June 14, 2012
Redemption or Damnation for the Eurozone
News have emerged yesterday of a possible change of mind of Angela Merkel on the famous Euro Redemption Fund which could amount to 2.3 trillion euro.
For those unaware of what is this, let us point out it is not a bailout mechanism like the EFSF which has failed miserably so far to avert contagion.
The Redemption Pact covers all public debts of EMU states above the Maastricht limit of 60pc of GDP, roughly €2.3 trillion.
The idea is to put all the excess debt above 60% GDP in a bad bank and allow each country to pay it down over twenty years.
Each state would be responsible for its own debt and would be forced to pay it back by its own means in specific Italy would have to repay €960bn, Germany €580bn, France €500bn and so forth -- but they would issue bonds jointly in order to obtain the most favourable rating and interest rate.
The debt would be covered by joint bonds, paid for from a designated tax.
Officials at Germany's top court say it appears compatible with the country's constitution -- unlike eurobonds. There would be a fixed limit to costs and the fund would not endanger the tax and spending sovereignty of Germany.
Italy and other states would have to pledge gold and other forms of collateral equal to 20pc of their debt in the fund.
"The assets could be taken from the country's currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal.
Germany would have veto power therefore would be able to ensure discipline in a way that it cannot do with the European Central Bank where it has just two votes.
The fund would entail sacrifices for Germany since it would no longer enjoy safe-haven borrowing costs and it would probably costs Berlin 0.6pc of GDP each year.
It seems a nice and fair plan in principle although I feel that some considerations are due.
It will certainly placate the markets for some time letting many States breath some fresh air for a while, but it will not address what is the core issue of the Eurozone a currency union without a fiscal and political union able to enforce common rules and it will exacerbate rather than mitigate the painful issue of austerity without growth. Countries will enslave themselves to a brutal plan of 20 years of debt repayment with no possible negotiation that will have to be enforced regardless of any consideration on the state of their economies. It will be for debtors the same of swapping the debt repayment from a bank to a shylock.
Austerity will become even more brutal on heavily indebted countries this will be only marginally relieved from the lower interest rates brought from the joint bonds.
It will be an insidious institutionalized indenture service for Club-Med and a de-facto seize of power of Germany who will keep on the hook the entire continent for 30 years.
Local politicians in Italy, Greece and Spain will become useless caretakers with no real budget power since a big chunk of it will go either as collateral or as repayment to the Redemption Fund.
The Redemption Fund in those terms will become the biggest CDS ever conceived where trash bonds such as the Italian, Greek and Spanish will be bundled together with German and given a triple A.
It will be interesting to see who will purchase those bonds at least until this fund will be attacked by speculation after some time.
Maybe it is a less painful measure in the short time for Europe than pursuing either an exit of indebted countries from the Eurozone or a closer and more disciplined union but it is again a less insufficient response to the core issues of the Eurozone. Can is being kicked down the road again.
For those unaware of what is this, let us point out it is not a bailout mechanism like the EFSF which has failed miserably so far to avert contagion.
The Redemption Pact covers all public debts of EMU states above the Maastricht limit of 60pc of GDP, roughly €2.3 trillion.
The idea is to put all the excess debt above 60% GDP in a bad bank and allow each country to pay it down over twenty years.
Each state would be responsible for its own debt and would be forced to pay it back by its own means in specific Italy would have to repay €960bn, Germany €580bn, France €500bn and so forth -- but they would issue bonds jointly in order to obtain the most favourable rating and interest rate.
The debt would be covered by joint bonds, paid for from a designated tax.
Officials at Germany's top court say it appears compatible with the country's constitution -- unlike eurobonds. There would be a fixed limit to costs and the fund would not endanger the tax and spending sovereignty of Germany.
Italy and other states would have to pledge gold and other forms of collateral equal to 20pc of their debt in the fund.
"The assets could be taken from the country's currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal.
Germany would have veto power therefore would be able to ensure discipline in a way that it cannot do with the European Central Bank where it has just two votes.
The fund would entail sacrifices for Germany since it would no longer enjoy safe-haven borrowing costs and it would probably costs Berlin 0.6pc of GDP each year.
It seems a nice and fair plan in principle although I feel that some considerations are due.
