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Europe's Debt Woes Are Not a Top Concern For Most Investors But Should Be As Cliff Risk Has Emerged In The European Financials

Financial market report for the week ending December 3, 2010


Cliff Risk emerged in the European Financials on November 5, 2010 … soon these banks will go over the cliff … then out of Götterdämmerung, that is an investment flameout, a Sovereign and a Seignior will emerge from Europe’s core to provide fiscal sovereignty and both credit and fiscal seigniorage

I ... Cliff Risk emerged in the European Financial on November 5, 2010 as sovereign and corporate interest rates rose and as currency traders sold the Euro and other currencies.  

A … Tracy Alloway, in FTAlphaville, June 15, 2010, developed the idea of Cliff Risk in a comment on article Charting Europe’s Grim Sovereign-Bank Loop: “Casper: The tipping point for Europe's banks' under related links discusses something similar. But the cliff risk in that one is when markets become uncomfortable with the bank-sovereign symbiosis.”

Joseph Cotterill in FTAlphaville, December 2. 2010 article, If Not The ECB, Whom?:  It is important to note that the market moves largely reflected selling by long-only investors trying to reduce their exposure, rather than speculative short-selling. We re-emphasise the point that our colleague, Laurence Mutkin, already made a while ago: the bonds of several peripheral countries, while still being government bonds in name, no longer offer the advantages of a government bond – safety, liquidity, low volatility and a negative correlation with risky assets … Hence, investors running a traditional government portfolio are exiting those markets. In short, peripheral government bonds have become an asset class in search of a new investor base … The sovereign-bank asset loop is crumbling, as above, or collapsing in spectacular and sudden fashion, as Ireland has just shown. But then the domestic banks stood in for a sudden drop in foreign demand from 2009 to 2010.

On December 2, 2010, Pan Pylas, of the Associated Press reported: “The ECB will extend special crisis measure, but gives no sign bond buys will expand. The European Central Bank stepped up its efforts to contain the continent’s government debt crisis, as ECB head Jean-Claude Trichet announced the bank will prolong special measures that provide ready cash to banks and steady the financial system.”

The European Financial Institutions, EUFN, traded in a volatile manner immediately before and after announcement of the ECB Policy to continue to buy debt:

1) Thursday, Dec, 2, 2010 ... 21.30 … Rallied on announcement of continuation of ECB Policy.

2) Wednesday, Dec, 1, 2010 … 20.65 … Rose on anticipation of continuation of ECB Policy.     

3) Tuesday, Nov, 30, 2010... 19.77 ... Plummeted on concern of discontinuation of ECB Policy.

Cliff Risk is seen in the Elliott Wave 2 Up of the Chart of the European Financial Institutions, EUFN, ready to enter Elliott Wave 3 Down. The 3rd Waves are the most sweeping of all they build wealth on the way up and destroy wealth on the way down. The 3rd Wave Down will utterly wipe out the banks as they are currently constructed; they will required reconstitution and will operate under a new regime.

The European Financial Institutions, having purchased sovereign debt are inexorably intertwined with the sovereign status and sovereign debt of the periphery nations. The banks are one and the same with the nations and their debt. When one looks at the European Banks, one is seeing the combined sovereign debt of Portugal, Italy, Ireland, Greece and Spain. If there be a currency war, and I believe there is one commenced on November 5, 2010, on these sovereign states, then there is also a financial stock war on the European Financial Institutions, and a corporate bond war on the debt these banks hold.

To document just part of the bank-sovereign symbiosis Business Insider presents the Evolution Securities chart showing Barclays, Deutsche Bank, and BNP have large estimated exposures to Spanish sovereign debt as of May 16, 2010. And Causes Of The Crisis related May 18, 2010, related it’s a banking crisis.

Banco Santender, STD, is under great selling pressure as Spain’s Casas, banks owned and operated by the Roman Catholic Church, extended real estate loans to build properties for which there was no demand.  Business Insider reports Spain is now a walking dead economy:  “Spain now has the highest unemployment rate in the entire European Union. More than 20 percent of working age Spaniards are unemployed. The total of all public and private debt in Spain has reached 270 percent of GDP. There are 1.6 million unsold properties in Spain. That is six times the level per capita in the United States.  Considering how bad the U.S. real estate market is, that statistic is incredibly alarming.”

B … On November 4, 2010, bond vigilantes reacted to the Fed announcement of QE 2 of money printing operations, by sustaining the Interest rate on the US 30 Year US Government Note, $TYX, higher.

