Sunday, November 20, 2011

November 20 2011: Why Germany is right to refuse to bailout Europe

John Vachon Real BLANK Spaghetti November 1940
"Greek restaurant in Paris, Kentucky." The word ITALIAN has been painted over after Mussolini's Fascist regime invaded Greece.

Ilargi: Here's why Germany is wise to refuse using the ECB to buy up anything not nailed down in Europe.

All economic forecasts for countries in the periphery -which itself grows as we go along- are based on unrealistically positive numbers. And that means that soon they’ll come calling again for bail-outs.

Austerity measures quite simply mean less consumption, and that in turn means a lower GDP. In the US, private consumption is some 70% of GDP; it may be somewhat less in other countries, but not that much.

Basically, you have a handful of countries that have borrowed their way into prosperity over the past few decades, and that now find borrowing has become much harder. Italy and Spain need to pay around 7% on sovereign debt, and Greece has already been effectively shut out of the markets.

On the sovereign front, borrowing becomes prohibitively expensive, which leads to budget cuts, which lead to austerity, which leads to wage cuts and increased unemployment, but the 2012 predictions all mention the need for economic growth. But what growth?

On the business and private front, it also becomes much harder to finance anything with credit. All Eurozone periphery countries have banks that are already teetering on the brink of collapse. What will they do to drag themselves away from the edge? Increase lending? Obviously not.

The only option -seemingly- available is to increase gambling. Double or nothing; everything on red. Buy credit default swaps, of course. Which may offer no protection whatsoever; if Greece's 50% "voluntary writedown" doesn't trigger a credit event (a CDS payout), then what does?

The outcome is clear: periphery banks (and not just them) will have to come back to the ECB, or the Fed, or the EFSF, but the latter has already pretty much been written off as a failure even now.

There’s no way left to turn. But nobody seems ready to accept that. Even if it's been obvious for a long time that it inevitably had to come to this. And that has nothing to do with indecisiveness, by the way, that's just a media ruse.

The ECB, read: Germany, doesn't have the means and wherewithal to save the entire Eurozone. It could opt to put itself on the hook for $2-3 trillion, just to keep up appearances for another year or so -if that long-, but after that, countries and banks would be trick-and/or-treating at the doorsteps in Berlin and Frankfurt anyway.

That wouldn't be a solution. There is no solution other than to let the bankrupt countries and financial institutions go, well, bankrupt. Mark to market. Restore confidence, albeit in a much smaller market. But the world's political and financial "leaders" won't allow it to happen, at least not in real time.

Letting it happen in apparent slow-motion has an added benefit: it allows for technocratic, non-elected governments to take over for a while, and make sure countries are bled dry before handing them over to a proper electoral process again.

Ironically, there is no more pivotal moment than this one for the people of the embattled nations, but they still allow for these broad daylight stealth takeovers to take place. Papademos and Monti even enjoy "broad support", while they should be tarred and feathered and told never to return or else.

Let's turn to the specifics. Greek Finance minister Venizelos says Greece will "only" have a 5,4% deficit in 2012, and no new cuts or measures are necessary. A large part of that "assessment", mind you is based on the 50% "voluntary" write-off by private investors, something that won't be available to other nations.

But it doesn't stop there: Greece is in a deep recession, something the negotiators of all the bailout deals and austerity plans have not -or at least not fully- implemented in their calculations. And it'll come back to haunt them (sometimes you'd suspect they aim for just that). Not that it seems to matter much today: all anyone is looking for are numbers that are palatable in the short term. Let 2012 take care of 2012.

Here’s the BBC:

Greek budget will 'cut deficit' by 2012
The new Greek government has submitted its plans for next year's budget, promising to almost halve the deficit. [..]

If the economy performs worse than expected, as it did in 2011, there are concerns that Greece may again fail to cut its deficit significantly.

Ilargi: And Nicholas Paphitis and Derek Gatopoulos for AP:

Greece Rules Out Fresh Austerity
Greece predicted Friday that its budget deficit will fall sharply next year and insisted that no fresh austerity measures will be needed to plug a hole in this year's finances.[..]

Venizelos, who kept his job in the new interim coalition government formed last week and led by technocrat Lucas Papademos, said the new debt deal will make the country's national debt "totally sustainable."

The deal includes provisions for banks and other private holders of Greek bonds to write off 50% of their Greek debt holdings[..] But the details have not yet been worked out, and negotiations have only just begun.[..]

"The entire process is voluntary," Venizelos said of the bond writedown. [..]

Gripped by a vicious financial crisis since last year, the Greek government has imposed a series of harsh austerity measures, including salary and pension cuts and increased taxes. But the measures have led to a deep recession, with the economy projected to contract by 5.5 percent of GDP this year

Ilargi: Italy, too, is in a recession, and well on its way toward a depression. So Mario Monti should be sent straight back to the drawing board (he won’t be, for now). Here’s the main takeaway from Monti as reported by Frances D'Emilio and Colleen Barry for AP:

Italy hit by protests as PM unveils economic plan
"We must convince the markets we have started going down the road of a lasting reduction in the ratio of public debt to GDP. And to reach this objective we have three fundamentals: budgetary rigor, growth and fairness," Monti said.

He said he would quickly work to lower Italy's staggering public debt, which now stands 1.9 trillion ($2.6 trillion) -- 120 percent of its GDP. "But we won't be credible if we don't start to grow," Monti added.[..]

Monti said if Italy fails to grow economically and unite behind financial reforms, "the spontaneous evolution of the financial crisis will subject us all, above all the weakest, to far harsher conditions."

Ilargi: "We won't be credible if we don’t start to grow", says he. The sort of growth he’ll tell his countrymen he's aiming for can only be achieved by loosening regulations for firing people and lowering their wages and pension plans, by raising taxes, and by privatizing public assets (through firesales to international investors). "The spontaneous evolution of the financial crisis" is the kind of thing you need to say out loud five or ten times, and see what taste it leaves behind on your tongue. You know, as opposed to "planned evolution".

It's the sort of plan for which the international finance industry, through the IMF and World Bank, has had blueprints on the shelf for many decades, and which have been finetuned in South America, Southeast Asia and Eastern Europe during that time.

But that’s not the sort of plan that will lead to renewed growth, or at least not for anyone else than the banks that control the IMF and World Bank. For the people on the street, it's guaranteed misery for many years to come.

Spain has become the new poster child for what ails the EU periphery, with its 10-year bond rate surpassing even Italy's in a very short timespan. Looking at the details, that shouldn't be all that surprising. For starters, the BBC's Robert Peston:

Spain becomes eurozone's weaker link
[..] if you add together all debts - government debts, corporate debts, financial institution debts, and household debts - Spain is a much more indebted or leveraged country than Italy.[..]

... the same group of global investors lend to governments, banks and businesses, so if they become worried about a country's economic prospects they become wary of lending to any of its economic actors. [..]

... the burden of paying debts suppresses economic activity, whether the debtor is a household, a government, or a company.

So here are the numbers - and for Spain they are hair-raising. In 1989, Spain's ratio of government debt to GDP - the value of what the country produces - was just 39%.

Its ratio of corporate debt to GDP was 49%, the ratio of household debt to GDP was just 31% and financial sector debt was just 14% of GDP. The aggregate ratio of debt to GDP was 133%.

By the middle of this year, the picture was utterly different. The aggregate ratio of debt to GDP had soared to 363% of GDP. And it was really from 2000 onwards, the euro years, that Spain really got the borrowing bug, with the ratio of aggregate debt to GDP rising by a staggering 171 percentage points of GDP.

The biggest increment over the past 20 odd years has been in the ratio of corporate debts to GDP, which has soared to a staggering 134% of GDP. Spanish companies have become addicted to debt.

Ilargi: The 800 billion peseta behemoth in the Spanish room is the real estate sector. The boom has been huge, and so will be the downfall. Spain is a favorite tourist destination, and it was construction for that sector that threw all caution to the wind. Sharon Smyth for Bloomberg has some ugly details:

'Unsellable' Real Estate Threatens Spanish Banks
Spanish banks, under pressure to cut property-backed debt, hold about €30 billion ($41 billion) of real estate that’s "unsellable" [..]

Spanish lenders hold €308 billion of real estate loans, about half of which are "troubled,"[..]

... unfinished residential units will take as long as 40 years to sell [..]

"Around 35 percent of Spain’s land stock is in the ex-urbs, which means it’s actually worth nothing."

Spanish home prices have fallen 28% on average from their peak in April 2007, according to a Nov. 2 report by, a real-estate website, and the IESE business school.

Land prices dropped by more than 60% in the provinces of Lugo, A Coruna and Murcia, and 74 percent in Burgos since the peak in 2006, data from the Ministry of Development and Public Works showed. Land values fell 33%nationwide.

"If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital [..]

Santander has €9.2 billion of foreclosed assets, followed by Banco Popular SA with €6.05 billion, BBVA with €5.87 billion, Bankia with €5.85 billion, Banco Sabadell SA with €3.6 billion and Banco Espanol de Credito SA with €3.36 billion [..]

Spain’s bank-bailout fund took over three lenders on Sept. 30, valuing them at zero to 12 percent of book value.

Ilargi: And we can finish off for now with Christopher Bjork at the Wall Street Journal

Spain Credit Crunch Deepens
Lending by Spanish banks contracted by 2.64% on the year in September, the sharpest annual decline on record, pointing to a deepening credit crunch in Europe's fourth-largest economy.

Data released Friday by the Bank of Spain showed that some €48.4 billion in credit was removed from the Spanish economy over the past year through September. The decline was the biggest on record in the country since the central bank began to track lending growth in 1962.

Ilargi: And that there’s yet another major factor in play, one that has so far been largely overlooked: capital flight. Make that: Capital Flight.

How can you grow an economy, if that were possible to begin with in view of the other circumstances, if not only there’s no money coming in from abroad, but your own people are taking their money out?

Capital flight is taking place all over Europe, from individuals and businesses alike. Rumor has it that Greece is negotiating a deal with Swiss banks to forcibly repatriate €81 billion to banks to Greece. Italy and Spain might want to negotiate similar deals, or for all we know they already are. Things like that never work. They just undermine confidence in domestic banking systems.

But let's stick with international capital for the moment. Nelson D. Schwartz and Eric Dash write for the New York Times :

Lenders Flee Debt of European Nations and Banks
Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral.

Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.

If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.

Ilargi: Meanwhile, the rot is spreading. Richard Milne and David Oakley for FT:

Investors move to price in euro split
The eurozone infection this week moved decisively from the periphery of the continent to its core.

Many investors are no longer just fretting about the possibility of a default here or there. They are now starting to worry about the chances of the euro itself breaking up. Bond markets may be putting as high a probability as 25 per cent on a split, according to Citi analysts.

The dramatic ratcheting up in the seriousness of the crisis could be seen in the eurozone’s triple A countries. France and Austria both saw their spreads over 10-year German Bunds reach records for the euro-era and in Paris’s case top 200 basis points, a level Italy was at just four months ago.

The Netherlands and Finland, previously classed as in the same safe category as Germany, saw their premiums over Berlin rise to their highest levels excepting a few weeks following the collapse of Lehman Brothers.

Government bond investors, a conservative bunch used only to dealing with interest rate risk, are now having to consider default possibilities for every eurozone country save for Germany. "Everything outside Germany trades as a credit," says Nick Gartside of JPMorgan Asset Management.

Worryingly, however, even Germany is showing some slight signs of being caught up in the burgeoning contagion. Its bond yields tend to move in the opposite direction of Italy’s, a sign of Berlin’s haven status. But, according to Evolution Securities, that has been less true recently.

Between mid-June and the end of August, German yields moved in the opposing direction on 86 per cent of days. But since the start of September that has dropped to 69 per cent. "Things will only change in the bond markets when Germany is truly contaminated. There are small signs that this could be beginning," says one large French investor.

Ilargi: "Even Germany is showing some slight signs of being caught up in the burgeoning contagion". And still everyone counts on Germany to step in and bail out everyone else?! Ambrose Evans-Pritchard says for the Telegraph :

Asian powers spurn German debt on EMU chaos
Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy.

Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region.

"The question on everybody's mind in the debt markets is whether it is time to get out of Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are not there yet," he said.

Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.

Ilargi: "Germany has higher debts than Spain". Need we say more?

Any German who reads that will say, as I did starting off this article, that Germany is wise to refuse using the ECB to buy up anything not nailed down in Europe. That's where the buck stops. It doesn't even matter whether Jean-Claude "When it gets serious, you lie" Juncker is correct in that particular assessment. What should be obvious is that Germany is in no position to save the entire periphery.

So let's get it over with alright. Mark all countries and banks to market. Start anew. The longer we wait, the more we’ll wind up impoverishing the people (the 99%) here. The case is over, closed, cold. It's checkmate. There are far more holes in the dike than there are -German- fingers to plug the holes. Why would they volunteer to have those fingers chopped off?

Greek bond losses put role of CDS in doubt
by Gillian Tett - FT

Earlier this year, Deutsche Bank quietly decided to reduce its exposure to Italian government bonds. But it did not do that by simply selling debt; instead it achieved this partly by buying protection against sovereign default with credit derivatives contracts.

That duly enabled the doughty German giant to report that its exposure to Italian sovereign bonds had dropped an impressive 88 per cent during the first half of the year – at least, when measured on a net basis – from €8bn to less than €1bn.

So far, so sensible; or so it might seem. But there is a crucial catch. These days, it is becoming less clear whether those sovereign CDS contracts really offer effective "insurance" against default.

And that in turn raises a more unnerving question: if the exposures of the large European banks were measured in gross, not net, terms, just how much more vulnerable might they be to sovereign shocks? Or, to put it another way, could the problems now hanging over eurozone banks and bond markets be about to get worse, due to the state of the sovereign CDS sector?

The issue that has sparked this debate is, of course, Greece. In October, eurozone leaders announced that they intended to ask investors to swap any holdings of existing Greek sovereign bonds for new bonds, with a 50 per cent haircut. Logic might suggest that a loss that painful should count as a default. If so, logic would also imply that it merits a CDS pay-out.

After all, the whole point of credit derivatives – at least, as they have been sold to many investors in recent years by banks’ sales teams – is that they are supposed to provide insurance for investors against the risk of a bond default.

And there is a well developed mechanism in place, created by the International Swaps and Derivatives Association, to make such pay-outs in a smooth manner. That has already been activated over six dozen times for corporate CDS; just last Friday, for example, the process was activated for Dynegy, a corporate entity which recently declared bankruptcy.

But Greece, it seems, is different from Dynegy; at least, under ISDA rules. When the eurozone leaders announced their plans to restructure Greek bonds they failed to meet – or, more accurately, deliberately missed – the fine print of "default" under ISDA rules.

Most notably, the standard ISDA sovereign CDS contract says that pay-outs can only be made when a restructuring is mandatory, or a collective action clause invoked. However, it seems that 90 per cent of Greek government bonds do not have collective action clauses; and the October 26 announcement presented the haircut as "voluntary".

Thus ISDA has concluded that "the exchange is not binding on all debt holders", so the CDS cannot be activated – even though losses on Greek bonds may well be bigger than at Dynegy.

Many investors, unsurprisingly, are outraged; some observers, such as Janet Tavakoli, a consultant, conclude that the saga has exposed the CDS market as a sham, with ISDA acting in bad faith. But ISDA officials vehemently deny this – and insist that the blame lies with eurozone leaders, and their determination to manipulate the fine print of the rules.

"The obsession with avoiding a credit event [to activate CDS contracts] is, in our view, misguided," the lobby group declares in a recent, unusually pugnacious, statement. After all, ISDA officials add, the published value of outstanding Greek CDS contracts is "only" $3.7bn. Since that is partly collateralised, ISDA thus concludes – ironically – that even if that October 26 announcement had actually activated the CDS contracts, it would have barely affected the markets at all.

ISDA may well be right; given the magnitude of the turmoil now shaping the eurozone financial system, $3.7bn is barely a rounding error. But the crucial question now is what happens to the wider sovereign CDS market – and banks. It is unclear how far eurozone banks have used CDS to hedge their exposures to eurozone debt.

However, the published level of outstanding sovereign CDS for Italy and France is more than $40bn, and the Bank for International Settlements recently suggested that US banks have now extended over $500bn worth of protection to eurozone counterparties on Italian, French, Irish, Greek and Portuguese sovereign and corporate debt.

For the moment, nobody is questioning the value of those hedges against corporate risk; the corporate CDS still appears to work relatively well. But the longer that the wrangle about Greece continues, the harder it will be for banks to argue that sovereign CDS is a good hedge for their counterparty or credit risk.

If so, it is a fair bet that banks such as Deutsche (among others) will redouble efforts actually to sell those eurozone bonds – or demand collateral from sovereign entities for derivatives trades. Indeed, behind the scenes, these efforts are already quietly starting. It is not a comforting thought; least of all when a mood of panic is afoot in Europe’s debt markets.

What price the new democracy? Goldman Sachs conquers Europe
by Stephen Foley - Independent

While ordinary people fret about austerity and jobs, the eurozone's corridors of power have been undergoing a remarkable transformation

The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself.

And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.

This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank's alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund's European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as "the Vampire Squid", and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman's interests are intricately tied up with the answer to that question.

Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren't "bought and paid for" by corporations, as in the US, he says. "Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions."

This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort.

Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

Mr Monti is one of Italy's most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him.

First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman's bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury's committee on the banking and financial system, which set the country's financial policies.

With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank's two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro.

Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman's UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland.

He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country's financial woes. The EU agreed to cut Ireland's interest rate this summer.

Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman.

He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank.

Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn't be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.

The bank's traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled $1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap.

On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece's unity government, was a technocrat running the Central Bank of Greece at the time.

Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: "It is clear with hindsight that the standards of transparency could have been and probably should have been higher."

When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn't involved in the swaps deals either at the Treasury or at Goldman.

It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a "voluntary" haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent's big banks, and it is their health that is the primary concern of policymakers.

The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus.

"My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?" says Simon Johnson. "It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same."

So certain is the financial elite that the banks will be bailed out, that some are placing bet-the-company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a $6bn bet with the firm's money that Italian government bonds will not default.

When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent.  Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries' debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under.

No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse.

Shared illusions, perhaps? Who would dare test it?

Banks Bracing for 2012 Euro Financial Apocalypse
by Shanthi Bharatwa- CNBC/The Street

As the European debt crisis threatens to spiral out of control, banks are scrambling behind the scenes to protect their balance sheets and hedge their exposure to ride-out an increasingly scary 2012.

But while some of the moves may help mitigate the losses from Armageddon, market watchers say certain financial insurance policies — particularly credit default swaps on sovereign debt — may not work in a new financial crisis.

Banks are loading up on hedges against a possible European financial collapse. The notional amounts outstanding of over-the-counter derivatives rose 18 percent in the first half of 2011 to $708 trillion as of June 2011, a record high, according to a report by the Bank of International Settlements released Wednesday. In the second half of 2010, the notional value rose only by 3 percent.

Over the counter derivatives are private agreements between parties, different from derivative contracts that are traded through exchanges. The notional value of contracts provides a measure of market size, but not the actual measure of the value that is at risk among participants.

"Given all the increased volatility — the unusual conditions with the dollar and the euro, the debt crisis in Europe, the debt problems of the U.S. — you are seeing an increase in hedging," says Steve Wyatt, professor and Chair of the Finance Department at the Farmer School of Business at Miami University, Ohio.

"The more astute observers in the market have come to the conclusion that the ECB will not buy enough paper to change the market view on this because of inflation fears. The only way out of this is fiscal integration or some modification of the membership in the Euro. That is not going to be quick or clean. That is the risk participants are hedging against."

Worries that some risks cannot be hedged away or that some hedges will prove ineffective have, however, dogged the stocks of Citigroup and Morgan Stanley, and other large banks, even as they strive to be more transparent with their disclosure and insist that their exposure to the peripheral zone in Europe is "manageable."
Here's a quick snapshot of their exposure and hedges purchased, according to latest disclosures.
  • Citigroup has a net funded exposure to Greece, Italy, Ireland, Portugal and Spain of about $7.2 billion. That figure has been arrived at after netting out hedges worth $9.2 billion and margin and collateral of about $4.1 billion. In addition, Citi has $9.2 billion in unfunded commitments to the region.
  • Morgan Stanley said it had $2.1 billion in net exposure to the troubled five countries and $5.7 billion in gross exposure.
  • Goldman Sachs has a gross exposure of $4.16 billion and a net exposure of $2.46 billion.
  • Bank of America has a gross exposure of $14.6 billion and has purchased credit protection worth $1.65 billion
  • JPMorgan Chase has a gross exposure of $20.3 billion and a net exposure of $15.1 billion after netting hedges worth $5.2 billion.

Banks say net exposure is a better estimate of the amount of money that is actually at risk. Investors are, however, focusing on the "gross" exposure, which excludes the impact of hedges, because they worry about the potential failure of counterparties on the other side of the transaction and their inability to honor their agreement.

Another risk to hedging strategies that has emerged since the crisis is "voluntary" debt forgiveness that has rendered CDS ineffective as an instrument. European policy makers wishing to avoid an outright default in Greece are asking bondholders to voluntarily write down 50 percent of their debt . While bondholders take a loss, however, they will not be compensated by the seller of the CDS because they took a voluntary writedown.

If this becomes prevalent as the contagion spreads and governments prevent insurance on debt to be paid, all the CDS purchased so far would prove ineffective.

Fitch highlighted the risk of unviable hedges in its report Wednesday on European exposure of U.S. banks. "While U.S. banks have hedged part of their European exposures through the credit default swap (CDS) market, this tactic could prove problematic if "voluntary" debt forgiveness becomes more prevalent and CDS contracts are not triggered.

Any cross-country hedges or proxy hedges (such as an index) could pose mismatch risk/poor hedge performance."

Russ Chrusciel, product manager, SunGard's Global Trading business, believes that anxiety over the effectiveness of such CDS and the desire to make some offsetting purchases might be one reason that is driving the increase in hedging activity.

"The amount of OTC derivatives outstanding may very well have increased as firms who had positions in miscellaneous credit default swaps (CDSs) across European countries sought additional protections in the marketplace...largely because the 50 percent haircut to Greek bonds did not trigger payout on these pre-existing credit default swaps." He believes market participants might be looking to buy other forms of protection that have clearer terms.

Then there are some risks that cannot be hedged. "How do you hedge against a nation as big as Italy? There is no counterparty that is credible enough to take on that risk," says Wyatt.

At the end of the day, he says, "the aggregate risk hasn't changed. All you are doing is transferring the risk. Someone else now is probably twice as risky. You are able to eliminate the risk from your portfolio but not from the economy."

Anti-Europe Debt Bets: Who is the Bookie?
by Allen Wastler -

There's a mystery a lot of business journalists would like to solve these days: Who is the bookie taking all the bets against Europe?

Why is the mystery so important? Because some fear the answer will be "another AIG." That could mean big trouble.

The bets come in the form of an ugly name, "credit default swaps," that covers a simple idea: Insurance against a certain country not paying off its debts. So if you own $10 million worth of Italian bonds and you are worried that Italy won't pay it off, you buy a credit default swap (right now it'd cost you a little more than half-a-million dollars). If it Italy doesn't pay, whoever sold you the CDS will pay off the $10 million.

So you see why many institutions that bought different types of European bonds over the years—various pension and mutual funds for example, as well as banks—might be interested in buying credit default swaps these days.

Of course, you don't have to own the debt at issue to buy a CDS. You can just buy one because you think a particular country is going down. That's when a CDS really goes from being insurance to being a flat out bet. And with Europe in the state it's in, many outfits (read: hedge funds) want to take the gamble.

But who is on the other side of these bets? Who is saying: "Sure, I'll take your half-a-million now. And if Italy defaults, I'll pay you $10 million"? That's worrisome. "It's not a good situation," said St. Louis Fed President James Bullard on CNBC this morning. "The CDS markets are hard to trace. It's hard to figure out who is really holding the bag at the end of the day...that troubles me."

Sure, there's information about CDS prices on country debt. Heck we have a whole CDS page. But that comes from the buy side. The sell side remains elusive.

Leading up to the financial crisis of 2008 there was a spate of CDS buying against mortgage debt. It turned out the major bookie taking the bet was the insurance giant AIG. That led to a government bailout and a whole lot of "too big too fail" discussion.

Now some are wondering if another large company is selling all these sovereign debt default bets now, which may lead to another major bailout headache. Or are the CDS bets being sold by a collection of smaller outfits, like hedge funds.

And if the bets get called in, will they just fold up and run leaving various investment funds and banks without the insurance they were counting on. (There is a ripple effect discussion here...did those outfits use the CDS insurance as justification for borrowing and investing even more money?)

Or is the answer somewhere in-between: A few major banks are selling the CDS contracts now, getting the short-term cash to bolster their books and hoping the Euro zone will sidestep defaults in the future?

The mystery was almost solved when Greece reached its "haircut" agreement with private investors in early November. Many thought taking a 50 percent loss on Greek bonds would be the "credit event" that called in all CDS bets. Then we'd get to see who was paying up...or running away. But the body in charge of making the call, the International Swaps and Derivatives Association, demurred.

So the mystery remains. It'd be major chest-thumping for the biz journo that answers the question. But as the Fed prez said, it's an opaque market. Probably the luckiest thing will be we never find out.

Wall Street Analysts Everywhere Are In Agreement: The World Is Ending
by Joe Weisenthal - Busines Insider

rapture hell

Image: Wikimedia Commons

If you like your Wall Street analysis with a heavy dollop of rapture and Armageddon, today was the day for you.

Blame the weighty issues of the day (Europe, mostly), and yesterday's big selloff for the spasm of bearishness.

It started off with Nomura's Bob Janjuah. He said that any talk of the ECB saving Europe was a mere pipedream, and that if the ECB did go whole-hog buying up peripheral debt to suppress yields, then that would prompt a German departure from the the Eurozone.

Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB?s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions.

Okay, but that's Janjuah. He's always bearish so maybe that's not even news.

But then there was Deutsche Bank's Jim Reid, who is always sober, but not usually wildly negative. He offered up one of the most bearish lines in history in regards to German opposition to ECB debt monetization:

If you don't think Merkel's tone will change then our investment advice is to dig a hole in the ground and hide.


But it got even wilder with the latest from SocGen's Dylan Grice. Again, he's always pretty negative, but he cranked it up a notch, comparing Germany's policy today against the policies that enabled the rise of Hitler. Specifically, he said that post-Weimar, Germany became too aggressive about fighting inflation, thus prompting deflation, thus prompting more unemployment, thus enabling the rise of the Nazis.

He included this chart:

nazi party germany hyperinflation

Image: Societe Generale

And finally, in our inbox, we just received the latest note from Nomura rates guru George Goncalves, which is titled: US and Europe: At the Point of No Return?

He writes:

...we were wrong in assuming one could be optimistic around the EU policy process and have learned our lesson not to accept apathy as a sign that all is factored in as its clear downside risks remain. In fact, we could be approaching the point of no return for the fate of the euro, the European financial system and more broadly the concept of a singular economic zone for Europe; this obviously would change the path for the US and the global economy in a heartbeat too. We still believe there is time to prevent worst-case scenarios, but these sort of watershed moments reveal one thing, that market practitioners are ill-equipped to navigate the political process, especially one that is driven by 17 different governments.

