrastructure to deal with it," says Elizabeth Kneebone, a senior research associate at the Metropolitan Policy Program at the Brookings Institution. "The safety net is already stretched really thin, and it's patchier in the suburbs. These providers are dealing with incredible increases in demand at the same time they are seeing their funding cut."
The growth of the suburban poor was underway before the Great Recession, a reflection of how increasing numbers of Americans from across the socioeconomic spectrum have been gravitating to suburban communities: first, in search of better schools and remove from urban life; more recently, because jobs have been shifting there, attracting the affluent and the working poor alike. By 2000, some 49 percent of the American poor already lived in suburban communities, according to work by Alan Berube and William Frey at the Brookings Institution.
But the recession substantially accelerated this trend in some suburban communities by assailing the incomes of previously middle class households, significantly elevating rates of joblessness, delinquency and foreclosure. In the Chicago and Detroit metropolitan areas, their suburbs last year claimed the distinction of holding more poor residents than the cities, according to Berube and Kneebone's analysis of census data. In both cities, the percentage of suburbanites living in poverty now exceeds 13 percent.
In the Las Vegas area, where a housing boom gave way to a bust, eliminating thousands of jobs in real estate and construction, nearly 15 percent of suburban residents were poor last year, up from about 10 percent in 2007 when the recession began. In southern California, 17 percent of suburban residents in Riverside, San Bernadino and Ontario were impoverished, a jump from about 12 percent in 2007.
Suburban-based social service agencies have been swamped. A survey of non-profit social service providers in suburban communities in the Washington, Chicago and Los Angeles metropolitan areas, conducted in 2009 and 2010 by researchers at Brookings, found that roughly nine in ten were seeing increased numbers of people seeking help compared to the previous year. Many had suffered cuts in financial support, prompting them to lay off staff and place needy people on wait-lists.
"In many communities, there just aren't the organizations needed to provide job training, counseling or emergency assistance," said Scott Allard, a political scientist at the University of Chicago's School of Social Service Administration and the lead author of the survey. "Poverty is a recent phenomenon."
One key piece of data from the survey underscores the corrosive effects of suburban poverty on the American identity: Nearly three-fourths of the suburban non-profits were seeing significant numbers of people turning up who had never previously sought help.
"Growing up here, things were good," says Blanco. "Now, you talk to people at the PTA, in the school cafeteria, and people are struggling. At the grocery store, people are going in only for what they need and not for what they want. You see people driving Lexuses and BMWs, and now they are in line at the food bank. Everyone is hurting. Everyone is looking for a job. We're middle class in the suburbs, and now we're hurting."
Just Beyond Denver
Jefferson County, where the Blanco family lives, is precisely the sort of place where the newness of poverty has found the community inadequately prepared, with too few programs, to address the problems. Traditionally middle class, Jeffco -- as it is widely known -- runs from older suburbs on the fringes of Denver, within sight of the city skyline and the flatlands stretching eastward, and out to more rural communities that rub up against the foothills of the Rocky Mountains to the west.
For decades, Jeffco has attracted people looking to settle outside the city limits. But beneath the surface of a community that is home to subdivisions with names like Hidden Lake and Country Meadows, Jeffco has been subject to the national trend. Between 2000 and 2010, the number of poor people living in the county grew from fewer than 27,000 to nearly 47,000, according to census data. Almost nine percent of the county is now officially poor. "It's just a sign of the times," says Lynnae Flora, the county's director of community assistance. "People used to be living paycheck to paycheck. Well, they're not anymore, because there isn't any paycheck."
Jeffco has known acute tragedy: This is where the Columbine massacre played out. Now a more gradual disaster is unfolding, gnawing at the fabric of life. In 2002, about 17 percent of students at the Jefferson County School District, the largest in the state, came from impoverished households and qualified for free and reduced lunches. Nine years later, that percentage has swelled to 30 percent.
Poor children tend to come from less stable homes, necessitating more frequent moves that interrupt the continuity of their education, consequently requiring extra attention to keep pace with wealthier peers. Yet these growing numbers of poor children are now getting less attention by dint of continuing budget troubles.
