"Arkansas farmer now picking fruit in Berrien County, Michigan" Wearing Tuf-Nut overalls
Ilargi: I get acutely nauseous when I see things like new Italian PM Mario Monti, king of cuts and lackey of bankers, calling the draconian austerity measures about to be unleashed on his own people "reforms".
That's the vocabulary that comes straight from the IMF and World Bank playbook on Chile, Argentina, Russia. It's the sort of "reform" that opens up economies to be raped and pillaged, as their 99% see their national assets privatized, their wages cut and their jobs lost due to legislative changes that relax "too stringent" job protection laws.
Spain is next in line: selling their 10-year bond at 6.975% today signals an imminent change in government in Madrid as well. And not through democratic means either: technocrats to the rescue, to infinity and beyond.
EC chief Herman Van Rompuy said it all in a few words this week in Florence: "We need reforms, not elections" (No, I kid you not). Democratic elections have been judged too risky and bothersome; economists must take over, as long as they adhere to the right school of economics.
What Spain also indicates is that Europe has turned the corner, or rather: has been stretched around it. You may see it as the little boy running out of fingers to put in the dike, or as a chess game in which you are outmaneuvered so badly the only thing left to do is surrender your king.
On Tuesday, every country but Germany saw their bond rates rise vs the Bund. A warning shot across the bow in case anyone still needed one. Last week Italy, this week Spain, and soon France. And Europe has no defense left. Or attack, for that matter.
The ECB, perhaps alongside the IMF, may still bring out alleged big guns at the eleventh hour, but we should hope not; it makes no difference, other than it will make the crisis on the ground that much worse. And that crisis will be plenty hard to begin with.
Sovereign debt has ruled the airwaves over the past little while. It may soon have to make way and move over for more bank bailouts. In the upcoming days and weeks, we will see an increasing number of stories about banks having funding trouble.
Even though they can largely make up their own rules, and even though they have an amazingly powerful arsenal of accounting tricks, they're still falling ever deeper into their self-dug holes.
The banks need another bubble to inflate, or they will be exposed as the giant bubble they themselves are. Well, they already have been, of course, it’s just that your trillions -which you never knew you had- have been used to prop them up like so many Norwegian Blues.
On that same ground level where the crisis is deteriorating, Occupy Wall Street -and many of its sisters- are trying to regroup and recommit. It won't be easy.
The reason why, while obvious again today through arrests on Wall Street and tear gas in Athens, is also presented very well in the piece below, which I decided to run in its entirety in today's intro, because it captures in a few words a lot of things that I personally care about.
I don't know Simon Black, he may be just another wealthy international investor. Still, he does capture the zeitgeist for me, without perhaps even trying to do so. The picture he paints makes me think of the song "Baby, it’s cold outside". I'll leave you to contemplate it.
Returning To America After A Long Time Abroad, The Changes Hit You In The Head Like A Baseball Bat
by Simon Black - Sovereign ManLongtime readers know that I don’t spend much time in the United States; I usually swing by for a month or so each year to visit friends and family, and the period in-between visits can often stretch 6-months or more. This is sufficiently long enough that I notice a lot of changes… some so drastic that they hit me in the head like a baseball bat.
For example, just last week when I was at Los Angeles International Airport, the police set up a checkpoint outside the main entrance as if we were in downtown Baghdad driving into the Green Zone.
And I couldn’t believe my eyes when, driving down Santa Monica Boulevard last Wednesday, I saw a police urban assault vehicle modeled after a US Army mechanized infantry fighting vehicle. It’s designed for one thing: maximum destruction.
It’s truly appalling how police forces across the country have become militarized. The concept of ‘peace officer’ no longer exists. Police are now paramilitary forces who only protect and serve the political class. Because I’ve been out of the country for so long, I notice these changes more acutely; it’s like diving in head first into ice-cold water as opposed to wading in slowly. And this rise of the police state is accelerating.
Here’s the thing– when you look around the world, you can see a lot of chaos and turmoil. Hardly a day goes by when there’s not multiple riots and protests in the western world being met with overwhelming force from the government. The government is sending a clear message: "We are in charge."
It’s no wonder that, according to a recent Gallup poll, a record-high 81% of Americans are dissatisfied with the way the country is being run. On a proportional basis, this is 25% higher than during the Watergate scandal.
What’s even more stark is that, according to the same poll, roughly HALF of Americans believe the federal government has become so large and powerful that it POSES AN IMMEDIATE THREAT to the rights and freedoms of ordinary citizens. This certainly explains why the government is increasing its offensive capabilities.
Now, clearly there are a lot of disgruntled Americans. There’s a lot of anger… even class tensions. The OWS movement is emblematic of this sentiment for sure, but in terms of taking action, most people still believe in the political process.
All of their angst and negativity will be taken out in the voting booth. Until then, it’s the calm before the storm. But the unfortunate reality is that no matter which way the 2012 election turns out, chaos will ensue.
If President Obama wins a second term, many conservative Americans will have reached their breaking points. If a republican candidate should win, a huge portion of Americans will feel they have lost their champion.
No matter what, though, people will quickly realize that absolutely nothing has changed. They’ll recognize that the insolvency of the United States government is a simple arithmetic problem; that social security is bankrupt; that the Treasury Department is a giant Ponzi scheme; and that there is. no. recovery.
For now, Americans are still investing in the political process. Come next year, though, all the hope that’s building up will turn quickly into disappointment… and then anger. Then they’ll take that anger to the streets.
This is what happens when governments go bust. It’s happened numerous times throughout history, and it’s playing out right now from Greece to Argentina. Social unrest becomes commonplace.
Governments engage in financial repression, giving rise to asset seizures, inflation, and capital controls. Militarized police states categorize ordinary citizens into combatants and non-combatants. Collateral damage becomes an acceptable risk. Society turns on itself, and crime rates soar.
Watching the farce of America’s political theater play out, it’s clear that this ticking time bomb will go off after Election Day 2012. As polarized as voters are, and as dismal the federal balance sheet is, there’s little chance of society keeping it together afterwards.
What’s happening right now is merely an overture… and you can mark a date on your calendar for when the real fun begins.
Ashvin Pandurangi: The TAE Community has recently completed its third poll in the "Diamonds" project, and boy did that one go down to the wire! First place received 49% of the total votes, while second place came within a hair's length at 46% of votes. Given the minor percentage difference between these two, we have decided that they will both be considered winners and, therefore, articles exploring both ideas in further detail will be published in the near future! First, we will look at the Diamond of developing Green Buildings,and then turn our attention to the Diamond of Food Urbanism.
Until then, I'm sure many readers are just as eager as I am to jump right into Round 4 of the Diamonds project, which features four more fascinating ideas to be polled. The following are brief descriptions of these ideas in the words of their originators and other sources. Please remember to continue placing your votes in the poll located on the upper right hand column of this page, and making the TAE Community's democratic voice be heard, loud and clear!
1. Declaring Citizens' Right to Food - Belo, a city of 2.5 million people, once had 11 percent of its population living in absolute poverty, and almost 20 percent of its children going hungry. Then in 1993, a newly elected administration declared food a right of citizenship. In just a decade, Belo Horizonte cut its infant death rate—widely used as evidence of hunger—by more than half, and today these initiatives benefit almost 40 percent of the city’s 2.5 million population. One six-month period in 1999 saw infant malnutrition in a sample group reduced by 50 percent. And between 1993 and 2002 Belo Horizonte was the only locality in which consumption of fruits and vegetables went up.
2. Our Lady Fortuna - A perfect antidote to corrupt partisan systems is a method of choosing representatives which relies on fate and Our Lady Fortuna. This would mean that at some "elections", and in some years, the final choosing would be done by casting lots. The final 3 applicants would each have an equal chance to be the "winner", and this method of choosing would be open, public and completely honest. The final choice by lot should not be the first winnowing of the field of candidates, and there must be some demonstration of support for those who can enter the race, i.e. some kind of party nomination process, petition signatures or open primary election, and possibly a second popular election.
3. The Safe Haven States Project (via Alt-Market) - When considering the idea of “safe haven”, especially when thinking about moving to a “safe haven”, ask yourself as I did, What makes me and my family “safe”? What makes any place a “haven” for us? I would include at least the following items on my “wish list”: Shelter and clothing, food and water, caring and helpful people, employment, and opportunities to express my knowledge and skills in productive, creative enterprise and activities. There are many, many more! Which of those are important to you as qualities of a “safe haven”?
4. The Strong Towns Approach - The Strong Towns approach ultimately requires a reorientation of emphasis and a renewed understanding of what it takes to build a town or a neighborhood. The current approach to growth emphasizes investments in new infrastructure to serve or induce new development. This approach uses public dollars inefficiently, destructively subsidizes one type of development over another and leaves massive maintenance liabilities to future generations. A Strong Town approach emphasizes obtaining a higher return on existing infrastructure investments, by conducting a street by street cost-benefit analysis.
Banks Face Funding Stress
by David Enrich - Wall Street Journal
European Institutions Resort to Potentially Risky Swaps to Generate Liquidity
European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank. The banks' moves, which include behind-the-scenes swapping of assets among financial institutions, could heighten risk across Europe's already fragile financial system, say some senior industry officials and regulators.
They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent's intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources.
Some banks are exhausting their supplies of assets—such as European government bonds and certain types of asset-backed securities—that the ECB accepts as collateral and that the banks haven't already committed to other uses, according to bankers and analysts. Others are scrambling to stockpile such assets to comfort analysts and investors worried about the banks' abilities to weather a long-term freeze in bank-funding markets.
Meanwhile, signs of stress continued to bubble up in the European financial system. ECB purchases of Italian and other euro-zone government bonds on Wednesday largely failed to halt the selloff of struggling euro nations' debt.
And some European bank customers are balking at doing business with the banks. Norfolk Southern Corp. has decided not to use any European banks to refinance a credit line out of concern about the banks' future health, according to people familiar with the matter. The railroad company declined to comment.
To ensure that their access to ECB loans continues, the banks are entering into a variety of complex transactions with other financial institutions to come up with billions of euros worth of assets that they can pledge as collateral to secure ECB loans, according to bankers and industry officials.
Some regulators and bankers are worried. By transferring potentially risky assets among a wide range of institutions, the so-called liquidity swaps have the potential to "create a transmission mechanism by which systemic risk across the financial system may be exacerbated," the U.K.'s Financial Services Authority warned in a July consultation paper.
Last month, the Bank of England hosted a meeting for a small group of risk officers from major international banks. When the conversation touched on liquidity swaps, a number of executives, including a senior UBS AG executive, voiced similar concerns as the Financial Services Authority, according to people familiar with the matter.
The scramble for ECB-eligible collateral highlights the tenuous state of Europe's banking industry. Traditional sources of bank funding, including institutional investors and fellow banks, have largely fled amid concerns that many lenders are sitting on huge piles of risky government bonds and loans to shaky borrowers. That has left a funding vacuum that a growing group of banks are filling with loans from the ECB.
In the increasingly popular liquidity swap, banks transfer illiquid assets such as non-investment-grade loans to corporations or to finance public-infrastructure projects—and which aren't eligible to serve as collateral for ECB loans—to investment banks or insurance companies.
In return, the investment banks or insurers provide government bonds or other liquid assets that the original bank can use as collateral to secure loans from the ECB. The investment banks apply a discount to the assets they are receiving—shielding them from some potential losses—and receive commissions on the trades.
A number of French, Italian and other European banks, including bailed-out Franco-Belgian lender Dexia SA, recently have entered into such transactions, according to people familiar with the matter. "It's a way to improve your liquidity and to get liquid some assets that are not liquid," said a senior Dexia executive, who says he has crafted billions of euros of such trades in recent months.
The Frankfurt-based central bank accepts a wide variety of assets as loan collateral, including European sovereign bonds, securities composed of mortgages and other assets, and "covered bonds" backed by loans and other assets on banks' balance sheets. Partly to protect banks in Europe's periphery, ECB officials suspended rules that had confined the central bank to only accepting investment-grade government bonds. As a result, the ECB now holds junk-rated Greek, Irish and Portuguese bonds.
At the end of October, euro-zone banks had borrowed a total of nearly €600 billion ($811 billion) from the ECB, up from €495 billion at the start of the year, according to data from individual central banks. Among the biggest borrowers are banks in France and Italy, with each country's sector having borrowed a total of more than €100 billion at the end of September, up sharply from prior months.
The ECB's loans to banks have put its own balance sheet at risk, many analysts say. ECB officials insist their balance sheet is safe. The central bank has taken steps to protect itself, including doubling its capital base.
At giant French bank Crédit Agricole SA, executives said last week that they are taking measures to "rapidly increase" their holdings of assets that can be pledged as collateral. Among those actions are bundling together large numbers of mortgages and other loans into asset-backed securities that the ECB will accept, according to a person familiar with the matter.
Some executives are pleading with the ECB to accept a wider array of assets. "In the name of the smallest Italian banks, I will ask [the ECB] to look into the possibility to broaden access to ECB liquidity by expanding the type of collateral offered," UniCredit SpA Chief Executive Federico Ghizzoni told an Italian newspaper Wednesday.
For months, European banks have been pursuing innovative strategies to address their real or perceived collateral shortages. Several Greek banks, for example, recently issued government-backed bonds that analysts say are likely to serve as collateral for ECB borrowings.
The use of the swaps transactions is becoming increasingly prevalent, bankers say. "They are becoming more frequent because in this environment, you want to have additional insurance policies," said a top executive at a major European bank.
What’s really ailing Wall Street
by David Weidner - MarketWatch
An industry without easy money
The 1% is worried.
It’s not the drumming in Zuccotti Park or the chants of "shame" keeping them up at night at their Manhattan homes. It’s a business model built to churn out easy money in a bubble that’s sounding an alarm. Wall Street is struggling with market forces that keep dragging its bubble machine back to the ground.
Oh, the banks have tried. On the retail front, Bank of America Corp. said it would slap a $5 monthly fee on its debit card users. On the institutional front, MF Global Holdings Ltd. ramped up leverage to buy risky European sovereign debt. But B. of A. was beaten back by a consumer revolt and an industry rebellion. And MF Global chief executive Jon Corzine found out the hard way that leverage is still every bit as risky as it was in 2008.
Without easy money, Wall Street’s apparatus for mining easy cash have gone quiet. Goldman Sachs Group Inc. lost money trading 21 days during the most recent quarter, the most since 2008. The firm even owned up to $100 million in losses on a single day.
Much of this is due to the evaporation of the huge spreads in fixed income that traders generally take advantage of. Treasurys and corporate and municipal bond spreads have narrowed to a sliver. This has hurt the so-called shadow bankers as well. Witness the 5.5% decline for the Hedge Fund Research Index in the third quarter. Not even gold has been gold since September, it’s off 5%.
The industry-wide wipe out is a far cry from the boom-to-bust two decades we’ve just completed. We went from real estate boom to bust in the 1990s, technology boom to bust at the turn of the millennium, back to a real estate boom to bust in the last eight years.
Without an asset to inflate, Wall Street is bracing for a prolonged grind. The industry has shed more than 30,000 jobs. Bonuses are expected to decline 20% to 30% for those who still hold their jobs. Investors have seen bank stocks fall 27% since February as measured by the KBW Philadelphia Bank Index and brokerages tumble more than 30%, according to the Amex Securities Broker/Dealer Index.
Then, of course, there are the European banking ties to Wall Street. Banks including J.P. Morgan Chase & Co. and Morgan Stanley have bent over backwards to show their holdings are relatively small.
But as many investors have figured out, direct holdings are one thing, indirect exposure through credit-default swaps and counterparty agreements are an equal, if not greater, threat. The market impact even if a bank or brokerage doesn’t have any ties remains dangerous.
Europe, in many ways, is the next — and perhaps not the last — bubble to pop. China’s exposure to its own growth and the hole it is digging itself into by buying U.S. debt and keeping its currency pegged to the dollar represents another.
If Wall Street could only find another bubble to inflate, those risks would mitigate. But the pump is broken. Ultimately, Wall Street could survive if bankers and investors could accept moderate growth. If the Obama administration and Ben Bernanke at the Federal Reserve took an aggressive and clear stance on the housing market and interest rates, banks could map their future.
For now, it’s still bubble economics. And the only thing for certain is that the air is coming out, not going in.
Financial Alchemy Foils Capital Rules as Banks Redefine Risk
by Liam Vaughan - Bloomberg
Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday.
Banco Santander SA, Spain’s largest lender, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as "risk-weighted asset optimization," allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.
Regulators in Europe, seeking to stem the region’s sovereign-debt crisis, ordered banks last month to increase core capital to 9 percent of risk-weighted assets by the end of June. Lenders, facing a 106 billion-euro shortfall, are reluctant to plug the gap by cutting dividends or bonuses and are struggling to sell assets or raise cash in rights offerings. Politicians are trying to stop banks from the alternative, cutting back lending, because it could trigger a recession.