Lenders Flee Debt of European Nations and Banks
by Nelson D. Schwartz and Eric Dash - New York Times

Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral.

Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.

If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs. "It’s a pretty terrible spiral," said Peter R. Fisher, vice chairman of the asset manager BlackRock and a former senior Treasury official in the Clinton administration.

The pullback — which is increasing almost daily — is driven by worries that some European countries may not be able to fully repay their bond borrowings, which in turn would damage banks that own large amounts of those bonds. It also increases the already rising pressure on the European Central Bank to take more aggressive action.

On Friday, the bank’s new president, Mario Draghi, put the onus on European leaders to deploy the long-awaited euro zone bailout fund to resolve the crisis, implicitly rejecting calls for the European Central Bank to step up and become the region’s "lender of last resort."

The flight from European sovereign debt and banks has spanned the globe. European institutions like the Royal Bank of Scotland and pension funds in the Netherlands have been heavy sellers in recent days. And earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt.

At the same time, American institutions are pulling back on loans to even the sturdiest banks in Europe. When a $300 million certificate of deposit held by Vanguard’s $114 billion Prime Money Market Fund from Rabobank in the Netherlands came due on Nov. 9, Vanguard decided to let the loan expire and move the money out of Europe. Rabobank enjoys a AAA-credit rating and is considered one of the strongest banks in the world.

"There’s a real sensitivity to being in Europe," said David Glocke, head of money market funds at Vanguard. "When the noise gets loud it’s better to watch from the sidelines rather than stay in the game. Even highly rated banks, such as Rabobank, I’m letting mature."

The latest evidence that governments, too, are facing a buyers’ strike came Thursday, when a disappointing response to Spain’s latest 10-year bond offering allowed rates to climb to nearly 7 percent, a new record. A French bond auction also received a lukewarm response.

Traders said that fewer international buyers were stepping up at the auctions. The European Central Bank cannot buy directly from governments but is purchasing euro zone debt in the open market. Bond rates settled somewhat Friday, with Italian yields hovering at 6.6 percent and Spanish rates around 6.3 percent; each had been below 5 percent earlier this year.

For Spain, the recent rise in rates means having to spend an extra 1.8 billion euros ($2.4 billion) annually to borrow, rapidly narrowing the options of European leaders. For Italy, every 1 percent rise in rates translates to about 6 billion euros (about $8 billion) in extra costs annually, according to Barclays Capital.

If officials simply cut spending to pay the added interest costs, they face further economic contraction at home. If they ignore the bond market, however, they could find themselves unable to borrow and pay their bills.

Either situation risks choking off growth in Europe and threatens the stability of the Continent’s banks, which would further undermine demand and business confidence in the United States and around the world.

Experts say the cycle of anxiety, forced selling and surging borrowing costs is reminiscent of the months before the collapse of Lehman Brothers in 2008, when worries about subprime mortgages in the United States metastasized into a global market crisis.

Just as American policy makers assured the public then that the subprime problem could be contained, so European leaders thought until recently that the fiscal troubles of a small country like Greece would not spread.

But after the bankruptcy last month of MF Global, spurred by its exposure to $6.3 billion of European debt, other institutions have raced to purge their portfolios of similar investments. "This is just a repeat of what we saw in 2008, when everyone wanted to see toxic assets off the banks’ balance sheets," said Christian Stracke, the head of credit research for Pimco.

The European bond sell-off has been similarly sharp, accelerating in the third quarter, according to a research report by Goldman Sachs. European banks trimmed their exposure to Italy by more than 26 billion euros in the third quarter, for example. French banks like BNP Paribas and Société Générale, whose shares have been pounded lately because of their sovereign debt holdings, were among the biggest sellers.

Meanwhile, American banks have become skittish about lending to European institutions over similar concerns. Of the biggest banks that lend to Europe, about two-thirds have pulled back on lending to their European counterparts, according to the most recent survey of loan officers by the Federal Reserve.

American money market funds, long a key supplier of dollars to European banks through short-term loans, have also become nervous. Fund managers have cut their holdings of notes issued by euro zone banks by $261 billion from around its peak in May, a 54 percent drop, according to JPMorgan Chase research.

With borrowing costs ticking higher, more institutions have started selling their sovereign debt, creating a frenzy that forces bond prices to plunge and yields to rise at dizzying speeds, which begets even more selling. In the case of Italy, the yield on 10-year bonds spiked to current levels in a month, a huge move by government bond market standards.

The dynamic of falling bond prices also undermines the capital position of the banks, since they are among the biggest holders of government bonds in many countries. As those assets plunge in value, banks cut back on lending and hoard capital, increasing the likelihood of a recession.

In some cases, banks may even need to raise funds to shore up their financial positions. That was the case with UniCredit, Italy’s largest bank, which announced plans to raise 7.5 billion euros in capital earlier this week. "The biggest risk everyone is talking about is whether Italy can continue to fund itself," said Pavan Wadhwa, an interest rate strategist at JPMorgan in London. He said Italy had auctions Nov. 25 and 29. Any sign that it is unable to sell its debt to investors would be troubling, he said.

The prospect of slower growth across the Continent, and fears that budget deficits will balloon, is a major reason the selling has spread beyond Italian bonds to much stronger government borrowers with AAA credit ratings like France. "You have to interfere with these cycles at as many places as possible," said Lawrence H. Summers, President Obama’s former chief economic adviser. "There is nothing good to be said about being tentative."

Asian powers spurn German debt on EMU chaos
by Ambrose Evans-Pritchard - Telegraph

Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy.

Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region.

"The question on everybody's mind in the debt markets is whether it is time to get out of Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are not there yet," he said.

Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said. "It is comforting to pretend that southerners are lazy and Germans hardworking, but that is not the case," he said, slamming France and Germany for their "disastrous" handling of the crisis.

German Bunds have already lost their status as Europe's anchor debt. The yields of non-euro Sweden are now 20 basis lower for the first time in modern history. Danish and UK yields are higher but have closed most of the gap over recent months.

Bunds clearly still enjoy safe-haven status. Yields are just 1.86pc, but a pattern has begun to emerge over the last week where they no longer strengthen as much with each fresh sell-off in Italy, Spain, or France.

"Bunds are no longer reacting the same way," said Hans Redeker, currency chief at Morgan Stanley. "Until recently, if investors were selling Italian bonds, they would tend to rebalance within the eurozone by buying Bunds. But now they seem to be taking their money out of EMU altogether. US Treasury (TICS) data shows that the money is going into US Treasury bonds as the ultimate safe-haven."

Simon Derrick from the BNY Mellon said flow data show a switch by foreign investors away from Bunds and into German paper of one-year maturity or less. "It is a dramatic shift in behaviour. Although investors continue to see Germany as a safe haven, they certainly do not view it in the same way as they did even six months ago." Traders say Asians are taking profits on Bunds and pulling out, with signs that even China's central bank is shaving holdings. Mid-east wealth funds have remained firm.

Germany's exposure to the crisis is already huge, and the strains can only get worse as the eurozone tips back into recession. The Bundesbank is so far liable for €465bn in "Target2" payments to the central banks of Club Med and Ireland for bank support. Hans Werner Sinn from the IFO Institute said this is a form of back-door eurobonds that leaves German taxpayers on the hook. "The current system is dangerous. It is prone to a gigantic build-up of external debts," he said.

The Bundesbank is final guarantor behind €180bn in bond purchases by the European Central Bank, a figure still rising fast as the ECB buys Italian and Spanish debt. On top of this, Germany is liable for its €211bn share of Europe's EFSF rescue fund, as well the original Greek loan package. If the eurozone broke up in acrimony with a clutch of sovereign defaults and a 1930s-style slump – already a "non-negligeable risk" – the losses could push German debt towards 120pc of GDP.

Gary Jenkins from Evolution Securities said EMU contagion to Europe's core has brought the prospect of break-up into focus and raised the question of how much longer Germany can remain a safe-haven. "Any worst case scenario is likely to require at least a substantial recapitalisation of German banks and potentially guaranteeing the debt of euro area partners."

Critics say Germany is falling between two stools. It has backed EMU rescues on a sufficient scale to endanger its own credit-worthiness, without committing the nuclear firepower needed to restore confidence and eliminate default risk in Spain and Italy. It would be hard to devise a more destructive policy.

There is no change in sight yet. Chancellor Angela Merkel repeated on Thursday that Germany would not accept joint EU debt issuance or a bond-buying blitz by the ECB. "If politicians think the ECB can solve the euro's problems, they're trying to convince themselves of something that won't happen," she said. Yet she offered no other way out of the logjam, and each day Germany is sinking a little deeper into the morass.

Investors move to price in euro split
by Richard Milne and David Oakley - FT

The eurozone infection this week moved decisively from the periphery of the continent to its core.

Many investors are no longer just fretting about the possibility of a default here or there. They are now starting to worry about the chances of the euro itself breaking up. Bond markets may be putting as high a probability as 25 per cent on a split, according to Citi analysts.

The dramatic ratcheting up in the seriousness of the crisis could be seen in the eurozone’s triple A countries. France and Austria both saw their spreads over 10-year German Bunds reach records for the euro-era and in Paris’s case top 200 basis points, a level Italy was at just four months ago.

The Netherlands and Finland, previously classed as in the same safe category as Germany, saw their premiums over Berlin rise to their highest levels excepting a few weeks following the collapse of Lehman Brothers.

Government bond investors, a conservative bunch used only to dealing with interest rate risk, are now having to consider default possibilities for every eurozone country save for Germany. "Everything outside Germany trades as a credit," says Nick Gartside of JPMorgan Asset Management.

Worryingly, however, even Germany is showing some slight signs of being caught up in the burgeoning contagion. Its bond yields tend to move in the opposite direction of Italy’s, a sign of Berlin’s haven status. But, according to Evolution Securities, that has been less true recently.

Between mid-June and the end of August, German yields moved in the opposing direction on 86 per cent of days. But since the start of September that has dropped to 69 per cent. "Things will only change in the bond markets when Germany is truly contaminated. There are small signs that this could be beginning," says one large French investor.

The same investor also notes the disconnect between markets. The euro is still relatively stable but bond markets are screaming distress. "One of them is wrong. We suspect the bond markets are right," he adds.

The big danger for some investors and strategists is that eurozone bond markets might be broken beyond repair. Matt King, a credit strategist at Citi, thinks the point of no return was passed long ago. He compares the situation to the triple A collateralised debt obligation market in 2008 when investors rushed to sell at almost any cost.

But the scale of the problem is bigger than in 2008. Mr King notes there is $3,000bn of government bonds trading with spreads of more than 150bp to German Bunds. There were only $2,000bn CDOs outstanding at the peak. "It’s thinking about your exposure in a new way. ‘It now clearly exceeds my risk tolerance’," says Mr King. "Once you start looking at it in that way it is almost unstoppable."

John Stopford, head of fixed income at Investec, an Anglo-South African fund manager, says: "We have been adding to positions outside the Eurozone ... We are concerned about the price action of core markets versus Germany. "Our biggest concern is that the price action is encouraging investors who are long non-German EU debt increasingly to reduce exposure."

Selling is being exacerbated by the concentration of risk. Italy is Europe’s biggest bond market and accounts for about a quarter of some benchmarks used by investors to measure their performance. The result is wholesale selling from investors who are suddenly waking up to their huge exposures.

Banks have been falling over themselves in recent weeks to outline how they have "reduced their exposure", or sold, their Italian bonds. The European Central Bank has responded with some of its heaviest purchases of the crisis so far, with about €7bn in three days this week, according to one trader.

But with no other real buyers out there other than the ECB, particularly for the debt of Italy and Spain, according to investors and traders, relief from central bank buying has proved temporary.

A trader, who works at a European bank, says: "We used to talk about the ECB bazooka, but I’m not sure even the ECB can sort these markets out. Even if it buys in real size, I’m not sure it will encourage any serious private investors to buy Italy or Spain. These markets are broken and possibly broken beyond repair."

The danger is not just to governments. Mr Gartside says the impact will be felt throughout the European economy with the chances of another credit crunch rising with each day. "The impact is less on the government side. The more immediate impact can be felt by banks, corporations and even individuals as it raises the cost of capital very meaningfully," he says.

That just illustrates how the stakes in the eurozone crisis are getting bigger and bigger. The risk for policymakers, struggling for a solution, is that investors have already given up on much of the eurozone. Mr King says: "Once that trust is destroyed, you can’t get it back again."

Spain becomes eurozone's weaker link
by Robert Peston - BBC

The implicit interest rate that investors charge for lending to Spain for ten years - what's known as the yield on the benchmark ten-year bonds - has in the past 24 hours exceeded what they demand of Italy, and is now more or less the same.

Or to put it another way, investors are now a little more anxious about lending to Spain than to Italy. Another way of seeing this is that yesterday, when Spain actually borrowed €3.6bn of new ten-year loans, it had to pay 6.975%, the highest rate for 15 years and so close to the unaffordable 7% rate as makes no helpful difference.

Or to put it another way, as Spain prepares for its general election on Sunday, it has become the weaker link in the eurozone chain.

New fundamental research by the consultancy McKinsey sheds some light on why that should be. The point is that if you add together all debts - government debts, corporate debts, financial institution debts, and household debts - Spain is a much more indebted or leveraged country than Italy.

It is relevant to add those debts together for two reasons. Broadly the same group of global investors lend to governments, banks and businesses, so if they become worried about a country's economic prospects they become wary of lending to any of its economic actors. And secondly, the burden of paying debts suppresses economic activity, whether the debtor is a household, a government, or a company.

So here are the numbers - and for Spain they are hair-raising. In 1989, Spain's ratio of government debt to GDP - the value of what the country produces - was just 39%. Its ratio of corporate debt to GDP was 49%, the ratio of household debt to GDP was just 31% and financial sector debt was just 14% of GDP. The aggregate ratio of debt to GDP was 133%.

By the middle of this year, the picture was utterly different. The aggregate ratio of debt to GDP had soared to 363% of GDP. And it was really from 2000 onwards, the euro years, that Spain really got the borrowing bug, with the ratio of aggregate debt to GDP rising by a staggering 171 percentage points of GDP.

The biggest increment over the past 20 odd years has been in the ratio of corporate debts to GDP, which has soared to a staggering 134% of GDP. Spanish companies have become addicted to debt.

You may have some inkling of what's been going on here from, for example, the massive debts that the Spanish business Ferrovial took on when buying the UK's airports group, BAA. In general Spanish businesses geared up, or took on huge amounts of additional debt, especially those in the property and utility sectors.

Meanwhile the indebtedness of households rose to 82% of GDP, government debt increased to 71% of GDP and financial debt - which is bank lending to financial vehicles that aren't banks - went up to 76% of GDP. Individually, none of those debt ratios are alarmingly high. But it is the fact that they are all relatively high that poses a problem for Spain.

Now the numbers for Italy - also furnished to me by McKinsey - are for the end of 2010 rather than for mid 2011. But the change since then hasn't been dramatic so they are useful for comparison.

Here's the thing. Italy's government debts, at around 120% of GDP, are a far bigger burden than Spain's. And the debts of its financial sector are more or less the same: which may be another way of explaining why creditors' confidence in both Italian and Spanish banks has been seeping away in recent weeks and months.

But the debts of Italy's private sector are a fraction of Spain's. The indebtedness of Italian businesses is just 81% of GDP and the indebtedness of households just 45% of GDP. Italy's private sector, from the point of view of indebtedness, is in pretty good shape.

So Italy's total indebtedness at the end of last year was 313%, some 50 percentage points less than Spain's. The point is that a government's ability to service and repay debts depends partly on the overall size of the debts, and partly on the health of the private sector that pays taxes.

A private sector relatively burdened by huge debts - as is the case in Spain but not Italy - is less able to spend and invest. As a result, it struggles to provide the momentum in the economy necessary for the generation of growing tax revenues. So if investors are finding it tricky to decide whether Spain or Italy currently represents the bigger credit risk, we shouldn't really be terribly surprised.

'Unsellable' Real Estate Threatens Spanish Banks
by Sharon Smyth - Bloomberg

Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that’s "unsellable," according to a risk adviser to Banco Santander SA and five other lenders. "I’m really worried about the small- and medium-sized banks whose business is 100 percent in Spain and based on real- estate growth," Pablo Cantos, managing partner of Madrid-based MaC Group, said in an interview. "I foresee Spain will be left with just four large banks."

Spanish lenders hold €308 billion of real estate loans, about half of which are "troubled," according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline.

Land "in the middle of nowhere" and unfinished residential units will take as long as 40 years to sell, Cantos said. Only bigger banks such as Santander, Banco Bilbao Vizcaya Argentaria SA, La Caixa and Bankia SA are strong enough to survive their real-estate losses, he said. MaC Group is an adviser on company strategy focused on financial services.

The banks will face increased pressure if Mariano Rajoy becomes prime minister as expected after national elections on Nov. 20. The People’s Party leader has said the "clean-up and restructuring" of the banking system is his top priority as he seeks to fuel economic recovery by boosting the credit supply.

More Consolidation
"Naturally, there is going to be a new wave of consolidation," said Luis de Guindos, director of the PricewaterhouseCoopers and IE Business School Center for Finance and named by newspapers as a contender for finance minister in a Rajoy government. "Stricter provisioning rules for land need to be implemented. Many banks will be able to deal with it, but others won’t."

Land in some parts of Spain is literally worthless, said Fernando Rodriguez de Acuna Martinez, a consultant at Madrid- based adviser R.R. de Acuna & Asociados. More than a third of Spain’s land stock is in urban developments far from city centers. About 43 percent of unsold new homes are in these areas, known as ex-urbs, while 36 percent are in coastal locations built up during the real-estate boom.

"If you take into account population growth for these areas, there’s no demand for them, not now or in ten years," he said. "Around 35 percent of Spain’s land stock is in the ex- urbs, which means it’s actually worth nothing."

Prices Fall
Spanish home prices have fallen 28 percent on average from their peak in April 2007, according to a Nov. 2 report by, a real-estate website, and the IESE business school. Land prices dropped by more than 60 percent in the provinces of Lugo, A Coruna and Murcia, and 74 percent in Burgos since the peak in 2006, data from the Ministry of Development and Public Works showed. Land values fell 33 percent nationwide.

"If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital," said Daragh Quinn, an analyst at Nomura Holdings Inc. in Madrid, in a telephone interview.

Santander has €9.2 billion of foreclosed assets, followed by Banco Popular SA with 6.05 billion euros, BBVA with €5.87 billion, Bankia with €5.85 billion, Banco Sabadell SA with €3.6 billion and Banco Espanol de Credito SA with €3.36 billion, according to an analysis by Exane BNP Paribas.

Disappearing Banks
Dozens of Spanish banks have failed or been absorbed since the economic crisis ended a debt-fueled property boom in 2008. Spain’s bank-bailout fund took over three lenders on Sept. 30, valuing them at zero to 12 percent of book value. Bank of Spain Governor Miguel Angel Fernandez Ordonez said the overhaul of the industry was complete after 45 savings banks merged into 15 and lenders increased capital levels.

Three Banco Pastor SA shareholders with about 52 percent of the stock accepted a takeover bid from Banco Popular Espanol SA on Oct. 10 as part of the industry’s consolidation. Banco Pastor’s shares gained 21 percent.

The cost to the public of cleaning up the industry’s books has so far been 17.7 billion euros in the form of share purchases from the government bailout funds known as the FROB. Banks have made provisions for a potential 105 billion euros of writedowns since the market crashed. Lenders may need to make another 60 billion euros in provisions to clean up their balance sheets, including real-estate debt, according to Rafael Domenech, chief economist for developed nations at BBVA.

'Lowest-Quality Assets'
"Since the crisis began, banks have only put their lowest- quality assets on sale while they waited for a recovery, so as not to sell the better properties at a loss," said Fernando Encinar, co-founder of, Spain’s largest property website. Idealista currently advertises 45,912 bank-owned homes in Spain, up from 29,334 in November 2010. In 2008 it didn’t list any.

Spain is struggling to digest the glut of excess homes in a stalling economy where joblessness is among the highest in Europe. Unemployment has almost tripled to 22.6 percent from a low of 7.9 percent in May 2009, according to Eurostat. Property transactions fell 28 percent in September from a year earlier, the seventh consecutive month of decline, according to the National Statistics Institute.

Financial institutions have foreclosed on 200,000 homes and that will balloon to as many as 600,000 in coming years as unemployment continues to rise, according to a report by Taurus Iberica Asset Management, a Spanish mortgage servicer which manages 35,000 foreclosed properties for 25 lenders.

1 Million Homes
"Spain has 1 million new homes that won’t be completely absorbed by the market until the middle of 2017," Fernando Acuna Ruiz, managing partner of Taurus Iberica, said in an interview in Madrid. "Prices will fall a further 15 to 20 percent in the next two to three years."

About 13 percent of Spain’s 25.8 million homes are vacant, according to LDC Group, an Alicante-based specialist in real- estate management. The hardest-hit areas are Madrid, with 337,212 empty properties, and Barcelona with 338,645, LDC said in a report published yesterday.

Lack of financing and concern about economic growth has choked investment in Spanish commercial real estate, currently at its lowest level in a decade, according to data compiled by U.K. property broker Savills Plc. (SVS) A total of 1.25 billion euros of offices, shopping malls, hotels and warehouses changed hands in the first nine months, 52 percent less than a year earlier, Savills estimated.

'Enormous' Price Gap
There is an "enormous" gap between prices offered by banks and what investors are willing to pay, preventing sales of large property portfolios, MaC Group’s Cantos said. He proposes that banks create businesses, in which they can hold a maximum stake of 19 percent, that attract other investors to help dispose of their real estate assets over five to eight years. The investors would manage the businesses.

Cantos says that prime assets can be sold at a 30 percent discount, while portfolios comprised of land, residential and commercial real estate may only sell after 70 percent discounts. "Therein lies the problem," he said. "Banks have already provisioned for a 30 percent loss, but if you are selling at 70 percent discount, you have to take another 40 percent loss. Which small and medium size banks can take such a hit?"

Spain's prime minister pleads for help from EU and ECB as yields climb
by Giles Tremlett - Guardian

• Zapatero: 'This is why power has been transferred to them'
• Madrid's borrowing costs near 7%
• ECB reportedly steps in to buy up Spanish debt

Spanish prime minister José Luis Rodríguez Zapatero made a direct appeal for intervention by the European Union and the European Central Bank (ECB) on Thursday as the country's borrowing costs soared to levels widely considered to be unsustainable.

Referring to the sovereign powers ceded to those European institutions since Spain joined the euro club, Zapatero said: "That is why power has been transferred to them." His request appeared to have been answered by late in the day as pressure on Spanish bond yields relaxed amid reports that the ECB was buying Spanish debt.

In the meantime, pressure was piling up on Mariano Rajoy, the People's party (PP) leader expected to take over as prime minister after Sunday's general election, to reveal his plans for saving the country from a bailout that might bring eviction from the eurozone.

Rajoy remained tight-lipped, however, as Spain's treasury was forced to borrow money at a rate of almost 7% on Thursday for the first time since 1997, declining to give further details of what is expected to be a major reform and austerity programme.

"I do not have a magic wand to fix these problems, nor can we expect that they will all be solved in one day," El País quoted the conservative leader as saying at a campaign rally. In an interview with El País published on Wednesday morning, Rajoy refused to say who his finance minister would be, arguing that he had not yet told the person in question, even though he himself had already decided.

He said there was no need to start asking the future minister to prepare emergency plans, as the party already has clear ideas about what it was going to do. "Both investors and a majority of Spaniards want change, political change, and that is the first thing that will generate confidence," he claimed.

Rumours continued to circulate, however, that the PP was drawing up a programme of dramatic reforms that would be implemented in the first month of a new government. Those reforms would involve everything from the labour market to the country's financial sector, which is weighed down with debt accumulated as Spain inflated a residential housing construction bubble that burst three years ago.

With the outgoing Spanish government lowering its growth predictions for the year to 0.8% on Wednesday and admitting that the economy had stopped growing after the second quarter, Rajoy will have to make serious cuts or raise taxes if he is to meet the 4.4% deficit target set by the EU for next year.

He has campaigned on tax cuts, though many economists think he will have no option but to raise them overall to begin with, especially after the European commission said that it thought Spain would miss this year's deficit target of 6%. It will require an estimated €17bn (£14.5bn) of cuts to meet that target if revenues not boosted by either growth or tax rises.

Rajoy said that he still aimed to lower taxes on small businesses so that they could create job in a country where unemployment has hit 23% and is still rising. He confirmed that his government would fight to stop the eurozone splitting into two or more parts. "The idea of a two-speed Europe seems ridiculous to me," he told El País.

Latest polls show that the PP is some 15% ahead of Zapatero's socialists, which should give Rajoy an absolute majority in parliament and the freedom to introduce undiluted reforms quickly.

Arturo Fernandez, vice-president of Spain's employers federation, warned on Thursday that the country's bond yields were dangerously close to a level that he called "unsustainable".

With neighbouring Portugal and fellow southern European economy Greece both needing bailouts after their 10-year bond yields rose above 7%, Fernandez said that he hoped the new government would be able to clear doubts about the country's future. "What no one wants is a bailout," he said.

Spain Credit Crunch Deepens
by Christopher Bjork - Wall Street Journal

Lending by Spanish banks contracted by 2.64% on the year in September, the sharpest annual decline on record, pointing to a deepening credit crunch in Europe's fourth-largest economy.

Data released Friday by the Bank of Spain showed that some €48.4 billion in credit was removed from the Spanish economy over the past year through September. The decline was the biggest on record in the country since the central bank began to track lending growth in 1962.

September is normally one of the most active months of the year for lending in Spain. A year earlier, banks extended €17.5 billion in additional loans that month. This year, the increase from August was a meager €892 million. "The rate of decline is starting to be alarming," said Maria Lopez, a banking analyst with Espirito Santo Investment in Madrid.

Banks lent at double-digit growth rates between 1997 and May 2008, driven by a massive real estate and construction boom. After the bubble burst and housing sales tumbled, banks cut down on lending to developers, and more recently to households and companies. The crunch intensified this year as Europe was thrust into an ever-deepening debt crisis which has made it increasingly difficult for Southern European banks to fund themselves.

The Bank of Spain data also showed that the pool of bad debt held by Spanish banks rose for the sixth consecutive month, albeit at a slower pace than in recent months. Some 7.16% of loans held by banks were more than three months overdue for repayment in September, up from 7.14% in August and 5.5% in September 2010. Bad debts have grown steadily ever since the decade-long housing bubble burst in late 2007.

Overall, €128.08 billion in loans were non-performing in September, a record high, and slightly more than the €127.79 billion recorded in August. Bad debts had been rising at a clip of roughly €3 billion a month in the previous five months. Spain's banks have a total of €1.79 trillion in loans outstanding.

Meanwhile, Spaniards look poised to elect a new government Sunday with a clear mandate for change, bringing an opportunity to shore up confidence in one of the euro zone's most indebted economies. The failure of Prime Minister Jose Luis Rodriguez Zapatero on the economy has brought on the electoral collapse of his Socialist party, which polls forecast could suffer its worst result yet in Sunday's election.