Over the last three years, the school district's general fund, which pays for teacher salaries, text books and basic operations, has fallen from about $650 million a year to $586 million, according to the superintendent’s office. The loss of funding has prompted the district to lay off nearly 300 teachers. The district aims for a student-to-teacher ratio of 20 to 1 for grades one through three, but the average now is about 25 to 1, with some classes holding as many as 28.
"The needs of the children are going up, and the funding is going down," says school superintendent Cynthia M. Stevenson. "When I step back and look at the big picture and know that it isn't going to get any easier, then I worry. We do everything we can for our kids, but there's simply no way to continue doing it."
Two years ago, the county's Department of Human Services was fielding fewer than 900 applications per month from households seeking food assistance. This year, more than 1,900 applications a month have been pouring in. Yet, during the last two years, the county agency has reduced staff handling applications for food stamps from about 120 to 105. Flora says the cuts have been achieved through attrition, enabled by efficiencies in how the county processes applications. But she still wishes she had more people, particularly as the time to process an application for emergency food aid lengthens.
She dispatches two outreach staff to non-profit social service agencies scattered through the county to help people fill out applications for food stamps. But they can only visit sites once or twice a week. As a result, many people needing help must make a trip to the county headquarters, a complex of offices perched at the top of a hill just above the town of Golden. With a commanding view over the parched terrain, the headquarters looks like a fortress. For many people seeking to reach it, it might as well be.
On a recent morning, Jamie Leavitt enters the lobby of the county's division of community services, takes a number, and waits for half an hour among some three dozen people. When her number comes up, she heads to one of four open windows.
Leavitt, 32, is a mother of three young children. She is here because she has been receiving food stamps in the wake of a divorce -- her ex-husband was the sole breadwinner -- and the division has sent her notice requiring that she recertify her eligibility. She has tried to call her caseworker numerous times, she reports, but has only gotten voicemail and an announcement that his mailbox is full. The clerk explains that the call center has been closed, though it is expected to reopen, because it has lost staff.
So Leavitt has come to the county offices. Without a driver's license, getting here from her home in Littleton took nearly two hours via two buses. JeffCo's government appears eager to tackle contemporary problems in all their complexity. The county's child support division, which previously took an enforcement tack against fathers who fail to pay, has earned plaudits -- and lower rates of non-payment -- for a multipronged approach that helps jobless men train for and find employment. County officials exude sensitivity to the challenges and enjoy productive relationships with a network of local non-profits.
But earnest efforts to tackle serious problems are running headlong into the limits of arithmetic in an era of shrinking budgets. At the county's workforce office, where jobless people sit quietly in front of computers, scrolling through listings, staff has been cut from 60 to 34 over the past two years. This, while the county's unemployment rate has ticked up from 8.1 percent to 8.6 percent. "We are at our absolute minimum of staff to meet the needs," says Flora, the director of community assistance. "We simply need more manpower."
"I Never Expected Anything Like This"
On a recent morning, two dozen people line up outside the Action Center, a non-profit social service agency in Lakewood, just before its 11 o'clock opening time: men and women, young and old, many watching after small children. Much of the extra need for aid falls on the shoulders of non-profit social service groups such as this one. The center operates a 22-bed homeless shelter, a food pantry and myriad assistance programs, from cash grants to pay for utilities and rent, to transportation money that enables people to get to work.
But much like the county, the Action Center is grappling with a spike in demand just as donations have tapered off. A federal grant that last year delivered $133,000 in utility assistance to about 100 families was cut in the spring. A similar program financed by the county has recently been cut in half. "The front door is busier than ever, but the resources coming in the back door, there's fewer of them," says the center's executive director, Mag Strittmatter.
In a twist of fortune, some of the same people who used to show up at the back door to donate food and clothing are now coming in the front door to ask for some of those goods for themselves. "We're hearing this over and over again," Strittmatter says. "They used to donate, and they don't know how to do this, and they never thought this would happen to them."
Tammy Pino certainly did not see this coming. The mother of four grown children, she worked for six years as a customer service manager for a trucking company, earning $11 an hour plus health and retirement benefits, enough to rent a modest duplex in North Denver. "I was doing fine," she says. "I had money to put away."
