December 11 2011: Cash for Christmas

John Vachon Hotel Dacotah October 1940
"Grand Forks, North Dakota"

Ilargi: Over the course of the next few weeks, we will shift our efforts increasingly towards our new site, which should soon be ready to go. This will inevitably result in less hours put into the present site. Which will mean we will slim down the amount of material presented, though not the frequency (that would be pretty silly given what's going on out there). Please bear with us.

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So I had this idea that I call "Cash for Christmas". Very simple, and no need to make it more complicated. My suggestion is for everyone, but certainly for those of you who live in Europe, to take out the amount of - cash - money you plan on spending on Christmas items, presents, food, charities etc. And then don't spend it, but keep it in your wallet. Pay for all your Christmas spending with anything you like, plastic, cash, or whatever, but not the money you just took out. Keep it.

I know many people will have thought I meant giving cash as a present for Christmas, instead of toys and trinkets. That's good too. But, preferably, don't use the cash you withdrew for yourself for that.

The reason behind my idea is the rising uncertainty in the banking system. There no longer is any reason to be overly confident that you will have continuous access to the money in your bank account. So it would be good to have cash available for at least some period of time, a week, maybe even a month, when other means, debit cards, credit cards, may be of limited use.

For many, if not most, this may -still- sound like a far out or far away scenario. And I'm not saying it absolutely WILL happen. And I have no secret inside information. Nor do I have the intention of unnecessarily scaring people. But things being what they are and where they are, I do think it's appropriate for The Automatic Earth to encourage people to think beyond the idea that no such thing could ever happen.

In this excellent video, Kyle Bass argues a point that I think we should all be aware of. Namely, that governments don't forewarn of drastic measures, if only because they can't really do that. They will always insist that all is well until it is not, or they would risk causing a stampede. The take away from that insight at this point is that we can't feel safe because our governments - or the main media that move in lockstep with them- haven't warned us.

We will need to inform ourselves. Which of course is what The Automatic Earth started helping you with close to four years and a 1000 posts ago.

What we've seen over the past few days is another, and this time especially, lukewarm summit in Europe. That ended with few concrete results other than a definite rift between Merkozy and British PM Cameron. All measures that were officially announced will be under legal scrutiny, both at EU level and at individual countries' level. A process, or multitude of processes, that can take years, during which time a zillion things can change or go outright awry.

What's more, nothing has been announced to help out European banks; but these are still in a lot of trouble. At the time of the coordinated central bank action a few weeks ago, there was a persistent rumor that a major financial institution had been about to fall over. Or even a whole group of large funds. That rumor hasn't died.

On top of that, on Friday, Moody's downgraded the top French banks, BNP Paribas, SocGen and Crédit Agricole. Also on Friday, news services in Holland reported that BNP Paribas will withdraw from the global mortgage market on January 1, 2012; that is, it will no longer accept new loans. A dramatic step for a bank with a substantial mortgage portfolio.

Like many European banks, BNP needs to either boost its reserves or shrink its balance sheet. First, because the EU requires them to do so, and second, because they need to cover losses. Still, to kill off one of your main revenue streams is a remarkable step. So, by the way, is the fact that BNP reportedly sold some $2 billion in swaps on France's sovereign debt. It may be legal to use public funds to bet on the demise of public funds, but it does raise a question or two. Desperate times, desperate measures, yeah, we get it, but .....

An indication of how bad the situation in the European banking world has become comes from Harry Wilson at the Telegraph:

Eurozone banking system on the edge of collapse

The eurozone banking system is on the edge of collapse as major lenders begin to run out of the assets they need to keep vital funding lines open. Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region's struggling banks, however City figures said a "collateral crunch" was looming. "If anyone thinks things are getting better then they simply don't understand how severe the problems are. I think a major bank could fail within weeks," said one London-based executive at a major global bank.

Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding. [..]

Bank deposits with the ECB now stand at their highest level since June 2010 at €905bn (£772bn) as lenders withdraw deposits held with their peers and put them into the central bank. At the same time, banks in major eurozone countries such as France and Italy have become increasingly reliant on central bank funding. This follows the trend seen in smaller countries like Ireland where lenders have effectively becomes taxpayer-funded "zombie" banks.

Alastair Ryan, a banks analyst at UBS, said: [..] "The system at the moment hasn't got funding of a duration that allows it to function, so it's failing," [..]

Others think the eurozone banks are heading for a catastrophe and the worry is growing that a major bank could collapse within weeks. The results of the fourth round of European Banking Authority (EBA) stress tests conducted in just under 18 months pointed to a €115bn capital shortfall in the eurozone financial system, with German banks showing the most notable deterioration in their core capital ratios. [..]

The fear is the European authorities do not have the financial firepower to deal with the banks' problems. Analysts at BarCap say that even if the European rescue funds were able to raise €1 trillion of funding this would only meet the needs of the Italian and Spanish government and banks.

The European banking sector's problems are being exacerbated by a wave of asset sales as lenders look to dramatically shrink their balance sheets. UBS estimates eurozone banks could sell off between €3.7 trillion and €4.5 trillion of assets in the next three years.

