| Project Midas: "Bad Bank" for "Bad Bank Debt" Posted: 21 Feb 2014 06:48 PM PST I seriously do not understand this "Bad Bank" concept. The idea that you can take bad assets and shift them off to the side and it will make things better seems ludicrous. If for some reason you disagree, please note that Spain now needs a "Bad Bank" for "Bad Bank Debt". They call this proposal "Midas N + 1". Via translation from El Economista, please consider Another bad bank? The government is considering transferring the debt of insolvent banking business to a fundThe Government is considering the possibility of creating a fund or financial vehicle to which banks could transfer the debt of insolvent companies in crisis. According to a banking source with knowledge of the negotiations, the Ministry of Finance instructed the investment bank N +1 to study the feasibility of this plan.
Concerned about the situation in which they find countless businesses in Spain burdened with high debt, there is a proposal to amend the law to try to save those companies and facilitate negotiations with creditors, mainly banks.
"We are working on legislation to adopt measures allowing companies with high debt and deleveraging but viable to continue operating," recalled a spokesman for Economy in relation to a legislative initiative announced by the Minister of Economy, Luis de Guindos , without elaborating.
According to the confidential document called 'Project Midas' N +1, the operating mechanism allows changing banking debt to capital.
The project calls for businesses to reduce debt through the capitalization of unsustainable debt, so the creditor banks participate capital of the company, albeit indirectly.
Specifically, the plan to repay the debt is set in a period of 5-7 years.
Capitalized debt would be covered by the provisions that banks accumulated to meet the total debt of the company, while the rest would be classified as normal risk and, therefore, the current payment.
However, the paper notes that to launch this N +1 initiative, the government would have to make some legislative changes to "a number of elements of the Spanish regulatory and policy framework that could limit or discourage the creation of such vehicles." "Midas" An Appropriate NameMidas is actually an appropriate name. The idea is to turn "sheet" into gold. Any investors in Midas will end up with "sheet", but the banks (via capital injections by suckers buying into the proposal) will make out like Midas. Hopefully investors in "bad banks" in Spain have learned their lesson. Yet, I suspect not even though Midas is fresh on the heels of a December 2013 announcement Spain's Bad Bank "FROB" Admits More Taxpayer Losses LikelyIn that post, Guru Huky (whom I quoted) commented on the "FROB" (Spain's bad bank). " The FROB croaked 26 billion euros in 2012 and 10 billion euros in 2011. Until recently they even sold us the idea that we were going to make money. Now the question we ask is whether we will recover anything," said Huky. Expect similar results from "Midas N + 1". PT Barnum would be proud. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Caracas Chronicles: Riots in Venezuela Continue 19th Day; Best Wishes but a Sober Assessment Posted: 21 Feb 2014 12:40 PM PST Ukraine has been in the spotlight by every major news organization. Meanwhile, Venezuela simmered in riots for 19 days. Where are the stories? That's what Francisco Toro at Caracas Chronicles wondered yesterday in his report The Game Changed in Venezuela Last Night – and the International Media Is Asleep At the SwitchListen and understand. The game changed in Venezuela last night. What had been a slow-motion unravelling that had stretched out over many years went kinetic all of a sudden.
What we have this morning is no longer the Venezuela story you thought you understood.
Throughout last night, panicked people told their stories of state-sponsored paramilitaries on motorcycles roaming middle class neighborhoods, shooting at people and storming into apartment buildings, shooting at anyone who seemed like he might be protesting.
People continue to be arrested merely for protesting, and a long established local Human Rights NGO makes an urgent plea for an investigation into widespread reports of torture of detainees. There are now dozens of serious human right abuses: National Guardsmen shooting tear gas canisters directly into residential buildings. We have videos of soldiers shooting civilians on the street.
And that's just what came out in real time, over Twitter and YouTube, before any real investigation is carried out. Online media is next, a city of 645,000 inhabitants has been taken off the internet amid mounting repression, and this blog itself has been the object of a Facebook "block" campaign.
What we saw were not "street clashes", what we saw is a state-hatched offensive to suppress and terrorize its opponents.