It will certainly placate the markets for some time letting many States breath some fresh air for a while, but it will not address what is the core issue of the Eurozone a currency union without a fiscal and political union able to enforce common rules and it will exacerbate rather than mitigate the painful issue of austerity without growth. Countries will enslave themselves to a brutal plan of 20 years of debt repayment with no possible negotiation that will have to be enforced regardless of any consideration on the state of their economies. It will be for debtors the same of swapping the debt repayment from a bank to a shylock.
Austerity will become even more brutal on heavily indebted countries this will be only marginally relieved from the lower interest rates brought from the joint bonds.
It will be an insidious institutionalized indenture service for Club-Med and a de-facto seize of power of Germany who will keep on the hook the entire continent for 30 years.
Local politicians in Italy, Greece and Spain will become useless caretakers with no real budget power since a big chunk of it will go either as collateral or as repayment to the Redemption Fund.
The Redemption Fund in those terms will become the biggest CDS ever conceived where trash bonds such as the Italian, Greek and Spanish will be bundled together with German and given a triple A.
It will be interesting to see who will purchase those bonds at least until this fund will be attacked by speculation after some time.
Maybe it is a less painful measure in the short time for Europe than pursuing either an exit of indebted countries from the Eurozone or a closer and more disciplined union but it is again a less insufficient response to the core issues of the Eurozone. Can is being kicked down the road again.
June 13, 2012
Greek Bank Run hits new record, $1 Billion in 24 hours
Reuters now
estimates that Greek bank run has nearly doubled from yesterday:
"Combined daily deposit outflows from the major Greek banks have reached 500-800 million euros over the past few days, with the pace picking up as the election draws closer and rising noticeably on Tuesday, two bankers said." This is roughly $1 billion a day in the upper case, and a number that is approaching 0.5% of the entire documented €170 billion (now likely much less) deposit base.
How much of this is fact, and how much pre-election scaremongering to scare people from voting against Syriza remains to be seen.
"Combined daily deposit outflows from the major Greek banks have reached 500-800 million euros over the past few days, with the pace picking up as the election draws closer and rising noticeably on Tuesday, two bankers said." This is roughly $1 billion a day in the upper case, and a number that is approaching 0.5% of the entire documented €170 billion (now likely much less) deposit base.
At the daily rate of doubling the "estimate" by Friday Greece will be experiencing a $4 billion in outflows. We wonder which banks will have any cash left at that point.Deposit outflows at smaller and medium sized banks were running at 10-30 million euros.
"This includes cash withdrawals, wire transfers and investments into money market funds, German Bunds, U.S. Treasuries and EIB bonds," said one banker, who spoke on condition of anonymity.
Fears that Greece may have to quit the single currency and return to a weak drachma have fuelled a steady stream of withdrawals by companies and businesses alarmed at the prospect of seeing the value of their deposits cut sharply.
The result of the election, called after a previous vote in May failed to produce a government, remains too close to call, with the conservative New Democracy party running neck and neck with radical leftist SYRIZA.
Both groups say they want Greece to remain in the single currency but SYRIZA has pledged to scrap a 130 billion euro bailout agreement signed in March which has imposed some of the toughest austerity measures seen in Europe in decades.
How much of this is fact, and how much pre-election scaremongering to scare people from voting against Syriza remains to be seen.
June 10, 2012
June 9, 2012
Spain Bailout Disaster Explained
Spain is going to ask for a bailout this weekend and what will happen in the next weeks is open to much speculation, the nightmare of a contagion to a major Euro economy has happened and any possible amount set aside from the Euro funds will fall short for the now escalating Spanish crisis.
Let us check some figures on the Spanish mess:
Spain's housing bubble is the dark blue line below. The US is the gray one.
Cajas primary lending market during Spain's housing boom were subprime and sub-sub prime borrowers.
The entire Spanish banking system is saturated with toxic mortgage debt on a level that makes the US in 2008 looks like a minor incident.
In response to this Spain has just performed the largest bank nationalization in its history: Bankia.
Here’s a brief summary:
Bankia was formed in 2010 when the Spanish Government merged seven insolvent cajas. In plain terms, Bankia was a trainwreck waiting to happen.
However, both the bank itself and the Spanish Government decided to maintain a charade that the bank was in great form right up until it collapsed (only one month ago Bankia was talking about paying its dividend).
On May 9th the Spanish Government stepped in to nationalize the bank. Its first step was to convert its (the Spanish Government’s) €4.5 billion worth of preferred shares to common shares, thereby taking a 45% stake in the bank.