Ilargi: These are the same banks that the same Harry Wilson reported earlier this week hold $2.35 trillion of toxic assets, $721 billion for British banks, and $700 billion for German banks. That last bit is reason for Germany to ponder nationalizing Commerzbank. Just like Spain wants to clean up $236 billion in "impaired" real estate assets in its banks. It's also why Greeks are emptying their bank accounts.

Friday's EU deal constitutes a - very sloppy - attempt at preventing future losses and deficits; it does nothing to address the true and most urgent problem: present losses. But that makes them no less real, or biting. And because they were once again not addressed by the politicians, they will be dealt with by the ratings agencies (expect a flurry of activity soon, certainly over the next 4 weeks) and the bond markets (who will have one field day after the other).

And in case you feel good because you happen to live in Britain, outside of the Eurozone, check out this chart from Morgan Stanley (via Business Insider) and tell me what you see.





Or if you feel good because you live in Holland, in the rich part of the Eurozone, by all means take a good look at this graph:





So there's why I thought "Cash for Christmas" might be a good thing to suggest to you. Not just in Europe, but certainly there. It's not going to hurt you. Well, unless you were planning to spend your last penny on gifts and/or booze, but then that wouldn't have been a great idea anyway.

Take out in cash from your ATM what you plan so spend for Christmas. And then pay for Christmas with other means and keep that cash in your pocket. Until at least, say, January 10 2012. At that moment, see what the world looks like.

Look, I know it's not for everybody, for various reasons. I realize many people are in a hard place financially. But if a major bank or financial institution fails soon, there's no predicting what will happen next. And a little bit of cash could go a long way. In helping you and your family get by, and also your friends and neigbors and those around you who are in need.

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Eurozone banking system on the edge of collapse
by Harry Wilson - Telegraph

The eurozone banking system is on the edge of collapse as major lenders begin to run out of the assets they need to keep vital funding lines open. Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region's struggling banks, however City figures said a "collateral crunch" was looming. "If anyone thinks things are getting better then they simply don't understand how severe the problems are. I think a major bank could fail within weeks," said one London-based executive at a major global bank.

Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding. "The system is creaking. There is a large amount of stress," said Anthony Peters, a strategist at Swissinvest, pointing to soaring interbank lending rates.

CreditSights' weekly funding report said the ECB had effectively become the central clearer for the region's banks as lenders are increasingly distrustful about funding one another.

Bank deposits with the ECB now stand at their highest level since June 2010 at €905bn (£772bn) as lenders withdraw deposits held with their peers and put them into the central bank. At the same time, banks in major eurozone countries such as France and Italy have become increasingly reliant on central bank funding. This follows the trend seen in smaller countries like Ireland where lenders have effectively becomes taxpayer-funded "zombie" banks.

Alastair Ryan, a banks analyst at UBS, said there would be "no Lehman moment" – or single catastrophic event – for the European banking sytem, but added that without a full backstop of bank liabilities by governments the system would "struggle to finance itself in the next year in a durable way". "The system at the moment hasn't got funding of a duration that allows it to function, so it's failing," he said.

Others think the eurozone banks are heading for a catastrophe and the worry is growing that a major bank could collapse within weeks. The results of the fourth round of European Banking Authority (EBA) stress tests conducted in just under 18 months pointed to a €115bn capital shortfall in the eurozone financial system, with German banks showing the most notable deterioration in their core capital ratios.

Moody's on Friday downgraded France's three largest banks, BNP Paribas, Credit Agricole and Societe Generale in light of what the US rating agency said were "liquidity and funding constraints". The banks' downgrade came despite Moody's acknowledging the three lenders could depend on a higher level of French taxpayer support in future.

Two weeks ago, rumours abounded that it was the near failure of a major French lender that had been the trigger for a massive co-ordinated intervention by the world's largest central banks to shore up the banking system.

The fear is the European authorities do not have the financial firepower to deal with the banks' problems. Analysts at BarCap say that even if the European rescue funds were able to raise €1 trillion of funding this would only meet the needs of the Italian and Spanish government and banks.

The European banking sector's problems are being exacerbated by a wave of asset sales as lenders look to dramatically shrink their balance sheets. UBS estimates eurozone banks could sell off between €3.7 trillion and €4.5 trillion of assets in the next three years.

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Like it or not, the euro is doomed
by Hibah Yousuf - CNNMoneyMarkets

As European leaders unveil their latest plan to solve the debt crisis, economists and market experts aren't convinced they'll actually be successful.

At least one group says there are one too many obstacles and chances are, the currency union will break up, triggering an end of the euro as we know it. "Three years after the first 'once in a generation' financial crisis, we may now be entering the end game for a euro of 17 countries," said Graeme Leach, chief economist at the Institute of Directors, a London-based non-political organization comprising 43,000 business leaders worldwide, but primarily in the United Kingdom.