Here at Caracas Chronicles we're doing what it can to document the crisis, but there's only so much one tiny, zero-budget blog can do.
After the major crackdown on the streets of large (and small) Venezuelan cities last night, I expected some kind of response in the major international news outlets this morning. I understand that with an even bigger and more photogenic freakout ongoing in an even more strategically important country, we weren't going to be front-page-above-the-fold, but I'm staggered this morning to wake up, scan the press and find…
Nothing.
As of 11 a.m. this morning, the New York Times World Section has nothing. Media, Paramilitaries, Abuses, and Some BloodToday, writer Juan Cristobal Nagel writes about Media, Paramilitaries, Abuses, and Some BloodThe stories
- The Media Blackout - From yanking a Colombian cable news channel off the air to taking an entire city offline, the government has made controlling the flow of information about the crisis a priority. This comes on the heels of the looming threat to newspapers all over the country, which we have documented extensively. President Maduro has already announced they will pull the plug on CNN En Español, an important source of independent information. Now their journos' official credentials have been revoked. All told, the past two weeks have been dreadful for the right of Venezuelans to be informed. The result? Tons of rumors, tons of disinformation, tons of uncertainty.
- Paramilitaries: Let's call a spade a spade: colectivos are paramilitaries. It's silly that chavistas are somehow trying to minimize the role of these government-sponsored groups that now roam freely in the streets of Venezuela, heavily armed, accountable to God-only-knows whom. They have been repeatedly lionized by the government. They are christened by Ministers as the main line of defense of the Revolution. They talk to the foreign press and gleefully display their weapons and their fire power. Chavista governors give them orders via Twitter. And numerous eyewitnesses tell stories of violence. True – they don't always shoot live ammo. Sometimes their role is simply to intimidate. Regardless, they are real, and they are not going anywhere.
- Human Rights Abuses - From the jailing of Leopoldo López to the alleged torture of student demonstrators, it seems clear that Venezuela crossed a rubicon in the past few days. This has been a PR disaster for the government, with everyone from Amnesty International to Human Rights Watch to (gulp) Madonna weighing in. I don't know if they care or not, but Maduro's cast in international public opinion seems set for now. He is an abusive, mustachoed thug. Any lingering claim to the moral high-ground or to hemispheric leadership that the revolution may once have held on to died this month.
News SuppressionMaduro threatens to expel CNN but suppression of the news does not change the facts. Those in Venezuela are well aware of the horrific situation, thanks in part to sites like Caracas Chronicles. Mission Impossible to Stop Capital FlightOn January 23, in Venezuela Strengthens Currency Controls in Impossible Mission to Stop Capital Flight; Airlines Collapse; End of the Line I commented ... Hyperinflation, and economic stupidity by the leftist government are both out of control. On the currency side, the official exchange rate is 6.3 Bolivars to the dollar. The exchange rate for foreign travelers was just set to 11.36 Bolivars per dollar. The black market exchange rate is 79 Bolivars per dollar.
The end of the line for the Bolivar is at hand. The leftist government nationalized oil reserves, and the result was an immediate collapse in production. The only way Venezuela can import anything is from dwindling US dollar reserves. When those run out, it's lights out for the Bolivar.
Ridiculous Idea
Hyperinflationists believe the same thing is going to happen in the US. The idea is ridiculous. For more on the story, please see Venezuela's Hyperinflation Anatomy; Army Storms Caracas Electronics Stores; Total Economic Collapse Underway; Could This Happen in US? Plunging Oil RevenuesTwo days ago professor Steve Hanke offered his stark view regarding Venezuela's Plunging Petroleum ProductionA hallmark of socialism and interventionism is failure. Venezuela is compelling proof of this, having spent the past half century going down the tubes. Indeed, in the 1950's, it was one of Latin America's most well off countries. No more. Now it is a basket case – a failed state that's descending into chaos.
