Italy is facing a EU bailout within 6 months

While the Italian press is rife with big headlines on Berlusconi's clusterfuck and his conviction  to seven years in prison and a lifetime ban on holding public office; the italian economy is deteriorating faster and faster.
The Italian government is giving few signs of intelligent life and treasury investors are starting to lose patience.
All things considered is not surprising that Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing red as the worldwide bond rout continued into a second week, pushing up borrowing costs.

The report warned that Italy will “inevitably end up in an EU bail-out request” over the next six months, unless it can count on low borrowing costs and a broader recovery.

As Ambrose Evans Pritchard noted:

“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”

Italy’s €2.1 trillion (£1.8 trillion) debt is the world’s third largest after the US and Japan. Any serious stress in its debt markets threatens to reignite the eurozone crisis. This may already have begun after the US Federal Reserve signalled last week that it will begin to drain dollar liquidity from the global system.

The ECB has already backed away from earlier plans to steer credit to small businesses in the Club Med bloc. The Italian banking association said it was bitterly disappointed by the latest break down in eurozone talks on a banking union, warning that it leaves Italy’s lenders at the mercy of a confidence crisis.

Andrew Roberts from RBS said the world has become “a dangerous place” as Fed tightening marks an inflexion point in global liquidity.

Borrowing costs of 5pc could prove crippling for Spain and Italy, both suffering from contraction of nominal GDP.

Mediobanca said the trigger for a blow-up in Italy could be a bail-out crisis for Slovenia or an ugly turn of events in Argentina, which has close links to Italian business. “Argentina in particular worries us, as a new default seems likely.”

Mr Guglielmi said Italy’s industrial output has slumped 25pc from its peak in the past decade, while disposable income has dropped 9pc and house sales have dropped to 1985 levels.

The 1992 crisis was defused by a large devaluation, allowing Italy to restore trade competitiveness at a stroke. Mediobanca said: “The euro straitjacket is clearly not providing a similar currency flexibility today. With the lira devaluation Italy managed to inflate debt away, which it cannot do today. It could take more than 10 years to revert to pre-crisis output levels.

Eu Wide Bank Confiscation Approaching

What happened in Cyprus is unfortunately going to be replicated all over Europe, the reason is simple at the end there is not enough money to bailout Spain and Italy, the system used so far in Portugal, Greece and Ireland is not sustainable, let us even suppose for one moment that Germany is willing to help Italy and Spain, it will not work, there is not enough money to sustain those rapidly decomposing economies and even if Germany would mortgage its future it would only kick the can down the road for few more years.

The crisis is systemic and the jump-ship set of mind is already in place all over Europe.
Italy and Spain are doomed, France is on the brink.
Cyprus has been correctly addressed as a guinea pig for future bail (out-in) but at the end all minds go to Italy with its large savings base and Spain with his colossal bank crisis.
This week Italy's largest bank CEO contemplated such a move and alarm bells should start ringing all over Europe:

From Bloomberg: Unicredit says global rule needed

Cutting large deposits in failing banks, along with other liabilities such as bonds, to offset losses is acceptable as long as small savers’ funds remain protected, Ghizzoni told reporters in Vienna late yesterday. The European Union has to introduce identical rules in all of its member states and ideally those rules would be coordinated globally, he said.

Unicredit knows the Cyprus effect is coming to Italy and Spain and it is asking a global coordination to ring fence the EU from massive capital flows.
What is scaring is that we have moved from a world where property and savings were guaranteed to a world where property is no longer safe and where starting from bankers to politicians a framework is being created to justify or legalize such confiscations as necessary.

From Reuters: EU to push for losses on big savers at failed banks.

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout.

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

"You need to be able to do the bail-in as well with deposits," said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks.

"Deposits below 100,000 euros are protected ... deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in," Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line.

The law, which will also introduce means to impose losses on bondholders, is due to take effect at the start of 2015. Germany wants provisions for bailing in bondholders and others in the same year, though that may be delayed.

Hokmark urged savers to check their banks' health before taking the risk of depositing money.

"If you put your money in Royal Bank of Scotland ... or Deutsche Bank, depending on how that bank is working you are taking a risk," he said. "You need to be aware that you are taking a risk.