The Spanish Government assured everyone that this move was adequate and that Bankia was solvent. Then Bankia announces €17 billion of new write-downs as well as €7 billion of mark-downs on investments. It also revised its 2011 results from a €309 million profit to a €3 billion LOSS.
It is true though that all major banks in the Western world are engaging in similar accounting practices to hide the true conditions of their balance sheets.
In Bankia’s case all of this culminated in the bank receiving a €19 billion Euro bailout, the largest in Spain’s history. And for certain this amount of money will be increased dramatically: Bankia’s loan book is roughly €200 billion in size (1/5th the size of Spain’s GDP) and a major chunk of this is most probably garbage.
The real problem though is that Spain itself is broke and doesn’t have the money to bailout Bankia.
The Spanish stock market has been in a free fall for most of 2012 as Spain's banking system teeters on the brink of collapse.
If we look at Spain's LONG-TERM chart where the market has just broken a 15 YEAR TRENDLINE we are set for disaster.
I believe we have at most a month before Spain drags down other countries. The Spanish economy and banking system are too large to be bailed out and the IMF and ECB know this.
Moreover, worldwide banking exposure to Spain is well over €1 TRILLION.
EU banking system is leveraged at 26 to 1 (Lehman Brothers was leveraged at 30 to 1 when it collapsed).
Troubled times ahead for Europe.
Let us check some figures on the Spanish mess:
- Total Spanish banking loans are equal to 170% of Spanish GDP.
- Troubled loans at Spanish Banks just hit an 18-year high.
- Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).
- Spanish citizens are pulling their money out of Spain en masse: over €100 billion left the Spanish banking system in 2012 alone.
- Over HALF of all Spanish mortgages are owned by Spanish cajas.
Spain's housing bubble is the dark blue line below. The US is the gray one.
Cajas primary lending market during Spain's housing boom were subprime and sub-sub prime borrowers.
The entire Spanish banking system is saturated with toxic mortgage debt on a level that makes the US in 2008 looks like a minor incident.
In response to this Spain has just performed the largest bank nationalization in its history: Bankia.
Here’s a brief summary:
Bankia was formed in 2010 when the Spanish Government merged seven insolvent cajas. In plain terms, Bankia was a trainwreck waiting to happen.
However, both the bank itself and the Spanish Government decided to maintain a charade that the bank was in great form right up until it collapsed (only one month ago Bankia was talking about paying its dividend).
On May 9th the Spanish Government stepped in to nationalize the bank. Its first step was to convert its (the Spanish Government’s) €4.5 billion worth of preferred shares to common shares, thereby taking a 45% stake in the bank.
The Spanish Government assured everyone that this move was adequate and that Bankia was solvent. Then Bankia announces €17 billion of new write-downs as well as €7 billion of mark-downs on investments. It also revised its 2011 results from a €309 million profit to a €3 billion LOSS.
It is true though that all major banks in the Western world are engaging in similar accounting practices to hide the true conditions of their balance sheets.
In Bankia’s case all of this culminated in the bank receiving a €19 billion Euro bailout, the largest in Spain’s history. And for certain this amount of money will be increased dramatically: Bankia’s loan book is roughly €200 billion in size (1/5th the size of Spain’s GDP) and a major chunk of this is most probably garbage.
The real problem though is that Spain itself is broke and doesn’t have the money to bailout Bankia.
The Spanish stock market has been in a free fall for most of 2012 as Spain's banking system teeters on the brink of collapse.
If we look at Spain's LONG-TERM chart where the market has just broken a 15 YEAR TRENDLINE we are set for disaster.
I believe we have at most a month before Spain drags down other countries. The Spanish economy and banking system are too large to be bailed out and the IMF and ECB know this.
Moreover, worldwide banking exposure to Spain is well over €1 TRILLION.
EU banking system is leveraged at 26 to 1 (Lehman Brothers was leveraged at 30 to 1 when it collapsed).
Troubled times ahead for Europe.
June 7, 2012
June 6, 2012
Stereotyping Europe
No Comment Required!
Source: Pew, Greeks and Germans at Polar Opposites, European Unity on the Rocks
Source: Pew, Greeks and Germans at Polar Opposites, European Unity on the Rocks
June 3, 2012
Drugs, Dollars and Banks
Drug is a precious commodity but also a powerful social disruptor able to wreak havoc in a society and weaken it; it was used in the past in China during the Opium Wars to weaken the Qing Dinasty and accumulate huge profits for Britain or today in Afghanistan and many other Latin and African countries to fragment and destroy the social fabric and control its production and profits.