"By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game-keeper," said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development’s financial and enterprise affairs division in Paris. "That risks making core capital ratios useless."
Spanish banks aren’t alone in using the practice. Unione di Banche Italiane SCPA, Italy’s fourth-biggest bank, said it will change its risk-weighting model instead of turning to investors for the 1.5 billion euros regulators say it needs. Commerzbank AG, Germany’s second-biggest lender, said it will do the same. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, and HSBC Holdings Plc, Europe’s largest bank, both said they cut risk-weighted assets by changing the model.
"It’s probably not the highest-quality way to move to the 9 percent ratio," said Neil Smith, a bank analyst at West LB in Dusseldorf, Germany. "Maybe a more convincing way would be to use the same models and reduce the risk of your assets."
European firms, governed by Basel II rules, use their own models to decide how much capital to hold based on an assessment of how likely assets are to default and the riskiness of counterparties. The riskier the asset, the heavier weighting it is assigned and the more capital a bank is required to allocate. The weighting affects the profitability of trading and investing in those assets for the bank.
While firms submit their models to national regulators once a year, they don’t have to disclose them publicly, and risk- weightings for the same assets vary among banks, regulators and analysts say. "There are potentially significant differences in how different banks calculate RWA," Daragh Quinn, an analyst at Nomura Holdings Inc. in London, said in a telephone interview. "It’s a very gray area."
The Basel Committee on Banking Supervision, which has set its own capital standards for banks worldwide independent of those laid out by the European Banking Authority, said in September it planned to review how lenders apply weightings to make sure "the outcomes of the new rules are consistent in practice across banks and jurisdictions."
That may mean publicly identifying lenders that game the rules, said a person with knowledge of the committee’s talks who declined to be identified because the discussions are private. A spokesman for the Basel committee declined to comment.
Most U.S. banks are governed by Basel I rules, which assign standardized weightings to broad classes of assets, since the U.S. never adopted the second round of regulations.
The proportion of risk-weighted assets to total assets at European banks is half that of American banks, according to an April 6 Barclays Capital report written by analysts Simon Samuels and Mike Harrison. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon in September described the Basel III rules, which give banks until 2019 to increase their core capital ratio to 9.5 percent of risk-weighted assets, as "anti-American."
Vikram Pandit, chief executive officer of Citigroup Inc. has called for banks to publish details of their risk-weightings on a quarterly basis. At a speech to the Bretton Woods Committee in Washington in September, he said weightings should also be "benchmarked" to ensure consistency across the industry.
Under Basel III, which maintains the same risk-weighting methodology as Basel II, all lenders will be required to use their own models to assess the riskiness of assets and therefore how much capital they need to hold.
"As you move to Basel III, these issues will become more ubiquitous, not less," the OECD’s Blundell-Wignall said. "The core Tier 1 ratio is a ratio of two meaningless numbers, which itself is a meaningless number because banks can alter the ratio themselves. Basel III does absolutely nothing to address that."
Sheila Bair, who stepped down as chairman of the Federal Deposit Insurance Corp. in June, has called Europe’s adoption of risk-weighting "naive." The Washington-based regulator guarantees most consumers’ deposits in U.S. banks.
"It is in a bank manager’s interest to say his assets have low risk, because it enables the bank to maximize leverage and return on equity, which in turn can lead to bigger pay and bonuses," Bair wrote in Fortune magazine on Nov. 2. "Indeed, even during the Great Recession, as delinquencies and defaults increased, most European banks were saying their assets were becoming safer."
Some regulators, including Bair, have pushed for a leverage ratio that would require lenders to hold a fixed amount of capital against total assets. One reason there’s a difference between risk-weighted assets and total assets is that some securities, such as certain sovereign bonds, carry a zero risk-weighting, requiring banks to hold no capital.
'Gaming the System'
"A basic leverage ratio would be rougher, but it takes away the risk of gaming the system," said Stephany Griffith- Jones, an economist and lecturer in financial markets at Columbia University in New York. "We need to move away from outsourcing regulation of the banks to the banks."
European bank stocks have tumbled 31 percent this year, valuing firms at 62 percent of tangible book value. By contrast, U.S. lenders, measured by the 24-company KBW Bank Index, have fallen 22 percent, valuing banks at 73 percent of book value.
Banco Santander, based in Madrid, and BBVA in Bilbao said they’re justified in adjusting risk-weightings because Spanish regulators have held them to higher standards than elsewhere.
Spanish banks have an average ratio of risk-weighted assets to total assets of 52 percent compared with 32 percent for U.K. banks, 31 percent for French and Benelux banks and 35 percent for German banks, analysts at Keefe, Bruyette & Woods Inc., wrote in an Oct. 26 report. A higher figure suggests a riskier balance sheet or a more conservative approach to risk-weighting.
"There’s a bias that penalizes the Spanish banks -- it’s a situation of relative discrimination," Luis de Guindos, a former deputy finance minister, said at a Nov. 4 conference. "If it’s fair and suitable, investors won’t see it badly." Santander said it planned to increase capital by 4 billion euros by optimizing risk-weighted assets and internal models. BBVA said the total effect of revising its model was expected to be 2.1 billion euros of additional capital.
"Santander’s core capital exceeds that of any of its continental banking competitors," a spokesman for the bank, who asked not to be identified by name in line with company policy, said in a phone interview.
Paul Tobin, a Madrid-based spokesman at BBVA, said the bank is "catching up with practices that are common elsewhere in Europe." After making the changes, he said, "BBVA will still be one of the banks with the highest, if not the one with the highest, density of RWAs among large European banks."
Commerzbank Chief Financial Officer Eric Strutz said that adjusting the risk model was only one of four options being considered by the bank. The lender needs "to look at models where our RWAs are higher than others because of market conditions," Strutz said on a conference call with reporters Nov. 3. "Commerzbank is more at the upper end compared with other banks."
UBI, based in Bergamo, Italy, said on Oct. 27 it’s confident of meeting the 9 percent target by converting debt, shedding assets and "the progressive changeover" to an "advanced" risk model. Spokesmen for UBI and Commerzbank declined to comment, as did a representative of the EBA.
Investors are unlikely be satisfied by banks adjusting risk models to avoid raising capital, said Harrison, the Barclays analyst, who is based in London. "Gaming RWAs isn’t helpful, particularly if the objective is to convince the market to invest in banks again," Harrison said. "The risk is that it’s counterproductive, because there is even less faith in what the banks are telling you."
Citi Chief Economist Willem Buiter: A Spanish Or Italian Default Could Happen In A Few Short Days
by Tyler Durden
Citi's Willem Buiter whose succinct analysis a few weeks ago sealed the coffin of the worthless EFSF, has just come out with another knock out punch this morning after telling Bloomberg TV what everyone else knows is true, but is terrified to say out loud: namely that, "time is running out fast."
He adds: " I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now."
In sum - a rehash of the Deutsche Bank pitchbook to the ECB we posted earlier, only in Mutually Assured Terms that would make even Hank Paulson blush. At this point Germany has an option: tell Europe to take a hike, or go balls to wall in bailing out 250 million European's early retirement packages. The ball is in Merkel's court, who unlike Citi, JPM, DB, and everyone else, has to worry about this fickle, and potentially pitchfork bearing, thing called "voters."
Buiter on Europe's crisis:
"Time is running out fast. I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now."
"The only two guns in town, one is only theoretical, and that is increasing the size of the EFSF to 3 trillion. It should happen but it can't for political reasons. The other one, the only remaining share is the ECB. They may have to hold their noses while they do it, and if they don't do it, it's the end of the euro zone."
On why the ECB hasn't acted yet:
"Because after the error of the Bundesbank, they consider central banks purchasing sovereign debt outright to be like swearing in church. It's just not done. This has been in fact to a certain extent embedded in the treaty which forbids the ECB from lending directly to governments or buying stuff in the primary market. But there is no restriction at all on them buying any amount of sovereign debt at any time in the secondary market, so they can do it."
"This crisis is the result of the failure to provide the minimal institutional underpinning for a monetary union in the euro area and also a result of the ECB unfortunately being the heir of the Bundesbank and therefore not understanding and rejecting the role of central bank as lenders' last resort to sovereigns. They certainly are a central bank. They just are a central bank that prefers to fight with both hands behind their back. If they just let go of one hand, that would be enough."
On Italy’s situation:
"This is already challenging. If this was the rate at which they are going to fund themselves, even over the medium term, that becomes an explosive debt deficit spiral…This is clearly unsustainable. You can live here for awhile, they're not going to keel over tomorrow, but this is not sustainable…The only way they can get back there is for the ECB to provide the liquidity while Italy does the hard work for years, in fact for the rest of the decade quite possibly, of restructuring their economy and tightening the budget in a major way."
On whether he's concerned about France:
I think France definitely has its work cut out for itself. It has a government budgeting problem which is structural to a large extent. And then they have a large banking sector. Do not forget that the U.S. banking sector balance sheet is less than 100% of GDP. In Europe and France, it is 300%. Their banks are under fire and so their sovereigns are under fire. I do not think the sovereign will keel over, but they have their work cut out for them.
On what he'd like to see in Europe to get the fiscal house in order:
Clearly some minimal federal fiscal structure would be desirable, but it is completely unrealistic. They best they can hope for is that the ECB will indeed ring fence the euro area sovereigns in exchange for basically glorified IMF programs. So that they will temporarily transfer a significant amount of fiscal sovereignty to some super-national body, but then when they get restored to health, they regain this. That is not a long-term solution. Ultimately there will have to be some form of fiscal union that creates a federal solution, but that's for the next crisis, not this one.
On whether Europe is an AIG waiting to happen:
No for several reasons. First of all, AIG happened and everybody learned from it. Whereas the sovereign CDS, the regulators by and large know who wrote it, who issued it and who holds it. Unlike quite a bit of the CDS written by AIG. This stuff is all collateralized. So nothing is ever completely safe, even sovereign debt, but I think it's a lot safer to trigger them and use their insurance value than to kill the market."
On the quality of the German economy right now:
"It is a mixed bag. It has a very productive manufacturing exporting sector. Much of the rest of it is not very efficient at all, including the services sectors. Germany had the world's largest corporate takeover in 1999 when West Germany took on East Germany. That has not been fully digested yet. It is a country that is very much a dual economy. It is very strong at the moment strong at the moment as an export-oriented economy, which of course is vulnerable to cyclical slowdowns...it is structural and cyclical. The German demographics are terrible, even by European standards."
On whether the U.S. should use its currency to help with exports:
"No, I think to pursue competitiveness policies by manipulating or steering down the nominal values of the exchange rate is a loser's game. In the limit, it gets you to Zimbabwe, which didn't exactly become a hub of competiveness. It's a gross misalignment for historical reasons…I think we shouldn't get too upset about the Chinese manipulating their currency. There's also no reason to attach great importance to the ability of the U.S. in manipulating its currency. Both are second order instruments."
Fitch's Warning Spooks Investors
by Dan Fitzpatrick and Jonathan Cheng - Wall Street Journal
In the latest sign of jittery markets racked by hair-trigger selling, investors on Wednesday took fright at a credit-firm report that contained little new information but warned of escalating risks facing U.S. banks in the European debt crisis.
Fitch Ratings, in a paper issued Wednesday afternoon, said U.S. lenders "could be greatly affected if contagion continues to spread beyond the stressed European markets" of Greece, Ireland, Italy, Portugal and Spain. The No. 3 U.S. rating company didn't change its ratings on any banks or the industry but said "the risks of a negative shock are rising."
Investors have been fixated for months on the euro crisis and its potential impact on banks. Many banks have stepped up their disclosures in a bid to quiet fears that they would be hit hard in a European government default or the failure of a large continental lender.
Even so, the comments sent stocks into a late-afternoon dive. The Dow Jones Industrial Average shed 191 points, mostly in the last 50 minutes of trading. Among financial firms, Morgan Stanley tumbled 8%, Goldman Sachs Group Inc. slid 4.2% and Citigroup Inc. slipped 4.1%.
Gerard Cassidy, a banking analyst at RBC Capital Markets, said the intense reaction to the Fitch report shows how vulnerable big, interconnected banks are perceived to be three years after the shocks of the 2008 financial crisis. "In this world we are living in, you are guilty until proven innocent," he said. "If you aren't disclosing it, you are hiding information. That is what investors think. It's a big predicament for the big banks."
The comments came on a day of anxious trading in the bond markets of stronger European nations such as France. The yield on 10-year French government bonds hit a euro-era record Wednesday of 1.95 percentage points above comparable German bunds before recovering to 1.84 percentage points, according to Tradeweb data.
Fitch said the five biggest U.S. banks had $188 billion of gross exposure to France at midyear, including $114 billion of exposure to French banks. That figure represents a quarter of the five top U.S. financial firms' Tier 1 capital, a measure of a bank's ability to absorb losses. The gross exposure shows "the susceptibility of banks to contagion risk and the interconnectivity of large global banks," Fitch said.
Morgan Stanley shares fell $1.27 to $14.66. The New York securities firm's shares were hit in August amid concerns that the firm was heavily exposed to French banks. Morgan Stanley made additional disclosures in its third-quarter earnings report that showed its gross exposure to France, before hedging and other loss-mitigation strategies, was $1.5 billion. A Morgan Stanley spokesman on Wednesday said the firm's net exposure to France was negative $286 million, meaning the firm could actually make money in a default.
By now, those numbers have been thoroughly chewed over by the markets. But with the Dow Jones average having risen 12% since early last month, the strong market reaction "shows if you have a couple good days, you are setting yourself up to have a bad day," said Paul Miller, a banking analyst with FBR Capital Markets.
Throughout Wednesday's U.S. trading day, stocks gyrated in tune with headlines from Europe. Just after the opening bell in New York, stocks were down sharply, even as the European Central Bank moved aggressively to prop up Italian, Portuguese and Spanish debt. The purchases seemed to have only a limited effect on bond yields, with the Italian 10-year-note yield spending much of the day above the 7% threshold that has forced other European countries to seek bailouts, before finishing at 6.99%. Spain's bond yield rose to 6.38%, after falling as low as 6.25% following the ECB buying earlier in the day.
Fitch put out the report, managing director for financial institutions Christopher Wolfe said, because it wanted "to go on record" with the view that the health of Europe's economies is more important for investors than the direct exposure of U.S. banks. Another Fitch analyst, Joseph Scott, acknowledged that "some of these concerns are very difficult to quantify, especially the macro concerns."
Michael Shea, managing partner at Direct Access Partners, said investors have long been aware of U.S. banks' exposure to the European sovereign-debt crisis. But lately, they had managed to brush those concerns aside amid improving U.S. economic data and hope for a resolution to the European debt crisis. The seriousness of the Fitch statement grabbed investors' attention, he said.
"This is not just that conversation in the hallway where your colleague says, 'You've got to stop doing that,' " he said. "It's as if that wasn't enough, and now here comes the official email from HR."
Investors may continue to react strongly to reports such as the Fitch Ratings note, Mr. Cassidy added, unless banks are willing to disclose the identities of their European counterparties.
Among the fears sweeping markets in recent months has been one, rooted partly in a solution to the Greek debt crisis, that the credit-default swaps some banks have purchased to hedge exposure may not perform in a pinch. "Investors don't have very good transparency from the big banks," Mr. Cassidy said. Until they do, it's "shoot first, and ask questions later."
Eurozone bonds hit by mass sell-off
by Richard Milne and David Oakley - FT
Eurozone bond markets suffered a mass sell-off on Tuesday as investor fears spread beyond Italy and Spain to triple A rated France, Austria, Finland and the Netherlands.
The premium that France and Austria pay over Germany to borrow rose to euro-era records of 192 basis points and 184bp respectively, levels investors say are no longer consistent with top credit ratings.
"Markets are losing patience so they are going for the jugular, which is the core countries and not the periphery," said Neil Williams, chief economist at Hermes, the UK fund manager. "There is convergence but it is convergence on the weakest." Mike Riddell of M&G, one of Europe’s biggest fund managers, called it "probably the most worrying day" of the crisis so far.
The rise in bond yields affected all main eurozone countries apart from Germany, and suggests that the two-year-old sovereign debt saga could be entering a dangerous phase.
In a day that euro-era records tumbled, Italian yields moved through 7 per cent – a level viewed as unsustainable – for the second time in a week. The Spanish premium to Germany hit 482bp, above the critical 450bp rate at which Irish and Portuguese yields spiralled out of control and forced both countries into international bail-outs. Belgium also saw its bonds’ spread over German debt reach record levels of 314bp.
Mariano Rajoy, the Spanish opposition leader forecast to win the country’s general election on Sunday, insisted that the next government would take the necessary measures to preserve Spain’s membership in the eurozone. "I believe in Europe, I believe in the euro project,," he said. " I want to fulfil the tasks that we all need to do as members of the euro."