And also in late October and early November 2010, the bond vigilantes called peripheral Europe sovereign debt interest rates higher as Mrs Merkel’s called for a sovereign debt default mechanism, and as she also called for bondholders to take a haircut.

Investors sold World Corporate Bonds, BWX, and International Corporate Bonds, PICB, and placed carry trade investments in selected groups of stocks such as Retail, XRT,  RTH, Semiconductors, XSD, large cap shares such as Nuclear Power, NLR, and prior to the last three days of this week, sold the European Shares, VGK and the European Financial Institutions, EUFN, Banks, KBE,  Investment Bankers, KCE, and Wall Street Financial Services, IYG, Silver, SLV, and gold, GLD, moved massively higher.

The chart of World Government Bonds, BWX, shows an Elliot Wave count of 2 up; and ready to enter into an Elliott Wave 3 Down. This is a bearish omen for Europe Financial Institutions as they they are loaded to the gills with sovereign bonds.

This week the US 30 10 US Government Yield Curve, $TYX:$TNX, flattened on risk aversion. Investors forsook the 30 Year US Government Bonds, EDV, the 20 to 30 Year US Government Bonds, TLT, and the 7 to 10 Year US Government Notes, IEF. and the 3 to 7 Year US Government Notes, IEI.  The fall in US Government bonds, as well as the longer maturity corpate maturity bonds, BLV, and corporate bonds, LQD, for the week contrasts with the rise in World Government Bonds, BWX, and International Corporate Bonds, PICB,  

Having read the Stephen Dinan Washington Times article Senate Blocks Obama's Tax Plan, I conclude that
if the economic collapse I envision is postponed, President Obama is a hostage and will succumb by Republican strength to signing a tax cut extension for the high income, which will worsen the US Budget deficit. Thus it is no wonder that the US Treasuries, are in worse shape than the World Government Bonds, as is seen in the Yahoo Finance chart of BWX, IEF, TLT, and EDV.   

Total Bonds, BND, fell to the edge of a massive head and shoulders pattern, portending a significant fall lower.

C … Since November 5, 2010, a global debt deflationary bear market has been underway as currency traders initiated a global currency war against the world central banks by successfully selling the world currencies.

Hedge Fund investor Jim Rogers said in Shiyin Chen and Haslinda Amin May 11, 2010 article Bailout Is Nail In The Coffin for Euro, Rogers Says: “It’s a political currency and nobody is minding the economics behind the necessities to have a strong currency.” Mr Rogers statement applies to the Euro from the day it was conceived and put into use.

Accumulated currency losses inflicted by the currency traders since November 5, 2010 are as follows: Euro, FXE, 4.5%, New Zealand Dollar, BNZ, 3.8%, Russian Ruble, XRU, 3.1%, Swedish Krona, FXS, 2.9%, British Pound Sterling, FXB, 2.6%, Australian Dollar, FXA, 2.2%, Emerging Market Currencies, CEW, 1.7%.

Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

There has been a death cross in the chart of the World Stocks relative to Commodities, ACWI:DBC, meaning that stocks have succumbed to currency deflation. And meaning that those invested in commodities DBC, are overextended.

Tyler Durden reports Goldman Sachs upgraded its rating on financial sector stocks. I give no, repeat no, such encouragement. I believe that the financial stocks are toxic and dangerous to one’s investment wealth. Goldman Sachs advisories are a “contrary indicator”, suggesting that one should take an opposite course of action, in this case flee the banks. Corporate investors who for one reason or another cannot invest in gold, should go short the financial and bank shares, as in a bull market one buys in dips and in a bear market one sells into strength.      

The rise in stocks, ACWI, on December 1st, 2nd, and 3rd, 2010, was simply a rally in a debt deflationary bear market, that is a currency deflationary bear market.

The rise in World Stocks, ACWI, for the last three days of this week was caused by a falling US Dollar, and rising yen carry trades seen FXE:FXY, ICN:FXY, FXS:FXY, FXA:FXY, which gave a boost to Metal Manufacturing, XME, Steel, SLX,  Sweden, EWD, South Korea, EWY, India, INP, Russia, RSX, Thailand, THD, Spain, EWP, Australia, EWA,  India Earnings, EPI, Basic Materials, DBN, Emerging Markets, EEM,

Chart of the euro yen carry trade EUR/JPY seen in FXE:FXY shows that it unwound the previous week, and this week, but recovered on Wednesday, Thursday and Friday.

D … Stocks will be going down again.

The most deflationary of all bear market ETF, Direxion Daily Emerging Markets Bear 3X Shares has turned up November 4, 2010, as is seen in this chart of EDZ.