Incidentally, the U.K. was also the one country that staunchly opposed the latest deal, with Prime Minister David Cameron saying, "What is on offer isn't in Britain's interests." Early Friday, European leaders, including 17 members of the eurozone, which share the embattled single currency, reached a deal for a new intergovernmental treaty to deepen the integration of national budgets.

With the exception of the U.K., it appears the plan also has the backing of the majority of the European Union. But questions remain about the role of the European Central Bank. The ECB has been buying debt on a limited basis, as part of an emergency program, but there have been calls for more aggressive action.

Leach argues that the collapse of the euro is inevitable without the ECB's virtually limitless financial support. ECB President Mario Draghi has firmly said, time and time again, that the central bank's only mandate is to prevent inflation. "It's the ECB or bust," Leach said. "Unless the ECB begins to operate as a sovereign lender of last resort function, with massive purchases of eurozone public debt, the inexorable logic is that the eurozone will break up."

ECB willing to help banks, not governments
The latest moves are steps in the right direction, but much more is needed, say experts. "All of the harebrained schemes invented so far to resolve the crisis in euroland remain half thought out, unfunded and unimplemented...and therefore, still harebrained," said Carl Weinberg, chief economist at High Frequency Economics.

European leaders, particularly from France and Germany -- the eurozone's two largest economies -- have had very different views on the ultimate role of the fiscal compact, and the latest proposals are just "too little, too late, and miss the structural problem," said Leach.

Germany has been strongly opposed to sending the ECB down a path of printing money to stabilize Europe's economy. "Printing money is associated with hyperinflation, the collapse of the Weimer Republic, and the rise of Hitler," noted Leach. "From a German perspective the question is that, once the ECB has lost its virginity printing money, just how promiscuous could it become."

European leaders hash out crisis deal
And even if a "catastrophic event" changes Germany's mind, Leach says hurdles remain because "the ECB's balance sheet is already shot to pieces. It's massively over-leveraged." Though investors and experts alike expect the ECB to intervene for fear of the alternative, Leach doesn't think that a fundamental change is likely.

And with no other surefire way out, Europe's hard hit "Club Med" economies like Greece, Italy and Spain could be driven "to the point where they deem it in their national interest to exit the euro," despite the immediate economic, political and practical consequences. And it could happen in the next six months, he said.

Not everyone agrees. Evolution Securities analyst Elisabeth Afseth only sees a 10% chance of a euro break-up happening that soon, but agrees that European leaders have a lot of work to do, and kicking the can down the road only increases the risks of an end to the eurozone.

"In the short-run, it's beneficial for everyone to stay in the eurozone because the cost and pain of a break-up would be huge," she said. "But European leaders have to be careful in how they formulate the fiscal union. If the terms are all wrong, that's not good for the long run, and the danger of a break-up will remain."

Afseth said the fiscal union needs to focus more on boosting economic growth, rather than just pushing for budgetary discipline and fiscal austerity. And it needs to advocate for pooling the eurozone's debt together, so the region can issue eurobonds, another highly contentious topic among Europe's political leaders.

Despite the multitude and extent of the political disagreements that could lead to the eurozone's crumble in the near-term, more optimistic experts say Europe's leaders will likely find a middle ground to avoid the severe economic consequences.

"The political arguments are strong, but they come against a hard economic reality," said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, Scotland, noting that the costs for a single country leaving the eurozone could amount to at least 15% or 25% of its economy, if not more.

World's largest economies
"A break-up could result in very major recession in Europe, and so it's hard to imagine how any politicians and governments could possibly make a conscious, voluntary decisions to leave the eurozone," said Milligan. But that doesn't mean it won't ever happen.

Milligan said leaders will likely lurch from crisis to crisis, and Europe's leaders will keep having to face complex political hurdles. "The chances that the eurozone will remain intact over the next several months are high, but the danger could get worse over the next couple of years, as they try and transition toward any sort of fiscal union," said Milligan. 

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BNP Paribas Sold $2 Billion Swaps on France
by Abigail Moses - Bloomberg

BNP Paribas SA, France’s biggest bank, sold a net 1.5 billion euros ($2 billion) of credit- default swaps on the nation’s sovereign debt, according to data compiled by the European Banking Authority.

UniCredit SpA, Italy’s biggest lender, and Banca Monte dei Paschi SpA are net insurers of more than 500 million euros each of their government’s bonds, and Oesterreichische Volksbanken AG, the Austrian lender which has yet to pay interest on 1 billion euros of state aid received in 2009, has guaranteed a net 839 million euros of its national debt, EBA data show.

European leaders have blamed credit-default swaps for exacerbating the region’s debt crisis and have gone out of their way to prevent a payout of insurance on any euro area country. The European Union is moving closer to banning the use of derivatives on government bonds for any reason other than hedging risk.

“Some of this is trading rather than pure hedging,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “If European counties the size of France or Italy actually defaulted and triggered CDS, there would be total carnage and meltdown. It would be the end of the world, and at that stage it’s likely your counterparty would be the least of your worries.”

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments fell two basis points to 360. Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest lenders, have no net exposure through credit- default swaps to their government, EBA data show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

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