Paul Griffiths, global head of fixed income at Aberdeen Asset Managers, said: "We don’t want exposure to the periphery and we are wary of buying anything in the eurozone in these markets."
Traders said there were few buyers in many bond markets, with only the European Central Bank active in Italy and Spain. "It is really scary," said one at a US bank. "Everyone is liquidating in the eurozone bond markets ... Everyone is heading for the door."
German benchmark 10-year yields fell slightly to 1.77 per cent. Finnish and Dutch yields rose 17bp and 10bp, leaving their premiums to Germany close to 2009 euro-era peaks.
Spain Bonds Slump as Yield Heads Toward 7% at Sale While French Debt Drops
by Paul Dobson - Bloomberg
Spanish bonds sank, driving 10-year yields to the highest since the euro was introduced in 1999, as borrowing costs climbed to the most in at least seven years at an auction of securities.
The extra yield, or spread, investors receive for holding 10-year French debt instead of benchmark German bunds reached 2 percentage points for the first time in the shared currency’s history as France sold 6.98 billion euros ($9.41 billion) of notes. The yields on bonds of countries from Portugal to Finland, the Netherlands to Austria rose relative to Germany amid mounting concern the debt crisis is spreading. Dollar funding costs for European banks climbed to a three-year high.
"There’s no doubt it was a bad auction," said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam, referring to the sale of the Spanish January 2022 securities. "This week has been the worst week of the crisis so far, given where yields are."
The 10-year Spanish yield jumped 35 basis points, or 0.35 percentage point, to 6.76 percent at 11:25 a.m. London time. The 5.5 percent bond due in April 2021 slid 2.260, or 22.60 euros per 1,000-euro face amount, to 91.390.
At today’s sale, Spain agreed to a yield of 6.975 percent, up from 5.433 percent when it sold 10-year bonds on Oct. 20. That’s the highest rate since at least September 2004. The auction attracted bids worth 1.54 times the securities offered, down from a bid-to-cover ratio of 1.76. The government sold 3.56 billion euros of debt today, compared with a maximum target of 4 billion euros.
With Europe’s debt crisis pushing up borrowing costs for some of the region’s largest economies, French Finance Minister Francois Baroin said the European Central Bank’s support for the region’s rescue fund is the best way to stem the turmoil.
The rate on two-year Spanish notes jumped 40 basis points, while the two-year Italian yield climbed 18 basis points to 6.59 percent even after the ECB was said by people with knowledge of the transactions to have bought the nations’ debt today. A spokesman for the central bank in Frankfurt declined to comment when reached by phone by Bloomberg News.
The spread between French and German 10-year yields widened to as much as 204 basis points, while 10-year bund yields dropped three basis points to 1.79 percent. The Belgian-German 10-year yield gap widened to a euro- lifetime record 321 basis points, while the spreads for Austria, Finland, the Netherlands and Portugal all increased versus bunds. Belgian two-year debt yields rose for the fourth day, increasing seven basis points to 4.05 percent.
Credit default swaps protecting Belgium, France and Spain rose to records. The cost of insurance on Belgium rose to 348 basis points from 340, according to CMA prices. France rose to 238 basis points from 227, and Spain climbed to 493 basis points from 470. The Stoxx Europe 600 Index of shares lost 1.4 percent, and the yield on 10-year U.S. Treasuries fell three basis points to 1.97 percent. The euro was little changed at $1.3476.
The average yield increased to 2.82 percent for the July 2016 notes auctioned by France today, from 2.31 percent at a sale of the securities on Oct. 20. The nation also sold notes maturing in September 2013, July 2015 and February 2016, along with 1.07 billion euros of inflation-linked bonds.
The increase in the premium France pays to borrow over Germany is "not justified," Budget Minister Valerie Pecresse said yesterday. The French government is confident that the ECB will restore financial stability in the euro area, Pecresse told reporters after a meeting of President Nicolas Sarkozy’s cabinet.
The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, reached 131 basis points below the euro interbank offered rate in London, the most expensive since December 2008. The one-year basis swap was 85 basis points under Euribor, after reaching 88.5 basis points, the biggest gap in three years, data compiled by Bloomberg show.
Greece regards two proposals by the Institute of International Finance on a planned debt swap as unacceptable because they don’t meet European Union requirements to reduce the country’s debt to 120 percent of GDP by 2020, Kathimerini newspaper reported, without saying how it got the information.
The yield on the Greek bond due October 2022 advanced 23 basis points to 28.88 percent, with the price falling to 25.365 percent of face value. The yield on two-year Greek notes tumbled 231 basis points to 111.15 percent after reaching a record 115.49 percent yesterday. The price of the securities increased to 29.53.
Volatility on Spanish sovereign debt was the highest among developed-country markets today, according to measures of 10- year bonds, two-10-year spreads and credit-default swaps. The cumulative change was 6.5 times the 90-day average, the Bloomberg gauge showed.
German bunds returned 8.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt handed investors a 0.5 percent loss, the indexes show. Spanish bonds fell 1.2 percent, Italian securities lost 9.8 percent, Belgian bonds dropped 2.3 percent and Greek debt lost 55 percent, the indexes show.
Spain and Italy's borrowing costs soar as Angela Merkel remains defiant over eurobonds
by Louise Armitstead - Telegraph
Spain and Italy's borrowing costs soared as economists warned that Europe is sliding into recession and Angela Merkel defied intense pressure and ruled out issuing European-guaranteed debt.
The German Chancellor told her party conference that Europe faced its "toughest hour since the Second World War" - but that Germany would not support launching 'eurobonds' to solve the crisis. Instead Ms Merkel said she would push for changes to European treaties to introduce sanctions for financially lax countries and the adoption of a financial transaction tax - with or without Britain.
David Cameron warned that the European Union would be "in peril" unless politicians agreed radical reforms. Speaking at the Lord Mayor's banquet last night, he said markets were "understandably tense" since the eurozone was not "a place to admire and emulate... but a source of alarm and crisis".
Traders sold equities and bonds amid doubts that politicians will act in time to prevent a recession. Eurostat said industrial production in the eurozone fell 2pc between August and September, the biggest monthly fall for two years. The Organisation for Economic Cooperation and Development (OECD) added that the slow-down is likely to continue in all developed economies. France's CAC index fell 1.3pc and Germany's Dax, 1.2pc.
In the bondmarkets, Italy was forced to pay 6.29pc to raise €3bn (£2.6bn) of five-year bonds - a eurozone debt auction record, despite the promise of a new government under Mario Monti. Italy, which still lacks a cabinet, needs to raise a further €46bn in debt before the end of the year.
Panicked traders looking for the next eurozone victim turned on Spain pushing bond yields above 6pc for the first time in three months. Spain faces more hurdles this week with the auction of up to €3.5bn of short term bonds today - and a further €4bn in 10-year bonds on Thursday.
Despite its far lower public debt level levels, traders bet that Spain would follow Italy into "bail-out territory." French bank Societe Generale said: "Spain is now joining Italy on the radar screen". Warren Buffett, the US investor, said bond markets were displaying a "partial run on Europe." British borrowing costs fell to just 2.2pc.
Michel Barnier, the EU markets commissioner, said he wanted to ban credit rating agencies from rating bonds from bailed-out countries. He told French radio that the agencies could lose the "right to rate certain countries for a certain time that are receiving an international support programme from the IMF or European Union." But few could see how the ban could be imposed.
In Athens, a debate over Lucas Papademos' leadership starts in the Greek parliament today. The new premier has to win a confidence vote tomorrow and then prepare next year's draft budget to take to his first showdown with eurozone finance ministers in Brussels on Thursday.
Antonis Samaras, leader of the Greek opposition, warned that he would not support Mr Papademos' interim government for more than three months without elections. His objections are said to be barring the disbursement of the €8bn tranche of international aid to Greece.
UniCredit Trading as Junk With $51 Billion of Bonds Due
by Ben Martin - Bloomberg
Bonds of UniCredit SpA, the Italian bank that posted a surprise 10.6 billion-euro ($14.3 billion) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year.
Fixed-income investors are pricing the Milan-based lender’s bonds at levels that imply a rating of B1, four levels below investment grade and eight steps lower than its A2 ranking, according to Moody’s Analytics. The 13.4 billion euros of UniCredit debt securities that are contained in Bank of America Merrill Lynch’s Euro Corporates Banking index have lost 2.8 billion euros since the start of June.
UniCredit, Italy’s biggest bank, has the highest amount of bonds maturing in 2012 by a major European lender, according to data compiled by Bloomberg. Concern that Italy will struggle to cut Europe’s second-highest debt load and tame the sovereign crisis drove the country’s debt yields to euro-era records, infecting UniCredit’s 40 billion euros of Italian bonds.
"It’s an Italian bank and given what’s going on in Italy, there would be a tendency to downgrade," said Otto Dichtl, a London-based credit analyst for financial companies at Knight Capital Europe Ltd.
The record loss prompted Moody’s to put the bank’s rating under review for a downgrade, saying that while UniCredit has "considerable liquidity," it faces pressure from "volatilities in the Italian and European operating environment."
Rating Previously Cut
"Any notable weakening in its funding and liquidity profile, or any significant impact of the current operating environment challenges," will weigh on UniCredit’s ratings, New York-based Moody’s said in a report.
The firm had already cut UniCredit last month from Aa3. The bank has an equivalent A at Standard & Poor’s and Fitch Ratings, which also have "negative" outlooks on the lender.The average coupon on the bank’s bonds issued this year is 3.15 percent, 40 basis points more than the 2.75 percent average for the securities coming due by the end of next year, Bloomberg data show. A UniCredit spokeswoman in Rome who declined to be identified citing company policy wouldn’t comment.
UniCredit’s bonds yield 9.8 percent on average, the highest in Bank of America Merrill Lynch’s Euro Corporates Banking index. That’s more than the measure’s 5.1 percent average, and compares with 9.3 percent for securities issued by Milan-based Intesa Sanpaolo SpA, Italy’s second-biggest bank, and 5.9 percent on the debt of BNP Paribas SA in Paris.
European Bank Spreads
The extra yield investors demand to hold European bank debt rather than government securities has risen 11 basis points since the start of the month to 347 basis points, Bank of America Merrill Lynch’s index shows. The spread widened to 411 basis points on Oct. 5, the biggest gap since May 2009. UniCredit has about 37.6 billion euros of securities maturing next year, according to data compiled by Bloomberg.
The Italian bank has completed its funding plan for this year and is raising money to refinance debt maturing next year, UniCredit said in its Nov. 14 earnings statement and a related investor presentation. UniCredit isn’t dependent on wholesale funding markets and senior unsecured bond sales aren’t "embedded" in its fundraising plans, it said in a separate planning presentation.
The company’s third-quarter loss, its biggest ever, came as the bank wrote down acquisitions by its investment bank and businesses in Ukraine and Kazakhstan. UniCredit is planning to raise as much as 7.5 billion euros from a rights offering in the first quarter of 2012 to plug the biggest capital shortfall among Italy’s lenders. The move may ease some concerns about UniCredit’s capital levels, according to Hank Calenti, head of bank credit research at Societe Generale SA in London.
"You have a combination of things at UniCredit, the capital needs and the sovereign issue, so the share sale may go a way to addressing one of those two," Calenti said. The rating implied by the bank’s outstanding debt fell below investment grade status on July 12, according to Moody’s Analytics, a division of Moody’s Corp. Speculative-grade, or junk-rated, debt, is graded below Baa3 by Moody’s and lower than BBB- by S&P and Fitch.
Credit-default swaps tied to UniCredit’s senior debt soared to a record 546.3 basis points yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point on a default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
"I’m frankly not surprised if some Italian banks drift into a junk-rating category because there is potentially liquidity, solvency and asset-quality risk," said Paul Owens, who helps manage the equivalent of about $8.2 billion as co-head of research at Avoca Capital Holdings Ltd. in London.
Investors are increasingly concerned that Italy won’t be able to lower its 1.9 trillion euros of debt and stimulate economic growth. Yields on 10-year Italian debt climbed to a euro-era record of 7.48 percent on Nov. 9 before dropping below 6.5 percent after the country’s Senate approved debt-reduction measures that led to the ouster of Silvio Berlusconi as prime minister. The yield climbed back above 7 percent this week.
"Sovereign debt concerns hover over UniCredit on both sides, keeping up their funding costs and also keeping people worried about whether they have to take an asset-side hit," said John Raymond, a London-based analyst at CreditSights Inc.
Countries may be 'pushed out' of single currency
by Katie Allen - Guardian
Debt crisis intensifies as the Netherlands and France come under pressure from rising cost of borrowing
The prospect of a eurozone breakup intensified on Tuesday night as borrowing costs around the region soared and the Dutch prime minister said it should be possible to expel some members from the currency union.
Investors are rapidly losing hope that a solution to the sovereign debt crisis will be found, and their fear was demonstrated by rising bond yields – the rate of interest governments have to pay to borrow – across almost all single-currency countries. The Dutch premier, Mark Rutte, stoked fears that a collapse could become a reality as he aired the prospect of countries being ejected, albeit as a last resort.
"We would like countries to be able to be pushed out of the eurozone," Rutte said on a visit to London, adding member countries must "put out the fire" of the debt crisis. As analysts warned of "terror taking hold", even some of those countries until now regarded as safe havens, such as the Netherlands, came under pressure as fears about countries' creditworthiness spread from peripheral countries such as Greece into Europe's core.
One bond expert described this as the most worrying day yet in the crisis. Mike Riddell, manager of M&G's international sovereign bond fund, said France was now suffering a "full-blown run" on its debt, with investors dumping French bonds to move their money to safer havens.
Riddell added that the credit default swap (CDS) market – where investors in effect bet on the prospects of countries going bust – now indicates that the chance of France losing its coveted top AAA rating is a near certainty. "Even the Netherlands, which the market perceives to be the second strongest eurozone sovereign, is coming under a bit of pressure," he said.
France faced fresh criticism over its efforts to contain public debt in a study from the Lisbon Council thinktank for Economic Competitiveness and Social Renewal. The Brussels-based thinktank accused Paris of making little progress on debt and said its economic health was mediocre for a triple-A-rated country.
In Italy, Monday's day of relative calm after Silvio Berlusconi's exit gave way to renewed fears about the country's economic and political future as bond yields climbed back through the 7% mark. That rise came despite the European Central Bank wading into the market to support Italian bonds.
The market has little faith that Italy's newly appointed leader, Mario Monti, will be able to push through austerity measures that might get Italy's deficit under control. Italy's borrowing costs climbed amid Monti's apparent struggle to form a cabinet.
Grant Lewis and Emily Nicol at Daiwa Capital Markets described the eurozone crisis as "arguably more precarious than even at the back end of last week". They added: "In spite of the fall of the Berlusconi government, the incoming PM faces huge challenges, not least in continuing to shrink Italy's deficit against a backdrop of slowing growth."
Italy's growth figures for the third quarter have yet to be released, but the latest update for the eurozone does not bode well. The 17-nation group grew by just 0.2% during the quarter, and many forecasts expect the eurozone economy to contract in the final months of this year.
In Spain, there was more evidence of investors' frayed nerves as the government was forced to pay out its highest borrowing costs in 14 years on new debt. Investors did come forward with enough money, but Spain's borrowing costs shot up to more than 5%, compared with less than 4% at similar recent sales.
Belgium was victim to the same flight from eurozone bonds, and yields on a sale of 12-month debt by Brussels were at a three-month high. Investors were looking outside the currency union, and Switzerland fared rather differently at its latest debt auction. Its sale of six-month bills had an average interest rate of -0.3%. In other words, investors are paying the Swiss government for the privilege of lending their money to the country.
Louise Cooper, markets analyst at BGC Partners, issued a stark warning to Europe's politicians: "Political leaders beware, this crisis is worsening, and worsening dramatically."
She said the euro's future was in the hands of the German leader: "Merkel, the pressure is rising, momentum is building, now is your moment to prove that you really want to save the euro. Traders and investors are becoming more and more fearful of the outlook for the eurozone, shown by two partially failed government bond auctions, fast rising borrowing costs for euro members and a flight to safety in Switzerland. Terror is stalking the markets and taking hold."
The UK bond market was also one of the few beneficiaries of the heightened panic around the eurozone. The yields on UK government bonds, or gilts, fell – meaning their prices rose – and outperformed German government bonds. Other countries in Europe but outside the eurozone, such as Sweden and Denmark, have also seen their borrowing costs fall.
Eurozone crisis stokes tension between Britain and Germany
by Patrick Wintour - Guardian
Standoff deepens after claims Angela Merkel will not allow UK 'to get away' with refusal to back financial transactions tax
Tensions between Germany and Britain over how to handle the crisis in the eurozone deepened after allies of the German chancellor, Angela Merkel, claimed she would not allow the UK to "get away" with its refusal to back a European financial transactions tax. Speaking before a meeting between Merkel and David Cameron on Friday, the parliamentary leader of her Christian Democratic Union said: "Britain had a responsibility to make Europe a success."
