Post-Rescue Cyprus Depression

So the rescue of Cypriot troubled banks has been finally approved after 1 week of absolute lunacy in Cyprus, for those not aware yet a quick recap on the key points approved yesterday night:

Key points of the deal:

Laiki bank will be fully resolved – it will be split into a good bank and bad bank. The good bank will merge with the Bank of Cyprus (which will also take on Laiki’s circa €8bn Emergency Liquidity Assistance – a last-resort funding system outside the usual ECB operations). The bad bank will be wound down over time with all uninsured depositors (over €100,000) taking significant losses (no percentage yet but some could lose all their money above the threshold).

The Bank of Cyprus will be recapitalised using a debt to equity swap and the transfer of assets from Laiki. Uninsured depositors will take large hits in this process – again no percentage but reports suggest up to 40%.

These actions will be taken using the new bank restructuring plan passed in the Cypriot Parliament on Friday. Crucially, no further vote will be needed in the Cypriot parliament since there is no direct deposit levy.

The banks will not receive any of the €10bn bailout money, the entire recapitalisation will be done using the tools outlined above.

Significant capital controls are likely to be in place when banks reopen, creating a risk of Cypriot euros being “localised”.

Further tax increases may be included in the detailed plan to be drawn up between the two sides.

  and as a consequence an entire country will be sliding very fast in a Great Depression:

From SocGen:

Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.

Cyprus’ position as a financial centre is over. There are few other alternatives for growth. One option that remains is tourism, but with a significantly overvalued currency it is not clear to what extent Cyprus can take advantage of this.
The capital controls will severely hamper liquidity in the economy, while it will be very difficult for the small island to trade with the rest of the world (it is far from self-sufficient, importing almost everything). The collapse in GDP could be anywhere between 5% and 10% this year, depending on how long capital controls are imposed and the resulting collapse in tax revenue could make the government’s position worse. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and ECB funding to function, possibly requiring further bailouts.

Capital controls are severe and could de facto lead to Cyprus being seen as out of the euro. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a Euro in Cyprus is worth the same as a Euro elsewhere. The real problem though may not be imposing the controls but removing them – Iceland still has capital controls in place, five years after it installed them (despite having the advantage of a devalued currency).

The €10bn bailout will push Cypriot debt to GDP to 140% - if Cypriot GDP falls by just 5% this year, that rises to 148%.

In the meanwhile the bailout deal is already rising anti-Euro sentiments all over the country,  one of the most influential voices speaking against the Euro and the EU is the Orthodox Church Leader Archbishop Chrysostomos II who commented on TV that "with the brains in Brussels... the Euro can't last," certainly the fact that the Orthodox Church of Cyprus lost over 100 million euro holdings in the Bank of Cyprus must have contributed to his anger toward the EU and the Cyprus politicians: "those that brought the place into this mess, should sit on the stool. " (blaming the outgoing government, Ministers of Finance, the Central Bank, and the Executive Directors of Banks).
May his prayer be accepted! When the full scale of social devastation inflicted on Cyprus will be apparent a chopping block would be more suitable than a stool!

IMF voiced to prepare an emergency 600 billion loan to Italy

Some stories in European press suggest that Italy is working on a very big loan package from the IMF according to the newspaper Repubblica a loan of 600 billion euro is being considered for Italy.
I'm very curious to find out what kind of tricks the IMF will resort to find this amount of money which is much larger than the current EFSF allocation.
If this option is being considered it means that there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone who think that Monti can pull off a miracle, they are deluded, he is simply in charge of seizing the private wealth accumulated by Italian citizen to cover for the enormous Italian public debt and compensate foreign investors and banks in the process. There is a zero chance for a market solution for Italy. Either the ECB (aka Germany) steps in and underwrites the debt with some form of Euro bonds or the IMF (aka the USA) steps in with some very serious money.
Italian bond yields more than doubled in a month and this has left banks and financial institutions scared to death.
Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of. The policy makers are aware of this too.
Something is brewing. If there is a plan in the works it must involve the IMF and it’s going to be big.