But when the monthly rent climbed from $650 to $800, she moved to a cheaper place in Jeffco. Early this year, the trucking company went out of business. For two months, she looked for a similar job but came up empty, so she took a cashier's position at King's Grocery, where she earns $9.14 an hour. The grocery recently cut her hours from 37 a week to 24, leaving her unable to pay her rent. So she moved in with her sister, who is battling uterine cancer. Her two nephews, 11 and 17, occupy a bedroom, while Pino, 46, sleeps on a couch.
Now, she is here, at the Action Center, wearing a pink T-shirt and matching pink flip-flops, sitting opposite a crisis counselor, Anita Daley, and asking for help. "I've never been like this anytime in my life," she says, breaking down despite stern attempts to maintain composure. "I never expected anything like this to happen." Her mother was a teacher, she says. He father was a janitor. They always worked. Pino could count on an allowance. At 16, her parents gave her a car. She had her own television, her own stereo system. "Now, it's like I'm 16 again," she says. "It's hard to ask anybody for help."
She is eager for another job, a full-time position that would enable her to finance her own place, but her search feels increasingly futile. "My niece graduated from college and even she can't find a job," Pino says. "She's working at McDonald's."
The counselor tells her about an upcoming job fair. She goes to a supply closet and fills a grocery bag with donated items -- travel-size shampoo bottles from motels, a roll of toilet paper, toothpaste. What else does Pino need? "I need to go to the dentist," she says, complaining of persistent pain. "I've been trying to hold on."
She gets no insurance at work, she says, adding that this did not stop her employer from recently demanding a doctor's note to excuse two days of absence when she had the flu. "I said, 'Unless you're going to pay for me to go see a doctor, I'm not going to pay just to find out that I have the flu,'" she recalls, quivering with anger.
The counselor tells her about a free walk-in medical clinic and hands her the paperwork for food stamps. She fills out a slip of paper entitling Pino to take home a box of donated food. She offers some pots and pans, which Pino accepts with a frown. Her own kitchen goods are in a rented storage locker, along with most of the objects she has accumulated in her lifetime -- clothing, furniture, photos of her children. "It's just depressing for me to go out there and open up those boxes," she says, referring to her belongings.
She goes back out to the lobby and waits for her name to be called for the food. When the box comes, it holds packs of instant ramen noodles and cans of soup, green beans and peaches. Most of these items have been donated by local households and businesses. A plastic tray of dinner rolls bears a sticker telling Pino who supplied it: King's Grocery.
Her employer does not pay her enough to feed herself the way she has for decades -- by working -- so her sustenance must now be seasoned with charity. And the charity comes from the same place where she rings up groceries destined for other people's kitchens -- an activity that fails to equip her adequately to stock her own. "There's people who need help more than I do," Pino says, her lips trembling. "I thank God that I have family, and I don't have to go to a shelter. But I'm just trying to get back on my feet and it's so hard."
Homelessness Touches Schools
At the headquarters of the Jefferson County School District in Golden, the marble lobby and two-story atrium attest to the level of comfort that has traditionally framed life here. Upstairs, three increasingly busy staff members in cubicles underscore how times have changed. The three staff members serve as the school system's homeless liaisons. They verify reports that a student is homeless, which can be defined as living in a motel, at a shelter or bunking with friends or relatives on a temporary basis. They offer what aid they can muster.
A decade ago, the district verified that 59 students were homeless. In the last academic year, the number came in at 2,800. This year, only two months into a new academic term, the district has already found nearly 2,000 homeless students. "We have homelessness everywhere," says homeless liaison Sheree Conyers. "We literally get e-mails and phone calls all day long. Younger people are moving back in with their parents, doubling up. Parents are taking in their kids and their kids' kids because there is nowhere else for them to go."
At Parr Elementary School, a tidy facility in a traditionally middle class neighborhood in the north of the county, where leafy streets are lined with brick homes on well-tended lawns, 28 percent of the student body was homeless at some point during the year. On a recent afternoon, homeless liaison Jessica Hansen is preparing to visit a family that has just been evicted from their rented home and has moved into a motel just off Interstate 70. They have two children: a girl in the seventh grade, and a boy in the eighth.
Hansen is bringing toiletries, books and microwaveable food. She prepares bus passes for the two children, because the motel that has become their temporary shelter is far beyond walking distance from their school. Getting there now entails a nearly hour-long ride on two buses.