Spain's Finance Minister Elena Salgado, in an attempt to downplay the impact of the recent flare up in the euro zone's sovereign debt crisis, said Friday Spain's average financing cost remains near historic lows and that the government's efforts to overhaul the ailing local economy are starting to yield results.

Although Spanish elections have sometimes produced unexpected outcomes, Mariano Rajoy's Popular Party is expected to win a large parliamentary majority that would clear the way for the conservative leader's program of austerity and economic overhauls.

Fitch: Italy 'already in recession'
by Telegraph

Italy is probably already in recession, ratings agency Fitch said on Thursday, adding that it would cut the country's credit rating further if Europe's third largest economy was shut out of the debt markets.

"Italy is likely already in recession and the downturn in activity across the euro zone has rendered the task of the new government much more difficult," the ratings agency said in a statement.

Fitch, which downgraded Italy to A+ from AA- with a negative outlook last month, warned it would cut the country's ratings to the low investment grade category if it were unable to borrow at sustainable rates on the markets.

"Sustaining political and public support for structural reforms and austerity will be challenging in the face of rising unemployment. Convincing investors that the reforms will be effectively implemented and will boost economic growth over the medium term will be equally if not more challenging," it added.

Italy's borrowing costs hovered close to euro-era highs on Thursday, with yields on 10-year bonds touching 7.1pc early in the day - past the levels that forced its smaller neighbours Greece and Portugal to seek a bail-out. The country has to refinance €312bn (£267bn) of debt next year. Fitch said Italian bond yields had risen to a level which, if protracted, would place public debt on an unsustainable path.

"In the event that the Italian government loses market access -- not Fitch's base case -- the ratings would be lowered, likely to the low investment grade category."

Italy's new prime minister, Mario Monti, said the euro zone's third-largest economy faces an emergency, and he promised sweeping but fair reforms to dig the country out of a major financial crisis. Monti's government of technocrats must pursue fiscal and structural economic reforms but the downturn in Italy and Europe will complicate his job, Fitch said.

Analysts say Italy's 1.8 trillion euro public debt -- the third-largest in the world -- would overwhelm the euro zone's current financial defences if the country had to ask for help like its smaller EU partners did.

Italy hit by protests as PM unveils economic plan
by Frances D'Emilio and Colleen Barry - AP

As riot police clashed with protesters in the streets, Italy's new premier unveiled his economic plan, vowing to spur growth yet spread out the sacrifices Italians must accept to save their country from bankruptcy and the eurozone from a disastrous collapse.

Mario Monti spoke to lawmakers Thursday as anti-austerity protesters turned violent in Milan, Turin and in Sicily, signaling the depths of resistance the economist-turned-premier will have to overcome if his plan is to succeed. He framed the situation in dire terms -- if Italy cannot save itself, the 17-nation eurozone of which it is a founding member would be in catastrophic danger.

"The end of the euro would cause the disintegration of the united market, its rules, its institutions," the former European Union competition commissioner told the Senate ahead of a confidence vote on his one-day-old government. "The future of the euro also depends on what Italy will do in the next weeks. Also, not only."

Europe has already bailed out three small countries -- Greece, Ireland and Portugal -- but the Italian economy, the third-largest in the eurozone is too big for Europe to rescue. Yet borrowing rates for Italy rose briefly over 7 percent Thursday -- a level that forced those other countries into bailouts. Italy's role in the eurozone is considered crucial for economic and political reasons -- but it's not clear how much sacrifices already-stressed Italians are willing or able to make.

Monti assembled his new government Wednesday, shunning politicians and turning to fellow professors, bankers and business executives to fill key cabinet posts. But while he appealed in a calm, professorial tone Thursday for the country to pull together, protesters chanted anti-Monti slogans in the streets of Rome, Milan and Turin.

Milan police in riot gear wielded clubs as they scuffled with egg-throwing students who tried unsuccessfully to march to Bocconi University, which educates Italy's business elite. Monti is Bocconi's president.

"The government of the banks" read one placard held by a youth. "Save schools, not banks!" read one banner raised by students in Milan in front of the Association of Italian Banks. Demonstrators chanted "Association of Italian bankrupters!"

Rome protester Titti Mazzacane was skeptical, even as she called Monti's choices "decent and competent people." "(His government) is a little bit too free-market liberal. I am a bit scared," said the 53-year-old elementary school teacher. Public schools have been hard hit by budget cuts from previous Italian governments.

Monti revealed plans to fight Italy's pervasive tax evasion, lower costs for companies so they can hire more and possibly lower taxes rates for women to encourage their increased participation in the work place. Hee warned Italians they must brace for more "sacrifices," including the probable return of a property tax on primary residences.

"We must convince the markets we have started going down the road of a lasting reduction in the ratio of public debt to GDP. And to reach this objective we have three fundamentals: budgetary rigor, growth and fairness," Monti said. He said he would quickly work to lower Italy's staggering public debt, which now stands euro1.9 trillion ($2.6 trillion) -- 120 percent of its GDP. "But we won't be credible if we don't start to grow," Monti added.

His administration must restore confidence in the country's financial future and avoid contagion that would worsen the eurozone's debt crisis. Italy's spiraling financial crisis helped bring down media mogul Silvio Berlusconi's 3 1/2 year-old government last week, after it spent months squabbling over how to save Italy from financial ruin.

Monti's choice of unelected experts for his Cabinet and the prospect of tough reforms have fueled unrest. In cities from north to south, students clashed with police Thursday in protests against feared budget cuts, while transport strikes idled buses and trains.

In the Sicilian capital of Palermo, demonstrators hurled eggs and smoke bombs at a bank, and protesters threw rocks at police who battled back with pepper spray, the Italian news agency ANSA reported. One protester was injured. Police charged demonstrators who were trying to occupy another bank. Jobless youths joined students in the protests.

In Rome, hundreds of students protested outside Sapienza University, while others assembled near the main train station. No clashes were reported, but some protesters hurled eggs and oranges just blocks from the Senate. Riot police in Turin reported several police injuries as they held back protesters trying to break through barriers. Peaceful protests were held in Venice.

Last week, parliament gave final approval to an austerity package that reform pensions and cuts state spending. Monti, however, strongly suggested that much harsher medicine was needed to heal Italy's finances. He indicated Italians would be paying new taxes. Italy's lack of a property tax on primary residences -- Berlusconi eliminated the tax -- is "a peculiarity, if not an anomaly" in Europe, Monti said.

Monti said if Italy fails to grow economically and unite in behind financial reforms, "the spontaneous evolution of the financial crisis will subject us all, above all the weakest, to far harsher conditions."

Berlusconi, who still is a lawmaker, told reporters that his People of Freedom party -- the largest in parliament -- would back Monti in the confidence vote and then decide measure by measure whether to back the government. But he immediately ruled out any support for Monti's strategy to tax wealth or property, saying that would have a "negative psychological" impact on development.

Monti also pledged to tackle chronic and widespread tax evasion. Hiding or underreporting income by the self-employed is rampant in Italy, and workers with paychecks have long complained they bear an unfair share of the nation's high taxes.

Stefano Folli, a political analyst at the il Sole-24 Ore paper, viewed Monti's overture to the nation as more political than economic, aimed at convincing both Italians and the international community of his mission. "The anti-crisis discussion was aimed at Italians to seek a season of sacrifices and rigor, and abroad to say Italy wants to gain credibility." Folli said.

Monti said his government would consider reforms to lower Italy's "elevated" tax rates. Employers say high payroll taxes discourage them from hiring. In the workplace, Monti called for structural reforms but added "we must avoid the anguish that accompanies it."

The question of how long Monti's government will last has sparked intense debate among Italy's political parties. Monti has said he intends to govern until the legislative period expires in the spring 2013. But Berlusconi's longtime ally the Northern League wants elections earlier. Sen. Roberto Calderoli, a Northern League leader, gave a "thumbs-down" signal at the end of Monti's speech.

Some in Berlusconi's conservative People of Freedom Party have called for early elections, but top party officials have said they will support Monti in parliament to achieve anti-crisis measures. Monti indicated he was looking for wide support among Italians.

But Antonio Romano, who was distributing leaflets to protesters in Rome, said the government's strategy is "make the workers and retired people pay for the crisis, not those who provoked the crisis. I mean big business, bankers."

Strikes also hit several cities Thursday. A transit strike of several hours idled the subway system and many buses in Rome, and Milan suffered a similar walkout. Alitalia reduced flights due to a four-hour strike by air traffic controllers and airport workers.

Banks in Italy Find an Unusual Liquidity Lifeline
by Mark Scott - New York Times

The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market. With cash increasingly hard to come by, Italy’s banks are turning to CC&G, the exchange’s Italian clearinghouse, for short-term lending. That includes some of the country’s largest financial institutions, including Unicredit and Mediobanca, according to a person close to the situation.

While just two banks received short-term capital from CC&G in 2009, that number has now risen to 15 — half of them Italian and the rest European financial institutions that trade in the country. Under terms of the deals, the clearinghouse, which acts as a middleman to guarantee trades between financial parties, is offering money to both Italian and European banks with a presence in Italy for up to three days.

The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow.

Previously, banks had used the so-called repo market, where banks lend capital to each other on a short-term basis, to meet their financing requirements. But fears about Italy’s ability to repay its debts has pushed up borrowing costs and reduced the ability of banks to access that market.

A spokesman for the exchange said the company was in close discussions with the Italian central bank about any potential problems in the country’s financial sector, and used stringent risk management to decide whether to give banks access to capital.

CC&G also doesn’t technically lend money to banks, but instead deposits the cash with them on a short-term basis. Under Italian law, this distinction makes CC&G a depositor with the banks, and places it ahead of other creditors looking to get their money back if any financial institution should fail.

The legal distinction may still leave CC&G exposed if a lender defaults. And analysts question the sustainability of lending to struggling banks. That’s particularly true as the collateral offered to institutions as short-term financing is often provided by the same bank’s separate trading operations.

Paul Rowady, senior analyst at financial consultancy TABB Group in Chicago, said the global squeeze on liquidity was forcing institutions to look elsewhere, including to clearinghouses, to meet their short-term financing commitments.

He added that central clearing parties might feel secure in lending to banks because it was on a short-term basis and they were eager for extra revenue. "Financial entities are making money in new and different ways," he said. "Just because times are bad doesn’t mean they’re not looking for profits."

And Italy’s turmoil has been good business for the London Stock Exchange. According to the exchange, CC&G reported a 209 percent jump in income to £54.3 million, or $83.6 million, during the first half of the year, compared with the same period in 2010. The Italian business now represents 14 percent of the exchange’s overall income, compared with just 5 percent in the first half of 2010.

Bank Chief Rejects Calls to Rescue Euro Zone
by Jack Ewing - New York Times

In his first speech as president of the European Central Bank, Mario Draghi complained Friday that Europe’s political leaders had been too slow to implement their own plan to address the sovereign debt crisis.

And despite ever louder calls for E.C.B. intervention, Mr. Draghi offered no hope he would come to any country’s rescue by pumping money into the financial markets. Mr. Draghi, who took office at the beginning of the month, implicitly rejected calls for the E.C.B. to use its enormous resources to stop the upward creep of borrowing costs for Spain and Italy, which threatens their solvency and by extension the European and global economies.

Mr. Draghi said the bank would not deviate from its focus on price stability and suggested that other measures could undercut the bank’s credibility. "Gaining credibility is a long and laborious process," Mr. Draghi said at a gathering of bankers in Frankfurt. "But losing credibility can happen quickly — and history shows that regaining it has huge economic and social costs."

He criticized leaders for taking too long to act on decisions they have made at numerous European summit meetings. "Where is the implementation of these longstanding decisions?" he asked. "We should not be waiting any longer."

If the collapse of the euro seemed imminent, the E.C.B. would become lender of last resort to countries like Italy, many analysts say. But the bank seems to be far from that point and instead is insisting that countries take steps to cut budget deficits and improve their economic performance.

Jens Weidmann, president of the Bundesbank, the German central bank, was more blunt than Mr. Draghi in rejecting use of the E.C.B. to get governments out of financial trouble, reflecting the hard line that German policy makers have taken on the issue. "The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way," Mr. Weidmann said at the same event, the Frankfurt European Banking Congress.

He put the onus on governments to address deficiencies in their national economies. "These deficiencies include a lack of competitiveness, rigid labor markets and the failure to seize opportunities for growth," he said.

In Madrid, an E.C.B. executive board member, José Manuel González-Páramo, said that now was the time for Europe’s leaders to implement plans to beef up and retool the euro zone’s rescue fund, the European Financial Stability Facility. "Accords are not enough," he said, according to Bloomberg News. "A characteristic of developed countries is to apply accords."

Crisis Ensnares Central Bank in Desperate Bid to Save Euro
by Brian Blackstone And Matthew Karnitschnig - Wall Street Journal

At a mid-July meeting of the European Central Bank's governing board, the bank's longtime president, Jean-Claude Trichet, was summoned from a conference room to take an urgent call from Berlin.

It was Angela Merkel. The German chancellor and French President Nicolas Sarkozy were about to meet in Berlin to deal with Greece's debt crisis and were at odds over what losses investors might be forced to take. They hoped the ECB could broker a compromise. "They want me to go to Berlin," Mr. Trichet told ECB colleagues when he returned from taking the call. He demurred, worried about thrusting the central bank deeper into the political realm and risking its independence.

In the end, however, he and his central-bank colleagues reached a conclusion that has defined their approach to the two-year-old euro-zone crisis: The danger of not helping outweighed the risk of entering the political fray.

Mr. Trichet caught the last Lufthansa flight to Berlin and passed through the gates of the austere chancellery, where he stayed past midnight in Ms. Merkel's office helping put together a deal on a new Greek bailout plan that was unveiled the next day.

Europe's politicians, unable to end the euro zone's two-year-old debt crisis, have relied increasingly on the ECB, an institution that was chartered to foster price stability but instead finds itself propping up the borrowing power of fragile nations. The expansion of its mission has profound consequences for Europe because in transcending its mandate, the ECB has assumed a new role: Europe's most potent institution. As the future of the euro hangs in the balance, many now believe the central bank is the euro's only hope for survival.

The worsening of the crisis in recent weeks has prompted calls from some European leaders, as well as senior U.S. officials, for the ECB to become more assertive. Federal Reserve Chairman Ben Bernanke, worried about the threat Europe posed to the U.S. economy, pressed Mr. Trichet recently to cut a deal with politicians to resolve the crisis by substantially boosting the firepower of Europe's bailout fund.

The gathering storm in Italy has a growing number of policy makers calling on the ECB to use its most powerful tool—its printing press—to shore up debt markets by buying unlimited amounts of euro-zone bonds, becoming the lender of last resort. So far, the bank has resisted, arguing this wouldn't be legal under European law. Yet few believe the ECB would let the common currency collapse to defend that principle.

That the bank has been forced to step into the power vacuum left by a fractious political class underscores the increasing centrifugal forces unleashed by the debt crisis.
A decade of growth across much of Europe initially followed the 1999 introduction of the euro, seeming to vindicate the promise that closer European integration would beget prosperity. The debt crisis that began in Greece two years ago has upended that idea, bringing the Continent's divisions to the fore.

Germany, Europe's largest and most prosperous country, is insisting that profligate countries implement deep cuts to public spending in return for aid, and refusing to endorse a broader role for the ECB. Germany's orthodoxy has isolated it within Europe and on the ECB's governing council. Many European leaders worry that national resentments could boil over if the crisis persists, destroying not just the euro but the EU itself.

Three camps have emerged within the ECB itself. One, led by Germany, is firmly opposed to more aggressive bond purchases, saying the program blurs the line between fiscal and monetary policy. Another, led by the euro zone's southern flank, sees the ECB as the only functioning institution against the crisis and one that should do whatever it takes to support markets. A pragmatic third camp, including countries such as Austria and Finland, has been willing to go along with limited bond purchases but is losing patience.

It will largely be up to Mario Draghi, who succeeded Mr. Trichet as ECB president this month, to decide which course to embrace. It is an awkward position for the Italian to have his first major decision be whether to bail out his home country, after the ECB failed to respond aggressively when others, such as Ireland and Portugal, were in the market's cross hairs.
The ECB's influence was on full display in Italy last week. When Italy's cost of borrowing spiked to levels considered unsustainable, the central bank did almost nothing.

Instead of stepping into the market and aggressively buying Italian bonds to push yields back down, as it had done previously, it sat on its hands. Within days, Silvio Berlusconi's Italian government fell.

The bank's inaction led to suggestions it was playing the role of kingmaker. Members of the bank's governing council had grown impatient with the progress of reform in Italy. ECB officials in August thought they had an iron-clad commitment from Italy to take tough austerity measures; when Mr. Berlusconi started to backtrack, ECB officials felt they had been misled.

On Saturday, the day Mr. Berlusconi drove past hecklers to hand his resignation to the Italian president, Mr. Draghi was also in Rome. The new ECB president paid a visit that day to Mario Monti, then considered the leading candidate to replace Mr. Berlusconi. The appointment was viewed by many in Europe as a tacit signal that the ECB president endorsed Mr. Monti as prime minister. Mr. Monti was named to the position earlier this week.

The turmoil surrounding the ECB is in contrast to the calm that marked its first decade. Established in 1998, the ECB was founded on a German principle that strictly separates central bankers from governments, a principle rooted in Germany's own history. In the early 1920s, its Reichsbank bought massive amounts of government bonds it paid for by printing money.

The result was hyperinflation, an episode that scars Germany's psyche as much as the Depression does in the U.S. The Reichsbank's successor, the Bundesbank, safeguarded Germany's postwar recovery by focusing on a single mandate to keep inflation low, a duty enshrined in the ECB's charter. Its first president, Dutchman Wim Duisenberg, was so grounded in the tradition of central-bank independence that he was known to tell politicians "I hear you, but I don't listen."

Under Mr. Duisenberg and in the early years of Mr. Trichet's presidency, conducting monetary policy was fairly routine. Officials looked at inflation indicators, growth in the money supply and wage negotiations by large German unions, and set official interest rates accordingly.

Aided by a favorable global economy, Mr. Trichet didn't raise interest rates his first two years, and then did so at a gradual pace to keep inflation in check. Behind the scenes, he was under constant pressure from some member states to more aggressively support the euro-zone economy, calls he ignored.

But as the ECB spurned advice from Europe's capitals, governments returned the favor in fiscal policy, running up large deficits and weakening the euro bloc's budget rules, over Mr. Trichet's objections. "We are dancing on a volcano," he more than once told his ECB colleagues, referring to the risks governments were taking.

Then came the collapse of Lehman Brothers in 2008 and, more critically for the ECB, Greece's debt crisis in late 2009. The latter exposed a fundamental flaw in the setup of the euro: a common currency and central bank without political union.

With no one else to step into the breach, the ECB tossed its rule book aside. Officials propped up banks by providing unlimited loans at low interest rates and by buying tens of billions of euros worth of collateralized bank bonds. As Greece, Ireland and Portugal careened toward default in 2010 and 2011, the ECB found itself as the only institution in Europe that could act quickly, by creating euros to buy bonds.

Proponents of a broader ECB role say Europe's politicians lack the means to cope with a crisis of this severity even if they could overcome their differences. They contend the only way to forestall a collapse of the euro is for the central bank to declare that it will underpin the bond markets of all euro-zone governments.

Germany's worry is that such a move would spark a debilitating inflationary spiral. Germans' visceral rejection to printing money is so strong that endorsing such a course could amount to political suicide for Ms. Merkel and her coalition.

The frictions burst into the open on Wednesday when German Finance Minister Wolfgang Schäuble shot down a call from visiting Irish Prime Minister Enda Kenny's for the ECB to adopt the expansive powers enjoyed by the Federal Reserve. "A U.S. Federal Reserve model will not work" in the euro zone, Mr. Schäuble said.

"The ECB should be the ultimate firepower," Mr. Kenny retorted as Mr. Schäuble looked on, shaking his head. "I know the chancellor disagrees with this," Mr. Kenny said, "but what we've been concerned about is contagion."

ECB bond buying so far hasn't stemmed the debt crisis because the bank makes clear its interventions are limited and temporary, critics say. "They need to go into the market and say we have a wall of money here and no matter how much speculation there is, we are going to keep buying Italian bonds and any other euro bonds that are threatened," Irish Finance Minister Michael Noonan has said.

That would mark a dramatic departure from the central bank's charter, which restricts its role to maintaining price stability through monetary policy, the setting of interest rates.

The euro zone's architects purposely limited the ECB's purview to shield it from political influence. Independence, they believed, would instill confidence in the long-term viability of the common currency, convincing both investors and ordinary Europeans that the bank's power to create money wouldn't be used to remedy political folly.

By testing the limits of its charter, the ECB has opened itself to accusations that it has traded principle for expediency, inviting disaster. Within the ECB, opponents of further action argue that the moves have already put the central bank's reputation at risk. Such concerns prompted two prominent German members of the ECB's governing council to resign in protest this year. Others warn that the bond purchases could invite reckless fiscal behavior by governments, a phenomenon often referred to as "moral hazard."

The credibility issue is central for skeptics of ECB bond buying. If the ECB were to give in to government demands for more aggressive action, the German public could lose confidence in the euro as a stable currency.

German economists contend that since the ECB prints the money to buy bonds, the extra funds it injects into financial markets when it makes bond purchases threaten to increase inflation. European inflation is currently about 3%, versus the ECB's 2% target.

ECB officials say they aren't adding new euros to the economy and feeding inflation because as they buy bonds, they withdraw equal amounts from the banking system. But if the ECB were to embark on unlimited bond buying, the sums involved would be too vast to withdraw.

In all, the ECB has bought nearly €190 billion in government bonds of fragile euro-zone countries. It also lends hundreds of billions of euros to commercial banks that are unable to borrow from other banks. These actions have raised by nearly 80% the amount of assets on the ECB's balance sheet since the start of the global financial crisis in 2008, though that's well below the roughly 200% increase in the Fed's balance sheet over that period.

There's little evidence the ECB bond purchases so far have worked. Greece remains at risk of default even after €50 billion in ECB purchases of its debt. In Italy, which doesn't face the solvency issues confronted by Greece, the yield on 10-year bonds is back up near the 7% mark, well above the 6% yield that sparked ECB bond buying three months ago, despite an estimated €80 billion in central-bank purchases of Italian bonds since then.

If the bank were to ramp up its bond purchases aggressively and yet fail to calm markets, the damage to its credibility could be devastating. Central banking is a subtle art that rests largely on the institution's ability to convey an aura of invincibility. Once investors lose confidence in a central bank's power, the credibility of the currency itself is impaired.

Other big central banks, particularly the Fed, have interpreted their mandates more broadly to preserve financial stability. The Fed, which unlike the ECB also has a mandate to maximize employment, has purchased large amounts of Treasury bonds to keep long-term interest rates low and has bought mortgage-backed securities to help housing.

Now, the ECB bank must decide if it needs to stray even farther from its core mission in to save the euro. Mr. Trichet's departure from the ECB offered a fitting coda to a tenure in which he largely succeeded in maintaining its autonomy. A farewell party for him last month in Frankfurt was interrupted by an emergency meeting, attended by Mr. Sarkozy and Ms. Merkel, to address the crisis. "These are difficult times," Mr. Trichet said at his final press conference as president. "We all have to be up to the challenge."

Germany raises ‘orderly defaults’ again
by Peter Spiegel - FT

Our friends and rivals over at The Daily Telegraph have gotten their hands on an interesting document from the German government detailing its proposals for EU treaty change, and have helpfully posted it online (with an English translation by the Open Europe think thank).

Although the Telegraph focuses on its implications for Britain, there is a significant amount of detail on how Berlin would like to change eurozone economic governance, including yet another stab at enshrining bondholder "haircuts" in the EU treaties.

For those who haven’t followed the debate closely, there is now a closed-door fight going on about whether Greece really will be the only country that sees its bondholders pushed into losses – as the eurozone’s leaders have repeatedly insisted in their summit conclusions – or whether the bloc’s new €500bn rescue fund, which could come into place as early as next year, should allow for organised defaults.

Although almost all EU institutions – including the European Commission and European Central Bank – want to make explicit Greece was a one-off, the German paper makes clear they want to keep the door open.

The documents calls for turning the new rescue fund, called the European Stability Mechanism, into a "European Monetary Fund" which would have the power to take over much budgetary sovereignty from a country in a bail-out, far more power than the current rescue fund – the €440bn European Financial Stability Facility – has.

Under a section headed "The establishment of a procedure for an orderly default as part of the ESM", Berlin makes clear that countries which are deemed to be insolvent – rather than just suffering a temporary loss of access to the financial markets – would be allowed, in effect, to declare bankruptcy and default on their bonds:
If [a debt sustainability review] is negative, the affected member state would instead receive loans for a limited time only, during which the procedure for an orderly default would be prepared. In order to make sovereign defaults possible where they are unavoidable, the threat of instability in the financial system resulting from such a default must be able to be credibly excluded. A plan to maintain the stability of the financial system in the event of an orderly default needs to be developed in close co-operation with European banking regulators. This would determine which banks would be restructured and/or recapitalised, which will necessitate the drawing up of Europe-wide rules on bank restructuring.

Up until now, the only agreed on mechanism for a default are so-called "collective action clauses", commonly used measures included in bond contracts that allows for a default if a supermajority of bondholders agree to it. But the German document says clear that a possible default through CACs "is not sufficient".

The debate is hardly a theoretical one. Although the ESM was originally not supposed to come into effect until 2013, there is increasing consensus that it should be moved up as soon as the middle of next year so that the eurozone’s rescue effort is less reliant on the somewhat shaky foundations of the current EFSF.

When broader default powers were mooted for the ESM at this time last year in a much-discussed agreement between France’s Nicolas Sarkozy and Germany’s Angela Merkel in the French seaside town of Deauville, bond markets swooned, sending Ireland and then Portugal into bail-outs. Days later, during a G20 meeting in Seoul, Merkel was forced to back down. But the issue clearly hasn’t died.

European Rift on Bank’s Role in Debt Relief
by Jack Ewing and Nicholas Kulish - New York Times

The financial stability of Europe has come down to one institution, the European Central Bank, which is now under heavy new pressure to rescue the euro — or possibly see it collapse.

José Luis Rodríguez Zapatero, Spain’s prime minister, on Thursday became the latest leader to demand that the bank find a solution to the euro crisis, saying that "this is what we transferred power for" and that it had to be a bank "that defends the common policy and its countries."

Mr. Zapatero made his unusually blunt statements on a day when markets sagged further and contagion continued its seemingly inexorable spread from the small economies on Europe’s periphery to Italy, Spain and even France at the core. Spain was forced Thursday to pay nearly 7 percent on an issue of 10-year debt, the highest since 1997, while investors demanded the largest premium for buying French as opposed to German debt in the decade-long history of the euro.

Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort.

European politicians and analysts say that unbending stance now threatens the survival of the euro and the broader integration of Europe itself. "There is no solution to the crisis without the E.C.B.," said Charles Wyplosz, a professor at the Graduate Institute in Geneva and co-author of a standard textbook on European integration. "The amounts we are talking about are too big for anybody but the E.C.B."

