marți, 26 martie 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

The Axe is in Position, Only the Timing of the Swing is in Question

Posted: 26 Mar 2013 11:50 AM PDT

It has been amusing listening to the hypocrisy from Brussels regarding the leverage in Cyprus.

Jeroen Dijsselbloem, president of the eurogroup led the charge that Cyprus had an unsustainable problem with deposits over 700% of GDP.

Here is a little perspective courtesy of the Financial Times.

European Bank Assets as Multiple of GDP



Somehow we are supposed to believe that 7-1 ratio of deposits to GDP is a problem but the 22-1 ratio in Luxembourg is not. And what about the 4-1 ratios in France and the Netherlands?

What sunk Cyprus now rather than later was Cyprus was dumb enough to be in Greek bonds.

So why did Cyprus stay in Greek bonds so long? The answer is Cypiot banks were foolish enough to believe ECB president Jean Claude Trichet when he insisted there would be no haircuts on Greek bonds.

Trichet Hails Success of Cyprus

Those looking for an amusing flashback should consider this glowing speech by Jean-Claude Trichet on the successful entry of Cyprus into the euro area, in January of 2008.
Today's euro celebrations are the result of the successful macroeconomic policies that the Cypriot authorities have pursued in recent years. Cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well-managed monetary and exchange rate policies combined with a range of structural reforms. ... The ECB and the Central Bank of Cyprus, together with the National Changeover Board, the European Commission and national and international authorities cooperated closely in many ways to prepare the introduction of the euro.  ...  It included public opinion polls, advertising and direct marketing. Over 900,000 copies of different publications were distributed by the Central Bank of Cyprus - this is more than one copy per Cypriot! ... As a result of these efforts, today we can celebrate a successful cash changeover.  ... intimate cooperation between the members of the team, the national central banks of the Eurosystem, and the ECB is the key for the success of the single monetary policy in the euro area.
Somehow, distributing over one pamphlet per Cypriot on the benefits of the euro was an insufficient formula for success. Shocking.

Four years and two Greek bond restructurings later, Cyprus was ruined but did not realize it yet. The second Greek bond haircut did Cyprus in, but the axe was yet to fall.

The ECB waited until the Cypriot election a month ago when their communist president was ousted by the pro-euro Nicos Anastasiades. The ECB then dropped a bomb on the new president.

For those of you who think Cyprus is "one off" and this will never happen again, please let me point out a few recent things.


  1. Dijsselbloem brags Cyprus to be model for future bailouts.
  2. A German Bank Economist Proposes "One Time" Cyprus-Like 15% Wealth Tax on Italians
  3. By a 526 to 86 vote, the nannycrats in Brussels passed a regulation in March that will require a country to accept a bailout if offered. It's An Offer You Cannot Refuse.
  4. Laying it on thick, the Bundesbank claims Spaniards are 33% richer than Germans.
  5. The "men in black" seek answers in Spain. Troika to Return to Spain in May Asking "What Happened to €42 Billion in ESM Bank Recapitalization Tranches?"

Timing the Axe on Spain and Italy

Cypriot banks may be the first to suffer a forced bail-in but they will not be the last.

Recall the "success" of Mario Draghi's LTRO program? Yes, it brought down yields on Italian and Spanish bonds, I believe temporarily.

The LTRO program was also an open invite for German banks to dump Spanish and Italian bonds and for Spanish and Italian banks to snap them up.

Was LTRO really a "success"? For who? The answer is Germany, not Spain or Italy.

Economists hailed Draghi a genius. Yet, LTRO further concentrated bond risk. Spanish banks are now more leveraged to Spanish bonds and Italian banks more leveraged to Italian bonds. It was concentrated risk that brought down Cyprus.

Groundwork Laid for Additional Forced Bail-Ins

Groundwork for further forced bail-ins has been laid: A model is in place, regulations are in place, and German sentiment is in place. Spaniards are supposedly more wealthy than Germans, and the "men in black" demand an audience in May.

Solidarity, be damned. It's every country for itself. Arguably, that is the way it should be, but that certainly wasn't the promise.

It's too late now for Spain, Portugal, and Italy. The axe is in position. Only the timing of the swing is in question.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Wine Country Conference

I am hosting an economic conference on April 5 in Sonoma, California. Proceeds go to the Les Turner ALS Foundation (Lou Gehrig's Disease).

Please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs for my association with the disease.

To learn about the economic conference with world-class speakers including John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson with guest moderator Lauren Lyster and other Special Guests, please visit Wine Country Conference April 5, 2013
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

EU Pushes Bail-In Regulations on All Deposits Above €100,000; Run on Banks Coming Up?

Posted: 26 Mar 2013 10:01 AM PDT

Cyprus was such a "success", 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.

Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, said on Monday that in future, the currency bloc should first ask banks to recapitalize themselves, then look to shareholders and bondholders and then "if necessary" to uninsured deposit holders.

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.
Step in Right Direction

Such regulation is a step in the right direction actually. There should be no deposit guarantees at all, no bondholder guarantees, and people should have to pay attention to where they put their money.

For a detailed explanation, please see Fraudulent Guarantees; Fictional Reserve Lending; Comparison of US to Cyprus; What About New Zealand?

Here are the key ideas from the article

Five Key Points

  1. In a Fractional Reserve Lending scheme, the notion there are meaningful reserves is ridiculous
  2. Far more money has been lent out than really exists (the rest is a fictional accounting entry)
  3. Fractional reserve lending constitutes fraud (just as lending something you do not own is fraud)
  4. There is no way for all this money to be paid back (so it won't be)
  5. Of all the central banks, the Reserve Bank of New Zealand has the most sensible policy for the most sensible reasons of all the central banks.

That said, note how bondholders and the ECB have been protected so far.

Bondholders did not suffer losses on Irish bonds, and the ECB did not even take a hit on its Greek bonds. Cyprus bondholders were not protected, primarily because the big European banks were not involved so they had nothing to lose.

Run on Banks Coming Up?

Looking ahead, the implication is that no one should place more than €100,000 in any bank. So no one will, especially in questionable Southern European banks. Instead, expect capital flight to presumed "too big to fail" Northern European banks, and also expect people to park more money directly at the ECB, where it will be safe.

Might such legislation then, spur a run on banks? Seems that way to me. My advice for European depositors is simple "Please don't wait until 2015 to find out."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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