Political use of drugs
Drugs are a powerful weapon when deployed on a population, its many advantages include:
Drugs have many similarities with oil as well; the reserve currency for drug smuggling and transactions is the dollar, every drug transaction is practically paying a fee to the US Federal Reserve, not surprising that such a trade is protected by concerned governments all over the world.
If the Iraqi wars were fought for oil; Afghanistan was in part fought for opium and it started shortly after the Talibans started to destroy opium fields and banned drugs trade.
This is past history and it can explain why war to drugs is and will always be a lost war, no one is really interested to fight such a profitable business regardless of occasional moral proclamations broadcasted on TV.
New Drugs economy
The future of drugs is the new synthetic trade growing rapidly and evolving technologically to become independent from natural sources.
If the new Canadian producers of synthetic drugs will succeed the economical landscape of drugs could change rapidly in the following years, removing the difference between producers and consumers countries and allowing for mass production of drugs without need of natural resources and reducing the time to market and cross-border illegal trade.
Still now though who is profiting the most from drugs is the banking system who launder the profits and reap the hidden tax of the dollar as a reference currency in the case of USA.
Let us not forget that when the Euro was introduced a 500 Euro bill was created specifically for the necessities of smugglers, cartels and bankers, at that time the major aspiration for the Euro was to replace the dollar as preferred currency of choice for drug barons, arm dealers and robber barons.
The Guardian today added an interesting outlook (brief excerpt below) on where and how profits from this trade are done.
It will not raise any parliamentary discussion or moral debate on the war to drugs, the issue has disappeared slowly and silently from public debates while drugs have been more and more popularized by the media as socially acceptable if not socially cool, after all banks are drowning in debt, economies are collapsing then what better way to fill the empty coffers with an increased number of addicts and stupor their futures and fortunes away.
From The Guardian:
Political use of drugs
Drugs are a powerful weapon when deployed on a population, its many advantages include:
- docility of addicted population
- increase of economic indebtedness
- increased stress on health services and social services
- social fabric fracture and degradation
- massive outflow of capitals to foreign banking systems and suppliers
- increased corruption and illegality
- creation of an indentured service system
Drugs have many similarities with oil as well; the reserve currency for drug smuggling and transactions is the dollar, every drug transaction is practically paying a fee to the US Federal Reserve, not surprising that such a trade is protected by concerned governments all over the world.
If the Iraqi wars were fought for oil; Afghanistan was in part fought for opium and it started shortly after the Talibans started to destroy opium fields and banned drugs trade.
This is past history and it can explain why war to drugs is and will always be a lost war, no one is really interested to fight such a profitable business regardless of occasional moral proclamations broadcasted on TV.
New Drugs economy
The future of drugs is the new synthetic trade growing rapidly and evolving technologically to become independent from natural sources.
If the new Canadian producers of synthetic drugs will succeed the economical landscape of drugs could change rapidly in the following years, removing the difference between producers and consumers countries and allowing for mass production of drugs without need of natural resources and reducing the time to market and cross-border illegal trade.
Still now though who is profiting the most from drugs is the banking system who launder the profits and reap the hidden tax of the dollar as a reference currency in the case of USA.
Let us not forget that when the Euro was introduced a 500 Euro bill was created specifically for the necessities of smugglers, cartels and bankers, at that time the major aspiration for the Euro was to replace the dollar as preferred currency of choice for drug barons, arm dealers and robber barons.
The Guardian today added an interesting outlook (brief excerpt below) on where and how profits from this trade are done.
It will not raise any parliamentary discussion or moral debate on the war to drugs, the issue has disappeared slowly and silently from public debates while drugs have been more and more popularized by the media as socially acceptable if not socially cool, after all banks are drowning in debt, economies are collapsing then what better way to fill the empty coffers with an increased number of addicts and stupor their futures and fortunes away.
From The Guardian:
The vast profits made from drug production and trafficking are overwhelmingly reaped in rich "consuming" countries – principally across Europe and in the US – rather than war-torn "producing" nations such as Colombia and Mexico, new research has revealed.
The most far-reaching and detailed analysis to date of the drug economy in any country – in this case, Colombia – shows that 2.6% of the total street value of cocaine produced remains within the country, while a staggering 97.4% of profits are reaped by criminal syndicates, and laundered by banks, in first-world consuming countries.