Volker Kauder, at the CDU conference in Leipzig, said: "I can understand that the British don't want that [a transactions tax] when they generate almost 30% of their gross domestic product from financial-market business in the City of London. Only going after their own benefit and refusing to contribute is not the message we're letting the British get away with."
The transactions tax on shares and other City exchanges – otherwise known as the Tobin tax or Robin Hood tax – has been supported by the French president, Nicolas Sarkozy, and leading UK charities. But Britain has resisted its implementation without it being copied by the US and other leading economies.
Asked about Kauder's remarks, the prime minister's spokesman said: "There is clearly going to be a debate about Europe and the shape of Europe over the coming weeks, months and years. What we would say is that the crisis means that we should focus on the economics.
"It is very clear that countries need credible plans to deal with their debts and deficits and we shouldn't be deflected from dealing with the structural problems in European countries."
In remarks that will further inflame Tory Eurosceptics, Kauder also claimed that Europe was now embracing Merkel's solutions to the crisis by focusing on tougher fiscal discipline for indebted countries. "Now all of a sudden, Europe is speaking German," he said. "Not as a language, but in its acceptance of the instruments for which Angela Merkel has fought so hard, and with success in the end."
The crisis in the eurozone is prompting Germany to draw up possibly far-reaching plans for change to EU treaties that would force Cameron to demand concessions in return. This process could in turn expose tensions between Conservatives and Liberal Democrats over Europe.
In his annual foreign policy speech at the Lord Mayor of London's banquet on Monday, Cameron said the crisis provided an opportunity for the EU to rethink its purpose and rules and to refashion it as a looser union.
On Tuesday the deputy prime minister, Nick Clegg, urged Europe's leaders not to disappear into a "windowless room" to debate institutional changes. The idea that one could simply get on the Eurostar, go over to Brussels and come back with a bagload of powers simply is not feasible, Clegg said. No 10 said Clegg and Cameron were agreed on making Europe focus on "the issues that matter".
European Commission data released on Tuesday showed economic growth between July and September of only 0.2% in both the 17 eurozone nations and across the 27 EU nations. The bulk of the growth came in Germany and France. Only Greece, Portugal and Cyprus grew more slowly than Britain over the last year. The eurozone has grown by 1.4% over the last year, compared with just 0.5% in the UK.
The figures suggest UK youth unemployment will go over the politically sensitive 1 million mark when figures are published on Wednesday. The business secretary, Vince Cable, will try to quell the political storm by announcing an incentive of up to £1,500 per person for companies with 50 employees or fewer to take on up to 20,000 apprentices aged 16-24. Labour claims youth unemployment has risen by 93 % since the general election.
Ministers, still struggling to assemble a coherent growth package before the autumn statement on 29 November, fear that whatever measures they announce around labour market reform will seem inadequate alongside the collapse in consumer demand.
Ed Balls, the shadow chancellor, said: "Instead of wrongly blaming events abroad for his own mistakes at home, David Cameron needs to realise that our economy has flatlined for more than a year – well before the recent eurozone crisis."
Signs grew that the European sovereign debt crisis is spreading across Europe, with France, Spain and even Belgium seeing bond yields rising significantly. Italian 10-year bonds moved back over the critical 7 % level. Bond yields are the interest rate countries have to pay to fund their debt.
Enda Kenny lays down the law to Chancellor Merkel
by Cathal Dervan, IrishCentral
Major stand-off over more power for Europe’s big players
First the Pope, now the German Chancellor – Ireland’s Prime Minister Enda Kenny is back on the attack, this time with the most powerful woman in Europe.
Kenny left German chancellor Angela Merkel on the ropes after a lunchtime meeting in Berlin turned into a full scale row over the future of the Euro.
All seemed sweetness and light at first with Merkel praising Kenny for his his response to the crisis and even having an army guard of honor meet him. But relations quickly cooled as the Irish leader left his seething German counterpart in no doubt that he would support her plans for greater Eurozone stability – but only on his terms.
Merkel wants more centralized power for Germany and France with Ireland agreeing to give up more sovereignty on issues such as tax policy. Kenny knows however, that will not fly with the Irish electorate.
As Merkel battles to save the Euro, Kenny insisted he will preserve Ireland’s status as the nation best placed to survive of all the bail-out countries. Kenny insisted that Ireland will only support her ideas while it keeps control of its tax policies – including the controversial corporate tax rate – and regains its economic sovereignty at the end of the bail-out programme.
He also warned Merkel that changing the European Union’s treaties, as she has proposed, will not stop the financial panic spreading across the globe on the back of the Euro’s problems.
The Fine Gael leader stressed at a post-meeting press conference that Merkel must utilize the European Central Bank’s strength to ‘stop the contagion’. Merkel had told the press conference that she believes countries who break the bail-out rules must be taken to the European Court of Justice and be fined.
In response, Kenny highlighted that Ireland ‘knew all about sticks and carrots being in the middle of a bail-out programme that requires us to have the budget approved by the Troika’. He argued that the necessary rules are already in place and reminded Merkel that ‘Ireland has put in place an independent fiscal council’ that will oversee budget decisions.
Kenny insisted: "Any moves to change the treaties will be very challenging. We recognise the need for stronger budgetary discipline; we recognise the need for fiscal responsibility. "While there are strong rules needed here, any steps towards major treaty change would obviously be very challenging.
"I’ve had a frank discussion about that with the chancellor. And I believe that the immediate crisis has to be dealt with in the short term with the facilities and tools that are available to us."
The Irish PM also stated that his government is preparing to legislate for a debt break that would make it illegal for the state to rack up debt and deficits. He then advised Merkel to ‘wait and see’ what proposals for Treaty change EU President Herman Van Rompuy comes up with for their December summit before the Germans move to change EU treaties.
Kenny has also turned down a meeting to discuss the Eurozone crisis with French President Nicolas Sarkozy as it clashes with a gathering to be attended by leaders from Ireland, Britain, Northern Ireland, Wales, Scotland, the Isle of Man, Jersey and Guernsey. Government officials are now trying to find an alternative date for the French meeting.
France Clashes With Germany on ECB’s Rescue
by Tony Czuczka and Mark Deen - Bloomberg
German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil.
As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a "snappy debt cut" as proposals that won’t work. "I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis," Merkel said in a speech in Berlin today. "If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen."
Merkel’s comments underscore German reluctance to assume more liability for taming the debt crisis even as it roils France, the euro region’s second-largest economy, and threatens to trigger a global recession. While President Barack Obama renewed calls for Europe to act, Merkel said "political action" to tighten budget rules is needed to stem the turmoil.
Stocks worldwide fell for a fourth day, the longest stretch of losses in two months, as Europe’s crisis festered. The yield on 10-year Spanish bonds rose as much as 37 basis points to 6.78 percent, a euro-era high, while the premium France pays over Germany to borrow for 10 years narrowed to 176 basis points after reaching a record 204 basis points. The euro gained versus the dollar as the ECB was said to buy Italian government bonds, reaching $1.3504 at 5:20 p.m. in Frankfurt after falling to its lowest level since Oct. 10 earlier today.
'Spreads Like Fear'
"Nothing spreads like fear," said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. "If the European Central Bank does not intervene forcefully to stop the rot, the panic could spread even further and eventually put the very existence of the euro and the ECB at risk."
French Finance Minister Francois Baroin renewed a clash with Germany over using the ECB as a backstop, saying in a speech in Paris late yesterday that central bank support for Europe’s rescue fund is the best way to counter the crisis.
The Frankfurt-based ECB has also resisted calls to provide more support. Mario Draghi, the Italian who took over as president of the central bank this month, said Nov. 3 that backstopping government borrowing lies outside the ECB’s remit.
Resist Printing Money
Two bouts of hyperinflation last century helped give Germans a "genetic code" that makes them resist "printing more money," Economy Minister Philipp Roesler told the conference. "You can’t make the mistake of giving in to this pressure. You’ll never get out of it, and that would be the end."
The clash is intensifying as France, the second-biggest backer of the European Financial Stability Facility after Germany, is dragged more deeply into the crisis that began more than two years ago in Greece and in the past week led to the ousting of Italy’s Silvio Berlusconi.
The spread between French and German 10-year yields widened as France sold 6.98 billion euros ($9.44 billion) of notes. Spanish bonds sank, driving 10-year yields to the highest since the euro’s debut in 1999. Speaking in Soria, Spain, today, Spanish Prime Minister Jose Luis Rodriguez Zapatero called on the European Commission and ECB to act "immediately" to stem the crisis.
Bond Yields Rise
The yields on bonds of countries from Portugal to Finland, the Netherlands to Austria rose relative to Germany amid mounting concern the debt crisis is spreading. Merkel, in her speech, said that Europe must flesh out the details on leveraging the EFSF rescue fund, while pressing for European Union treaty changes to enforce budget control and reassure markets over the medium term.
She reached out to the U.K. on the eve of Prime Minister David Cameron’s visit to Berlin tomorrow, praising his effort to cut government spending and saying that "we want a Europe with Great Britain" that doesn’t exclude any member country from the euro area.
She called for countries to drop national objections and agree on changes to EU treaties to tighten oversight over national budgets, saying amendments could be "very limited" and possibly apply only to euro countries. Treaty change is "indispensable to persuade markets that we will continue on our path together," she said.
The market rout comes three weeks after European leaders agreed at an all-night summit to recapitalize banks and force bondholders to take a 50 percent writedown on Greek debt in what was billed as a comprehensive solution to the crisis.
If the package fails, the ECB will have to step in or the euro region will break up, Beatrice Weder di Mauro, a member of Merkel’s council of economic advisers, said today. "Everything depends on Germany," she said at the Berlin conference. "Which way we head next year and whether things quiet down will depend on German policy makers."
French President Nicolas Sarkozy had backed down over the role the ECB should play in fire-fighting, acknowledging Germany’s inter-war experience of inflation, to help obtain the Oct. 27 accord among European leaders.
Citigroup Chief Economist Willem Buiter suggested that Germany should overcome its fear of inflation. The ECB is "the only remaining show in town," Buiter, a former member of the Bank of England’s monetary policy committee, said on Bloomberg Television’s "Surveillance Midday" with Tom Keene yesterday. "We’re not asking for Weimar."
Franco-German Battle over the ECB Intensifies
Germany remains adamantly opposed to using the European Central Bank as the lender of last resort to prop up the common currency. But with debt contagion rapidly spreading to several more euro-zone countries, France has upped the pressure. The future of the EU may be at stake.
In early 2010, when Greece first ran into serious debt problems and required an immediate €110 billion ($148 billion) bailout, the debate in Europe was more of a philosophical one. European Union member states, said many, should not be forced to pay the debts of fellow members.
This year, the discussion has taken a much more existential turn. With an ever-increasing number of countries becoming infected by the debt contagion spreading across the Continent, serious questions have been raised as to whether the EU is even able to help out its struggling members. And the heart of the increasingly tense debate as to what should happen next has become the ongoing clash between France and Germany. Should the European Central Bank (ECB) become the lender of last resort or not?
On Wednesday, France reiterated its affirmative answer to that question. In comments to the newspaper Les Echos, French Finance Minister Francois Baroin demanded that the ECB step in to do everything in its power to prop up the common currency. "We want to deploy all European institutions, including the ECB, to find the best possible answers to the crisis," he said. Baroin added that the US Federal Reserve "actively intervenes" in times of need, as do the central banks of Britain and Japan. The ECB, he demands, should do the same.
Berlin, however, is adamantly opposed to such a move. Were the ECB to flood the market with liquidity in the form of unlimited purchases of government bonds from debt-stricken euro-zone member states, rapidly climbing inflation could be the result. And Germany, for historical reasons stretching back to the 1920s -- when hyperinflation smoothed Adolf Hitler's rise to power -- has a deep-seated phobia of rapidly rising prices.
Chancellor Angela Merkel on Wednesday reiterated her government's opposition. Speaking in Berlin, she said: "We interpret the treaties such that the ECB doesn't have the authority to solve the problems." She insisted that the primary problem at the moment is that, while European Union leaders agreed to boost the firepower of the euro backstop fund -- the European Financial Stability Facility (EFSF) -- at a summit in late October, the agreed upon resolutions have yet to be implemented.
She apparently received some high-powered support on Thursday. Wolfgang Franz, head of the influential German Council of Economic Experts -- which advises the government on economic issues -- expressed vehement opposition to unlimited ECB bond purchases.
"History has shown us, and not just in Germany, that the monetization of state debt is a deadly sin for central banks," Franz told the Frankfurter Allgemeine Zeitung in an interview published on Thursday. "Doing so not only results in a loss of independence, but it also raises the risk of inflation. Finally, it also represents the undemocratic collectivization of debt under the auspices of the ECB."
Limited Eagerness to Invest
The debate between Paris and Berlin has increased in volume in recent days as indications grow that the EFSF, despite the adjustments to the fund made in late October, may not be large enough to put a halt to Europe's debt crisis. Furthermore, the plan to leverage the fund from its current lending capacity of €440 billion to €1 trillion, in part by attracting outside investors, may ultimately fail.
Given recent political chaos in Greece and Italy, along with indications that financial markets have lost faith in Rome's ability to manage its outsized debt load, not many have shown much eagerness to invest in the EFSF.
Indeed, even despite the departure of Silvio Berlusconi and the Wednesday swearing-in of a new cabinet of experts under the leadership of respected banker Mario Monti, interest rates on sovereign bonds issued by Rome remain high. On Thursday, the rate was just over the 7 percent mark, the level considered unsustainable in the long term.
Furthermore, danger signs have cropped up in several additional euro-zone member states in recent days. Interest rates on French sovereign bonds have crept upward this week and are now double the rates that Germany has to pay. Furthermore, the country's economy is set to grow less than 1 percent next year -- partially as a result of the €18 billion austerity package recently passed in Paris. Concerns are rising that France could lose its top AAA credit rating before long.
Critical Debt Auction
Austria has also run into difficulties on the financial markets, with its bond interest rates having climbed as high as those of France. While the country's public debt remains at a relatively low 72 percent of gross domestic product, the large exposure of Austrian banks to Eastern Europe have analysts assuming that the government will have to spend billions to prop them up.
Belgium, which has been stuck in a political crisis for well over a year now as the country has been unable to assemble a government, has also been hit by rising interest rates, with yields on 10-year-bonds rising to 4.8 percent this week, a record high.
In Spain, yields have likewise risen sharply in recent days. In a Thursday €3.56 billion auction of 10-year bonds, Spain had to pay an interest rate of 6.9 percent, the most the country has had to pay for debt since 1997.
Given the uneasiness, it seems likely that the debate over the ECB's future role in the euro crisis will only become more heated. Furthermore, European Council President Herman Van Rompuy on Wednesday reiterated his cautious support for the idea of "euro bonds," which would essentially collectivize European debt. Berlin is adamantly opposed to that deal as well for fear of risking its own AAA rating.
European Commission President Jose Manuel Barroso has warned that the ongoing crisis poses a serious risk to the cohesion of the European Union. "We are facing a truly systemic crisis," he said in comments before the European Parliament on Wednesday.
Latin showdown with Germany over ECB
by Ambrose Evans-Pritchard - Telegraph
Germany is facing a moment of strategic truth. The sacred union with France that has held together through thick and thin for half a century is in growing danger as contagion spreads North, engulfing the French bond market.
For EU veterans, the drama has has echoes of 1993 when the Bundesbank ditched orthodoxy to rescue France, after first cutting Britain and Italy adrift in the Exchange Rate Mechanism. But this time the stakes are much higher.
On that occasion, Chancellor Helmut Kohl pulled rank, more of less ordering his bankers to obey. "We must always bow three times before the Tricoleur", as he famously put it. On Wednesday, France began to deploy its political leverage in earnest, leading an open revolt against Germany over the fire-fighting role of the European Central Bank.
The country's budget minister Valérie Pécresse said the central bank had a greater duty to Europe's citizens than mere adherence to its low inflation mandate. "The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures," she said. Finance minister François Baroin made near identical comments to Les Echos.
In what is clearly a co-ordinated move by top EU players, European Commission chief Jose Manuel Barroso said Europe is "facing a truly systemic crisis" that requires a condign response from all players in the unfolding drama. "Should the central bank be responsible for financial stability as well as price stability? My reply is yes, definitely."
The groundswell of revolt came as yield spreads on 10-year French bonds over German Bunds rose to a post-EMU high of 195 basis points, with stress in Austria and even Finland. Italian yields punched back up to 7pc despite the new technocrat government of Mario Monti.
Jacques Cailloux from RBS said the taboo of a euro collapse has been broken, inflicting deep and lasting damage. " We expect investors to increasingly pull out of countries at risk of large depreciation in case of exit, and even potentially start moving their investments out of the region entirely," he said.
