Report on the Euro for August 13, 2011
1) … Eurozone Finance Ministers will finalise the EFSF guidelines at a work group meeting this week as the French stock market and the Euro have plummeted.
The French stock market, EWQ, is now down to the depth of the 2009 recession as three French banks lost more than 10% of their market value on Monday August 12, 2011. Reuters reports The times are fast approaching when some kind of official response may be the only circuit-breaker to stem off a major panic over French banks.
Euro Intelligence reports in their for fee daily newsletter reports the following items: Yesterday was the day when the euro crisis crept into France, where the banking sector has now become so vulnerable that even the French government is no longer in a position to rescue it without itself being drawn into the abyss. The trigger for this meltdown was Moody’s announcement of a downgrade.
France’s finance minister cautiously endorses Eurobonds. Speaking at a conference yesterday France’s finance minister Francois Baroin cautiously endorsed Eurobonds, Libération correspondent Jean Quatremer reports on his blog Coulisses de Bruxelles. Eurobonds “can be a final goal, not a starting point”, the minister said. Quatremer sees nevertheless an important step because “the expression has been used and that is what is important”.
EU finance ministers will finalise the EFSF guidelines at a work group meeting this week. Reuters reports that eurozone finance ministers, at their informal meeting in Poland on Friday, will finalise the guidelines for the EFSF, deciding on the instruments and procedures. The guideline would also stipulate how market intervention works, and how it is coordinated with the ECB. The ruling of the German constitutional courts complicates the process, as the German parliament now has to be involved.
The Wall Street Journal reports The trouble with French banks.”We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore, a bank executive for BNP Paribas, who declines to be named, told me last week. Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore. Now that the situation is bordering on catastrophe, analysts are suggesting that the government is set to start nationalizing France's banks.
The New York Times reports German Leader faces key choices on rescuing Euro. As Europe struggles to reverse a plunge in financial confidence, the world waits for Germany’s chancellor, Angela Merkel, to make a fundamental choice. She, more than any other European politician, will have to either summon the leadership to rescue the euro or concede that the political will is not there. Mrs. Merkel, 57, faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and, more immediately, whether to allow Greece to default or even to leave the currency union. American officials fear that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn on both sides of the Atlantic. Fears of a worsening debt crisis slammed European stocks on Monday, especially shares of French banks, forcing the French government to declare its support for its three largest financial institutions. The turmoil added to worries that the Greek crisis would prove difficult to contain without more robust action from Germany and, ultimately, its taxpayers.
Bloomberg reports that Greece’s chance of defaulting over the next five years has risen to 98 percent, according to forecasts based on the cost of credit default swaps on Greek sovereign debt. “It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit default swaps, up from $5.5 million in advance September 9, according to CMA,” Bloomberg wrote. The collapse of confidence in Greek debt is spreading more broadly across the European banking system and wreaking havoc on the euro, FXE. The common currency on Monday slipped to its lowest level against the yen since 2001 and fell to a seven-month low against the dollar. Bloomberg wrote: “The risk of contagion beyond Greece pushed sovereign credit default swap prices to record highs across the euro region.” It cited Suki Mann, a strategist at Societe Generale SA in London, as saying, “The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too. This trio are already under intense pressure, but it will get much worse.”
Ambrose Evans-Pritchard wrote of the statements coming from Germany on a Greek default: “If it is a pressure tactic to force Greece to submit to EU-IMF demands of yet further austerity, it may instead bring mutual assured destruction. We have never been so close to EMU (European Monetary Union) rupture.” Citing a report issued last week by UBS bank, he continued: “If a debtor such as Greece left [the euro zone], the new drachma would crash by 60 percent. Its banks would collapse. Switching sovereign debt into drachma would be a default, shutting the country out of capital markets. Exit would cost 50 percent of GDP in the first year.”
Tyler Durden reports the European Financial Institutions are both insolvent and illiquid as the usage of the ECB Deposit Facility soared to €198 billion on Monday from €182 billion on Friday. This is a massive €118 billion increase in the past month alone. As the chart below demonstrates, a good word to describe the chart is parabolic. Furthermore, USD Libor continues to rise and has now risen nearly 40 days in a row.
Robert Lenzner of the Huffington Post in Forbes reports Europe is both a sovereign debt problem and a bank solvency problem.
2) … Will Europe and the world suffer a Global Economic Collapse from the European Sovereign Debt Crisis or an uncontrolled Greek Insolvency?
Bloomberg reports Mrs Merkel, in a German radio interview broadcast today, said that an “uncontrolled insolvency” would further roil markets spooked by the prospect of a Greek default. The euro region currently has no system for “orderly” insolvency until the permanent rescue fund is established in 2013, she said. “The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” Merkel told Berlin-based broadcaster Inforadio. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”
The Milton Friedman Free To Choose Regime is collapsing again just like in 2008 and for the exact same reasons, except with one major difference: this time is is all about sovereign wealth and the collapse of the value of entire nations. Bloomberg reports European banks valued at post-Lehman lows show sovereign risks are growing and Arthur Beesley, Irish Times journalist relates No one is in charge ... Around Brussels, people in the know speak of drift, despair and danger. And Reuters reports Greece's race to catch up on reforms seems doomed. And Guy Johnson comments Greece’s Euro membership hanging by a thread.
