Friday, November 25, 2011

November 25 2011: Deleveraging: There never was another choice

Dorothea Lange Family Trip August 1939
Agricultural migrants. "Family who traveled by freight train. Toppenish, Washington. Yakima Valley"

Ilargi: I'm under the impression that it’s not all that difficult to see what goes on and why in the financial world these days. Everyone simply keeps talking about what Germany should do, and about eurobonds etc., but a relatively concise overview of a few numbers should be adequate to point out that none of that "solution" talk is based on too much realism.

That’s not to say that it's impossible that Germany would succumb to the growing pressure to "act", just that even it it did, not one underlying issue would be solved. Instead, it would mean that the Germans would take the huge risk of taking on enormous losses incurred by other countries and their banks.

Germans may have enjoyed their spot in the safe haven limelight a bit too much to see the mote in their own eyes, but that should not mean they must keep on doing so. All's not well in Berlin either.

Let's do a list of where several countries stand at this point (I made a list of 10-year sovereign bond yields at 8.00 AM EST):

  • Greece: Will be broke in 3 weeks unless it receives the €8 billion next bailout tranche. It will get this only if the main opposition party signs a letter declaring its support for the EU/CB/IMF troika's austerity measures and budget cuts, supported by new technocrat PM Papademos. Opposition leader Samaras has so far refused to sign.
    10-year bond yields 29.87%.

  • Portugal: Downgraded by Fitch to junk status. 2012 GDP expected to fall 3%. Portugal expected to need the same level of bailout as Greece, though a 50% debt writedown has been ruled out by the Greece deal.
    10-year bond yields 12.32%.

  • Ireland: Nominal gross national product (GNP) has already contracted by 22%. Public wages have fallen 12% on average. There are likely to be further wage cuts in the December budget.
    10-year bond yields 8.21% (down from 14% in July)

  • Italy: Paid 6.5% this morning for 6 month loan, 2-year is over 8%. Monti needs to speed things up, or else...
    10-year bond yields 7.33%.

  • Spain: Enormous pressure on the banking system.
    10-year bond yields 6.7%.

  • Belgium: The Dexia bailout deal struck with France recently is rumored to be falling apart; Belgium can't afford the terms of the deal (a €4 billion price tag and a €51 billion guarantee) . It wants France to pick up a larger piece of the pie; which France in turn can't afford to do, for fear of being downgraded.
    Update: S&P just downgraded Belgium
    10-year bond yields 5.84%.

  • France: Has been threatened with a downgrade by Moody's. Analysts have claimed losing its AAA status would be the end of President Sarkozy's career. Eurozone chief Jean-Claude Juncker has said it would also threaten the credit rating of Europe's bailout fund, the EFSF.
    10-year bond yields 3.67%.

  • Austria: Will almost certainly lose its AAA status; Eastern European loans (Hungary) are the main culprit.
    10-year bond yields 3.80%.

  • Hungary: Downgraded to junk status.
    10-year bond yields 8.83%.

  • Germany: Had a disastrous bond auction, and its bond yields are creeping up. Has a number of banks with high exposure to PIIGS debt.
    10-year bond yields 2.23%.

  • Netherlands: Germany's little brother, but with an impending housing bust.
    10-year bond yields 2.72%.

  • US: Manages to stay in the shade for now, but a further downgrade is believed to be all but certain.
    10-year bond yields 1.92%.

  • UK: See US, no downgrade threat announced to date. Still a Bank of England expert said this week that its housing market will NEVER recover.
    10-year bond yields 2.27%.

• Recently downgraded to junk : Portugal, Hungary.

• Under threat of an imminent downgrade: US, Japan, Austria, France, Belgium.
Update: S&P just downgraded Belgium

• Additional downgrades could be coming fast and furious soon

Simone Foxman at Business Insider presents a nifty little list of 20 European banks that have the worst exposure to the PIIGS. Which means they, too, are under very real downgrade threat.

Here's an abbreviated version, which focuses on PIIGS Exposure as % of Common Equity:

20 European Banks That Are Desperate For A Solution to The Euro Crisis
by Simone Foxman - Business Insider

We took a list of the largest European banks by assets and compared their market cap, common equity, and total exposure to PIIGS debt (thank you for the bank statistics, EBA!). Then we calculated exposure to PIIGS debt (sovereign and private) as a percentage of the banks' common equity. (Notice that HSBC, ING, and even Societe Generale are all absent from this list.)

So far our track record is pretty good--we predicted that Dexia was the most vulnerable bank outside of the PIIGS back in July. If the eurozone crisis continues to escalate, we will see more and more banks bow to the pressure of exposure and become unable to borrow money.

The worst 20 cutoff for our test ended up being exposure equal to about 175% of common equity, but it really gets out of control once you get to the PIIGS banks (#1-9). But Dexia's fall suggests that bank vulnerability is already seeping beyond the periphery into the core (#10-20).

20 - Royal Bank of Scotland Group (UK)
  • PIIGS Exposure as % of Common Equity: 175%
19 - Landesbank Berlin (Germany)
  • PIIGS Exposure as % of Common Equity: 179%
18 - Barclays (UK)
  • PIIGS Exposure as % of Common Equity: 189%
17 - Landesbank Baden-Württemberg (Germany)
  • PIIGS Exposure as % of Common Equity: 230%
16 - DZ Bank (Germany)
  • PIIGS Exposure as % of Common Equity: 239%
15 - KBC Bank (Belgium)
  • PIIGS Exposure as % of Equity: 247%
14 - Credit Agricole (France)
  • PIIGS Exposure as % of Common Equity: 293%
13 - Deutsche Bank (Germany)
  • PIIGS Exposure as % of Common Equity: 327%
12 - BNP Paribas (France)
  • PIIGS Exposure as % of Common Equity: 358%
11 - Commerzbank (Germany)
  • PIIGS Exposure as % of Common Equity: 462%
10 - Dexia (Belgium)
  • PIIGS Exposure as % of Common Equity: 552%
9 - Banco Santander (Spain)
  • PIIGS Exposure as % of Common Equity: 953%
8 - Unicredit (Italy)
  • PIIGS Exposure as % of Common Equity: 1,070%
7 - Bank of Ireland (Ireland)
  • PIIGS Exposure as % of Common Equity: 1,385%
6 - BBVA (Spain)
  • PIIGS Exposure as % of Common Equity: 1,566%
5 - EFG Eurobank Ergasias (Greece)
  • PIIGS Exposure as % of Common Equity: 1,601%
4 - Intesa Sanpaolo Group (Italy)
  • PIIGS Exposure as % of Common Equity: 1,638%
3 - Banco Popular Español (Spain)
  • PIIGS Exposure as % of Common Equity: 1,927%
2 - Banca MPS (Italy)
  • PIIGS Exposure as % of Common Equity: 4,666%
1 - Allied Irish Banks (Ireland)
  • PIIGS Exposure as % of Common Equity: 33,352%

Ilargi: See the full article for exact amounts. I added them up, and these 20 banks alone (No Société Générale, no HSBC yet) have $3916 billion in exposure, almost $4 trillion. Now we all know that the latest Greek bailout talks included the provision for 50% in writedowns, with the specific note that only Greece could do this.

These are amounts too vast for Germany to insure. It would be madness to do so. Many of these banks will soon come knocking for bailouts. Many of the countries too. Just watch their bond yields go up.

As an increasing number of countries gets de facto locked out of credit markets (no country that has to pay 7% -or even close to it- on 10-year debt can do that for long), so are their banks. European banks try to get rid of trillions of euros worth of "assets", but can't find buyers. They even sink as deep as lending the money to potential buyers themselves, see European Banks Get 'False Deleveraging' in Seller-Financed Deals.

Inevitably, the discussion of how rigged Libor rates are flares up again as well. Got to restore confidence in the markets, right?! Basically, the banks are stuck. They can only turn to the ECB, but so far it resists. It did lend a whooping €247 billion in short term (one week) loans this week, but that's not going to help. Says Gareth Gore for the International Financing Review:

European banks' asset sales face disastrous failure
"Banks are feeling pain on both sides of the balance sheet," said Alberto Gallo, head of European credit strategy at RBS. "On the one side you have a funding squeeze with banks unable to raise cash in the capital markets. At the same time, many of the assets they hold are deteriorating in quality."

"Banks need to reduce their balance sheets as much as €5 trillion in assets over the next three years or so," he added. "The problem is that there just aren’t enough buyers. Most banks will be forced to hold on to much of this stuff to maturity, which will affect their ability to lend and impact on the real economy."

Ilargi: Deleveraging, anyone? Gus Lubin at Business Insider writes:

Citi Warns Of A Coming Decade Of Deleveraging
The Western World is just getting started on the second of two lost decades, according to a big report by Citi's Matt King. While the last lost decade was characterized by boom and bust, the new one will be characterized by deleveraging and slow growth.

We haven't even begun to erase the massive debt load from the past few decades. The UK particularly stands near the Japanese peaks of the early 1990s.

Ilargi: Nice one for Citi, but please do note that Stoneleigh and I at The Automatic Earth has been warning about this deleveraging since even before the present site existed.

So you have all these bad assets, which lose value on a daily basis. And even today, they don't sell. Next thing to happen is price discovery, selling them for whatever a potential buyer is willing to pay. Which is less and less, on a daily basis. Without help from the ECB, read Germany, one bank after another will fold.

Unless the US steps in through the Fed and the IMF. But there no longer seems to be any political appetite for this in Washington. Doesn't mean it can't happen, but it’ll necessarily be a convoluted affair if it does. America might do better allowing select banks to default.

The last gasp ideas that now float around Europe are 1) Eurobonds, and 2) new Eurozone treaties. Number one is very unlikely. Charles Hawley at Der Spiegel quotes Wolfgang Münchau to explain why:

The Return of 'Madame Non': Why Merkel Remains Opposed to Euro Bonds
But euro bonds would be an entirely different case. Wolfgang Münchau, the Financial Times columnist who recently began writing editorials for SPIEGEL ONLINE, points out that they would be everything that the German Constitutional Court finds questionable about bailout programs thus far.

They would have the potential to make Germany liable for debts incurred by other countries in the euro zone, the program would be huge (otherwise there would be no point in introducing them in the first place) and German guarantees could be triggered by the actions of foreign governments. "The court's verdict leaves me no alternative but to conclude that (euro bonds) are indeed unconstitutional," Münchau wrote in the Financial Times in September.

Ilargi: Number two, new treaties, suffer from similar problems. Ambrose Evans-Pritchard provides an example why in the Telegraph:

Ireland demands debt relief, warns on EU treaties
The EU's new fiscal rules would be legally binding and "justiciable" before the European Court, [Prime Minister Noonan] said. This raises the likelihood that Ireland's top court would insist on a referendum.

Ilargi: Potential legal challenges in any of the 17 Eurozone countries (or even in the larger 27 country EU) can delay any treaty changes for far longer than the situation can bear.

OK, last of last gasps, China to the rescue. I don't think Jim Chanos sees this as a realistic option:

Chinese Banks 'Built on Quicksand' as Lending Binge Goes Bad, Chanos Says
"[The Chinese government] doesn't [have money], and that's the problem. The banking system in China is extremely fragile, and that's one of the messages we wanted to get to people."

"In fact, because what happened the last two crises, in '99 and '04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over.

Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we're short, those restructuring receivables are equal to over 100% of their tangible book.

The Chinese banking system is built on quicksand, and that's the one thing a lot of people don't realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there's liabilities against that."

"Everybody seems to think it is a free and clear open checkbook. It's not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system."

Ilargi: We need to start allowing both Eurozone countries and European banks to default. Restructuring where possible, bankruptcy where not. The road we've been on for the past 3-5 years is a dead end street, always was. The wall at the end of it is now right in front of our faces. Want to risk running forward? Throw another, oh, $10 trillion at it to see if anything sticks? Doesn't seem wise, does it?

Moreover, Germany can't afford to risk that sort of money. Neither can the US, or China, or anyone else. Nor can they do it together.

All that's left to do is writing down debt, and let go under who owns too much of it. Deleveraging. There never was another choice.

Citi Warns Of A Coming Decade Of Deleveraging
by Gus Lubin - Business Insider

The Western World is just getting started on the second of two lost decades, according to a big report by Citi's Matt King.

While the last lost decade was characterized by boom and bust, the new one will be characterized by deleveraging and slow growth.

We haven't even begun to erase the massive debt load from the past few decades. The UK particularly stands near the Japanese peaks of the early 1990s.


King recommends fixed income for the best returns in the next decade. Corporate bonds could provide a better return to risk ratio, just watch out for bankruptcies.


Interestingly another recent report from Citi Equity Strategy predicts a rebirth of the cult of equities driven by low bond yields -- but that this change might not take place for another decade.

As for real estate, the combination of deleveraging plus demographics is a nightmare scenario.


European banks' asset sales face disastrous failure
by Gareth Gore - International Financing Review

European banks are being forced to abandon their efforts to sell off trillions of euros worth of loans, mortgages and real estate after a series of talks with potential investors broke down, leaving many already struggling firms with piles of assets they can barely support.

Lenders have instead turned their attention to reducing the burden of carrying such assets over months and years, with many looking at popular pre-crisis "capital alchemy" arrangements to minimise capital requirements and boost their ability to use the assets to tap central banks for cash.

Deadlocked talks with potential buyers – a mix of private equity firms, hedge funds, foreign banks and insurers – show little sign of making breakthroughs, say bankers taking part in those negotiations, with the stalemate threatening to block the industry’s ability to save itself from collapse through a mass deleveraging.

"European banks have spent far too long saying everything is fine, when it really isn’t," said one banker at a US bank who has been advising European clients on their options. "They are slowly realising that they just won’t be able to do what the market is expecting. We are edging slowly closer to the depths of the crisis."

Some of Europe’s largest banks, including BNP Paribas and Societe Generale, have in recent weeks pledged to sell assets. Together, firms are expected to shrink their balance sheets by as much as €5 trillion over the next three years – equivalent to about 20% of the region’s total annual economic output – through a combination of sales, asset run-off and recapitalisations.

Draconian measures
A funding squeeze has prompted the Draconian measures. Since the summer, most banks have been unable to tap traditional sources such as unsecured bond markets. As old debts come due – some €1.7trn will roll over in the next three years alone – banks need to find cash to avoid bankruptcy.

"Banks are feeling pain on both sides of the balance sheet," said Alberto Gallo, head of European credit strategy at RBS. "On the one side you have a funding squeeze with banks unable to raise cash in the capital markets. At the same time, many of the assets they hold are deteriorating in quality."

"Banks need to reduce their balance sheets as much as €5 trillion in assets over the next three years or so," he added. "The problem is that there just aren’t enough buyers. Most banks will be forced to hold on to much of this stuff to maturity, which will affect their ability to lend and impact on the real economy."

People involved in asset sale talks say price is the major sticking point. Lenders want only to sell higher-quality assets near to par value so as to avoid huge write-downs, which would erode capital further. By contrast, potential buyers want high-yielding investments and are offering only knock-down prices.

"There is a huge amount of liquidity among investors right now, but they only want to buy at distressed prices," said Stefano Marsaglia, a chairman within the financial institutions group at Barclays Capital. "Lots of discussions are taking place but there is a gulf in terms of pricing."

The homogeneity of assets on offer is also complicating the negotiations – a number of Dutch lenders, for example, all want to sell very similar mortgage-backed securities. Several bankers advising such clients were unanimous in saying that the deals will struggle to happen.

Vast overhang
There is also a vast overhang of unsold assets from the initial part of the crisis. Many banks such as Commerzbank, RBS, WestLB and even the Irish government set up legacy units – or bad banks – that were charged with winding down and selling those assets. That process is still ongoing.

"Selling assets is a positive to announce, but it’s going to be very challenging for all the banks that have announced asset sales to get them done," said Marc Tempelman, head of EMEA financial institutions capital markets and financing at Bank of America Merrill Lynch. "Everyone is selling similar assets."

He added: "Many banks in Europe have been looking to sell assets for the past couple of years. If those disposals haven’t been closed in better markets, what makes anyone think they can do it now in larger amounts and much more volatile markets?"

Looking for alternatives
Without the cash that would have been generated through outright asset sales, struggling European banks are now looking at alternative levers. The problem is that traditional options such as issuing equity, increasing deposits or consolidation just aren’t feasible.

That has prompted banks to turn to more creative solutions, with some now looking at what one banker termed as pre-crisis "capital alchemy" arrangements to reduce capital needs. Such methods can also in some cases make assets which banks hold to maturity eligible for ECB repo operations.

Securitisation is at the heart of such arrangements. Assets with low ratings are pooled together into diversified portfolios in order to attain a higher rating. The resulting asset requires less cash and as a result of the higher rating can be more readily pledged to the ECB or to other banks to borrow against.

Bankers point to an increased number of retained securitisations in recent months as an indication that banks are using the process to ease the burden of holding such assets through to maturity. Spanish banks in particular have securitised billions of euros worth of corporate loans since early October.

"It’s not just about selling," said Marsaglia. "Banks are also looking at ways of re-evaluating the risk weightings of some assets by pooling them together and in some cases people are securitising those pools to get better ratings. There is a lot of work going on around that right now."

Still, the practice is not a panacea to banks’ asset and liability problems. Although it can open the door to using ECB repo facilities by making collateral meet strict eligibility criteria, assets pledged are still subject to a haircut, meaning banks cannot borrow enough to fund the asset in question.

Use of the facility is surging, nevertheless. ECB lending to banks spiralled this week, with 178 lenders requesting €247bn in one-week loans, the highest in two years. Bankers warn that if banks are unable to sell assets, the ECB will have to play a much bigger role in funding banks.

"Natural deleveraging through not renewing loans is one of the few options remaining to banks to shrink their balance sheets, but the timetable for implementing this kind of strategy can be very protracted," said Ryan O’Grady, head of fixed income syndicate for EMEA at JP Morgan.

20 European Banks That Are Desperate For A Solution to The Euro Crisis
by Simone Foxman - Business Insider

EU leaders are dithering over what they should do to stem the escalating eurozone crisis, and banks across Europe are praying that they will get their act together before it's too late.

Economic conditions in core eurozone states like Germany have begun to take a hit, and signs that credit conditions are tightening for banks are everywhere. Banks with high exposures to the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) would be the first to feel the heat of a sovereign default or euro exit.

We took a list of the largest European banks by assets and compared their market cap, common equity, and total exposure to PIIGS debt (thank you for the bank statistics, EBA!). Then we calculated exposure to PIIGS debt (sovereign and private) as a percentage of the banks' common equity. (Notice that HSBC, ING, and even Societe Generale are all absent from this list.)

So far our track record is pretty good--we predicted that Dexia was the most vulnerable bank outside of the PIIGS back in July. If the eurozone crisis continues to escalate, we will see more and more banks bow to the pressure of exposure and become unable to borrow money.

The worst 20 cutoff for our test ended up being exposure equal to about 175% of common equity, but it really gets out of control once you get to the PIIGS banks (#1-9). But Dexia's fall suggests that bank vulnerability is already seeping beyond the periphery into the core (#10-20).

#20 - Royal Bank of Scotland Group (UK)
  • PIIGS Exposure: $146.42 billion

  • Market Cap: $60.96 billion
  • Common Equity: $83.58 billion
  • Exposure as % of Common Equity: 175%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#19 - Landesbank Berlin (Germany)
  • PIIGS Exposure: $13.11 billion

  • Market Cap: $5.60 billion
  • Common Equity: $7.31 billion
  • Exposure as % of Common Equity: 179%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#18 - Barclays (UK)
  • PIIGS Exposure: $123.51 billion

  • Market Cap: $43.91 billion
  • Common Equity: $65.510 billion
  • Exposure as % of Common Equity: 189%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#17 - Landesbank Baden-Württemberg (Germany)
  • PIIGS Exposure: $32.05 billion

  • Market Cap: $11.27 billion
  • Common Equity: $13.94 billion
  • Exposure as % of Common Equity: 230%

Source: EBA Stress Tests (exposure and common equity) and Google Finance (market cap)

#16 - DZ Bank (Germany)
  • PIIGS Exposure: $24.69 billion

  • Common Equity: $10.34 billion
  • Exposure as % of Common Equity: 239%

Source: EBA Stress Tests (exposure and common equity) and Google Finance (market cap)

#15 - KBC Bank (Belgium)
  • PIIGS Exposure: $39.70 billion

  • Market Cap: $9.05 billion
  • Common Equity: $16.09 billion
  • Exposure as % of Equity: 247%

Source: EBA Stress Tests (exposure and common equity) and NYSE Euronext (market cap)

#14 - Credit Agricole (France)
  • PIIGS Exposure: $192.06 billion

  • Market Cap: $29.97 billion
  • Common Equity: $65.50 billion
  • Exposure as % of Common Equity: 293%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#13 - Deutsche Bank (Germany)
  • PIIGS Exposure: $140.61 billion

  • Market Cap: $49.73 billion
  • Common Equity: $43.02 billion
  • Exposure as % of Common Equity: 327%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#12 - BNP Paribas (France)
  • PIIGS Exposure: $280.96 billion

  • Market Cap: $79.91 billion
  • Common Equity: $78.43 billion
  • Exposure as % of Common Equity: 358%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#11 - Commerzbank (Germany)
  • PIIGS Exposure: $67.38 billion

  • Market Cap: $18.45 billion
  • Common Equity: $14.60 billion
  • Exposure as % of Common Equity: 462%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#10 - Dexia (Belgium)
  • PIIGS Exposure: $132.95 billion

  • Market Cap: $5.229 billion
  • Common Equity: $10.34 billion
  • Exposure as % of Common Equity: 552%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#9 - Banco Santander (Spain)
  • PIIGS Exposure: $567.20 billion

  • Market Cap: $92.08 billion
  • Common Equity: $59.51 billion
  • Exposure as % of Common Equity: 953%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#8 - Unicredit (Italy)
  • PIIGS Exposure: $541.54 billion

  • Market Cap: $34.41 billion
  • Common Equity: $50.59 billion
  • Exposure as % of Common Equity: 1,070%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#7 - Bank of Ireland (Ireland)
  • PIIGS Exposure: $102.43 billion

  • Market Cap: $1.39 billion
  • Common Equity: $7.40 billion
  • Exposure as % of Common Equity: 1,385%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#6 - BBVA (Spain)
  • PIIGS Exposure: $552.90 billion

  • Market Cap: $52.80 billion
  • Common Equity: $35.39 billion
  • Exposure as % of Common Equity: 1,566%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#5 - EFG Eurobank Ergasias (Greece)
  • PIIGS Exposure: $76.01 billion

  • Market Cap: $2.07 billion
  • Common Equity: $4.74 billion
  • Exposure as % of Common Equity: 1,601%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#4 - Intesa Sanpaolo Group (Italy)
  • PIIGS Exposure: $607.03 billion

  • Market Cap: $51.06 billion
  • Common Equity: $37.07 billion
  • Exposure as % of Common Equity: 1,638%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#3 - Banco Popular Español (Spain)
  • PIIGS Exposure: $182.94 billion

  • Market Cap: $6.91 billion
  • Common Equity: $9.49 billion
  • Exposure as % of Common Equity: 1,927%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#2 - Banca MPS (Italy)
  • PIIGS Exposure: $290.98 billion

  • Market Cap: $7.96 billion
  • Common Equity: $6.24 billion
  • Exposure as % of Common Equity: 4,666%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

#1 - Allied Irish Banks (Ireland)
  • PIIGS Exposure: $129.02 billion

  • Market Cap: $2.00 billion
  • Common Equity: $0.387 billion
  • Exposure as % of Common Equity: 33,352%

Source: EBA Stress Tests (exposure and common equity) and Bloomberg (market cap)

Total PIIGS exposure 20 banks: $3916.49 billion

Europe’s Banks Relying on Money From E.C.B.
by Jack Ewing - New York Times

Banks clamored for emergency funds from the European Central Bank on Tuesday, borrowing the most since early 2009 in a clear sign that the euro region’s financial institutions are having trouble obtaining credit at reasonable rates on the open market.

Indebted governments among the 17 members of the European Union that use the euro are also finding it harder to borrow at affordable rates as investors lose confidence in their creditworthiness.

In a Tuesday auction, the Spanish treasury, for example, was forced to sell three-month bills at a price to yield 5.11 percent, more than double the 2.29 percent interest rate investors demanded at a sale of similar Spanish securities on Oct. 25. Spain also sold six-month debt at 5.23 percent Tuesday, up from 3.30 percent in October.

Italy’s 10-year bond yield, meanwhile, edged up once again — to nearly 6.8 percent Tuesday — as foreign investors withdrew their money from that debt-staggered country.

Together, the commercial banks’ heavy reliance on the central bank to finance their everyday business needs, along with the growing borrowing burden for Spain and Italy, raise the risk of failure for some banks within the countries that use the euro and the danger that nations much larger than Greece could eventually seek a bailout or be forced to leave the euro currency union.

European stocks were down broadly on Tuesday’s gloomy news. In the United States, stocks closed lower, too, but were not down as much as they had been before the International Monetary Fund announced at midday that it would extend a six-month lending lifeline to nations that might seek it in response to the euro zone crisis.

At the same time, though, the central bank continued to resist calls that it stretch its mandate and expand the money supply, as the United States Federal Reserve and the Bank of England have done.

The European debt crisis has crimped the flow of funds to banks by raising doubts about the solvency of institutions with a large exposure to European government debt. In particular, American money market funds have severely cut back their lending to European banks in recent months, leading many institutions to turn to Europe’s central bank.

Compounding the problem, many banks using the euro have also had trouble selling bonds to raise money that they can lend to customers. That raises the specter of a credit squeeze that could amplify an impending economic slowdown. In addition, some banks may fail if they are unable to raise short-term cash.

The central bank said Tuesday that commercial banks had taken out 247 billion euros, ($333 billion), in one-week loans, the largest amount since April 2009. And the 178 banks borrowing from the central bank on Tuesday compared with the 161 banks that borrowed 230 billion euros ($310 billion) last week.

Since 2008, the central bank has been allowing lenders to borrow as much as they want at the benchmark interest rate, which is now 1.25 percent. Banks must provide collateral. But the central bank is not supposed to prop up banks that are insolvent, only those that have a temporary liquidity problem.

And while the central bank has been buying bonds from countries like Spain and Italy to try to hold down their borrowing costs, the amount —195 billion euros ($263 billion) so far — is modest compared with the quantitative easing employed by other central banks like the Fed.

A growing number of commentators say the European Central Bank should be authorized to buy government bonds at levels sufficient to stimulate the economy. "It is essential to have a central bank free to use all the levers, including variants of quantitative easing," Adair Turner, chairman of Britain’s bank regulator, the Financial Services Authority, told an audience in Frankfurt late Monday. The audience included Vítor Constâncio, vice president of the central bank.

Richard Koo, chief economist at the Nomura Research Institute, wrote in a note Tuesday that "the E.C.B. should embark on a quantitative easing program similar in scale to those undertaken by Japan, the U.S. and the U.K." "Doubling the current supply of liquidity," Mr. Koo said, "would not trigger inflation and would enable the E.C.B. to buy that much more euro zone government debt."

But there has been no sign the central bank will budge from its position that it is barred from financing governments, and that purchases of government bonds are justified only as a way of keeping control over interest rates and fulfilling the bank’s main task to keep prices stable.

"By assuming the role of lender of last resort for highly indebted member states, the bank would overextend its mandate and shed doubt on the legitimacy of its independence," Jens Weidmann, president of the German Bundesbank and a member of the central bank’s governing council, said Tuesday in Berlin. "To follow this path would be like drinking seawater to quench a thirst," he said.

Lucas D. Papademos, the new prime minister of Greece and a former vice president of the central bank, met with Mario Draghi, the central bank’s president, when he visited the bank on Monday. The bank did not disclose details of their discussions, but Greece’s fate is to a large extent in the central bank’s hands.

Because of its bond purchases, the central bank is the Greek government’s largest creditor, and the bank is one of the institutions that determines whether Greece will continue to receive aid from the 17 European Union members that use the euro.

Barnier panel to study break-up of EU banks
by Stanley Pignal and Alex Barker - FT

Europe’s leading financial regulator is to set up an "expert commission" to study the mandatory separation of risky investment banking activities from traditional retail lenders, saying that while he has reservations about such measures there should be "no taboo on the question".

To the delight of some MEPs, Michel Barnier, the European Union’s internal market commissioner, told the European parliament that a high-level group would start reflecting along lines that could lead to a breaking up of some of Europe’s largest banks.

"It will have a look on that subject of structure of banks and separation in risk management," he said, citing the work of the Vickers commission in the UK and the US Volcker rule, which have moved towards limiting the activities of retail lenders that have investment banking arms.

"For my part I am not closed to this idea of separation," he added. "That having been said, we must be conscious that separation measures always have negative effects on the organisation of entities and their economic efficiency. Therefore, to go down that road, we must be sure that the gains in terms of financial stability outweigh the costs."

Mr Barnier’s impromptu announcement came as a suprise, particularly given his doubts about the UK plans to ring-fence the retail banking operations of British banks. No experts have yet been appointed to the panel and it will be given less than six months to produce its report, according to one EU official.

France and Germany have made plain their opposition to the breaking up of joined-up banking groups, a view Mr Barnier has largely endorsed in the past. "The recent crisis has not uncovered risks linked to universal banking model per se," he told MEPs after announcing that he would launch the commission.

Instead of opting for a mandatory split, the UK is pursuing reforms proposed by the Vickers commission in September, including "ring-fencing" of traditional banking deposits away from riskier investment banking activities.

This summer Mr Barnier proposed EU bank capital requirements that included a ceiling on how much capital regulators could require banks to hold – a measure Britain saw as preventing the UK from enacting Vickers’s 10 per cent minimum capital rule.

Since then the Vickers reforms have gathered support, particularly in the European parliament, where MEPs are keen to insert some of its provisions into proposals on bank capital or the new resolution regime for failing banks. Since the summer, a small group of Commission officials have been looking at options on separation, in order to support negotiations between member states and the European parliament.

In the US, the Volcker rule, passed as part of the Dodd-Frank act, places curbs on banks that take retail deposits from so-called "prop trading", where banks use their own funds in market activities.

The Barnier announcement was welcomed by the left-leaning Greens group in the European parliament, "The proposed commission should not shy away from exploring radical options," said Philippe Lamberts, an MEP. "Investment banking - and the reckless speculation this entails - has benefited from implicit state guarantees and taken societies hostage for far too long".