It is a painful moment for Germany. Either it gives up fiscal sovereignty and monetary purism, embracing eurobonds and allowing the ECB to backstop Europe's sovereign debt; or it endangers its whole strategic investment in Europe's post-War order.
Pressure is mounting across the world. US president Barack Obama said a lack of "political will" in Europe was threatening to drag the global economy into crisis, and called for "a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes".
The EU's €440bn EFSF bail-out fund was supposed to take over on the rescue task, relieving the central bank. It has been a disastrous flop, unable to raise money itself at a viable cost after toying with leverage plans that greatly concentrate risk for creditor states. The net effect has been to accelerate contagion to the core.
This leaves the ECB as the only lender of last resort, the one body that can stop monetary union spiralling out of control. "It's ECB bail-out or bust. And it's looking like bust," said Nobel economist Paul Krugman.
German Chancellor Angela Merkel was unrelenting on Wednesday, echoing the Bundesbank's hard line. "According to our interpretation of the treaties, the ECB does not have the means to resolve these problems."
Yet EU law is complex. While Article 123 of the Lisbon Treaty enshrines price stability as the bank's chief task, the ECB also has a duty under Article 3 to promote "economic cohesion" and the general objectives of the Union.
"EU treaties do not explictly give the ECB the role of lender of last resort, but they do not forbid it either. The treaties are silent," said professor Andre Sapir from the Breughel Institute in Brussels. "I have sympathy for the ECB because it is the governments that have failed, and now they are dumping everything on the bank's doorstep. But the ECB is the only actor that can move quickly," he said.
Germans are understandably distressed. The Bundesbank has already accepted €465bn of liabilities under the so-called "Target2" payment system from the central banks of Greece, Ireland, and Portugal, among others. "If the eurozone broke up, the Bundesbank could incur enormous losses," said Eric Dor from the IESEG School of Management in Lille.
The Bundesbank is on the hook -- partially -- for €180bn in EMU debt purchases undertaken so far. It would face massive risk if the ECB launched a blitz to hold down bond yields, should the gamble fail.
Germany's constitutional court has ruled that "open-ended" and "automatic" liablities violate the country's Basic Law. So only the Germans can save monetary union, yet the Germans cannot legally do so. Europe's crisis has reached an impasse, the result of the original design flaws of EMU.
Even so, a growing chorus of economists within Germany itself is calling for a strategic change. Wurzburg professor Peter Bofinger wants the ECB to cap Italian and Spanish yields. "We are in an emergency situation; this isn't plastic surgery. If worst comes to worst, the ECB has to act before the financial system falls. And if it acts, it should act properly and set an upper limit for sovereign yields. It's naive to believe that Italy can solve its problems on its own. Structural reforms can't be implemented overnight."
Dennis Snower, head of the Kiel Institute, said the ECB must act to stem the crisis, even if this means straying into fiscal policy. Thomas Mayer from Deutsche Bank said Italy's new government will fail unless the ECB buys time by holding down yields, perhaps as low as 5pc.
David Heathcoat-Amory, Britain's former Europe minister, said Berlin will do whatever it takes to try to save EMU. "The Germans will pay up, accept eurobonds, and mobilise enormous firepower. They are not out of ammo yet."
"But this won't save monetary union in the end because it is not a debt crisis. It is a currency crisis. The weaker states are uncompetitive and you cannot force them to deflate their way back to competitiveness by cutting wages 30pc. The EU elites won't admit it, but the euro experiment is over," he said.
France in spotlight as debt spiral worsens
by Anirban Nag - Reuters
Yields on Italian and Spanish bonds climbed back to unsustainable levels on Tuesday, putting the focus squarely on France with risks mounting by the day that euro zone debt contagion would ensnare one of the region's biggest economies.
Top-rated European nations came under increasing pressure from investors betting that the euro zone could eventually break up with the yield spread of French, Austrian and Belgian 10-year bonds over German Bunds rising to euro-era highs. The equivalent Dutch spread hit levels not seen since early 2009. Spain issued short-term debt at yields seen 14 years ago, highlighting how most European governments are struggling to raise funds.
The cost of insuring against a default by France rose to record highs, a grim reminder that one of the biggest economies in the region would come under the scanner of bond market vigilantes. The ongoing turmoil in euro zone debt markets led to widespread risk aversion with European stocks falling, U.S. stock futures pointing to a weak start on Wall Street and the euro easing against the dollar and the safe-haven yen.
"The fact that Holland and Austria (spreads) are moving out -- countries which were seen as cohorts of Germany in the past -- is a worrying development," said Nick Stamenkovic, rate strategist at RIA Capital Markets. "Investors are looking to Germany given the worries not just about Italy and Spain but about the future of Europe as a whole."
Any relief from the ongoing formation of technocrat-led governments in Italy and Greece proved short-lived. Italian Prime Minister-designate Mario Monti meets the leaders of the country's biggest two parties on Tuesday to speed up efforts to deliver painful reforms. And while a Monti-led government has improved the likelihood of a more credible fiscal policy, the market still needs to be convinced.
Italy's 10-year bond yields rose more than 30 basis points above 7 percent, perceived to be a dangerously high level to service debt. It also pushed Spanish 10-year yields well above 6 percent for the first time since the European Central Bank started to buy the country's bonds in August. The spread, or interest rate gap, of Italian bonds over German government bonds, or Bunds, remained elevated at over 500 basis points.
Particularly worrying has been the steep rise in French bond yields -- over 40 basis points in 10-year yields in the past two weeks. French banks are among the biggest holders of Italy's 1.8 trillion euro public debt pile and a study of euro zone countries on Tuesday warned France's inability to make rapid adjustments to its economy was a serious concern and should be ringing alarm bells for the euro zone.
All of this dragged European shares lower for the second straight day. The FTSEurofirst 300 .FTEU3 index of top European shares was down 1.3 percent at 963.17 points after losing 0.9 percent on Monday. U.S. stock index futures pointed to a weaker open for equities on Wall Street with futures for the S&P 500, the Dow Jones and the Nasdaq 100 down 1 to 1.3 percent.
A bleak economic outlook for the region also weighed. German analyst and investor sentiment slumped in November, a survey from the influential ZEW economic think tank showed. That overshadowed data which showed Germany and France posted solid growth in the third quarter although euro zone countries at the sharp end of the crisis were faring much worse.
The recent downturn in financial markets has raised the urgent need for recapitalization at banks, prompting them to sell assets, especially those of the euro zone, to make up for losses elsewhere. The euro eased against the dollar and the yen, stuck near the bottom of its recent trading range. The euro fell 0.7 percent to $1.3529, trading near the lower end of its trading band since late October of $1.3484 to $1.4248.
"The euro zone debt crisis continues to escalate ... The ultimate outcome is still unclear - whether the euro zone moves closer to fiscal integration or whether there is a more disorderly break-up," said Lee Hardman, currency economist at BTMU.
Japanese and U.S. government bonds drew safe-haven bids on Tuesday, with $31 billion of 0.3 percent five-year JGBs fetching healthy demand and Treasuries extending their rally. December German Bund futures were 64 ticks higher at 138.88 with benchmark 10-year yields down two basis points at 1.76 percent.
France draws fire after "alarm bells" warning
by Daniel Flynn and James Mackenzie - Reuters
France came under heavy fire on global markets Tuesday, reflecting fears that the euro zone's second biggest economy is being sucked into a spiraling debt crisis after a warning that Paris's failure to adapt should be "ringing alarm bells."
Global stocks and the euro fell as Italian bond yields climbed back to unsustainable levels on doubts that Italy's Mario Monti and new Greek leader Lucas Papademos, unelected technocrats without a domestic political base, can impose tough austerity measures and economic reform.
European Central Bank President Mario Draghi has predicted the 17-nation currency bloc will be in a mild recession by the end of the year, a view underlined by data showing the economy barely grew in the third quarter and faces a sharp downturn. "The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter, most likely in the first quarter of next year," said Michael Schroeder of the German economic research institute ZEW.
On the markets, Italy's 10-year bond yield rocketed back above 7 percent, pushing its borrowing costs to a level that helped to trigger the fall of Silvio Berlusconi's government last week and is widely seen as unsustainable in the long term. Spain's Treasury paid yields not seen since 1997 to sell 12- and 18-month treasury bills.
French 10-year bond yields have risen around 50 basis points in the last week, pushing the spread over safe haven German bonds to a euro-era high of 173 basis points. French banks are among the biggest holders of Italy's 1.8 trillion euro public debt pile.
The urgency of resolving the debt crisis was underscored by a think-tank report saying that triple-A rated France should also be "ringing euro zone alarm bells" as it could not make rapid adjustments to its economy.
"Threat To The World"
Fears are growing in the United States that Europe's debt crisis is mushrooming into a wider systemic problem. President Barack Obama's top economic adviser said the European debt crisis was the leading risk to the U.S. recovery. "Clearly, Europe is a tremendous concern," Alan Krueger, chairman of the White House Council of Economic Advisers, said. "It is important they act quickly, because it is a threat not only to Europe and the U.S. but the world as a whole."
But Greek conservatives set themselves on a collision course with the European Commission, refusing its demand to sign a pledge to meet the terms of a bailout designed to save Greece from bankruptcy and safeguard the euro zone. Members of the New Democracy party, a key player in Papademos's new crisis coalition, said they would not bow to "dictates from Brussels" to give a written guarantee.
With the survival of the 17-state currency zone in its current form now at risk, EU governments have until a summit on December 9 to come up with a bolder and more convincing strategy, involving some form of massive, visible financial backing. Peter Bofinger, a member of the group of economists who advise the German government, said the ECB should become the euro zone's lender of last resort if the bloc's debt troubles threatened to rip apart the financial system.
Although anathema in Germany, many analysts believe the only way to stem the contagion for now is for the European Central Bank to buy large amounts of bonds without sterilizing their purchases -- effectively the sort of quantitative easing undertaken by the U.S. and British central banks. "If politics can't do it, then the ECB must do all it can to bring interest rates down to more reasonable levels," Bofinger said at Euro Finance Week.
New Italian Cabinet Seen Wednesday
The debt crisis is likely to make matters worse in the next months with nations such as Italy, Greece, Ireland, Portugal and Spain forced to adopt politically unpopular cuts to stop the bond market driving them toward default. Economists say there is no visible growth strategy in place to counter those austerity measures.
After last week's disastrous week for the euro zone's third biggest economy, Italy's Monti appeared to secure a breakthrough Tuesday when Angelino Alfano, secretary of Berlusconi's People of Freedom (PDL) party, emerged from the talks saying moves to form a government would succeed.
In brief comments to reporters, the prime minister-designate said he would present the results of his political consultations to President Giorgio Napolitano early Wednesday, hinting he had cleared any obstacles to forming a government. "I would like to confirm my absolute serenity and conviction in the capacity of our country to overcome this difficult phase," Monti said.
His technocrat-led cabinet have the job of speeding up reform of pensions, labor markets and business regulation in order to put Italy's finances on a sustainable path. It must refinance some 200 billion euros ($273 billion) of bonds by the end of April.
With the euro zone under intense scrutiny, Germany and France posted solid growth in the third quarter, according to statistics released Tuesday, but euro zone nations on the front line of the debt crisis fared much worse and analysts expect bleaker times ahead in the core economies. "Forward-looking indicators suggest that the euro zone economy is likely to drop back into recession in the fourth quarter and beyond," said Jonathan Loynes, chief European economist at Capital Economics.
The euro zone economy grew just 0.2 percent in the third quarter, lifted by France and Germany, but economists were resigned to the fact the bloc was almost certainly heading for a recession.
Greece Must Sign
Greece's failure to convince markets and its European partners that it can act decisively to rescue its finances is also fuelling the crisis, though Finance Minister Evangelos Venizelos told parliament the government would submit plans to overhaul the tax system by early next year. But the conservatives on whom new Greek premier Papademos is reliant for support demanded pro-growth policies and rejected more cuts, fuelling fears of a Greek default that may force Athens out of the currency group.
New Democracy leader Antonis Samaras said he would not vote for more austerity measures and would not sign any pledge about new belt-tightening. His party was, however, expected to back Papademos in a parliamentary vote of confidence Wednesday.
The European Commission demanded Greece provide written confirmation of its commitment to reforms to bring down its debt, no matter who wins the next election. "The Eurogroup as a whole expects Greece, the Greek political forces, to provide a clear and unequivocal commitment to the agreement ... and we expect this in writing. It has to be a letter and signed," Amadeu Altafaj, Commission spokesman on economic and monetary affairs, told reporters.
Most Greeks hailed Papademos's appointment, but thousands of people angry at more than a year of austerity are expected to rally Thursday, the anniversary of a 1973 student uprising that helped to bring down the colonels' junta of 1967-74.
Utopian Germans risk full-blown EMU depression
by Ambrose Evans-Pritchard - Telegraph
The relief rally from technocrat takeovers in Italy and Greece has already wilted, once again reviving the elemental question of whether Germany will go beyond rhetoric and commit its full strategic power to halt Europe's debt crisis.
Yields on Italy's 10-year bonds jumped back up to 6.7pc after Bundesbank chief Jens Weidmann dashed hopes for muscular intervention by the European Central Bank to stabilise bond markets and buy time for the new government of Mario Monti. "Monetary policy cannot and must not solve solvency problems of states and banks," he told a Frankfurt forum, calling for a halt to incessant pressure from the rest of the world for the ECB to violate its own legal mandate with debt monetisation.
Hours later, Germany's Chancellor Angela Merkel called for a "breakthrough to a new Europe, and political union" but ruled out Eurobonds, debt-pooling or any form of fiscal transfers to weaker EMU states in a speech to the Christian Democrat (CDU) party conference in Leipzig.
The body language from Germany has washed away any alleged benefits from installing EU technocrats in power in Rome and Athens. Spanish yields have once again crossed the danger line of 6pc. Credit default swaps measuring bond risk have reached a record highs of 203 basis points for France and 322 for Belgium, with major knock-on effects in Eastern Europe and the Baltics.
"What investors want to know is whether the ECB is ready to stand behind the bond markets because it is not clear who else is going to buy €350bn of Italian debt over the next year," said Hans Redeker from Morgan Stanley. "If we had seen a credible government in Italy six months ago it might have turned market sentiment, but it may be too late now.
"What is really dangerous is that the market is losing confidence in France even though Paris is delivering a €65bn austerity package. We are nearing the point where French bond yields will force rating agencies to downgrade France," he said.
The Swiss bank Pictet said Europe is sliding into a catastrophic slump with its policy mix of fiscal austerity, a credit crunch, and the lack of any lender of last resort. "The German recipe for solving the crisis is geared towards deleveraging all economic agents simultaneously. This is utopian. This policy will brutally depress aggregated demand. It is the route that led towards the Depression of the 1930s," it said.
Mr Weidmann is unrelenting. He said that the ECB is prohibited by treaty law from acting as a lender-of-last resort for states, whether directly or covertly through the International Monetary Fund.
What chilled markets most was his comment that Italy's bond yields are "no big deal" and that the country must sort out its own problems. "Monetary financing will set the wrong incentives. Fixing an interest rate for a country is certainly not compatible with our mandate," he said.
Many investors had assumed the ECB would step in to cap Italian yields once Silvio Berlusconi had the left office, giving Mr Monti a "dowry" of lower borrowing costs to help him shake up the labour markets as demanded the EU authorities.
"The markets want a quick win and the ECB is not willing to give it to them," said David Bloom from HSBC. "It is going to take us to the edge the abyss first. There is a lot of 'Game Theory' going on. But this can go awry if the debt cancer spreads."
Mrs Merkel is giving mixed signals. She said Europe was facing its "hardest hour" but there was no hint that Germany is ready to shoulder further debt risks. Days earlier she shot down proposals from Germany's five "Wise Men" for a temporary sinking fund to mutualise €2.3 trillion of eurozone bonds.
Mrs Merkel's version of "Fiskalunion" is not what is meant in the rest of Europe. It is essentially a "stability union" where Brussels acquires greater powers to police the deficits of sinner states.
Berlin wants limited EU changes under the Lisbon Treaty's "ratchet clause"– avoiding the need for ratification – to make it easier to impose discipline, including an EU "austerity commissioner" with powers to administer delinquent nations.
Mrs Merkel may wish to go further – and her finance minister Wolfgang Schauble is a diehard integrationist – but her hands are tied by Germany's Basic Law, the anchor of German democracy, and the constitutional court. The judges ruled in September that the fiscal powers of the Bundestag may not be transferred to EU bodies.
"There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit... then Germany must give itself a new constitution. A referendum would be necessary," said chief justice Andreas Vosskuhle.
The pro-European wing of the CDU is floating plans for changes to the Basic Law to allow for a quantum leap to a European superstate. This is vehemently opposed by Bavaria's Social Christians, and part of the CDU itself. It would require a two-thirds majority in both houses of parliament. There is a high likelihood that German voters would reject the plan. It would in any case take two or three years to push through.