Looking ahead, the implication is that no one should place more than €100,000 in any bank (but then since every rule can be twisted according to the moment's necessity who know if 100.000 will still be the threshold in 1 year time).
So no one will invest in Europe especially in questionable Southern European banks.
Instead, expect capital flights to resume in different, more creative forms.
Pressure is going to rise on offshore banks as well to undermine their attractiveness and willingness to accept deposits from EU citizens, proof enough is this week leaks on offshore accounts.
A major campaign has started to coral money inside the EU in anticipation of the Great Confiscation and Great Depression approaching.
My only tip if you have money inside the EU is time to move out before the trap is in place.

Russian Depositors use loophole to take billions out of Cyprus

Another very disturbing piece of news has emerged today, it appears that large amounts of money in the order of billions have been withdrawn from Laiki and Bank of Cyprus during the one week blockade; should this be confirmed the hole in the two banks could be much larger than thought; which in exchange would guarantee a total wipe out of the two banks' deposits.
If the purpose of all this was to punish dirty Russian capitals in Cyprus well it seems it failed miserably.

From FAZ, Google translation edited:

Despite the closed banks and a lock for payments in the past week, more money flowed out of Cyprus than in previous weeks, Frankfurter experts report.

Prior to the escalation of the crisis in Cyprus accruing on the payment system targetting liabilities of Cypriot central bank to the European Central Bank (ECB) had increased daily at approximately 100 to 200 million euros. In the days after Parliament rejection of the stabilization program, the daily risk has risen to more than double.
Just in the last week so cash assets have been withdrawn from Cyprus in the billions, regardless of the fact the Cypriot central bank had issued a lock.

Cyprus Central Bank Board nonetheless left exemptions from capital controls
such as transfers for humanitarian aid reasons and "special payments", which are not defined in detail.
The unusually high outflows from Cyprus in recent days indicates that the central bank of Nicosia has interpreted this capital control rather liberally.

From Reuters:

While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

Euro Template to Confiscate European Bank Accounts

As reported in my previous post, signals are there already that Cyprus will not be an isolated case and that similar confiscations will be applied to other nations in the Eurozone.
Of course having the luxury of the Eurogroup leader to agree with you and stating it publicly the day after is something unexpected.
Mr. Dijsselbloem, Leader of the Eurogroup and Dutch Finance Minister stated that Cyprus will become the new template for resolving Eurozone banking problems.
Markets did not appreciate the candour of Mr. Dijsselbloem (apparently it is pronounced Diesel-BOOM), his explosive remark did not take long to bring down the markets and put an end to the insane optimism following the Cyprus bailout deal.


Talking with Reuters, on the resolution model just put in place in Cyprus:

A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.

"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.

After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.

Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.

The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

Translation:

It is now officially dangerous to have a big bank account in Europe. In other words being an Uninsured Depositor.


After the not so amiable reaction of the financial markets Mr. Dijsselbloem (Diesel BOOM) has clarified his remarks on the Eurogroup's website:

Statement by the Eurogroup President on Cyprus

25/03/2013 - Statement

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.

I'm sure now all the Ininsured Depositors feel very reassured, Thank you sir!

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!

After Cyprus levy; are Italy and Spain next?

Cyprus crisis is reaching his climax this weekend but regardless of how it will develop served well in distracting the media and the EU population from the bigger fishes frying in the EU pan, Italy and Spain.
So despite dimmed lights on the Italian political disaster and the Spanish banking Armageddon it is worth highlighting the following news:

Via El Pais (Via Google Translate),
The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type "moderate" to bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate.  This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits. 

"The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits," said the minister, adding that this kind "will not be much higher than 0%" . 

The Minister of Finance has clarified that such "moderate" will have no tax collection effort, "but that these regions serve to offset the revenue loss to see."  So, he assured that the amount will correspond to the amount "exact has been undermined by the cancellation of regional taxes". 

Subsequently the Spanish Minister of Finance & Public Administration announced a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing.

and on Italy:

In an article on Handelsblatt the chief economist of Commerzbank says: Italy should bring a unique wealth tax.

It is a myth to talk of crisis-strapped states. Even the German Institute for Economic Research (DIW) and the chief economist of Commerzbank, Joerg Kraemer says the numbers suggest a different view.