In the real world of global finance the reality is that any country that is forced to accept an IMF bailout is also blocked from issuing debt in the public markets. IMF (or other supranational debt) is ALWAYS senior to any other indebtedness of the country. That’s just the way it works. When Italy borrows money from the IMF it automatically subordinates the existing creditors. Lenders hate this. They will vote with their feet and take a pass at Italian new debt issuance for a long time to come. Once the process starts, it will not end. There will be a snow ball of other creditors. That's exactly what happened in the 80's when Mexico failed; within a year two dozen other countries were forced to their debt knees.
There is unfortunately not anymore a safe exit from this mess. The liquidity crisis in Italy is scaring us to death, the solution will almost certainly kill us.

Global crisis alarms mounting

We are getting closer to a major event and ringing bells are everywhere, although lately the doom and gloom business is not only reserved to fringe alarmists but it is becoming normal business for credible and serious institutions and figures, below a collection of quotes that have been issued by major players of the world economy.

#1 Credit Suisse’s Fixed Income Research unit: “We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”
#2 Willem Buiter, chief economist at Citigroup: “Time is running out fast.  I think we have maybe a few months — it could be weeks, it could be days — before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it.”
#3 Jim Reid of Deutsche Bank: “If you don’t think Merkel’s tone will change then our investment advice is to dig a hole in the ground and hide.”
#4 David Rosenberg, a senior economist at Gluskin Sheff in Toronto: “Lenders are finding it difficult to finance their day-to-day operations with short-term funding. This is a lot like 2008 but with more twists.”
#5 Christian Stracke, the head of credit research for Pimco: “This is just a repeat of what we saw in 2008, when everyone wanted to see toxic assets off the banks’ balance sheets”
#6 Paul Krugman of the New York Times: “At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.”
#7 Paul Hickey of Bespoke Investment Group: “More and more, we are hearing anecdotal comments from individual and professionals that this is the most difficult environment they have ever experienced as the market is like a fish flopping around after being taken out of the water.”
#8 Bob Janjuah of Nomura International: “Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB‟s balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions.”
#9 Dan Akerson, CEO of General Motors: “The ’08 recession, which was a credit bubble that manifested itself through primarily the real estate market, that was a serious stress….This is much more serious.”
#10 Francesco Garzarelli of Goldman Sachs: “Pressures on Euro area sovereign bond markets have progressively intensified and spread like a wildfire.”
#11 Jim Rogers: “In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful”
#12 Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush: “Market forces are increasingly determining what the options are and foreclosing on options policymakers thought they had. One option which is now under discussion involves permitting a country to temporarily leave the Euro, return to its native currency, devalue, commit to returning to the Euro at a better debt to GDP ratio, a better exchange rate and a better growth trajectory and yet not sacrifice its EU membership. I would like to say for the record that this is precisely the thought process that I expected to evolve,but when I proposed this possibility back in 2009, and again in September 2010, I had a 100% response from clients and others that this was “impossible” and many felt it was “ridiculous”. They may be right but this is the current state of the discussion. The Handelsblatt in Germany has reported this conversation, but wrongly assumes that the country that will exit is Germany. I think that Germany will have to exit if the Southern European states do not. Germany’s preference is to stay in the Euro and have the others drop out. The problem has been the Germans could not convince the others to walk away. But, now, market pressures are forcing someone to leave. Germany is pushing for that someone to be Italy. They hope that this would be a one off exception, not to be repeated by any other country. Obviously, though, if Italy leaves the Euro and reverts to Lira then the markets will immediately and forcefully attack Spain, Portugal and even whatever is left  of the already savaged Greeks. These countries will not be able to compete against a devalued Greece or Italy when it come to tourism or even infrastructure. But, the principal target will be France. The three largest French banks have roughly 450 billion Euros of exposure to Italian debt. So, further sovereign defaults are certainly inevitable, but that is true under any scenario. Growth and austerity will not do the trick, as ZeroHedge rightly points out. Ultimately, I will not be at all surprised to see Europe’s banking system shut for days while the losses and payments issues are worked out. People forget that the term “bank holiday” was invented in the 1930’s when the banks were shut for exactly the same reason.”
#13 Daniel Clifton, a policy strategist with Strategas Research Partners on the potential for more downgrades of U.S. debt: “We would expect further downgrades, a first downgrade from Moody’s and Fitch and possibly a second downgrade from S&P.”
#14 Warren Buffett on the problems in the eurozone: “The system as presently designed has revealed a major flaw. And that flaw won’t be corrected just by words. Europe will either have to come closer together or there will have to be some other rearrangement because this system is not working”
#15 David Kostin, equity strategist for Goldman Sachs: “The wide range of possible outcomes on both the super committee process and the unstable political economy in Europe drives our view that investors should assume the worst while hoping for the best.”
#16 Mark Mobius, the head of the emerging markets desk at Templeton Asset Management: “There is definitely going to be another financial crisis around the corner”
”