How could this be? After all, Venezuela's combined reserves of oil and gas are second only to Iran's. Well, it might have reserves, but thanks to the wrongheaded policies of President Hugo Chavez, Venezuela is the only major energy producer that has seen its production fall over the past quarter of a century. The following chart tells that dismal tale:
 The above chart may not look so ominous. The next chart will. Venezuela Foreign Reserves Given complete mistrust of president Nicolás Maduro, and nationalization of the oil industry, Venezuela's massive energy reserves are not worth much. Current production does matter to the extent Venezuela can keep paying its bills. At the current pace, those reserves will last another two years. Best Wishes but a Sober AssessmentBest wishes and a tip of the hat to writers Francisco Toro and Juan Cristobal Nagel for the two lead stories in this post. Those interested in Venezuela may wish to bookmark Caracas Chronicles. Unfortunately, my sad assessment is things are likely to get a lot worse, eventually culminating in complete or near-complete loss of value of Venezuela's currency, the bolivar. Meanwhile, ridiculous exchange rates ensure a constant shortage of consumer goods and food. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Hilarious Transcripts of Fed Minutes from 2008 Reveal Completely Clueless Fed Posted: 21 Feb 2014 10:02 AM PST Today the Fed released minutes of meetings at the start and during the great financial crisis. These minutes show how clueless the Fed Governors were at the start of the recession. Here is a list of FOMC Transcripts and Other Historical Materials, 2008Notes - I purposely cherry picked statements of various Fed governors. There was much more gloom in the early minutes than I show below. Yet, the consensus opinion, even though the recession had already started, was that a recession would be avoided.
- Amazingly, Bernanke spoke of pent-up demand for housing in January of 2008
- The January 29-30 transcript was a whopping 194 pages long. I slogged through most of it. Some outside consultants presented to the Fed at that meeting, generally giving an amazingly rosy view of the world as well.
January 9, 2008: Telephone Conference Meeting of the Federal Open Market CommitteeStaff Report: The incoming data on spending and production have, on net, led us to revise up our estimate of real GDP growth in 2007:Q4 by about 1-1/4 percentage points relative to the December Greenbook.
Much of the upward revision is in consumer spending and reflects the November figures on retail sales and PCE services. In addition, the construction put-in-place data for November imply a sizable upward revision to our estimate of nonresidential construction in Q4.
For purposes of this update, we have not made any changes to our assumptions for the federal funds rate. In particular, the forecast update is predicated on the assumption that the funds rate will be held steady at 4¼ percent through mid-2009 and then lowered by 25 basis points in the second half of that year.
Real GDP growth is lower in 2008 and 2009 than in the December Greenbook, though the level of real GDP at the end of 2009 is only a bit lower than in the last Greenbook, reflecting the upward revision to our estimate of real GDP growth in 2007:Q4. January 21, 2008: Conference Call of the Federal Open Market CommitteeMr. Lacker: Can you explain that third consequence of monoline downgrades? I
didn't quite get that.
Mr. Dudley: The monoline insurers don't have to mark to market the consequences of the deterioration in, say, the structured-finance product they insured. All they have to do is pay out, as it is incurred, the interest that the structured-finance product can't pay out. So their losses are going to be realized only very gradually over a long period of time.
Bernanke: Many of you have valid concerns about inflation. Let me just make a few comments on that. First, in the Greenbook, despite a 100 basis point drop in the rate assumption and the scenario that I take as being in some sense optimistic in that it avoids an outright recession, the preliminary Greenbook forecast for 2009 has total PCE inflation at 1.7 percent and core PCE inflation at 1.9 percent . This does not take into account any disinflationary effects that would arise if we did have an NB ER recession or worse. Again, I note that we have, for example, effects working through oil prices, which the Greenbook doesn't take into account directly. So I think, obviously, that we have to continue to watch inflation and inflation expectations carefully. January 29–30, 2008: Meeting of the Federal Open Market CommitteeMr. Reifschneider: Not all the news was bad. Nonresidential construction activity has continued to be surprisingly robust, and defense spending looks to have been higher last quarter than we anticipated. Moreover, retail sales in November came in stronger than we predicted, and the figures for September and October were revised up. Overall, we read the incoming data as implying an increased risk of recession.