Financial Paralysis: Europe Short on Cash as Bond Fears Deepen
by Stefan Kaiser - Spiegel

The euro zone is stuck in a double crisis. On the one hand, investors are no longer interested in purchasing sovereign bonds. On the other, banks with such bonds on their books are being treated with extreme caution. A massive financial crisis threatens -- and it could be worse than the last.

Josef Ackermann is a busy man this autumn. Hardly a day goes by that the Deutsche Bank chief, despite his impending departure from the bank, doesn't hold a speech on the current financial crisis that has gripped Europe. And more often than not, his talk centers on the immense problems faced by the sovereign bond market. Nobody, it would seem, wants state bonds anymore.

Germany's top banker is not alone with his concern about the problem. The entire financial world is in turmoil this autumn. Once seen as iron-clad investments, state bonds are no longer seen as secure -- particularly since the European Union agreed to a 50 percent debt haircut for Greece in October. It can, warned Andreas Schmidt, president of the Association of German Banks, earlier this week, no longer be taken for granted that countries can turn to the capital markets to finance their budgets.

The truth of Schmidt's statement became readily apparent this week. On Tuesday, Spain auctioned off three-month and six-month bonds, a sale that in normal times would be quick and easy. Interest rates of 3 to 4 percent on such sales are normal. But this week, Madrid had to pay 5.11 percent and 5.23 percent respectively, the highest it has had to pay on such bonds in 14 years -- and up significantly from the 3.30 percent it paid on six-month paper as recently as October 25. Even Greece didn't have to pay as much on a similar offering recently.

And the problem isn't just limited to indebted euro-zone countries. Banks too have run into difficulties as a result of the sudden aversion to sovereign bonds. Most of them, after all, have significant amounts of sovereign bonds on their balance sheets -- making other banks extremely wary of lending to them. Indeed, the European Central Bank said on Tuesday that 178 banks borrowed €247 billion in one-week loans from the ECB -- the most since early 2009 when the last financial crisis was at its peak.

Mistrust of EU Bonds
"There is, at the moment, a collective mistrust of European sovereign bonds and banks," said Eugen Keller, a financial market expert with the Frankfurt-based private bank Metzler.

US money market funds have long since withdrawn from the European common currency zone. American and British banks have also become extremely careful when it comes to doing business with European financial institutes. "The willingness of investors to engage in banks on the longer term is not particularly pronounced," Deutsche Bank head Ackermann said in describing the phenomenon.

Were the ECB not on hand to provide banks with cheap money -- since 2008, it has been allowing banks to borrow as much as they need to overcome liquidity shortfalls -- the situation would look much worse, Ackermann added.

In an effort to win back investor faith, European banks are doing everything they can to clear their books of state bonds. According to an estimate from the US investment bank Goldman Sachs, the 55 largest European banks reduced their holdings of Italian bonds by €26 billion just in the three months between the end of June and the end of September -- roughly a 30 percent decrease. Holdings of Spanish bonds have also plunged by a similar percentage, equating to €6.8 billion. The trend is likely to have continued in October and November.

Most of the bonds shed by the banks have likely landed on the balance sheet of the ECB, which has been on a bond-buying spree since May 2010 in an effort to push down sovereign bond interest rates. But the effort has not been met with unreserved success. So far, the ECB has amassed euro-zone bonds worth €195 billion -- and the interest rate on Italian bonds still edged up to 6.8 percent on Tuesday. That is down from the highs of earlier this month, but still worryingly close to the 7 percent mark that is widely considered to be unsustainable on the long term.

Ultimate Survival
Still, many feel that the ECB is not doing enough and would like to see it embark on a gigantic bond shopping spree in an effort to calm the financial markets. But the ECB has remained resistant to being turned into Europe's lender of last resort -- a position vehemently supported by Germany's central bank and by Chancellor Angela Merkel.

But the problem is not likely to disappear overnight. And the longer the double-crisis -- of state debt and bank liquidity -- continues, the more dangerous it will become for the ultimate survival of the euro. The two are, after all, dependent on each other. Countries need liquid banks to purchase their bonds and the banks need financially solid states as guarantors of the state bonds on their balance sheets. At the moment, neither half of the relationship is functioning properly.

Over the weekend, the world's largest sovereign bond buyer Pimco sounded the alarm. "This is just a repeat of what we saw in 2008, when everyone wanted to see toxic assets off the banks' balance sheets," Christian Stracke, head of research for Pimco, told the New York Times.

Keller, the analyst from Metzler, also sees parallels. "Back then, it was shoddy US real-estate loans that was causing the banks problems," he says. "Today it is the European state bonds that everyone thought were so safe."

The comparison with 2008 is frightening. Following the fall of the investment bank Lehman Brothers, the entire financial system faced collapse. And this time, the condition of the markets is, if anything, even worse: The crisis has eaten its way deep into the credit system. The entire method by which European countries access money is under threat -- and by extension, so too is European prosperity.

Keys in Berlin
It is a situation that has become unsustainable on the long term. If Europe is not able to quickly re-establish faith in European sovereign bonds, a downward spiral of fear and debt could be the result.

The key to preventing that spiral from gaining momentum lies in the hands of the German government. Germany is, at the moment, the only euro-zone country that investors continue to trust unreservedly -- which can be seen in the low interest rates that Berlin must pay on its sovereign bonds.

It is a trust that Merkel's government is hesitant to loan out, as would be the case were so-called "euro bonds" -- essentially a pooling of euro-zone debt -- to be introduced. Experts, though, think that the chancellor will soon be forced to buckle. "I think that it is only a question of weeks before we have to say: all for one, one for all," says Keller.

The implication is clear. Either Germany will have to guarantee the debts of other euro-zone countries in the form of euro bonds. Or the ECB will have to jump in and buy massive quantities of bonds from highly indebted currency zone members. A third alternative doesn't exist.

ECB lending to eurozone banks hits high
by David Oakley, Tracy Alloway and Ralph Atkins - FT

Eurozone banks raised sharply their borrowing from European Central Bank on Tuesday, with lending hitting a new high for the year amid signs banks are being shut out of private markets.

The ECB lent almost €250bn to eurozone banks in its weekly tender, the highest amount in 2011, as traders said more banks were finding it harder to access wholesale funding because of concerns over their creditworthiness.

"The bank lending markets have never been as stressed as this, or not since the collapse of Lehman Brothers [in 2008]. We are talking about a credit crisis, not a liquidity crisis. There is plenty of money out there, but more and more banks are deemed too great a risk to lend to," said a money markets broker.

The ECB is becoming an increasingly important source of funding for eurozone banks as the sovereign debt crisis has deepened with banks borrowing €247bn from the central bank on Tuesday, an increase of €17bn from the previous week and up €52bn compared with two weeks ago. The number of banks participating in the tender also rose, from 161 a week ago to 178 on Tuesday.

Lending conditions in the interbank markets have deteriorated in the past two weeks, despite the ECB reinstating some of its most potent crisis-fighting tools, including one-year liquidity injections.

A worry in the markets is that, despite the access to ECB liquidity facilities, banks still may not be able to repair their balance sheets. With possible further sovereign and bank downgrades to come, more banks may find they are being shut out of the private markets.

"It is a vicious cycle. Sovereign yields rise, leading to government and bank downgrades, which closes the market further to financial institutions, which then do not have the balance sheet to buy sovereign bonds," said one trader at a European bank.

Mario Draghi, the ECB president, has hinted at further action by the central bank. Among the steps the ECB could consider are providing longer term liquidity, possibly for periods of as long as two or three years, and looser requirements on the collateral demanded to obtain ECB funds.

In the longer term lending markets, Europe’s banks have largely been unable to raise new senior unsecured debt, the bread and butter of their funding, in recent months as investors fret over the effects of the eurozone crisis.

Since the beginning of July, the region’s banks have sold a collective €11bn of senior unsecured debt according to Société Générale data. That compares to €121bn raised year to date, and about €150bn raised annually in 2009 and 2010.

If sovereign and banking stresses continued, "we will be looking at what will surely be a catastrophic, historically low level of senior unsecured issuance level for 2012", Suki Mann, SocGen credit strategist, told clients. "That means deleveraging, the ECB, retail deposits and private placements will bear a higher burden than they ever have."

European Banks' Dollar Need May Soon Trump Their Pride
by Anusha Shrivastava - Wall Street Journal

Banks may soon need to set aside their worry over potential reputational questions and ask the European Central Bank for dollars.

European banks have found it increasingly difficult and expensive to secure the dollars they need to pay for loans denominated in U.S. currency. Big lenders in the commercial-paper market are less willing to offer short-term loans, and swapping euros for dollars with another financial institution costs more than four times what it did in July.

The European Central Bank in September set up a program to swap financial institutions' euros for the central bank's dollars. But that facility has barely been used as most banks are still willing to pay extra for dollars in the open market to avoid appearing hard up enough to need the "lender of last resort."

That looks to change soon.

Funding costs have climbed to levels not seen since the height of the financial crisis in 2008. Investors are wary of lending to European banks that made loans to Greece, Italy and other countries at the center of the sovereign-debt crisis.

Eventually, the market cost for dollars will be so great that it won't make economic sense for banks to bear the cost and so, faced with this, banks will take the hit to their reputation and go to the ECB. "We are reaching the point where the willingness to use the facility is growing," said Joe Abate, a money-markets strategist at Barclays Capital.

Mr. Abate points to euro-dollar swap rate to support his contention. The indicator shows that the cost of swapping euros into dollars, the three month euro-dollar cross-currency basis swap, has widened to minus-1.37 percentage points, the widest level seen since December 2008. The negative reading means it is cheaper to borrow dollars and exchange them for euros through a swap rather than vice versa. Mr. Abate believes banks will start using the ECB more regularly once the euro-dollar swap rate hits minus-1.5 percentage points.

The ECB's swap rate is about 1.08 percentage points. That means a bank exchanging €1 billion for the equivalent amount of dollars would currently pay about €7.9 million less on an annual basis when the central bank is on the other end of the trade.

However, banks must also post collateral, like sovereign bonds, with the ECB. The central bank also charges a haircut. For every $100 in bank collateral, the ECB will lend only $80 against it, leaving the borrower to lean on the market for the remaining $20.

Still, the need for such funds, even at penalty rates, became apparent during the 2008 financial crisis as short-term funding markets failed to function normally. Central banks around the world acted to increase liquidity to institutions and markets by lengthening the terms of their lending, increasing the range of collateral accepted, and expanding the set of counterparties with which they would undertake operations.

The Fed established bilateral currency swap agreements with 14 foreign central banks during the financial crisis, Fed Chairman Ben Bernanke noted. "One of the lessons of the crisis was that financial markets have become so globalized that it may no longer be sufficient for central banks to offer liquidity in their own currency; financial institutions may face liquidity shortages in other currencies as well," Mr. Bernanke said in a speech last month at the Federal Reserve Bank of Boston.

So far, the ECB swap facility has $3 billion in outstanding loans as few banks have been willing to take the reputational hit to tap the funds. By comparison, in late 2008 when the swap rate was at a level similar to those now, a similar Fed dollar swap facility had $475 billion outstanding, Mr. Abate said. "There's a stigma in going to the central banks. … It shows you have a desperate need for dollars," said Shyam Rajan, a rates strategist at Bank of America Merrill Lynch.

The central banks don't disclose the names of the borrowers. But banks believe the damage would be so great if their use of the facility were disclosed that they avoid it entirely. "Word gets out on the Street," Mr. Rajan said. "It's a big price to pay."

Stigma aside, Stanley Sun, an interest-rate strategist at Nomura Securities, said the bottom line is that the ECB needs to encourage use of the facility to shore up confidence in European banks. "The situation is much worse in euro land than in dollar land," he said.

London Banks Seen Rigging Rates for Decades Losing Credibility in Markets
by Mark Gilbert, Gavin Finch and Anchalee Worrachate - Bloomberg

Every workday morning in London, at about 10 o’clock, representatives from 19 banks make a series of decisions that affect financial transactions around the world, from what homeowners pay on their mortgages to the underlying value of credit-default swaps and corporate bonds.

The bankers’ power is unsettling, says Tim Price, who helps oversee more than $1.5 billion as director of investment at PFP Group LLP, an asset-management firm in London. "It’s a kind of Wizard of Oz surrealist nightmare," he says.

It could hardly be more real, Bloomberg Markets magazine reports in its January issue. What the bankers are deciding on is Libor, the London interbank offered rate. Libor is based on what each participating bank says it would have to pay to borrow money from another bank.

The rate, produced under the auspices of the century-old British Bankers’ Association, represents the average of the collected figures, minus several of the highest and lowest quotes. The resulting benchmark determines interest rates on an estimated $360 trillion of financial instruments around the world, according to the Bank for International Settlements.

Unelected and lightly regulated, the Libor panelists have come under increasing scrutiny from money managers such as Price who say Libor is biased in favor of the bankers who submit the quotes. "The whole system is rigged," Price says. "The banks are able to say, ‘Let’s just collude and set rates, and we have the sanction of the authorities to do it.’"

Market Manipulation
In a series of lawsuits filed in 2011 and now winding their way through courts in Europe and the U.S., investors have accused a number of banks represented on the Libor panel of distorting market prices by hiding the banks’ true borrowing costs since as early as 2007.

In August, for example, Charles Schwab Corp., a San Francisco-based brokerage firm and investment manager, sued 11 major banks, including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co., claiming they conspired to manipulate Libor, depriving investors of fair returns.

The banks conspired to depress Libor by understating their borrowing costs, thereby lowering their interest expenses on products tied to the rates, according to the lawsuit. The banks "reaped hundreds of millions, if not billions, of dollars in ill-gotten gains," Schwab said. "We believe the suit is without merit," Danielle Romero- Apsilos, a spokeswoman for New York-based Citigroup, told Bloomberg News at the time.

Concealing Distress
In addition, regulators and prosecutors in the European Union, Japan, the U.K. and the U.S. have been investigating whether banks manipulated Libor to conceal the extent of their financial distress from lenders and shareholders. Edinburgh-based Royal Bank of Scotland Group Plc disclosed in August, for example, that it had received requests for documents from EU and U.S. regulators.

Barclays Plc, Credit Suisse Group AG, HSBC Holdings Plc, Bank of America, JPMorgan Chase and RBS all declined to comment about the lawsuits and inquiries in which they were defendants or targets.

Misgivings about Libor have been gathering momentum since the early days of the financial crisis in 2008. Analysis of Libor over time shows that the spread between low and high rates submitted by bank panelists widens most at times of greatest financial distress.

Widening Spreads
That was the case in the immediate aftermath of the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc., when the difference in the rates submitted by Libor panelists on three- month loans in dollars increased from 7 basis points to 115 basis points by the end of the month. (A basis point is 0.01 percentage point.) It was also the case more recently as the European sovereign-debt crisis deepened and concerns mounted about banks exposed to economically fragile debtor nations such as Greece and Italy.

In November, the spread between the lowest and highest rates being submitted for three-month dollar loans was at its widest in more than two years. The difference reached 30 basis points on Nov. 8 with Credit Agricole SA saying it could pay 0.575 percent to borrow funds, while HSBC said it could pay just 0.275 percent. The Nov. 8 spread was the widest since a bout of market volatility in May 2009.

Parking Cash
While the BBA says it’s willing to consider changes to Libor, its response to criticism has been muted so far. Just days before Lehman’s bankruptcy, BBA Chief Executive Officer Angela Knight said the trade association was moving at a "good, steady pace" to improve the scrutiny of the rate-setting process.

In March 2011, the BBA said in a statement, "We are committed to retaining the reputation and integrity of BBA Libor, which continues to be the authoritative benchmark of the wholesale money market."

Libor, inaugurated in 1986, arose out of a need for a dollar rate to be set outside the U.S., says Christopher Wheeler, a banking analyst at Mediobanca SpA in London. In the 1970s, London was growing as a center for financial transactions. That was partly because, during the oil crises, Arab and Soviet producers were looking to park proceeds from their dollar-denominated sales of crude with London banks to shelter revenue from confiscation by U.S. authorities.

Big Bang
Several early versions of benchmark rates evolved into BBA Libor, set in dollars and pounds, in 1986. The birth of Libor coincided with then-British Prime Minister Margaret Thatcher’s Big Bang financial deregulation program and the consequent growth of bond and syndicated-loan markets in London. Thomson Reuters Corp., which competes with Bloomberg LP, the parent of Bloomberg News, in selling financial and legal information and trading systems, calculates the rate.

While the suite of currencies has since expanded to 10 and the collection process is now electronic, Libor has changed very little in the past quarter century. The banking industry, on the other hand, has been transformed by the proliferation of new financial instruments and by the vanishing separation between commercial and investment banks.

In March 2008, after the sub-prime mess began spreading beyond the U.S., the Bank for International Settlements, known as the central bank for central bankers, questioned the accuracy of Libor quotes, suggesting some could be biased.

Threat of Expulsion
"If there is uncertainty about the liquidity position of a contributing bank, the bank will be wary of revealing any information that might add to this uncertainty for fear of increasing its borrowing costs," the BIS said in its quarterly review. "Banks’ quotes are determined by strategic behavior as well as credit quality and funding needs."

Responding to such criticism, the BBA decided in June 2008 to review the system for setting Libor. It subsequently increased the number of banks on the dollar Libor panel to 20 from 16. (German bank WestLB AG has since stopped contributing quotes.)

The BBA also added three noncontributing members to the Foreign Exchange and Money Markets Committee, the independent group that oversees Libor. And the BBA said it would expel any firm that was found to be deliberately misstating its borrowing costs. The attacks on Libor continued unabated. The U.K. Financial Services Authority, the U.S. Commodity Futures Trading Commission, the U.S. Department of Justice, the U.S. Federal Trade Commission and the U.S. Securities and Exchange Commission have all launched investigations.

Distorting Value
"The complaints are substantially similar and allege, through various means, that certain members of RBS Group and other panel banks individually and collectively violated U.S. commodities and antitrust laws and state common law by manipulating Libor and prices of Libor-based derivatives in various markets," RBS said in a note on its Aug. 26 financial statement.

In April, a European asset-management firm and two related funds accused 12 banks, including Bank of America, Barclays, Citigroup, Credit Suisse, HSBC and JPMorgan Chase, of conspiring to manipulate Libor. FTC Capital GmbH of Vienna, FTC Futures Fund PCC Ltd. of Gibraltar and FTC Futures Fund SICAV of Luxembourg alleged in U.S. District Court in New York that the banks had distorted the value of futures contracts used by traders and investors to speculate on the direction of interest rates.

Not Fairly Priced
"My client’s trading of eurodollar futures was harmed as Libor was not fairly priced," says David Kovel, a partner at the law firm Kirby McInerney LLP in New York who represents FTC Capital. Kovel didn’t identify specific trades that resulted in losses nor did he reveal how much FTC Capital is seeking from the banks.

Marco Bianchetti, who holds a Ph.D. in theoretical condensed-matter physics from the University of Milan and works on the market risk management team at Intesa Sanpaolo SpA in Milan, says quantitative analysts who engineer financial transactions need a reliable benchmark to do their work. He says a rate based on actual transactions would be more trustworthy than Libor. U.K. Debt Management Office Chief Executive Officer Robert Stheeman agrees.

'The Real issue'
While he says he doesn’t question the integrity of Libor, Stheeman says he’s concerned about its authority as a benchmark. "That, to me, is the real issue," he says.

In that spirit, the search is on for Libor alternatives. In the U.K. in June, the Wholesale Markets Brokers’ Association launched a new reference rate called the Repurchase overnight index average, or Ronia. It’s based on actual money-market deals struck from noon to 4:15 p.m. London time.

Roberto Verrillo, a managing director of U.K. interest-rate products at Nomura International Plc in London, helped to develop Ronia. He says Ronia’s advantage over Libor is that it’s based on real deals. "That’s why Ronia is going to be an appropriate benchmark in the market," he says.

Eila Kreivi, head of capital markets at the European Investment Bank in Luxembourg, which manages investments for the EU, says she’s seen a gradual increase in demand for reference rates outside of Libor.

'Less Relevant'
"It’s not a huge trend yet, but it’s there," Kreivi says. "As an issuer, we don’t tend to analyze the usefulness of Libor. But it seems that Libor has come a long way from its original intrinsic purpose. One hears once in a while from the market that Libor has lost its relevance."

BBA Director John Ewan says Libor doesn’t need an overhaul. "We’re not dogmatic," he says. However, he adds that the BBA has a duty to borrowers who have taken out long-term loans based on Libor. "If we suddenly switched the benchmark radically, that may give them problems," he says. "We do have to think about that."

As influential as Libor is today in determining interest rates around the world, Peter Hahn, a professor of finance at Cass Business School in London and a former managing director at Citigroup, says its authority may slowly ebb away.

"As it becomes less relevant, it becomes even more unreliable," Hahn says. "It’s up to the market to come up with alternatives that have a lot more integrity and aren’t as influenced by the conflicted interests of their participants. The battle is on for a new, more credible alternative to Libor."

European Banks Get 'False Deleveraging' in Seller-Financed Deals
by Anne-Sylvaine Chassany, Simon Packard and Neil Callanan - Bloomberg

European banks, vowing to sell distressed assets as regulators tighten capital requirements, are lending money to buyers to get deals done.

Royal Bank of Scotland Group Plc may provide as much as 600 million pounds ($939 million) in debt to help Blackstone Group LP acquire part of a 1.4 billion-pound portfolio of commercial mortgages from the bank after the private-equity firm struggled to get outside funding, three people with knowledge of the transaction said.

The deal, scheduled to close within weeks, follows Credit Suisse Group AG's agreement to finance the sale of $2.8 billion of property loans to Apollo Global Management LLC in December, two people with knowledge of the matter said.

"The use of vendor financing to de-lever defeats its own purpose," said David Thesmar, a professor of finance at HEC Paris, a business school. "The assets may become safer because the buyer injects equity, but the actual gain in core Tier 1 capital ratio for the bank isn't as great as if it was purely and simply sold. It shows banks' deleveraging is going to be tougher than planned."

The increase in vendor financing reflects the challenge European banks face selling their distressed loans and avoiding greater losses as the sovereign-debt crisis deepens. Lenders have pledged to cut assets by more than 775 billion euros ($1.05 trillion) within two years as regulators require them to meet a 9 percent core capital ratio earlier than planned and urge them to reduce funding needs.

'Off Your Books'
Because most buyers of distressed assets fund purchases with debt, which has become increasingly expensive and difficult to obtain, banks are financing transactions themselves, even if it means retaining loans on their balance sheets. That will slow deleveraging and make more asset sales necessary, analysts say.

"A lot of those asset sales might be dependent on the banks themselves, the sellers, providing financing to the buyers," Raoul Leonard, a London-based RBS analyst covering southern European banks, said on a conference call with clients Oct. 20, without referring to any specific deal. "It'll be almost false deleveraging going on, but it's off your book and you can argue that the risk-weighting changes."

Loan Quality
Sales of loan portfolios have been sluggish, in part because banks are reluctant to sell assets at the discounts sought by private-equity firms such as Apollo, Blackstone and Colony Capital LLC. Selling at a loss would reduce banks' capital at a time when regulators are demanding they raise more.

The issue isn't banks' high-quality assets, which can be sold to other lenders, pension funds and insurance companies without debt financing, said Andrew Jenke, director in KPMG's Portfolio Solutions Group in London, who advises buyers and sellers of loans. Nor is it their poorest-quality assets on which firms can afford to accept discounts because they have been written down already, he said.

"The issue is the large pool of medium-quality loans that are not yet provisioned because there hasn't been a credit event triggering an incurred loss," Jenke said. "There is a big price gap: too risky for other banks, and not enough cheap financing for the private-equity buyers. This will make vendor financing crucial."

European banks will dispose of less than 100 billion euros of the more than 500 billion euros of distressed loans and other impaired assets because they can't afford to take losses on the sales, Huw van Steenis, a Morgan Stanley analyst in London, wrote in a Nov. 13 note. Banks may have to unload some of their good assets to U.S. or Asian competitors, he said. Van Steenis estimated banks in Europe may shrink assets by between 1.5 trillion euros and 2.5 trillion euros in two years.

Boosting Bid Prices
Buyers of distressed assets seek vendor financing because it's the cheapest debt option and helps them boost their bids, said Joseph Swanson, managing director at investment bank Houlihan Lokey in London.

"With very few exceptions, banks will get the best price for their assets if they provide the financing package themselves," Swanson said. "The bank already has the risk on its books and knows its assets better than any third-party financier. As a result, it should be in the best position to provide financing which allows the buyer to put in less equity and boost the price."

The issue is more acute for large portfolios of loans, said Dilip Awtani, managing director in charge of Colony Capital's European distressed-debt investments in London. "The pricing gap between buyers and sellers is still huge, and one of the ways to close it is vendor financing because the lending market is contracting and the pockets of capital for third-party financing are very limited," Awtani said.

Project Isobel
RBS, which got a 45.5 billion-pound taxpayer bailout in 2008, said in July that New York-based Blackstone would find outside financing to buy part of a 1.4 billion-pound U.K. commercial-property loan portfolio codenamed "Project Isobel." Blackstone and RBS agreed to set up a vehicle to hold the assets, which were priced at a 29 percent discount to face value, said the people with knowledge of the talks who asked not to be identified because they weren't authorized to speak.

The world's largest buyout firm, which will manage the assets, agreed to buy a 25 percent stake, while RBS will retain the rest and sell it over time, the Edinburgh-based bank said in a July 13 statement.

'Innovative Structure'
Blackstone, seeking to finance the acquisition with 60 percent debt, has struggled to secure outside lending because credit contracted and became more expensive as Europe's crisis worsened, the people said. China's sovereign-wealth fund, China Investment Corp., may buy half of Blackstone's stake, or 12.5 percent, they said.

RBS said in the July statement that the deal was structured to allow it "to participate in potential future profits of the fund and from Blackstone's asset management and market recovery while at the same time reducing its exposure and risk." David Gaffney, a spokesman for the bank, declined to comment further.

"We think this innovative structure could serve as the model for future transactions as banks look to dispose of non- core real-estate assets," Michael Nash, chief investment officer of Blackstone Real Estate Debt Strategies in New York, said in the statement. Helen Winning, a spokeswoman for Blackstone in London, declined to comment.

'Not Enough Money'
RBS also provided a loan in September to help Patron Capital Ltd. purchase 24 U.K. hotels the bank seized after Jarvis Hotels Ltd. defaulted on loans. The lender provided financing to an RBS venture with Patron that bought the properties. Because the deal was relatively small, loan terms were comparable to what was available from other lenders, said Keith Breslauer, managing director of Patron, a London-based buyout firm that specializes in real estate and manages about 1.7 billion euros of assets.

For larger transactions, "you need vendor finance to get deals done," Breslauer said. "Without it, the deal doesn't get done." Patron is in talks on three deals that will collapse unless the vendor provides finance, he said, adding "there's not enough money out there." Richard Thompson, a partner at PricewaterhouseCoopers LLP, who advises on loan sales in London, said about half the deals his firm is handling involve vendor financing.

Credit Suisse, Lloyds
Credit Suisse, Switzerland's second-largest bank, agreed to sell $2.8 billion in distressed property loans to New York-based Apollo at a 57 percent discount in December, a person with knowledge of the deal said at the time. The bank provided a loan to help fund Apollo's deal, two people familiar with the transaction said. Adam Bradbery, a spokesman for Credit Suisse in London, declined to comment.

Lloyds Banking Group Plc, which received a 20.3 billion- pound government bailout, is considering vendor financing in the sale of 1 billion pounds of U.K. mortgages, a person with direct knowledge of the talks said. Ian Kitts, a spokesman for London- based Lloyds, declined to comment.

The National Asset Management Agency, set up to purge Irish banks of risky property loans, said it will also provide as much as 70 percent of financing to help sell commercial assets. "Vendor finance sounds like window dressing to me," said Christophe Nijdam, an AlphaValue analyst in Paris. "The risk isn't properly transferred."

Equity Requirements
The use of such funding can reduce the riskiness of the assets and free up regulatory capital, David Abrams, in charge of European nonperforming loan investments at Apollo Global Management in London, said in an interview. "The risk for the banks changes," he said. "In a way, they are turning nonperforming loans into performing loans."

The buyers need to inject sufficient equity for the banks providing vendor financing to benefit from a regulatory capital point of view, said Alexander Greene, managing partner at New York-based private-equity firm Brookfield Asset Management LLC. "Ultimately, regulators scrutinize those deals," Greene said. "The question is then, will the investors be able to earn their returns if they overcapitalize?"

Banks must be innovative to sell the "stickiest" of their assets, said Ian Gordon, an analyst at Evolution Securities Ltd. in London. "Banks will be naive if they use vendor finance to notionally dispose of assets at whatever price the market will take," he said. "They could fall in the trap in giving away the upside without meaningfully reducing the downside."

Investors warn banks could face buyers' strike over controversial bond changes
by Harry Wilson - Telegraph

Europe's biggest banks have been warned they could face a debt buyers' strike by one of the world's leading investor groups, amid an increasingly bitter feud over controversial changes to their bonds.

Otto Thoresen, director-general of the Association of British Insurers, told The Daily Telegraph attempts by banks to force debt investors to accept the terms of their bond exchange offers were "coercive" and could harm the banks' ability to refinance hundreds of billions of pounds of borrowings. Mr Thoresen claimed banks were using a "thinly veiled threat" not to redeem their junior debt to force subordinated bondholders to accept less attractive terms.

"Such tensions will clearly impact on continuing relationships and raise into question the implications for individual banks' future access to debt capital markets. This is an important issue in the light of future capital and debt refinancing requirements for the banking sector in the coming years," said Mr Thoresen.

Barclays Capital analysts reckon Europe's banks must sell about €800bn (£689bn) of new bonds next year, or about €50bn to €70bn every month. However, the eurozone crisis has led bank issuance to come to a virtual halt since May, creating a huge backlog of debt that needs to be refinanced.

The ABI's members, which include all of the UK's largest insurance group with over £1 trillion of assets under management, are among the biggest buyers of bank bonds and their support will be crucial if lenders are to get anywhere close to hitting their funding targets.

Large insurance groups and other debt investors have been angered by multi-billion euro bond exchange programmes launched this month by lenders including Banco Santander and BNP Paribas. Bondholders are saying the terms of the exchanges represent a transfer of value from debt investors to bank shareholders, making them more wary about buying new issues from banks.