Kramer relies on surveys of the European Central Bank. Net financial assets of the Italians are 173 percent of gross domestic product (GDP). This is significantly more than the net financial assets of the Germans, which corresponds to 124 percent of GDP, said Kramer for Handelsblatt Online.

"So it would make sense, in Italy for a one-time property tax levy," suggested the Bank economist. "A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product."

Tax collectors steal 100 million euro from the Italian Government

Employees protesting not being paid since 5 months

Another day another colossal fraud in Italy!
Today Mr. Saggese, the boss of Tributi Italia, a tax collection agency has been arrested for pocketing 100 million euro from taxes collected on behalf of over 400 Italian cities.
Mr. Saggese had been arrested twice in 2001 and 2009 nonetheless he become the director of Tributi Italia which was until recently the biggest collection agency in Italy with a revenue of 280 millions in 2008 and thousand of employees who have lost their job.
The agency is currently filing for a Chapter 11 bankruptcy, while the government has been considering a bailout of the firm.
His former administrator Mr. Cali' had been arrested in 2007 for a 93 million euro fraud against Banca di Roma while many of the auditors were not even qualified.
It did help of course to enrol government auditors and pay lavishly some inspectors to join the company, furthermore city administrators and councillors were granted luxury holidays and gifts to cooperate.
Tributi Italia was paid a commission of 30% of the amount collected and in some cases the commission went up to 75%.
According to investigators the amounts stolen were used in part to pay debts contracted with banks and more than 20 million euro were pocketed by Mr. Saggese.
Of course having control of so much money meant a lot of leverage power for Tributi Italia who was also able to dictate to municipalities to hire friends and relatives.
The 400 cities which took advantage of Tributi Italia services are either broke or in deep trouble and the final price is being paid by the citizens who are losing services and jobs.
The money has vanished and so far has not been traced yet.
Municipalities, regulation authorities, Ministry of Finance, government and regions were either blind, pretending to be blind or useless in controlling the largest tax collection agency in Italy.
This is again not an isolate case, many more scandals like this will rock Italy soon, let us not forget that Tributi Italia started to fail when austerity started to bite and reduced tax figures.
Corruption is surfacing because the economic crisis is stalling its engine.
Be prepared to enjoy soon more colourful tales from Douche Land!

Spain bank-run reaching disastrous levels

The central bank of Spain just released the net capital outflow numbers and they are disastrous.

During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain.

For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically.

The Spanish ten year now yields a 6.81% and their thirty year is yielding 7.34%.

Spain has now set up a fund for its regions to tap of $22.6 billion and this may not even be close to what is asked for or required with the regions needing some $50-75 billion in assistance. Many of the regions in Spain are not paying suppliers or their other local debts and the situation is clearly out of control.

On top of this Bankia, late Friday, reported out bad loans of $8.24 billion and an operating loss of $5.58 billion causing the government to promise to inject $5-6 billion into the bank immediately to prevent its collapse.

Furthermore, Spain has the highest unemployment rate in Europe, even higher than in Greece, with a 25.1% jobless rate. For those under twenty-five the job situation is extreme with a 53% unemployment rate.

Between December of 2011 and the end of March 2012 the Spanish banks bought $109 billion of the Spanish sovereign debt. Much of this was facilitated by the ECB who lowered the collateral rules and handed the money to the Spanish banks in such a size that very bad things will result if Spain hits the wall and defaults.

Then since March the trend has reversed and the Spanish banks have sold $21.3 billion of Spanish sovereign debt with $11.7 billion in July alone as capital flees from the Spanish banks.

Spanish Bank run accellarating

From The Guardian:

Deposit flight from Spanish banks hits 15-year high as bailout rumours grow

Spanish banks lost €1 out of every €20 deposited with them in July, making it the worst month for deposit flight in 15 years as rumours grew that the country is edging closer to a full bailout.

News that banks were losing deposits came as Spain's statistics institute revealed the current recession is worse than thought, with the economy shrinking at an annual rate of 1.3% in the second quarter.

"The downturn in the Spanish economy is deeper than previously thought and accelerating," warned Robert O'Daly of the Economist Intelligence Unit.

A collapse in internal consumption in a country squeezed by government austerity and massive unemployment is largely to blame for the recession, as this fell at an annual rate of 3.9% in the second quarter.