At issue is whether the bank has the will — or the legal foundation — to become a European version of the Federal Reserve in the United States, with a license to print money in whatever quantity it considers necessary to ensure the smooth functioning of markets and, if needed, to essentially bail out countries that are members of the euro zone.

Traditionally, and according to its charter, the European bank has viewed its role in much narrower terms, as a guardian of the value of the euro with a mission to prevent inflation. But as market unease has spread over the past two years, critics say the bank’s obsession with what they say is a phantom threat of inflation has stifled growth and helped bring the euro zone to the edge of a financial precipice.

With events threatening to spin out of control, the burden now rests on Mario Draghi, an inflation fighter in the president’s job at the bank barely two weeks who surprised many economists by immediately cutting interest rates a quarter point.

"Everything until now is just a prelude. This is where it gets serious," said Peter Zeihan, vice president of analysis at Stratfor, a geopolitical research center. "This is not purely economics. This is about Germany’s position in Europe and whether they control the institutions or not."

Angela Merkel, Germany’s chancellor, and President Nicolas Sarkozy of France held a conference call on Thursday with Italy’s newly sworn-in prime minister, Mario Monti, to discuss how Italy could win back the confidence of markets, Mrs. Merkel’s office said in a statement. German policy makers believe the crisis is serving a purpose, keeping pressure on free-spending governments and forcing them to reform. Any rescue by the European Central Bank, they say, would only delay the inevitable reckoning.

Unlike the Federal Reserve, which has a mandate to promote employment as well as to fight inflation, the European Central Bank is charged first and foremost with maintaining price stability. In addition, the bank is specifically prohibited from financing the governments of euro area members.

So far, the bank’s bond interventions have been modest by central bank standards — $252 billion so far, compared with more than $2 trillion purchased by the Federal Reserve in recent years. The European bank does not disclose details of its purchases, but it has been active lately, and traders said it bought Spanish and Italian bonds on Thursday in small amounts, Reuters reported.

In theory, the bank’s ability to buy bonds is unlimited because it can print money. There would certainly be legal complaints about its violating its charter, but legal experts say those are questionable, and in any event the euro crisis will be decided long before the cases are adjudicated.

The political constraints, however, remain formidable, and as always Germany plays the pivotal role. While wielding only 2 of the 23 votes on the bank’s governing council, Germany is the biggest contributor to its capital, and Germany’s central bank, the Bundesbank, is the biggest institution in the network of central banks that conduct most of the European bank’s business, including market intervention.

The bank’s focus on price stability was transplanted from the Bundesbank, where the aversion to inflation is virtually genetic. In German eyes, there is a de facto promise that the bank will never turn loose the printing presses to bail out overindebted nations.

That path "belongs to the deadly sins of a central bank," Wolfgang Franz, chairman of the German Council of Economic Experts, an official panel that advises the government, said in an interview with the Frankfurter Allgemeine newspaper.

Many economists say there is little risk of inflation in the sagging European economy, but any large-scale intervention would create a political uproar. The bank could move quickly, said Richard Portes, professor of economics at the London Business School, but "it needs political cover to do what it needs to do."

It is not clear where that will come from. In a speech in Berlin on Thursday, Mrs. Merkel cautioned, "If politicians believe the E.C.B. can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen."

Germany has reason to be cautious. In the event that Italian, Spanish and other bonds had to be written down the way that Greek bonds were, Berlin would have to pay the most to recapitalize the bank. That would be tantamount to a backdoor bailout, a transfer of money from German taxpayers to cover the debts of other states without parliamentary approval.

"New Yorkers don’t mind transferring money year after year to Appalachia, but in Europe, people do mind," said Dennis J. Snower, president of the Kiel Institute for the World Economy. "Populism would rise, the European project would truly be in danger because the democratic deficit would explode."

Much discussion has centered on whether Greece might leave or be forced to leave the euro zone, but the Germans might question whether they should stay if all their most cherished principles are violated. "The Germans are pushing to amend the treaties right now so a country could leave the euro zone," said Mr. Zeihan of Stratfor. "In the end, Germany might leave."

Irish banks face mortgage strikes
by Henry McDonald - Guardian

Ireland's New Beginning is intent on mobilising 250,000 homeowners facing repossession

It's been a tough time to be Irish. The boom years are a distant memory and now there's just austerity and a long haul back to recovery for a nation crippled by the reckless lending of its banks. But, a year after the country was forced to call in the International Monetary Fund (IMF), there is a sign that the people are fighting back and targeting the hated lenders with the "nuclear option" of a mortgage strike.

Ross Maguire is the co-founder of New Beginning, a new de-facto trade union for Irish mortgage holders and those in debt distress with banks, which aims to recruit 10,000 members in a movement that has strong parallels with the Occupy protests that have swept through scores of countries.

"The nuclear weapon is for borrowers acting in concert and to say that unless proper and sustainable solutions are put in place which are fair and reasonable, then we should not continue to pay under these current conditions," he says. So does this mean a "mortgage strike" under the New Beginning banner similar to the "rent and rates strike" by nationalists in Northern Ireland protesting against internment without trial in 1971?

"It is radical but it is where we are going if things don't change. It's the last option but it is better that people like us have control over it because the danger is that if that kind of people power was misdirected it could wreck the financial system. New Beginning doesn't want to smash the financial system; we merely want to reform it and re-balance power between banks and borrowers."

With more than €70bn (£60bn) of taxpayers' money already transferred into the banks to save them from collapse and public fury intensifying after the banks refused to pass on a cut in interest rates by the European Central Bank two weeks ago, Irish people are bracing to pay a further price for the bailout. Next month the Fine Gael-Labour coalition will introduce yet another austerity budget aimed at driving down Ireland's national debt and satisfying the IMF that the government is getting the nation's finances in order.

Many blame the fiscal crisis on the banks' reckless lending to property developers – the same banks that are refusing to cut interest rates and threatening to repossess thousands of people's homes. New Beginning estimates that up to 250,000 homeowners could be in mortgage-distress.

The quiet 42-year-old who launched this crusade against the banks from his office in a trendy building near Dublin's Smithfield Market area is a barrister. But Maguire is the antithesis of the public perception of well-heeled "silks" in wigs and gowns: he doesn't charge fees for families with distressed mortgages who are fighting to keep their homes.

After working at the Dublin bar since returning from a successful legal practice in the City of London in the 1990s, Maguire noticed how skewed Irish law is towards banks as opposed to their borrowers. A person declaring bankruptcy in Ireland will be in financial and credit purdah for 12 years, Unlike Britain's 12 months.

Now he and New Beginning are emerging as lightning rods for the anger of an entire nation towards the banks that they believe helped bust Ireland. Other more sinister forces have tried to tap into the widespread hostility towards the banking system.

The Real IRA recently confirmed that they had bombed three banks in Northern Ireland in response to complaints within the nationalist community about threats to re-possess homes. The terrorist group has warned of further attacks on banks and bankers. Maguire and his group, however, offer a legal, non-violent but direct action alternative to challenge bankers' power.

His own epiphany came last year when he and two colleagues heard of a client who had fallen foul of the banks. "A man came to us who had a loan with the Irish Nationwide building society, which subsequently was forced to merge with the Anglo Irish Bank. He got his file under the Data Protection Act and discovered that the Irish Nationwide had created a completely new version of him for their credit committee!

"They had changed his occupation. They had given him a salary far higher than his actual one of €30,000 – in fact, they said he was now earning €60,000. They had changed the grade he worked at in his job to a higher one. They had even forged not only his signature but also his employer's. It was incredible in terms of sharp practice. This was all so they could lend him more and more money during the boom.

"We thought to ourselves that if this happened once across the state it was happening all over. It was then that we realised something needed to be done to check the power of the banks and that it had to be done collectively."

Before they opt for the "nuclear option", Maguire stresses that New Beginning has devised a practical plan to reform the mortgage payment system that will, he claims, help the banks as much as the people. They have proposed to the government an "income annuity mortgage". It would mean a homeowner in difficulty paying a €1,000 a month mortgage could cut that to €700. If things improved, the payments could be raised to, say, €1,500.

But would the banks accept such a system, which would entail stretching out mortgage payments for longer? "The Irish banks don't think we are serious," Maguire says, "but just wait."

New Beginning are about to go on a nationwide recruitment tour and Maguire compares the emerging social movement to the Irish Land League of the 19th century, which successfully gained land for the country's peasantry, or the trade unions of the early 20th century led by socialist stalwarts such as James Connolly and Jim Larkin.

"When we get over 10,000 members, each paying a levy of just €15, we will see who is serious. We are offering a fair solution for all concerned, including the banks, but if ultimately they reject it there is the nuclear option of a payment strike. Individually, people go in mortal terror to meet their banks but together in a national movement they won't be in such a weak position."

Maguire says they are not firebrand radicals hellbent on destroying the system. "Why throw a brick through a bank window? They will just replace the glass the next day," he points out.
However, the barrister says they could link up with others in Northern Ireland and Britain, such as the Occupy movement and UK Uncut, who are equally disgusted at the banks' behaviour during this long recession.

"Two of the taxpayer-rescued banks in Ireland – the Bank of Ireland and First Trust [Allied Irish Banks' UK operation] – have a big presence in Northern Ireland. We would like to help out borrowers who are under pressure from these banks up there too.

"And I don't see why we couldn't see the establishment of a New Beginning force on the other side of the Irish Sea. We would like to speak to groups like UK Uncut and Occupy over there to help each other and explain some of our ideas for re-balancing the power between bankers and borrowers."

He suggests his organisation could provide a model on how to reform banks and reduce their power to threaten customers further across the globe. "There is widespread discontent across the 'Anglosphere' and elsewhere regarding the banks. We are offering practical solutions on the one hand and the right of borrowers to organise and deploy the ultimate, last weapon of resort on the other."

"We want to establish an Obama-style grassroots movement that is financed from the bottom up. The Land League worked this way and took on the powerful Anglo-Irish aristocracy and won. "The trade unions gave Irish workers power they never had before thanks to Connolly and others. This is a 21st-century struggle to re-balance power in favour of people. Whether in Britain or Ireland, we can find the power to turn off the banks' oxygen if they won't change their ways."

That’s 1,000 olives, please
by Gillian Tett

Even in the ‘unimaginable’ scenario of a eurozone break-up, it would be less messy than in the USSR in 1991 when barter became the norm

A few weeks ago, I stumbled on a Soviet 10-rouble note, tucked into an old notebook. Gazing at the crumpled piece of paper, with the iconic face of Lenin, invoked a frisson – particularly given all that is now happening in the eurozone.

Back in the late 1980s, I lived in the former Soviet Union as a PhD student, where I received a (pretty generous) monthly stipend of Rbs430. As I collected notes each month, I never questioned whether that paper would always be "money"; to me it seemed self-evident that this money had value and could be spent anywhere across the USSR. The Soviet Union – and its monetary union – seemed to be permanent.

But in 1991, my assumptions were brutally turned upside down – along with those of millions of other Soviet bloc inhabitants – when the old Soviet system ceased to exist, and republics such as Tajikistan (where I had been living) declared independence. For the first few months, many republics continued to use the old Soviet rouble.

After all, the task of printing and distributing new banknotes is a complex one, particularly amid political turmoil. But nobody really knew who was "in charge" of that rouble; the political union had collapsed. Unsurprisingly, prices went haywire. A hotel room might cost Rbs200 in one town in Tajikistan, but 10 – or 100 – times that in a city in Uzbekistan.The only constant was the level of student stipends.

Then the new republics started to launch their own currencies (which, confusingly, were sometimes also called the rouble), and the disorientation grew. Some of these new currencies were pegged to the old rouble or each other.

But confidence in them was low, so people hunted for alternatives. Even before 1991, back during glasnost and perestroika, shops and factories had used barter to conduct some of their affairs since the Soviet financial system was so crude. But after 1991, barter became almost the norm in many regions.

One friend in Dushanbe used to import gas cookers from other Soviet republics, which he "paid" for with items such as cotton, or anything else to hand; on one bizarre occasion he even "paid" with ski goggles.

And I adapted too. By late 1991 I had become a journalist, reporting on events from around the former USSR. In some places I "paid" for things with a bewildering mixture of old and new roubles, which I carried in multiple plastic bags. But elsewhere, barter was better: I used tins of caviar to buy hotel rooms in Latvia and Estonia and I bought – or bribed – my way on to a plane in Baku with a cassette player.

The only currency that was accepted everywhere was a grubby dollar bill (closely followed by the Deutsche mark or Swedish krona in the Baltics). But the exchange rate was a lottery. And since dollars could not be used for small transactions, I used Marlboro cigarettes as "currency" too; these were light and could be divided into small denominations (ie single cigarettes) more readily than dollars.

Are there any lessons here for the tumultuous eurozone? I fervently hope not. The eurozone officials are still insisting that it would be impossible for the euro to ever break apart. And even if that "unimaginable" scenario did occur, I assume – or pray – that a break-up would be less messy than in the USSR.

Since the eurozone only emerged a decade ago and never pretended to be a single political structure, the separate countries have functioning central banks and finance ministries, staffed by clever technocrats who could get new banknotes printed and distributed in a hurry.

Europe also has savvy companies and consumers with a global perspective; if a country such as Greece, say, suddenly left, it would probably continue to use the euro, Swiss franc or dollar as a mental reference point. I don’t expect anyone to start bartering with olives.

But, then again, it is worth remembering that the eurozone’s monetary links are exponentially more complex than they were in the USSR; that could create a different type of chaos. And today’s eurozone population seems psychologically ill-prepared for any shock.

Anyone who is old enough to remember the hyperinflation of the Weimar Republic already knows just how flimsy fiat currency can be; so does anyone who saw Argentina in the 1980s (or who, like me, had their assumptions overturned in the Soviet bloc).

But there are millions of Americans and western Europeans under the age of 50 who have never lost their trust. How they will respond to a eurozone break – or seeing part of their savings wiped out – remains an open question. Hopefully we will never need to find out. But that old rouble note on my desk is a potent warning that sometimes the tectonic plates of the political economy can shift with stunning speed – even when politicians insist they cannot.

Greek budget will 'cut deficit' by 2012
by BBC

The new Greek government has submitted its plans for next year's budget, promising to almost halve the deficit. Finance Minister Evangelos Venizelos predicted the deficit would fall from 9% of GDP this year to 5.4% in 2012 due to a write-off of debt held by banks. The cut, of up to 50% of Greece's debt held by commercial banks, is part of the eurozone's latest bailout deal.

Mr Venizelos said banks would be given different options over how to take part in the debt deal. "There won't be one model for Greek banks and foreign banks (alike), but there will be two or three variations and anybody can pick the one that suits them," he said.

Coalition government

The budget is being proposed by the new coalition government headed up by the former head of Greece's central bank Lucas Papademos. Passing it is required in order to keep receiving EU bailout funds under an agreement reached in October. Greece has been relying on international bailout funds since 2010. Mr Papademos said the EU deal made Greece's national debt "totally sustainable".

The budget predicts that, excluding interest payments, Greece would post a primary surplus in 2012 of 1.1%. The government also said it did not need to implement any further austerity measures to achieve the deficit reductions.

The latest round of cuts was introduced in October and include slashing pensions, wages and jobs across the public sector and raising taxes. The measures have had a severe impact on the economy. The economy is expected to shrink by a total of 5.5% this year and 2.8% next year.

If the economy performs worse than expected, as it did in 2011, there are concerns that Greece may again fail to cut its deficit significantly.

Greece Rules Out Fresh Austerity
by Nicholas Paphitis and Derek Gatopoulos - AP

Greece predicted Friday that its budget deficit will fall sharply next year and insisted that no fresh austerity measures will be needed to plug a hole in this year's finances.

Submitting the 2012 budget, Finance Minister Evangelos Venizelos said the deficit will shrink from an expected 9 percent of gross domestic product this year to 5.4 next year, largely thanks to a debt writedown that is part of Greece's second international bailout agreed on by European leaders last month. Without the bailout, Greece faces bankruptcy and a possible exit from the euro.

"This budget comes during extremely hard international conditions ... the attack is now focusing on the hard core of the eurozone," the minister said.

Venizelos, who kept his job in the new interim coalition government formed last week and led by technocrat Lucas Papademos, said the new debt deal will make the country's national debt "totally sustainable."

The deal includes provisions for banks and other private holders of Greek bonds to write off 50 percent of their Greek debt holdings — potentially cutting the country's debt by €100 billion and reducing the debt-to-GDP ratio to 120 percent by 2020 from an expected 161.7 percent this year . But the details have not yet been worked out, and negotiations have only just begun.

Greece has been relying on international bailout loans since May 2010 after its borrowing rates ballooned. The country turned to its European partners and the International Monetary Fund, winning an initial euro110 billion ($148 billion) bailout in return for an austerity package to cut deficits bloated by years of government overspending.

It soon became clear that the rescue loans were not enough, and European leaders agreed on a second deal as part of a package to shore up a debt crisis that's been spreading to bigger economies, such as Italy.

"The entire process is voluntary," Venizelos said of the bond writedown. "There won't be one model for Greek banks and foreign banks (alike), but there will be two or three variations and anybody can pick the one that suits them."

Gripped by a vicious financial crisis since last year, the Greek government has imposed a series of harsh austerity measures, including salary and pension cuts and increased taxes. But the measures have led to a deep recession, with the economy projected to contract by 5.5 percent of GDP this year, and a further 2.8 percent next year. Unemployment is also steadily increasing, with the jobless figure expected to reach 15.4 percent this year and 17.1 percent in 2012.

"When it comes to direct taxes, the mechanisms must work. And ours suffer from great deficiencies," Venizelos said, referring to the country's notoriously inefficient tax collection system. "We all want to be rich and healthy, nobody wants to be poor and sick. But we must save the country, remain in the euro ... and maintain our standard of living," Venizelos said.

On a positive note, for the first time in several years Greece expects to post a primary surplus — a budget surplus when not counting interest rate payments on outstanding debt — of 1.1 percent of GDP next year.

"After very many years we can present a primary surplus of 1.1 percent," Venizelos said. "We started with a primary deficit of €24 billion in 2009, and are achieving a 2.5 billion primary surplus in 2012. This is under very hard circumstances and a deeper recession than initially expected." Parliamentary debate on the budget is to start on Dec. 3 and be completed on Dec. 7, so it can be voted on before an EU summit set for Dec. 8-9, the minister said.

Venizelos and Papademos are due to meet later Friday with a delegation from Greece's international creditors — the IMF, European Central Bank and European Commission — for talks on releasing a vital €8 billion installment of the country's current bailout. Without the funds, Greece will go bankrupt before Christmas.

Papademos, a former central banker and vice president of the ECB, will also meet Bank of Greece governor George Provopoulos and travels to Brussels on Monday to see top EU officials. He then heads on to Luxembourg Tuesday for talks with eurozone head Jean-Claude Juncker.

Papademos was appointed last week to head a coalition government formed following laborious power-sharing talks between the country's main parties. The discussions followed a severe political crisis sparked by his predecessor's sudden announcement that he would put the new debt deal to a referendum.

The government, which is only expected to last until elections in February, won a confidence vote earlier this week. Its mandate is to save Greece from bankruptcy by securing continued payment of the rescue loans, approve last month's bailout deal and implement sweeping reforms already passed.

Germany's secret plans to derail a British referendum on the EU
by Bruno Waterfield - Telegraph

Germany has drawn up secret plans to prevent a British referendum on the overhaul of the European Union amid concerns it could derail the eurozone rescue package, leaked documents obtained by The Daily Telegraph disclose.

Angela Merkel, the German chancellor, is today expected to tell David Cameron that Britain does not need a referendum on EU treaty changes, despite demands from senior Conservatives for more powers to be repatriated to Britain. The leaked memo, written by the German foreign office, discloses radical plans for an intrusive new European body that will be able to take over the economies of beleaguered eurozone countries.

It discloses that the EU’s largest economy is also preparing for other European countries, which are too large to be bailed out, to default on their debts — effectively going bankrupt. It will prompt fears that German plans to deal with the eurozone crisis involve an erosion of national sovereignty that could pave the way for a European "super state" with its own tax and spending plans set in Brussels.

Britain would be relegated to a new outer group of EU members who are not in the single currency. Mr Cameron will today travel to Brussels and Berlin for tense negotiations with Mrs Merkel amid growing disagreement between the leaders over how to deal with the eurozone.

The Prime Minister is increasingly exasperated that Germany refuses to provide more financial help for Italy and other struggling countries amid concerns that the crisis is having a "chilling effect" on the British economy. Mrs Merkel yesterday said she expected Mr Cameron to "examine a stronger involvement with other countries" once the eurozone crisis had been resolved.

She said: "We’ve seen a sovereign debt crisis evolve in some states and particularly those in the eurozone find themselves in the international focus. "It was right of David Cameron to concern himself with the UK’s debt issues when he became Prime Minister — that’s my firm conviction, and once the negative focus has moved away from Europe, he will examine a stronger involvement with other countries."

The eurozone contagion is threatening to spread to Spain and France. Yesterday, the price of Spanish government borrowing reached the "brink" of crisis point. The Spanish government sold 10-year bonds at a 6.975 per cent yield — just below the seven per cent level which has triggered international assistance elsewhere.

Amid protests in Milan and Turin, Mario Monti, Italy’s unelected "technocrat" prime minister unveiled sweeping austerity reforms. Mr Monti warned that a break-up of the single currency would take eurozone economies "back to the 1950s" in terms of wealth.

The six-page German foreign ministry paper sets out plans for the creation of a European Monetary Fund with a transfer of sovereignty away from member states. The fund will have the power to take ailing countries into receivership and run their economies.

Even more controversially, the document, entitled The future of the EU: required integration policy improvements for the creation of a Stability Union, declares that the treaty changes are a first stage "in which the EU will develop into a political union". "The debate on the way towards a political union must begin as soon as the course toward stability union is charted," it concludes.

The negotiating document also explicitly examines ways to limit treaty changes to speed up the reforms. It indicates that Mrs Merkel will tell Mr Cameron to rule out a popular EU vote in Britain. "Limiting the effect of the treaty changes to the eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK)," read the paper.

Senior government officials confirmed that they had dropped a previous demand that EU powers should be "repatriated" to Britain in return for the treaty changes requested by Germany, a move that will anger Conservative MPs. "I don’t think that anyone is seriously proposing going down that route," a senior government source said.

Open Europe, a think tank, last night called for Mr Cameron to demand something in return from Mrs Merkel for her "far-reaching plan", which requires the unanimous consent of all 27 EU countries, giving Britain a veto. "It would be the first step towards a vision of 'political union’ that would have major consequences for the future of the entire EU, and therefore the UK’s place within it," said Stephen Booth, the think tank's research director.

"Merkel is daring Cameron to call her bluff, but if the UK is serious about taking a leadership role in shaping the EU, Cameron will have to take a stand sooner rather than later."

Bill Cash, chairman of the Commons European scrutiny committee, accused the Coalition of standing by in "no–man's land" while Germany shaped the EU to suit its own interests. "We are going to get nothing significant in return for agreeing to this," he said.

Mr Cameron is today also expected to pressurise Mrs Merkel into lifting German opposition to the use of the European Central Bank to rescue the euro. However, last night, Mrs Merkel said: "If politicians think the ECB can resolve the problem of the euro's weaknesses, then I think they are persuading themselves of something that won't happen.

Democrats reject 'last-ditch' GOP supercommittee plan
by Libby Leist and Frank Thorp - NBC

With the clocks ticking down to deadline, it is becoming increasingly apparent on Capitol Hill that the supercommittee will not be able to reach its goal of cutting $1.2 trillion from the national debt.

Democrats rejected a fallback deal offered Friday by Republicans that would shave $643 billion from the debt over the next decade. It targeted spending in areas other than Medicare and Social Security, entitlement programs that Democrats had resisted cutting. Republicans called their offer a "last ditch effort."

Each party has shifted toward the blame game, looking to saddle the other with the political burden of the supercommittee's failure, specially as approval of Congress sags toward an all-time low.

Democrats said they rejected the new Republican offer because they see it as an approach that focuses on cuts alone, and doesn't include any new revenue -- an element that Democrats have demanded as part of any "serious" proposal. The offer "was rejected out of hand," said a Democrat familiar with the talks, who called it "woefully inadequate."

"It doesn't meet or even close to coming to meet the issues we have set out from the beginning, fair and balanced," said Washington Sen. Patty Murray, the Democratic co-chair of the committee.

A Republican aide contended that their offer contained $229 billion in new revenue, which included new money from land sales. The plan included $316 billion in spending cuts and $98 billion in interest savings. The aide said the GOP plan targeted "low-hanging fruit," but wasn't necessarily Republicans' final offer.

The new GOP proposal, said Democrats, contains only $3 billion in new tax revenue by closing loopholes for corporate jets. Sen. Max Baucus (D-MT), the Senate Finance Committee chairman who sits on the supercommittee, said "there are many ways to skin a cat."

The new breakdown sets up a tense weekend of last-ditch negotiations toward a deal; while the summer's legislation to raise the nation's debt ceiling required the 12-member, bipartisan group to report a plan by Nov. 23, the deadline is effectively on Monday, since the nonpartisan Congressional Budget Office would need two days to measure the plan's effect on the deficit and debt.

This offer follows a week's worth of countervailing offers from Republican and Democratic members of the supercommittee. But the two parties remain far apart on the issue of new revenue, the linchpin of the supercommittee impasse.

If the supercommittee fails to reach a deal, a series of automatic cuts -- including heavy reductions in defense spending -- would be triggered. Democrats feel the Republicans' last-minute offer -- a smaller package than mandated by the debt ceiling deal -- is motivated in part by a desire to soften the automatic cuts to defense.

"If the Joint Select Committee fails toreach agreement on $1.2 trillion in deficit reduction, it seems clear that Democrats are going to insist on the full sequester, with Defense cuts that President Obama's Secretary of Defense calls 'irresponsible.'" said a Republican leadership aide.

BCM Has Ceased Operations
by Ann Barnhardt -

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves.

Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem "complex" and "abstract" by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise.

What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate.

This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses.

I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

Perhaps the most ominous dynamic that I have yet heard of in regards to this mess is that of the risk of potential CLAWBACK actions. For those who do not know, "clawback" is the process by which a bankruptcy trustee is legally permitted to re-seize assets that left a bankrupt entity in the time period immediately preceding the entity’s collapse.

So, using the MF Global customers as an example, any funds that were withdrawn from MFG accounts in the run-up to the collapse, either because of suspicions the customer may have had about MFG from, say, watching the company’s bond yields rise sharply, or from purely organic day-to-day withdrawls, the bankruptcy trustee COULD initiate action to "clawback" those funds.

As a hedge broker, this makes my blood run cold. Generally, as the markets move in favor of a hedge position and equity builds in a client’s account, that excess equity is sent back to the customer who then uses that equity to offset cash market transactions OR to pay down a revolving line of credit.

Even the possibility that a customer could be penalized and additionally raped AGAIN via a clawback action after already having their customer funds stolen is simply villainous. While there has been no open indication of clawback actions being initiated by the MF Global trustee, I have been told that it is a possibility.