The bear, not the bull, is in charge of the markets. The bear is termed a “global currency war” by the currency traders, as they have introduced competitive currency deflation, that is competitive currency deflation, on rising interest rates globally. This bear market is largely unseen to many because of the flight to perceived safety in US dollar stocks over the last three days, such as the Nasdaq 100, QTEC, and the S&P, SPY. Yet, the currencies, especially the Euro, FXE, the New Zealand Dollar, BNZ, the Russian Ruble, XRU, the Swedish Krona, FXS, the British Pound Sterling, FXB, and the Emerging Market Currencies, CEW, tell the story that a bear market is on. And the currency deflationary bear market can be seen in chart of Portugal Telecom, PT, where on November 3rd there was a lollipop hanging man candlestick-evening star pattern on November 3, 2010 with a pop to 15.24. The down-ward flow seen in the chart of Portugal Telecom tells that a global debt deflationary bear market, centered in Europe, is underway.

Austria's, EWO, banks are well known for having significant exposure to Eastern Europe. Agnes Lovasz of Business Insider reports: “The region required more than $100 billion in international bailout money as depreciating currencies made it difficult for borrowers to service debt, increasing the stock of non-performing loans and destabilizing banking systems. Foreign-currency loans at the end of last year accounted for 91 percent of the total in Latvia, 87.1 percent in Estonia and 71.8 percent in Lithuania, according to data from London- based Capital Economics. In Hungary, Romania and Bulgaria, they are about two-thirds of outstanding credit.” Austria, uses the Euro, and as such the foreign currency loans are a drag on the Euro. Investors have voice their dissatisfaction by selling the Austrian shares, by going short the Euro, or going short the developing Europe currencies, such as Hungary’s Forint. Krystof Chamonikolas of Bloomberg reported on November 30, 2010:  “Hungary’s bonds tumbled for a seventh day, lifting five-year yields to the highest since September 2009, as a row between the central bank and the government over interest rates undermined investor confidence.   The yield on government bonds in forint due February 2015 jumped 20 basis points to 8.38%...”

Gregory White of Business Insider reports Belgium, EWK, which uses the Euro, has debt problems, but there is also a political crisis looming that could rip the nation in two. Dutch speaking Flanders and French speaking Wallonia have been unable to sort out a government.

Chart of Nasdaq 100, QTEC. Few understand that the reason the Nasdaq is rising is a perceived flight to safety in US stocks, far away from the European Sovereign Crisis. Yes, many stocks that got the “safety juice”; these included Dorman Products, DORM True Blue, TBI, Home Building, ITB, Home Depot, HD, Lowes, LOWS, even mortgage finance company, iStar Financial, SFI. Few are aware that when the European Banks go down, that they will take all stocks down with them globally.


Chart of the Euro, FXE, The chart of the Euro shows an Evening Star on November 4, 2010, as currency traders called the Euro lower on November 5, as Mrs Merkel called for a sovereign default mechanism and for bond holders to take a haircut.

The European periphery sovereign debt owned by the European banks poses systemic risk, that is the risk of a black swan event where there could be a run on the banks; and where through rising sovereign debt interest rates, or through a rapid Euro currency depreciation, the capital of the banks will be quickly depleted, causing the banks to shutter. A  “run on sovereign debt”  and a “pure financial panic in Western Europe” is at hand.

E ...The fall of the US Dollar, $USD, for the last three days of this week, propelled commodities, DBC, especially oil, USO, up strongly.

Energy service stocks, OIH, rose on the higher price of oil. The chart of base metals, DBB, suggests they have peaked out on a call from China to stop inflation; this likely peak in base metals, means a likely top in copper miners, COPX, and BHP Billiton, BHP.  The rise in China Material, CHIM, has been stopped out. China stocks, FXI, did not participate with the rise in the Nasdaq 100 stock, QTEC, or the S&P, SPY.  Leslie Patton of Bloomberg reports Cotton Surges to Biggest Weekly Gain in 39 Years on India Limits. Cotton, BAL, futures surged, heading for the biggest weekly gain in 39 years, on mounting concern that supplies will be limited from India, the world’s largest exporter after the U.S. Cotton-yarn shipments will be capped at 720,000 metric tons in the year that started Oct. 1, the Indian government said Dec. 1 in a bid to stabilize domestic prices and boost supply. Futures traded in New York are up 75 percent this year and touched a record last month, partly on concern that India won’t ship enough of the fiber to meet growing global demand. Uranium miners, URA, rose this week as Yuriy Humber of Bloomberg reports: “Uranium rose to the highest in more than two years after China Guangdong Nuclear Power Co. agreed on long-term supply with the two largest producers and expectations Asia’s biggest economy will boost its reactor-building targets.” Grains, GRU, rose.Timber, CUT rose.