Yet the crisis is escalating by the day. Moody's said it is not clear whether Europe's EFSF bail-out machinery can "fund itself in the markets at low cost", raising doubts about its ability to contain the debt crisis. The rating agency said plans to leverage the EFSF to €1 trillion have come to little, leaving it with just €266bn after funding Ireland, Portugal and Greece. "This limits the EFSF's role as an important pillar of the euro area crisis management strategy," it said.
There is nothing yet standing behind the system as Europe spins wildly into the eye of the storm.
Europe Development Bank Leads Talks to Stem East’s Crisis Damage
by Agnes Lovasz - Bloomberg
The European Bank for Reconstruction and Development is leading talks between lenders and officials from across the continent for a second time in three years to prevent funds for eastern banking units from drying up.
The solution will differ from the Vienna Initiative, a 2008 pledge from Europe’s biggest banks to back their subsidiaries in nations such as Poland and Hungary after Lehman Brothers Holdings Inc.’s collapse, Piroska Nagy, adviser to the EBRD chief economist, said yesterday in an interview. An agreement may be reached in a few weeks, she added. "What’s needed in the new situation is heightened coordination," Nagy said in London. "Otherwise we’ll have negative spillovers from narrowly nation-based solutions."
European leaders decided last month that the region’s banks must increase core capital reserves to 9 percent by mid-2012 as the sovereign-debt crisis threatens to spread to Italy and Spain. With about three-quarters of eastern Europe’s banking industry owned by lenders including UniCredit SpA and Erste Group Bank AG, local units are likely to receive less support as a result of the new requirements, the EBRD has warned.
Western European lenders need an extra 106 billion euros ($149 billion) of capital, according to the European Banking Authority. Italy’s UniCredit, the largest lender in eastern Europe, must raise 7.38 billion euros of fresh capital, it estimates. Erste, which owns the region’s second-biggest banking group, said yesterday that it requires 750 million euros.
The euro region’s debt crisis may damp demand for eastern European exports and lower inflows of capital, similar to 2008, the EBRD said today in its annual Transition Report on the 29 former Soviet bloc countries where it invests.
"Unfortunately the region again has reasons to prepare itself for another crisis," chief economist Erik Berglof said in the report. "If the crisis spins out of control, the financial integration model across advanced and emerging Europe and beyond may be in jeopardy."
Economies in the region have strengthened since 2008 and are less dependent on external financing, while bank balance sheets are generally sturdier the EBRD said. Still, lenders may need more capital because of high levels of non-performing loans, which probably haven’t peaked yet, the EBRD said.
The turmoil in advanced European nations poses "significant risks even to the already worsened outlook," the EBRD said. Hungary, Slovakia, Bulgaria are most vulnerable to contagion, followed by Croatia, Slovenia, Romania and Poland, according to the EBRD.
The Hungarian forint and the Czech koruna are the world’s two worst performers in the past month, declining 9.2 percent and 5.7 percent, according to Bloomberg data. Poland’s zloty is the fifth-weakest, dropping 4.1 percent.
Eastern Europe may face a credit squeeze as neighboring western banks withdraw liquidity, Christine Lagarde, managing director of the International Monetary Fund, warned Nov. 7. The region’s financial stability is at risk as western European lenders trim their balance sheets by as much as 2.5 trillion euros to meet capital requirements, Morgan Stanley said yesterday.
Western European banks may unwind about 13 billion euros of assets in eastern Europe, Peter Attard Montalto, a London-based economist at Nomura International Plc, said Nov. 4 in an e- mailed note.
There may be "a worrying effect on southeastern Europe, particularly Bulgaria, Serbia and Romania, as well as Hungary, given both the sizes of assets involved and the more stressed market dynamic," he wrote. "We see a potential Vienna 2 and domestic measures like capital controls, use of reserves and potential nationalization as adding to the backstop against a disorderly impact on emerging Europe."
Working More Closely
European leaders and the EBA are aware of the threat to eastern bank units, with lenders and the authorities working together more closely than in 2008-09 to address the risks, according to Nagy. Financial supervisors should "take into account" banks’ subsidiaries when encouraging them to continue lending while raising capital reserves, the EBA said in a statement this year. Banks should avoid putting "undue pressure" on credit lines to companies in nations where they have units, the EBA said.
"These principles really must be fully implemented so subsidiaries aren’t discriminated against," Nagy said. "This means that beyond the recapitalization liquidity support is also provided in one way or another."
There’s "no need and no desire" for western European lenders to remain committed to the Vienna initiative, Manfred Wimmer, Erste’s chief financial officer, said Oct. 29. The banks made the promise when countries such as Hungary and Romania had large current-account deficits and fewer options to finance themselves, he said.
"When they say there’s no need for a Vienna 2, people have in mind the specific outcome of the Vienna discussions at that time," Nagy said, citing pledges to maintain financing to eastern European units and provide fresh capital as required.
This time round, it’s more about utilizing the framework those discussions created, according to Nagy. "We have the reactivation of the Vienna platform," she said.
Eastern Europe has most to fear from banks’ retreat
by Patrick Jenkins - FT
Faced with an anaemic growth outlook in developed markets and an intensifying regulatory clampdown on banks, you would think lenders would be stepping up their focus on emerging markets.
Quite the reverse, it seems. Take China for starters. Last week, Goldman Sachs, hardly the weakest of global financial institutions, announced it wanted to offload another $1.5bn worth of shares in Industrial & Commercial Bank of China. Only a few months earlier, Bank of America Merrill Lynch had followed a similar strategy, halving its stake in China Construction Bank.
In the short term, there is a clear dual appeal of cauterising the problem of slumping Chinese bank valuations (Goldman took a $1bn hit in the third quarter of the year, having to mark down the value of its ICBC stake), while also releasing some much needed capital to buoy balance sheets.
Having such large sums tied up in shareholdings is set to be unattractive under new capital regulations. Worse still, the stakes had not brought in the business that some had expected they would. Buttering up the Chinese state, still the controlling shareholder at all local lenders, didn’t work. Following the same logic, bankers reckon the sell-down of stakes won’t damage the underpinning relationships between the US banks and their Chinese partners.
That is debatable, but what is certain is that backing away from the world’s biggest market looks odd when the prospects for business in so much of the rest of the world are bleak.
A similar trend – though less marked – is taking place in that other emerging markets powerhouse, Brazil. Here, surely, there should be no nervousness about the state’s limiting hold on the market.
All the same, HSBC is trying to sell its consumer lending business in Brazil, as part of a global pullback from much of its retail banking network, and Royal Bank of Scotland is in retreat in investment banking. Only JPMorgan is really pushing ahead with a growth strategy in Brazil, according to local rivals.
Yet, this is one of the few countries in the world where banks are still generating typical return on equity numbers of 25 per cent or more, reminiscent of pre-crisis levels on Wall Street.
Again, bankers say there is pressure from head office, and from home market regulators, for capital to be retained at the centre of a group’s operations. Nowhere is that more true than in Europe, where the continent’s banks not only have to bring themselves into line with global Basel III rules on capital adequacy over the next few years, but by June 2012 must comply with tougher targets set by the European Banking Authority, the pan-EU regulator.
If that constrains far-flung operations, it will hit hardest closer to home. As UniCredit revealed on Monday, alongside a €7.5bn rights issue, it plans to narrow its geographic focus in eastern Europe, where it is currently the number one lender. A few days earlier, Germany’s Commerzbank similarly pledged to restrict new lending to only Germany and Poland, cutting adrift the rest of its eastern European operations.
Ever since the world became excited about the Bric economies of Brazil, Russia, India and China, the promise of eastern Europe has drawn less attention. But with western banks, predominantly western European banks, controlling nearly three-quarters of eastern Europe’s banking system, this is the region that has the most to fear from a retreat of developed market banks from the emerging markets.
While Poland and the Czech Republic remain relatively attractive, virtually every other market is vulnerable to a credit crunch, as western banks freeze new lending. More disruption could be caused as they try to sell old portfolios of business or whole entities.
The squeeze is made all the tighter by the fact that the banks with the biggest presence in eastern Europe are among those with the biggest troubles back home. Aside from UniCredit and Commerzbank, the list includes Austria’s Erste and Raiffeisen, both of which are seen by analysts as undercapitalised, France’s Société Générale, which has embarked on aggressive shrinkage, not to mention the Greek banks that will have no choice but to retrench from their leading positions in parts of south-east Europe.
All of this clearly matters for the affected economies – if the traditional suppliers of credit suddenly withdraw capacity en masse, as threatens to be the case in much of eastern Europe, economic disruption looks pretty much inevitable.
But it also matters profoundly for banks and their shareholders. If western banks withdraw systematically from growth markets, either to hoard capital or to de-risk, there is yet another reason – on top of the regulatory and economic constraints – for investors to desert them.
EC set to overhaul credit ratings agencies
by Helia Ebrahimi - Telegraph
The European Commission will crack down on credit rating agencies - forcing them to report how they assign ratings and making them liable for compensation when mistakes are found. Standard & Poor's, Fitch Ratings and Moody's Investors Service dominate some 95pc of the global rating market, but have been widely criticised for serious misjudgements in the lead-up to the global crash and through the current eurozone crisis.
European markets chief, Michel Barnier unveiled the new rules, saying: "Ratings have a direct impact on the markets and the wider economy and thus on the prosperity of European citizens." "Credit rating agencies should follow stricter rules, be more transparent about their ratings and be held accountable for their mistakes," he said. He added that the rules should create "increased competition in this sector."
"My first objective is to reduce the over-reliance on ratings, while at the same time improving the quality of the rating process." Mr Barnier said he had been "surprised" by the timing of some rating firms' decisions on sovereign debt and that policy makers must not "let ratings increase market volatility further."
However, the outspoken commissioner was forced to concede on his controversial proposals to introduce a temporarily ban sovereign debt ratings under bailout circumstances. Until the last moment, Mr Barnier had insisted the new proposals would include some form of a ban. But after meeting fellow commissioners, Mr Barnier acknowledged no final agreement had been reached, adding a proposal could be reintroduced later.
The new rules, which still need approval by EU governments and the European Parliament, will tighten surveillance of credit rating agencies and limit their commercial activities. Rating agencies will be liable for their decisions, potentially sparking expensive lawsuits in civil courts.
Companies will have to rotate the credit-rating firm they use every three years, with a four-year "cooling off" period. There will also be constraints on the ability and the type of advisory work that credit rating firms are allowed to provide. As well as forcing agencies to disclose the models, methodologies and key assumptions on which they base their ratings, with annual transparency reports.
Many of the ideas have run into stiff resistance, with leading rating firms claiming they are impractical, politically motivated, and that they damage the quality and independence of ratings. A Moody's spokesman said the proposals were "inconsistent with the objectives of stabilising credit markets" adding that the rules would "disrupt access to credit and increase market volatility."
According to Moody's the move to force ratings to be approved by EU regulator ESMA would lead to a perception that all views were "European regulatory views on EU credit" - damaging all objectivity. Richard Hopkin, at the Association for Financial Markets in Europe said ESMA's ability to suspend sovereign ratings "may damage the independence of the credit rating agencies in the eyes of the financial markets."
Can vulture funds be prevented from preying on poor countries?
by Mark Tran- Guardian
Firms that buy up the debt of poor countries and then try to force them to pay up are being hobbled by legislation in the UK. But the law doesn't go far enough
Appropriately named, vulture funds buy up the defaulted sovereign debt of poor countries and then refuse to participate alongside other official creditors in international debt relief initiatives.
The wheeze followed the heavily indebted poor countries (Hipc) initiative in 1996, when donor countries and multilateral institutions such as the International Monetary Fund (IMF) and the World Bank cancelled more than $90bn in bilateral and multilateral debt to poor countries. Hipc, however, was a voluntary initiative, not binding on private creditors. This allowed vulture funds – specialised types of private investment and hedge funds – to acquire some of this debt and insist on full repayment from countries they targeted.
In 2007, finance ministers from the G7 industrialised countries voiced their concerns about "the problem of aggressive litigation against Hipc countries", and former prime minister Gordon Brown, when he was chancellor, condemned such lawsuits as "a morally outrageous outcome" in a speech to the UN in 2002. The World Bank said vulture funds were "a threat to debt relief efforts".
The exact number of lawsuits involving vulture funds, operating in offshore tax havens such as the Cayman Islands, is unclear as they tend to emerge through reports on the ground. According to the IMF and the World Bank, many countries have been pursued by vulture funds, including Cameroon, Ethiopia, Sudan, Uganda and the Democratic Republic of the Congo, as illustrated by the case involving FG Hemisphere. The IMF has said that vulture funds are engaged in claims seeking a total of $1.47bn from Hipc countries.
The immediate impact of such lawsuits is on the targeted countries themselves, which have to fork out millions. In 2007, Zambia paid $15.4m to settle a $55m case brought by Donegal vulture fund, which had bought for $3.2m the debt Zambia originally owed to Romania. Donegal's defenders argue that Zambia broke legally binding promises on the debt.
Vulture fund litigation also complicates life for any company doing business in, or with, a country that has become a target. Vulture funds not only litigate against debtor countries, they also pursue solvent companies that have contracted to do business with the countries. To protect themselves from vulture-fund litigation, most trading partners of countries targeted have to adjust the price of their contracts to insure against expensive litigation, and the competing claims of vulture funds.
However, an IMF-World Bank report last year says the number of lawsuits by vulture funds has dropped in recent years, from 33 to 14 during 2008, rising to 17 during 2009. This has been attributed to a number of national and multilateral responses, notably Britain's recently enacted law limiting amounts that litigating creditors can recover in UK courts against Hipc debtors.
Similar legislation is being pushed in the US, although nothing is expected before the US presidential election next year. In 2009, the African Development Bank launched its African legal support facility to provide legal help to countries facing litigation from commercial creditors.
UK legislation on vulture funds has already had an impact, when Liberia last year reached agreement to repay just over 3% of face value of $43m in debt. The case was brought by two Caribbean-based vulture funds, Hamsah Investments and Wall Capital Ltd, over a debt dating back to the 1970s. The case sparked a furore when the high court ordered Liberia to repay the full debt in 2009. The case mobilised debt campaigners, who pushed for a change in the law – resulting in the Debt Relief (Developing Countries) Act 2010 being passed.
The law, a world first, requires commercial creditors to comply with the terms of international debt cancellation schemes, which specify a single discount rate for creditors to ensure equal treatment. The law applies to the UK courts and ensures that public money given towards debt cancellation is not diverted to private investors. However, debt campaigners point out that UK legislation applies only to the 40 Hipc countries and applies to cases before 2004.
Vulture funds – how do they work?
Funds who buy up debts of countries mired in war and chaos have received payouts of $1bn and are due a further $1.3bn
How do vulture funds make their money?
They buy up the debts of countries in chaos and war, speculating on the fact that when investors finally come back into the country – often encouraged by generous debt writedown schemes and International Monetary Fund programmes – the vultures will get their money back with huge interest on top, benefiting from the fledgling trade and new liquidity.
What's wrong with that?
These desperately poor countries like the Democratic Republic of the Congo, for example, where 100 women a week are dying in childbirth, have better things to do with their money than pay off the vultures.
Investors and companies who want to put money into rebuilding the countries, by investing in natural resources – mining, gold, diamonds and cobalt for example – simply stay away. They worry that they will also be targeted by the vultures by getting involved in joint projects with the government. One vulture fund, FG Hemisphere, tried to seize the embassy of the DRC in Washington as payment for the debt.
How big is the problem with these vulture funds?
The World Bank estimates that more than one-third of the countries that have qualified for its debt relief programmes have been targeted with lawsuits by at least 26 vultures. The funds have so far received payouts totalling $1bn.
Why is the Jersey loophole so important?
Many countries have now banned the vulture funds from collecting on the debts through their courts. But a few places, mainly tax havens like Jersey and the British Virgin Islands, still have not closed the loophole. Next month one vulture is hoping for a $100m payout through a court in Jersey. There is still a flock of at least another 22 vultures waiting for a further $1.3bn in payouts.
UK urged to prevent vulture funds preying on world's poorest countries
by Greg Palast, Maggie O'Kane and Chavala Madlena - Guardian
Campaigners demand Jersey legal loophole be closed as financiers seek $100m from the DRC
Britain is being urged to help close down a legal loophole that lets financiers known as "vulture funds" use courts in Jersey to claim hundreds of millions of pounds from the world's poorest countries. The call came from international poverty campaigners as one of the vulture funds was poised to be awarded a $100m (£62m) debt payout against the Democratic Republic of the Congo after taking action in the Jersey courts.
"The government could close this loophole tomorrow if it wanted to and stop tax havens becoming the 'go-to' destinations for vulture speculators. These people seek to profit by forcing the world's poorest countries to pay them millions," said Max Lawson, head of policy at Oxfam.
Vulture funds legally buy up worthless debt when countries are at war or suffering from a natural disaster and defaulting on their sovereign debt. Once the country has begun to stabilise, vulture funds cash in their cheap debt deeds, at massively inflated cost to the countries.