And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.

Remember, derivatives contracts are NOT NECESSARY in the commodities markets. The cash commodity itself is the underlying reality and is not dependent on the futures or options markets. Many people seem to have gotten that backwards over the past decades. From Abel the animal husbandman up until the year 1964, there were no cattle futures contracts at all, and no options contracts until 1984, and yet the cash cattle markets got along just fine.

Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform.

So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.

To my clients, who literally TO THE MAN agreed with my assessment of the situation, and were relieved to be exiting the markets, and many whom I now suspect stayed in the markets as long as they did only out of personal loyalty to me, I can only say thank you for the honor and pleasure of serving you over these last years, with some of my clients having been with me for over twelve years. I will continue to blog at, which will be subtly re-skinned soon, and will continue my cattle marketing consultation business.

I will still be here in the office, answering my phones, with the same phone numbers. Alas, my retirement came a few years earlier than I had anticipated, but there was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law.

As for me, I can only echo the words of David: "This is the Lord’s doing; and it is wonderful in our eyes."

James Koutoulas Responds to Ann Barnhardt's Letter, Thinks She's Taking the "Easy Way Out," Advises Her to Fight
by Louis Bedigian - Benzinga

Ann Barnhardt made quite a splash when she shared her true feelings about MF Global and the closure of her own firm, Barnhardt Capital Management.

"The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not," she wrote.

"And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy."

Now James Koutoulas, the CEO of Typhon Capital Management and the co-founder of the Commodity Customer Coalition, is sharing his opinions on Ann Barnhardt's letter.

"I agree 100 percent with her [on the point that] I think the way everyone handled it initially was terrible, and it made matters worse," Koutoulas told Benzinga during a recent interview. "As for [her second point about moral obligation to cease facilitation of access to futures markets], I honestly think that is taking the easy way out."

"I think we've been courageous; we've stood in the face of all of these guys who have done things wrong and who have tried to screw over the customers," Koutoulas added. "Sure, that's a hard thing to do, but I think that it's important for America to have futures markets."

Moreover, Koutoulas said that it's important for the farmers who "go and hedge their risk," and for Southwest Airlines, "which has been able to maintain high profitability for three years of high oil prices because of their futures hedging program."

"I think it's important that we use this situation as an opportunity to fix what is wrong with the system," Koutoulas explained. "If we make enough noise, these people have to listen to us. We've come out with a message that, while there is some anger there – and with good reason – it's been a focused message and it's been solutions-oriented."

Thus far, Koutoulas said that Judge Martin Glenn (of U.S. Bankruptcy Court in Manhattan) has been receptive "to what we have had to say; he's been reasonable. The trustee has sped up this recovery process. The CME has gone part of the way there with their $300 million guarantee."

"I think, within a couple of days, the CME is going to be forced to step up and make customers whole," Koutoulas continued. "Once that happens, we can talk about things like class actions to get people the damages back from forced liquidation, and all of that."

Koutoulas said that while we can talk about "tweaking the regulations to eliminate the ability of firms to invest in repos," he wants to make one thing clear: "I in no way think that other futures customers should have to pay for this particular situation." "I think it's the JP Morgans, it's the holding company assets, it's Corzine and the other directors personally that should have to pay for this particular mess," he said.

But he doesn't think that Barnhardt should give up so easily. "Look, Ann, don't quit," Koutoulas advised. "It's an easy thing to quit. Stand up and fight. Make your voice heard and advocate on behalf of your customers, like what we are doing. We would be welcome to have her join our side if she were so inclined."

Why That Corporate Cash Pile Isn't So Impressive
by Bernhard Condon - AP

Hardly a day goes by without some politician or pundit pointing out that companies are hoarding cash — roughly $3 trillion of it. If only they would spend it, the thinking goes, the economy might get better.

But the story is not as simple as that. Though it seems to have escaped nearly everyone's notice, companies have piled up even more debt lately than they have cash. So they aren't as free to spend as they may seem. "The record cash story is bull market baloney," says David Stockman, a former U.S. budget director.

U.S. companies are sitting on $358 billion more cash than they had at the start of the recession in December 2007, according to the latest Federal Reserve figures, from June. But in the same period, what they owed rose $428 billion. Before the recession, you have to go back at least six decades to find a time when companies were so burdened by debt.

Companies borrow money all the time, of course. They borrow to build factories, cover expenses, even make payroll. The problem: Debt doesn't go away. A business can cut costs during a recession. But it can't just shred the IOUs. Heavy debt means companies could have to dip into those reserves of cash to pay their lenders. And when interest rates eventually go up, companies will have to spend more money just to service the debt.

In the last recession, which ended in June 2009, small businesses that depended on credit cards and bank loans got slapped with higher rates just as sales began to drop. Some got cut off all together.
Peter Boockvar, equity strategist at Miller Tabak & Co., says business debt is too high even if the U.S. manages to stay out of a second recession. If economic growth doesn't pick up, "they'll be more bankruptcies, and more defaults," he predicts.

Even if companies used cash to pay off what they owe, they would be left with plenty of debt — in fact, an amount equal to 83 percent of all the goods and services they produce in a year, according to Federal Reserve data for incorporated businesses.

In March 2009, the low point of the Great Recession, companies owed 95 percent. To stay afloat, companies tapped credit lines at banks, increasing debt while they were bringing in less money. They burned through cash to meet expenses. Before that, though, it has been at least six decades since companies owed so much money as a share of what they produce, says Andrew Smithers, a London consultant who has written extensively about debt.

In short, American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it. Already, there are signs that companies are struggling to pay off debt. Since this summer, buyers of bonds issued by deeply indebted companies — called junk bonds because they're so risky — have been demanding 14 percent more in annual interest. Some companies haven't been able to sell bonds at all.

The financial picture is at least better for the biggest, publicly traded firms. Non-financial companies in the Standard & Poor's 500 are making more money than ever and adding to their cash fast. It's middle-sized and small companies that appear to be most vulnerable. "There are almost two economies out there — the big S&P 500 companies, then everyone else," says Michael Thompson, managing director of S&P's valuation and risk strategies.

But this sunny picture for the largest companies is marred by debt, too. Since the start of the recession, S&P 500 companies have borrowed an additional 44 cents for every additional dollar they've hoarded in cash. For many companies, debt has risen more than cash. Drugmaker Pfizer added $3.5 billion to cash from the start of the recession. But it added $28 billion of debt, according to FactSet. PepsiCo added $22 billion more debt than cash. Hewlett-Packard added $16 billion more, Wal-Mart $13 billion.

The lack of fear about debt is an about-face from the recession. Back then, Wall Street was worried that many companies had borrowed too much during the boom, and would suffer for it in the bust. The expectation was that this "wall of debt" would cause some companies to fail. Others would struggle but ultimately pay their lenders. Either way, borrowing would ultimately fall.

But that didn't happen. Instead, the Federal Reserve slashed benchmark interest rates to near zero, lowering yields for conservative investments like money market funds and pushing frustrated investors into riskier corporate bonds offering higher returns. As demand for those bonds rose, businesses were able to issue more of them than ever, and use the proceeds to pay off old ones coming due soon. "The Fed encouraged debt refinancing, but we need debt extinguishment," says Boockvar. "It's bought time, but it doesn't deal with the fundamental problem."

That problem could upend the expectations of investors. Many are banking on companies using cash to buy back more of their own stock, which might lift sagging prices. Smithers thinks high debt will eventually force companies to do the opposite — cut buybacks. And given the big role these purchases play in the market, that could wallop stocks. Smithers says that buybacks by non-financial companies over the past decade have more than compensated for the wave of selling by individuals and mutual funds.

The problem with debt is you don't need an actual recession to cause trouble for companies, just the fear of one. Spooked lenders can hike rates on new loans needed to pay off old ones, or cut companies off completely. For companies issuing those risky junk-rated bonds, that day has already arrived.

A maker of private planes in Kansas saw rates on its bonds jump 40 percent in just a month. And on Wednesday, a shipping company in Florida filed for bankruptcy because it was unable to borrow to pay off old loans. "They thought, 'We survived that one and we won't have another for 10 years,'" says Martin Fridson, global chief credit strategist at BNP Paribas Investment Partners, speaking of the Great Recession. "But the economy is not out of the woods yet."

Restoring Capitalism: Why Atlas Shrugged
by Bruce Judson - NewDeal2.0

Ayn Rand’s Objectivism glorified wealth-creators over moochers, but Wall Street traders might be surprised to learn which category they’re in.

As the dysfunctional nature of our economy becomes ever clear more apparent, the media is appropriately focusing on the whether the ideas of economic thinkers from earlier eras can help to solve today's problems.

Recently, NPR devoted a segment to the thinking of Ayn Rand. The NPR segment quoted from an extensive television interview with her conducted by Mike Wallace in 1959, and now available on YouTube.

As the segment noted, Rand is a hero to many Washington politicians who advocate free markets. In the Wallace interview, Rand said, "I am opposed to all forms of control. I am for an absolute, laissez-faire, free, unregulated economy."

The Washington establishment has, in fact, misinterpreted what Rand valued and what she would advocate today.

At this moment, what's relevant to our nation is not the laissez-faire policies Ayn Rand advocated in the late 1950's, as an outgrowth of her philosophical system (which she called "Objectivist"), but what the philosophy itself considered important, how these principles should be applied to our modern economy, and whether we believe implementing these ideas would aid the economy.

The central point Ayn Rand made in her interview with Wallace, which she stressed repeatedly, was that entrepreneurs and businessmen are the producers who create the goods and services that make our economy run. They deserve their wealth, are her heroes, and no one including the government has the right to take their property. As NPR notes, "In Atlas Shrugged, which Rand considered her masterpiece, the wealthy corporate producers are the engines of the American economy." In this fictional book by Rand, the economy starts to stagnate when these producers go into hiding, leaving behind what she calls "the moochers."

In effect, an important aspect of Rand's philosophy supports the central tenant of a functioning capitalist economy: Those who create the greatest societal wealth should be the most highly compensated.

This is a fundamental notion in any capitalist economy. It underlies one aspect of the American Dream and also explains the historic admiration of the American people for rich people. In general, (and before the Occupy Wall Street Movement), the prevailing ethos in America has been that rich people deserve their wealth because they have created societal value for all of us. Indeed, I suspect the vast majority of the American people believe do not begrudge the wealth earned by successful risk taking innovators like Michael Dell, Jeff Bezos, the late Steve Jobs, or Ross Perot.

This leads to a clear conclusion: Ayn Rand's philosophy is only anti-regulation because it is ultra-supportive of the capitalist ideal: The people who create the most societal wealth should receive the benefits of this contribution. From this perspective, Ayn Rand's philosophy points out that real capitalism is on life support in America today; not because of welfare programs, taxes, the social safety net, or government regulations, but for a very different reason: The highest paid people in America today create no real wealth for the society.

The financial industry, comprised of traders, hedge funds who exploit arbitrage opportunities, and "Quants" who develop mathematical models to take advantage of minute inefficiencies in trading markets (for stocks, derivative securities of all types, commodities, and more) are now earning seemingly inestimable sums. Hedge fund owners earn billions of dollars annually and traders earn less than several million dollars a year are not, by Wall Street standards, real successes. Yet, they are all gambling in "a heads I win, tails you lose game." The outcome of all their efforts are high profits, but little, if any, new societal wealth.

Real societal wealth is anything that enhances the lives of those in our society; starting with basics such as food, shelter and medicine, while including almost any property a person can own or anything a person can experience, such as entertainment or greater convenience. Real wealth can be eaten, used, shared or experienced.

Profits cannot be eaten, and they do not provide shelter. As a consequence, it's essential to recognize that the creation of profits is often confused with the creation of real societal wealth. They are different.

Profits are an accounting proxy we use for indicating whether wealth is created. But, like all proxies this one sometimes falls short. With regard to the financial industry, this proxy has failed the nation spectacularly.

The current issue of Foreign Affairs describes how a Wall Street firm spent $300 million to construct a fiber-optic cable connecting the Chicago Mercantile Exchange and the New York Stock Exchange, to shave "three milliseconds off high-speed, high-volume automated trades--a big competitive advantage" (Nov/Dec. p. 22). And, huge sums are now being spent to use technology to earn these profits. High frequency (i.e. computer driven) trading is now estimated to account for 75% of all buying and selling of U.S. equities. Does any of this add to our societal wealth?

Some economists openly wonders whether our financial services sector actually destroys, instead of creating, societal wealth. In December of 2008, Paul Krugman wrote in The New York Times (emphasis added):

"The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: the vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole....

We're talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America's G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing -- and it probably was -- we're talking about $400 billion a year in waste, fraud and abuse."

By late 2009, Krugman noted that this view was now widely shared.

Yes, many financial economists have concluded that high speed trading and hedge fund arbitrage add to the efficiency of these markets. But, I wonder if they have quantified the value to our society of these benefits and compared them to the very real costs? As far as I know they have not. It's my understanding that they have only looked at the isolated impact of these activities on markets — not their overall impact on our society.

This system, providing the highest rewards to those who create nothing, is antithetical to a capitalist economy. 

We have turned the underlying premise behind our entire economic system on its head. Now, those who create little, if any, societal wealth receive the most wealth.

Moreover, the wealth now inappropriately channeled to Wall Street is harming our society in a myriad of ways: Here are just a few of these negative effects: First, money inevitably leads to political power in the nation (through donations, lobbying, access, and more.) Inevitably, trading related money is now further distorting our capitalist economy by influencing legislation for its own anti-capitalist benefits.

Second, in a society where success is often defined by income (for better or worse) the talent the nation desperately needs to create real wealth is instead sucked up by the financial system and dedicated to arbitrage and other zero-sum activities.

Third, the speculative investments of hedge funds and other trading entities can have a dangerous destabilizing impact on markets, the prices of essential commodities (such as food and energy), and create systematic risk for the economy as a whole. In February of this year, Bloomberg reported on the findings of a federal government report, stating:

"Hedge funds and insurers might threaten U.S. economic stability in a time of crisis, according to a report aimed at helping regulators decide which non-bank financial companies warrant Federal Reserve supervision."

Fourth, it's likely that billions of dollars of the limited resource of our nation are spent each year on infrastructure with no real societal value; all of which could instead be spent for productive uses. Fifth, pay scales throughout the society are thrown out of whack as other elites start to question whether they should be earning similar amounts.

Finally, the notion that all profits are good--whether they create real societal wealth or not--is consistently reinforced through the highly publicized example of Wall Street earnings and applied with the same harmful effects in other industries throughout the nation.

Ayn Rand would, I believe, argue that this absolute failure to enforce capitalist principles is exactly what she most feared: The emergence of a powerful group that produces nothing, yet manages to takes a large share of the societal wealth created by others. In her view, this inevitably leads a society to implode and self-destruct.

(Yes, Rand did not believe in altruism or any type of social safety net, and I am not addressing this aspect of her "Objectivist" philosophy here. But, it is worth noting that she opposed these programs for the same reason I am certain she would be horrified by the current channeling of wealth to financial firms: She believed that they were allocating the benefits of production away from the rightful beneficiaries. Whether we agree or not with these assertions, they are irrelevant to this discussion.)

I do, however, feel comfortable asserting that if she returned today Ayn Rand would consider eliminating the transfer of undeserved wealth to the financial sector to be a far greater and far more urgent priority than addressing her beliefs related to the social safety net.

Unless we address the destructive effects caused by making speculators and traders the highest earning class in our capitalist society, the economy will remain dysfunctional. In effect, the nightmare that Ayn Rand's philosophy anticipated for our economy is increasingly real; but because of the financial industry not the social safety net or taxes.

Here's a final thought: In Ayn Rand's Atlas Shrugged, the industrialists who create the real wealth of the society start to disappear as they go into hiding. The trains that make the society work, both literally and metaphorically, stop.

So, I have developed what we can call the Ayn Rand test of value: If securities traders and Quants at investment firms and hedge funds started to disappear in large numbers tomorrow, would the trains that comprise our economy and society run better or worse?

The Wall Street disconnect
by Matthew Goldstein and Jennifer Ablan - Reuters

It was a telling moment at the height of the Occupy Wall Street protests.

John Paulson, the hedge-fund trader who famously made billions betting on the collapse of the housing market, was threatened by the demonstrators with a march on his Upper East Side home in New York last month. Paulson responded by putting out a press release that described his $28 billion, 120-person fund as an exemplar of the American Dream: "Instead of vilifying our most successful businesses, we should be supporting them and encouraging them to remain in New York City."

Other captains of finance like to portray themselves as humble entrepreneurs. One owner of a multi-billion-dollar hedge fund grumbled in the midst of the financial crisis that he has to worry not only about making trading decisions but also about "all the hassles that come with running a small business."

With U.S. cities moving this week to crack down on Occupy Wall Street encampments - including the one in New York's Zuccotti Park - the staying power of the movement is in question. Whatever its future, it's clear that so far, the Occupiers haven't changed many minds on Wall Street over blame for the country's hard times. The cognitive disconnect between the protesters and the captains of finance is alive and well.

David Mooney, chief executive officer of Alliant Credit Union in Chicago, one of the nation's larger credit unions, used to work at one of Wall Street's top banks, JPMorgan Chase. There's a vast cultural gap between Wall Street and his new world, he says: Old friends from the Street, he says, now jokingly refer to him as a "socialist."

A credit union is supposed to be run in the interests of all members, he says, while commercial bankers tend to see consumers as customers who can be "exploited" by layering on more
fees. Says Mooney: "I don't say this lightly, but the consumer is simply an income stream and exploiting that is the purpose of the banking organization."

In conversations with nearly two dozen current and former bankers, finance professionals and money managers across the United States, the prevailing sentiment is that the anger at Wall Street's elite is misguided and misdirected. Blame the politicians and policymakers in Washington, many of them say, for encouraging people to buy homes they couldn't afford and doing nothing to stop or discourage U.S. consumers from piling on more than $10 trillion in household debt.

"I think everyone gets what the anger is about... But you just can't say, 'Well I want all debts forgiven.' That is not happening," says one West Coast trader, who like most still working in the financial services industry, declined to be identified by name in this article.

The disconnect, says Jason Ader, a former top Wall Street casino analyst turned hedge fund manager, is in part a simple product of Wall Street's isolation from the hardship out there. Ader says he spends a lot of his time in Las Vegas, one of America's hardest-hit housing markets, and thus wasn't too surprised by this fall's anti-Wall Street outburst.

"I see plenty of despair in places like Las Vegas, where in some neighborhoods every other house is vacant or foreclosed and lots are overgrown by weeds," says Ader, who sits on the boards of Las Vegas Sands Corp and a small Nevada community bank called Western Liberty Bancorp.

But the 43-year-old Ader, who manages $200 million in his hedge fund, says it's a different story for many of the wealthy who work in finance in New York City and don't spend a lot of time in states with high unemployment and high foreclosure rates. Living in Manhattan or the Hamptons or hedge fund havens like Greenwich, Connecticut, can lead to a bit of myopia, he says. "At first I had friends who were scratching their heads at the protests," says Ader.

Blame Game
To put it bluntly, many on Wall Street still see the events leading up to the financial crisis as a case of banks having legitimately sold something - whether it be mortgages or securities backed by those loans - that someone wanted to buy.

Thomas Atteberry, a partner and portfolio manager with Los Angeles-based First Pacific Advisors, a $16 billion money management firm, says his success "wasn't a gift" and he had to work hard to get where he is. Atteberry says he understands the frustration many feel about income inequality. But he said the problem isn't with those who are successful, but rather our "tax codes and regulations."

While some members of the financial elite say they are willing to pay higher taxes, they note the picture for Wall Street firms is not as sunny as some on Main Street might paint it. Wall Street banks already are beginning to shed jobs, and consulting firm Johnson Associates Inc. is predicting bonuses for those who remain will shrink by 20 percent to 30 percent.

Complaints over new financial regulations burdening Wall Street firms are a major reason blamed for the layoffs. Sit down with a hedge fund manager or a top trader and it won't take long before he or she grabs some spreadsheet that shows all the new rules and regulations coming out of the Dodd-Frank financial reform bill.

Many of America's well-to-do, not just Wall Streeters, say they don't feel particularly advantaged. A recent survey by marketing firm HNW Inc. found that half of the nation's richest 1 percent "don't see themselves as being part of that elite group." Also, 44 percent of those surveyed told HNW's pollsters they already pay too much in taxes.

Maybe it is just the ethos of Wall Street, where success is defined solely by who makes the most money, that makes it hard for financiers to feel they've wronged anyone. But in a time of 9 percent unemployment and 15 percent of U.S. citizens receiving food stamps, some Wall Street alums say the financial elite are doing themselves no favors by giving the appearance of shrugging off the current mood.

"I think Wall Street hasn't taken in how much anger there is out there and they haven't taken partial responsibility for the financial crisis," says Brookings Institution fellow Douglas Elliott, who was an investment banker for two decades before joining the liberal-oriented public policy group. "I think both sides - Wall Street and Main Street - misunderstand each other."

Some who get paid to advise the rich on how to deal with the media and the public are telling clients to pay attention. Robert Dilenschneider, founder and principal of The Dilenschneider Group corporate consulting group, recently sent a report to his clients telling them that many of the protesters taking part in the Occupy movement are not a bunch of unemployed crazies and hippies.

"The CEOs in big board rooms in Paris, in Zurich and New York don't normally think about people who are demonstrating in parks," says Dilenschneider, whose firm advises some of the biggest companies in the world. "In the banking and financial area, we are telling our clients you have to explain more completely what makes up your business and why your profits are what they are."

Mom And Pop Hedge Funds
Some of the disconnect is simply a matter of lifestyle and the fact that the super wealthy really do live differently from everyone else. Hedge fund managers and bankers fly around on private jets, live in palatial penthouse apartments overlooking Central Park and have second homes in the country.

In New York City, the average pay for those working in finance is $361,183, more than five times the average salary of $66,106 for all workers in the city, according to the New York State Department of Labor.

This disparity in income and attitudes was evident in the response of hedge fund managers like Paulson who portrayed themselves as humble businessmen. Says Wall Street historian Charles Geisst, "Hedge funds may be small businesses in terms of labor intensity, but in terms of capital intensity they are just the opposite." A spokesman for Paulson said he had nothing more to add on the subject.

Former Wall Street practitioners say the Street does not lend itself to a lot of introspection. "The world of investment bankers and especially the trading floor region is notoriously hermetically sealed,'" says Kenneth Froewiss, a retired JPMorgan Chase investment banker and former finance professor at New York University's Stern School of Business. "The walls may be filled with screens beaming the latest news, but there is typically an obliviousness as to what is happening across the street."

Lessons Learned
There are exceptions, of course. Some are saying it may be time for the government which has bailed out the banking system to help millions of struggling homeowners.

One of those is former top Pacific Investment Management Co executive Paul McCulley, best known for his analysis on central banks and monetary policy when he worked at the world's biggest bond fund. McCulley, who retired a year ago from Newport Beach, California-based PIMCO to become a consultant with a public policy firm, enjoys the wealth he accumulated in his old role. He lives in a house by the water where he docks his two boats. But he says Wall Street went too far.

"Our society was ripe for a convulsion about social justice, and Occupy Wall Street was the catalyst for that," says McCulley. "New York can be very insular. It is not the real world and neither is Newport Beach."

Now that he's no longer working for PIMCO, McCulley is a bit more free to speak his mind. And he says the only way to jumpstart the U.S. economy is for the federal government to get behind a serious program to encourage consumer debt forgiveness and principal reductions on mortgages by banks.

McCulley noted that mortgage firms Fannie Mae and Freddie Mac have been propped up by about $169 billion in federal aid since they were rescued by the government in 2008, yet there's a "a moral overtone" to the argument against reducing mortgage debt burdens for individual borrowers. "Wall Street capitalism has given us a foul stench in our society," says McCulley.

The disconnect continues. Just this week, top executives at Fannie and Freddie found themselves drawing fire on Capitol Hill for trying to distribute nearly $13 million in bonuses to key employees.

And the October 31 collapse of MF Global Holdings is prompting some critics to say Wall Street hasn't learned any lessons from the financial crisis. The futures brokerage house filed for bankruptcy after investors and traders became fearful that MF Global had taken on too much exposure to European sovereign debt in a bid to juice revenues.

The risky trade was put on by former New Jersey Governor Jon Corzine, a former Goldman Sachs Group chief executive. Last year, Corzine was saying Wall Street investment banks had taken on too much risk in the months leading up to the financial crisis. On the lecture circuit Corzine was calling for tighter regulation of Wall Street, even while his firm was borrowing more and more money to bet on some of the riskiest European debt. A Corzine representative declined to comment.

William Cohan, the author of several Wall Street-related books and a former Lazard investment banker, said MF Global was acting as if the 2007-2008 crisis never happened: "You would have to be living under a rock if you didn't get the message of the financial crisis."

Words of a Euro Doomsayer Have New Resonance
by Landon Thomas Jr. - New York Times

The euro zone was crumbling, just as he had long predicted, yet Bernard Connolly, Europe’s most persistent prophet of doom, still faced a skeptical audience.

"The current policy of lending plus austerity will lead to social unrest," Mr. Connolly told investors and policy makers at a conference held this spring in Los Angeles by the Milken Institute, arguing the case that Greece, Italy, Portugal and Spain could not simply cut their way to recovery.

"And one should not forget that of the four countries we are talking about, all have had civil wars, fascist dictatorships and revolutions. That is history," he concluded, his voice rising above the chortles and gasps coming from the audience and the Europeans on his panel. "And that is the future if this malignant lunacy of monetary union is pursued and crushes these countries into the ground."

Mr. Connolly has been warning for years that Europe was heading for disaster. As a European Union economist in the early 1990s, he helped design the common currency’s framework, but then he was dismissed after he expressed turncoat views.

In 1998, just months before the euro’s introduction, he predicted that at least one of Europe’s weakest countries would face a rising budget deficit, a shrinking economy and a "downward spiral from which there is no escape unaided. When that happens, the country concerned will be faced with a risk of sovereign default."

Now, as the European debt crisis that began in Greece threatens to engulf even France along with Italy and Spain, Mr. Connolly’s longstanding proposition that the foisting of a common currency upon so many disparate nations would end in ruin is getting a much wider hearing. Hedge funds looking to bet on a euro zone breakup scour his research reports for insights.

Longer-term investors who listened to his decade-long recommendations to steer clear of the bonds of Greece, Italy, Portugal and Spain are congratulating themselves for not falling into the trap that bankrupted MF Global, the investment firm run until recently by Jon S. Corzine, the former Goldman Sachs executive and New Jersey governor. And central bankers outside the euro zone are among his most faithful readers.

In 2008, Mark Carney, the governor of the Canadian central bank, cited the British-born Mr. Connolly, along with the far more prominent Nouriel Roubini of New York University and the Harvard economist Kenneth S. Rogoff, as having been among the few who foresaw the global financial crisis. Mervyn A. King, the governor of the Bank of England, has become more vocal about the euro zone’s problems and is also a longtime follower.