Analysts at Societe Generale have estimated that Santander's €6.8bn offer to exchange Lower Tier 2 debt for new senior unsecured bonds could result in the bank making a Tier 1 capital gain of about €640m, which it could potentially book as a fourth-quarter profit. "Transactions push bondholders into debt at non-economic prices. As such, it has the clear impact of transferring wealth from bondholders to shareholders," said Hank Calenti, a bank credit analyst at Societe Generale.

The deadline for Santander junior bondholders to accept the terms of the bank's debt exchange programme elapses today. For those investors who do not take part in the exchange the worry is they will be left with holdings that are less actively traded and therefore less valuable than before.

Mr Thoresen said banks must engage in a more "active dialogue" with bondholders. "Whilst nominally voluntary in nature, the economic terms being a commercial decision for each investor, too frequently these operations have been marketed without the dialogue element and in manner which investors find coercive," he said. A Special Bond Committee of the ABI has already been formed to argue against the exchange offers.

Rabobank to Halve Bond Sales on Debt Turmoil
by Esteban Duarte and Maud van Gaal - Bloomberg)

Rabobank Nederland, the fourth- largest corporate bond issuer in Europe, plans to halve sales of senior debt next year to reduce its reliance on a market roiled by the sovereign crisis.

The world’s highest-rated private lender will seek 20 billion euros ($27 billion) to 25 billion euros from senior bond offerings in 2012, according to Michael Gower, the head of long- term funding at Utrecht-based Rabobank. Investors will be denied AAA rated securities that returned 3.3 percent this year, more than double the average for securities in Bank of America Merrill Lynch’s EMU Corporates, Banking index.

"We’ve been extremely conservative by raising a significant amount of capital over a number of years, just to be prepared for what was a highly unlikely scenario that we’re now living in," Gower said in an interview. "The bank doesn’t need to borrow until 2013 so there’s no pressure."

Rabobank raised more than 40 billion euros from senior debt sales this year, 43 percent more than it needed to refinance securities coming due. The lender is stockpiling reserves as the debt crisis intensifies, sending borrowing costs in core economies outside Germany to euro-era records and driving relative yields on bank bonds to the highest since May 2009.

European banks face about 400 billion euros of debt coming due next year, ING Groep NV data show. The extra yield investors demand to buy bank bonds instead of government debt has climbed 171 basis points this year to 406, and reached 411 on Oct. 5, according to Bank of America Merrill Lynch’s index.

Dutch Farmers
Rabobank’s bonds yield 3.2 percent on average, according to Bank of America Merrill Lynch index data. That’s less than the 5.8 percent average for the 803 securities in the bank’s European financials index, and below the 4.9 percent that investors demand to hold U.S. bank bonds in its U.S. Corporates, Banks gauge.

Rabobank, formed in 1898 as a cooperative lender serving Dutch farmers, is the world’s biggest agricultural bank with operations in 48 countries, according to the lender’s website. Net income climbed to 1.85 billion euros in the six months ended June 30, a 13 percent increase from the same period a year earlier, the bank said in August. The lender has the top ratings from Moody’s Investors Service and Standard & Poor’s. Fitch Ratings ranks it one level lower at AA+.

Less Volatile
"Given its conservative structure, Rabobank gives you banking exposure with less volatility," said Andreas Fischer, a Zurich-based fund manager at Clariden Leu AG, which oversees $102 billion of assets, including some Rabobank bonds. "People will like the fact that they get a relative attractive yield pickup for a bond they can allocate to their AAA rating bucket." The cost of insuring against a Rabobank default has risen 36 percent since Oct. 28, about half the jump in a benchmark index of bank-bond risk.

Credit-default swaps on the Dutch lender climbed to 129 basis points, the highest since May 2009, from 95, CMA prices show. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 65 percent in the same period to a record 342 basis points, according to JPMorgan Chase & Co. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of bonds.

Windows Closing
The Netherlands’s second-largest bank had a core Tier 1 capital ratio of 12.7 percent at the end of June, up from 12.6 percent six months earlier and 11.8 percent in June 2010. That compares with the 9 percent minimum required by the European Banking Authority.

Rabobank faces 33.3 billion euros of maturing debt in 2012 and 20.5 billion euros the following year, according to the lender’s data. The bank said it almost doubled its cash reserves to 26.1 billion euros at the end of June compared with 13.5 billion euros in December, and 9.4 billion euros in June 2010.

The Dutch bank is cutting issuance as the euro region’s crisis damped bank and corporate bond sales to a five-year low, according to data compiled by Bloomberg. Sales slumped after July with just 10 percent of this year’s 121 billion euros of senior, unsecured bonds sold since then, according to Societe Generale SA.

"For us, it’s a question of whether there really is a market window to take advantage of," said Rabobank’s Gower, who’s overseen the lender’s long-term funding and capital raising since 2005. "There will be a fewer windows for banks to issue and fewer banks prepared to issue in those windows."

Rabobank is focusing on sales of senior unsecured debt for its market funding, eschewing the trend for more issuance of secured obligations. Sales of covered bonds, debt backed by loans and guaranteed by the issuer, soared to a record 337 billion euros this year as banks struggled to fund themselves through conventional securities.

"What covered bonds do in these institutions is take the best assets in the balance sheet and tie them up," said Gower. The issuance boom is "weakening credit in the European banking sector, and we don’t think that’s a good thing," he said.

Rabobank’s surplus issuance this year is helping the lender reduce its short-term financing. Borrowing due within one year equates to 11 percent of the bank’s 665 billion euros of assets at the end of June, down from 12 percent a year earlier and 17 percent in 2008, Gower said. By contrast, long-term funding increased to 24 percent of assets from 22 percent in June 2010 and 17 percent in 2008.

"Given recent issuance, they are doing the prudent thing, which is prefunding," said Roger Webb, a London-based fund manager at Scottish Widows Investment Partnership. "I can’t see any environment where bank funding gets easier."

Financial Finger-Pointing Turns to Regulators
by Louise Story and Gretchen Morgenson - New York Times

In the whodunit of the financial crisis, Wall Street executives have pointed the blame at all kinds of parties — consumers who lied on their mortgage applications, investors who demanded access to risky mortgage bonds, and policy makers who kept interest rates low and failed to predict a housing market collapse.

But a new defense has been mounted by a bank executive: my regulator told me to do it. This unusual rationale is presented by the bank executive in one of the few fraud suits brought against a mortgage banking official in the aftermath of the financial crisis — the one filed by the Securities and Exchange Commission against Michael W. Perry, former chief executive of IndyMac Bancorp, which failed spectacularly in mid-2008.

After being accused of fraud and misleading investors about his company’s financial health just before it collapsed, Mr. Perry set up a Web site this fall to defend himself. In a document on the site, he said that a top official at the federal Office of Thrift Supervision, IndyMac’s overseer, directed and approved an action related to the S.E.C.’s allegations. "It was O.T.S. who had the final say regarding IndyMac Bank’s capital levels," Mr. Perry wrote.

He went on to say that Darrel W. Dochow, former regional director for the Western region of the agency and a financial regulator for more than 30 years, had "specifically directed" Mr. Perry to backdate IndyMac’s report to regulators to include an $18 million cash infusion that would make it appear well capitalized.

The shift masked IndyMac’s problems for any investors trying to assess its soundness and allowed it to continue attracting large deposits crucial to its operations. The S.E.C., in its suit against Mr. Perry, contends that more details about the cash infusion should have been disclosed, though the commission did not accuse him of accounting fraud.

Mr. Dochow was not accused of wrongdoing by the commission or any other prosecutor, though his role has been criticized by the inspector general of the Treasury Department, which oversees some bank regulators. It does not appear that Mr. Perry’s argument persuaded the commission to back off. The S.E.C., as is its custom, did not elaborate.

A representative for Mr. Perry said he did not care to discuss the case further, but his lawyer described the lawsuit in an e-mail as "exceedingly weak, unfair and meritless." Mr. Dochow, who retired as a regulator in 2009 at age 59, said: "There’s a lot more than what’s been written, but I can’t talk. I could go to jail."

The IndyMac collapse, with its multibillion-dollar cost to the Federal Deposit Insurance Corporation fund, highlights the role played by federal overseers of financial companies in the years leading up to the crisis.

It also raises questions about whether government officials should be held accountable for dubious conduct related to the failure of an institution and whether the government has avoided pursuing some cases because of the roles regulators have played. For years, some bank overseers have maintained cozy ties with the institutions they monitor, treating bankers like clients because of the fees that banks pay to be regulated.

The Justice Department could not cite any regulator that it had named in a prosecution related to the crisis. However, Mr. Dochow’s conduct was referred to Justice for possible criminal charges in 2009, according to Eric Thorson, the inspector general of the Treasury Department. Mr. Thorson said Mr. Dochow’s action "was clearly improper and wrong."

A spokeswoman for the Justice Department in Washington declined to comment on the case and on whether the department investigated regulators for possible wrongdoing. IndyMac is not the only institution whose questionable accounting was approved by regulators in recent years, though it is by far the largest of several highlighted by the Treasury inspector general.

Even if regulators are involved in wrongdoing, they have some immunity. Internal disciplinary measures are rarely taken against regulators who perform badly in their jobs, say government officials.

Some regulatory shortcomings may be chalked up to innocent mistakes and failures to spot problems. Still, some economists and lawyers would like the government to examine regulatory actions leading up to the financial crisis to determine whether officials actively participated in improper behavior. And, they say, in cases like Mr. Dochow’s, penalties should be levied on overseers who acted improperly.

"The word conspired needs to be used here," said Edward J. Kane, a finance professor and regulatory expert at Boston College who is familiar with the case. "Dochow conspired with IndyMac management to misrepresent this. He was trying to fool certainly the F.D.I.C. and the public, and anyone who lost a dollar as a creditor to this institution was harmed by relying on something they had every right to rely on."

Longtime defense lawyers say one reason there have been so few prosecutions related to the credit crisis is because financial executives often solicited advice from outside parties — like accountants and lawyers — and experts shelter them from some potential charges because they can argue they relied on the advice. Regulatory advice may be a similar shelter against prosecution.

A Comeback From Demotion
Mr. Dochow had had a long run as a financial regulator when IndyMac ran into trouble. He started out in 1972 as an assistant national bank examiner with the Comptroller of the Currency. He rose through the ranks and in 1985, became a senior regulator with the Federal Home Loan Bank of Seattle and later with the Federal Home Loan Bank System’s Office of Regulatory Activities in Washington.

It was during his time in that office that Mr. Dochow played a central role in trying to stop a regulatory attempt to rein in Lincoln Savings and Loan, an Arizona institution run by Charles Keating, with $5.5 billion in assets. After regulators in San Francisco uncovered fraudulent sales and other improprieties at the institution, Mr. Dochow worked in Washington to avoid the issuance of a cease-and-desist order, the normal course of action in such a case, according to records handed over to Congress.

The savings and loan institution failed in 1989 at significant cost to taxpayers, and Mr. Keating was convicted on multiple fraud charges, some later overturned. Mr. Dochow was demoted, according to a half dozen regulators who had worked with him, but remained a bank regulator.

Once again, he worked his way up in the organization, which became the Office of Thrift Supervision. By September 2007, he had been promoted to head the Western region, reporting directly to the agency’s top officials in Washington.

In that position, Mr. Dochow oversaw a host of institutions that had dived headlong into risky mortgage lending. Among them were Countrywide Bank, IndyMac Bancorp and Washington Mutual, three of the most aggressive lenders — and largest flameouts — in the crisis.

Mr. Dochow was known within the O.T.S. to be bank-friendly. One former examiner said: "His approach was negotiating with the banks, as opposed to regulating the banks, and viewing them more as clients, as opposed to people or entities that needed to comply."

According to three former examiners who worked with Mr. Dochow but who requested anonymity because they feared retaliation from regulatory colleagues, he would sometimes negotiate between the banks and their lower-level O.T.S. overseers, arguing that an institution should be allowed to keep one component of its regulatory rating high if another was dropping. That way, the composite score representing a bank’s financial standing, would change little, if at all.

At other times, Mr. Dochow exhibited a close relationship with a savings and loan association when it was under investigation. In 2007, when the attorney general of New York was investigating Washington Mutual for its possible role in appraisal fraud, Mr. Dochow called Kerry K. Killinger, the institution’s chief executive, to discuss the matter, according to e-mail messages released by a Senate subcommittee in the spring of 2010.

Washington Mutual had hired a law firm to do an internal investigation. Mr. Dochow told Mr. Killinger that he wanted to rely on Washington Mutual’s investigation as much as possible as opposed to having O.T.S. officials do a completely separate one. Mr. Dochow told his superiors that he planned to leverage the Washington Mutual report but noted that "we need to be able to defend that we have done our own independent examination."

Mr. Dochow retired in 2009, with his full government pension, according to the Treasury inspector general. Because of its woeful regulatory record during the recent mania, O.T.S. was abolished last summer. Of its remaining employees, 95 were transferred to the F.D.I.C., and 670 to the Comptroller’s office.

IndyMac’s Survival Struggle
The S.E.C. case against Mr. Perry, IndyMac’s longtime chief executive, and two former chief financial officers centers on disclosures made from February through mid-May of 2008. The disclosures related mostly to IndyMac’s capital and liquidity. The bank collapsed in July of that year and was taken over by the F.D.I.C., which had to pay insured depositors $10.7 billion.

By early May, it had become clear inside IndyMac that it could no longer be considered "well capitalized" unless money was shifted from its holding company. This meant that IndyMac could not accept so-called brokered deposits, large amounts of money from investors looking for the highest possible rates of return. Brokered deposits represented just over a third of IndyMac’s deposits; without them, it would have been out of business.

And so on May 9, Mr. Perry instructed his deputies to shift money into the bank from the holding company and account for $18 million of it as if it had been there on March 31. Mr. Dochow as well as IndyMac’s auditors, Ernst & Young, had signed off on the move, according to the Treasury inspector general. And Mr. Perry highlighted the regulatory approval in a document on his Web site.

"Mr. Dochow, with full knowledge of the circumstances, communicated O.T.S.’s approval," Mr. Perry wrote. "Mr. Dochow also directed Mr. Perry to amend the bank’s thrift financial report to reflect the $18 million receivable."

D. Jean Veta, a partner at Covington & Burling who represents Mr. Perry, said in an e-mail message that IndyMac’s financial statements followed accounting rules and that Mr. Perry "was a completely transparent leader who always favored more disclosure rather than less." But the O.T.S., the Comptroller’s office and the inspector general’s office at the Treasury Department have all said the backdating of the cash infusion was improper.

Mr. Thorson, the Treasury inspector general, said last week that Mr. Perry and Ernst & Young could reasonably say that they acted with permission of the O.T.S. "I’m sure they said ‘O.K., that’s the guy who calls the shots; the umpire has called the shots,’ " Mr. Thorson said.

Indeed, when asked about the IndyMac accounting, a spokesman for Ernst & Young said last week that it was "approved by the bank’s regulator, not Ernst & Young." And there has been no enforcement action against the accounting firm.

Mr. Thorson said that his referral for a case against Mr. Dochow was given to Ranee Katzenstein, an assistant United States attorney in Los Angeles, and that Ms. Katzenstein told his office she did not intend to pursue a prosecution. When reached by phone, Ms. Katzenstein declined to say why. A spokesman for her office said she could not discuss the case. The spokesman said the investigation into Mr. Dochow’s actions was still open, although he cautioned that it might not yield a case.

Another backdated capital shift with regulator approval took place in 2008 at a savings and loan association in Florida, according to Mr. Thorson’s report. In August of that year, O.T.S. officials directed BankUnited to backdate capital that it had moved within its holding company. The report does not list their names, but it does include their titles, indicating that they were Timothy T. Ward, the deputy director for exams; Scott M. Polakoff, the agency’s senior deputy director; and Jack Ryan, the Southeast regional director.

In another instance in July 2008, O.T.S. officials objected to a backdated capital shift at Century Bank, also of Florida, but did not require corrective action. Mr. Polakoff was placed on leave in March 2009 pending a review of the capital backdating by the Treasury department. He now works as executive managing director at FinPro Inc., a financial services consulting firm in Liberty Corner, N.J. Mr. Polakoff defended his actions last week, saying that with BankUnited, it was a "rather innocuous accounting mistake."

Mr. Ward is a senior official at the Office of the Comptroller of the Currency; through a spokesman, he declined to comment. Mr. Ryan, who retired in 2009, said on Tuesday that he had pointed out at the time that the capital shift violated accounting rules, though he says he now regrets that he did not fight forcefully for his position. "I think the regulators have to abide by the rules," he said. "And, yeah, if they tell them, ‘forget the rule, go ahead and do it’ — they shouldn’t be doing that."

Mr. Dochow, interviewed only briefly in front of his home outside Seattle, said he could not talk, but added that "I’m not sure there’s more to say." Regulators like Mr. Dochow, of course, would have the chance to publicly defend themselves if accusations against them ever resulted in court cases.

Regulators’ Protection
It would be difficult and unusual for the Justice Department or the S.E.C. to bring a case against a bank regulator, longtime securities lawyers say. Regulators enjoy some immunity from allegations of wrongdoing under the Securities Exchange Act, which says that you cannot file a case against an officer of a United States agency for violation of a securities law if the officer was acting within the scope of the job.

For financial regulators like Mr. Dochow, a conflict comes into play when banks run into trouble — on one hand, regulators try to help banks maintain their stability. But, on the other hand, securities laws require companies to be transparent in their disclosures to public investors.

Jeffrey M. Kaplan, a lawyer at Kaplan & Walker in Princeton, N.J., said: "In a case of a regulator contributing to misrepresentations made to shareholders, you could have individual criminal liability. But those cases are pretty rare." More common are cases involving a bribe or another element of corruption.

Congressional oversight could help identify regulatory misconduct, but such efforts have been less than fruitful. Indeed, when Senate investigators tried to get information about the capital backdating that O.T.S. had allowed at IndyMac and other institutions, officials from the agency were not forthcoming, said a former Senate aide who was not allowed to speak publicly about the investigation.

Any financial crisis case that named a regulator probably would turn into a huge political battle, because it would question many of the nontransparent acts that bank regulators take while trying to save banks, said Denise Voigt Crawford, former commissioner of the Texas securities board and now a law professor at Texas Tech University.

In any prosecution of bank regulators, she said, "you’d have the Justice Department in a fight with the policy goals of the Department of Treasury. Particularly in this environment, you know the banking regulators would fight it tooth and nail."

Some longtime lawyers go further and say the overall scarcity of cases related to the financial crisis might be in part because regulators want to avoid scrutiny of their own kind.

"It’s not just one 30-year-old wunderkind who was responsible for the financial crisis," said Dennis C. Vacco, who was the New York State attorney general in the 1990s and now is a lawyer at Lippes Mathias Wexler & Friedman. "Once you start pulling the string through in these complex cases, you might be surprised what you find at the other end."

Mr. Vacco continued: "What’s at the end of the string? The defense may be that ‘at the highest echelons of the financial institutions, we were in regular contact with the government.’ "

U.S. may lose second triple-A rating within months
by Sue Chang - MarketWatch

The failure of the supercommittee to reach a compromise on a debt-reduction plan exposes the U.S. sovereign rating to more downgrades, with ratings agencies expected to fire their first salvo by the year’s end.

"It is just a matter of time before the government’s rating is cut," Steve Ricchiuto, Mizuho Securities’ chief economist, said in a report. "I would not be surprised if S&P puts the Treasury on watch for another downgrade in the weeks ahead and that Moody’s or Fitch move before the Dec. 23 date when the legislation implementing the Super Deficit Committee’s recommendations were scheduled to be enacted," he added.

The scope and the severity of the actions will depend on how the politicians handle sequesters, or the automatic cuts scheduled for 2013, as well as payroll taxes and extended benefits. The Congressional Joint Select Committee on Deficit Reduction, better known as the supercommittee, announced late Monday that it failed to reach a deal on a $1.2 trillion budget-deficit reduction plan that will result in spending cuts equal to that amount to take effect in 2013.

Citigroup also believes a downgrade is in the offing. "Leading politicians stating that they would seek an end run around the sequesters would speed up the Moody’s downgrade, which now appears likely in the first half of next year," said Greg Anderson, senior FX strategist at Citigroup.

U.S. is rated triple-A with a negative outlook by Moody’s. A cut would follow the decision by Standard & Poor’s on Aug. 5 to drop its rating on the U.S. to AA+ from AAA. When the stock market opened for trading the following Monday, panic sales dragged the Dow Jones Industrial Average down more than 600 points, its worst day since late 2008.

News of the supercommittee’s impasse also battered stocks on Monday, dragging the Dow into the negative territory for 2011. The benchmark index fell 248.85 points, or 2.1%, to close at 11,547.31. By Tuesday, the impact was muted as investors shifted their focus back to Europe which is grappling with debt woes of its own.

Moody’s: Supercommittee results not ‘decisive’
Moody’s on Tuesday declined to comment on the specific date for a review but said that the outcome of the supercommittee negotiations would not be "decisive" in analyzing U.S.’s rating. "As Moody’s stated on Nov. 1, the deliberations of the Joint Select Committee would be informative for the rating analysis but not decisive, and failure to reach an agreement would not by itself lead to a rating change for the U.S. government," said Moody’s in a statement.

Earlier this month, Moody’s also stated that an analysis of the U.S. rating "will incorporate any fiscal actions taken during 2012, including the budget for the 2013 fiscal year, the policy environment resulting from the elections in November 2012, and how the so-called ‘Bush tax cuts’ are dealt with at the end of that year."

Economic performance is also an important factor, it added, since this will impact the budget. The Commerce Department earlier [Tuesday] morning said the U.S. economy grew 2.0% in the third quarter, compared with a first reading of 2.5%, as companies reduced inventories and scaled back investment.

"Major deviations from a modest rate of GDP growth over the course of 2012, either upward or downward, would also be relevant to our analysis," Moody’s said. The Federal Reserve on Nov. 2 cut its forecast on the 2012 U.S. GDP growth to a range of 2.5% to 2.9%.

Fitch review ends this month
Meanwhile, Fitch had warned in August that failure by the supercommittee could result in a revision of the rating outlook to negative. It rates the U.S. at triple-A with a stable outlook. A negative outlook "would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade," Fitch reiterated in a statement Monday. Fitch also added that it now expects to wrap up its review of the U.S. sovereign rating by the end of November.

Standard & Poor’s said Monday the inability of the supercommittee to forge a deal will not affect the U.S.’s rating or outlook. "However, we expect the caps on discretionary spending as laid out in the Budget Control Act of 2011 to remain in force. If these limits are eased, downward pressure on the ratings could build," it said.

Still, not all is doom and gloom. Kevin Giddis, president of fixed-income capital markets at Morgan Keegan & Co., was more upbeat about the developments on Capitol Hill. "Politicians may be willing to take the risk of failing to act responsibly, but I don’t believe they are willing to be assigned blame for increasing taxes or weakening our military capabilities. In that light, my guess is that a compromise will ultimately be reached," he said.

He also pointed out that ratings agencies may face a credibility problem if they were to downgrade the U.S. given that all of its debt is in dollars which in theory, the government can print at will.

"While there are obvious negative repercussions involved with inflating our way out of any problems we face, the reality is that the probability of a payment default from the government is as close to zero as possible. Any rating less than AAA for the U.S. government says more about the rater rather than the borrower," Giddis said.

Fitch Downgrades Portugal to Junk Status
by Art Patnaude - Wall Street Journal

Fitch Ratings Thursday dropped its credit rating on Portugal into junk territory and warned further downgrades were possible, as a recession in the country is increasing challenges for the government to comply with its austerity plans.

Fitch lowered the rating one notch, to double-B-plus from triple-B-plus, and maintained a negative outlook. "The country's large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign's credit profile is no longer consistent with an investment-grade rating," Fitch said. Moody's Investors Service cut the country to junk in July this year. Standard and Poor's Corp. affirmed Portugal's investment-grade rating in October.

Fitch said growing economic pressures in Europe will play a role in the expected contraction of Portugal's gross domestic product in 2012, which is seen down 3%. "The recession makes the government's deficit-reduction plan much more challenging and will negatively impact bank asset quality," Fitch said. "However, Fitch judges the government's commitment to the program to be strong."

The ratings company expects the official deficit target of 5.9% to be met this year, albeit with significant recourse to one-off measures. State-owned enterprises are another key source of fiscal risk, Fitch said. The sector has been responsible for several upward revisions to the general government debt and deficit figures over the past year.

"The sovereign crisis poses significant risks to the banking system, which lends to one of the most indebted private sectors in Europe and is highly reliant on wholesale financing (access to which is now closed off)," Fitch said. "Recapitalization and increased emergency liquidity provision from the ECB to Portugal's banks will, in Fitch's view, be needed and provided," it said.

Hungary Credit Rating Cut to Junk at Moody’s
by Zoltan Simon - Bloomberg

Hungary lost its investment-grade rating at Moody’s Investors Service after 15 years as the Cabinet seeks International Monetary Fund help to boost confidence in the European Union’s most-indebted eastern member.

The foreign- and local-currency bond ratings were cut one step to Ba1, the highest junk-level score, from Baa3, the company said today in a statement. Moody’s, which awarded Hungary its investment grade in 1996, assigned a negative outlook. The country is rated the lowest investment grade at Standard & Poor’s and Fitch Ratings.

Since winning elections last year, Prime Minister Viktor Orban has rejected IMF help, saying he wanted more freedom to pursue "unorthodox" policies aimed at cutting Hungary’s debt level, while trying to meet a campaign pledge to end years of austerity measures. Orban’s Cabinet on Nov. 17 asked for IMF "insurance" that doesn’t entail a loan and doesn’t impose conditions.

"Many have been assuming that the bid for an IMF deal was an attempt to forestall such rating actions, but that came too late and many had doubts that Hungary would offer the concessions needed to get the IMF easily on board," Charles Robertson, chief economist at Renaissance Capital in London, said in an e-mail. "This downgrade may eventually encourage the reformist policies that pushed Hungary into investment grade in the first place."

Funding Challenge
The forint weakened for a third day, dropping to the lowest level in more than a week versus the euro after Moody’s downgrade. The forint slipped 1.4 percent to 315.81 against the euro, the lowest level since Nov. 15 on a closing basis, at 8:24 a.m. in Budapest. The currency has depreciated 16 percent since the end of June, the biggest decline among more than 170 currencies worldwide.

The government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened. The central bank on Nov. 15 warned it may need to raise interest rates to support the currency.

"The first driver of today’s downgrade is the uncertainty surrounding the Hungarian government’s ability to meet its targets on fiscal consolidation and public sector debt reduction," Moody’s said in its statement. "Hungary’s recent requests for assistance from the IMF and the EU illustrate the funding challenges facing the country."

'Sign of Weakness'
Investors are shunning riskier countries’ bonds as Italy, which has a bigger debt load than Spain, Greece, Ireland and Portugal combined, struggles to ward off contagion from a debt crisis that started in Greece more than two years ago and threatens to infect weaker economies.

Hungary was the first EU member to obtain an IMF-led bailout in 2008 and had the highest government debt level among the bloc’s eastern members last year at 81 percent of gross domestic product. Asking the IMF for help would be "a sign of weakness," Economy Minister Gyorgy Matolcsy told Heti Valasz in its Oct. 27 issue.

"Since Moody’s decision has no realistic basis, the Hungarian government can only interpret this as being part of a financial attack against Hungary," the Budapest-based Economy Ministry said in an e-mail today.

Orban’s Measures
Orban’s steps included raising revenue by effectively nationalizing $14 billion of assets held by private-pension funds, levying extraordinary taxes on the banking, energy, retail and telecommunication industries and forcing banks to swallow exchange-rate losses on foreign-currency mortgages. The steps were aimed partly to plug budget holes resulting from a cut in personal income and corporate tax rates.

The Constitutional Court was stripped of its right to rule in most economic issues. An independent Fiscal Council was dismantled and a new one set up dominated by Orban’s allies.
The government is also carrying out spending cuts, including drug subsidies, and increasing taxes to meet budget goals. The Cabinet announced plans to cut outlays by as much as $4 billion a year by 2013. The government also plans to raise taxes next year, including the value-added tax and excises.

Debt, Deficit
Orban has argued that his "unorthodox" policies are needed to lower debt and reduce the budget deficit to 2.5 percent of gross domestic product next year, below the EU’s 3 percent limit. The Cabinet forecasts 1.5 percent growth next year, which it may cut later this year after Germany, Hungary’s biggest export market, pared its forecast.

Hungary’s economy may expand 0.5 percent in 2012 as the government’s tax and spending measures will probably slow growth, the European Commission, the EU’s executive arm, said on Nov. 10. The debt level may drop to 75.9 percent of GDP this year because of one-off revenue from nationalized pension assets before rising to 76.5 percent next year, partly as a result of a weakening forint, the commission said.

Standard & Poor’s said yesterday it’s keeping Hungary’s sovereign debt rating on "CreditWatch with negative implications" for longer than the one-month period it originally planned after the country approached the IMF for assistance.

"In order to assess the progress of negotiations and the likelihood that the agreement may materially affect policy predictability, we are maintaining our CreditWatch status," S&P said in a statement today. "We expect to resolve the CreditWatch by February 2012."

Japan 'May Be' Close to a Downgrade: S&P
by Aki Ito - Bloomberg

Standard & Poor’s said Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden, an indication it may be preparing to lower the nation’s sovereign grade.

"Japan’s finances are getting worse and worse every day, every second," Takahira Ogawa, director of sovereign ratings at S&P in Singapore, said in an interview. Asked if that means he’s closer to cutting Japan, he said it "may be right in saying that we’re closer to a downgrade. But the deterioration has been gradual so far, and it’s not like we’re going to move today."

A reduction in S&P’s AA- rating would be a setback for Noda, who took office in September and has pledged to both steady Japan’s finances and implement reconstruction from the nation’s record earthquake in March. It’s unrealistic for Japan to think it can escape the debt woes that have engulfed nations overseas unless it can control its finances, according to Ogawa.

While Japan has enjoyed borrowing costs at global lows for its debt, the International Monetary Fund said in a report released on its website yesterday there’s a risk of a "sudden spike" in yields that could make the debt level unsustainable. Japanese government bonds fell after Ogawa’s remarks, sending 10-year yields to the highest level in three weeks.