In the case before the Jersey court, to be decided next month, FG Hemisphere, run by vulture financier Peter Grossman, is trying to collect $100m from the DRC on a debt that appeared to start out at just $3.3m. The original debt was owed to the former Yugoslav government to build power lines.
Jubilee Debt Campaign, Oxfam and Christian Aid are just three of the big international charities calling for vulture funds to be banned. "It would be catastrophic for the world not to close these loopholes. Offshore centres such as Jersey are the outriders for dangerous deregulated dealing … The Jersey government also needs to act fast to close the loophole before it is too late," said Tim Jones, of the JDC. Jones will arrive in Jersey on Wednesday to lobby the government to close the loophole.
Grossman told a joint investigation by BBC's Newsnight and the Guardian: "I am not doing anything wrong. I am collecting a legitimate debt." However, the investigation has found evidence that the debt was improperly acquired. The investigation has discovered that the original loan, owed to Bosnia and intended to finance the power lines, may have been illegally sold to Grossman, according to the Bosnian authorities.
Bosnia's police claim the former prime minister, Nedzad Brankovic, who sold the debt, was acting illegally as he did not personally own it. Instead, it belonged to the Bosnian state. Zufer Dervicevic, chief inspector of Bosnia's financial police, says Brankovic acted illegally: "Of course it is illegal, that's why we filed a criminal complaint. The financial police saw elements of criminal activity within the management's actions and this crime is abuse of power."
Although the Bosnian police have recommended Brankovic be charged, no charges have been brought against him. The critical ruling on the DRC comes when the country is facing yet another cholera outbreak. Boukari Tare, a Unicef sanitation specialist in the DRC, said the $100m that could be awarded to the fund would save the lives of 200,000 children.
Outside his New York home, Grossman was questioned on whether he thought his pursuance of $100m from the war-ravaged country was fair. He replied: "Yeah, I do, actually." He added he was unaware the debt was tainted by any potential illegality and disputed its real value was $3.3m.
Before turning to the Jersey loophole, Grossman's company had tried unsuccessfully to seize the DRC embassy in Washington as a downpayment on the debt. The bid was turned down by the US authorities, but FG Hemisphere tried once more in the US before moving on to Hong Kong. Both actions were unsuccessful.
Despite previous success for FG in the English courts, winning $30m from the DRC in 2007, the new Debt Relief Act in effect on the mainland meant Jersey became an attractive breeding ground for vulture funds as it did not apply there. The exact number of lawsuits involving vulture funds operating in offshore tax havens is unclear, as many of these funds are highly secretive of their holdings.
The International Monetary Fund and the World Bank said many countries had been pursued by vulture funds, including Cameroon, Ethiopia, Sudan, Uganda, and the DRC. The IMF has said that vulture funds are engaged in claims seeking a total of $1.47bn from the world's poorest countries.
Lawson added: "It's outrageous that when the rest of the world is trying to help rebuild these desperately poor countries, these guys can swoop in and use a legal loophole in Jersey to demand millions of dollars that could be spent instead getting kids into school."
The DRC's hopes rest on an appeal next month, when the privy council in London will decide whether the $100m award should stand and Jersey considers shutting down the loophole for good.
IMF sounds warning for Chinese banking system
by Alex Hawkes - Guardian
China's banks face 'steady build-up of financial sector vulnerabilities', according to IMF report
A rise in off-balance sheet liabilities and a house-price boom have left Chinese banks vulnerable to heavy losses, the International Monetary Fund (IMF) has said.
In a wide-ranging report into the Chinese financial system, the IMF said that China is facing a "steady build-up of financial sector vulnerabilities". "The system is becoming more complex and inter-linkages between markets, institutions, and across international borders are growing. In addition, informal credit markets, conglomerate structures, and off-balance sheet activities are on the rise," it warned on Tuesday.
The government's role in allocating credit, as well as broader economic policy, is leading to a build-up in contingent liabilities, the IMF added, although it said it was difficult to quantify the risks given the paucity of data. Stress tests on the country's 17 largest banks showed they were resilient to one-off shocks: "If several of these risks were to occur at the same time, however, the banking system could be severely impacted," the IMF has said.
The review is the first time the IMF has reviewed the Chinese banking system. It recommends that the Chinese government intervenes less to keep down the value of the yuan, uses interest rates rather than administrative limits to control credit demand, and allow banks to make commercial decisions on lending.
"Banks' large exposures to state-owned enterprises, guaranteed margins provided by interest rate regulations, still limited ability and willingness to differentiate loan rates, coupled with the implicit guidance on the pace and direction of new lending, undermine development of effective credit risk management in the banks. It is important that banks have the tools and incentives to make lending decisions based upon purely commercial goals."
In response to the report, the People's Bank of China (PBC), the country's central bank, said: "While the assessment in the reports is, overall, objective and positive, and the recommendations on the future reforms are constructive, a few points are not sufficiently well-rounded or objective, and the timeframe and suggested priorities of some proposed reform measures need to be further analysed." In particular, the PBC said China had already moved away from administrative quotas on credit and towards an interest-rate based monetary policy.
China's breakneck growth has created huge opportunities for investment. But many warn of the significant risks attached, too. Veteran UK fund manager Anthony Bolton, of Fidelity, said on Monday he was employing five different corporate investigation firms to check up on Chinese investment targets after a disastrous year in which the value of some of his fund's assets have slumped on the suspicion of fraud.
Chinese TV Host Says Regime Nearly Bankrupt
by Matthew Robertson - Epoch Times
China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.
Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece.
The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or "everyone will look bad," in the audio that is now on Youtube.
In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. "What I’m about to say is all true. But under this system, we are not allowed to speak the truth," he said.
Despite Lang’s polished appearance on his high-profile TV shows, he said: "Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it." He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. "If you don’t agree with him, he thinks you are against him," he said.
Lang’s assessment that the regime is bankrupt was based on five conjectures.
- Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.
- Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.
- Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.
- Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).
- Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said. Once the "economic tsunami" starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.
Several commentators have expressed broad agreement with Lang’s analysis. Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far fetched. Major construction projects have helped inflate the GDP, he says. "On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession."
Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province "had to personally see the hard data."
Cheng Xiaonong, an economist and former aide to ousted Party leader Zhao Ziyang, said that high praise of the "China model" is often made on the basis of the high-visibility construction projects, a big GDP, and much money in foreign reserves. "They pay little attention to things such as whether people’s basic rights are guaranteed, or their living standard has improved or not," he said.
Behind the fiat control of the economy, which can have the appearance of being efficient, there is enormous waste and corruption, Cheng said. It means that little spending is done on education, welfare, the health system, etc.
Cheng says that for the last decade the Chinese regime has accumulated its wealth primarily by promoting real estate development, buying urban and suburban residential properties at low prices (or simply taking them), and selling them to developers at high prices.
According to Cheng, the goals of regime officials (to enrich themselves and increase their power) are in direct conflict with those of the people–so social injustice expands, and economic propaganda meant to portray the situation as otherwise prevails. Few scholars inside the country dare to speak as Lang has, Cheng said. And that’s probably because he has a professorship in Hong Kong.
China vs. USA bout: 6 rounds to oblivion
by Paul B. Farrell - MarketWatch
China’s not winning, America is throwing the fight
"Let’s rrrummmmble!" China vs America. Imagine Caesars Palace. Fight night. New announcer. Harvard financial historian Niall Ferguson subs for Michael Buffer, iconic Vegas fight announcer, famous for his signature "Let’s get ready to rumble." Trump signed him exclusively. Sugar Ray Leonard said, "When Buffer introduces a fighter, it makes him want to fight."
OK, fight fans, Ferguson’s the new Buffer in this "Fight of the Century." His must-read book, "Civilization: The West and the Rest," hit the stands earlier this month. The promos are already rrummmbling: China vs. USA for the heavyweight crown America’s "owned" for centuries.
Let’s rrummmble! Vegas odds: China wins. Why? You decide: Ferguson’s Newsweek excerpt: "The lesson of history is clear. Voters and politicians alike dare not postpone the big reboot." Yes, he sees a war of killer apps. Says America needs rebooting.
But also hints at a knockout: "Decline is not so gradual that our biggest problems can simply be left to the next administration, or the one after that. If what we are risking is not decline but downright collapse, then the time frame may be even tighter than one election cycle."
Get it? Start planning. Now. Later’s too late. Warning: this fight is no video war game with apps that need rebooting. This is the World Heavyweight Championship: China vs America. Huge stakes: Super-Power status. Bragging rights in a global economy that’s $65 trillion racing to $140 trillion by 2050. No video game. More like an "Ultimate Extreme Fighting" grudge match. Winner take all. East beats West. China conquers America. Let’s rrummble!
No, China is not winning, America’s taking a dive in 6 rounds
Yes, the plot thickens: As an academic, Ferguson plays softball with words as well as metaphors. Imagine his message in colorful jargon by ESPN announcers at a mixed-martial arts fighting brawl. They’d make it painfully obvious: China’s already winning this fight.
Why? Because America’s not "in it to win it." We’re already throwing this fight, folks. Yes, I’m mad as hell: Marine vet, don’t like what’s happening in my America today. Yet, Ferguson has a calming perspective. He sees our great nation on an inevitable historical trajectory, a path of destiny that will play out no matter who gets elected in 2012, 2016, or even 2040.
In his grand sweep of historical cycles, even the corruption of ideals and values by self-destructive politicians and greedy capitalists is predictable. And we are setting ourselves up to lose. China’s not winning, folks, we’re taking a dive.
Warning: History proves nations collapse suddenly, rapidly, terminal
Ferguson’s brutal: "Civilizations don’t rise, fall, and then gently decline, as inevitably and predictably as the four seasons … History isn’t one smooth, parabolic curve after another. Its shape is more like an exponentially steepening slope that quite suddenly drops off like a cliff," an argument he made last year in Foreign Affairs.
History’s loaded with examples: "Machu Picchu, the lost city of the Incas. In 1530 the Incas were the masters of all ... Within less than a decade … their empire" was smashed "to smithereens." Ming dynasty in a decade. Rome within decades. Recently the Soviet Union:
"And if you still doubt that collapse comes suddenly, just think of how the postcolonial dictatorships of North Africa and the Middle East imploded this year. Twelve months ago, Messrs. Ben Ali, Mubarak, and Gaddafi seemed secure in their gaudy palaces. Here yesterday, gone today."
And the plot’s so predictable: "What all these collapsed powers have in common is that the complex social systems that underpinned them suddenly ceased to function. One minute rulers had legitimacy in the eyes of their people; the next they didn’t."
Next? The European Union is at the edge. "In the realm of power … you’re fine until you’re not fine—and when you’re not fine, you’re suddenly in a terrifying death spiral." Suddenly. Rapidly. Terminal.
Seriously, China is not winning, we’re taking a dive in 6 rounds
Ferguson uses the popularity of killer apps as a literary device to explain the West’s six-part lock on global power for the past five centuries. No, killer apps is softball lingo. Heavyweight championship boxing is a more accurate metaphor.
Why too soft? "In 1500 the average Chinese was richer than the average North American." More historical facts: "By the late 1970s the average American was more than 20 times richer than the Chinese." Back in "the early 20th century, just a dozen Western empires — including the United States — controlled 58% of the world’s land surface and population, and a staggering 74% of the global economy."
No more. In a few short years China’s economy will be bigger than America’s. Ferguson warns: There’s one main "insidious cause" of the decline of the West: "The tendency of Western societies to delete their own killer apps." That’s another way of saying that we’re now sabotaging what made America great, committing suicide in six ways. America is really not "in it to win it."
In fact, we have been throwing this fight for a generation. Here’s Ferguson announcing this historical rumble:
- Round #1. The Scientific Revolution … hard right jab to the jaw
Ferguson says "all the major 17th-century breakthroughs in mathematics, astronomy, physics, chemistry and biology happened in Western Europe." But today, we’re falling behind. "Mathematical literacy" surveys reveal huge gap: China’s youth are way ahead.
- Round #2: Revolution in Medicine … solid left hit to the ribs
"Nearly all the major 19th- and 20th-century breakthroughs in health care were made" in "germ theory, antibiotics and anesthesia." Today America "spends twice what Japan spends on health care and more than three times what China spends." And yet both beat us with huge increases in life expectancy the last generation.
- Round #3: Democracy and Rule of Law … one-two punches to head
Ferguson says "an optimal system of social and political order emerged in the English-speaking world." But today in World Economic Forum (WEF) measures of "issues relating to property rights and governance," America’s performance is "shockingly bad." We’re "50th for public trust in the ethics of politicians, 42nd for various forms of bribery and 40th for standards of auditing and financial reporting."
- Round #4: Domestic, Global Competition … bleeding, cut over eye
"Europe was politically fragmented into multiple monarchies and republics," says Ferguson, "internally divided into competing corporate entities." Today our advantage is gone: The WEF shows us in "one of the steepest declines among developed economies," while China "has leapt up" big-time. At home "extraordinary social polarization," inequality and a new "super-rich elite" that’s "dangerously divorced from the rest of society" is killing our edge.
- Round #5: America’s Consumer Society … pounding, on the ropes
The Industrial Revolution "took place where there was both a supply of productivity-enhancing technologies and a demand for more, better and cheaper goods," says Ferguson." Today, "26 of the 30 biggest shopping malls in the world are now in emerging markets" Just three here, as Americans struggle to pay down consumer debts.
- Round #6: Our Work Ethic … down, short count, up, staggering
The West was first "to combine more extensive and intensive labor with higher savings rates, permitting sustained capital accumulation." But "who’s got the work ethic now?" asks Ferguson. "The average South Korean works about 39% more hours per week than the average American." Their school year is 40 days longer." And in U.S. universities, we "know which students really drive themselves: the Asians and Asian-Americans."
- Round #7: Can’t come out of corner … referee calls the fight
OK, let’s combine the two metaphors: A championship boxing match-up between two robotic heavyweights guided by killer apps, like in Hugh Jackman’s recent movie, "Real Steel." But now the rrummmmbling’s over: After many centuries, China has won the World Heavyweight Championship title, taken it back from America, "The West and The Rest."
Finally, Ferguson wraps up the dueling metaphors: "Most Americans remain instinctively loyal to the killer applications of Western ascendancy, from competition all the way through to the work ethic. They know the country has the right software. They just can’t understand why it’s running so damn slowly." His solution resonates in America’s Apple generation: "Delete the viruses that have crept into our system."
Yes, Ferguson says delete "viruses." America’s suicidal viruses: "The anticompetitive quasi monopolies that blight everything from banking to public education; the politically correct pseudosciences and soft subjects that deflect good students away from hard science; the lobbyists who subvert the rule of law for the sake of the special interests they represent — to say nothing of our crazily dysfunctional system of health care, our overleveraged personal finances and our newfound unemployment ethic."
Delete viruses? Never happen: Koch brothers? Norquist? McConnell? They’re all rigid, dogmatic ideologues. Fuggetaboutit. Ferguson knows it. But he’s too polite to admit it like a real fight announcer.
You know it too. We’re in denial, kidding ourselves. Secretly we know that few ever learn the lessons of history in time to change, to prevent a collapse. So nothing changes. Nothing. Only a deadly historic catastrophe will jar America’s obsessed, myopic Super Rich and their clueless, ineffectual political puppets and lobbyists.
Get it? A crash is dead ahead. But when it hits, it’ll be too late, the revolution will be raging, and we’ll all suffer, big-time. Wait, listen, a cannon’s roaring. No, it’s the "99%ers" rrummmbling!
The stock market’s big lie revealed
by Brett Arends - MarketWatch
Private-equity companies outperform the market
Millions of people still put their faith in the stock market. Even after the events of the past dozen years people still hold trillions of dollars in equities and equity mutual funds in their personal accounts and 401(k) plans.
They believe, as they’ve repeatedly been told, that "free" and public markets offer the best long-term deal for themselves and for the economy as a whole. They are told that the stock market is "efficient," always setting the "right" prices for securities and always squeezing the best performance out of the economy.
Our country, including our government, relies to a remarkable degree on the idea that if you let stocks trade publicly they will "find their level" and we will all gain. Even the Supreme Court has cited the verdict of the stock market in support of decisions.
But is that right? Or is it all a big lie?
Into my hands last week fell a confidential document that makes me wonder, once again. It is the latest analysis of the private-equity industry by Cambridge Associates, a highly regarded investment advisory firm. Private-equity firms jealously guard their performance figures from the public and, to a lesser extent, from competitors. The person who gave me the document begged me not to disclose him as a source.
Why is the document so explosive? Because it shows what a terrible deal the public stock markets have really been for ordinary investors. And it does that by showing how much better investors have done in the hands of small groups of private-equity managers. The numbers, reported as of June 30, are simply staggering.