Nicolas Carn, an independent research analyst and money manager who worked previously as chief investment strategist for the London-based hedge fund Odey Asset Management, is one of Mr. Connolly’s biggest fans. "Bernard has influenced me a great deal," Mr. Carn said. "He has shaped my views on Europe and contributed significantly to my investment performance."

To be sure, Mr. Connolly was not the only analyst who raised early warning flags about the euro project. Economists like Martin Feldstein of Harvard and Paul Krugman, a Princeton economist who writes an Op-Ed page column for The New York Times, have been longtime critics, as were many experts in Britain, which has long been skeptical of the euro. But few have gone on to devote more or less their entire professional career to exposing Europe’s monetary fault lines.

Unlike many critics of the euro, Mr. Connolly, 61, plies his trade mostly in private, eschewing cable television programs, opinion pages and policy journals. He represents a new breed of independent analyst that has come increasingly to the fore since the financial crisis broke in 2008.

As investment banks have cut down on staff and remain constrained by their banking and government relationships, independent analysts like Mr. Connolly, who are mostly pessimistic in outlook, have become highly popular for hedge fund investors who wager large sums of money betting against the currencies, bonds and banks of countries headed for trouble.

Mr. Connolly worked for AIG Financial Products, the banking arm of the insurance company American International Group, until it went into government receivership. He now operates out of a nondescript office in New York, where he is said to pound out as much as 20,000 words of analysis a week.

His insights, like those of other such analysts scattered around the globe, do not come cheap. While the price Mr. Connolly charges is not public, analysts of his stature command, in some cases, as much as $100,000 for a full array of services, including regular meetings and phone calls along with written reports.

And like many of them, Mr. Connolly — the Oxford-educated son of a bus driver from Manchester — guards his privacy zealously. He declined numerous requests to comment for this article. People who know him say that his public reticence is also fed by a lingering anxiety that officials in power will exact some form of revenge.

The origins of that fear, as well as the anger and passion that drive him, date to 1995, when he took a leave from his job with the European Commission to write "The Rotten Heart of Europe." The book was an excoriating history of the failure of the euro’s predecessor, the European exchange rate mechanism.

In Britain, where suspicions of common European economic policy ran very high, the book was a hit for its attacks on the architects of the European common currency, including Jacques Delors, the former head of the European Commission, and Jean-Claude Trichet, the French finance official who would go on to run the European Central Bank for eight years. The book was greeted less enthusiastically in Brussels; Mr. Connolly was told not to return from leave to reclaim his position.

Moreover, the European Commission investigated whether he had disclosed any proprietary information in his book. Investigators found that he had not. In 2005, when Greek, Portuguese and Irish bonds were trading at rates barely higher than Germany’s, Mr. Connolly’s work at AIG Financial Products persuaded a small group of hedge funds and independent investors to bet on a euro zone crackup.

They did so by buying the credit-default swaps of what he saw as the most vulnerable European countries. When fears that those countries would default took off in 2008 and 2009, sending the values of those swaps skyward, they were able to sell — reaping large profits.

"It took a while, but we finally were able to monetize Bernard’s views on Europe," said James Aitken, who worked with him at AIG Financial Products and describes his job at the time as translating Mr. Connolly’s arcane musings into actual investment strategies.

While other investors have also profited from following Mr. Connolly’s advice, Mr. Aitken says that the analyst’s true passion is to try to prevent the social and political train wreck he fears is just around the corner. "He is anguished," said Mr. Aitken, who runs his own research service for investors, Aitken Advisors, from his home in London. "He sees where this is going and is warning against the human tragedy."

Yra Harris, a trader on the Chicago Mercantile Exchange, is another of Mr. Connolly’s supporters in the investment world. "Bernard is like no one I have ever met," he said, citing his work as inspiration for some recent profits he made selling Italian bond futures.

Mr. Harris concedes that Mr. Connolly’s reports can be hard going. Indeed, some exceed 70 pages, cite Hegel and John Stuart Mill and include footnotes that can run on for more than a page. But Mr. Harris is so convinced that Mr. Connolly’s views should find a wider audience that he and a colleague have offered to pay Mr. Connolly’s publisher $75,000 to reissue 25,000 paperback copies of "Rotten Heart," now out of print.

"I will pay out of my pocket because he has meant so much to me," Mr. Harris said. "Each time I talk to him, it’s like I’ve been to Harvard for four years."

Wells Fargo Says 80 May Be the New 65 for US Retirees
by Elizabeth Ody - Bloomberg

Americans are prepared to work longer in order to save enough for retirement, according to a survey by Wells Fargo & Co.

About 76 percent of respondents said it’s more important to reach a specific dollar amount before retiring, compared with 20 percent who said it’s more important to retire at a given age, regardless of savings, according to the survey of adults with household incomes or assets from about $25,000 to $100,000. "Eighty is the new 65," Joseph Ready, executive vice president of Wells Fargo Institutional Retirement & Trust, said in an interview at Bloomberg headquarters in New York before the survey was released today. "It’s a real sea change."

About 74 percent expect to work in retirement, according to the survey, with about 39 percent working because they’ll need to and 35 percent because they want to. And 25 percent of those surveyed said they expect they’ll need to work until at least age 80 because they don’t have sufficient savings. "People are starting to move toward understanding the different levers of what they’re going to have to do to make it in retirement," Ready said.

About 68 percent of those surveyed said they’re not confident the stock market is a good place to invest their retirement savings. About 45 percent of respondents said if they were given $5,000 they would buy a certificate of deposit, and 50 percent said they’d invest it in stocks or mutual funds.

No Good Alternative
"Even though there’s a lack of confidence, I don’t know that they see there’s a good alternative," to investing in stocks, said Laurie Nordquist, executive vice president of Wells Fargo Institutional Retirement & Trust.

The Standard & Poor’s 500 Index returned 1.32 percent this year through Nov. 14. One-year CDs yielded 0.35 percent and five-year CDs paid 1.19 percent on average as of Nov. 3, according to, an online provider of consumer-rate information and a unit of Bankrate Inc.

Survey respondents had saved a median of $25,000 towards retirement and estimated they’d need a median of $350,000 to support themselves in retirement. About 42 percent expect to receive a pension or already receive one. "The numbers don’t add up," Nordquist said. "The gap is probably larger than what they self identified."

Those surveyed expect to withdraw about 18 percent on average from their savings each year in retirement. "We would recommend typically 4 percent or less, in terms of withdrawals," Nordquist said.

About 57 percent of respondents said they’re confident they’ll have saved enough for retirement. "You used to just save blindly, but I think the blinders are coming off," Ready said.

Geographic Attitudes
Wells Fargo hired Harris Interactive Inc. to survey 1,500 Americans aged 25 to 75 by phone in August and September. San Francisco-based Wells Fargo is the fifth-largest administrator of 401(k) retirement assets, overseeing about $117 billion as of 2010, according to Cerulli Associates, a research firm based in Boston. Fidelity Investments is the largest administrator with about $824 billion in assets.

Residents of the San Francisco and Sacramento, California, metropolitan areas are generally the most ready for retirement, and residents of Indianapolis and New York are generally the least ready, according to a ranking of 30 major metropolitan areas by Ameriprise Financial Inc. The ranking, released yesterday, evaluated the survey responses of almost 12,000 adults about their preparations and attitudes towards retirement.

Why doesn't Britain make things any more?
by Aditya Chakrabortty - Guardian

In the past 30 years, the UK's manufacturing sector has shrunk by two-thirds, the greatest de-industrialisation of any major nation. It was done in the name of economic modernisation – but what has replaced it?

Before moving to Yale and becoming a bestselling historian, Paul Kennedy grew up on Tyneside in the 50s and 60s. "A world of great noise and much dirt," is how he remembers it, where the chief industry was building ships and his father and uncles were boilermakers in Wallsend. Last year the academic gave a lecture that reminisced a little about those days.

"There was a deep satisfaction about making things," he said. "A deep satisfaction among all of those that had supplied the services, whether it was the local bankers with credit; whether it was the local design firms. When a ship was launched at [Newcastle firm] Swan Hunter all the kids at the local school went to see the thing our fathers had put together and when we looked down from the cross-wired fence, tried to find Uncle Mick, Uncle Jim or your dad, this notion of an integrated, productive community was quite astonishing."

Wandering around Wallsend a couple of weeks ago, I didn't spot any ships being launched, or even built. The giant yard Kennedy mentioned, Swan Hunter, shut a few years back, leaving acres of muddy wasteland that still haven't lured a buyer. You still find industrial estates, of course, and they look the part: overalled men milling about, passing lorries. Only up close does it become clear that there's not much actual industry going on.

The biggest unit on one estate is a dry cleaner; on another, a warehouse for loft insulation dwarfs all else. At a rare actual manufacturing firm, the director, Tom Clark, takes me out to the edge of the Tyne, centre of the industrial excitement remembered by Kennedy. "Get past us and there's nothing actually being made for miles," he says, and points down the still waterfront.

At his firm, Pearson Engineering, Clark introduces me to a plater called Billy Day. Now 51, he began at the firm at 16. His 23-year-old son William is still out of work, despite applying to dozens of small factories. As the local industry's gone, so too have the apprenticeships and jobs. "No wonder you get young kids hanging out doing whatever," says Day. "We've lost a whole generation."

You can see similar estates and hear similar tales across the country, from the north-west down to the Midlands and the old industrial parts of suburban London. But it's in the north-east, the former home of coal, steel, ships and not a lot else, that you see this unyielding decline at its most concentrated. It's a process I've come to think of as the de-industrial revolution, in which previously productive regions and classes are cast adrift.

It gets little airtime nowadays, but this story cuts across most of the key debates in British economics: from why the wealth gap has widened so dramatically to why the country remains stuck in a slump. The dismal unemployment figures that you saw on Nov 16 – they're part of it, too. And as David Cameron and Vince Cable this month tout their get-behind-British-manufacturing campaign, what they fail to mention is the bag of bones that the sector has become.

What's driven the de-industrial revolution? In significant part, it's a tale about where Britain is going, one that's been told by Conservative and Labour alike over the past 30 years. It's a simple message that comes in three parts. One, the old days of heavy industry are gone for good. The future lies in working with our brains, not our hands. Two, the job of government in economic policy is simply to get out of the way.

Oh, and finally, we need to fling open our markets to trade with other countries because, despite the evidence of countless Wimbledons and World Cups, the Westminster elite believe that the British can always take on the competition and win.

Yet there's ample evidence that the promised rewards of this post-industrial future haven't materialised. What was sold as economic modernisation has led to industrial decay, with too often nothing to replace it.

But before coming to the results in the north-east and elsewhere, let's set out the promises made by the politicians. Over the past 30 years, there have been three main versions of the de-industrial revolution. I call them the Thatcher argument, the Blair vision and the Cameron update. I'll come back to the coalition and the future at the end, but let's start with Mrs T.

By the mid-70s, the press, politicians and academics agreed that Britain was in crisis. And as far as correcting the critical weakness of the British economy went, the Thatcherites had a clear answer. In a word: competition.

In 1974, Keith Joseph – the man Margaret Thatcher described as her closest political friend – gave a speech in which the key section was titled "Growth Means Change". He argued that British industry was "overmanned" with "too low earnings and too little profit and too little investment". The answer lay in shedding factory workers, which would make industrial companies leaner and free up labour for new businesses.

"This is growth," Joseph said. "Whether the new work is in industry, commerce or services, public or private ... The working population must choose between narrow illusory job security in one place propped up by public funds or the real job security based on a prosperous dynamic economy."

Five years later, the Conservatives encouraged just that process: first came an austerity programme that saw nearly one in four of all manufacturing jobs disappear within Thatcher's first term. Then followed privatisations and an economic policy geared towards a housing boom and the City. Despite Joseph's assertions, the middle-aged engineers who were laid off didn't go away and become software engineers – they largely landed up in worse jobs or on the scrapheap.

But it was with Tony Blair that the argument for moving from industry to services shifted from one of dire necessity to being an altogether more optimistic vision about Britain's place in the world. The architects of New Labour were convinced that the future lay in what they called the "knowledge economy". Mandelson declared Silicon Valley his "inspiration"; Brown swore he would make Britain e-commerce capital of the world within three years.

Again, the theme was simple: most of what could be manufactured could be done so more cheaply elsewhere. The future lay in coming up with the ideas, the software, and most of all, the brands. Once the British had sold cars and ships to the rest of the world; now they could flog culture and tourism and Lara Croft.

The odd thing is that all this techno-utopianism came from men who would struggle to order a book off Amazon. Alistair Campbell tells a story about how Blair got his first-ever mobile phone after stepping down as prime minister in 2007. His first text to Campbell read: "This is amazing, you can send words on a phone."

But Blair and Brown had plenty of advisers and consultants and thinktankers to help them stay cutting-edge. One of the most interesting walk-ons was played by an American academic called Richard Florida, who comes up time and again in this saga. Florida argued that the successful regions of the future would be driven by what he called a "creative class" of young people living in city centres. And there was an even groovier elite termed the "super-creative core".

It was always a daft argument: ask Florida who was in this "super-creative core" and he'd suggest all sorts of occupations that didn't sound especially groovy, such as IT support staff.

But what really stuck out was how Florida fenced off creative work. You were either a knowledge worker or a factory worker – as if the other stuff didn't require brains. And running through a lot of the knowledge-economy talk was a carelessness, bordering on contempt, for what people did. That was echoed in the stark choice that Labour presented workers in this entrepreneurial, innovative young country: brain up, or get written off.

There is a popular argument which holds that all the rot in the British economy began in 1979. I don't believe that. Nor am I spinning a tale of leonine industrialists being led by Westminster donkeys. Pearson Engineering's Tom Clark has a good story about how the firm's previous owners used to handle industrial relations. Every time the workforce went on strike, which was often, one of the Pearsons would buy a new Rolls-Royce Silver Cloud and drive through the picket line, waving two fingers at his own staff.

The real charge against Blair and Brown is that, rather than focus on this problem of underpeforming managers and shareholders, they chased the fantasy of the knowledge economy. In their wake trailed a whole phalanx of propagandists.

Take Tyneside's regional development agency, One North East. Its website features only one document on manufacturing, but plenty with titles such as "Towards an E-region". And there is a discussion paper called "The North East: Bohemian or Behemoth?". It highlights a pensioners' day centre, where young and old can chat "on the complexities of digital art". There's also a scheme in Durham that helps young people "avoid the temptations of crime by encouraging them to take up fishing".

What's all this civil servant away-day speak got to do with regional development? All becomes clear with the RDA's discussion of how it can keep "bright, innovative people, with transferable skills" in the area. So that's what it's about: attracting the super-creatives. It comes as no surprise to find that the leaflet was produced for a visit by Florida.

Meanwhile Britain has been undergoing one of the biggest industrial declines seen in postwar western Europe. When Thatcher came to power, manufacturing accounted for almost 30% of Britain's national income and employed 6.8 million people. By the time Brown left Downing Street last May, it was down to just over 11% of the economy, with a workforce of 2.5 million.

(Two caveats need to be made. First, manufacturing is partly a productivity game: you get more machines in, so you employ fewer staff on a particular task. Second, other countries have stepped back a bit from manufacturing – all those new Labour-isms about the competitive threat from China and India were not just babble.)

Even so, by any standards these numbers represent a collapse. As the government itself admits, no other major economy has been through our scale of de-industrialisation. The Germans and French have kept their big domestic brand names – the Mercedes and Mieles, the Renaults and Peugeots – and with them their supply chains of smaller suppliers and partners.

In Britain there's been no such industrial husbandry, with the result that we have few big manufacturers left – but a profusion of bit-part makers. Is that a bad thing? Plenty of evidence suggests so. Bad economically, and terrible socially and culturally.

You can sum up the economic problem in a word: Greece. Not my comparison, but the one I repeatedly heard in Newcastle. To me, it still sounds too extreme but I saw their point: the loss of manufacturing means Britain no longer pays its way in the world. Last year, we British bought £97bn more in goods from other countries than we sold to them – the biggest shortfall since 1980.

The de-industrialists in Whitehall have long argued that this doesn't matter: that Britain can simply borrow more and sell its assets to foreigners. But there are problems with relying on foreigners for hard cash; they can simply refuse to extend it to you – just ask George Papandreou.

In the north-east, manufacturing jobs have nearly halved since 1997 alone – one of the biggest drops anywhere in the country. So what's come along in its place? The simple answer is: not a lot. A few minute's walk from Newcastle train station is the old Scottish & Newcastle brewery, which is now called Science City. It was meant to be home to hi-tech new businesses, but all you can see there is some fancy student accommodation and acres of barren ground.

Even the good-news stories of de-industrialisation turn out to be pretty grim. In 2005, MG Rover shut its plant at Longbridge in the Midlands. Around 6,300 staff lost their jobs but, the argument ran, if anyone was going to bounce back it would be these skilled staff at a prestige name.

Three academics tracked what happened to 300 MG workers, interviewing them regularly for three years. Sure enough, about 90% got another job. A lot retrained and some went into the service sector. In other words, they did everything the government told them to. Only now they were earning an average of £5,640 less every year than they had at MG Rover. And a quarter of those interviewed admitted to living off their savings or being in financial difficulties.

It's a similar story at regional level. Look for private-sector growth in the north-east and you get the odd high-skilled niche such as computer games in Middlesbrough – but they're never going to provide volume employment.

At the other end of the labour market the north-east is now in with a shot at becoming call-centre capital of Britain. There's Northern Rock, of course, which was a great success story until it collapsed. Finally, you get the public sector, covering up for the weakness of private industry.

The Centre for Research on Socio-Cultural Change at Manchester University calculates that, between 1998 and 2007, the bulk of the new jobs in the Midlands, the north, Wales and Scotland came from the state. And, of course, there's welfare: more than one in six of all people living in the north-east claim some form of out-of-work benefit.

Now think about the cost to the places that used to be home to all this now-rotting industry. Everywhere in Tyneside are traces of its industrial past. There's Newcastle university, founded by the arms-maker William Armstrong, and the local tech colleges, which used to provide training to factory staff on day release.

Then there's the literary and philosophical society, the mining and engineers institutes, the social clubs. The culture here was traditionally a productive one rooted in making things and selling them. What the de-industrial revolution has obliged the north-east and others to do is to adopt a consumerist culture – to buy things instead, often on tick.

So it is that you get a giant shopping centre such as Liverpool One describing itself as the largest urban regeneration project in Europe without any apparent irony. Or you hear American economists arguing that free trade may have reduced salaries for blue collar workers in the west, but they can now buy cheaper Chinese imports. In other words, you may have lost your factory workshop – but at least you've got a pound shop.

If you're employed in the service sector or, more to the point, you're a politician who considers that Britain's future lies in services rather than manufacturing, there might seem nothing wrong with that. Still, the net result has been to undermine whatever economic or political clout the old industrial regions and classes had, by making them dependent on Westminster for jobs and welfare.

But, you might say, isn't David Cameron going to change all that? After all this is the government that talks about the March of the Makers. Obviously, it's difficult to disagree with the argument that the coalition put about – that Britain's economy is lopsided, dependent on the City and the housing bubble – but there aren't the policies to go with it.

Instead, Cameron issues the same prescription as Thatcher – that if you cut back on public spending, private spending will inevitably grow. His ministers give train contracts to German factories rather than to workers in Derby. On taking office, the heir to Blair even let it be known that he had a new guru – none other than Florida.

And yet many of the arguments that preoccupy the British are haunted by the spectre of manufacturing. Angry at the overweening power of banks? Then you want a more mixed economy. Distressed at the gap between the rich and the rest of society? In the end, that will require jobs with decent wages and skill-levels, like the old manufacturing jobs.

This applies to non-economic debates, too. Politicians go on about localism, without discussing what de-industrialisation has done to local economies. Pundits bemoan the loss of community spirit without considering the wrecking ball that has been put through many communities.

In Walker, on the Tyne, the workers at Pearson Engineering are recalling when their firm employed 1,000, rather than a couple of hundred. Clark, the apprentice who worked his way up to company director, sketches out his retirement plans. Then he pauses. "I'm beginning to worry about what my grandkids are going to do," he says.


Ash said...

A very timely lead post today, because it is absolutely critical that Germany continue refusing to be pressured into full-blown capitulation by the Euro Mafia. It will be a lot of pressure, indeed, given the likely strains on Italy and Spain's public finances this week. The ghost of Francisco Franco has now returned to the latter, but it will do little for the country but further infuriate the 20-40% of Spanish people without employment.

Bailouts, Austerity and Rage: People of the Sun

"A castration of Spain's regional governments would certainly be keeping in line with the overall trend within the "EU dream", but it would do very little to put Spain's fiscal house in order. In fact, the spending programs of these regions, which are significantly more tailored to their specific populations, are perhaps the only thing keeping the country's housing-based economy afloat, which keeps some tax revenues flowing to the national government. Once these regional administrations are "overhauled" with austerity, the Spanish people can wave goodbye to what remains of their housing and employment markets. Holders of Spanish public debt will once again be clawing at the ECB and ESFS for a bailout while the Spanish people continue to starve.

Bloomberg:'Spain’s biggest companies were instrumental in Zapatero’s decision to call early elections, El Mundo reported yesterday, citing people at the country’s main business group it didn’t identify. Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, said in a July 29 statement that Zapatero had taken the “right decision" in calling early elections. The Nov. 20 date for the elections coincides with the anniversary of the death of the Spanish dictator Francisco Franco in 1975.'

...So the ghost of the fascist and ruthless dictator, Franco, will return to haunt the people of Spain in November [today], when the "Biggest Companies' Party" wins the early elections and proceeds to develop and implement extensive spending cuts, tax increases, regional "reforms" and plans for privatizing public assets. It is inevitable that such a development will further stoke the fires of rage and revolution within the Spanish population. History has clearly proven that it rhymes, but will it repeat itself? Will the uprisings be squashed by a fascist, militaristic government or combination of governments in Europe? Or, instead, will the modern-day People of the Sun ultimately prevail in unlocking their financial chains?"

As noted above, a partial answer to that last question may hinge greatly on decisions by Germany in upcoming days and weeks. Already, Barclays is somehow using the Spanish election as a reason why Germany must capitulate to unlimited ECB borrowing/printing and a general backstopping of bankers' jobs, salaries and bonuses. Many other banks have also piled on the pressure in the last two weeks. Make no mistake, we are at a HUGE crossroads for financial markets now, and possibly the entire European population as well.

el gallinazo said...

Euro fiasco

Graham Summers of Phoenix Capital has a post on ZH today

where he makes the blunt and certain claim that Germany will leave the euro first, because Germans ***will never permit*** the trillions of euro monetization by the ECB to kick the global fiscal collapse can down the road a little more. This is based on the purported remaining trauma in the German collective unconscious of the Weimar fiasco. But arrayed against this purported national, psychological resistance is a formidable artillery battery composed of the NWO / Bilderberger, the senior bond holders and managers of the giant banks, the central banks trying to prop up equity prices on the global markets, and the politicians. Merkel and Schaüble want to monetize, but are trying to appear a little nebulous about it to avoid defections from her coalition. She also has well over a year before she must face re-election. The groups mentioned above are putting a full court press through their owned and toady media to convince the public. The consolidation of Europe under a politically and fiscal sovereign federal government, superseding the power of individual nations, has been a cornerstone of the NWO for 50 years, and they are not about to let the plan collapse without firing off every one of their many cannons.

The only time, so far, a nation has won even a short term victory over the banks was Iceland, a country the size of a mid-sized city. And this happened through a rather unpredictable quirk where a titular head of government, due to conscience, forced the question onto a referendum. The banksters can aways control the national legislatures through corruption of their members, as we have seen in recent elections in Ireland, Portugal and as we will shortly see in Spain and Greece. Recent events in Greece show that that the referendum word has become anathema. In summary, I quite disagree with Summers prediction and that the ECB will monetize by the trillions without Germany leaving the euro. My only caveat to this is that they may not be able to do so due to the sudden speed and size of the collapse. This is not a minor caveat as it forms a cornerstone of I&S's deflationista position. So to put it a bit differently, the ECB will do everything in its power to monetize the debt without a German departure from the euro because of their actions.

Ash said...

El G,

What do you make of ZH's claims of late that Goldman is willing to accept an EMU collapse, and is maybe even actively pushing for one?

"To summarize: everyone is dumping European paper, except for the ECB and Italian banks, which have no choice and instead have to double down and buy more. In the meantime, the market is going increasingly bidless as liquidity evaporates, confidence has disappeared and virtually everyone now expects a repeat of Lehman brothers. Of course, this means that when the bottom finally out from the market, the implosion of the Italian banking system, and thus economy, will be instantaneous. And when Italy goes, so goes its $2 trillion+ in sovereign debt, and at that point we will see just how effectively hedged and offloaded the rest of the world is, as contagion shifts from Italy and slowly but surely engulfs the entire world.

Incidentally, is it really that surprising that Goldman is now doing its best to precipitate a bank run of Europe's major financial institutions by "suddenly" exposing the truth that was there all along? During the great financial crisis of 2008, the one biggest winner from the collapse of Bear and Lehman was none other than the squid. This time around, Goldman has set its sights on Europe and has already made sure that its tentacles will be in firmly in control at all the right places when the collapse comes, as the Independent shows."

It's hard to see how this is comparable to Bear and Lehman, though, and easy to see how the financial contagion from entire countries the size of Spain or Italy going down would be much more risky for Goldman. Still, Goldman hasn't really pushed for full-blown ECB intervention as the other major banks have, could be actively shorting EUR/USD (implied by its sell side telling clients to buy), and obviously has a lot of control over the ECB and European countries now. Perhaps another caveat to consider?

Also, I imagine the sociopolitical situation in Berlin would come to resemble that of Athens within a relatively short time if Germany capitulates to ECB monetization. Along with financial markets, that could be another fast-acting force that overwhelms the attempted political, fiscal and monetary policies of the Euro masters.

Greenpa said...

Someone in the previous thread pointed out that there is not a great deal of schadenfreude here on TAE- which is certainly true in comparison to some of the snark and smack fests out there. But-

"Thus ISDA has concluded that "the exchange is not binding on all debt holders", so the CDS cannot be activated – even though losses on Greek bonds may well be bigger than at Dynegy.

"Many investors, unsurprisingly, are outraged;"

I confess to a few giggles, over that one. I'm a bad, bad, person. :-)

Anonymous said...


If anyone is interested and if the Debt Clock ( is reliable, the U.S. is coming up very soon to a federal debt to GDP ratio of 100%. (I know, it depends on what you consider, but it is still a milestone.)

A few days ago, I calculated that the 100% mark was to be reached on 30 November, but then last night (European time), the debt-clock managers must have updated their info because the debt jumped by 15 G$ (billion dollars), whereas normally, the debt increases only 2 to 3 G$ per 24-hour period. The calculation is iffy because the rate of acceleration seems to jump around, probably depending on when a number of different parameters are updated.

As of now, 22.00 hours European time (20 November), the ratio is 99.9937.


trojanhorse said...

Vampire Banker Hunter on Keiser today, bit of fun and unless it was bleeped along other naughty words no mention of g--d!

Ilargi said...

Major shift announced just now in Spanish elections, the right wipes out incumbent socialist Zapatero.