As you know, we are not forecasting a recession. While the model estimates of the probability of recession have moved up, they are not uniform in their assessment that a recession is at hand. Another argument against forecasting recession is that, with the notable exception of housing, we see few signs of a significant inventory overhang. In addition, the recent weakness in the labor market and spending indicators is still limited; for example, initial claims have drifted down in recent weeks rather than surging as they typically do in a major downturn. Finally, a good deal of monetary and fiscal stimulus is now in process that should help support real activity. That said, it was a close call for us.
Mr. Sheets: Going forward, we see the external sector contributing 0.5 percentage point to GDP growth in 2008 and 0.3 percentage point in 2009. Exports are expected to expand at a crisp 7¼ percent pace in both years, supported by stimulus from the weaker dollar.
Going forward, we see the external sector contributing 0.5 percentage point to GDP growth in 2008 and 0.3 percentage point in 2009. Exports are expected to expand at a crisp 7¼ percent pace in both years, supported by stimulus from the weaker dollar.
Mr. Evans: My modal outlook for 2008 is close to that in the Greenbook. I expect that we will eke out positive growth in the first half of 2008. This expectation largely reflects the judgment that businesses have not begun to ratchet down spending plans in the nonlinear fashion that characterizes a recession. Our cumulative actions following this meeting should provide noticeable stimulus to the economy by midyear.
Mr. Rosengren: Our forecast returns to full employment by 2010 only if we reduce interest rates more than they are i n the Greenbook. Thus, our baseline forecast assumes that we reduce rates 50 basis points at this meeting followed by additional easing in 2008 , which eventually results in core inflation below 2 percent and the unemployment rate settling at our estimate of the NAIRU, somewhat below 5 percent.
Vice Chairman Geithner: Thank you, Mr. Chairman. Let me just start by saying it's not all dark. [Laughter]
Mr.. Mishkin: Don't worry; be happy?
Vice Chairman Geithner: I'm going to end dark, but it's not all dark. The world still seems likely to be a source of strength. You know, we have the implausible kind of Goldilocks view of the world, which is it's going to be a little slower, taking some of the edge off inflation risk , without being so slow that it's going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good.
Central banks in a lot of places are star ting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That's a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That's all good, I think. As many people pointed out, the fact that we don't have a lot of imbalances outside of housing coming into this slowdown is helpful.
Mr. Kohn: Thank you, Vice Chairman Geithner, for a little less gloom here. I didn't expect the bright side from that source. [Laughter] Like everyone else around the table, I have revised down my forecast, which looks very much like the Greenbook: a couple of quarters of very slow growth before a pickup in the second half of the year spurred by monetary and fiscal stimulus.
My forecast for 2008 was revised down only a few tenths from October. But that is because of the considerable easing of monetary policy undertaken and assumed in my forecast. I assumed 50 at this meeting, and unlike that piker, President Yellen, I assumed another 50 over the second quarter.
MS. Yellen: I'll see you and up you. [Laughter]
Mr. Mishkin: My view on the economy is that we are going to have quite a weak first part of 2008 , in which we're going to skirt recession. This is my modal forecast. I do think that the economy will be stronger in 2009 and 2010, but that's because I decided to be even less of a piker than Governor Kohn. He accused President Yellen, but I was going to accuse him because I did actually assume a 75 basis point cut at this meeting and then another 50 basis point cut at the meeting following. Then I hoped that afterward we would be able to reverse.