Over any decent stretch, private equity has trounced the Standard & Poor’s 500 index. If you’d invested $100,000 in the Standard & Poor’s 500 index 25 years ago, and stuck it out through all the turmoil that followed, you would have made about $800,000 in profits in return for all your trouble.
Sound good? Try this. If you’d invested in a typical basket of private-equity funds you’d have made $2.1 million. No kidding. The gap in recent years has been even more startling. Over the past, grim decade, that same investment in the S&P would have earned you $30,000 in profits. Meanwhile, private-equity investors have earned $180,000. Six times as much.
Even over the last five years, a disaster for the U.S. economy and for investors in the U.S. stock market, private equity has posted returns of 10% a year. This is no mere detail.
If public markets were really "efficient," then you would expect them to capture most, if not all, of this potential performance themselves. After all, if Amalgamated Widgets is currently trading on the New York Stock Exchange at $50 a share, but under the right management, and with the right strategy, it should really be worth $100 a share, you would expect the public markets to get it there.
You would expect stockholders would get the upside at least into the $90 to $100 range. You would not expect, in an "efficient" market, for AW to drift around at $50 or so, maybe for years, before being taken over by a private-equity firm for $60 … and then sold back to the stock market five years later at $120. But, as the research from Cambridge Associates shows, this happens all the time. Over and over again.
Remember, too, that these private-equity funds are achieving this outperformance even after hefty fees. If this were the case of a few private-equity funds beating the stock market, or a few stocks being mispriced, it wouldn’t matter so much. And if the outperformance were restricted merely to funds that invest in small companies and start-ups, maybe that would be OK, too. After all, maybe the stock market isn’t that efficient at pricing tiny companies.
But when the entire stock market systematically underperforms private equity, and does so by a country mile, it stands condemned as shockingly inefficient. Most egregiously of all, it seems that private-equity investors are making some of their best returns by taking big public companies private and running them better.
If public markets were efficient, that would be either incredibly difficult or impossible. Big companies should be efficiently priced and efficiently run. Yet the actual numbers prove otherwise. Over the past 20 years, public investors in large-company stocks, through the S&P 500, have reaped a total profit on their initial investment of about 400%. But over the same period of time large-company stocks that have been bought out by private-equity firms have produced returns for their investors, net of fees, of 1,700%.
There are three take-aways.
- First, the next time someone cites the verdict of the stock market have a good laugh. Federal Reserve Chairman Ben Bernanke is fond of arguing that his latest money-printing endeavor is a success because the Dow or the Russell 2000 is up. Maybe we should ask him: Is it improving returns for private equity?
- Second, the next time someone tells you stock-market index funds must always outperform, because "you can’t beat the market over time," laugh at them as well. Index funds beat most actively managed funds, but that is largely an indictment of most actively managed funds. Private-equity firms have handsomely beat the market over time for decades.
- And, third, be wary of dealing with a private-equity manager. As a general rule, don’t sell him anything he is willing to buy, and don’t buy anything he is willing to sell. Private-equity managers make their money at the expense of the suckers… excuse me, ordinary investors. They only buy stocks for a lot less than they are worth, and they only sell them for a lot more than they are worth. It’s not complicated.
No wonder Chairman Stephen Schwarzman, and the other honchos at private-equity group Blackstone were so eager to sell stock in their company to the public in 2007. The IPO was $31 a share. Today that stock is $15. Their gain, your loss. It’s something to bear in mind during the next IPO.
Hugh Hendry: 'I work ... trying to get opportunities from the arcane world of paradox '
The Occupy movements are the realists, not Europe's ruling elites
by John Gray - Guardian
The protesters realise our post-cold-war settlement is at stake – unlike a political class in thrall to a defunct market utopia
The Occupy movements have been attacked for being impractical visionaries. In fact it is the established political classes of the west that are wedded to utopian thinking, while the protesters are recalling us to the actualities of human experience. Based on economic theories that left out human beings, the global free market was supposed to be self-regulating. Now a process of disintegration is under way, in which the structures set up in the post-cold-war period are visibly breaking up.
Anyone with a smattering of history could see that the hubristic capitalism of the past 20 years was programmed to self-destruct. The notion that the world's disparate societies could be corralled into a worldwide free market was always a dangerous fantasy.
Opening up economies throughout the world meant ordinary people were more directly exposed to the gyrations of market forces than they had been for generations. As it overthrew existing patterns of life and robbed large numbers of people of any security they might have achieved, global capitalism was bound to trigger a powerful blowback.
For as long as it was able to engineer an illusion of increasing prosperity, free-market globalisation was politically invulnerable. When the bubble burst, the actual condition of the majority was laid bare. In the US a plantation-style economy has come into being, with debt-servitude for the many coexisting with extremes of volatile wealth for the few.
In Europe the muddled dream of a single currency has resulted in social devastation in Greece, mass unemployment in Spain and other countries, and even, for some, reversion to a life based on barter: sucking society into a vortex of debt deflation, austerity policies are driving a kind of reverse economic development.
In many countries a settled bourgeois existence – supposedly the basis of popular capitalism – has become an impossible aspiration. Large numbers are edging closer to poverty and a life without hope.
History tells us how perilous this process can be. It has been taken for granted that a sudden collapse of the kind that occurred in the former Soviet Union and more recently Egypt cannot happen in advanced market economies. That assumption may be tested severely in coming years.
While totalitarian mass movements of the sort seen in the 30s are not going to return, Europe's demons have not gone away. Blaming minorities and immigrants is a perennially popular response to economic dislocation, and ethnic nationalism can be hideously destructive. In the US the continuing demise of the middle class could engender a style of politics even more rancorous and unhinged than that prevailing today.
A figure such as Father Coughlin, the Depression-era radio demagogue, shows what can be expected as the economy continues its slide. With the rise of trigger-happy politicians like Mitt Romney and the need for Obama to act tough, it would be unwise to rule out the prospect of another major war.
Despite the claims of some protesters, what is required is not a full-scale retreat from globalisation – though that may happen as countries seek shelter – but a more restrained version of globalisation in which worldwide linkages grow organically, and different countries are not penalised for having different economic systems.
A more fragmented world could also be a more stable world. A body of common rules would still be necessary, but there would be no attempt to force convergence on a single type of capitalism. Governments could act as brakes on market forces, rather than – as at present, when they have taken on the debt of reckless banks – being in the position of overleveraged or insolvent hedge funds.
The trouble is that there is no global institution with the authority to frame the necessary reforms. In our multipolar, or non-polar, world, the deciding forces are geopolitical. The prospect in Europe is not only of deepening recession: Germany faces a choice between allowing the European Central Bank to refloat the eurozone through massive quantitative easing or else withdrawing from the eurozone along with Austria, Holland, Finland and maybe some Baltic states.
Either way, the European framework put in place after the fall of communism and German reunification will be altered fundamentally. Moving from attacking the peripheral countries to an assault on Italy, Spain and soon France, global markets are unravelling the post-cold-war European settlement.
The emergence of a two-tier eurozone, with Germany leading a Hanseatic-style northern league and France the Mediterranean countries, would sever the Franco-German axis that has for more than 60 years served as the continent's linchpin.
Refloating the eurozone by large-scale money-creation could stave off imminent disaster at the price of generating a great inflation a few years down the line; but the divergences between countries, which are the root of the problem, would not be ended. Forcing societies with different wage costs and levels of growth along with different histories and political systems into a single framework, the eurozone would still be a fragile construction.
The departure of Papandreou and Berlusconi has been welcomed, but their replacements – heading technocratic administrations rather than democratically accountable governments – are committed to the same self-defeating policies of austerity. European leaders are turning to China, which is deeply concerned by the crisis. But it is fanciful to imagine that China will bail out a continent that lacks the capacity to govern itself.
The risk is that Europe will drift until markets finally lose confidence and trigger a disorderly breakup of the eurozone's unworkable structures. European elites have yet to face the fact that radical change is unavoidable.
The demands of the Occupy movement may be inchoate, or else conflicting. But it is not the protesters who threaten the world economy. The danger comes from denying the fact of systemic crisis. By trying to prop up a system that is chronically dysfunctional, our rulers are making a cataclysmic collapse more likely.
So far in Britain only Ed Miliband has acknowledged the importance of the Occupy movement. It should be a warning to the entire political class. The people camped outside St Paul's may have no clear solutions. But it is they – not ruling elites in thrall to a defunct market utopia – who are engaging with reality.
Money has been privatised by stealth
by Ben Dyson - Guardian
The greatest privatisation in history has gone unnoticed. It's time to take from the banks the power to produce money
It's common knowledge that printing your own £10 notes at home is frowned upon by Her Majesty's police. Yet there's a small collection of companies that are authorised to create – and spend – more new money than the counterfeiters have ever been able to print. In industry jargon, these companies are called "monetary and financial institutions", but you probably know them by their street name: "banks".
The money that they create, effectively out of nothing, isn't the paper money that bears the logo of the government-owned Bank of England. It's the electronic money that flashes up on the screen when you check your balance at an ATM. Right now, this electronic money makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of real cash that can be touched.
Hard to believe, isn't it? Martin Wolf, one of the experts who sat on the independent commission on banking, put it bluntly, saying in the Financial Times that "the essence of the contemporary monetary system was the creation of money, out of nothing, by private banks' often foolish lending".
Here's how it works. When you ask the bank for the money to buy a one-bedroom box in London, the money that appears in your account isn't borrowed from some prudent grandmother's life savings. In fact, the bank simply types those numbers into your account, creating brand new money that you can now spend.
As other banks do exactly the same, the amount of money in the economy grows and grows. Every new mortgage creates new money, which pushes up house prices just a little more and forces the next buyer to borrow even more from the banks. (A more detailed and fully-referenced explanation of this process is given in the book Where Does Money Come From? published by the New Economics Foundation.)
Through this process of creating money, banks have been able to inflate the money supply at a rate of 11.5% a year, pushing up the prices of houses and pricing out an entire generation.
Of course, the flipside to this creation of money is that with every new loan comes a new debt. This is the source of our mountain of personal debt – not money that had been prudently saved up by pensioners, but money that was created out of nothing by banks and lent to anyone and everyone. Eventually the debt burden becomes just too high, and we see the wave of defaults that triggered the start of the ongoing financial crisis.
But how did something as important as money become privatised? How did the power to create money fall into the hands of the same banks who caused the crisis, with such devastating consequences for millions of ordinary people?
Incredibly, the law that makes it illegal to print your own tenners at home has never been updated to apply to the electronic money that is now created by banks. As we began to use electronic money to make the vast majority of payments, cash became less important and the power to create money shifted to the banks that caused the crisis. Without anyone noticing, the power to create money was privatised by stealth.
So while criminal gangs manage to create about £2.5bn of fake cash each year, the banks collectively create more than £100bn a year without breaking a single law. Their reward for doing so is the interest that is currently being collected on nearly every pound in existence. The cost to the rest of us is a lifetime in debt.
This brings us to a very simple solution to the financial crisis. Many of the current protesters might be surprised to hear that the answer to our current crisis comes from a former Tory prime minister. Back in 1844, Sir Robert Peel realised that metal coins, which at that time were the only legal form of money, had been superseded by new paper notes issued by banks.
These paper notes were lighter and more convenient, and therefore much more popular. Peel's 1844 Bank Charter Act took the power to create paper money away from the banks and placed it back under control of the Bank of England. We should now do exactly the same with the power to create electronic money. My own organisation, Positive Money, has even drafted the legislation that would be required to do this.
By reclaiming this power, we can ensure that new money is not used to blow up house price bubbles and fund risky speculation. Instead, newly created money can be put in at the roots of the economy, through ordinary consumers. It will then end up with shops, businesses and factories, who can use it to invest, grow and create jobs.
Simply "getting banks lending again" won't help when the public are already saddled under a mountain of debt. What we need is more money, not more debt. This is impossible while all money is created by banks when people go into debt.
Of course, we need to shelter this power to create money from vote-seeking politicians. But the power to create money is far too dangerous to leave in the hands of the banks who caused the crisis. Taking this power away from them is our best hope of both ending the current crisis, and preventing the next one.
The Ninety-Five Theses on the Ills of Europe
by Jérôme E. Roos
This list of theses was pinned to the door of the European University Institute in Florence, Italy, while EU President Herman Van Rompuy was delivering a lecture on the political and economic crisis. It was prepared by a group of concerned PhD researchers associated with with the Collettivo Prezzemolo. These are just some issues we came up with — the list is obviously not meant to be exhaustive. For more theses, consult the peoples of Europe!
1. No to austerity!
2. Forgive the debt!
3. Strengthen the welfare state!
4. Redistribute wealth – tax the rich!
5. Defend social rights!
6. End labor market precarity!
7. Combat wage stagnation!
8. Establish a minimum income scheme!
9. Invest in free, high-quality public health!
10. This is not a clash of generations – defend pension rights!
11. End the privatization of public goods and state assets!
12. No to bankocracy – too big to fail is too big to exist!
13. People before profits – bail out the people not the banks!
14. No to the rule of the rating agency oligopoly!
15. End the ECB’s obsession with inflation control!
16. Troika out of Greece!
17. IMF and ECB out of Italy, Ireland and Portugal!
18. Institute a common European debt!
19. Institute capital controls!
20. Institute a financial transaction tax!
21. Regulate the financial sector!
22. Outlaw over-the-counter commodity speculation!
23. Nationalize failing banks and restructure them into cooperatives!
24. Break up investment and retail banks!
25. Crack down on offshore tax havens!
26. If corporations are legal persons, why aren’t they paying taxes?
27. Curtail corporate lobbying in Brussels!
28. No common currency without a common democracy!
29. You can’t balance the budget with a democratic deficit!
30. Elect the President!
31. Allow us to remove the President!
32. Elect the Commission!
33. Allow us to dismiss the Commission!
34. Empower and downscale the European Parliament!
35. Bring EU bureaucrat pay back in line with common standards (and tax it)!
36. What about the Irish referendums?
37. What about the Dutch referendum?
38. What about the French referendum?
39. Why were we so afraid of a Greek referendum?
40. Stop coddling up to corrupt national elites at the expense of the people!
41. Don’t play us apart – defend cross-national solidarity!
42. Don’t blame the lack of a public sphere – the peoples of Europe exist!
43. Define our borders inclusively, not exclusively!
44. End the illegal war on terror!
45. Stop coddling up to dictators!
46. Prosecute all war criminals!
47. End the EU-condoned oppression of the Palestinian people!
48. Ban arms sales to Greece and authoritarian regimes outside of Europe!
49. Stop cracking down on pro-democracy protests at home while encouraging them abroad!
50. Develop our own democracy, don’t just export this flawed system as if it were perfect!
51. Don’t produce elitist expat multiculturalism – aim for a multicultural society on all levels!
52. No to Fortress Europe! No to FRONTEX!
53. End the internment and criminalization of immigrants on Europe’s margins!
54. Free and high-quality public education for all!
55. Promote socially-relevant research!
56. Stop the hypocrisy of the Lisbon Agenda!
57. Expand the Erasmus program – it is the only European policy that actually works!
58. Live up to article 2 of the TEU – respect human dignity, freedom, democracy and equality!
59. Defend immigrants’ rights at home!
60. End institutionalized xenophobia – stop the crackdown on immigration!
61. No more detention centers!
62. Enact visa reciprocity for non-EU countries!
63. The Polish plumber is not taking away our jobs!
64. Europe has gone cold turkey!
65. Crack down on human and sex slavery!
66. Asylum is a basic human right!
67. Stop the racism of Italian and Hungarian parliaments!
68. End the oppression and criminalization of Roma citizens and all other minorities!
69. End the reproduction of homophobia through state institutions!
70. Promote gender equality in politics and the working place!
71. Create free public kindergartens across the EU!
72. Abolish the EU Carbon Trading Scheme!
73. Institute an EU-wide carbon tax!
74. Pursue massive public investments in renewable energy!
75. End our continued dependence on nuclear energy!
76. Invest in high-quality and sustainable public transport!
77. End our overdependence on air travel – create a continental public transport system!
78. Stop promoting unrestrained and mindless consumption!
79. Subsidize small organic farms – not large industrial conglomerates!
80. Promote food sovereignty – not WTO principles!
81. Stop plundering fish stocks off the Western Saharan coast!
82. Protect oceanic ecosystems – ban bottom trawling!
83. Institute a pan-European ban on GMOs!
84. Defend Europe’s most beautiful regions from the destructive forces of mass tourism!
85. More internal welfare transfers to end regional disparities!
86. It takes a couple of Zimbabwean welfare states to build a Scandinavian one!
87. Live up to our Millennium Promises – raise the Official Development Assistance budget!
88. End the obsession with free trade – promote fair trade practices!
89. No to intellectual property rights!
90. Defend the right to peaceful protest!
91. End police militarization!
92. Long live the occupations!
93. Power to the people’s assemblies!
94. The revolution will not be privatized!
95. For more theses, consult the peoples of Europe