Gaviria and MejÃa estimate that the lowest possible street value (at $100 per gram, about £65) of "net cocaine, after interdiction" produced in Colombia during the year studied (2008) amounts to $300bn. But of that only $7.8bn remained in the country.
"It is a minuscule proportion of GDP," said MejÃa, "which can impact disastrously on society and political life, but not on the Colombian economy. The economy for Colombian cocaine is outside Colombia."
The mechanisms of laundering drug money were highlighted in the Observer last year after a rare settlement in Miami between US federal authorities and the Wachovia bank, which admitted to transferring $110m of drug money into the US, but failing to properly monitor a staggering $376bn brought into the bank through small exchange houses in Mexico over four years. (Wachovia has since been taken over by Wells Fargo, which has co-operated with the investigation.)
But no one went to jail, and the bank is now in the clear. "Overall, there's great reluctance to go after the big money," said MejÃa. "They don't target those parts of the chain where there's a large value added. In Europe and America the money is dispersed – once it reaches the consuming country it goes into the system, in every city and state. They'd rather go after the petty economy, the small people and coca crops in Colombia, even though the economy is tiny."
With Britain having overtaken the US and Spain as the world's biggest consumer of cocaine per capita, the Wachovia investigation showed much of the drug money is also laundered through the City of London, where the principal Wachovia whistleblower, Martin Woods, was based in the bank's anti-laundering office. He was wrongfully dismissed after sounding the alarm.
Gaviria said: "We know that authorities in the US and UK know far more than they act upon. The authorities realise things about certain people they think are moving money for the drug trade – but the DEA [US Drugs Enforcement Administration] only acts on a fraction of what it knows."
"It's taboo to go after the big banks," added MejÃa. "It's political suicide in this economic climate, because the amounts of money recycled are so high."
The Small Earthquake that can bring Italy down
It is estimated that more than 3000 enterprises and factories have been damaged by those two earthquakes, after the first earthquake on the 20th of May all factories were checked for damages and were granted green light to resume production, unfortunately workers died under the rubble of crumbling warehouses when the second earthquake hit at 9 am on the 29th.
This time of course production in the factories has been stopped undefinetely until all structures are thoroughly checked for damages which could take months.
If we check a seismic map of Italy this area was considered as a safe one not requiring special precautions when building since no earthquake had been registered in the last 400 years.
Historically there was an extremely long series of earthquakes that struck the region in the 16th century and that went on for many years with hundreds of medium-low intensity earthquakes but not further activity since then.
It is true that most probably even if the area was highlighted as prone to earthquakes little would have changed in building practices, even critical areas prone to major earthquakes in Italy are still building with no seismic fail safe; corruption, carelessness and lack of rules are all ingredients to buildings being raised cheap and fast; ready to fall and boost the reconstruction business when disaster strike.
After all Italians still remember the laughs of joy of corrupt builders when informed of the earthquake of Aquila in 2009, transcripts of their phone calls were intercepted by Police in relation to bribery charges to former Berlusconi government officials.
Reconstruction is a major business for Italian builders; it boosts revenue and margins and incentivates them to build as bad as possible in order to increase the base of possible candidates, furthermore since even in case of proved negligence not even a builder has ever gone to prison, there is not even fear of retribution. This morally repulsive and economically destructive (for the society not for the builders) attitude has been dominant for many decades and it can explain why the most recent buildings are the first to collapse during an earthquake even before centuries-old historical buildings.
News of the first strike briefly appaered on major international news while the second one was mostly unreported although it has the potential of accelerating the Italian economic crisis to new heights and consequently affect the entire eurozone economy.
Let us be clear if terrorists would decide to cripple the economy of Italy they would have chosen the same area; destroy or paralyze the industrial production of The Emilia Region is equivalent to destroying 1-2 % of the Italian GDP with a consequent spiralling of the crisis.
This area alone is the backbone of Italy's industrial system, firms producing almost everything from biomedical to mechanics to food processing, current damages are 2 billion euros but aside from this a prolonged production shutdown will cause immense stress to the Italian tax revenue with a consistent shortfall and an almost sure missing of the budget parameters requested by the European fiscal compact.
If earthquakes will go on for months or even years as geologists are predicting, those factories that were already deeply affected by the global economic crisis will be out of business causing a major blow to an already crumbling Italian economy.
Pity that a similar earthquake in places such as Japan or California would have been just a small inconvenience with little or no damages.
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