She has in hand a list of available shelters, reflecting the reality that this will likely be the next stop for this family. They are moving into a motel that runs $34 per night, telling themselves they will save up and move back into their rental eventually. But the father works at McDonald's. The mother draws a small disability check. They will probably exhaust their resources in a matter of weeks, Hansen says, and then be forced to start dialing the shelters on the list in pursuit of available space.
Among the 52 listings for shelter beds and transitional housing, only eight are in Jeffco, and only one is open to all types of people, with the others restricted to victims of domestic violence, youths or families. The vast majority are within the Denver city limit, a move that would make the children's bus commute even longer.
The Family Tree, a non-profit social service group, operates a shelter in JeffCo for homeless and runaway youths, but not for families. Still, the options are so limited and the needs so great that, in some families, kids are leaving their parents behind. "We're getting kids coming into the shelter where the entire family is homeless," says Scott Shields, the group's chief executive officer. "They are so desperate that they are willing to split the family up."
For years, Shields and colleagues at other social service agencies have talked about opening a new youth shelter in Jeffco but have not pursued plans in the face of opposition from the local zoning board. The school district derives most of its funding for homeless programs via federal grants delivered to the state. But this year, even as the need has exploded, the budget was cut from $40,000 to $36,000.
Conyers, the coordinator, has managed to expand services by aggressively seeking donations. She recently secured a $10,000 check from a local church, using the money to stock a bank account for special emergencies. She tapped that money for a new mattress for a child who was staying with another family and sleeping on the floor. She used those funds to pay for a storage unit for a family in transitional housing, so they would not lose their belongings.
She procures clearance items from local retailers -- blankets, backpacks, toiletry items and food -- storing her cache in a temporary classroom at an elementary school, alongside music stands arrayed for orchestra practice. All of this feels tenuous, she laments. "We're really only as strong as our collaborators," Conyers says. "We'll continue to hang on by a thread."
Everyone Is Hurting
For decades, Selena Blanco and her family were doing far better than hanging on. They were representative of the burgeoning opportunities and rising living standards that characterized this swiftly growing metropolitan area. Growing up, her mother worked as an administrator for a Denver construction company. Her father worked in the technology department at AT&T. He drove a prized Corvette.
When Blanco was five, her parents moved the family out of Denver to Edgewater, an established suburb just over the city line, in search of better schools. The unassuming A-frame house had an ample yard. Blanco walked to school, went to neighborhood Halloween parties, and studied at a local library. Her family took vacations to Disneyland. When Blanco got married and started her own family, she felt confident that the future would follow this familiar trajectory. But two years ago she was laid off from her job as an administrator at a health care provider.
She and her husband could no longer afford the rent on their two-bedroom townhouse, so her father offered them, rent-free, the house in which she had grown up. He and Blanco's mother had split years earlier, he was living elsewhere, and the house was vacant.
In January, her husband lost his job in customer service at Dish Network when the satellite television provider shuttered a local call center and shifted operations to Mexico. She drove to the county seat in Golden to apply for public assistance. She felt a deep sense of shame, combined with a deeper feeling of resignation: She had a family to feed. Her case officer explained that she did not qualify for help. Her husband's income was imputed to her, and that income bumped them over the limit for cash assistance and food stamps. The bureaucracy seemed to be working against families.
"If you're a single parent, you can get so much help," she says. "But if you're a family, they don't help you. If I divorced my husband, I would qualify for everything immediately." Her husband has searched aggressively for work, looking for jobs that seem incommensurate with his experience, which includes a college degree. "He has applied to Walmart and Target, the simplest places to get a job," she says. "And they don't even call him back."
Without money for childcare, she can no longer work, she says, further limiting their income. She did qualify for Headstart, and she values the experiences her youngest child is having there, but that is only three hours a day, four days a week -- not a window that any employer can use. From the curb, her home looks like many on her block. A trampoline sits out back. An American flag flaps in the breeze above their front stoop.
But when Blanco contemplates her life, her family's future feels deeply unsettled. They are behind on their cable bills and on their Internet service. They have grown used to picking up the phone to hear menacing words from bill collectors.
Blanco and her husband describe themselves as Christians. "We stay positive," she says. "We have faith." Yet the breakdown in their lives is testing that faith. "I put on such a good face," she says. "People have no idea how we're hurting. In all actual reality, there's times when I'm like, 'How are we going to get through this?'"