Developed nations are struggling to retain investor confidence in their bonds after borrowing deepened with the global recession and financial crisis. Germany yesterday failed to get sufficient bids to sell all of the 10-year securities it offered to sell.

'Comprehensive' Plan
S&P has had Japan on a negative outlook since April. Ogawa said the nation needs a "comprehensive approach" to containing its debt burden, which the government projects will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction.

The yen pared gains and traded at 77.18 per dollar at 6:04 p.m. in Tokyo. Yields on Japan’s benchmark 10-year government bond rose to 0.995 percent from the previous close of 0.965 percent. The Nikkei 225 Stock Average fell 1.8 percent to 8,165.18, its lowest close since March 2009.

"The events in Europe show us that when you lose market confidence at some point, the situation deteriorates fast," Ogawa said. "Politicians need to act with the understanding that they’re running out of time" to fix the nation’s finances. "If you don’t act early, it’ll become even more difficult" to maintain market trust, he said.

Tax Increase
Japan’s lower house of parliament today approved legislation that would add an additional 2.1 percent levy to an individual’s annual payment. Lawmakers revised the government’s proposal to extend the period of the measure to 25 years, from 10 years, to help pay for earthquake rebuilding. The measure takes effect in 2013.

"Just because this passes doesn’t mean that it’s positive for public finances," Ogawa said. "Politicians are squabbling over the minute details, while avoiding what’s most important." While Japan’s policy makers have signaled they will double the nation’s sales tax from 5 percent by around 2015, a bill has yet to be enacted. Moody’s Investors Service cut the nation’s debt rating by one step to Aa3 on Aug. 24. S&P lowered Japan to AA- in January. Fitch Ratings also has Japan at AA- with a negative outlook.

"Absent an offsetting effect from more rapid growth, debt dynamics could deteriorate precariously," the IMF said in a report published on its website. "Once confidence in sustainability erodes, authorities could face an adverse feedback loop between rising yields, falling market confidence" and "a more vulnerable financial system," it said.

Politically, Noda is struggling to find solutions that the opposition political parties will accept, said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute Inc.

The Clearest Sign Yet That Europe Has Entered A Dangerous New Phase
by Joe Weisenthal - Business Insider

Great chart from Morgan Stanley, showing that for the first time, German yields are moving up along with everyone else's.

If this trend continues it's a huge deal, since it means that Germany is no longer a special intra-Europe safe-haven, where yields improve when everyone else's get worse.

The fact that yields have been moving higher strongly suggests that yesterday's German bond auction failure was not merely a technical matter, but rather a reflection (even if only a little bit) that credit risk is creeping into Germany, which would be: a big deal.


Image: Morgan Stanley

Also, for what it's worth, Morgan Stanley FX Pulse crew deserves big credit for flagging several days ago that German bund yields had stopped falling, even as peripheral yields were widening.

Germany Buys Itself a First-Class Ticket on the Titanic
by Mark Gilbert, Lukanyo Mnyanda and Emma Charlton - Bloomberg

When the Titanic sank in 1912, even its first-class passengers ended up in the sea. Germany’s failure to attract bids for all the bonds it wanted to sell yesterday suggests investors are growing wary of lending to even the euro region’s most creditworthy nation.

Germany’s 10-year borrowing cost dropped to a record 1.64 percent on Sept. 23 as bunds offered a refuge from the debt crisis. The rate now exceeds 2 percent, driving the gap with U.S. Treasuries to a 30-month high, after bids at the sale of securities repayable in January 2022 fell 35 percent short of the 6 billion euros ($8 billion) offered yesterday.

Bunds are losing the haven status they share with Treasuries as Germany rules out common bond sales to solve the debt crisis, and argues against the European Central Bank becoming the lender of last resort. As recently as Nov. 10, bunds yielded 28 basis points less than the American debt. Ten- year yields advanced to a four-week high of 2.26 percent today in London.

"The Titanic and the single currency cannot continue in its current form," said Stuart Thomson, who helps oversee about $121 billion at Ignis Asset Management in Glasgow. "Safety lies in another ship, RMS Political Union, which is just over the horizon. It remains to be seen whether the third-class passengers of the peripheral economies and the second-class passengers of the semi-core will be willing to decamp from their current luxury liner to this cramped tramp steamer."

October Accord
An all-night summit of European leaders in October failed to calm investors after producing a pledge to write down Greece’s debt, recapitalize banks and strengthen the region’s rescue fund. Former Greek Prime Minister George Papandreou spooked markets by calling for a national vote on the agreement to rescue the country, a proposal he later withdrew.

Germany opposes a plan that would raise money for indebted nations by issuing joint euro-region bonds because it would probably lose its top AAA rating under such a program. It also wants to have a more integrated budget to police spending across the region to prevent future debt crises.

Michael Meister, finance spokesman for German Chancellor Angela Merkel’s Christian Democratic bloc, rejected calls this week for Europe’s largest economy to do more to counter market turmoil. Germany doesn’t possess a "new bazooka," he said on Nov. 22.

Bunds also yield more than 10-year U.K. government bonds for the first time since March 2009. Investors demanded 3 extra basis points to hold 10-year bunds rather than benchmark gilts today. That compares with an average yield difference, or spread, of 40 basis points in Germany’s favor over the past year.

New Commitment?
"Up until a few weeks ago, it was fairly easy for clients to justify an investment in bunds," said Jim Reid, a global investment strategist at Deutsche Bank AG in London. "We’re getting to the point where either Germany has to make a huge commitment or they won’t. The market may not be prepared to take that risk at these yields."

Germany’s Finance Agency sees no risk in financing the government’s budget, Joerg Mueller, a Frankfurt-based spokesman, said in an interview yesterday. The agency allotted 3.644 billion euros of the securities, leaving the Bundesbank to retain 2.356 billion euros, or 39 percent of the supply.

"It’s a wakeup call for Germany," said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. "Investors are starting to turn more cautious on Germany, which has been the hallmark of stability."

Selling Out
Yields are rising as failure to end the crisis fuels speculation the 12-year old monetary union will collapse under the weight of austerity and recession. European industrial orders declined by the most in three years during September, led by Germany and France, the European Union’s statistics office in Luxembourg said yesterday.

"It seems as if international investors, mainly from Asia and the U.S., are selling out of euro-region assets all together," said Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London. "In all this mess, the bund isn’t rallying, so that shows there may be a full blown divestment of euro-region assets."

Almost half of 984 clients surveyed by Barclays Capital expect at least one country to leave the euro in 2012, double the proportion two months ago, a report published yesterday showed. About a quarter said they expect the euro to break up.

"It’s becoming increasingly difficult to see how we get through this without some sort of restructuring of the euro, which we hope will only sacrifice Greece," Bill Dinning, head of strategy at Kames Capital in Edinburgh, said on Nov. 18.

U.S. Budget
It’s too early to say that Germany has lost its safe-haven status, with yields close to record lows in the secondary market and U.S. lawmakers at odds over that country’s fiscal problems, according to Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. "If you take into account global assets, where do you go?" Green said by telephone. "You’ve got other leading economies that have their own issues."

German bonds gained 0.2 percent this month as of yesterday, while U.S. Treasuries returned 1.2 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Austrian, French, Dutch and Finnish securities lost between 0.9 percent and 5 percent.

"The crisis has had a short-term positive effect for Germany in that it has lowered the borrowing costs because people are willing to pay a premium for the security of German bonds," said Gianluca Ziglio, a London-based interest-rate strategist at UBS AG. "But the medium- and long-term costs dwarf the short-term advantage of lower yields. The cost of a break-up of the euro-region would be massive for Germany."

The Return of 'Madame Non': Why Merkel Remains Opposed to Euro Bonds
by Charles Hawley - Spiegel

There were some who thought that Angela Merkel might soon soften her stance on euro bonds. But on Thursday, the German chancellor once again emphasized her opposition. Why, though, is Berlin so adamantly opposed to issuing joint euro-zone debt? SPIEGEL ONLINE offers an overview.

Angela Merkel's response could hardly have been clearer. European Commission President Jose Manuel Barroso on Wednesday presented a study outlining the possible forms euro bonds could take -- whereupon the German chancellor found unusually unambiguous words in response. The proposal, she said, was "extraordinarily distressing." She also called it "inappropriate."

The reaction was unusually firm for Merkel. She has become notorious in Germany for shying away from positions that can't be wriggled out of later. But when it comes to pooling the debt of all euro-zone member states in the form of euro bonds, she has long been firm in her rejection. In December 2010, for example, she said "the euro zone needs more harmony and competitiveness rather than common euro-zone bonds." In September, she called euro bonds "absolutely wrong." Wednesday's outburst, in other words, should not come as a surprise.

There are those, of course, who think that, in the end, Germany will have no choice but to put its own AAA credit rating on the line to ensure that other members of the European currency union have access to cash at reasonable rates. Borrowing rates for several euro-zone countries have risen alarmingly in recent weeks -- including yields for countries like France and Austria that had long been considered financially solid. Both Spain and Italy have seen borrowing rates spike to near or above 7 percent, the amount analysts consider to be the limit for sustainable long-term borrowing.

'Weaken Us All'
Indeed, on Thursday, media reports indicated that some within Merkel's governing coalition -- pairing her conservatives with the business-friendly Free Democratic Party (FDP) -- are no longer ruling out the introduction of euro bonds. "We never say never. We only say: No euro bonds under the existing conditions," Norbert Barthle, budgetary spokesperson for the conservatives in parliament, told the Financial Times Deutschland.

Merkel, though, would seem to have put a stop to such speculation on Thursday. Following a meeting with French President Nicolas Sarkozy and Italian Prime Minister Mario Monti in Strasbourg, she told reporters euro bonds "would weaken us all."

Germany has largely isolated itself in the ongoing European discussion over what steps should next be taken to confront the euro crisis. Governments across the Continent are clamoring for a solution. And analysts around the world have come to the conclusion that the spread of Europe's ongoing debt crisis can only be halted by implementing one -- or both -- of two methods: Either debt must be pooled in the form of euro bonds, or the European Central Bank must become the lender of last resort by buying up massive quantities of sovereign bonds from indebted euro-zone members.

Virtually all euro-zone members have thrown their support behind one of those two antidotes. Germany, though, has firmly opposed both. Berlin fears that massive ECB bond purchases could significantly drive up inflation (indeed, it evokes fears of 1920s hyperinflation in the country) and sacrifice the independence of the Frankfurt institution, which was modelled after the German central bank, the Bundesbank, that for decades served as guardian of the highly stable deutsche mark. And it's opposition to euro bonds? SPIEGEL ONLINE provides an overview of the most important reasons.

Backed into a Political Corner
Germans are tired of forking over cash to prevent heavily indebted euro-zone member states from going bankrupt. With the tabloid press, led by Bild, having spent the last 18 months portraying Greeks as lazy spendthrifts who only want to get their grubby hands on German taxpayer money, the aversion is not surprising.

Indeed, in the run up to the October European Union summit at which euro-zone leaders agreed to enlarge the euro backstop fund, the European Financial Stability Facility (EFSF), Berlin went out of its way to promise that Germany, which provided €211 billion for the fund, would under no circumstances agree to increase its share.

Euro bonds, though, would essentially transform Germany -- and its solid, AAA credit rating -- into the strongest guarantor of collectivized euro-zone debt. And, should worse come to worst, German taxpayers would, once again, be forced to fork over. That, at least, would appear to be the widespread fear. A survey performed by Emnid in August found that fully 76 percent of Germans oppose euro bonds, with only 15 percent in favor.

Furthermore, Merkel isn't the only one who has made it abundantly clear that euro bonds are not high on Berlin's wish list. On Wednesday, Alexander Dobrindt, general secretary of the Christian Social Union (CSU) -- the Bavarian sister party to Merkel's Christian Democrats (CDU) -- blasted Barroso, telling Bild that the Commission president had "made himself the mercenary of Dolce Vita countries who want to get access to our tax money."

Merkel's junior coalition partner, the Free Democrats, are no less opposed. Party head Philipp Rösler on Thursday said clearly: "We don't want euro bonds." Several others in his party have been even more vehement in recent weeks.

Given the FDP's dismal poll ratings and the CSU's suddenly shaky support in Bavaria, neither party would appear to be in a position to easily reverse course. Indeed, it seems possible that the FDP may even prefer a collapse of the governing coalition in Berlin than yet another about-face on a key policy issue. Merkel's power, in other words, may depend on a firm "nein" to euro bonds.

The Best of the Bond World
Less than 2 percent. That was the interest rate being commanded by German 10-year government Bund bonds on Wednesday. Indeed, there are some analysts who would argue that Berlin's inability to find buyers for its entire bond issue was not necessarily an indication of growing wariness of euro-zone debt. Rather, it showed merely that, with such a low return, they simply weren't all that attractive.

That particular view of the situation was not widely shared, however. Most saw the shortfall as another sign that the euro-zone crisis is frightening investors off. And on Thursday, interest rates on German bonds shot upwards to 2.26 percent. "This is just one auction," Don Smith, an analyst with ICAP, told the Financial Times. "But there is a growing feeling among many in the markets that the crisis is heading one way -- and that is towards the break-up of the euro zone."

Still, Germany has to pay less for its debt than any other country in the euro zone -- and vastly less than the over 6 percent currently being demanded of Italy and Spain. It is a status quo Berlin would like to preserve.

By pooling euro-zone debt, however, euro bonds would likely make it more expensive for Germany to borrow. Some models under consideration would, of course, allow Germany to continue to issue its own sovereign bonds. But it seems certain that the interest rates on those bonds, too, would rise were the country to become a guarantor of pooled euro-zone debt. And with a debt load of over €2.2 trillion, representing 81.2 percent of the country's gross domestic product, a lasting increase in German bond yields would translate to billions more needed to service that debt.

Germany's Pesky Constitution
In September, Germany's Constitutional Court handed down a landmark ruling on the country's participation in bailout efforts for Greece and for other heavily indebted euro-zone countries. While the court allowed Berlin to go ahead on its planned support for the European Financial Stability Facility (EFSF), it made it clear that any additional moves to aid fellow euro-zone member states would be viewed negatively.

Specifically, the ruling clearly indicated that Germany's constitution frowns on any permanent mechanism to transfer German taxpayer money to foreign countries in the form of a bailout. The larger such payments are, the larger the frown. The court also specifically warned against a situation whereby foreign governments could trigger payments of German guarantees through their actions.

The court's primary concern was the German parliament's constitutionally anchored control over the country's budget. There was concern that, given the speed with which some bailout packages have been assembled in recent months as the euro zone slides ever deeper into crisis, the parliament was being side-stepped. In response, parliament has since established a committee to quickly analyze and approve any large bailout payments made by the EFSF.

But euro bonds would be an entirely different case. Wolfgang Münchau, the Financial Times columnist who recently began writing editorials for SPIEGEL ONLINE, points out that they would be everything that the German Constitutional Court finds questionable about bailout programs thus far.

They would have the potential to make Germany liable for debts incurred by other countries in the euro zone, the program would be huge (otherwise there would be no point in introducing them in the first place) and German guarantees could be triggered by the actions of foreign governments. "The court's verdict leaves me no alternative but to conclude that (euro bonds) are indeed unconstitutional," Münchau wrote in the Financial Times in September.

The Cart Before the Horse
Germany's popularity within the euro zone has not exactly risen as the currency crisis has continued. Berlin has been blamed from Athens to Lisbon for some of the most severe belt-tightening measures the Continent has ever seen. And many in Greece particularly have found fault with what they see as a patronizing attitude coming from Berlin and Brussels.

Merkel, though, remains convinced that euro-zone leaders must keep the pressure on in order to ensure that debt-laden countries institute the austerity programs necessary to begin bringing debt levels down. That, she never tires of intoning, is the only thing that will convince markets in the long term that the euro zone can survive.

As such, she prefers that European Union treaties be changed to allow for greater integration of euro-zone countries -- a position she repeated on Wednesday in response to Barroso's euro bond proposal and again on Thursday following the meeting with Sarkozy.

Specifically, she wants clear consequences to be anchored in the Lisbon Treaty should a euro-zone member state fall afoul of EU debt rules. "We have to take steps toward the creation of a fiscal union," Merkel said on Thursday in Strasbourg. Those that violate the EU's Stability and Growth Pact must "be taken to task." She and Sarkozy said that they would be presenting a proposal for possible amendments to the Lisbon Treaty in the coming days.

Only once such fiscal discipline is anchored in the EU's underlying treaty can a collectivization of euro-zone debt enter the discussion, Merkel insists. That, though, may not happen for some time to come. The last time a fundamental change was made to the fundamental treaties governing the EU, it took years before all 27 members granted their approval.

France, Germany and Italy squash market hopes of ECB intervention
by David Gow - Guardian

  • Merkel rules out expanded role for European Central Bank
  • Instead calls for EU treaty changes to advance fiscal union
  • Eurozone bond yields soar
  • UK borrowing costs lower than those of Germany

Leaders of the eurozone's three biggest economies have squashed market hopes for a huge intervention by the European Central Bank to solve the sovereign debt crisis and prevent a renewed recession.

With eurozone bond yields soaring and UK borrowing costs below those of Germany for the first time since 2009, Angela Merkel, the German chancellor, again ruled out any expanded role for the ECB and stamped upon proposals for eurobonds to share sovereign risk. The ECB, she said, was responsible for monetary policy alone.

At a news conference with French president Nicolas Sarkozy and new Italian premier Mario Monti in Strasbourg, Merkel instead pointed to forthcoming plans for EU treaty changes to advance a – distant – fiscal union in the eurozone and, at most, early agreement to boost the bailout fund, the EFSF.

The euro began to drop as soon as Sarkozy clearly kowtowed to Berlin only hours after his foreign minister, Alain Juppé, had called for urgent intervention by the ECB to "play an essential role in restoring confidence".

The French president said proposals for changing the EU treaties would be made "in the forthcoming days" but insisted that the ECB's independence was untouchable – and political leaders would make "neither positive nor negative" demands upon the central bank. Monti took a similar stance.

Merkel said the trio would "do everything to defend the euro" and "we want a strong, stable euro" but repeated her mantra that this required strict actions by governments to abide by the rules of the stability and growth pact setting limits on budget deficits and national debt.

The trio's comments, which poured cold water on any lingering market hopes of early and concerted intervention in the face of the deepening debt crisis, came as European banks run the increasing risk of being sucked into the vortex and of a renewed credit crunch.

Only a day after Germany failed to find buyers for a third of a planned €6bn (£5.15bn) auction of 10-year bunds, Belgian bonds soared to 5.7%, Portugal's credit rating was notched down to junk status and an ECB governing council member said the downturn would be "significantly longer than we expected" – despite a 0.5% rise in German economic output in the third quarter.

German media reports suggested that, privately, the country's political leaders are preparing to cave in on both ECB intervention and eurobonds – when the crisis gets to intolerable or unsustainable levels.

The only concrete decision to emerge from the mini-summit in the Alsatian capital was that the three are to meet again soon in Rome to discuss further Monti's pledge for structural reforms to promote growth and for a balanced Italian budget by 2013.

Brussels plans to bring eurozone to heel
by Peter Spiegel - FT

Brussels will on Wednesday propose measures giving it more authority over the national budgets of eurozone states, including a requirement to submit tax and spending plans to European Union authorities before their national parliaments.

The proposals, obtained by the Financial Times, would also allow the European Commission, the EU’s executive arm, to send fiscal inspectors to eurozone capitals if it decides a country is "experiencing severe difficulties" – even if that country’s government has not requested them.

The new regulations, to be unveiled alongside a report on creating commonly issued eurozone bonds, come at a time of mounting criticism that the EU is subverting national fiscal policymaking, including pushing for technocratic governments in Italy and Greece to implement economic reforms de-manded by Brussels.

Speaking on Tuesday alongside Mario Monti, the new Italian prime minister, José Manuel Barroso, Commission president, insisted all final budget decisions would be left to national parliaments. But he said the Commission had to act when eurozone governments failed to live up to their commitments.

"National parliaments should know that when they take a decision they are also responsible for the consequences of these decisions on others," Mr Barroso said. "In a monetary union we need to acknowledge this level of interdependence."

Mr Barroso’s plans would allow the Commission to "request a revised draft budgetary plan" if it decides a government has violated EU budget rules. Although such a request would not be binding, it would be made public, putting political pressure on the country to comply.

Despite criticism from some quarters, intrusive surveillance has been pushed by northern countries, particularly Germany and the Netherlands. The Dutch have advocated an "intervention ladder" of progressively more Brussels control over policymaking in wayward countries.

Making such controls binding is central to Germany’s push to reopen the EU’s treaties, an effort viewed with trepidation by Mr Barroso and Herman Van Rompuy, the European Council president, who has been given the task of recommending possible changes at a summit next month.

"We have to change the construction of the euro area," Angela Merkel, the German chancellor, said on Tuesday. "Treaty changes are for me an immediate part of solving the crisis, the political response to a politically derived confidence crisis."

Unlike Ms Merkel’s treaty changes, Mr Barroso’s plans could be adopted quickly through existing rules, though EU officials acknowledge that they stretch treaties to the limit.

Olli Rehn, the EU’s senior economic official who would be empowered to use the new powers, made clear that he intended to act vigorously. "Rest assured, I will make full use of all these new instruments from day one of their entry into force," he said in a Berlin address on Tuesday.

The Commission’s ambitions are detailed in its "annual growth survey", which will be issued on Wednesday. A draft obtained by the FT chastised EU countries failing to implement reforms and warned that unless decisive action were taken, markets would continue to be sceptical about whether "the euro is a stable and strong currency".

The survey – and subsequent country-by-country recommendations based on it – can be used by the Commission to launch inquiries into national accounts that could eventually be used to levy fines on countries that do not abide by EU reform recommendations.

Why we all get burnt in the bonfire of the bond markets
by Heather Stewart, Simon Goodley and Katie Allen - Observer,

The crisis in the eurozone has shaken up the shadowy world of the bond trader

When Bill Clinton was in the White House, such was the power of the mighty bond markets in taming his ambitious spending plans that his adviser James Carville notoriously quipped: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Silvio Berlusconi, the erstwhile Teflon Don, who bowed out last week after a battering from the bond markets, would probably agree. Over the past 18 months, as one eurozone leader after another has been toppled and finance ministers have announced drastic spending cuts and public sector sackings, the shadowy figure of the bond trader has been landed with much of the blame.

Suddenly, we're all transfixed by daily movements in "yields" – in effect, the interest rate governments pay to borrow from financial markets. Reassuring the bond investors has become the overriding aim of politicians from Paris to Athens. When Italian yields surged through 7%, it was the last straw for the once-unassailable Berlusconi, demonstrating the extraordinary power of the buyers and sellers in sovereign debt markets.

Governments that want to borrow from the financial markets hold auctions of bonds – IOUs that carry a fixed interest rate over a certain period, typically 10 years. The actual return on the investment – the "yield" – will depend on how much investors are willing to pay for each batch of bonds, relative to the face value of the bond.

But there's a healthy so-called "secondary market" in bonds, as investors bet on their future value, and adjust their portfolios by buying and selling the debt they hold. It's in this secondary market that the Bank of England's recession-busting quantitative easing takes place: it offers to purchase bonds – to the tune of £275bn once its current buying spree is over – from investors such as pension funds in the hope that the money will flow out into the economy. And it's also in this secondary market that the European Central Bank has been intervening in recent weeks to try to bring down the yields on Spanish and Italian bonds and contain the crisis in the two countries.

Hard facts on this secondary bond market are hard to come by since – unlike shares, which are traded mainly through the major exchanges – much bond trading takes place "over the counter", which is financiers' talk for "between themselves". Many banks and interdealer brokers have platforms for trading bonds. The sums are extraordinary: one platform, MTS, which calls itself "Europe's premier electronic fixed-income trading market," claims average daily volume of over €85bn.

For traders in the once-staid European debt markets, the past few months have been a rollercoaster ride. "You come into the office and you don't know if you are going to see Berlusconi saying this, Merkel announcing that and so on, so the risk is very high. So even if you are right, a headline that is unverified can push you offside," says one.

In these nervous times, there has also been a lack of liquidity: in other words, a relatively small number of trades each day, causing volatility and what one analyst calls a "feeding frenzy" when an investor does stick their neck out. "You look at what's going on and it's just fear."

Most bond traders feel sensitive enough about their new-found power not to talk on the record; yet they maintain they have the public's financial interests at heart. "Do I want my pension fund lending to Italy at 3% when it should be more?" says one. "I don't want them to piss my hard-earned cash against the wall."

And they are dismissive of the idea that a single investor now could play the role of George Soros, who was seen as precipitating the pound's humiliating plunge out of the European exchange rate mechanism by shorting sterling on Black Wednesday in 1992. "Italy's bond market is the third-largest in the world, at €1.6tn. What hedge fund has enough cash to take out a €1.6tn bond market?" asks Louise Cooper at BGC Partners.

Investors in bonds have rarely had a good press. When Tom Wolfe wanted to portray the ultimate amoral money man in his novel Bonfire of the Vanities, he made the philandering Sherman McCoy a bond trader – a "master of the universe". Financial writer Michael Lewis, in Liar's Poker, his account of a stint as a cub bond salesman at Salomon Brothers in the 1980s, sketched his colleagues as fearless, larger than life, and motivated entirely by money and status: the "big swinging dicks" of Wall Street.

But one bond market expert insists traders have been far from gleeful as they watched the crisis on the continent unfold. "People are aware of the job cuts going on around them and of the money clients are losing, and that's putting a dampener on things," he says.

It wasn't always like this. During the period now wistfully known as the Great Moderation – the period of steady growth and low inflation in much of the developed world that ended in 2007 – government bond markets were a haven of calm, untouched by the "irrational exuberance" of, say, the dotcom bubble.

Yet there was a quiet boom going on even in the staid sovereign bond markets: the money that was flooding out of countries such as China in search of a safe haven washed far beyond "risk free" US treasury bonds, driving down interest rates on borrowing for many countries that would once have been seen as much less of a sure bet.

That process was especially pronounced in the eurozone, where the formation of the single currency, amid a heady rush of supra-national solidarity, gave investors a reason to diversify out of ultra-safe German debt.

Despite the so-called "no bailout clause," which was meant to prevent profligate eurozone countries free-riding on their thriftier cousins, traders nonetheless assumed that Italian or Greek debt was all but equivalent to rock-solid German "Bunds". "In the first part of the last decade, from say 2001 to 2006, the European bond markets seemed the most boring place in the world," says Simon Derrick, currency strategist at BNY Mellon.

One reading of the sparring between the markets and Europe's rattled politicians over the past 18 months has been as a painful test of the assumption that, when it comes to the crunch, eurozone members won't let each other go bust. But the announcement that Greece would seek an agreement with its private sector creditors aimed at achieving a 50% writedown of its debts exploded the myth that a eurozone member couldn't default.

And when George Papandreou's ill-fated proposal for a referendum revealed that both he, and the Germans and French, were thinking the unthinkable about a smaller eurozone, suddenly the idea of government bonds as the ultimate safe haven looked shaky.

"The investment case for government bonds is essentially gone in the sense that people invest in government bonds because they provide risk diversification relative to equities and credit, and that isn't the case any more," says one insider. "The majority of government bonds, with the exception of Bunds, have become positively correlated with equities and credit because there's a euro-exit-risk premium you have to price, and credit-risk premium you have to price."

As the crisis has rolled on, bond traders themselves – often seen by other trading desks as brainier and more subtle – have seen their activities scrutinised more intensely. But the point they make over and over is that the ultimate owners of much of this mountain of debt are banks, which hold it as capital, or pension funds, which appreciate the regular "coupon", as the interest payment on a bond is known.

So in many cases, the Sherman McCoys who hold the fortunes of a generation of harassed eurocrats in their hands are looking after our pensions, as well as their own bonuses.

Fate of Euro May Hinge on Italian Savers
by Landon Thomas Jr. - New York Times

Even though Europe’s debt crisis has turned Rome into financial ground zero, Italy has been able to lean on at least one solid support: the relatively large amount of government debt held by Italians themselves.

Nearly 57 percent of Italian debt is held by Italian banks, insurance companies and individuals. Those holdings have helped slow the flight of capital from Italy, even as foreign investors have been withdrawing their money from the country to park in safe havens like German, Swiss, American or Japanese government bonds.

But financial officials have become jittery about the possibility that Italians may stop buying this debt, and instead become more like Greeks and send their hard-earned savings abroad.

If that were to happen, it would greatly raise the odds that Italy, the third-largest economy that uses the euro currency, would be forced to seek a bailout — a move that could risk the future of the entire euro zone.

Hoping to stave off that calamity, the country’s banking industry and some prominent businessmen have banded together to sponsor a "buy Italian bonds day" next Monday, in which individual Italians who buy government bonds will be able to do so without paying commissions.

It is but the latest step taken by Italy’s increasingly skittish financial establishment to induce the nation’s cash-rich savers to continue financing the country’s sky-high debt, which is 130 percent of the gross domestic product. Compared with debt-saddled Greece, Spain and Ireland, Italy is much less reliant on foreign investors to finance its debt.

And more so than in any other euro zone country, Italian citizens have been active buyers of government debt, with such bond holdings representing 10 percent of household assets. So far, the evidence suggests that Italian households are not panicking.

According to Luca Mezzomo, chief economist at the banking group Intesa Sanpaolo in Rome, deposits in Italian banks remained stable through September. (The banks, in turn, use much of those savings to invest in government bonds.)

But Mr. Mezzomo concedes that the government has come under increasing pressure to do all it can to keep Italians buying bonds — especially now that foreigners are aggressively selling. "I am confident that you will see demand from retail investors," he said, pointing to the high yields on Italian debt. "There is a long tradition of investing in government bonds in Italy."

The Italian treasury is doing its bit, too, with a plan to sell its debt online to individuals. And while the high yields, or interest rates, on Italian bonds are an international distress signal, to domestic investors they may be a good way to profit. "Bonds are a very lucrative investment now," said Maria Letizia Ottavella, an architect in Rome. "I am deeply convinced that we should all buy Italian bonds to support our economy."

And yet — and here’s where jitters arise — other indicators suggest that money is nonetheless fleeing Italy at worrisome levels. John Whittaker, an economist at Lancaster University in Britain, has analyzed how much each of the 17 central banks within the euro zone’s system are borrowing from the European Central Bank. A sharp increase in this figure generally suggests money is leaving the country. When that happens, a nation’s central bank must borrow more to keep the banks afloat.