Question: is the new guy, Mariano Rajoy, technocrat enough to get the job done? Hard to gauge. Is being the youngest ever property registrar sufficient. Tune in again next week.......

¿He'll last at least a week, no?


Skip Breakfast said...


Does Goldman want a collapse?

I had a very lengthy conversation with a couple of intelligent friends with some cash. And we arrived at a rather disturbing conclusion. If you think that banks and states are reflections of the human condition, and that their decisions are often correlated with normal human desires and emotions--greed, fear, envy, etc.--then it stands to reason that any cashed up entity would absolutely love a Euro collapse. You get prize assets for pennies on the dollar. When you're sitting in cash, it becomes difficult not to hope for prices to come down. And they will certainly come down in a Euro collapse.

jal said...

Does Goldman want a collapse?

Do vulture funds exist to buy at dirt cheap prices?


Greenpa said...

So, Ann says: "It is my recommendation that ALL customers withdraw from all of the markets as soon as possible ..."

yeeeha. This is a good big kick up in the "She who panics first, panics best" department.

Then she mentions that the possibility of clawback "as a hedge manager, makes her blood run cold...

Wow. So what, she's pumping liquid helium, in her cold, cold, heart now?

trojanhorse said...

Does Goldman want a collapse?

Do vulture funds exist to buy at dirt cheap prices?


Does TAE want a collapse? If it does are it's motivations the same as Goldman Sachs?

Ilargi said...

"Does Goldman want a collapse?"

At this point in time, that would depend on their control over the (OTC) derivatives market. Looks like a big gamble to me, I know they are used to such wagers, but there's no guarantees their shirts will come out starched and ready to wear on the other side. Too much risk they don't control. They may have lots of Monti clones on the ISDA Derivatives Board, but what if other parties decide they don't want what GS wants, simply because it'll kill them? Who was it again that said Goldman could be the next MF Global? Oh, Roubini! All on red!


Nassim said...

hang around and watch what age group went voting. Sure enough, its like the media are saying ... seniors.

Actually, they are 68ers - like myself. :)

Greenpa said...

Re: retirement age. Today a well known Harvard Professor of Sociopathy had a bit in the Sunday NYT; on how everyone having to work longer is actually good for us all.

Isn't that nice? Thank goodness.

Jack said...

About Goldman want a collapse
They are in the driver seat and they are going to have the collapse when they want it.
What I am wondering is if this situation going to change and are the people on the streets ever going to have justice.

el gallinazo said...


There was an article on ZH the other day which indicated that the average American would have to work two years after he died in a few years.

el gallinazo said...

A few more thoughts on the MFG debacle:

Gerald Celente claims that he used gold futures contracts as a means to augment his physical stash, not to speculate. He claims that at the end of his contract he would always demand physical delivery. This sounds plausible and if true, would tend to neutralize claims against him of hypocrisy.

Why has the CME now allowed this first uncompensated client rip-off in its long history? They claim that they have over $100B in collateral backing their guarantees, so the Corzine theft appears to represent less than 1% of their ability to compensate. The mystery is that many of the small and mid-sized speculators and hedgers are going to bail out, so this can't be great for the future and commodities business. Perhaps they feel that this loss will be a lot less than a $800M hit. Or perhaps they have thrown in the towel and know the end is nigh, and this is just the first of many. Maybe they believe that most of their clients are gambling junkies who cannot kick the habit even when they see the magnets under the wheel. Since much of the stolen money seems to have wound up with JPMC, maybe they are afraid of angering that other giant cephalopod.

IMO, the MFG failure is what one blogger on ZH, MsCreant, believes to be a fractal precedent for systemic failure, or in simpler terms, a template for various canaries to keel over at all levels of debt. This brings to mind Stoneleigh's oft repeated warning that money and credit appear to be identical in an expansion, but act quite differently in a contraction. When you have a money inflation, such a Weimar or Zimbabwe, the increase in the money supply simply dilutes the purchasing power of each unit. When the expansion is primarily one of credit, this results in multiple claims to the same assets.

It appears to me that we have hit an inflection point in the deflationary collapse of credit. We have truly entered the contraction now. And we have multiple claims to Gerald Celente's margin account: Gerald himself, Corzine, Dimon, MFG's trustee and their lawyers, and perhaps others. It also appears that the banksters, since their sovereign coup under Clinton / Rubin, have rewritten the laws, one loophole at a time, so it is now quite legal for them to steal other people's money. So the grand riddle is who is going to wind up with the winning claims; the guppies, the pirana, the tuna, or the great white sharks? I think that is an easy one.

el gallinazo said...

For US citizens, one question that arises is how safe is their money to confiscation when invested in cash equivalent treasuries as Stoneleigh advises for the near term? I agree with her that it is safer than any other type of paper as the great whites do not have any form of direct claim on the money (if you exclude the federal government itself from that category). But this would only apply to non-tax deferred money where the treasury debt is purchased through Tax deferred funds are not eligible, so treasuries purchased through registered brokers and banks are eligible for the same type of theft that occurred to Celente and others. For holders of IRA's under the penalty withdrawal age, which if I recall correctly is 59.5, this additional and growing risk to outright theft under "competing claims" of the great whites should be considered against the 10% penalty hit and a probable higher tax bracket hit that a massive IRA extraction would cause. One should also throw into the equation the almost certain increase in various income taxes for the 99% which will come with the austerity sledgehammer after the Nov 2012 elections. Additionally, a withdrawal penalty of 10% was not written in stone on Mt. Sinai, and it is not about to get any smaller. IRA holders have a tendency, though, to look at their account numbers and forget the claims that various levels of governmental have on them and feel shocked when they have to pay the pipers.

As to 401-k's, that is a different kettle of fish as one has actually to discontinue the current employment to extract the funds. Borrowing the money against the account is no solution in this regard. In summary, what I am writing is to be as honest as possible with yourself as to what your realistic level of money loss risk is. This is something that CHS hits home repeatedly in his latest book. The MFG rip-off means that we have entered a new round where the apparent rules and risks have changed.

el gallinazo said...

Mish's last post is a shocker about a possible joining of the UK into the Eurozone.

Nassim said...

IMHO, the recent discussion about the merits, or otherwise, of gold as an investment or saving tool, is a bit of a red herring. The problem is that real interest rates have been negative for so long that anyone with some cash is in a quandry. He either loses around 5% of his savings annually or puts them in some risky endeavour.

In the Wheels of Commerce by Ferdinand Braudel, he mentions "interest rates ... dropped spectacularly in Holland ... in the seventeenth century" (page 386) - Tulip Mania happened at around the same time.

Braudel referred sometimes to the "natural interest rate" as being around 5%

Schadenfreud regarding Celente's malinvestment is misplaced. Everyone has a right to try to stop their savings from disappearing - he was too trusting that is all. Some of these remarks remind of Bob Dylan's Rainy Day Women

Well, they'll stone you when you're trying to be so good
They'll stone you just like they said they would
They'll stone you when trying to go home
And they'll stone you when you're there all alone
But I would not feel so all alone
Everybody must get stoned

Just change "stoned" to "screwed" and you will get my meaning.

Jack said...

It will help to have gold but I think the credit crunch is going to take the metal away from the people and put it into the hand of the central bankers.

Franny said...

Re: safety of IRA accounts from brokerage theft, it helps if you keep your money with a firm that does not gamble, e.g. Vanguard Group, which is owned by its customers, via the funds themselves.

Skip Breakfast said...


You ask, "Does TAE want a collapse? If it does are it's motivations the same as Goldman Sachs?"

Given the very well reasoned posts you've made in the comments, I'm suprised you'd see fit to conflate the interests of TAE with Goldman Sachs. I've defended myself against the same charge in these comment sections a few months ago. I wish I'd kept my rant, because I thought a lot about it. But I'll give a shorter answer again, from my point of view.

In short, "no." TAE does not WANT a collapse the same way Goldman wants one. Indeed, I don't WANT one in the sense you're suggesting. But that doesn't mean I'm not going to get one anyhow. My wanting anything in this regard changes the outcome not a bit. All I can do is accept the inevitable and try to prepare best for it. Goldman on the other hand wants one and has tremendous influence over the outcomes. Indeed, Goldman is one of the biggest cogs in the machine that orchestrated the scenario that has got us into this position in the first place.

That said, I do think the current system is vastly corrupt and destructive to ordinary human citizens and the environment, and I do want a re-set. That is different from imagining I met get rich from such a re-set.

As for getting rich(er). I am desperately trying to protect myself from the whims of the Goldmans and the system they have helped create. I'm at the mercy, and can only try to shore up my reserves based on the most likely outcome: collapse. What I want is to be able to eat and have shelter after a collapse, since I probably won't be able to get a job. I want to be able to pay for a surgery if I need one, and to help my friends and family put food in the fridge too, if necessary.

I would prefer that the myth I used to believe was restored as truth: that we have the capacity to grow forever, with better and more productive lives. I'd love a blossoming career with pay raises every year, leading to nicer houses and sunny vacations for everyone! Alas, that is a drug-induced pipedream we swallowed for too long.

In the end, what I want doesn't affect the outcome we're going to get. All I can do is prepare for it.

Ash said...

re: Goldman pushing for collapse

It seems that scenario never fails to bring out the extreme cynicism in everyone here, and, unfortunately, that includes me! Given both ancient and recent banking history, there is very little reason to think Goldman is not setting itself up to profit immensely from a Euro collapse scenario. However, I lean towards Ilargi's sentiment that the stakes have changed immensely in the last few years from their perspective, and that's a factor against them actually pushing for collapse. Perhaps it's more like... watching yourself hurtling towards a brick wall on a high-speed train and figuring out the best way to jump from the train and come out alive, while most of the others keep lobbying for the brick wall to move.

SB: "In the end, what I want doesn't affect the outcome we're going to get. All I can do is prepare for it."

You may be more like Goldman than you think!

Skip Breakfast said...

We're all a little like Goldman. You yourself have argued Ash that it is a mistake to label "others" pathological. We have all participated in tiny ways, even if only through negligence or willful blindness. Human nature applies to all humans. So far I'm still a human.

Skip Breakfast said...

Oh, I think I see more what you're saying Ash. That Goldman itself is just seeking to "prepare" for the collapse, rather than wanting it. Its preparation might make it vastly wealthy. Mine might just mean I eat while others starve. But it's the same thing in a way, I suppose, is what you're saying.

trojanhorse said...

Skip Breakfast
" ...I'm suprised you'd see fit to conflate the interests of TAE with Goldman Sachs. " and etc ...

Looks like I can depend on you for a reasoned statement. (Not a jibe!)

I won't speak for TAE but I will speak for myself. I too would like things to be the way they were, but like you say resources are not unlimited.

A collapse that I would envision would be horrible, but I see no way that the machine that we have built that is destroying this world can be halted. The best we can do is talk about all the things we should be doing and then find that life's necessities dictate we go on going on.

Maybe Goldman will be turn out to be the saviour of the world ... wouldn't that be a kick in the ass? Does one cynically LOL at this point, or just whimper?

Was about to post this and saw Ash's comment and Kurt Vonnegut's definition of Twerp came to mind. Don't know why, must just be the way what I call my mind works, or is that, doesn't?

Ash said...

re: Supercommittee unsurprisingly going for bust

This will certainly be a relatively large factor weighing on risk markets this week, as it was in August. However, I imagine the effect on Treasury yields will be similar to what it was last time as well (after S&P downgrade) - yields continued to compress on the flight to safety trade!

It is very unlikely S&P will downgrade US debt another notch to AA, especially before it knocks France down from AAA. The latter was paying nearly 200bps more than Americans and Germans to borrow for 10 years last week, and will be on the hook for countless billions of bad Euro debt if its government gets its way. Either way, its on the hook for its own crumbling banking sector.

I find it more likely that Moody's and/or Fitch follow up on the first downgrade and make the US AA+. That's a tough call, though. Some may see a lack of a deal as being even better than a potentially half-ass deal that may have come out of the committee, due to the $1.2trn in automatic cuts to defense/entitlements that will kick in and the automatic expiration of Bush tax cuts, which is estimated to save about another $3trn over 10 years (all BS estimations, I know).

All in all, it's probably another blow to risk-on this week, but not nearly enough to act as a significant hit to Treasury markets in this extremely volatile environment for risk centering around Europe. The "flight to safety" trade will easily continue to overwhelm short-term deficit concerns.

Joe in NC said...

I think it was a couple of months ago that I used the thoughts of Jeremy Grantham who said that markets can usually deal with one significant problem at one time, but not two.  I also referred to China's problems. Mish posted this today:

China Vice Premier Sees  Chronic Global Recession

What does the Vice Premier really gain by making this statement?


trojanhorse said...

Skip, no not the same at all, Goldman is acting out of greed, you are acting out of need. Do not conflate the two. LOL

trojanhorse said...

Hmmm now why did underlining 'conflate' result in what looks to be a dead hot link? curious that!

Ash said...


"Oh, I think I see more what you're saying Ash. That Goldman itself is just seeking to "prepare" for the collapse, rather than wanting it."

Yes, there was nothing too deep in that comparison!

I'm saying what GS wants to happen may have become just as irrelevant to what actually happens as what we want to happen during this phase of systemic break down, which can be greatly distinguished from the situation we had just three short years ago.

So despite what Blankfein tells us, his firm is not doing God's work, and it may be just as powerless in this situation as you and I are. Other than that, though, we are obviously nothing like the high-up banking execs in terms of our complicity in creating the current predicament and also our motivations for either propping the system up or watching it collapse.

They want to cling on to their current levels of wealth, status and power no matter what the severe costs which result and are imposed on everyone else, destroying our wealth and lives. No mater what destruction comes to the environment and future generations. So, yeah, we have little in common with them beyond our superficial inability to influence large-scale outcomes right now.

Lynford1933 said...

From the previous post about UC Davis. I heard on the radio this evening that the police Lt who casually walked along and sprayed those kids is on administrative leave. IMHO, he should be in jail.

el gallinazo said...

Franny said...
Re: safety of IRA accounts from brokerage theft, it helps if you keep your money with a firm that does not gamble, e.g. Vanguard Group, which is owned by its customers, via the funds themselves.

That's a really excellent idea!

Ash said...

While the police state response to UC Berkley/Davis protests was quite bad, it was still nothing compared to what's happening in Egypt. You know, that country which had a "revolution" earlier this year, where just about everyone in the MSM declared it a huge victory for democracy and peace. Yeah well, as I'm sure everyone here is aware, that revolution never ended and is only getting worse.

"Thousands of Egyptian protesters remain in Cairo's Tahrir Square after two days of clashes in which at least 13 people were killed and hundreds injured.

On Sunday, police and troops made a violent attempt to evict the demonstrators, firing tear gas and beating them with truncheons. However, the protesters returned less than an hour later, chanting slogans against Egypt's military rulers.

The European Union said it condemned the violence "in the strongest terms". There were also clashes in other cities including Alexandria, Suez and Aswan.

A total of 11 people were reportedly killed on Sunday and two on Saturday, according to medical sources. Health officials say as many as 900 have been injured, including at least 40 security personnel.

The demonstrators, some wearing gas masks, say they fear Egypt's interim military rulers are trying to retain their grip on power.

The violence comes a week before the country's first parliamentary elections since President Hosni Mubarak was overthrown in February."

trojanhorse said...

Oops Skip

I skimmed over your phrase" ... I don't WANT one in the sense you're suggesting".

Let us be clear; what exactly was it you thought I was suggesting?

And I may have been unclear in my saying this:

' A collapse that I would envision would be horrible, but I see no way that the machine that we have built that is destroying this world can be halted.

'It should have read ' no other way' not 'no way'.

Ash said...

Only one day in office, and Franco's ghost is already a DUD for markets. There will be no calming of the markets through talks of implementing savage austerity, whether in Greece, Italy, Spain or anywhere else. The big money investors only want one or two things before they are willing to settle down for awhile - unlimited ECB intervention and Euro-bonds. No "structural reforms", no pea-shooting EFSF and no temporary ECB SMP purchases will have any lasting effect. No more rumors of rumors of a plan to make a plan will keep the bottom from falling out. You can take that to the bank!

Markets braced as fear grows over new Spanish leader

"He cautioned that Spain would not be able to perform miracles to dig it out of a severe economic crisis, but said the country must win back respect in Europe after his sweeping election victory.

Speaking to ecstatic supporters after Spain's biggest election victory for 30 years, in which his centre-right People's Party crushed the discredited outgoing Socialist government, Mr Rajoy said he would immediately consult all the country's regions to discuss how to overcome the crisis.

Although he has promised a tough package of austerity measures and reforms, it remains doubtful that he has done enough to calm the febrile [?] markets.

One trader said: "Rajoy says he can rebuild market confidence in Spain but his arrival isn't enough and he hasn't said anything 'magical' tonight. The crisis is moving too fast, in this environment bond markets might not extend him credit while we wait."

Skip Breakfast said...

Given Godman's massive CDS sales on European bonds, can they survive a Euro collapse? Then again, they sold massive subprime mortgages, and then shorted them on the other side to the tune of several billion in their pocket. I think they could do it again!

trojanhorse said...

"Goldman Can Create Shorts Faster Than Europe Can Print Money"

Alexander Ac said...

Hi Ilargi,

is it a fair statement that your views of the "solutions" of the political crisis are increasingly different from that of AEP?

Or it was always like that and I just did not notice?


Skip Breakfast said...

Further to the gold debate, this very succinct post by Charles Hugh Smith summarises why US dollars will continue to be an important "investment" in the face of coming calamities.

Nassim said...

By exempting the ultra-Orthodox from basic general educational requirements, the democratic state fosters a burgeoning sector of society that neither understands nor values democracy ...
As the symbolic battle over women and the public display of their image continues, a new report from the World Economic Forum indicates women's status in Israel is deteriorating year by year.

When women and girls are the enemy

Sad to see them becoming like the Saudis or like many Pakistanis in the UK.

Ashvin said...

As contagions envelops the Euro "core" [Moody's warned of potential French downgrade], Greece still needs EUR8bn within a few weeks to avoid default.

Telegraph: "Greek PM Papademos is meeting the EU's José Manuel Barroso and Eurogroup chief Jean Claude Juncker to discuss whether Greece has made enough progress getting a grip on its finances to earn another slice of IMF bailout.

But the government's resolve is cracking - and Greeks are refusing to pay new taxes.

The ten-day old Papademos regime has bowed to public pressure and asked the state-run power company NOT to cut off people struggling to pay a new property tax charged via electricity bills.

The tax - a property levy for ordinary Greek homeowners - would charged between 0.5 and 16 euros per square metre. It was one of a number of revenue-raising measures imposed in exchange for EU-IMF funds.

Non-payers would be cut off from the Public Power Corporation from today, after being sent warning letters 40 days ago.

But that sanction has been dropped in the face of a campaign by the unions, who protested outside company's offices with banners reading: "The tax should be paid by the rich."

Ashvin said...


Greek 1Y yield = 270%


Any takers??

Ilargi said...


Sorry mate, no can do.


Jack said...

That is funny because that is the truth and it looks like this place is not any better than cnn.

Jack said...

This place has also been purchased by the Rothschilds

Ashvin said...

Spike Lee's new picture, co-directed by Jürgen Stark - Do The Right Thing, Right?!?

The Guardian: "Another senior European official has warned that the crisis has reached the 'core' of the eurozone. This time its Jürgen Stark, the outgoing chief economist at the European Central Bank.

Stark told an event in Dublin that sovereign debt worries have spread far beyond the periphery of the region (echoing a similar warning from Olli Rehn this morning):

'The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon.'

Stark also put his finger on one issue that usually goes unspoken in the corridors of Europe -- the public are losing faith in their leaders.

'There is a lack of confidence in the ability of politicians to do the right thing or do the right thing right and fears of the longer term impact of the sovereign debt crisis on economic growth and jobs.'"

Olli Rehn was piling on the German pressure, Stark not so much (that's why he is "outgoing")

Jack said...

It is sad to see that TAE is censoring post to protect the bankers.
With this attitude they will not be able to help anyone solve this problem.
The brave Armenian's of this world will bring down this bankers and they dont need the TAE.
Thank God for that.

lautturi said...

Golem XIV has excellent insight to what the meaning of risk really means. And who has ended up with the lot. Sounds really familiar, doesn't it?

Another fresh gem by the same man is about MF Global and what the recent events appear to be when considering the big picture. Can you say Lehman times two - or three - or ten?

Banks are in trouble... oh, wait - did I read someone else mentioning the very same issue just today (kudos to TAE troopers, of course).

Ashvin said...

The Essence of Greed.

(Reuters) "A company run by former American International Group Chief Executive Maurice "Hank" Greenberg has sued the United States, claiming that the government takeover of the insurer was unconstitutional.

The lawsuit filed Monday in the U.S. Court of Federal Claims in Washington, D.C. seeks at least $25 billion for Greenberg's Starr International Co and other shareholders.

Starr said that in bailing out AIG and taking a nearly 80 percent stake, the government took property from other shareholders. It said this violated the Fifth Amendment, which bars the taking of private property for public use, without just compensation."

Chas said...

What is the disadvantage of buying short-tern Treasuries from a bank or broker/dealer?

jal said...

I hope that Canadian municipalities are paying attention. This "P3", business of going into private partnership for public infrastructures is only good for those wanting to get an income stream for 30 years from tax payers.

only 12 municipal bankruptcies, so far
Jefferson County is the 12th entity to file a Chapter 9 bankruptcy this year. Three filings were by municipalities: Boise County, Idaho; Central Falls, Rhode Island, and Harrisburg. The rest were special purpose districts, or public- benefit corporations eligible to use Chapter 9.

Ashvin said...


One is counter-party risk. See el gallinazo up thread.

humphrey flowers said...

Chas - short term treasuries will be owned by the FICC, then your broker, then you.

This is the chain of custody.

Owning through treasurydirect is the only way to have the securities put in your name. It's currently the only class of securities you can do this with in the United States.

If you trust the brokers and FICC won't have problems due to the massive derivative problem, which is in the process of being back stopped by FICC/DTCC thanks to Dodd-Frank, there is no risk in owning bonds in the street name.

There is really no reason to not own bonds directly through the treasury- the costs are the same.

I'd still recommend keeping a portion of your portfolio in an S&P index fund and long term bonds incase they manage to reinflate the ponzi scheme, and a portion in gold in case of sovereign default.

trojanhorse said...

Jim Kunstler posts another good one this week, in fact good [juicy] to the point that I was thinking exactly what he, in conclusion, summarily stated:

"I have admittedly painted an extreme picture this week. But this week presents the most extreme convergence of events the world has seen since September of 2008, and perhaps a good bit worse.

Ashvin said...

Who ever said the markets were "rational"? Austerity, half-austerity, no austerity, doesn't matter... what matters is fear of the system itself.

By Naomi Tajitsu

LONDON, Nov 21 (Reuters) - "The dollar hit a six-week
high versus a currency basket on Monday after U.S. leaders
failed to agree deficit-cutting measures, darkening the fiscal
outlook and prompting a shift from riskier currencies into the
safety of the U.S. currency.

The dollar index <.DXY> rose to 78.477, its highest since
Oct. 10 as debt problems deteriorated on both sides of the
Atlantic due to ongoing worries that wrangling between European
leaders will protract the bloc's debt crisis."

humphrey flowers said...

Mr. Ash did my comments have an objectionable content? Do you disagree? Have I misunderstood that this is a public blog?

Ashvin said...

@. .

Sometimes Blogger eats up or spams comments on its own. Yours has been re-posted.

Biologique Earl said...

CNBC is reporting that there are now clients running out of the markets entirely because they do not believe their customer funds are safe. See:

KD says "Here You Go: It's Over". He may be right.

Biologique Earl said...

The red flags are flying.

Now Jesse says "Now may be the time to exit all arrangements not specifically guaranteed directly by the government, and bring your money home. And better yet if no guarantees are required, and no parties standing between you and your wealth.

If they steal from one unpunished, they can steal from any and all almost at will. You are not an insider, and there is no honor among thieves. You are prey." See:

Greenpa said...

Just had a pleasant surprise, which I'll pass on.

I opened a NYT Op Ed entitled "How China Can Defeat The USA" - expecting little, nothing, or worse, and discovered instead:

An extremely thoughtful and scholarly article, translated from the Chinese, by a Chinese professor of Political Science. I think the title was a BAD translation.

If China can still put such scholars forward- they have some hope.

Not that I believe in Chinese pixie dust.

Ilargi said...

Hey Alex,

How are you?

I may hope my views differ from AEP a lot, and often. For as I know, that has always been the case. I post his articles because find him an interesting journalist, since he has a lot of contacts that nobody else seems to have, But, as I’ve said before, I think he’s typically one of those guys who should limit himself to reporting; as soon as he starts venting his own opinion, the quality plummets.

I remember a piece not so long ago where he started predicting the US would do much better than Europe because it will soon turn into Saudi Arabia squared on account of its shale gas reserves. When I read things like that, I’m thinking: wait, I need to feed the cat! There must be something, anything better to do with my life!

Ambrose is one of many who seem to think that if only Germany would wake up and hand over its wallet (they don’t yet have the guts to steal it will the Germans are asleep, apparently), all would be wine and roses (Krugman is another, there’s tons, the idea that there may not be a solution is hard to swallow for many).

I definitely do not; I think it would be very wrong for them to do so, because that wallet will be swallowed whole by the black hole that is the banking system.

It may still happen, don’t get me wrong, the pressure is huge, but it would not solve a single problem beyond tomorrow morning.

There are now rumors that Bernanke will initiate a global program to save the financial markets, probably through the IMF. Which is exactly what I said Germany would tell Obama to focus on: use US cash to replenish the banks, not just German cash.

A few more days like today in the stock exchanges and panic will set in power positions from Washington to Berlin. Maybe they can get a bunch of technocrats there too.


trojanhorse said...

Moody's: Risks For German Financial System Have Risen Significantly

Ash said...

An interesting comment about an EMU break-up on FOFOA's forum, via "victorthecleaner" (as far as I can tell, he believes a Freegold revaluation will occur sometime in the future, but does not think the ECB/Euro will be the conduit)

"If a weak country, say Greece, wants to leave the euro, how would this work?

They need to print new notes or perhaps mark existing notes. All banks need to change their software as there is now one more currency. They need to make it legally at least somewhat foolproof. Which bonds are converted and which are not?

If there is a leak and some insiders talk, they will immediately get the final bank run. So as a voluntary step, this would work only if they keep the banks closed for, say, 4-6 weeks, and freeze all international payments during that time.

What remains is the scenario in which the run on the Greek banks happens and their economy comes to a halt anyway. In such a situation in which their banks are effectively out of service, they can work on the switch.

Second, how would a strong country such as Germany leave the euro? That's a lot easier because even if some insiders know it, there would be no immediate run on the banks. Perhaps a run of foreigners to open bank accounts in Germany. But they could have a rule and go by residence or by nationality or by location of the company's head office on January 1, 2011, in order to counter that.

My conclusion is that a weak country cannot leave the euro if they are under pressure. Only after a total collapse, they could, just because it wouldn't make any difference in that chaos. But a strong country can. The example of Switzerland shows that they will probably not want to leave. But, for example, if Germany would find the ECB policy so disadvantageous that it were worse that leaving with an ultra-strong new Deutschmark, they could.