I am one who believes that Europe and the world will suffer a Global Economic Collapse from the European Sovereign Debt Crisis, or an uncontrolled Greek insolvency.
The Beast Regime of Neoauthoritarianism is built upon many; it is fathered by the 300 luminaries of the Club of Rome, whose 1974 Call is clarion, compelling, and comes with authoritarian imperative for regional economic government, as an answer to the chaos coming from unwinding carry trades and deleveraging stocks, as well as the failure of sovereign debt. The Club of Rome’s Call is very timely, as Doug Noland of Prudent Bear writes in Crumbling Pillars “The eurozone is unraveling, as global market de-risking and de-leveraging intensifies … Whether it’s monetary or fiscal policy, at home or abroad, there seems to be confirmation everywhere that policymaking has become largely ineffectual and, increasingly, incapacitated.”
I am one who believes that while the Euro system is not about to break up, its viability can only be assured, and will be assured by diktat of leaders, who in framework agreements, waive national sovereignty and form a fiscal union, together with other components of a true economic government, with a Leader, as called for in August Joint Communique by Angela Merkel and Nicolas Sarkozy. WSWS.org relates that German Chancellor Angela Merkel has spoken out in favour of the euro. It was “much, much more than a currency”, she said. It was “the guarantor of a united Europe”, she explained in the budget debate in the Bundestag. “If the euro fails, Europe will fail.” Even Finance Minister Schäuble defended the euro as the only alternative. “What we need in a globalised world is a common European currency”.
The die has been cast. Fate it seems, yes, destiny is at work, destroying nations, so that regional sovereignty of the Beast Regime of Neoauthoritarianism can be revealed, which will rule in all of mankind’s seven institutions, and as state corporatism in ten world regions. This Ten Toed Kingdom of regional economic government will be imposing austerity and debt servitude. Sovereign leaders will be replacing sovereign individuals. Freedom and choice are illusions on the Neoauthoritarian desert of the Real.
Soon out of the soon coming global sovereign debt and banking crisis, a new European Super Government will arise. It will be like a revived roman empire. A new moneyness, will come from the word, will, and way of both a European Chancellor, the Sovereign, and His Banker, The Seignior. One leading candidate for the Sovereign is Herman Van Rompuy, who the Daily Mail reports as saying, the age of the nation state is over and the idea that countries can stand alone is an ‘illusion’ and a ‘lie’
The people will be amazed by this new seigniorage, that is a new moneyness, and follow after the Beast Regime of Neoauthoritarianism, giving it their allegiance
3) … Is it time to go short longer duration Treasuries as well as precious metal mining stocks?
I recommend that one own in one’s personal possession gold bullion, but for those not so oriented such as corporate treasurers, one might consider going short both TMF and NUGT as a contrarian investment.
Tyler Durden reports in Duration in Pimco's Total Return Fund soars to near record, Highest Since 2007 in anticipation Of QE3. Bill Gross came, saw, and i) stopped shorting govvies, and ii) doubled down on QE3, after, as he himself said, he did not anticipate how bad the US economy would get. As the just released latest monthly Total Return Fund data indicates, PIMCO now has a substantial net long position in Government Related securities, at $51.5 billion (net of swaps), a more than the duration of their fixed income holdings from 4-5 to over 6. A 100% increase from the $22.1 billion in July (and a far cry from the $9.6 billion short in April). As a reminder, Gross skepticism was predicated by the concern of who would buy bonds in an inflationary environment coupled with the end of QE2. Well, since then the bottom fell out of the market, and the Fed is about to re-enter the securities market to prevent the latest re-depression with Operation Twist if not much more. So while it no longer makes sense to be short bonds (as Gross has figured out the hard way), what makes sense is to be very, very long duration, since this is what the Fed will be buying in Operation Twist/Torque. Enter Exhibit A - the chart of maturity/distribution of PIMCO holdings, of which most notable is the explosion in average holding duration, which from 4.56 in July, has soared to 6.27 in August, the highest since 6.23 in October, and possibly the highest on record (that said our records only go back to 2007). As part of this expansion, Gross has seen his Mortgage Securities soar to $78.5 billion, the highest since February, when Gross was actively reducing his MBS holding profile, and now is doing the opposite, and is accumulating Agency paper hand over fist in an attempt to extend duration. Bottom line: Pimco is now balls to the wall in the QE3 camp, first to be manifested by Operation Twist, and then, likely by outright Large Scale Asset Purchases. Look for numerous other copycat investors to expand.
History shows that longer duration US Treasuries, EDV, and precious metal mining, GDX, always make market turns lower together. The gold mining stocks, GDX, and the silver mining stocks, SIL, turned lower Monday September 12, 2011. Could it be that bond vigilantes will rally and take charge of the Treasury market and ruin Pimco’s ambitions? This as Reuters reports Fisher says Fed can do little now to spur economy. And Associated Press reports Federal Deficit totaled $1.23 Trillion through August The third straight $1 trillion-plus deficit adds pressure on Congress and the White House to reach an agreement on a long term plan to trim government spending.
The chart of the HUI Precious metal mining stocks, ^HUI, traded by the ETF, GDX, manifested a long legged doji today, after having parabolically lower yesterday.
4) … Are we beginning to see the end of traditional banking and credit?
Chris Whalen writes Bank Of America is doomed, Stop firing people and just declare bankruptcy now. ... And Cliff Kule writes Time to Prepare for Another 2008-style Credit Crisis?