Mr. Whittaker found that between June and September of this year, the Italian central bank had borrowed 109 billion euros (roughly $145 billion) from the European bank. Before then, the Italian central bank had a 6 billion euro surplus at the European Central Bank. Mr. Whittaker says the borrowing surge was most likely a response to foreigners withdrawing their money from Italian banks, but says that it could also include Italians shifting some of their assets abroad. "This is capital flight," he said.

Relative to the 1.3 trillion euro pool (roughly $1.75 trillion) of Italian bank deposits, even 109 billion euros is a small figure. And it may largely reflect the move by foreigners to pull their money out of Italy. But if Italians were to follow suit, the consequences for the nation and the euro zone would be dire. When Greece, Ireland and Portugal could no longer persuade enough domestic investors to buy bonds after foreigners decamped, the next step was a bailout.  

Since the debt crisis hit Italy, many euro zone policy makers and central bankers have been betting that Italian savers will act like their counterparts in another savings-focused nation — Japan — and continue to buy government bonds even as the nation’s overall debt and attendant risks grow further.

Indeed, of all the economies in the euro zone, Italy’s may most closely resemble Japan’s. The two have persistently high debt — fully 230 percent of G.D.P. for Japan —  as well as aging populations of conservative savers and bond markets that rely more on domestic rather than foreign investors to provide crucial financing. (Japan’s median age of 44.8 years is closely followed by Italy’s, at 43.5.)

According to Morgan Stanley, Italians sit on 8.6 trillion euros of net wealth — or about 340,000 euros per household, the highest among major industrial nations. Of that figure, 3.6 trillion euros is in the form of financial assets.

So far, that pile of savings has been adroitly channeled into the bond market, either indirectly via deposits at Italian banks or directly through Italians’ purchases of government bonds.

In a recent study, Carmen M. Reinhart and Jacob Funk Kirkegaard of the Peterson Institute for International Economics in Washington highlighted the extent to which governments in the euro zone (and other indebted nations, especially Japan) have taken steps to create a captive domestic audience for their borrowing needs. They call it a form of financial repression.

This can be done through a variety of measures that include providing tax incentives to encourage bond buying, keeping interest on savings accounts artificially low to make bonds more alluring, as well as persuading government-linked entities like public employee pension funds to step up their bond purchases.

In that vein, Mr. Kierkegaard argues, Italian savers, even with the increased uncertainly, are likely to get the message and keep buying government debt, instead of heading for the exits like their Greek counterparts. "In rapidly aging societies like Japan and Italy, the broad population will be extremely cautious about initiating such a run as they know they will be heavily dependent on government services going forward," Mr. Kirkegaard said.

Japanese experts point out, however, that it may be a mistake to draw such a close parallel. Investors in Japan have been buying government bonds in relative isolation, with few easy investment alternatives in their region.

Japanese bond buyers also have the benefit of a strong domestic currency, the yen, that is bolstered by the country’s robust net savings position — as measured by the national current-account surplus, which is 2.2 percent of G.D.P. (Italy has a current-account deficit of 3.8 percent of G.D.P.) By comparison, an Italian saver might easily see the benefit in transferring his savings to Germany or Switzerland out of fear that Italy might be forced to leave the euro currency union.

Moreover, international investors consider Japanese government bonds such a safe place to park money that Japan pays slightly less than 1 percent on its 10-year bonds. On Tuesday, Italy’s 10-year bond yield was nearly 6.8 percent, a dangerously high cost of borrowing that is probably unsustainable and remains the nation’s biggest financial risk.

All of which is why, as Italians become more anxious, the world is watching to see if they seek a safer haven for their money. As Mr. Whittaker, the economist, warned, "It just takes a few taking their cash out — and then it can quickly turn into a flood."

Dexia bailout plan looks unworkable
by Barbara Kollmeyer - MarketWatch

France and Belgium are reportedly in fresh talks over the rescue plan for troubled financial institution Dexia SA , according to a report in Belgian newspaper De Standaard on Wednesday.

The newspaper says the Belgians want to renegotiate the bailout deal agreed with France and Luxembourg in October, and get the French to take on a bigger chunk of financing it. But with France's AAA credit rating already in question, media reports said such renegotiations could put that rating at risk further.

The article quoted French Finance Minister Francois Baroin as saying the agreement was "in no way questioned." A spokesman for Dexia could not immediately be reached for comment.

Crisis hits central and eastern Europe
by Stefan Wagstyl and Neil Buckley - FT

Austria’s move this week to impose tight curbs on its banks’ future lending in central and eastern Europe has thrown into sharp relief the potential impact of the eurozone’s sovereign debt crisis.

To protect its own triple A credit rating, Vienna has instructed Erste Bank, Raiffeisen Bank International and Bank Austria, a subsidiary of Italy’s UniCredit, to boost capital reserves and limit cross-border loans.

The decision came just days after UniCredit announced a review of its extensive businesses in the region, and Germany’s Commerzbank said it would restrict new loans to Germany and Poland only. The Latvian authorities on Tuesday rescued Krajbanka, the country’s ninth biggest bank, after Lithuania’s bail-out last week of Snoras, its fifth-largest lender.

These are the most difficult times for banking in central and eastern Europe (CEE) since the immediate aftermath of the end of communism. In the 20 years to 2008, west European lenders came to dominate the sector in most countries except Russia. With the eurozone in crisis, many lenders are pulling in their horns even more drastically than they did when the global turmoil first struck in 2008-09.

As the charts show, cross-border credit is poised to fall rapidly – perhaps by 20 per cent according to Canada’s RBC. The biggest economies, led by Russia and Poland, might respond by accelerating the development of domestic financial resources: others will seek new foreign investors, possibly from Russia. The most vulnerable states will struggle, however, with their main external funding source reduced just as their main external source of growth, exports to western Europe, runs out of steam.

"We cannot stop deleveraging, we have to manage the process," says Erik Berglof, chief economist at the European Bank for Reconstruction and Development. "But I don’t think we should have the illusion that banking in the region will look the same after this."

For many investors, the region’s fundamental advantages remain. Despite the turmoil of the past three years, economies, headed by Poland, are still competitive exporters with vibrant consumer markets. The EBRD forecasts that the region’s GDP will grow 4.4 per cent this year and 3.2 per cent in 2012. This is far less than it forecast, even in the summer, but is streets ahead of a stagnating eurozone.

Also, bank deleveraging may now come as less of a shock than in early 2009, when the region was spooked by fears of a post-Lehman bank pull-out. Then, the global crisis struck economies riding high on cheap credit.

Now, the eurozone crisis is buffeting countries that have suffered three years of recession or slow growth and financial retrenchment. In most CEE countries new bank credit has shrunk to a trickle. The burden of low foreign exchange rates weighs heavily on borrowers trying to service debt in depreciating local currencies, for example in Hungary, Poland and Romania.

But things could also get worse. Three years ago the EU could invest time and money in CEE – working closely with the International Monetary Fund on rescue loans for seven CEE states and encouraging western banks to stay in the region.

Now, only Ukraine has a fully fledged IMF programme in place. Romania and Serbia have precautionary accords and Hungary last week announced that it was also seeking one. But, with the EU fighting much bigger fires in the eurozone, there is little energy left for the east.

Mr Berglof wants a new version of the 2009 "Vienna initiative", which promoted regional banking co-ordination. He says although the EU said the interests of all countries should be taken into account in implementing new bloc-wide banking rules, western national regulators are, in practice, tempted to put their own countries first.

Differences between countries are critical. West European banks see the central European heartland of Poland, the Czech Republic and Slovakia as sound, core territories. In Poland, banks that wish to pull out find buyers, as Allied Irish Bank did this year when it sold Bank Zachodni WBK, Poland’s fifth-largest lender, to Spain’s Santander for €4bn.

But institutions which ploughed east as far as Kazakhstan are now cautious about the former Soviet Union and south-east Europe. Oil-rich Russia can support its own banks and even encourage them to invest abroad. But Ukraine is vulnerable, as are the smaller Balkan states, where Greek banks are cutting back because of the crisis in Athens.

Hungary, once the foreign investors’ darling, has fallen far out of favour, with banks turning against its economic policies, including a foreign exchange mortgage law.

Which banks will go as far as pulling out altogether, such as Allied Irish, will depend more on the condition of parent groups than on their local subsidiaries. Clearly, the possible sellers include banks based in crisis-hit eurozone countries, such as Greece, Italy, Spain and Portugal. As one French banker says: "It’s not to do with the region – it’s to do with the eurozone."

The eurozone's borrowing costs may stay lethally high
by Robert Peston - BBC

A newish narrative for why the eurozone faces a stark choice between break-up and transforming itself into a federal super-state has been given by the chairman of the Financial Services Authority, Lord Turner.

The analysis in the speech he gave last night in Frankfurt, "Debt and deleveraging, long-term and short-term challenges", also implies that - on the basis of the eurozone's current rules and structure - it is rational for investors to charge more for lending to any eurozone government (even Germany's) than to governments such as those of the US or UK which have their own respective currencies and central banks.

To put it another way: Italy, Spain and France can manage their respective fiscal affairs as prudently as they like, but there are - in Turner's view - bigger risks in lending to each of them than to governments of comparable economies outside the eurozone.

The reason is that as and when the UK government, for example, is perceived to have borrowed too much, the Bank of England can buy some of its debt and turn it into money. This is, in fact, the Bank of England is doing, to the tune of £275bn, through quantitative easing (though it hasn't gone the whole hog - which it could do if the UK were ever in a seriously deflationary recession - of cancelling the debt).

Of course, this so-called monetisation can debase the currency and spark inflation.

Central bank
But here's the thing. Although devaluation of the currency and inflation would generate losses for creditors, those losses are typically a fraction of losses that would arise from a default by government or - as Greece is trying to do - from a request to creditors to voluntarily forgo an element of what they're owed.

Also, inflation and devaluation are worst for overseas creditors. If you are resident in the UK, and you have substantial liabilities and outgoings in sterling, a bit of inflation will help you service what you owe at the same time as eroding the real value of your assets (or in this case, the real value of your loans to Her Majesty's Government).

But surely, you may say, the eurozone has a central bank: the European Central Bank. What is to stop it buying up Italian government debt or Spanish government debt in substantially bigger amounts than it is currently doing?

To be clear, right now the ECB is purchasing modest amounts of Italian and Spanish government debt, for example, in an attempt to keep the respective interest rates they're charged at a bit less than the penal and prohibitive 7%.

But the ECB is prevented both by its own constitution and by the passionately held views of the Bundesbank - the German central bank and the ECB's most influential shareholder - from purchasing substantially more than that.

Although many economists believe the Germans are wrong-headed in refusing to countenance substantial purchases of government debt by the ECB, there is some logic to the prohibition. If profligate members of a currency union know that their reckless spending and borrowing will always be bailed out by a central bank, they will have an incentive to borrow as much as they dare relative to the balance sheets of the more prudent members of the currency union, rather than to their own balance sheets.

Asymmetric risk
To put it in more practical terms, if Greece or Italy had known that the ECB would purchase their debts and let them off the hook, they would have had an even bigger incentive to borrow, to the point (but no further) where the losses on their debts would have either wiped out the central bank and taken Germany to the brink of financial collapse, or would have sparked rampant inflation (if all the debt had been turned into money).

In the good years, Greece and Italy would have reaped all the benefits of their spendthrift behaviour, knowing that most of the bill for the party would be picked up by other eurozone members. It's an asymmetric distribution of risk and rewards that more-or-less guarantees long-term financial disaster (you'll note a similarity with what happened in the banking sector, where bonuses in the boom years of lending were enjoyed by bankers, and losses when it all went pop fell on taxpayers).

By the way, there is nothing particularly unusual about a central bank refusing to purchase the debt of public-sector entities. In the US, it is taken for granted that states and municipalities can and do go bust.

But if there is a good reason for central banks in monetary unions not to bail out subsidiary entities - whether they are local, regional or even national - then by definition there is an elevated risk of those subsidiary entities defaulting on what they owe.

Which is why the economist Charles Goodhart has devised the useful concept of "subsidiary sovereign bonds", to describe the debt issued by any individual sovereign member of a currency union, such as Spain, Italy or Germany, and why he argues that subsidiary sovereign bonds are inferior to fully sovereign debt. All sorts of other things flow from that distinction.

Unhealthy incentive
It was (and is), for example, a chronic failure of international bank regulation that the debt of Italy, Spain, Germany and so on was classified by financial regulators as completely safe and without risk after monetary union - which gave an unhealthy incentive to banks to lend to these governments (in the jargon, the government bonds of these countries were given a zero risk-weighting).

International bank regulators gave a second dangerous incentive to banks to lend to these countries, by classifying the debt as a close proxy for money for liquidity-management purposes (or to give protection against the risk of a bank run).

Finally, even the ECB helped to inflate the market for this debt and therefore encouraged the likes of Greece and Italy to borrow substantially more than was sensible. It did this by classifying such subsidiary sovereign debt as the highest quality collateral - which means that banks wanted an ample stock of it, just in case they needed assets to swap for central bank loans.

So by failing to recognise the elevated risks of subsidiary sovereign debt, regulators made it cheaper for the likes of Italy, Greece and Spain to borrow for a good number of years before the penny dropped.

And regulators made sure that when the penny dropped, a sovereign debt crisis would become a banking crisis, because the Italian, Greek, Portuguese and Spanish banks were all stuffed to the gunnels with Italian, Greek, Portuguese and Spanish government debt.

Anyway, if you're still with me (which I rather doubt you are), then you may have worked out where this argument is heading. Which is that the putative economic benefits of monetary union may well be completely wiped out by the higher borrowing costs for member states that stem from their ability only to issue subsidiary sovereign bonds, or their inability to issue fully sovereign bonds.

Bye-bye eurozone?
Probably the only way to regain those economic benefits would be for member states to pool their sovereignty when it comes to spending and borrowing decisions, for there to be centralised decision-making for the budgets of all member states, for them to become (to use the ghastly emotive cliche) a federal superstate. Only in those circumstances would it be possible for the eurozone to raise money on a consolidated basis, through the sale of what have come to be known as euro bonds.

Now, once the eurozone were borrowing in this way as a de facto single sovereign entity, then of course these euro bonds would be fully sovereign bonds, available for purchase (in theory) by the central bank (though gawd alone knows whether Germany would allow it).

So the borrowing costs for the eurozone should then fall to the levels enjoyed by the likes of the US and UK - or indeed lower, given that on an aggregated basis both the indebtedness and external deficit of the eurozone is lower than those for the US and UK.

Which is why you might say that it's either bye-bye eurozone, because the costs for borrowing of an unreformed eurozone remain prohibitively high, or it's bye-bye eurozone, because it turns into something that looks more like a giant single country.

Greece Faces Last Chance to Stay in Euro, Central Bank Says
by Marcus Bensasson and Maria Petrakis - Bloomberg

Greece has one last chance to reshape its economy and stay in the euro region, the country’s central bank said, adding to European Union pressure on Greek political leaders to move decisively on economic revamping.

A 130 billion-euro ($174 billion) bailout approved by EU leaders on Oct. 26 "represents a milestone on the adjustment path of the Greek economy," the Bank of Greece said today in its interim monetary policy report. Greece’s debt-sustainability dynamics have changed in the past year, putting the country in its most critical situation since World War II.

"We must step up the pace not just to reach our goals but to make up for lost ground," Greek central bank Governor George Provopoulos said in Athens, according to an e-mailed transcript of his statements. "What is at stake is very great: it is Greece remaining a member of the euro and I think that for most Greeks there is no dilemma here. We must succeed."

Provopoulos’s stark warning echoes that of new Prime Minister Lucas Papademos, a former vice president of the European Central Bank and former head of the Greek central bank, who has said Greece must remain a member of the euro area. Papademos was appointed this month after former Prime Minister George Papandreou’s bid to hold a referendum on the second financing package angered EU leaders, leading to a freeze on payments and throwing markets into disarray.

'Not in Treaty'
It is also at odds with comments from Provopoulos’s colleagues on the governing council of the ECB. Mario Draghi, the ECB president, said on Nov. 3 a Greek euro exit was "not in the treaty."

"The new opportunity provided to Greece under the agreement may well be the last opportunity," the Greek central bank said in the e-mailed report. "The country must avoid any further delays and deviations from targets at all costs."

Papademos must implement budget measures to get rescue money from the EU and the International Monetary Fund flowing again. That will also mean arranging a Greek debt swap early next year that aims to slice 100 billion euros off the debt burden of 360 billion euros. Greece needs the cash by the middle of next month to meet payments on maturing bonds and to pay pensions and wages.

Signatures Needed
German Chancellor Angela Merkel said there will no payout of the next loan tranche from last year’s Greek bailout unless the leaders of all parties supporting the country’s interim government sign a document pledging adherence to austerity and other measures. "We need not only the signature of the Greek prime minister, but also the signatures of all supporting parties," she said today in a speech to parliament in Berlin.

On Nov. 22, European Commission President Jose Barroso accused Antonis Samaras, head of the New Democracy party and one the parties backing the Papademos government, of playing "political games" for refusing to commit in writing. Luxembourg Prime Minister Jean-Claude Juncker yesterday set a one-week deadline for Samaras to sign. Greek Finance Minister Evangelos Venizelos told lawmakers in Athens today that demands from EU leaders for written commitments before paying the 8 billion-euro loan were "no bluff."

'Play With Fire'
"Does anyone believe that the money will be paid because our partners won’t leave us hanging?" Venizelos said. "We don’t have the right to play with fire. I am certain that all the country’s political forces as well as the country’s political leaders will do what is needed within the day so that the sixth tranche is released by Dec. 15."

The Bank of Greece forecasts gross domestic product to drop 5.5 percent in 2011 and 2.8 percent next year before returning to growth in 2013, forecasts in line with the 2012 budget submitted to parliament on Nov. 18. Unemployment may exceed 18 percent next year after coming close to 17 percent in 2011, the central bank said.

Papademos’s government is racing against a Samaras-imposed deadline for elections on Feb. 19 to get approval for the new financing package, which will provide funds to recapitalize Greek banks after they participate in the debt swap.

The ratio of non-performing loans in the Greek banking industry was 12.8 percent as of June 30, up from 10.5 percent at the end of 2010, according to the report.

Debt crisis now at German doorstep
by William L. Watts - MarketWatch

Belgian, French yields jump on Dexia bailout worries

An auction of German government bonds technically failed Wednesday, underlining fears that Europe’s long-running sovereign debt crisis now threatens the core of the euro zone.

The sale of 6 billion euros ($8.1 billion) of 10-year government bonds, known as bunds, attracted bids totaling just €3.889 billion. The Bundesbank, which conducts auctions on behalf of the Germany’s federal debt agency, accepted €3.644 billion in bids. That left the central bank to pick up the slack, retaining €2.356 billion of the supply, or 39% of the total amount on offer.

Granted, it hasn’t been uncommon for German debt auctions to fall short as safe-haven demand has driven German yields to record lows in recent months. Six of the last eight bund auctions have required the Bundesbank to pick up some slack, noted strategists at RBC Capital Markets.

However, total bids in Thursday’s sale exceeded the amount sold to bidders just 1.07 times, the lowest ratio since 1999, according to RBC. Also, the amount retained by the Bundesbank was much higher than the euro-era average of 20%, analysts said. "It was awful," said Nick Stamenkovic, fixed-income economist at RIA Capital in Edinburgh. "It just shows that investors are not only shying away from [peripheral] euro-zone bonds," but are turning away from the euro zone in general.

The results were enough to spook investors, sending the euro skidding to a six-week low below $1.3400. The euro  traded at $1.3381 in recent action, down 0.9% from Tuesday. Elsa Lignos, currency strategist at RBC, said that while the results offer little budget risk to Germany, "it is a further sign of a lack of demand" for European paper.

The results come as Germany continues to resist calls for jointly issued euro government bonds — an option that would presumably raise the country’s borrowing costs if effectively it participated in joint guarantees of debt issued by other euro-zone countries.

Simon Smith, chief economist at ForexPro, warned that it would be premature to see Wednesday’s auction results — and the ensuing "abject panic" in the currency market — as a sign investors are worried about Germany’s ability to pay back its debt.

"And it’s too early to tell whether investors are genuinely concerned that Germany could become the banker for the rest of Europe," he said, in emailed comments. "But with the proposal for common bonds now on the table ... it is a concern that could well gain increased traction in the coming weeks."

Meanwhile, safe-haven flows into bunds weren’t much in evidence as Germany’s 10-year bund yield jumped 12 basis points in the secondary market to 2%. The development comes after Finland and the Netherlands — two triple-A rated euro-zone nations with strong public finances — saw their yields rise sharply last week. Bond yields rise as prices fall.

Those moves were widely seen as evidence the two-year-old debt crisis had shifted from the periphery of the euro zone to the core amid ongoing de-leveraging by banks and outright shunning of European debt by investors.

France in spotlight too
Meanwhile, French and Belgian bond yields rose sharply on Wednesday after a Belgian newspaper reported that a previously-agreed bailout plan for troubled lender Dexia SA  was proving unworkable.

The report by De Standaard said new negotiations between French and Belgian officials were under way. Fears France would be forced to dig deeper to fund the bailout heightened worries the triple-A rating of the euro zone’s second largest economy could be under threat, said Jane Foley, currency strategist at Rabobank International.

Underlining those worries, Fitch Ratings said on Wednesday that France’s triple-A rating would be at risk if a further intensification of the euro-zone crisis resulted in a much sharper economic downturn in France and a material increase in the risk of contingent liabilities.

On the positive side, however, Fitch noted that the French rating is underpinned by its high-value-added and diverse economy, stable tax base and commitment to deficit reduction.
France’s 10-year yield rose 11 basis points to 3.63%, while Belgium’s 10-year yield jumped 18 basis points to 5.22%.

And pressure remained on Italy and Spain, with Italy’s 10-year yield moving back toward the 7% danger zone. It was last seen at 6.87%, up 20 basis points. The Spanish 10-year yield rose 7 basis points to 6.66%.

EU Warns Greece on Bailout
by Costas Paris - Wall Street Journal

The European Union has warned Greece that unless political leaders give written pledges they will back agreed reforms, an €8 billion ($10.79 billion) loan payment won't be given and the country will run out of money in about 20 days, Greek and euro-zone officials said Tuesday.

The impasse stems from the refusal of conservative New Democracy leader Antonis Samaras to sign the pledge, which he fears voters will see as giving up a promise to renegotiate Greece's bailout loans if he comes to power.

"There is enough money for another 20 days," a senior Greek government official said. "Without the loan tranche we will default on the €2.8 billion bond payments in December, and we won't be able to pay out salaries and pensions. The situation is very serious and this issue has to be settled this week."

An EU diplomat said Greek Prime Minister Lucas Papademos received a renewed warning in meetings with European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy in Brussels on Monday.

Mr. Papademos, who heads a coalition government supported by the former ruling socialist Pasok party, New Democracy and the small LAOS nationalist party, met Tuesday with Eurogroup President Jean Claude Juncker in Luxembourg. Mr. Juncker told reporters the written pledge should be submitted by the Nov. 29 Eurogroup summit.

"I will have to chair a meeting of the Eurogroup a week from now on Nov. 29. We will discuss the sixth disbursement, and I am quite optimistic that we will be in a position from now to then to make a positive decision. ... We have asked to be given a letter of commitment by the new Greek prime minister ... this view should be shared by the main political leaders," Mr. Juncker said.

Dutch Finance Minister Jan Kees de Jager also said future financial aid for Greece will be terminated if Mr. Samaras doesn't support the reforms in writing. "I don't understand why they are so difficult," he said in a television interview, referring to Mr. Samaras and his party. "We have to be assured that they are committed to undertake reforms." A New Democracy official acknowledged the pressure on Mr. Samaras is mounting and said the party was looking for a "face-saving compromise" that could come this week.

The euro zone wants the leaders to commit that whoever wins power in scheduled elections in February will carry on with the reforms. "There is a major issue of mistrust towards Greece," said the EU diplomat. "So the usual promises from Athens that have been repeatedly broken won't suffice."

The loan slice represents the sixth disbursement of aid under an existing €110 billion bailout Greece received in May 2010 from its euro-zone partners and the International Monetary Fund. An IMF official said the fund's board is likely to meet next week to decide on the tranche's release.

Eurozone industry contraction speeds up
by Ralph Atkins - FT

Eurozone industry saw the biggest one month fall in orders in almost three years in September, as worries about the region’s escalating debt crisis hit demand.

New orders plunged by 6.4 per cent compared with August, according to Eurostat, the European Union’s statistical office. It was the biggest month-on-month fall since December 2008, when the global economy was reeling from the collapse of Lehman Brothers investment bank. Then, orders dropped by 10.2 per cent.

The data suggested the region’s debt crisis had undermined economic confidence even more than feared, resulting in business and consumers cutting back investment and spending. Earlier this week, the European Commission reported its index of eurozone consumer confidence had fallen in November for the fifth consecutive month to the lowest level since August 2009.

With orders data providing an early indication of trends in economic activity, September’s figures added to evidence that the eurozone has fallen into recession. Italy, where the eurozone debt crisis intensified from August, saw the biggest drop in industrial orders – of 9.2 per cent – between August and September. But France and Spain saw drop of 6.2 per cent and 5.3 per cent respectively, and Germany saw a 4.4 per cent contraction in orders.

Eurozone purchasing managers’ indices for November, also published on Wednesday, indicated overall economic activity is contracting at a significant pace – although the rate of decline appeared to have stabilised. The "composite" index, covering manufacturing and services, rose from 46.5 in October to 47.2 – the third consecutive month below the 50 level, which divides an expansion in activity from a contraction.

Chris Williamson, chief economist at Markit, which produces the survey, said the latest readings were consistent with the eurozone economy contracting at a quarterly rate of 0.6 per cent. "Malaise has spread from the [eurozone] ‘periphery’ to the core. Even Germany is stagnating and France contracting by around 0.5 per cent," he said.

The latest gloomy data are likely to fuel expectations that the European Central Bank will cut its main interest rate again at its December meeting. At his first meeting as ECB president earlier this month, Mario Draghi announced a cut from 1.5 per cent and 1.25 per cent and predicted a "mild recession" by the end of the year. With the eurozone debt crisis increasing the strains on the region’s banks, the ECB could also announce fresh help with the provision of liquidity.

Two charts that will frighten Angela Merkel
by Nils Pratley - Guardian

Today's failed German debt auction adds a new twist to the eurozone's tale of pain. This moment, arguably, was bound to arrive eventually. After all, Germany's status as a safe haven would look considerably shakier under two credible plotlines – Germany being bounced by events into underwriting its eurozone neighbours' debts in some form; or losses on eurozone sovereign debts rebounding on German banks, thus necessitating a huge bailout.

Now, clearly, it cannot be deemed an out-and-out catastrophe that German 10-year yields have risen from 1.91% to 2.06% today. The latter is still a very low rate.

On the other hand, the direction of travel also matters. And – remarkably – Germany's long-term cost of borrowing is rapidly converging on that of the li'l ol' debt-ridden UK, where the money-printing presses whirr merrily. The yield on 10-year gilt yields is still falling and stands at 2.14%. They probably won't be chuckling at the comparison in Berlin. The description of the auction itself as a disaster seems fair.

What does it all mean for eurozone politics? "It's quite telling that there has been upward pressure on yields in Germany – it might begin to change perceptions in Germany," David Beers of Standard & Poor's said. Yes, but how would perceptions change?

It could go either way. It is conceivable (just) that German chancellor Angela Merkel might swallow her scruples and allow the European Central Bank to be unleashed as a lender of last resort, as the French are urging, to protect the single currency. Alternatively, the German political establishment might be more inclined to conclude that the crisis is now so severe that the cost of saving the euro has become too steep.

Here are a couple of eyecatching graphs pulled from Bloomberg by analysts at bond manager M&G Investments and French bank BNP Paribas. They show eurozone government bond yield weighted by each country's GDP. So think of the charts as a rough approximation of the movement in borrowing costs for an imaginary United States of Europe. Up, up and away since the start of October is the quick summary.

First the 10-year:

10-year eurozone bonds/GDP weighted. Source: BNP Paribas, Bloomberg, M&G

And now the two-year:

2-year eurozone bonds/GDP weighted. Source: BNP Paribas, Bloomberg, M&G

The question is: viewed from Berlin, do these charts illustrate the urgency of acting now to save the single currency – or are they are an invitation to scarper to protect German interests? Do not expect a quick answer because that's not Angela Merkel's style, as my colleague Jon Henley indicates in today's paper. No wonder the euro is getting clobbered in the currency markets.

Ireland demands debt relief, warns on EU treaties
by Ambrose Evans-Pritchard - Telegraph

Europe's plans for treaty changes to enforce fiscal discipline in the eurozone may fall foul of popular anger in Ireland unless the EU creditor states agreee to share more of the pain.

The Irish government has suddenly complicated the picture by requesting debt relief from as a reward for upholding the integrity of the EU financial system after the Lehman crisis, though there is no explicit linkage between the two issues.

"We carried an undue burden for protecting the European banking system from contagion," said finance minister Michael Noonan. "We are looking at ways to reduce the debt. We would like to see our European colleagues address this in a positive manner. Wherever there is a reckless borrower, there is also a reckless lender," he said, alluding to German, French, British and Dutch banks.

Mr Noonan hinted that Dublin is asking for some form of interested relief on a €31bn EU promissory noted linked to the Anglo Irish fiasco, among other matters. Mr Noonan said Ireland's public mood has turned very sour. "We have indicated to Europe's authorities that it will be difficult to get the Irish public to pass a referendum on treaty change," he said.

The EU's new fiscal rules would be legally binding and "justiciable" before the European Court, he said. This raises the likelihood that Ireland's top court would insist on a referendum. The Irish voted `No' to both the Nice and Lisbon Treaties, before being pressured into repeat ballots, and would certainly some form of quid pro quo in this case.

Ireland took on the bulk of the debt from its oversized banking system in 2008, resisting a chorus of calls for the country to follow Iceland's example and walk away from private bank liabilities. Had Ireland done so, it might have set off a catastrophic chain reaction across Britain and Europe.

The fateful move has saddled the taxpayers with colossal losses from Anglo Irish and other banks, and will push public debt to near 118pc of GDP by 2014. There is a widespread resentment in Ireland that taxpayers were sacrificed for the greater cause of Europe without receiving any acknowledgement from the EU's creditor states.