Dexia's nationalization and Greece de-nationalization

On many occasions in the last two years when it should have been time to let Greece go to greener pastures, Euro bureaucrats had cold feet and decided to keep the circus rolling for another show.
This time although it could be finally the right time to unload the burden and let Greece default.
Judging from today's comments the giant Euro Ponzi scheme is reaching the limits of manipulation and it could have been decided to start the end game.
 
ECB head Draghi says the bank in Europe have funding problems (aka a liquidity crisis), the Finland Finance Minister has said he does not want an expansion of the EFSF nor does he expect a solution on the collateral "row", saying a Deal on EFSF Collateral is uncertain, and lastly, Spain's Salgado has said there is no need of "quantitative amplification" of the EFSF.
In other words, with the EFSF meeting imminent, it appears that pretty much nobody aside from France, and some Economical PhDs, are any longer concerned about the domino effect, the Euro project or marginally of the necessity to keep Greece afloat.

This could have something to do with the fact that banks which were supposed to be in real danger with a collapse of Greece are already falling with or without a Greek default.

Dexia CDS is skyrocketing and the Sunday Times announced an imminent nationalization of the bank which hold assets amounting to 180% of Belgium's GDP. It appears Belgium will have to intervene soon with a bailout or total nationalization to prevent the institute premature demise.

At this point to avoid throwing away more money to a lost cause such as Greece it is retrenchment time for the ECB, with all the ideals of European unity being thrown out of the window.

Great Depression 2.0

FDR Memorial Site, Washington DC

Yesterday in my post after hearing the declaration of Prime Minister Berlusconi I wrote my conclusion that Italy had lost effectively sovereignty becoming a protectorate of the ECB.
Today we have even an official confirmation that Italy is now administered by the ECB under mandate of France and Germany which are the new masters of the country and will dictate to Trichet (then Draghi in October) what he has to order Italian politicians to do.
This is major news which has been reported so far by only one Italian Newspaper Repubblica.
EU president Van Rompuy and EU Commissioner Olli Rehn contacted Berlusconi and made clear that either Berlusconi follow orders or it is the end game.
It has been confirmed that France, Germany and the USA have reached the conclusion there is no other solution than seizing power in Italy and run the country as they see fit in order to prevent its default and an economic armageddon.
Both the EU and Washington have decided with the "Washington Consensus" that unreliable governments will fall under protectorate rules, bailout money provided only if following orders.
Berlusconi and the entire Italian political class will be mere puppets who will enforce any order they receive regardless of the electorate opinion. After all, the current state of Italian politics is perfect, Italian voters are currently unable to decide the name of the person they elect, they can only decide which party to vote, the name of the elected MPs are decided by the party, this is causing a major disconnection of responsibility toward the electorate which favour the implementation of blood and tears austerity measures.
Italian MPs do not have any allegiance to their voters but only to their party and their boss and therefore will not have any constraint in following the lead when requested to.
Berlusconi has been forced to accept the dikat but if with his collapsing popularity both among the electorate and with other coalition parties he will be able to implement it, well this is a different story.
Tremonti is right when he said yesterday that this week the world has changed forever, we are in uncharted territory and following US credit rating downgrade we are on the verge a major financial breakdown. Even China's traditionally diplomatic aplombe is being tested with furious official attacks to the US Government.
Events are turning sour fast and the choices left to solve the Global Crisis are getting worse every day.
News from Germany today are complicating things even more: Der Spiegel anticipated today
that Germany is opposing any EFSF increase and any bailout of Italy, it appears it is opposing also ECB purchase of Italian bonds and it is pretending harsh cuts in Italy regardless.
According to Daiwa's Head of Economic Research, Grant Lewis, the increase of the EFSF should reach the astonishing amount of 3.5 trillion euro this is the only act that could convince financial markets of euro area resolve to save Italy and Spain. Lewis says: "France, Germany contribution to EFSF’s capital would increase to 80% if Spain, Italy had to drop out of guarantee structure. France, German contingent liabilities would be > 50% of GDP if EFSF expanded; added to France, Germany current debt it may trigger downgrades to both countries."
There is no safe option anymore if the debt crisis spreads to France as it is becoming probable given the exposure of France to Italian Treasury bonds for over 25% of its GDP, the bailout system will become useless, if they pursue harsh austerity measures in Italy the country will start to paralyse ending like Greece and given the size of the Italian economy effectively pushing the global economy in Depression zone.
If Germany is successful in blocking both the EFSF increase and the ECB purchase of Italian bonds, the Eurozone is dead and will break apart.
Even if the Italian government has agreed in principle to the enforced austerity will face a revolt both from the opposition, the unions and the Italian people whose patience with a rotten and corrupt Berlusconi's government was reaching boiling point already before this last crisis.
The amount of things that can go wrong and turn into a Black Swan are too many at this stage to discard a possible incoming Great Depression. Brace yourself!