So I conclude that the ECB cannot act against Bundesbank interests in the long run."

el gallinazo said...

I am glad that a moderator retrieved the posting concerning the FICC from the Blogger automated spam bucket, as knowing something about this huge, private corporation is quite valuable. It is described in Wikipedia as Depository Trust & Clearing Corporation. While the article has defects, it is certainly worth the read.

Regarding I&S and Ambrose Evans-Pritchard, I also regarding hims as interesting as he is a pompous shill for the bankster elites and would do anything within his power to use his propaganda to keep them appearing solvent and in power. He is also a British nationalist and staunchly anti-German. But his propaganda has information value if you read between the lines, as Ilargi says, due to his insider contacts. That Ilargi parrots his opinions is patently absurd. One must read the shill media to keep up regardless of how nauseating it is. I do my part by listening to Jeff Sommers of the NYTimes This Week in Business. I keep an old article ready on my iPod where he interviews Haardvark professor Gregory Mankiw as an instant emetic in case I eat a bad taco. But I have to use the half speed option to try to understand his rubbish.

Chas said...


Thanks. The problem is with my 401K/IRA's. There's no way that I know if buying directly from Treasury Direct.

What broker/dealer is safest in this environment? I have most of the retirement money with Fidelity.

Ash said...

WOW - is my response to the "note" from David Zervos of Jeffries Investment Bank. How can these jokers release notes containing the following statements, and simultaneously claim they are not at risk from European exposure?? It's not that he's completely wrong about the current German strategy of "sado-fiscalism", but that his solution only makes sense for international bankers on their death beds, such as himself.

"There is one easy way to do that - get the Americans involved. The US can force monetization at the ECB. If the Colonel deems sado-fiscalism as a global systemic threat (which it is), the Fed could act. The Fed has an account at the ECB in Euros. When the pesky Europeans borrow dollars from us on currency swaps to fund their insolvent banks we get this lovely account. And right now the Euros just sit there! If things get messy we just jack the "unlimited" lines up, back up the forklift, and buy Euro area bonds. Lots of them. Say a trillion or two across all non-German markets. The Fed already owns nearly 100b in German and French bonds. And if anyone tries to default down the road, well we have a few hundred billion in European gold to confiscate in the basement of the NY Fed. And if that's not enough we just institute "annual fees" for NATO membership or start confiscating European assets in the US."

el gallinazo said...


re Victor the Cleaner on FOFOA

"The example of Switzerland shows that they will probably not want to leave."

What does this mean? Switzerland has never been a member of the EU or the EZ. One might assume that he knows that, and that he is referring to tent pegging the SF to the euro to prevent it from flying to the moon in a knee jerk "flight to safety." Since the total assets of the two largest Swiss banks are something like 7 times the Swiss national GDP, and since these banks are huge players in derivatives, one wonders just how safe the SF is. Sort of like one life raft for the Titanic. Reminds me of CHS essay on real and MSM perceived risk.

el gallinazo said...
This comment has been removed by the author.
Frank said...

AEP is actually also intelligent and insightful, even if we don't often agree with him.

Example: his summary below did not actually tell me anything I didn't know, but I've never seen this important piece of information put in three sentences before.

"Two first world countries, Japan and Italy did not accept the general reevaluation of the status of women in the 1970s. Young women in those two countries went on a 'baby strike'. Those two countries are now facing demographic implosions far worse than those in any other first world country."

Not new information, but a cogent, discussion stopping summary. I chose this example because it's largely orthogonal to TAE's concerns.

el gallinazo said...

Why the phuck would Germany have put their gold under the NY Fed? There must be a great conspiracy story there. The Germans were afraid that the Russians would overrun their stash back in the cold war? As the old saying goes, possession is 9/10's of inertial force (sometimes referred to as law). Wonder how Chavez if making out retrieving his stash? I'll give good odds that it is still sitting under 33 Liberty long after he dies from cancer. Or maybe in Jon Corzine's parking space.

Ash said...

El G,

"Switzerland has never been a member of the EU or the EZ"

Good point. I'm guessing he meant that, if it was in the EMU, it would be a good example of a "strong" country that would rather suffer ECB monetization than leave, as we can infer from the SNB's current FX policy. In stark contrast with Germany and the Bundesbank, who may be more willing to face collapsing exports than a collapsing currency.

el gallinazo said...

Re Switzerland

I find it a bad analogy in any event. Switzerland could remove their peg to the Euro in a matter of minutes. If Germany chooses to exit the euro, it is not so reversible.

Frank said...

El G a quick google says that only a modest fraction of Venezuela's gold (which only Chavez claims is his) is in the US, let alone at 33 Liberty.

Ash, that thing in ZH is indeed scary. Especially since, if his quotes are even close to correct, there are whackos in Germany as crazy as he is. I worked for a German company for a few years...I find the existence of such a smoking Mauser only about as unlikely as the Jeffries doc that ZH just put up.

Ash said...

El G,

I see your point. I think you're right that adding the Swiss into the equation just confuses the issue, which is whether strong Euro countries like Germany and the Netherlands will have enough incentives (fear) to exit at the expense of their export sectors. A lot of people focus on the peripheral countries "choosing" to leave, but that probably only happens when they are about to default and crash anyway (which is also a distinct possibility).

trojanhorse said...

"I'll give good odds that it [Venezualian gold]is still sitting under 33 Liberty long after he dies from cancer."

El Gal

How would he say in Spanish: Freeze to death you Northern Bastards?

Ash said...


I think Zervos is largely correct when he says this:

"But first, the foundation of "sado-fiscalist" solutions is built on cognitive dissonance - it cannot work. Using market forces" to generate austerity and reform will backfire. Nearly all European countries do not have the ability nor the desire to pay back - in real terms - the debts racked up by their over indulgent governments and banks. And the good news is, if they don't have to pay them back. They can just leave EMU, default or monetize, and go on their merry way.

The reason the Germans are trying so hard to implement a "sado-fiscalist" solution is that without it, they lose - and lose big. If the debts are defaulted or monetized away, the savers of Europe - the Germans in large part - get crushed. This idea that the vendors to Europe are paid back by indentured servants perpetually sending 50 percent of their wages up north to pay for previous sins is folly. The Germans cannot win this game. The question how much systemic pain is created as they waltz down the path to losses?"

The problem is that he goes on to suggest an extreme and aggressive "solution" involving the US, rather than the obvious one - stop writing "notes" for Jefferies, quit your job, build a "doomstead", donate half your wealth to worthy causes and let the Germans and Europeans decide what's best for themselves.

It's also amusing that the bank continues to vociferously deny the "evil rumors" about its European exposure, but also feels the need to make concoct such radical notes proposing such radical "solutions". If that's not an admission of exposure, then I don't know what is.

el gallinazo said...


True, and I stand corrected. It's the Germans who may have most of their gold under 33 Liberty. The Bundesbank is keeping the physical location of their gold reserves secret. Max Keiser blew this issue up a couple of years ago when he interviewed the Bundesbank which initially stated on the record that they had all their gold reserves on German soil, but now it appears that it may be as little as 5%. The only number I could come up with as to the physical possession of German gold by the NY Fed was 66%, but this was a conjecture between Keiser and Jim Rickerts. So much for transparency of the people's gold of Germany.

Venezuela, which despite being a socialist dictatorship will tell you exactly where its gold reserves are located (at least to the best of their knowledge), does have a little less than half their gold (99 MT) with the Bank of England, quite a bit in "private" bank vaults such as JPMC, and a small amount with the Fed though I couldn't get an exact number. So I would move my odds against prompt return from the Fed to the BoE. Pretty much the same difference IMO. Also interesting to see how the private banks are expediting the return. A quick search didn't yield anything on this.

Regarding my conjecture that most of the gold in Fort Knox is really gold plated tungsten, I do not regard that it is a fact but I do regard it as a probability. There is much evidence to believe so. But until such a time that the Fort is audited by someone whose veracity can be accepted by all and in such a fashion that thinly plated ingots are tested for randomly, I will continue to believe that it is a probability. This is something that Ron Paul has been demanding for decades, but I am not holding my breath regarding such an audit.

trojanhorse said...

El Gal

Just rethinking that bit about Cheavez and realized that I doubt he would ever say such a thing as he is I feel a decent human being!

el gallinazo said...

scrofulous said...
El Gal

Just rethinking that bit about Cheavez and realized that I doubt he would ever say such a thing as he is I feel a decent human being!

You lost me. I couldn't find any quotes, direct or indirect, attributed to Chavez in this thread.

Alexander Ac said...

Hello Ilargi,

Thanks! I am fine, trying to educate our public by writing articles on our popular Financial Web, though I am not sure to what extent I am successful.

Yeah, I have read that terrible piece about energy independence of USA, thoroughly debunked by Gregor MacDonald.

And yes, AEP is excellent reporter, but that is all. Like John Williams is excellent data collector, but terrible interpreter of the collected data.

And I was lately surprised to read Niall Ferguson "vision" of Europe in 2021 "bailed-out" by ECB... of yes, sleep well, Central Banks are here to save everybody...

Everybody. No mattter what, that is.


Nassim said...

Worth watching, if you can get access:

Nov 21 2011 Regulators have found a new way of killing the derivatives market, so says author of 'Extreme Money: The Masters of the Universe and the Cult of Risk', Satyajit Das. He explains to Jeremy Grant, FT Trading Room editor, that the goal to deal with counterparty risk between derivatives traders and also system risk is a good one, unfortunately the execution plan is "awful".

Regulators have found new way of killing derivatives market, says author Satyajit Das

Essentially, he says that "the derivatives system is broken and cannot be repaired"

Saudi Arabia has halted the $100bn expansion of its oil production capacity after reaching a target of 12m barrels a day as the kingdom believes that new oil sources will meet rising demand.

Saudi Arabia halts $100bn oil expansion programme

trojanhorse said...

El gallinazo you said:

"You lost me.
I couldn't find any quotes, direct or indirect, attributed to Chavez in this thread.


My comments were in order:

El Gal

How would he [meaning Chavez ] say in Spanish: Freeze to death you Northern

I then posted this:

El Gal

Just rethinking that bit about Chevez and realized that I doubt he [Chevez] would ever say such a thing as he is I feel a decent human being!

Sorry to confuse you.

trojanhorse said...

Oh yes Gallinazo I had best mention, that confusing item, was in response to your:

"Wonder how Chavez if making out retrieving his stash? I'll give good odds that it is still sitting under 33 Liberty long after he dies from cancer"

Ash said...

Something I didn't catch from last week. Adds some more hope for the "German resistance".

"We need a common market, not one currency,” said Anton Börner during an interview with the BBC yesterday. He is the president of the BGA, an industry federation that represents 120,000 small and medium-size exporters in Germany. One of its primary functions is to lobby the government of Germany and the government of the European Union. So, his voice doesn’t go unnoticed in the circles of power.

While Chancellor Angela Merkel was out there claiming that "everything must be done" to keep the Eurozone intact—even if it means kicking Greece out—the hitherto unthinkable happened. German companies, in particular those that directly or indirectly depend on exports, have been a massive cornerstone of support for the euro. And that cornerstone just cracked.

“The German taxpayer is not going to pay anymore," Börner said. Geithner must have tuned him out. People think that "Germans should put more money on the table, and everything will be okay,” Börner said. “But that's not the truth, and nothing will be okay."

Biologique Earl said...

Cheryl, I suggest you participate in the research described here:

It might mellow you out a bit and make your day. If you are a he as many suspect, there is another place you could shove the tampons.


Robert 1

Joe in NC said...

Cheryl snuck in for a minute - I guess she got terminated. She was talking about eating a bear omelette tomorrow morning.

el gallinazo said...


Sorry, dense of me not to associate the link as a quote. As I recall, back when oil hit $147, Chavez donated quite a bit of heating oil to the poor in New England. Really pissed off the Wall Street wankers. So it was probably wishful thinking that the rich northern bastards could freeze to death. But not very likely.

el gallinazo said...

I agree that AEP is a very good reporter and a very horrid editorialist.

Greenpa said...

I just learned a new phrase, which I think is going to be extraordinarily useful!

The ICARUS scientists, part of the top Italian physics group, have published a paper saying those neutrinos cannot be moving faster than light; they have too much energy. It's a long story; but the quote:

"It says, he wrote, "that the difference between the speed of neutrinos and the speed of light cannot be as large as that seen by OPERA, and is certainly smaller than that by three orders of magnitude, and compatible with zero.""

I love it! Seriously. I'm looking about me actively for other ideas, numbers, statistics, and hypothesis that should be described as "compatible with zero."

There are so many! This is a phrase with real legs. The first one that occurs to me is "Newt Gingrich is compatible with zero."

Greenpa said...

Nassim: "Essentially, he says that "the derivatives system is broken and cannot be repaired"

I was under the impression the more accurate statement would be "The derivatives "system" was a con, from the outset, and is now exposed."

They were, in fact, literally selling confidence. It's gonna look hilarious in the history books, if any more are written.

trojanhorse said...

el gallinazo

"As I recall, back when oil hit $147, Chavez donated quite a bit of heating oil to the poor in New England."

Good on you!

It would be such a great sigh of pleasure if we had leaders with concern for people instead of what we do have ... Bushes, Harpers and Obamas who put 'The People' on a pedestal all the better to set fire to their feet.

Greenpa said...

Nassim: "Schadenfreud regarding Celente's malinvestment is misplaced. Everyone has a right to try to stop their savings from disappearing - he was too trusting that is all. "

You're a nicer man than I am. :-)

I mean. The guy makes his living as a self proclaimed oracle-biggity-whoop-whoop; and feels wounded and surprised that the sharks he was playing 'Johnny Weissmuller And The Alligators' with - bit him? I'm sorry; but- it does make me smirk, just a little. Probably also because his concept of "savings" and mine are several neutrinos apart. :-)

Ruben said...

@ Greenpa

Are your savings compatible with zero?

Greenpa said...

A little climate-engineering oops in California.

grit your teeth through the add; the video is great.

So in our brave new world; how fast do you think this highway will be repaired? Do they have money on hand to do it? That's a definite no. Probably. :-)

I see this as a large and generally unappreciated down-force on "civilization"; climate change is going to eat infrastructure; faster and faster; and we are increasingly unable and unwilling to replace/fix these losses.

Will there be "economic growth" going on for the folks who used to use this highway? They'll lose jobs, close businesses- and that will mean other businesses will lose customers... ad terminum.

Greenpa said...

Ruben- they sure are!

trojanhorse said...

Greenpa said...

" Ruben- they sure are!

Huh! I thought you had a farm with animals and apple trees and such?

I think there is a guy in the middle of the Kalahari desert who I understand to, for sure, have zero savings. but I think he might just end up being richer than any one here.

Is the day now drawing late ... is that the little bats I hear, fluttering about my ears?

NZSanctuary said...

Greenpa said...
I was under the impression the more accurate statement would be "The derivatives "system" was a con, from the outset, and is now exposed." They were, in fact, literally selling confidence. It's gonna look hilarious in the history books, if any more are written.

Yep, I suspect that as a supposedly highly-educated society, we are collectively going to look like a bunch of fools in the rear vision mirror.

NZSanctuary said...

As an aside, I have a relatively old acquaintance (as in, I have known him for over 15 years, although he is only about 30 years old) who works for a major bank in England. He noted a couple of months ago, during a visit home, that he was planning on moving back to NZ to start a hedge fund (and to be near his family).

I just nodded and stared in disbelief. We were not in the kind of environment where a deep discussion of finance could ensue (we were at a martial arts workshop). I didn't talk to him again before he left, but it struck me as interesting that he really did not understand just how screwed the financial markets were. He has done well as a trader, but I think for many people in the industry there really must be a HUGE element of cognitive dissonance at work.

Obviously some people get it. But I suspect many poor schmucks who think they have it "made" are in for a rude surprise or three.

humphrey flowers said...

I agree with the sentiment in the comments.

There's a lot of propaganda out in the air right now to make the derivatives seem more complicated than they really are.

Essentially, two children on a playground making a Jean Shepherd style double dog dare to jump off the monkey bars is a derivative contract.

A derivative is a private contract between two parties that has zero intrinsic value, besides the obligation between the two parties to pay each other.

The fact that it requires Ph.D. physicists to price this garbage for a "market" does not make the asset more sophisticated, and the idea that highly qualified people are involved in the creation of these assets does not mean they represent any claims on my or your wealth.

The bankers that find their portfolios full of these derivatives would love for us to believe that these contracts represent a claim on our wealth, however, which is why the media keeps telling this lie.

Lynford1933 said...

NZ: IMHO the highly educated often look like fools in real time. Peace prize, anyone? How bout a 100K for the latest economic formula?

Now front running high speed computers, that's a real money making economic formula. It is the ultimate insider trading except perhaps for our congress critters who can't negotiate but are really good with market trading.

Not only that, the wind this week end that blew for 18 hours over 35mph with gusts to 70mph ruined the plastic on our 14' X 42' high tunnel. The autopsy yesterday showed the extended wind wiggled the wood blocks out from under the PVC and cut the lines. Since I am a doomer, I have three more plastics backing that one up. Better than your average derivative, eh?

humphrey flowers said...

The German gold in the New York FED probably got there shortly after WW2. This gold probably now is Germany's membership dues to the IMF.

The NY Fed/Treasury Dept has a habit of grabbing up the assets of states we make war on, briefly redistributing it to the Treasury Dept of the new government with the understanding that the money will be redeposited with the Treasury Dept/New York Fed/IMF.

Most recently this was done with the assets of Saddam Hussein. The logistical dance of this process makes for a hilarious read:

Nassim said...

... it struck me as interesting that he really did not understand just how screwed the financial markets were. He has done well as a trader, but I think for many people in the industry there really must be a HUGE element of cognitive dissonance at work.

Put anyone in front of several computer screens, with flickering graphs and lines of numbers that change colour for a few days/weeks/years, and their mental faculties are bound to be damaged.

Nassim Taleb goes to the other extreme - ignoring any news that he hears out of a social context. IMHO, it is a much healthier option that I wish I could follow.

You're a nicer man than I am. :-)

I wish :)

Frankly, I think one's attitude depends on whether one has savings or not. People with savings have a problem - a different problem that is all.

Right now, as a pure gamble (I don't pretend it to be an investment) I am shorting AAPL with a put option. I almost got wiped out two weeks ago and doubled my bet. It seems that I may get my money back after all. It beats the casino any day - and is far cheaper. I mean, I have had 4 weeks of excitement for a very low price. Maybe Celente also likes to gamble. If he lost $600,000 in Vegas, would that make him a hypocrite?

NZSanctuary said...

Lynford1933 said...
NZ: IMHO the highly educated often look like fools in real time. Peace prize, anyone? How bout a 100K for the latest economic formula?

Yeah, unfortunately most are too inured in the system to see the foolishness. Hopefully that spell will be smashed soon. Of course, nothing to say another illusion won't be constructed instead . . .

A Fall Guy said...

@ ElG and Ash

"The example of Switzerland shows that they will probably not want to leave."

"They" refers to Germany not Switzerland. And "the example of Switzerland" refers to the high value of Swiss Francs, implying that if Germany were to leave to Euro, the new mark would skyrocket and hurt exports.

Alexander Ac said...

Oh yeah, the growth obsession:

Debt is “a drag on growth”, Mr Cameron told business leaders.

and I thought it is the other way around, that the debt is a necessary condition for growth...

Greenpa said...

scroffy: "Huh! I thought you had a farm with animals and apple trees and such?"

sure! but we're immediately into cultural semantics. I consider those "real wealth", and indeed I am very wealthy- I just have squat for money.

The concept of "savings" means "money" or something like it in a "bank" or "fund" - to most of the world, and I guess me too.

Possibly I could consider a stack of cut and dried firewood as "savings". But- boy that gets to be a long conversation, trying to translate; and I've found over the years that "investor" and financial wonk types get all glassy eyed in the process, and pity me as they drive off in their Mercedeezes.

Ash said...

A Fall Guy,

Thank you for the clarification!

I believe the analogy to the Swiss may still be misleading, though. There are too many differing variables for both countries above and beyond exports, not limited to their domestic banking sectors (a lot of underwater Eastern Euro loans denominated in CHF), public finances (Germany would certainly see much higher borrowing costs from staying in), and cultural history (acute fears of wiping out savers through currency devaluation).

There are, of course, many factors weighing in favor of Germany staying in as well. It seems we have two fronts pressuring EMU collapse in the very near-term. One is a peripheral default (most likely Greece), and the other is the financial and political pressure on Germany that backfires and forces it to quit the game, as it is simply not ready to make any more drastic changes in policy. Time will certainly tell the tale, and quite soon at that.

Ashvin said...

The Euro equivalent of a 2 minute warning?

The Guardian: "Deep breath time. Greece has got just nine days to persuade international lenders to hand over its next aid payment, worth €8bn, otherwise it will run out of cash.

Prime minister Lucas Papademos revealed that Greece has even less time than we thought, at a press conference in Brussels following his meeting with Jean Claude Juncker.

We had thought that Greece could last until mid-December before needing the €8bn tranche (which has been frozen for several months now, while the IMF and the EU sought proof that Greece is meeting its obligations). Instead, Papademos explained, the process of paying the aid needs to start no later than the beginning of December.

So what's the delay? Well, as Juncker stated firmly, no money will be paid until the three most powerful political leaders in Greece have signed a letter promising to enforce tough austerity measures.

Papademos told journalists in Brussels that:

'I expect that the party leaders will do their duty'

However one leader -- Antonis Samaras of New Democracy -- continues to argue that his word is enough. In this letter, sent last week, Samaras said that his party was "committed" to supporting Papademos and "strongly committed" to fiscal consolidation and structural reforms - but also argued that the austerity plan needs to be revised."

scandia said...

NZSanctuary said, " Hopefully that spell will be smashed soon..."
That's it! The spell!
We have been under a spell! I have been under a spell!
And the spell that we are the good samaritans is being withdrawn by contraction and constraints.
I have had a secret dream/fantasy that millions of people will pool their moral authority and march on Washington,Ottawa London etc and drive the evil from government. I have been wanting " growth " in the protest movement. I now fear that the growth will manifest in Cairo and thousands of brave people will be slaughtered by the military junta.

scandia said...

Corzine is being accused of " improper use of funds ". How refined! You and me, we'd be hauled off in cuffs for a mug shot.

Ashvin said...

Austrian bank Ad sums up the West's sub-prime culture in 30 seconds.

Raiffeisen Bank TV-Ad

Ashvin said...

Lending to Spain for 3 months is more risky than lending to Portugal and Greece!

Bloomberg: "Spain’s three-month borrowing costs doubled as it sold bills at an average yield of 5.11 percent, more than twice the rate at the previous auction a month ago. The Treasury paid more than the 4.63 percent for 13-week bills sold Nov. 15 by Greece, which received a European Union-led bailout last year. Portugal paid 4.895 percent on three-month bills the following day."

Greenwood said...

The one issue I hear very little about as a root cause of global financial unsustainability is chronic export trade deficits.

Specfically the fact that China and Germany account for the lion's share of global exports.

This is categorically unsustainable. It is another form of Ponzi.

Two country's manufacture most consumed goods in the world, Germany the higher end stuff, China spanning the larger range from Wal-Mart to fairly high end stuff.

What are the vast majority of other countries in the world suppose to pay for Germany and Chinese manufactured/value added goods with?

Credit to the infinite power?

Raw materials?

Germany will have no export business after the crash, no matter what way is decided now.

All the other countries will have no credit line because the financial system is bankrupt to it's utter core.

The German's absolutely cannot have Germans suck up their own exports (China either) and does anyone really think that German banks/government will lend credit to all these bankrupt sovereigns to buy German exports?


That's the 'bankrupt sovereigns' detail.

I heard an interview with Richard Heinberg where he mentioned that fossil fuel at the end of the 19th century made overproduction of manufactured goods an inevitability. One of the underlying factors in the run up to the WWI was that France and England and Germany were overproducing goods to the extreme and that even their colonies could not soak up the excess. The U.S did not want or need French, English or German exports.

WWI itself soaked up that overproduction export capacity with armaments and neatly destroy much of the manufacturing finances to boot.

Chas said...

Will small, well capitalized local banks survive the coming crisis?

Greenwood said...

"Will small, well capitalized local banks survive the coming crisis?"

read up on the Bank of North Dakota.

They are like a state scaled mini-Fed without the Pure Evil of the Federal Reserve.

trojanhorse said...


"Possibly I could consider a stack of cut and dried firewood as "savings"

Yes for sure I am playing the 'pain in the ass' role that I find such a kick, but as far as that wood you mention, I run on natural gas for the time being, because it is cheaper to use than my savings of three years of cut and stacked firewood. Can't semantics, like a good wood fire, be such a warming endevour on the net? LOL

PS I will keep my discussions of savings as being in fiat, bonds, stocks, insurance policys, gold and silver and such and leave the fruit and nut trees to be defended as savings by other squirrels than myself.

Ash said...

re: Germany's gold at the NY Fed

FOFOA starts a discussion thread on Jim Rickards' claim in his book, "Currency Wars", that this gold reserve (among others) will be confiscated.

Greenwood said...

Nazi Gold

Makes for an interesting who-done-it.

"The present whereabouts of the Nazi gold that disappeared into European banking institutions in 1945 has been the subject of several books, conspiracy theories, and a civil suit brought in January 2000 in California against the Vatican Bank, the Franciscan Order and other defendants."

"The Swiss National Bank, the largest gold distribution centre in continental Europe before the war, was the logical venue through which Nazi Germany could dispose of its gold.[6] During the war, the SNB received $440m in gold from Nazi sources, of which $316m is estimated to have been looted.."

And last but not least:

"During the war, Portugal was the second largest recipient of Nazi gold, after Switzerland and this came through the sale of Wolfram (as tungsten was called), with the German armaments industry nearly entirely dependent on the supplies from Spain and Portugal"

Anonymous said...

Hello Ash,

You write:
An interesting comment about an EMU break-up on FOFOA's forum, via "victorthecleaner"

"Victor the cleaner" is a reference, but to what? Do you know?
I will give you a hint, France 1990.

In as much as CH is not part of the EZ, it will not want to leave. His logic is solid.

@ El G

About Ambrose, yes, he is British, with all that that entails, but after reading him for years, I have not picked up on any specifically anti-German bias. If I remember, he spent some time in Germany as a student and even speaks the language to a point, in as much as the British are wont to do, but that is still better than 99% of the foreign press.

Otherwise, I agree that he is a better reporter than editorialist, particularly when it comes to the euro.

@ Greenpa

About useful phrases such as "compatible with zero", the other day, someone wondered if a German word mentioned (invented?) by you was really a word. So I thought the one below might please you.


It is a real word and is even the name of a law. There are many others much longer, though rather contrived (e.g. Selbstzerstörungsauslösungsschalterhintergrundbeleuchtungsglühlampensicherungshalterschraubenzieherersatzgrifffabrikantengütesiegelaufkleberin), and I thought it interesting that the first one actually came into use.

Have fun with it.


Ilargi said...

New post up.

Europe Tumbles, America Pays and We Build Something Better