Ireland was ordered to pay a penal surcharge of 300 basis points on the orginal EU loan package, which Mr Noonan described as a "piece of foolishness" that has since been abandoned. "Bank shareholders were wiped out already so they had their sharp lesson in moral hazard."

Ireland has imposed haircuts on the junior debt tranches of rescued banks. Mr Noonan said this may now be extended to Bank of Ireland debt to help cover €350m of fresh capital it needs by next month. The state holds 15pc of the bank's equity.

Mr Noonan said Ireland is sheltered from the storm blowing through the eurozone since it does not need market funding until 2013, but the crisis cannot be allowed to drag on. "Some way will have to be found to create a firewall. The role of the ECB is a matter of debate. There may be legal difficulties in it operating in the same way as the Federal Reserve.Whether the ECB has a role in working with the IMF or EFSF (bail-out fund) is under discussion," he said.

Ireland has no "detailed contingency plans" for a eurozone break-up. "Obviously, we have thought about it, but it's a very remote possibility," he said. Mr Noonan said the country will stay the course with unbending austerity, even though nominal gross national product (GNP) has already contracted by 22pc. Public wages have fallen 12pc on average under Ireland's "internal devaluation" policy to regain competitiveness within EMU. There are likely to be further wage cuts in the December budget.

"We have to face reality. There is no painless way, no soft option: we're going to cut spending drastically, but with social cohesion. We don't want situation we see in Greece with people on streets and the foundations of state under threa. We're not going that route."

Chinese Banks ‘Built on Quicksand’ as Lending Binge Goes Bad, Chanos Says
by Ye Xie and Betty Liu - Bloomberg

Chinese banks are "extremely fragile" because the lenders don’t have enough capital to offset bad loans, said Jim Chanos, president and founder of the $6 billion hedge fund Kynikos Associates Ltd.

Chinese lenders are saddled with non-performing loans accumulated in the late 1990s and early 2000s, Chanos, the short seller who predicted the collapse of Enron Corp. in 2001, said in an interview on Bloomberg Television yesterday. The banks are failing to recognize the losses on the bad loans and have carried out a lending binge since 2008, said Chanos.

"The Chinese banking system is built on quicksand and that’s the one thing a lot of people don’t realize," said Chanos, who is shorting the shares of Agricultural Bank of China. "Everybody seems to think it is a free and clear open checkbook. It’s not. The banking system in China is extremely fragile."

The MSCI China Financials Index of bank stocks has declined 32 percent this year on concern the quality of loans to local governments and the housing market will deteriorate as economic growth slows. State-run Central Huijin Investment Ltd., an arm of China’s sovereign wealth fund, said on Oct. 10 that it started buying stock in the four biggest Chinese lenders after their shares tumbled this year.

China spent 3.5 trillion yuan ($550 billion), equal to a fifth of its 2005 gross domestic product, bailing out and recapitalizing state-owned banks since 1998 as their lending to unprofitable state-owned businesses turned sour, according to an estimate by Moody’s Investors Service in 2007. Since September 2008, Chinese banks doled out $3.8 trillion in new loans to offset the impact of the global financial crisis, according to the International Monetary Fund.

Chanos said that he’ll keep his short positions until the government recapitalizes the banking system again. In short selling, investors sell borrowed shares in anticipation that the securities will decline and they can buy them back at a profit.

Partial transcript of Jim Chanos interview with Bloomberg TV:

Chanos on his recent trip to Hong Kong and Australia:
"I think we probably came back a little bit more bearish….Our concerns about what we saw in Australia: an economy clearly tied to China has hitched its wagon to the tail of the tiger.

In terms of the general complacency, what we heard over and over from investors and clients and potential clients is, 'yes, yes, there are some excesses, but the government will figure out a way. That the government is this all-knowing, omniscient basic entity that will not prevent me from losing money."

Jim Chanos on whether the Chinese government has money:
"[The Chinese government] doesn't [have money], and that's the problem. The banking system in China is extremely fragile, and that's one of the messages we wanted to get to people."

"In fact, because what happened the last two crises, in '99 and '04, when non-performing loans went crazy in China without even a recession, the Chinese banking system was not re-capitalized like ours was, it was papered over.

Going into this credit expansion, Chinese banks are sitting on lots of bonds from the so-called asset management companies set up in 1999 and 2004, and they are keeping them on the books at par, at full value. In the case of Agricultural Bank of China, which we're short, those restructuring receivables are equal to over 100% of their tangible book.

The Chinese banking system is built on quicksand, and that's the one thing a lot of people don't realize. When they talk about the foreign reserves of $3 trillion, what everybody forgets is there's liabilities against that."

"Everybody seems to think it is a free and clear open checkbook. It's not. That is what we have been trying to tell people. Focus on the lending system over there, because everything occurs through the banking system."

On the Chinese economy:
"Property prices and transactions are really beginning to decelerate. We saw that starting in August, that's continued into November. Transactions are down 40% to 50% year over year in the tier 1 through 3 cities. Prices are down. In some cases, we've seen riots in sales offices, where people are amazed that prices could actually go down.

There's lots of indicators on the side. There's a growing sense that the Chinese government will ease. We point out that credit this year will grow between 30% and 40% of Chinese GDP. If that’s tight, I'd hate to see it ease."

On the scenario in which Chanos would cover his shorts in China:
"At some point, we will cover our shorts. [The scenario would be] a system where the banking system would have to be recapitalized again, most likely. You would see a flood of RMB in the system, and a realization that the growth by fixed asset model has got to change. Mr. [Stephen] Roach and others are convinced that the Chinese customers will pick up the slack.

And at some point, he and she will. But the transition is going to be the real tough part. And right now, the consumer continues to decline as a percent of the Chinese economy.  That is, I think, flies right in the face of what most people think will happen."

Germany Rejects Euro Bonds After Failed Auction 'Wake-Up Call'
by Tony Czuczka and Brian Parkin - Bloomberg

German Chancellor Angela Merkel again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.

Euro bonds are "not needed and not appropriate," Merkel said today at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France. She said euro bonds would "level the difference" in euro-region interest rates. "It would be a completely wrong signal to ignore those diverging interest rates because they’re an indicator of where work still needs to be done."

Merkel, the leader of Europe’s biggest economy, has so far backed a focus on debt reduction and closer economic coordination, calling for a revision of European Union treaties, a move that threatens to bog down in a multiyear negotiation, as core euro economies risk succumbing to the contagion that began in Greece in 2009.

German analysts, newspaper editorials and opposition politicians stepped up calls for Merkel to shift from an incremental approach after the government sold a fraction of the bonds it auctioned yesterday.

"As the crisis deepens with yesterday’s bond auction, the veil has been torn off Merkel’s policy of muddling through," Sebastian Dullien, a senior fellow at the European Council on Foreign Relations in Berlin, said in a telephone interview. "It’s only got us closer to the end-game, either the breakup of the euro or euro bonds. The strategy has failed."

Losing 'Sex-Appeal'
"The flop shows that bunds are losing their sex-appeal as an extremely secure investment," Germany’s Handelsblatt business newspaper said in a commentary today. "This shows the crisis has reached the entire euro-zone core. France, Finland, the Netherlands and Austria have to pay more interest for their bonds than just a few months ago."

German bunds fell a second day. The 10-year bund yield rose as much as 12 basis points, or 0.12 percentage point, to 2.26 percent, the highest since Oct. 28, and was at 2.19 percent at 12:55 p.m. London time. Bids at yesterday’s auction of 10-year securities amounted to 3.889 billion euros ($5.2 billion), out of a maximum target for the sale of 6 billion euros.

Handelsblatt said the shortfall was a "wake-up call" for Merkel’s government, which opposes both issuing bonds for the entire 17-member euro region and allowing the ECB to buy unlimited amounts of euro-nation bonds.

Germany Rejects
The German government stood by its rejection of any common bonds for the euro bloc following a report in Bild newspaper that Merkel’s coalition is concerned it may have to agree to euro bonds under certain conditions. The newspaper didn’t say where it got the information.

"We say ‘no’ to euro bonds," Economy Minister Philipp Roesler, who is also vice chancellor, said today in parliament in Berlin. "A transfer union would be wrong because it would mean German taxpayers pick up the costs. Euro bonds are wrong because they would mean a rise in interest rates for Germany."

That contrasted with Handelsblatt’s view. "The ECB remains the only investor that can keep down the interest rates of bonds from euro states in the short-term," Handelsblatt said. "In the long-term, there’s no getting around the necessity of creating fiscal union with at least partial euro bonds."

The Frankfurter Allgemeine Zeitung newspaper said that while the low demand for German bunds was "no reason to panic" it shows that "around 2 percent interest for investors in these uncertain times is simply not enough."

'Moment of Truth'
"Pressure is growing on Merkel," said Die Welt newspaper. "Up until now she managed to steer the nation through the crisis so that the people didn’t really notice the turbulence." Merkel now faces a "moment of truth" in the crisis as her opposition to ECB bond purchases and euro bonds "is being challenged," Die Welt said.

German opposition parties ratcheted up calls for euro bonds. Frank-Walter Steinmeier, parliamentary leader of the Social Democratic Party in parliament, said on Nov. 21 that his party wants euro bonds as part of a solution to the crisis. "A model using euro bonds that links European bonds to a reform program is the better alternative," Juergen Trittin, a co-leader of the opposition Greens party, said in an N24 television interview today.

In Paris, the French government underlined calls for giving the ECB a bigger role in fighting the crisis. "What’s not working is confidence and that’s what we must restore," French Foreign Minister Alain Juppe said today in an interview on France Inter radio. "I hope that reflection will move forward that the ECB should have an essential role to restore confidence."

Only German pain can solve euro crisis
by Phillip Inman - Guardian

Strike-hit Portugal is going to need a bailout on a Greek scale, and Ireland may do too. The answer: Germany must stump up the cash

Portuguese strikers are giving a helping hand to Lisbon's negotiators in Brussels. It may appear that angry protests are the last thing president Aníbal Cavaco Silva needs before an austerity budget vote next week.

But Cavaco Silva knows, like the rest of Europe, that his country is bust if it slavishly follows the Brussels line of spending cuts. And industrial unrest allows him to demonstrate that the situation is already so volatile that further austerity measures might be a touch tricky to push through.

His government has made it clear to Germany's chancellor, Angela Merkel, and the head of the eurozone's finance ministers' group, Jean-Claude Juncker, that debt forgiveness is the only way to rescue his country. In other words, Portugal needs the same level of bailout as the Greeks.

Wednesday's statements by the Irish finance minister, Michael Noonan, revealed the Dublin administration is thinking along the same lines. As he said, the Irish played their part in saving the euro, for which there is only further punishment. If the Irish debt reaches 113% by 2013, as predicted, it is hard to see it getting a welcome back from the private markets before 2020. No amount of tigerish export growth will bring down such a monstrous level of debt.

France's president Sarkozy is deaf to these claims for clemency. He knows his banks are up to their eyeballs in Irish and Portugese debt and a write-off will wreck their finances and his chances of re-election. As we know, he wants the European Central Bank to turn on the taps. He can't afford to spend real money.

Merkel appreciates the efforts of Ireland and Portugal. She is prepared to dispense real cash, but only if everyone else joins in, at least to some extent. She is right that no amount of eurobonds or ECB spending is going to get rid of the debt pile. Only write-offs can do that.

But she is wrong to say other eurozone countries must play a similar role to the Germans. Yes, the French, Dutch, Belgians and Austrians need to put in some token funds, but they are fast approaching levels of debt that could excite the markets. The Germans need to take the hit.

The last best hope: Why the supercommittee failed
by Economist

With the deficit-reduction committee’s failure, American fiscal policy is drifting in a dangerous direction

The failure by Congress’s joint select committee to produce a deficit plan was greeted with widespread disappointment, but little shock. Voters had long expected failure. Wall Street had predicted at best a small deal. Deprived of even that, stocks fell November 21st, the day the committee announced its failure, but soon turned their attention back to Europe.

Superficially the lack of alarm was understandable. The showdown between Republicans and President Barack Obama over the debt ceiling in August could have forced the federal government to renege immediately on its bills. In contrast, the law that established the "supercommittee" dictates that without a deficit plan, $1.2 trillion in spending cuts spread over domestic and defence programmes (a "sequester") be triggered, but not until 2013.

However, the implications of the committee’s failure are more disturbing than the reaction of the markets has let on. It leaves a series of landmines in the path of the economy over the next 14 months while leaving America’s longer-term fiscal challenges unaddressed. It also further entrenches Democrats and Republicans in their opposing positions and thus less able to deal with either problem, not to mention any of the various other catastrophes threatening the global economy.

A sensible fiscal plan would couple modest near-term stimulus with long-term reforms to entitlement spending and taxes. Instead, America is getting the exact opposite. A legacy of patchwork budget-making and temporary tax cuts means as much as $360 billion in fiscal tightening, or 2.4% of GDP, could unfold over coming months (see table).

A couple of the smaller items are almost certain to be overridden, such as a cut in Medicare fees and the effects of the non-indexation of the alternative minimum tax, both of which routinely get "fixed" and "patched" respectively. Mr Obama is also pressing to extend the 2% cut in the payroll tax and enhanced jobless benefits for another year. The Republicans seem receptive, but the supercommittee’s failure robs both sides of the tidiest vehicle for doing that.

Analysts at ISI Group, a stockbroker, put the odds that those last two measures will be extended again at a bit above 50%. But, ISI also notes, every dollar of stimulus extended now will add a dollar to the extent of the fiscal contraction felt a year later. Added to the expiry of George Bush’s tax cuts at the end of 2012, the sequester, and a new Medicare tax, would produce a crushing 2.6% fiscal hit in 2013, easily enough to tip the economy back into recession.

And even though the deficit would be reduced, debt would remain on an upward path over the long term because of the rising bills for Medicare and Medicaid (health care for the elderly and the poor respectively) and Social Security (pensions), and interest payments.

Every attempt to solve these problems has so far failed, but the supercommittee had a fighting chance, thanks to the threat of the sequester and the agreement that its proposals could not be subject to either amendment or filibuster. Its six Democratic and six Republican members, drawn equally from the Senate and House of Representatives, by most accounts got along swimmingly, at various times watching football, cycling, singing "Happy Birthday" and eating beef jerky together.

Conflicting explanations for the failure of the committee, which met in private, have emerged, but the main stumbling block, as usual, was taxes. On October 25th, Democrats proposed a $3 trillion deficit reduction package, including $1.3 trillion in increased taxes, and some cuts to entitlements, such as increased contributions by affluent beneficiaries to Medicare.

Republicans termed the revenue demands too steep. Then on November 7th Pat Toomey, a Republican senator from Pennsylvania, proposed a $1.5 trillion package including $250 billion in higher taxes from reducing tax deductions.

Some Democrats saw Mr Toomey’s proposal as a promising departure from Republicans’ decades-old opposition to tax increases in any form. But the closer they looked, the less they liked it. Mr Toomey would not only lock in Mr Bush’s tax cuts for ever, but lower rates further.

The top rate would drop to 28% from 35%, and the 15% lower rate on capital gains and dividends would become permanent. The result would be big tax cuts for a few rich households, who do not benefit much from tax deductions, and increases for middle and upper-middle income taxpayers, who depend upon them. That was anathema to Democrats, who want the wealthiest to pay more, not less.

Republicans claim Mr Toomey’s revenue plans were flexible. Not flexible enough, according to Democrats. "Whether it was meant that way, the reality is [Mr Toomey’s proposal] became a take-it-or-leave-it," says Chris Van Hollen, a Democratic congressman and supercommittee member. "The Republicans never moved off that position."

Mr Van Hollen does not question the good faith of his Republican counterparts. The problem is that the two parties’ sincerely-held views about politics are so far apart. "We could not bridge the gap between two dramatically competing visions of the role [of] government," said Jeb Hensarling, a Republican congressman and the committee’s co-chairman, in a newspaper article.

What now? Republicans are already drawing up proposals to protect defence from the sequester, but Mr Obama says that he would veto any such attempt. Both sides are preparing to fight next year’s election over those differing visions, so the odds of a resolution to the Bush tax cuts, the sequester, and entitlements before then are close to nil. (What happens after November 6th 2012, though, is anyone’s guess.)

Last August, Standard & Poor’s shocked markets and politicians by stripping America of its AAA credit rating because of the debt ceiling stand-off. Fitch and Moody’s, the other main ratings agencies, have refrained from doing so, in part because of the promised deficit reductions under the sequester.

As Steve Hess of Moody’s notes, the committee’s failure to enact more sweeping reform cost America an opportunity to remove the shadow over its AAA rating. "At this point we’re factoring into the outlook no significant deficit reduction measures until after the election.

And that’s because of the legislative environment." Election years have always carried above-average risks of financial crisis because governments are too scared to take the painful steps necessary to fix the underlying problems. That is true in spades for 2012.

UK housing market 'unlikely to recover', says Bank of England expert
by Robert Winnett - Telegraph

The housing market is unlikely to ever recover from the financial crisis and it may prove economically beneficial for fewer people to own property, a senior Bank of England expert warned yesterday.

David Miles, a member of the Bank’s Monetary Policy Committee, suggested that people may have to wait until they are in their forties to buy a home as banks will not offer large mortgages.

His remarks raise the possibility that house prices will not return to pre-recession levels as house buyers will be unable to take out the necessary home loans to trigger another boom. Mr Miles added that he did not "think we should regret" the fundamental transformation of the housing market caused by the credit crisis.

The comments may undermine David Cameron and other ministers, who earlier this week unveiled proposals designed to boost housing ownership as part of the Government’s growth strategy.

Yesterday the Prime Minister told the Cabinet that housing reforms would act like "Dyno-Rod" to unblock the problems preventing economic growth.

But Mr Miles, who previously led an official inquiry into the mortgage market, cautioned against a return to banks offering mortgages with small deposits. He said: "Housing markets and mortgage markets have been close to the centre of the economic and financial turmoil we have lived through over the past four years. ''I do not believe that the housing market and the mortgage market will get back to where we were in the years leading up to the crisis. I also do not think we should regret that."

Mr Miles suggested that the economy may "become more stable" if Britons were less dependent on changes in house prices and mortgage rates. He also said that those renting, rather than buying homes, "can move more easily to take up new jobs" and therefore "the risks of structural unemployment are lower".

"It will take time for first-time buyers to accumulate larger deposits, so they will typically buy later and the share of home ownership will be lower," he said. "But in the longer run it is not at all clear that a lower rate of home ownership represents a big loss to society."

Mr Miles spoke out about the housing market as a Bank of England survey found that experts were warning that the risks facing the economy may be as great as on the eve of the credit crisis in 2008.

A survey of City experts found that more than half believe the probability of a short-term high-impact event was "very high" or "high". "The specific concerns … related mainly to the euro area or countries in the euro area," the Bank’s survey said.

Yesterday, there were renewed fears over the eurozone after the borrowing costs faced by the Spanish government for short-term loans almost doubled.

There are also growing concerns that France may lose its triple A credit rating. Germany warned that the world must accept the current plan to solve the eurozone crisis as the EU prepares to announce proposals for continent-wide bonds. "We don’t have any new bazooka to pull out of the bag," Michael Meister, the finance spokesman for Angela Merkel’s party said. "We see no alternative to the policy we are following."

In Case You Were Wondering Why We Keep Bailing Out Wall Street...
by Henry Blodget - Business Insider

Not that there was any mystery about why the government keeps shafting Main Street and bailing out Wall Street, but in case you had any doubts, this chart excerpt below from XKCD should put them to rest.

More than anyone else, Wall Street has the power to hire and fire our elected officials.

So it's no wonder that those officials take care of Wall Street first.

(The Wall Street money, by the way, goes to both sides of the aisle. And that's to be expected. If you're a bank, there's no sense in picking a side when you can just own both teams.)

Campaign donations to government by industry

Image: XKCD

Click to see the whole chart.


el gallinazo said...


My plumbing career was a time sandwich. I was a union plumber in NYC in my 20's where I worked on new high rise buildings and had no work with heating, as that was controlled by a sister union, the steamfitters. I then donned a suit and tie for a couple of decades as well as taught chemistry and physics at the high school level. At the age of 50 I moved to St. John, USVI, and eventually took up plumbing again. The point of this brief bio is that I have limited expertise in heating systems. However, I lived in the burbs during my high rise period, and when my friends and neighbors learned that I was a plumber, I got a lot of calls for heating problems. So I took several adult ed courses in oil heating to augment my weekend cash flow (as well as not screw up my own house). In STJ, if the temperature fell below 70F, which almost never happened, everyone rushed in a panic to dig out their long underwear. (Of course Ben would already be wearing his :-) However, I did do a lot of domestic hot water, both standard electric heaters and roof solar.

In STJ there were two types of solar hot water systems. The more common type worked without any electric, with convection, and had the hot water reservoir situated on the roof next to the panels. There was another type which had the reservoir on the ground floor. This needed a very small DC circulating pump. The pump was juiced by a 12 volt solar panel on the roof which was very ingenious, because if the pump ran at night or cloudy days, the panels would act as radiators pumping all that stored heat back into the sky. Since the electricity on STJ was subject to constant blackouts, a timer would just not do.

I find your situation curious as someone in the past paid for a very expensive 400' deep well in a water table with a static 12' level. A suction pump can in theory pull water up 32 feet, but practical reality is in the area of 20-23 feet without undue stress. Thus a much cheaper and more convenient shallow well system would have sufficed for your house. Either your 12 foot level may not be as static as you believe, or whoever put in the big bucks for the 400 feet was quite the pessimist.

el gallinazo said...

What you are looking to do is to keep both your hot and cold water systems under pressure without any electricity. The only convenient way of doing this would be to keep a hot and a cold reservoir tank on the roof which would supply the pressure through gravity. When I lived in Argentina last year, I expanded a house which I pressurized from a 500 liter roof tank. We had intermittent municipal water, but often without enough pressure to fill the roof tank So I also put in a 2000 liter plastic cistern in the ground and had a small electric pump to fill the roof tank from the ground cistern. We did not have solar hot water but rather a standard electric heater located fairly high up on the wall of the kitchen. The roof tank had a float valve shut off similar to that in a toilet tank. We would operate the pump with a standard switch in the kitchen. The plastic roof cistern would fill automatically if the muni pressure was up, but if we ran out of water, we would just turn the switch on for half an hour or so, though we would have access to more water in a few minutes when the tank began to fill. I would say that the vertical distance between the bottom of the roof tank and the shower head was only about 8 feet. As water gives a pressure of 0.42 pounds per square inch to the foot of elevation, this would give a minimum pressure of only about 3.5 pounds if the tank was almost empty and about 5 pounds if the tank was full. Must Americans with a shallow well system are used to a 30/50 lbs system, and those with municipal water as high as 80-100 lbs. But I found this 4 lb shower to be quite adequate, functional and refreshing.

Hope this might fill in a few of your questions. BTW, I would suggest some form of bicycle type mechanism to power your pump as opposed to something worked with your arms, though I am not familiar with the market for such a device.

Biologique Earl said...

Frank said...

"It's also pretty clear evidence that the Russian army is hollow. They apparently only won the Georgian war by overwhelming manpower."

The problem is they have missiles with nuclear warheads too. Don't need an army to carry out MAD.

Anyway I always assumed that the US would start launching before the Soviets. :-(

el gallinazo said...


Of course the systems I was describing were for areas where the possibility of the roof tank freezing were near zero. Where I lived in Argentina, in the middle of winter, the night temperature would fall to a point to find the cat's water bowl frozen in the morning, but the average temperature never allow the freezing of a 500 liter water tank. If you live in a place where the winters are cold enough to freeze a roof tank, you would have to allow for this in the design.

Chas said...

What this site lacks to me is actionable advice on one's financial assets. I already know that we are teetering on collapse, so a lot of the information presented here is interesting, but not particularly useful to me.

Obviously, getting out of debt is important, but I'm not in debt.

My question is what do I do with the significant amount of money I have in a self-directed IRA and in savings with a small, responsibly managed, well-capitalized local banks

I guess I need to be in "cash", but what does that mean?

I have way too much money to stuff under my mattress.

I had asked about Swiss Annuities previously. Swiss Francs have traditionally been a safe have. Is this a reasonable place for retirement money? What are other options for cash?

jal said...

Ilargi said ...

The last gasp ideas that now float around Europe are 1) Eurobonds, and 2) new Eurozone treaties.
... OK, last of last gasps, China to the rescue.

Will someone please stop the clock!

Without the heavy hand of a dictator, the clock will run out before those options are enacted.

Even the wisdom of our Wise, (cough, cough), Canadian leaders guiding from a position of "best banking system" cannot stop the clock to allow a Canadian solution to be implemented before the deleveraging.

(Canada has been operating an
equalization system
for decades to keep Canada united.)


Ashvin said...

Latest downgrade goes to the country without a government for well over a year.

S&P cuts Belgium from AA+ to AA.

Ash said...


First of all, don't expect people here to tell you exactly how to allocate your cash. That's ridiculous.

Second, for someone who asks a lot about short-term treasuries and gets a lot of answers, you display a surprising dearth of gratitude when saying this site "lacks actionable advice".


"I had asked about Swiss Annuities previously. Swiss Francs have traditionally been a safe have. Is this a reasonable place for retirement money?"

Why would you swap dollars for a currency of a country whose central bank has explicitly created a policy goal of devaluing the currency through a fixed peg to the euro? If you weren't aware of that policy, perhaps you should have been paying more attention to TAE.

el gallinazo said...


Stoneleigh does deal with your question. If you live in the USA and have too much cash to hide in your mattress, then she says that you should put the money in cash equivalents, namely with short term treasury bills with perhaps a small percentage in precious metals. Obviously if the money is tax deferred, you cannot use the safest method, You either have the choice of pulling your money out of the tax deferred status and paying the various penalties, or investing it in them through the safest and most honest broker you can find. As to Switzerland, my personal opinion is that their reputation for security is a vestige of the distant past and does not represent current realities. My opinion. Your milage may vary.

LynnHarding said...

I, too, wonder why the static level is 12'. I assume that there is pressure coming from below? I did not build this house and there is a stream-fed pond not 50' downhill of my back porch (not up for filtering and drinking water bc. of beaver activity.) The original owner said there was a thick layer of clay hardpan so he couldn't drill a shallow well. I suspect that the owners of the land in previous centuries may have brought in loads of clay to create a mill site because my soils are generally glacial sands and gravels. Anyway, once the well is dug the static level IN THE WELL goes up. Does that make sense? No, not to me either but there it is!

Yes, I have to worry about freezing. Maybe the whole system has to be in the basement. It is underground on three sides and can easily be protected from freezing. I do have a bicycle powered grain mill and two electric assist recumbent bikes - mainly homemade, not good in cold weather. I have a friend who would be interested in building a universal chain driven power supply. It could power a splitter or a washing machine or a pump. That is somewhere out in the distance if we last that long. In the meanwhile, I want to be able to wash the milk pails, the dishes and the underwear!

I just read on the Survival Blog about a system of rafts and paddle wheels that would work on my pond in the nice weather. Check it out, sounds like fun. Maybe could generate enough electricity to power a DC battery combined with solar charging on nice days in the winter. Here the winter is always the problem.

Thanks again for the ideas.

Ilargi said...

Dow, S&P Log Worst Thanksgiving Week Since 1932


Joanna said...

I find your situation curious as someone in the past paid for a very expensive 400' deep well in a water table with a static 12' level.

In my area, if you want your place to be eligible for certain kinds of financing, your well has to be 160ft deep. The average water table is around 20-30 with another more dependable water layer under the gravel glacial outflow at about 60ft.

So the well depth of any given place depends on when it was put in and plans the owner might have had for future sales.

Ruben said...


Advice from a real plumber like ElG is invaluable, but if you haven't looked at Build It Solar do check it out. Lots of plans and projects and explanations of how things work.

Frank said...
This comment has been removed by the author.
Frank said...

Lynn, that's called an artesian well. In a classic one, named aft Artesia in Greece, the water actually comes out of the ground.

They happen in valleys with folded strata. The water soaks into the aquifer up in the hills, so the water is pressurized under impermeable rock. Then when you punch a hole in the impermeable rock, the water rises to the actual altitude of the water table up in the hills.

el gallinazo said...


How far apart is the 12 foot well and the 400 foot well? This is, indeed, and interesting story.

el gallinazo said...

Hugo due to get his first shipments of gold in by air today from the TBTF vaults. The BofE stored gold is soon to follow, maybe. Basic comments from the ZHers in this article advise Hugo to saw a couple of bars in half. Some suggest that the gold still has some Libyan insects on it. Whenever an oil rich country demands its gold back, NATO will have to invade and confiscate it from another oil rich country. Or maybe Italy under the Full Monti. They have lots of olive oil.

Greg L said...
This comment has been removed by the author.
Greg L said...

This thing seems to be unraveling very quickly.

Here's what I'd like to see discussed, assuming I didn't miss it previously. How long before US banks are acknowledged to be in trouble? One thing that's unknown is all the derivative exposure to European debt. How soon should I have "Backyard National" opened or perhaps I should have opened it already?

bluebird said...

What is "Backyard National"?

trojanhorse said...

El gal

FRom the Zero hedge article you linked:

"However, he will probably sleep sounder knowing that his gold is no longer in the vaults of the LBMA, HSBC, or several hundred feet under the New York Fed. That is, of course, if the "presidential palace or Cuba or something" ends up having real 999 gold, and not just several blocks of Tungsten with a pretty plating on top."

I imagine you, having lived in South America, know that they are not so dim as to trust a gringo bearing a gold brick. I do not think even Celente could be that dumb? lol!

Ilargi said...

"What is "Backyard National"?

I'm guessing that's where you bury the loot, bluebird.

Greg, my first thought is to say you should be fine till Christmas, but that would be construed by the finest amongst us as meaning that I said the world ends on December 26 or 27 (depending on what Christmas you're in), so let's not go there. Been there done that: I once said you MIGHT not recognize your world by Christmas, and lots of folks were sure that meant to say you WOULD not recognize it. Sorry, but it doesn't.

I think we're in for some really crazy ideas and laws and treaties and bailouts. I hope the Germans won't cave, because that will make matters much worse for all of us down the line, but at the same time that means the line involved may get much shorter.

There's nobody who can tell you exactly when what will happen, which is why I said a while back that only chaos is certain. It's like when you blow up a toy balloon: you know it'll burst if you keep at it, but not exactly at what time or in which spot on the balloon. And there's no physicist who can tell you either.