Bridgewater see collapse by 2013

New Yorker has released a must read interview with Ray Dalio - head of the world's biggest hedge fund, Bridgewater.

From the full interview:

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”

Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.

The New Great Depression

Recently more and more important voices are ringing the alarm bell of a new recession coming although this time some of them do not hesitate to call it a new Depression.
No doubt that recent quantitative easings and government interventions are having the only purpouse of earning some time to avoid a sharp collapse, practically they are trying to drive us down a rolling hill instead of falling down a cliff. If this earned time would have been spent to seriously reform the economy, ban the derivatives and go back to a productive system would have been a wise decision, instead it has been used to reinflate myriad of bubbles while going on living like there is no tomorrow and not addressing any of the systemic risks that are growing by the day.

The most interesting graph that I have been checking constantly since 2008 and that give a clear picture of what is going on is the following:

Job losses have mounted faster and sharper than ever before while job recovery is non-existent; we are on a plateau and unfortunately in the following months we could slide down even more.
It is no wonder that many are starting to talk openly of Great Depression.
The news that frequent CNBC guest Peter Yastrow of Yastrow Origer (and formerly with DT Trading) told CNBC that "We’re on the verge of a great, great depression. The [Federal Reserve] knows it" went viral.
Although this is hardly any news since in the last 2 years the following experts have said that the economic crisis could be worse than the Great Depression:

• Fed Chairman Ben Bernanke

• Former Fed Chairman Alan Greenspan (and see this and this)

• Former Fed Chairman Paul Volcker

• Economics scholar and former Federal Reserve Governor Frederic Mishkin

• The head of the Bank of England Mervyn King

• Nobel prize winning economist Joseph Stiglitz

• Nobel prize winning economist Paul Krugman

• Former Goldman Sachs chairman John Whitehead

• Economics professors Barry Eichengreen and and Kevin H. O'Rourke (updated here)

• Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb

• Well-known PhD economist Marc Faber

• Morgan Stanley’s UK equity strategist Graham Secker

• Former chief credit officer at Fannie Mae Edward J. Pinto

• Billionaire investor George Soros

• Senior British minister Ed Balls

In the meanwhile a new report from Moody's has just confirmed that as in regards to banks we are already far worse than during the Great Depression:

The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

States and cities all over United States are in dire financial straits, and many may default in 2011.

California is issuing IOUs for only the second time since the Great Depression.

Things haven't been this bad for state and local governments since the 30s and for common people will be even worst when soon normal services including food stamps in US will be terminated due to lack of funds. If everything goes according to tradition we could see a new crisis exploding in September before the US presidential election, last time in 2008 it changed the race to the White House in favour of Obama, this time it could sign his demise.

Bankruptcy Outsourcing!

A disturbing trend in a global economy is the bankruptcy outsourcing we are starting to witness in the world.

Global companies are taking bail-outs from different countries and in some cases from more than one at the same time. Bail-outs are becoming for some companies a new form of revenue. GM for example has been bailed-out from the Canadian government after scaremongering plant closures in Ontario. Unicredit the Italian bank which has invested and lent heavily in Eastern Europe has been supported by the Polish and Austrian government. Greek banks have asked contributions to Eastern European countries to leave their capitals in the country and after some weeks moved back to Athens a big bulk of their assets.