Unemployment is already at 25% but the speed at which jobs are being destroyed quickened to an average rate of 800,000 jobs a year in the second quarter, according to the statistics institute.

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:

• 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 the same effect of war mines on a population, their purpose at war is not to kill in many cases but simply cripple people in order to create a taxing burden for the society.

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 Mejía 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 Mejía, "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 Mejía. "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 Mejía. "It's political suicide in this economic climate, because the amounts of money recycled are so high."

Eurozone Capital Flight

Citi' analyst Matt King has been monitoring the situation of bank assets in Europe and his results are most disturbing: "In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks.
The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy.
Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows.


Below a summary of all the less than pleasant capital flows out of Europe's periphery.

 How far is the flock likely to run? In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks (Figure 18). The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further €215bn and €214bn in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy (Figure 19).

Although large, if these flows occur slowly enough, they might not represent a major problem. After all, Portugal’s banks have managed to replace fleeing foreign deposits with domestic ones, and ECB repo should allow a further ramp-up in banks’ holdings of government bonds.

But we think the risks are skewed towards larger outflows occurring considerably more rapidly. Admittedly there are a great many unknowns, including the potential policy response. But none of these estimates allow for the possibility of domestic deposit flight. In the case of a Greek exit from the euro, that outcome seems highly likely. Nor is there any sign that the flight from Ireland and Portugal is diminishing (if anything, we expect the opposite).11 Moreover, banks’ appetite to buy further government bonds may prove limited if they start to suffer deposit flight – and all the more so if they suspect that deposit flight stems in part from their holdings of government bonds

Once the run (either bond or bank) starts, there is no stopping it:

Above all, though, we think capital flight, like so much in markets, is a self-reinforcing process. Provided other depositors and bondholders are grazing quietly, there is no reason to run. But as risks come ever more into the spotlight – whether through the TARGET2 imbalances, benchmark shifts or the threat of EMU exit in Greece – the unattractiveness of the risk-reward becomes ever more obvious.

What is the only possible outcome that will prevent this virtually catastrophic outcome?

To our minds, capital flight will stop only once there is decisive policy intervention. The longer investors have to wait for this, the more decisive it will need to be. Even a Euro area-wide deposit guarantee scheme might struggle to be credible if investors fear the incentives for redenomination are strong enough... Quite simply, investors in ‘safe assets’ need to be reasonably sure they will get their money back. Foreign investors in peripherals can no longer be sure of that.

Recession update charts

The following charts issued by the Federal Reserve Bank of Minneapolis track the current recession and how it compares to historical recessions.
Regardless of how money is being thrown there is no sign of return to normality, the scale of current job losses is clearly the worst in history with no real recovery in sight.
















Source: Minneapolis Fed

The Sack of Rome

The WSJ describes the complex scams governments are using to just hand money over to banks without going through democratic considerations. Of course at each step along the way transactions can be inflated to benefit banks. Incredibly these privatizations (and that’s what they are) can be securitized, and pledged as collateral to borrow from the ECB. This explains why a Goldman Sachs crony has taken over in Italy. We are at peak loot.

WSJ:

Derivative Crisis Looming

An excellent article on the Derivatives market and its implication on global economy:

The word "derivatives" sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.
Keep in mind that the GDP of the entire world is only somewhere in the neighbourhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction".  For now, the financial powers are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.
Most people don't talk much about derivatives because they simply do not understand them.
Perhaps a couple of definitions would be helpful.
The following is how a recent Bloomberg article defined derivatives....

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is "speculation".  Today the folks down on Wall Street are speculating on just about anything that you can imagine.
The following is how Investopedia defines derivatives....

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own.  A derivative is essentially a side bet.  Usually these side bets are highly leveraged.
At this point, making side bets has totally gotten out of control in the financial world.  Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it.  This system is almost entirely unregulated and it is totally dominated by the big international banks.
Over the past couple of decades, the derivatives market has multiplied in size.  Everything is going to be fine as long as the system stays in balance.  But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.
The amount of money that we are talking about is absolutely staggering. Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective....