Chairman Bernanke: Now, the central issue here, though, ultimately comes back to the housing market. Certainly by this point there must be some pent-up demand for housing. We've had obviously very low sales for a period. House prices are soft. Mortgage rates are low. Affordability is better. What's keeping people from buying houses is the fact that other people aren't buying houses. If there were some sense that a bottom was forming in the market or in house prices, we probably could actually see a pretty quick snap-back, an increase in housing demand, and that in turn would feed back into the credit markets, I think, in a very beneficial way. So there's the possibility that, if the housing market can get restarted , we could get a relatively benign outcome. March 10, 2008: Conference Call of the Federal Open Market CommitteeChairman Bernanke: Good evening, everybody. I am sorry, once again, to have to call you together on short notice. We live in a very special time. We have seen, as you know, significant deterioration in term funding markets and more broadly in the financial markets in the last few days. Some of this is credit deterioration, certainly, given increased expectations of recession ; but there also seem to be some self-feeding liquidity dynamics at work as well. So the question before us is whether there are actions we can take, other than monetary policy, to break or mitigate this adverse dynamic. There are two actions on the table, which I think we should just try to consider together, if possible. The first is the proposed term securities lending facility — I know you received the documentation on this without much notice, but we will get some explanation in the meeting. The second item — we have received formal requests from the European Central Bank (ECB) and from the Swiss National Bank (SNB) to expand and extend the currency swap lines that we have with them. Bernanke was clearly worried about inflation as late as January 2008. By March, panic set in with emergency measure after emergency measure and an alphabet soup of Fed programs, culminating in numerous unsound bailouts, fiscal stimulus, 10% unemployment, the complete collapse of the monolines (reinsurance companies like MBIA and Ambec), and ultimately the collapse of Lehman. At no point has any Fed official admitted causing this financial mess due to their bubble-blowing policies. They did not see the last crisis or dot-com bubble in 2000 either. The Fed will not see the next crisis either. A global currency crisis awaits, most likely coupled with another stock market crash. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Ukraine Truce: New Elections Announced; Will this Truce Last? Posted: 21 Feb 2014 07:39 AM PST As I stated yesterday, it was impossible to predict which way the crisis would head. Today we have the possibility of settlement to the crisis. President Viktor Yanukovych and the opposition signed an Agreement on the Settlement of the Crisis in Ukraine. Treaty Synopsis- Restore the Constitution of 2004
- Constitutional reform, balancing the powers of the President, the government and parliament, will start immediately and be completed in September 2014.
- Presidential elections will be held as soon as the new Constitution is adopted but no later than December 2014.
- Investigation into recent acts of violence will be conducted under joint monitoring from the authorities, the opposition and the Council of Europe.
- The authorities will not impose a state of emergency. The authorities and the opposition will refrain from the use of violence. Illegal weapons should be handed over to the Ministry of Interior bodies within 24 hours of the special law.
- The Foreign Ministers of France, Germany, Poland and the Special Representative of the President of the Russian Federation call for an immediate end to all violence and confrontation.
Will this Truce Last?The key issue today is whether this truce will last any longer than the last one did. While pondering that subject, please consider Ukraine leader, opposition sign deal to end crisis. Ukraine's leader and opposition on Friday signed a deal to end the splintered country's worst crisis since independence after three days of carnage left nearly 100 protesters dead and the heart of Kiev resembling a war zone.
President Viktor Yanukovych's dramatic decision to hold early elections and form a new unity government was met with caution by the tens of thousands gathered on central Kiev's main square for a protest that began exactly three months earlier.
The deal was signed in the presidential palace's Blue Hall in the presence of EU envoys by Yanukovych and and three top opposition leaders who included the charismatic boxer turned lamaker Vitali Klitschko.
The peace pact met the demands the opposition had laid down at the start of the protests: the balance of political power would shift back to parliament -- as it had been before Yanukovych assumed the presidency in 2010 and took the nation of 46 million on a course away from the West and toward Russia.
It would also create an opposition cabinet with the authority to reverse Yanukovych's decision in November to ditch an historic deal that would have put Ukraine on the path to eventual membership of the EU, which many Ukrainians see as their protector from centuries of Russian domination.
Life appeared to be returning to normal in much of Kiev as the city's vital metro network resumed service after being shut down to keep protesters from reaching Independence Square on Tuesday night.
But many protesters told AFP that the deal represented too little and came much too late.
"These steps were what we needed but I think it is now too late after all the blood that has been spilt," said 58-year-old Sergiy Yanchukov.