The collapse of complex systems is hardly ever predictable to the second, but that doesn't mean you can't know it'll go.

That said, we're moving forward, that's absolutely positively a solid brick wall right in front of us, and there are no solutions other than deleveraging, deflation, credit crunch.

It's risk assessment: If you put into Backyard National now what you feel comfortable with, what exactly do you think you have to lose?


el gallinazo said...


What is "Backyard National"?

It's when you drag your mattress to the back yard.


The comment section following the ZH article is rife with comments about how Hugo better assay it backwards and forwards and inside out and questioning whether he was able to do so before it was airborne. That said, some commenters opined that the banks, including the BoE would be pretty stupid to try to stick Hugo with some gold plated tungsten since it could well lead to a public furor around the world to have all their treasuries assay the People's Tungsten, which is an outcome that these treasuries may not desire. OTOH, since Corzine is not wearing orange, they may not give a shit anymore. Beer and popcorn.

Jerry McManus said...

I wonder how how many times we will hear about "another lost decade" before people finally figure out that what we had before is gone for good.

And it ain't comin' back.

Ka said...

Here is my surefire, can't-fail plan for handling my cash stash.

1. I have most of it in a TBTF, on the grounds that, by definition, it can't fail. (Actually, it's still there because it hasn't been convenient to move it out yet, but why let a good line go.)

2. When it does fail, the odds are good that it will be the first to go. That means the gov't will back the FDIC promise, since otherwise there will be a run on all banks. Meanwhile, I have enough in another bank to tide me over.

3. When the whole banking industry goes, taking my savings with it, I can live on my social security if need be. And I have enough cash on hand to last me a month or two.

4. When social security goes belly up, well, I've always wanted to try out the Robinson Crusoe bit.

5. When that gets old, I've long considered dying to be an acceptable alternative as well.

(This post might be called "How I Learned to Stop Worrying and Love the Crisis".)

Ruben said...

Ka +1

Ash said...

A fantastic article on Spiegel today. IMO, it illustrates very well the intersection of idealistic philosophy and empirical reality. The visceral frustration and anger of Jürgen Habermas with the present Euro situation is perhaps the best validation of his critical views, while at the same time being the best criticism of his Kantian and Hegelian idealism, and American pragmatism. His rejection of all things "nihilistic" and "convoluted" postmodern philosophy leaves him wondering what the hell is happening to his Continent right now.

A Philosopher's Mission to Save the EU

"His problem as a philosopher has always been that he appears a bit humdrum because, despite all the big words, he is basically rather intelligible. He took his cultivated rage from Marx, his keen view of modernity from Freud and his clarity from the American pragmatists. He has always been a friendly elucidator, a rationalist and an anti-romanticist.

Nevertheless, his previous books "Structural Transformation of the Public Sphere" and "Between Facts and Norms" were of course somewhat different than the merry post-modern shadowboxing of French philosophers like Jacques Derrida and Jean Baudrillard. What's more, another of Habermas' publications, "Theory of Communicative Action," certainly has its pitfalls when it comes to his theory of "coercion-free discourse" which, even before the invention of Facebook and Twitter, were fairly bold, if not perhaps naïve.

Habermas was never a knife thrower like the Slovenian thinker Slavoj Žižek, and he was no juggler like the German philosopher Peter Sloterdijk. He never put on a circus act, and he was always a leftist (although there are those who would disagree). He was on the side of the student movement until things got too hot for him. He took delight in the constitution and procedural matters. This also basically remains his position today.

Habermas truly believes in the rationality of the people. He truly believes in the old, ordered democracy. He truly believes in a public sphere that serves to make things better."

bluebird said...

Ah ha! The Backyard National, good one :)

Follow-up question...Let's pretend I could put $100,000 into Backyard National. What good will it be if I haven't spent it all by the time the dollar currency is no longer viable? Could the extra dollars be exchanged for whatever new currency is printed, assuming the withdrawal receipts are kept to prove the financial institution where the money was withdrawn?

bluebird said...

and also assuming I am still living and have a map to the 'Backyard National'

trojanhorse said...

"I hope the Germans won't cave, because that will make matters much worse for all of us down the line, but at the same time that means the line involved may get much shorter."

Okay, now instead of Christmas balls, you are giving me lines. Do you have two different lines going there or one?

I read that as "if Germans cave then they print Euro stability bonds making things worse in the long term" but after that things either don't compute or else that second 'line' is meant to mean individual countries, or what?

Would you clarify?

LynnHarding said...

@ El gallinazo. I think the artesian explanation is correct. The hill out back is full of seeps and there is a lot of water for such a small watershed. Once you get down to water it rises up to a certain level. So the water level in the well is within 12' of the surface. Then a pipe brings it into the basement where it can either go into the pressurized (by electricity) traditional plumbing system or, can be pumped by hand when the lights go out.

I am thinking about your idea of two tanks on the roof. That would have to be quite a roof, I guess, to hold all of the water. I could hang them from the roof on the inside to keep them from freezing or just build up a platform from the floor.

Ilargi said...

"I hope the Germans won't cave, because that will make matters much worse for all of us down the line, but at the same time that means the line involved may get much shorter."

There's less 'down the line' to go if they don't cave.


Ilargi said...

"What good will it be if I haven't spent it all by the time the dollar currency is no longer viable? Could the extra dollars be exchanged for whatever new currency is printed, assuming the withdrawal receipts are kept to prove the financial institution where the money was withdrawn?"

Too far into a too unknowable systems collapse. Whatever option you choose, sitting down and looking the other way for a number of years is not a viable answer.


Nassim said...


It looks like the USD price of corn is finally beginning to tumble. However, it is still a lot more expensive than its price was two years ago.

The two hours that sank Strauss-Kahn

This investigation, reported by the FT, implies that it was a honey trap. DSK must have been the easiest victim of all time. IMHO, I don't think that Sarkozy will have much time to gloat about it. :)

Russian Army is hollow

Well, that is what a lot of others thought as well. In this case, even if it is "hollow", their rocket forces are better than the USA's. I mean, they are doing the heavy-lifting for the International Space Station and so on. Let's not delude ourselves - even if our "leaders" might.


I don't quite understand your water-supply setup. However, if a pump is at the surface and the subterranean water level is more than 32 feet below, the pump cannot suck the water up that gradient - as a vacuum is created. If the pump is at the bottom of the well, it can pressure the water and push it up to almost any height. I just wanted to make sure that you are aware of this limitation to water pumps.

Dow, S&P Log Worst Thanksgiving Week Since 1932

Finally, my AAPL options are almost in the black on a weighted average.

el gallinazo said...


That's a lot of cash to put in Backyard National. You might consider 20% of that and put the rest in Neither, of course, is safe. As to a new currency, that's a hard one to figure. The NWO wants to eliminate all paper money as paper money exchanges can not be traced by the Stasi and the government can not simply seize all of one's cash by switching a couple of digits. OTOH, cash is so small compared to the credit money supply, that it is not worth dealing with other than the freedom issue. The Fed claims there is a total of $800B in cash in circulation. Exactly how they determine this would be interesting to know. Probably at least one third of that is overseas and another large per cent is in Backyard National. So total cash actually in the country with any velocity at all is probably about 2.5 weeks of the GDP. In countries like Russia in the 1990's, when the government pulled the new currency scam, most of the Russians' savings were in the mattress, so Yeltsin and the Oligarch's (a defunct rock group which morphed into Putin and the Punkers) found it really easy to steal their savings. But our Oligarch's will steal our savings electronically a la Jon Corzine -'s gone.

Ka. Sounds like you have your savings in Bank of America. As to the FDIC bailing you out - you are at the back of the line after the $50 trillion in Merrill derivatives they just moved over. Robinson Crusoe was on a tropical island and the pigs were easier to kill.


I am quite sure that Frank is correct that you have an artesian well that just doesn't quite make it to the surface. The mystery story is the 400 foot well. Sounds like a serious boat payment for the installer. The standard size for a roof solar reservoir tank kit is 80 gallons or about 850 lb (the weight of three typical Walmart shoppers) including the weight of the tank. Most roofs can handle that without a problem. My cold water tank in AR was about the same size but you could make it a lot smaller if you wanted to. The point is to give your system pressure via gravity. If your house has an attic, it would be easier to keep above freezing there and you probably would still have enough elevation for pressure. If you planned to keep either the solar or stove going to the hot reservoir on the roof, you could bundle them close to each other and use the hot tank to keep the cold from freezing. You do have to keep the solar tank a little higher than the panels for convection and the panels have to have some pitch to them as well in the direction of the tank, I recall about 8 degrees or so. So you can't put the solar reservoir in an attic. Also you have to give a lot of thought to the placement of the panels to the arc of the sun in summer and winter. If you had to leave you would just drain them down to prevent damage.

omega1alpha said...

Boy do the yanks worship at the altar of consumption. Some of those Black Friday videos on yahoo are very revealing. I especially enjoy the wild rampage at various Walmarts across the nation. Some of the more creative beasts actually learned a few tricks from the local cops. Why not utilize some pepper spray to disperse the competition in line? Very smart. I wonder how those clowns will react when they are not only out of credit, but out of food. Imagine those crowds bursting down the hills toward your homesteads? Yeah I know, they'll never make it that far....

bluebird said...

Unfortunately, no, I do not have that kind of money. Re-read my previous post, I was pretending. But others who read TAE, possibly may have a large stash wondering whether the Backyard National would be the optimum storage place.

What I've been doing, is reading Stoneleigh's Lifeboat primer, and preparing as best as I can. Definitely not sitting down watching the world go by.

ogardener said...

dr. strangelove - survival plan

Joe in NC said...

What is this crazy idea?

NO Losses For Banks

Could this actually happen? this a word reserved to politicians & professional athletes these days?


Nassim said...

Lithuania's Olympic committee warned that it might not be able to send its athletes to London next summer since its funds were deposited in Snoras.

I told my friends in the UK that the London Olympics would be a called off or poorly attended. That was back in 2008. A lot can happen between now and next July. In fact, a lot can happen between now and next week.

TechGuy said...


While I am not a big solar power fan, a few solar panels and a DC pump might be sufficent to pump water into a storage tank.

If you live on a hill and the hill rises significantly above your house you might be able to install a below ground cistern that feeds into your home. Use a Solar DC pump to get the water from the well into the pump. If there is a significant distance, two or more pumps could be used.

If you install the tank in your attic, the tank could be wrapped in insulation to mitigate freezing issues. a small thermal panel and Solar DC panel could be used to help regulate the tank temperature. Or you could use a circulation system tied to a wood stove to regulate the temperature.

FWIW: Human powered equipment burns a lot of food calories. Food is probably the most expensive source of energy. Alternatively you might wish to consider using wood-gas (producer-gas) powered gas/diesel motors to either generate electricity or provide direct power to machines required mechanical power. Producer gas system consist of a gasifer that convert combustable biomass (wood, coal, etc) into producer gas (CO + H2 + Air) that can be feed into an engine intake to provide a source of fuel. Engines running on producer gas, lose about 50% of their rated power, but its fine for many applications.

TechGuy said...

Chas wrote:

"What this site lacks to me is actionable advice on one's financial assets. I already know that we are teetering on collapse, so a lot of the information presented here is interesting, but not particularly useful to me."

1. Do you have resources to be self-reliant in a period of chaos caused by a finance collapse?

You need food, water, shelter. In the case of previous financial collapses, supermarket food shelves go bare in minutes. A stockpile of food, water and other basic necessities is a worth while investment. Buy only what you would use such as canned foods you like to eat. don't buy those prepacked survival kits, since most are junk and worthless.

Investments in your infrastructure can also be a sound investment. Probably the top is adding insulation, or adding an alternative heating source. Oil prices have been hovering around $85-$100 the past couple of years. Prices will whipsaw as conventional oil production declines exceeds non-conventional production (ie total global liquids production declines).

It will be difficult to predict what will happen in urban centers. We can see major chaos in the ME under the Arab spring, and Greece is only slightly better. Having a place go to away from cities is a worthwhile investment.

3. Precious Metals. While not a perfect solution, it does offer some alternatives to make purchases when paper currencies fail. There is a good chance of another 2008 panic causing PMs to nose dive again. That would be a good time to acquire some.

4. I don't recommend investing overseas. Just because a foreign nation is favored as a "safe haven" does mean it will be a safe haven when you need it to be. The US already has laws that restrict the flow of capital, and if there is pressure from sovereigns, you can bet your bottom dollar that these safe havens will turn over your money, and you end up with nothing. Don't forget about the recent MF Global collapse where people thought there money was safe, was anything but. MF is just one of many that used Client money to stay afloat.

Joanna said...

That means the gov't will back the FDIC promise, since otherwise there will be a run on all banks.

I am curious if there might be wiggle room introduced into whatever comprises the actual wording of the FDIC promise. Some way to guarantee the deposit, but only if 90% or similar were left untouched. Some way to make people feel the promise was being kept enough to prevent a bank run as far as the general unaware [ublic is concerned.

Anonymous said...

Ilargi wrote:

"That said, we're moving forward, that's absolutely positively a solid brick wall right in front of us, and there are no solutions other than deleveraging, deflation, credit crunch."

Quitting is more of a "solution" than those options.

TechGuy said...

Joanna wrote:
"I am curious if there might be wiggle room introduced into whatever comprises the actual wording of the FDIC promise."

It really doesn't matter, In Sept 2008 shortly after the Lehman collapse, there was the beginning of a Bank run on Money Market accounts when the "the Reserve" Money Market fund (Providing MM to many banks) informed the public that they broke the Buck. Meaning they didn't have the funds to pay back depositors. The Fed (Bernanke) quickly made a statement that the Fed would guarantee all deposits in Money Market accounts, and the bank run quickly ended. With in the period of the reserve announcement and the Fed statement depositors requested about $500 Billion in MM assets to be returned. I think it was around 5 hours. Since the Announcement, there hasn't been a real bank run (except for the small unsuccessful OWS account withdrawals a few weeks ago)

Another words, the Fed will step in and bailout depositors (print) Any US banks caught up in the Euro Sovereign debt crisis will be bailed out by the Fed. The Fed won't risk a US bank run.

FWIW: I believe that the EU will resort to Money printing then permit a full collapse of the Euro. Printing while does really solve the problem it will prevent an all out panic in Europe. The question is how far will they go before they start printing. How many business will fail and how high will unemployment go before they print.

Ilargi said...

Rumor has it Belgium has a new government.... Took 529 days?! Nothing like little panic to help things along.


Greenwood said...

The FDIC does not insure individual accounts, like most people seem to think.

It insures the bank for each individual account on it's books.

If the bank goes bust, the bankruptcy judge in charge of the case oversees the payment by the FDIC to the bankrupt bank, now under their charge, for each account the bank had.

In due course, the general payment made by the FDIC to the burnt out shell/carcass of the formerly solvent bank will be distributed by the bankruptcy judge to the individual customer accounts.

A long and lengthy process.

Hope you can function without your account money for a long, long time. Sometimes years.

The FDIC's fine print also gives it tremendous leeway in the time frame it must honor the claims in. I think it can be up to almost a century.(99 years)

They can streeeeetch it out longer then you can stay alive.

Quite a 'loop hole', aye?

Remember your account is not insured to you, it's insured to the bank.

The bank in trouble can only make a claim to the FDIC if it's bankrupt and no longer a functioning business!!!

There's always a Catch

Catch 22 :>)


Ash said...


"Another words, the Fed will step in and bailout depositors (print) Any US banks caught up in the Euro Sovereign debt crisis will be bailed out by the Fed."

Seeing as how MF Global recently went bust from their reckless exposure to European sovereign debt, was allowed to fail and many of its "depositors" were blocked access to and/or screwed out of their funds [granted, largely due to blatant criminal activity], we shouldn't say any US bank and their depositors will be bailed out. It seems more likely that only the largest institutions will be bailed out, but we cannot rule out a situation in which, let's say a BoA, is forced into bankruptcy, split up and pawned off to others (while low level employees, shareholders, depositors and a few creditors take many of the losses). It's getting more and more difficult to backstop entire sectors or even institutions, especially in the run up to elections, so we may see future "bailouts" given through a bankruptcy process and geared towards their upper management, boards and largest depositors/creditors.

Frank said...

Greenwood, yes your version could happen in theory. In practice, federal or state regulators jump in before actual bankruptcy and seize the company on Friday afternoon. They then work with the FDIC to sell it in pieces over the weekend, including the FDIC slipping in a few cents on the dollar to make some of the deals work.

There is currently an adequate supply of ductape and baling twine on this side of the pond. Europe is where the current problem is.

TMO said...

"All that's left to do is writing down debt, and let go under who owns too much of it. Deleveraging. There never was another choice."

Ilargi, what about the other option? What do you think is the likelihood of hyperinflation at some point?

TechGuy said...

Ash Re: MF Global

Its still a little early for the Fed to engage the issue. Until an audit is done to see how much money is lost, the Fed can't act. Accounts were frozen for the Audit. If the loss is a small amount, less then a few billion the Fed probably won't come to the rescue.

I would be surprised if BoA is broken up. More likely the Fed will pump in liquidity, by buying up BoA Non-Performing assets. It was the Fed and Hank Paulson, that made the TBTF even bigger. It easier for them to manage a few TBTG than a much larger group of TBTF banks. It wouldn't surprise me that the TBTF get even bigger as more trouble banks are forcefully sold to the TBTF, or sound banks are forcefully sold to the TBTF to shore up the TBTF.

el gallinazo said...

This may be old news to many, but Koch Industries had 8 accounts with billions of dollars in them with MF Global, and this relationship went back decades. This is not surprising as one would expect an oil company to be active in the futures market. What is surprising is that Koch pulled out all their cash from MF a couple of weeks before the crash and transferred it to Mizuho Securites. While Celente and thousands of others were taken to the cleaners by Jon (Too Big To Jail) Corzine, the Koch Brothers didn't lose a penny. So here we have the great (pseudo) progressive politician, financial supporter of our Chains We Can Believe In president, tipping off the Koch Bros. to pull out their cash before his vacuum cleaner arrives. That's the Koch Bros., as in puppet master of the Nazi Party Governor of Wisconsin Scott Walker. Left and right is just a sham in the USA and Europe; pigs feeding at different ends of the slops trough that comes down from the castle on the hill. But when it comes to the 1% of the 1%, money is thicker than water.


Other than revoking their primary dealer privileges, already done, what would you expect the NY Fed to do eventually vis-a-vis MF Global?

jal said...

Go to
Click on
Acquiring Institution
to find out who bought which failed banks

el gallinazo said...

A 15 minute Bill Black video. Even for those who have seen several of his videos in the past, this is a virtuoso performance.

trojanhorse said...


Is this site now censoring all antiwar statements?

Or only ones that concern American criminal acts of war.

It looks like I must have rattled the mental chains of the flower child who was on the delete button last night! Though I guess I should be kind and understanding in that it is generally understood that IRONY baffles Yankee brains , or is just that HUMBLE PIE [include the current crop of Canadians here as well] sticks in their craw?

Family members and neighbours of the victims furiously denounced the operation. One survivor, Noor Agha, told Reuters: “My house was bombarded in the middle of the night and my children were killed ... the Taliban were far away from my home; why was my house bombed?”


Ilargi said...

Prepare for riots in euro collapse, Foreign Office warns


jal said...

Here is the unofficial problem bank list for Nov 25, 2011. (table is sortable by assets, state, etc.) 980 institutions

Earlier this week, the WSJ reported that Bank of America was warned by regulators of a possible formal action if the bank doesn't make progress. That would be a huge addition to the Unofficial Problem Bank list!

Ilargi said...


I have no idea what you're talking about, I haven't seen your alleged comment(s), and they're not in the spam box either.

I do know, however, that I don't like the tone of the comment you just posted. Tone it down.


Ilargi said...


There's a bunch of posts in the Primers section that deal what our views on deflation and inflation. Short: no country will have hyperinflation until it's shut out of financial markets. US hyperinflation may eventually occur, but that moment is years away. First deflation will run its course.


Ilargi said...

It's been flying through Dutch media space for a few weeks, first time I read it, and going international now: get ready for the "Neuro".


TMO said...

Thank you, Ilargi. You are one of the few analysts I've read that offers a definable trigger for a hyperinflation episode.

Greenwood said...


The way you describe the FDIC process is quite accurate.

I think that will be a thing of the past very shortly, just like the 'sanctity' of brokerage accounts of any stripe.

The rules for just simply stealing your assets in broad daylight took a seismic shift with MFG.

And still the sheep don't believe it.

How many tens or hundreds of thousands of non .01%ers still have huge portions of their assets parked in brokerage accounts like plump little ultra high calorie canapes at the Oligarch's Monsters Bank Ball.

If a supposedly savy guy like Celente got boinked black & blue, imagine Joe & Jane Uppermiddleclass and their deer in the headlights disbelief and paralyzing shock when all of their nest egg gets eaten as a miniature finger food souffle at one of Jaime Dimon's 'Let's Celebrate Banker's Bonuses Galas.'

Yum, I can't wait to taste Cheryl's nest egg all whipped up and creamy in a little dish. I hope it's not all gamey and off color, I've heard on the grape vine that her nest egg is reptilian in origin ;>)


trojanhorse said...

Ilargi said...

" Scrofulous,

I have no idea what you're talking about, I haven't seen your alleged comment(s), and they're not in the spam box either.

I do know, however, that I don't like the tone of the comment you just posted. Tone it down.

'Alleged'? Is calling me a liar your idea of appropriate tone?

By the way, and for your information, I checked to see if there were any replys to my comment about a half hour after posting. If there is some way it could go missing after appearing there please let me know.


el gallinazo said...


Got any sort of link for this Neuro.

Also, CHS has an interesting and highly bearish technical analysis for world equities markets. From a fundamental viewpoint, he sees the EZ crisis as the triggering event. Also, like I&S, sees the USD entering a longer term up trend.

jal said...

... financial supporter of our Chains We Can Believe In president, tipping off the Koch Bros. to pull out their cash before his vacuum cleaner arrives.

Another possibility ???

Koch Bros. and others pulled out their cash and caused MF Global to go belly up.
Hey! Why not? Its a dog eat dog on that plateau and survival of the swift.


A moderator said...


It is policy among all of TAE moderators not to delete comments, but rather escort them to a Blogger spam box. As mentioned earlier, Blogger takes it upon itself to do the same occasionally with comments which we have no desire to spam. Thus we must occasionally peek into the spam box to see that there are no innocent victims. FYI, there is not a trace of a comment from you in the box for the last several days. As to tone, your tone was belligerent considering the lack of solid evidence that your comment was spammed. It may have been a little more diplomatic initially simply to inquire. The moderators are not shy as to writing exactly what and who were spammed and why. And with the exception of a certain unisex individual as well as commercial spam, it is fairly rare. And considering the nature of Blogger, from whom we hope to depart in the near future, there are many conceivable ways that your comment could have been lost.

Joanna said...

Thanks for the info re FDIC. I often hear a PSA on the radio reassuring 2 identical twins, one using a bank the other a credit union, that their money is 'identically' safe in either institution.

Whenever I notice a media campaign ramping up, my first thought is to wonder what catastrophe are they trying to get people to ignore.

Not that I ever trust anything but Backyard National, but it's really chilling to know just how much will vanish right under the noses of the poor suckers who thing the FDIC means protection for them.

LynnHarding said...

I do appreciate all of the comments and advice about my strange plumbing issues. I am going to make a compendium of all of them as I sketch out an initial design. Yes, I do have some books but none of them addresses my own particular issues. Thanks so much.

About the Backyard National: we have had several recent power outages where I live. In every case, we had to use cash or checks to buy essentials because the machines that check ATM cards were down. You should really have a pile of cash in small denominations put away.

I moved my pitifully small remaining amount of money out of BoA into a highly rated local bank within biking distance of my house. But I really wonder whether any bank will survive a real run. Most banks don't keep much physical cash around. In fact, I have understood that there would be a huge shortage of physical cash in a real banking emergency. Those 'businesses' that typically rely on cash, such as drug dealing, would be in great shape comparatively speaking.

Everything seems so ordinary and quiet out there in consumerville. Hard to believe that anything will ever change, isn't it?

el gallinazo said...


These were segregated margin accounts. They were not working capital for MFG. Your conjecture would only have any validity if MFG was using the Koch segregated accounts to finance their own bets. Since they apparently warned Koch before they stole everyone else's money, this is unlikely.

trojanhorse said...

"there are many conceivable ways that your comment could have been lost."

Thank you, but, to be clear,I assume that to mean that after posting, and once I read my comment in the thread that it still might be lost? I have assumed that once it appeared there that unless it was deliberately removed that it would remain part of the thread.

Best wishes for your new device, I hope it serves better than Blogger, particularly if it makes for more fluid conversations and of course fewer messages gone astray.

Gravity said...

Have you ever noticed how reality features a Gravity-based user interface? Whats up with that?

Ilargi said...

El G,

Best I could do for now:


Old ideas are back again. Like the proposal to split the euro zone into northern and southern parts. Instead of a euro we’ll then get ‘neuro’ and ‘zeuro’. Some Dutch newspapers found a funny word: the ‘scheuro’, a phonetic similarity to the words schism and euro...

In Dutch a "zeur" is a whiner.

Ilargi said...


Never called you a liar, just pointed out I never saw the comment in question. Still haven't.


A moderator said...


Blogger has a nasty habit of moving already posted comments into the spam box for its own, mysterious reasons. So that conjecture is incorrect. But your initial posting didn't wind up in the spam box, so we have no idea what happened to it. For my part, I write all my comments into a WP initially and hold on to it for a while after I post so that if something untoward happens to it I have a backup.

el gallinazo said...


Ruben said...

On the topic of the Bank of Backyard, does anybody have any speculation on the general acceptability of denominations in the event of a cash shortage? Many stores already don't accept 100s due to high counterfeiting. Could we expect the same for 50s? 20s? Should you stockpile quarters?

Joanna said...

Could we expect the same for 50s? 20s? Should you stockpile quarters?

For our general kitty/power outage stash, we include everything from rolls of quarters to a number of 20's, with lots of smaller bills in between.
I sell eggs for $3/dz. and once a week I transfer that money into our ready cash stash. Sure comes in handy.

A Fall Guy said...

@ LynnHarding and ElG

re: 400' deep wells and 12' static water level

Water tables in bedrock areas (common in south-western BC, where I live) have some odd characteristics. I don't know details about Lynn's well, but at our previous place, our 6" well was 600' deep with a static water level of about 30'. The reason is that the pressure of the water in the rock is such that the water table was in theory at 30', but cracks in the rock were only hit down deep. That is, the water runs under pressure through small cracks in the bedrock (unlike water tables in gravel or sand, where water is free to find its static level). If you're lucky, the pressure is high enough that the water table is "above ground" and you get an artesian well, and no pump is needed to get water above ground.

zby said...

The risk that the currency disintegrates within weeks is alarmingly high - The Economist (

agtefc said...

Regarding well depth:

The subsurface is largely characterized by stratified horizons of different hydraulic conductivity (K). Relatively impervious layers (differing by at least 3 orders of magnitudes (10^-3) can isolate higher pressure (head) zones "trapped underneath. When the low K layer is punctured the water will flow upward through the well under pressure, kind of like an artificial artisan well (spring). This same phenomenon occurs in the oil industry hence backflow preventers when drilling.

Although the water table may be a short distance down, it may be in a low K horizon such that water seeps too slow into the pumping zone to achieve and significant, sustained flow rate. Drilling deeper is then done to tap into a higher K layer.

Ground water close to the surface is subject to recharge which can include anything from low density and high density organic compounds (of which low density organic compounds ride the water table), fecal contamination, toxic nitrate levels. In many ways the water quality will be better if drawn from deeper horizons. Each case is different;always good to get complete tests done every time.

In B.C. the law is to have septic fields 30m from your drinking well. I would put my field at least 100m. Even deep wells can become contaminated with surface sources. Although wells are sealed often the drilling process creates a high K channel down the side of the well casing .

Everywhere is different :)


el gallinazo said...

My impression from what Lynn wrote was that the 12 foot well and her 400 foot well were quite separate. That was why I asked how far they were apart. I would imagine if they were pretty close, the 400 well would have pierced the impermeable layer and may have allow the 12 foot well to fill through a horizontal seepage. In that case the 12 foot well would have not been functional without the 400 foot well first and the driller's boat payment was earned.

Joe in NC said...

El G,

What is the story behind your avatar? The flag is torn & frayed at it's end.

The Rolling Stones - Torn & Frayed (Exile on Main St. side II):

Torn & Frayed

"Well the ballrooms and smelly bordellos
And dressing rooms filled with parasites
On stage the band has got problems
They're a bag of nerves on first nights

He ain't tied down to no home town
Yeah, and he thought he was wreckless
You think he's bad, he thinks you're mad
Yeah, and the guitar player gets restless"

A Fall Guy said...


Our relatively low-tech setup might help with your design. We live off-grid, so minimizing power is a feature not an option.

We have a shallow well that siphons to the house, but at very low pressure, so the first step is a small pump (basically a boat pump hanging from a rope in our basement to minimize noise) and large pressure tank to pressurize the house water (the larger the better to minimize how often the pump runs).

We can heat water either with our solar panel, wood stove (via a heating "double-pipe" filled with water that forms the first part of the chimney out of the stove) and propane on-demand.

To keep things simple (and avoid too much complicated piping and valves) we have it set to be either (a) propane only or (b) solar panel and/or woodstove. We could have set it up so the propane heater could take warmish water on cloudy days or from small fires, but we prefer to be stoic and only use propane when the other option is frigid water.

We have a clerestory house, which has a small upstairs floor and the south-facing part of the roof over the main floor meets the clerestory vertical wall half-way up. This wasn't a coincidence, as it was designed for solar when built in 1981. Our solar panel, a Viessmann unit (which works nicely), is on this roof.

The cold and hot water pipes run upstairs to near the propane heater, where there are two valves that must be set to either direct water through the propane heater or through the solar/woodstove system.

The "centrepiece of the solar/woodstove system is a hot water tank (not plugged in, but used for hot water storage - ours was salvaged). The tank sits next to the chimney, so it's almost directly above the woodstove, and is raised so that the top of the tank is above the "hot water outlet" of the solar panel, and the bottom of the tank is below the "cold water intake". This setup allows water to naturally thermosiphon (no pumps) to the solar panel and/or the woodstove (depending on how the valves are set). On a sunny day, warm water rises in the panel up into the tank, pushing cold water into the panel. When the woodstove is fired, warm water rises in the double-pipe upstairs into the tank, pushing cold water down into the double-pipe.