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.
The notional value of the derivative market is roughly $1.4 QUADRILLION.
I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.
$1.4 Quadrillion is roughly:
-40 TIMES THE WORLD’S STOCK MARKET.
-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.
-23 TIMES WORLD GDP.

In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system....

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.
They will almost certainly be at the center of the next financial crisis as well.
For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.

Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.
JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.
It is hard to even conceive of such figures.
Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.
Morgan Stanley also has tremendous exposure to derivatives.
You may have noticed that these are some of the "too big to fail" banks.
The biggest U.S. banks continue to grow and they continue to get even more power.
Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.
These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.
You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the "too big to bail" banks to become bigger than ever.
And they pretty much do whatever they want.
A while back, the New York Times published an article entitled "A Secretive Banking Elite Rules Trading in Derivatives".  That article exposed the steel-fisted control that the "too big to fail" banks exert over the trading of derivatives.  Just consider the following excerpt from the article....

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

So what institutions are represented at these meetings?
Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.
Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.
But that is a faulty assumption.  Just look at AIG back in 2008.  When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone "bust" without gigantic bailouts from the federal government.  If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.
It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.
When "the house" goes "bust", everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.
A horrible derivatives crisis is coming.
It is only a matter of time.
Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly.

Deutsche Bank, Credit Suisse, slam Euro recovery plan

It seems major events are ready to unfold and major games are being played right now to manipulate events and critical decisions that will have to be taken this week.

First we have Credit Suisse saying 66 European banks will fail the 3rd stress test, and will need hundreds of billions in fresh capital, something the market ignored entirely last week but that may be re-evaluated now that Germany is shattering the sweet dreams of business as usual with today's Schäuble and Merkel declaration. And few hours ago inexplicably, we have Deutsche Bank warning that France may well be put on downgrade review by year end.

"We highlight in this note that the French corporate sector is already financially stretched, with poor profitability and large borrowing requirements. We consider that the deterioration in economic conditions is now creating a distinct risk that France could be put under “negative watch” by the rating agencies before the end of this year. We think that France has the wherewithal to react to such an outcome and could avoid an outright downgrade by taking corrective measures quickly, but this naturally would be a very sensitive political decision a few months before a major election."

Why Credit Suisse or Deutsche Bank are starting to fore-say doom and gloom while putting at risk the recapitalization of banks all over Europe I have no idea. But something serious and dangerous is incoming.

European Banks Rating

After the fall

In the final episode of Meltdown, we hear about the sheikh who says the crash never happened; a Wall Street king charged with fraud; a congresswoman who wants to jail the bankers; and the world leaders who want a re-think of capitalism.

The financial crash of September 2008 brought the largest bankruptcies in world history, pushing over 30 million people into unemployment and bringing many countries to the brink of insolvency.

Banking liquidity update

This chart from an Espirito Santo report shows a 2-D matrix of liquidity (i.e. liquid assets as a % of wholesale funding assets), versus reliance on wholesale funding - the one component in European interbank markets which is now completely dead. Needless to say red is bad. And if Dexia is in trouble then it is time to call a priest for Soc Gen, BNP, Raiffeisen, and DnB Nor.

Siemens' bank run: 500 million euro withdrawn from unidentified French bank

If someone had doubts that banks in Europe are the next nightmare well it is time to consider alternatives.
Financial Times reports that Siemens, pulled €500 million form a large French bank, which is not BNP so that leaves just SocGen or Credit Agricole and deposited the money straight to the ECB.
The implications of this are stunning, as it means that even European companies now refuse to work directly with their own banks, and somehow the ECB has become a direct lender of only resort to private non-financial institutions!
As Bloomberg reports further on the FT story, in total, Siemens has deposited between 4 billion euros and 6 billion euros, mostly through one-week deposits, with the ECB, FT says.
It isn’t clear from which bank Siemens withdrew its deposits, per the FT... but it is hardly difficult to figure out.
BNP Paribas isn’t the bank involved, FT reports, according to an unidentified person familiar with the bank.
This story will have a major impact on markets.

Greece crisis: photo sequence of bank protester on fire

A man set himself on fire today outside a Piraeus bank branch in Thessaloniki in northern Greece.
The 55-year old man had entered the bank and asked for a renegotiation of his overdue loan payments on his home and business, according to police, which he could not pay, but was refused by the bank (Reuters).