"It was a crime against humanity and Yanukovych should be sent to The Hague (home of the International Criminal Court). I rather doubt people are going to hand over their weapons. Regardless, let's hope the bloodshed and riots stop. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Ukraine's President Replaces Head of Armed Forces, Military Intervention Feared; Financial Crisis Threatens Russia; What's in Store for the Ruble? Posted: 20 Feb 2014 11:55 PM PST The situation in Ukraine grows more desperate by the hour. President Viktor Yanukovic had already replaced the head of the army. Today Yanukovic replaced the head of all armed forces. Given that lower ranks are divided in support, calling out the military could start an all-out civil war. "If there is a decision to use force to clear the protesters, it can be done but will start a civil war," said Ihor Smeshko, former head of Ukraine's SBU security services. "The army is so far neutral, but if it is pulled into this conflict it will be a point of no return. Army personnel are themselves split 50/50 in their views of Ukraine."
The government prepared the way for using the army on Wednesday, when the defence ministry said the military could be deployed in "antiterrorist" operations. Authorities and legal experts had previously said the army could only be used within Ukraine if a state of emergency was imposed.
Mr Yanukovich on Wednesday night also replaced the head of all Ukraine's armed forces with the former navy chief – just weeks after he already replaced the head of the army – in what appeared to be a move to ensure loyalty in the top ranks.
"[The Yanukovich government] have put their placemen into the army," said James Sherr, a Ukraine scholar at London's Chatham House think-tank. "But still the question is what proportion of units would obey such orders?" Financial Crisis Threatens RussiaThe Telegraph reports Financial crisis threatens Russia as Ukraine spins out of controlThe dramatic escalation of Ukraine's civil conflict and fears of Russian military intervention have sent financial tremors across Eastern Europe, turning the region into the new fulcrum of the emerging market crisis.
"This has suddenly gone from a domestic Ukrainian story into a geopolitical clash," said Lars Christensen, from Danske Bank.
The Russian ruble has fallen to a record low against the euro, with contagion reaching Poland, Hungary and Romania in recent days. "The moves in Russia are very like the events during the war in Georgia in 2008. Markets are pricing in the risk of Russian intervention," he said.
Regis Chatellier, from Societe Generale, said there is a "high risk" that Ukraine will be pushed into default on its €60bn sovereign debt, triggering a credit shock for Russian banks. Sberbank and VTB are both large holders of Ukrainian bonds. Global emerging market bond funds hold 3pc of their portfolio in Ukrainian debt. "The spillover effect of a Ukrainian default would be significant, but not systemic," he said.
The decision by the Ukrainian nationalist stronghold of Lvov this week to declare "independence" from Kiev has upped the ante, creating a volatile climate in which the Ukrainian army may be forced to intervene to head off civil war.
"Ukraine is on the verge of splitting into two countries. We're looking at events that we have not seen in Europe since the break-up of Yugoslavia," said one City economist with links to Lvov. "When you have this level of hatred and mistrust, anything can happen."
Ukraine's foreign reserves are down to survival levels. Russia has so far kept the country afloat with a $3bn loan, the first tranche of a $15bn bailout, but further payments are in doubt.
Russia faces the choice of large losses from a default or the ever rising costs of propping up Ukraine's economy. Military intervention to subjugate the rebels in the Catholic strongholds of Western Ukraine orbit could lead to a quagmire.
The International Monetary Fund said in a report for the G20 summit this weekend that emerging market woes are the key risk for global recovery, warning that a trifecta of "capital outflows, higher interest rates and sharp currency depreciation" could set off a corporate debt crisis.
Societe Generale said in a new report that emerging markets have risen from 18pc of world output to 40pc over the past 20 years, implying that a broad upheaval in these countries today would have "much greater ramifications for the global economy". US$ vs. Ruble Euro vs. Ruble It is impossible to know what's ahead. A civil war could break out tomorrow, but so could another cease fire. The military could even oust the president. The longer this simmers, the more pressure there is on emerging markets and the more pressure there is on any banks that lent money to Ukraine. Meanwhile, check out the collapse in the Ukranian Hryvna. Euro vs. Hryvna So far, things are still orderly. If a full scale civil war breaks out, it won't be. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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