And pressure release valves wherever pressure could build up by incorrect valves, overly hot water, blockages, etc. These drain out onto the roof or out from under the house. Since there is no upper limit on how hot the water can get (short of boiling, in which can the valves will "steam off"), one needs to ensure that fittings are rated for high temperatures (e.g. no plastic bits inside valves).

Some people might not like the "aesthetics" of three copper pipes descending through the ceiling from upstairs into our main living space (cold and hot water to the woodstove heater plus the drain pipe). But to me, it's a vision of warm showers and hot water for washing dishes (with an added benefit that you can feel the pipes when the stove is burning - if the "cold intake" pipe is getting warm, then you know that the entire tank is brimming with hot water and you can take a nice long shower).

Hot water may not technically be a necessity, and one can certainly make do with small amounts heated in a pot, but it's certainly at the top of the list of nice-to-have luxuries.

trojanhorse said...

After warming my blood, crossing words today with that rare oppugnant ilargi, I went into the out of doors to continue an on going battle with a tree. [ for 'oppugnant' see dictionary - no, it does not mean repugnant or anything of an odoriferous nature]. But yes, I do have a tree and it has a shady insalubrious limb much, much, beyond my hand's flailing reach.

Therefore being out and about the other day, I bought a NATO approved wire survival saw and a plastic bow and arrow with the plan of shooting an arrow over the limb with a line attached to the wire saw. [That link was not to my plastic bow, mine says 'lil soux' on it and is much too embarassing to post a link to ... if there is one.] All went well and with a cords attached to the saw cut the limb about half way through before the saw irretrievably jammed leaving me, for all good purposes not staggering but still two sheets to the wind. Frustrated but figuring that was a sign grabbed a beer and then some paper and pencil and with pondering have devised a second cunning plan; it, as well, entails shooting a line over that limb. To the line, this time, I will attach a wire rope and connect that to my 2 ton come-a-long. If that doesn't do it I think I will leave that tree alone. One should recognize when stupid is stupid, and when time to stop is time to stop, I imagine some here would agree with that , eh? LOL!

Joanna said...

The tank sits next to the chimney, so it's almost directly above the woodstove, and is raised so that the top of the tank is above the "hot water outlet" of the solar panel, and the bottom of the tank is below the "cold water intake". This setup allows water to naturally thermosiphon

@A Fall Guy
My first house was built in 1930, but was still fairly 'primitive', having a coal/wood-fired cook stove originally. From the pipe stubs & tracks I discovered during a few projects, it looks like the water was heated by the stove and piped from it (a reservoir near or attatched to it) to the bathroom.

Given appropriate levels of hot & cold pipes etc. would thermosiphoning be how water got from the kitchen, up to the attic, and slightly down to the bathroom without a pump?

I have always been curious how the original set up would have looked, but reference material on the works of kitchens of that time have been hard to find.

Joe in NC said...

Derivatives Gone Wild:

Big Derivitaves Increase  

A Fall Guy said...


I won't claim to know much about the limits of thermosiphoning. The thermosiphon mostly works when there is no water exiting the system (i.e. it is a flow of water between the heat source and the hot water storage). If the hot water tank was in the attic, the thermosiphon would be able to push water up to the attic while it is being heated, and the pressure in the system could push water down to the bathroom when a tap is turned on. I know there are systems around here that don't have such an ideal situation for the tank relative to the woodstove or solar panel, but can still get a thermosiphon (perhaps with not quite as strong a flow). So there is some flexibility up to a point.

Ash said...

It's quite sad that we read headlines like the following, and probably say "what else is new?" Of course NATO launched an airstrike in Pakistan and killed dozens of Pakistani troops that were asleep in the middle of the night. What else would it be doing?? And people wonder why Americans are despised in other parts of the world, while they tumble into the black hole of debt addiction and pepper spray each other for an Xbox.

Greenpa said...

Ash- re the Pakistan thing; there's now the beginning of a rumor that those "sleeping" Pakistani troops- fired at the helicopter first. Which is something known to have happened several times in the past year.

News is cooked from all sides, these days. No idea if we'll ever know the truth; but what IS clear to me; the chances of serious military fusses with Pakistan are at least as great as chances with Iran, at the moment. Enmity for the US is deep there; with resentment made worse by the billion$ we've shoveled into their military and government.

el gallinazo said...

Brilliant (warning, rather long) article by Jim Quinn of The Burning Platform, putting it all together.

Joe in NC

If you really must know, this is an action photo taken of my rather dimwitted cousin Arnie, who strayed into a no fly zone over Michele Bachmann's national campaign headquarters. The frayed end of the flag is due to a shotgun blast from Michele, but as usual she was behind the curve, and to the family's relief, she forgot to lead Arnie.

trojanhorse said...


Oh S--t I must have missed that bit of news, greenpa!

When did the US declare war on Pakistan?

jal said...

Re.: backyard national
If you use the backyard national bank, then it might be a good idea to leave instructions of where it is located for future generations.


The treasure described in the Copper Scroll consists of vast quantities of gold and silver, as well as many coins and vessels. It is difficult to assess the value of what is described, since we are not sure what the weights in the scroll are actually equivalent to, but it was estimated in 1960 that the total would top $1,000,000 U.S.

You can get a list of the treasures at

Biologique Earl said...

Thanks El G for the following:

It is brilliant and nicely captures my understanding of what has been happening.

Joanna said...

If you use the backyard national bank, then it might be a good idea to leave instructions of where it is located for future generations.

I love reading about Roman/Viking hoards turning up in English fields. I always wonder who left them and why they never came back.

Been rummaging through this site -

Lots of low-tech household ideas from the past.

Biologique Earl said...

Silver_Lady said...

Coins, coins, coins

Well, IMHO you might want to buy a backhoe, before TSHTF, to move your hoard around.

Frank said...

@Scrofulous, which does not make India good either. The whole Kashmir thing is India's fault. There was a deal whereby Kashmir should have gone to Pakistan, but Nehru was from Kashmir, so he started something like 5 wars rather than give up his home town.

Ash said...

Greenpa and Frank,

I have decided not to participate in any more discussion on specifics of the ongoing wars of the West for now. There is too much speculation about what just happened in Pakistan, for example, and very little substance. Time will hopefully make these events more clear. Just one last point I feel compelled to make:


Your last comment is a perfect example of rationalizing a fundamentally unjust situation, for what reason I do not know (make yourself feel better about US militaristic imperialism?). Bottom line is that we shouldn't be in Iraq or Afghanistan right now and we shouldn't be heavily meddling in the affairs of numerous others ME countries as we are doing, including Pakistan. These senseless killings are a direct result of our senseless, belligerent and degrading policies of global imperialism, and there is no justifying any of those things anymore.

Feel free to respond, but as I said, I am now done with this topic.

Nassim said...


Either you are ahead of everyone else or two months behind. Here is the silver price

My 22-year-old Greek hairdresser is desperate to find work abroad, but can’t afford the fare. ‘Greece? Greece is about the past,’ he says, angry at his country for denying him a future. Once the young go, what hope is there for any nation?

Anyone who is looking forward to things speeding up should read this one Think we've got it bad? Read about the British expats whose lives have become a nightmare in violent, chaotic Greece

The 'new Dunkirk' - British forces to use Tsars' railway to travel 3,500 miles home by train from Afghanistan

It is funny to see the propoganda machine working overtime - trying to convert Afghanistan into a Dunkirk. The fact is that it was too much to handle and that they are begging the Russians to help them bring their gear home. The Russians are bound to scalp them while talking a lot about cooperation with NATO - what do you expect when NATO rocket bases are being built around Russia?

Frank said...

Ash, I will respond. Without claiming that the US is "good" I'm flipping sick of the meme that the only two regimes worse than ours in the last 50 years were Pol Pot and the Kim family in North Korea. Not only is it a crock, but many of those worse regimes we didn't even support (doofus in Turkmenistan), and a few (doofus in Byelorus) we actually opposed.

Another example. The regime in Iran is evil. It is worse than Israel, who I sincerely dislike. It is truly wrong to pretend that Khameny and Ahmadhinajhad (or however it's spelled)are not slime just because Cheney and Netanyahou, who are also slime, don't like them.

el gallinazo said...

The Bill of Rights of the US Constitution is to be **officially** buried next week, RIP.

Once enacted, the US military will have the "right" to arrest anyone anywhere in the world, including any backyard in the USA without charge, and detain him indefinitely. BTW, this bill was written up in closed committee by John McCain and that great Democratic liberal from the state of Michigan, Carl Levin.

Why now? One must believe that the global financial Ponzi may collapse any day and the Owners want an official total police state to deal with the consequences.

Frank said...

Jeezus, Nassim the only wackier bit of hyperbole than your post that I've seen today was the article you referenced.

Why yes, the Tsars built those railroads. Basically all the railroads were built in the 19th century, when the Tsars owned that neck of the woods. You do have a tertiary education, which means you also know that air freight would be insanely expensive.

I strongly suspect the burbling about Royal Navy sealift capabilities is just a bargaining ploy. There's idle merchant shipping all over the world, not to mention all the HM.*S, and for that matter USS bottoms available.

As for rocket bases, OMG, Putin has decided to play in the big leagues, even though he's about France. Betcha Obama and Hu had a chuckle about it together.

Nassim said...


I am simply pointing out that a retreat is being painted as some sort of "victory" or, as in the case of Dunkirk, as a "strategic retreat" before an attack much later on.

As of July 2009, Russia's strategic arsenal reportedly shrunk to 2,723 warheads, including: 367 ICBMs with 1,248 warheads, 13 SSBNs with 591 warheads and 76 bombers with 884 warheads.

Russia and weapons of mass destruction

Anyone with Russia's remaining ICBM capability is very much in the big league IMHO. Frankly (pun intended), I do not see much to chuckle about.

Ash said...

[Democracy Isn't Dead Yet - It's Just the Euro] "And it gets even funnier. It is clear that the ruling politicians in both Greece and Italy are both scrambling to provide some "resolution" to their chaotic political atmosphere before Mr. Market opens on Monday, and that tells us almost all we really need to know. Every weekend has become a chance to smooth out the increasingly unprecedented volatility of the week that preceded it. To stifle the democratic processes of the economy, if you will. To prevent investors from voting with their accounts, and to prevent that from feeding back into actual political change.

Every weekend this happens, and every weekend the people who have to actually live in this world find the whole process less and less funny. All of these people aren't taking to streets to protest individual leaders, either. Many of them are protesting the entire Hollywood show, with all of the rigging and cheating and stealing and killing that goes with it. Some of us still wait in anticipation for the twists and turns, yes, but perhaps that is because we realize there is no longer only one way it could all play out."

So this weekend's rumor du jour has become one about the IMF creating some mega bail out facility for Italy, providing up to $600bn of loans well below market rates (citing "IMF sources"). How such a massive loan commitment will be accepted by the relevant governments (i.e. US, UK, Germany) in their current political environments is not explained at all. What is pretty certain, though, is that this alleged IMF fund, while certainly being discussed, is not really any closer to implementation than the now defunct EFSF (including the October "expansion"). The half life of what has come from this latest weekend "recovery" round is sure to be shorter than last weekend and the ones before that, perhaps not even surviving until market open in Europe tomorrow. Regardless, another exciting week of volatile market [re]action lays ahead.

Greenpa said...

Ash: "Time will hopefully make these events more clear."

But don't bet on it. Good ol' Wikipedia! I was able to hit the google and find the, perhaps, source of the phrase, "the fog of war". Not surprisingly, it was von Clausewitz.

Intelligent generals are extremely worth listening to.

I have a question, just out of curiosity, for our polyglot gang here; Wikipedia gives von Clausewitz in the original German, then gives a translation. I'm a lightweight German speaker; but I immediately disagreed with the translation. I would LOVE to hear from you all on your own word choices here.

"Der Krieg ist das Gebiet der Ungewißheit; " ; and the Wiki translation is:

"War is an area of uncertainty" - which to me far undershoots his impact. My own translation, aiming at equal effect not transliteration:

"War is the realm of the unknowable" - rather different; and a really good argument for learning multiple languages.

The entire German, maybe needed to get the feel:

"Der Krieg ist das Gebiet der Ungewißheit; drei Vierteile derjenigen Dinge, worauf das Handeln im Kriege gebaut wird, liegen im Nebel einer mehr oder weniger großen Ungewißheit. Her ist es also zuerst, wo ein feiner, durchdringender Verstand in Anspruch genommen wird, um mit dem Takte seines Urteils die Wahrheit herauszufühlen."

(Incidentally, yes, I hugely enjoyed the outrageous overinflated German words- ) :-)

Gravity said...

I've been considering what situation would be created if the battlefield earth law would pass. Regretfully it would create defined acts of sedition [subverting the structure of government by coercion, specifically debasing the authority of the judiciary] and possibly treason [levying war against the US by declaring its political space a battlefield], as well as entailing a global crime of war against every sovereign nation.

Publicly advocating such legislation is an act of political extremism by definition, insofar as it intends to severely damage civil and human rights of citizens in all nations, and establishes a global crime of war towards this end. Any agent of government who has publicly advocated this malicious act of sedition must be dismissed from public office on grounds of autogenic political extremism.
If said legislation passes, those members of congress who voted in favor of it, as well as those executive agents advocating its implementation, must be removed from office and charged forthwith with said offenses.

A declared state of war upon all nations without cause, so rendering their sovereign territories a theater of war, entails a crime of war upon all nations peoples.
I shall personally sue the US government for attempted criminal infringement of my civil rights within my country, levying war [crimes] upon, and subsequent attempted kidnapping of, all citizens in all countries, whereas the status of enemy combatant is voided under the geneva convention as ratified.

Nassim said...

Steve Keen On Parasitic Bankers, Deluded Economists, and Why “We Are Already In The Second Great Depression”

This is a great interview. The BBC lady would not let Steve Keen off the hook of how to decide whose debts to forgive. Steve Keen, despite his laudatory approach to economics, cannot answer that question - because there is no answer that makes much sense when looked at closely. I mean, his basic premise is correct but how to carry it out without causing even bigger problems is not obvious. Keen clearly does not enjoy discussing the nitty gritty of his proposal.

trojanhorse said...

Ash, you are likely right, that subject should be dropped, the Middle East being a touchy issue, too new! So what about a bit of discussion about the big old one, WWII? For instance, did Britain declared war on Germany because Germany invaded Poland or because Russia invaded Poland? ..... Or, hey, how about the date that WWII started, was it 1939 or 1941? ... Chuckle!

Ash said...


I noticed that too in the interview, and I believe it stems from our evolved culture of soundbite "solutions" expected from academics and politicians. We expect people like Dr. Keen to give us uber-specific details of how a debt reduction plan can be formulated and implemented, and get rid of all of those unhealthy liabilities. Reality is much too complex for such simplistic attempts at understanding how we can go from the disastrous state of affairs we have now to a significantly less disastrous state of affairs in the future.

That understanding comes with patience, effort, open-mindedness and a tolerant acceptance of the inherent uncertainties and unpredictability contained within our "plans" and "solutions". Those are the things that most consumers in the developed world, unfortunately, will not have, filling the void with frustration, fear and hate instead. Our "leaders" will never get a chance to craft sensible and equitable policies, such as Keen's, because they will be blinded by a culture of short-term, simplistic and narrowly-focused perspective.

Nassim said...

Our "leaders" will never get a chance to craft sensible and equitable policies, such as Keen's, because they will be blinded by a culture of short-term, simplistic and narrowly-focused perspective.


I thoroughly agree, and that is why Keen is wasting his time. People are very short-term creatures and so it can only end badly. Sorry for being such a pessimist. :)

Ash said...

Goldman succinctly explains why a concept [exiting the EMU] does not have to be spelled out in a bunch of words on paper (or bits on a hard drive) before that concept has an undeniable existence in the real world.

"Contrary to the opinion of some observers, we hold the view that the likelihood of an ‘orderly break-up’ or ‘managed divorce’ (the dissolution of Czechoslovakia is sometimes held up as a precedent) is low. Beyond the fact that there is no ‘pre-nuptial’ agreement in the event of such a divorce, markets operate more quickly than political negotiations. As soon as the prospect of an exit or break-up is entertained, we would expect a run on sovereign bonds and bank deposits in the weaker countries as investors seek to protect themselves from being paid in a devalued currency. And measures taken to limit these flows (and, by implication, to limit the exposure of other countries to any such devaluation) would lead to the dissolution of the monetary union ahead of any formal political announcement, as they would disrupt the equivalence between Euros held in one part of the Euro area and those in another (which is the key feature of monetary union)."

el gallinazo said...

I am a big fan of Steve Keen. But if he suggests a limited debt Jubilee as a least worst case solution, I also would like a lot of details as to how it would work in order to evaluate the idea. And I think the interviewer was quite justified in pursuing this.

I personally think we could wipe out a lot of the bad debt by just letting capitalism take its course, which of course would throw all the multinational banks and most of the private hedge funds into receivership and wipe out all their shareholders, and more importantly, bondholders. And put Bill Black in charge of prosecuting financial fraud. If convicted, they should be given a choice of paying back every penny they stole plus serious punitive damages with some hard time as well or the firing squad.This is exactly what they deserve. And let little banks take over business as the little insectivore mammals did after the dinosaurs got zonked. Bring the financial sector to under 5% of the economy where they might do something useful, perhaps even God's work, and outlaw fractional reserve banking and leverage. Cash and carry and cash on the barrelhead.

I also feel that the interviewer was being totally obnoxious when she accused Keen of being on a massive ego trip, but I thought he handled it well. Keen is one of the most ego balanced of the academic economists.

Joe in NC said...

Re: Steve Keen.

Steve Keen is a fantastic academic. I prefer Michael Hudson as far as academics go.  Both have made many contributions to help me understand the deep shit we are in.  Roubini was great '04 - '07 explaining things like sub-prime and NINJA loans.  Not sure what happened to Roubini - too much politics?


el gallinazo said...

Joe in NC said...

Roubini was great '04 - '07 explaining things like sub-prime and NINJA loans. Not sure what happened to Roubini - too much politics?


Too many 20 something groupies. Really.

I thought Roubini was a lot better than the other neoclassical morons, but never great. He always vastly underestimated the problems, but at least he acknowledged their existence. Dr. Doom Lite is what I used to call him. Now I call him Paul Krugman Lite.

Ash said...

re: half life of this weekend's "game-changing" rumor [IMF bailing out Italy with "massive" loan facility]

It was denied within a day and couldn't even make it to the Asian close. Oh well, perhaps we'll hear something about a new "bailout coalition of the willing" for Europe tomorrow. Rumor has it that Japan is planning on shipping some Playstations over to Italy and Spain.

Anonymous said...


@ Greenpa

Concerning von Clausewitz, I think the word "unknowable" is too strong. "Ungewißheit" is, in my opinion, correctly translated as "uncertainty".

However, the term "area" is poorly chosen, I think your term, "realm" is quite good.

Please note that I am not German.

@ All

Spiegel is talking today about a Die Welt article about "elite bonds", i.e. euro bonds limited to six countries (D, F, A, NL, L, FI).

Spiegel also mentions a Bild article about a bilateral agreement between D and F on a new Euro contract for the stronger countries. They speak of it being operational as of the beginning of January.,1518,800255,00.html

No English translation yet.


Ashvin said...

Morning Euro market update:

EUR/USD (+1%) and equities (+2-3%) staging a rally on two rumors that were since denied and temporary ECB buying.


"European markets have surged on those reports of an IMF bailout for Italy and chatter of a German-led six-nation bond issuance to raise loans for Club Med.

The German Finance Ministry says there are "no plans" for joint bonds between AAA nations - contrary to a report in Die Welt newspaper - but says it is working "intensively" to create a stability union through treaty changes.

09.00 Italian 10-year bond yields - the cost to the government of borrowing money - have eased a little but remain in unsustainably high territory, down 20 basis points to 7.025pc. Spanish 10-year bonds yields are down a little as well, dropping 5bps to 6.584.

UK yields are up 9bps to 2.369, higher than Germany at 2.308 (up 5bps). French yields are down 1bps to 3.657pc.

Update: there are reports of ECB buying Italian debt this morning, which will explain the narrowing on spreads over Germany."

Very weak bond auctions from Italy and Belgium, but, hey, at least they didn't "fail"!


"Italy had to accept yields of 7.3% on an auction of 12-year index-linked bonds. That's a huge jump compared with a similar auction a year ago, where the yield came in at 2.19%.

Belgium found buyers for €450m of 10-year bonds, but saw the yield (or interest rate) demanded by investors jump to 5.659% (from 4.372% at the last auction of this type). That's the highest yield paid since 2000, according to Bloomberg data."

And to round off the positive market sentiment, a new OECD report defecated all over Europe and the world, slashing growth rates and predicting a worst case scenario of -2%+ contraction in all of Europe 2012.


"Some chilling words on the euro debt crisis from the OECD (Organisation for Economic Co-operation and Development). Policy makers around the world must "be prepared to face the worst", they say.

The failure of EU leaders to stem the crisis could "massively escalate economic disruption" and end in "highly devastating outcomes".

"The euro area crisis represents the key risk to the world economy at present. A large negative event would... most likely send the OECD area as a whole into recession."

A significant worsening of the eurozone debt crisis would push the single currency area into recession of more than 2pc for the next two years. The US and Japanese economies would also be tipped into recession.

There would be intense pressure for some countries to abandon the euro, which the OECD warned would amplify the crisis and trigger "massive wealth destruction, bankruptcies and a collapse in confidence in European integration."

The OECD, referring openly to the possibility of a country or countries leaving the eurozone, said that more middle-way efforts at "muddling" through would leave the eurozone and world economies in the doldrums for years."

scandia said...

@FB...About those bonds I have been wondering how an " elite " bond would play out. Seems to me such an action defies reality in that it assumes a haven from contagion. How can this be in our connected global structure?

@Greenpa...Re the Pakistan crisis I wonder how significant the closing of the supply line is? Are troops in the field impacted? Are there now troops stranded behind enemy lines cut off from needed supplies of food, ammo,etc? The buzz is that the spat will be patched up and there will be a return to BAU. Looking at the rage in the populace I don't think Pakistan can control the population in this case. Especially when it comes close on the heels of the bin Laden assasination causing a loss of face for Pakistan.

snuffy said...

I seem to have trouble posting today.
I think this is end-game time.When the euro goes,its going to take every fast move every entity in existence to keep the rest of the world financial centers intact.
We seem to be on the brink of so many crisis,that the reaction time for "our leaders"is being stretched past their ability to respond effectively to them.

In warfare,one of the most effective means of a smaller force defeating a much larger one is to use speed of operation to prevent effective response to attacks

Our leaders ability to respond speedily to all of these various crisis in a effective manner is what will bring chaos and crisis HERE to the streets and cities if America....Watch and see if this is not the case in the coming months.......

Bee good,or
Bee careful


Anonymous said...


@ Scandia
I would not take the notion of "elite bonds" overly seriously. At least not right now. They are being announced as a means for the stronger countries to consolidate their own finances and put themselves in a position to assist the less strong. I doubt the weaker countries would receive much help. Elite bonds are probably a means to purge the euro of the weaker countries or at least to put pressure on them.

For a while now, I have thought that the euro would be trimmed down to the original six EU countries (F, D, NL, B, L, I), minus Italy, plus Austria, perhaps with Finland thrown in. Belgium is now iffy and who knows if it will even exist in five years.

However, that would probably mean the end of the EU as we know it, so I doubt it would happen any time soon.


agtefc said...

@ Board (& Stoneleigh)

Good Day:)

Regarding battery storage for solar power systems:

Most batteries have approx. 2000 charge cycles. One can store batteries on a trickle charge or by charging every month to ensure they are not depleted. Once fully depleted you run the risk of the battery becoming permanently dead.

Are any of you storing batteries en mass as your strategy for long term power. ??? I still see batteries becoming the single limiting factor of solar power to the downside.

Ultimately, my lifeboat is designed around no gas, and no electricity, with the solar system being an item to ameliorate the transition.

How many amp-hours of capacity do you have hooked in parallel?


trojanhorse said...


I think this might be the English Translation, or a related article, about the 'Elite bonds' you mentioned.

Berlin Denies Rumors of Plans for Joint 'Elite Bond'

Greenpa said...

FB: "Please note that I am not German."

yup, knew that. :-) But you've also previously illustrated familiarity much greater than my own.

"Uncertainty" does make sense to me now. I suppose "unknowable" would be something like "ungewißbarkeit" :-)

trojanhorse said...

If anyone would care to listen to a better interview of Steve Keen with a less obnoxious interviewer heere is something from C-Realm Podcast

... or if you are into the art and practice of circumlocution, like some, then this interview of Brian Eno by Dick Flash is the one. Dick is really a Flash while Eno is for the main ambient, but with a brief flash of prepotence towards the conclusion of the interview.

Anonymous said...


@ Scrofulous
Yes, that is the article, but it looks much shorter than the German. Just checked, the whole end of the German article is missing. The title is different too. Still, the essential parts are there. Spiegel is very good about putting up translations rapidly and I am impressed by their translator.

@ Greenpa
When I say I am not German, it not to dissociate myself from them, it is simply that I am not a native speaker and so cannot speak authoritatively.

About "unknowable", it obviously depends on the context (language is context), but perhaps "unbegreiflich" or "unfassbar".

@ Cheryl
With the exception of your highly obnoxious comment a few weeks ago, I happen to find your contributions very funny (I mean that in a positive sense).
But there is a word in your message just above (12.00) that reveals why you are simply not on the same wavelength as TAE. That is "today". TAE is looking through the other end of the spyglass.


Greenpa said...

Oh, yippee skippee. The judge threw the Citi settlement out.

"The court “concludes, regretfully, that the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest,” Rakoff wrote."

That should put a kink in the markets; the herd is already very spooky.

Supergravity said...

I've read those indefinite detention provisions in sec.1031 and sec.1032 of s. 1867

The status of unpriviledged enemy belligerent [unlawful enemy combatant] may not be used to constrict the protection and facilitate the mistreatment of prisoners under the laws of war without establishing a warcrime directly, pursuant to the authorization for use of military farce.

Voting in favor of said bill may constitute a warcrime, although acts of judiciary sedition resulting from implementation of detention provisions may only occur pursuant to authorization for use of military force within the US against belligerent citizens, whereas such authorization itself would constitute treason.

The requirement[!] to detain a person in military custody under this section does not extend to citizens of the United States."

This provision is meaningless as the designation of enemy belligerent applied to any person superseeds the constitutionally protected status of citizen, which is precisely the intention of the military detention acts.

Ashvin said...

Europe's new strategy for containing the sovereign debt crisis - make it impossible for officials to deny rumors.


"From the horse's mouth? Christine Lagarde, the head of the International Monetary Fund, throws her weight behind the unnamed denials - she says neither Italy nor Spain has made a funding request to the IMF.

She was speaking from Lima, Peru today as part of a tour of South America.

The story (see 06.20 post) that the IMF was drawing up a £517m rescue package for Italy and Spain, sparked by Italian newspaper reports over the weekend, was denied by an unnamed IMF spokesman earlier today.

However Ms Lagarde's denial that there has been a request for funding still leaves open the possibility that the fund is thrashing out possible ways to help the eurozone without waiting to be asked..."

Anonymous said...


All sorts of interesting info from Germany. Spiegel just came out with an article on three options.

1. Protocol 14. Never heard of it, but apparently, it would allow the EU, if the EP agrees, to modify the euro contract while sidestepping lengthy ratification procedures, on the condition all 27 vote for it, which is unlikely. I doubt this would fly.

2. Intergovernmental agreement, i.e. outside EU channels, to set up a new governance system for the euro and essentially a new euro. This is pretty much the same as the "elite bonds" proposal and includes the same six (D, F, NL, L, A, FI). Others could join, but obviously under certain conditions.

3. Germany leaves the euro. The costs would be between 250 and 340 G€ for Germany alone. German euro banknotes would receive a special magnetic marker for the transition period to the new banknotes. This is acknowledged as the end of the EU.

Pretty much everything is now on the table.

The above is sketchy because the article was not exactly detailed.


seychelles said...

Dow up 303, S&P up 35; nothing but cherylulian skies ahead.

Orwellian thoughts for those who claim innocence via denial or ignorance, taken from "Comfortably Numb" on the Burning Platform:

“The mistake you make, don’t you see, is in thinking one can live in a corrupt society without being corrupt oneself. After all, what do you achieve by refusing to make money? You’re trying to behave as though one could stand right outside our economic system. But one can’t. One’s got to change the system, or one changes nothing."

May OWS be the little pebble that starts an avalanche!

Ashvin said...

Under-statement of the year.

(Telegraph) "And here's some more from that President Obama meeting with EU officials. A disclaimer before you read on - it's pretty light on details...

The two sides said:

'We are committed to working together to reinvigorate economic growth, create jobs, and ensure financial stability. We will do so by taking actions that address near-term growth concerns, as well as fiscal and financial vulnerabilities, and that strengthen the foundations of long-lasting and balanced growth.

In that regard, the United States welcomes the EU’s actions and determination to take all necessary steps to ensure the euro area’s financial stability and resolve the crisis. The EU looks forward to U.S. action on medium term fiscal consolidation.'

The EU side also said it was preparing more sanctions against Iran."

jal said...

@ TAE Daily said...

So now, we have everyone agreeing to print paper for the bears to wipe their arses.

Supergravity said...

Here's a paper arguing that self-selective psychopathic behavior and clustered sociopathy within business and banking contributed to financial collapse.

"When presented to management academics in discussion, the Corporate Psychopaths Theory of the Global Financial Crisis is accepted as being plausible and highly relevant. It provides a theory which unifies many of the individual interpretations of the reasons for the Global Financial Crisis and as such is worthy of further development."

Ashvin said...

Fitch revises US ratings outlook to negative, but won't "resolve" the outlook for 2 years, barring "material adverse shocks".

At that time, Fitch will flip a coin. Heads = downgrade, Tails = No downgrade.

"The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon. Fitch will shortly publish its revised economic and fiscal projections for the U.S. and will conduct a further review of its sovereign ratings in 2012. However, in the absence of material adverse shocks, Fitch does not expect to resolve the Negative Outlook until late 2013, taking into account any deficit-reduction strategy that emerges after Congressional and Presidential elections."

Ilargi said...

New post up.

Are we there yet?