Wherever corporations have employment and financial leverage with the local government a bail-out request is being put forward. It is not always a request for money but also a request for favours and deregulation, economic crisis is allowing companies to obtain advantages that until 1 year ago were considered serious infringements. Eastern European governments not notoriously rigid in their supervision are in this period closing not one but both eyes. Companies are threatening that if ad hoc measures are not undertaken their financial situation could be deteriorating and they would be left with no choice than moving their assets and capitals to different location.
Taxpayers are effectively paying a bribe to corporations for the luxury of keeping inefficient, corrupt and broke companies in their backyard. If a company is broke should be allowed to fail, we are delaying the inevitable buying some time with our savings.

Though the interesting scenario especially in Europe will be to assist to the collapse of one of those corporations, which country will take the paternity of a fiasco and will make its citizen pay for this? how fast and how seriously the economical infection will spread to other involved countries?

Unfortunately we have a monetary union in Europe but we do not have yet a single reference for crisis like this, ECB cannot and will not cover the losses leaving to local central banks such issues. The Iceland-England quarrel on the lost assets of UK councils who invested in the failed Icelandic banks teaches us a lesson on how this issue can bring to a fracture or collapse of the European cooperation. If countries will start to freeze each other investments and assets to cover the losses we will have a Great Depression 2.0 in a matter of weeks.

Population and Peak Oil: where is the debate!

These days certainly we do have an abundance of gloom and doom subjects: the latest in the hit parade, swine flu is joining global warming and recession/depression at the forefront of media discussion.
It remains to understand though why the two key actors Population and Peak Oil are hardly discussed.
Population and Peak Oil are the source of every imbalance we are witnessing today; Global Warming, Water and Food depletion, Wars, Economical Crisis, pandemic etc. etc. are all consequences of these two strongly interlaced factors.
It is true that recently Peak Oil has started to be acknowledged by the oil experts and oil corporations that until 1 year ago were strongly calling everyone proposing the theory a lunatic.
Total, Aramco and others have finally acknowledged the fact that peak oil is here and that we probably peaked in 2005.
The excellent work of Matthew Simmons and Colin Campbell at explaining this potentially catastrophic issue is finally being considered more broadly by the establishment even though a large scale acknowledgment and discussion is still missing.
Population on the opposite is still widely ignored or diminished of magnitude, being the most delicate of the issues is being addressed with soft tones and occasional innuendos that are preventing any serious and drastic remedy. It is quite sad considering that population was a serious discussion in the 60s and 70s when the Club of Rome issued the famous report: The Limits to Growth.
Since then the issue has not been revisited anymore and has fallen in the sands of oblivion.
If the economy and corporations need always more and more clients to increase their revenue; growth in all its form cannot be bad! Right!
Well it is wrong actually! Unlimited and undisciplined growth in a world with finite resources is a monstrosity and a disaster being manufactured. We have had an explosion of population in the last 100 years due to the abundant and cheap oil.
Abundant and cheap oil allowed for the Green revolution which increased 10 fold the food output, allowed for transportation, manufacturing and energy to be readily available for a growing number of people, but now we are at a turning point in human history, oil is no longer abundant and cheap anymore. An oil shock according to many experts is only months away and a gas and food and water shock could follow in various parts of the world in the following years.
Controlling the world's population explosion is now more than ever essential to avoid an armageddon scenario unfolding in the following years.

The obstacles to control the population are first of all moral and political. Democracy and human rights by themselves are blocking any attempt to tackle this enormous problem, a new rethinking of what is a a sustainable democracy and what are human rights is longely due.

Human rights were proclaimed in a very different world from the one we are entering into now.
Western civilization was controlling the entire planet and consuming 90% of the resources.
Today hugely populated countries as China and India have entered the game as superpowers and they joined the party when only scraps have been left on the table.

If the population of China would live according to European standards we would need the resources, food and water of an extra 6 planets.

They will have to compete with the rest of us for those last scraps.

Democracy will not survive when the first signs of resource and social stress will show up and human life in the following years will become much cheaper.
Two paths are available either we continue on this road and then we will face resource wars, disasters and pandemics unleashing each year; or we accept that current population levels are unsustainable that our ant community has grown too big and too fast and that we need to rebalance the population level even with draconian measures. Ignoring the reality or being indolent in addressing it will only increase the price we will have to pay in terms of lives and social collapse when nature will take care of it soon!

Some scary things are happening right now and I will report them in following posts! Be tuned!

How to bankrupt a country !

Are we not supposed to know better this time and avoid the mistakes of the past?