Oil, USO,

Base metals, DBB,

F … Given the risk involved, the wise investment option for the investor is to buy and take possession of gold, GLD, and silver, SLV, bullion.

Silver, SLV, silver has risen strongly on the well founded and perceived risk of failure in the European Financial Institutions

Gold, GLD, popped up and out of a consolidation triangle this week, on concerns that the US Federal Reserve’s QE 2, constitutes monetization of debt; and on concerns that the sovereign crisis is unmanageable.

II … Soon the European Financial Institutions will be going over the cliff, as the sovereign crisis deepens and interest rates go higher yet …. Charts show these banks to be on the edge of the cliff
Deutsche Bank, DB … Germany; chart shows that it has lost a significant amount of value recently.

Banco Santander Madrid, STD … Spain  …. Charles Penty and Gavin Finch of Bloomberg report: “Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout.”

ING Groep NV, ING, … Netherlands

Credit Suisse, CS … Switzerland

Royal Bank of Scotland, RBS … Scotland

HSBC, HBC .. United Kingdom

Barclays, BCS … The UK

UBS … Switzerland; chart shows that there is nothing but thin air between its current price of 16 and support at 14.

European Financial Institutions, EUFN  … The Elliott Wave Count is ... Wave 1 Down on Wednesday, Dec, 1, 2010 …  to 20.65 and now … Wave 2 Up on Friday Dec, 3, 2010 …. And most likely a Wave 3 Down will commence the week beginning Monday Dec, 6, 2010.

III … There is a total disconnect between the system risk poised by the bank-sovereign debt symbiosis and German, EWG, economic output and optimism.

Simone Mejer of Bloomberg reported on November 29:  “European confidence in the economic outlook improved to the highest in three years in November as Germany’s export-driven growth helped counter concerns that a spreading sovereign-debt crisis will hurt the recovery.” And Rainer Buergin of Bloomberg reported on November 30: “German unemployment fell for a 17th month in November as business optimism improved, underscoring the gulf between Europe’s biggest economy and peripheral nations struggling to cut debt. The number of people out of work declined a seasonally adjusted 9,000 to 3.14 million, the lowest since December 1992.”

IV … Out of Götterdämmerung, that is a investment flameout a Sovereign, and a Seignior will emerge from Europe’s Core to provide fiscal sovereignty and both credit and fiscal seigniorage.

When the European Financial Institutions go over the cliff, assuredly there will be Götterdämmerung, that is a investment flameout -- it will be global.

Out of Europe's Core, that is out of Brussels, and Frankfurt and Basle, a Sovereign, that is a Chancellor, a leader like Herman van Rompuy, as well as a Seignior, an old English word meaning top dog banker who takes a cut, a minister such Olli Rehn, or Jean-Claude Trichet, will arise to establish strong economic governance like the world has never seen, to deal with the global banking crisis. This as the currency traders will likely continue to sell off the major currencies, DBV, as well as the emerging market currencies, CEW, in an ongoing global currency war against the world central bankers.

Leadership for reconstitution of the global economy will come from Germany, as Germany is the real power force in a revived Roman Empire, and is currently taking the lead in an attempt to find a way out of Europe’s sovereign debt crises.  Ambrose Evans Pritchard commented, on May 2, 2010, in the Telegraph, documenting the power of Germany in words reminiscent of Margaret Thatcher: “If the aim of Helmut Kohl and Francois Mitterrand at Maastricht was to tie down a ‘European Germany’ with the silken chords of emu, they failed. Monetary union has delivered a ‘German Europe’ after all. And he continues, We now know the answer to Henry Kissinger’s question: “Who do I call if I want to call Europe?” Only one person matters,The Chancellor of Germany.” …. And also Arthur Beesley in October 20, 2010, Irish Times article Sarkozy And Merkel Union Just Too Powerful To Ignore documents the rising power Germany in the EU.

Germany has always had an enduring desire for leadership within Europe. It was one of six signatory nations to the Treaties of Rome which established the Eurozone on March 25, 1957.  Historian Juan Carlos Ocana writes: These Treaties being the European Economic Community, EEC, Treaty, and the European Atomic Energy Community Treaty. The EEC affirmed in its preamble that signatory States were “determined to lay the foundations of an ever closer union among the peoples of Europe.”  In this way, the member States specifically affirmed the political objective of a progressive political integration. The EEC was colloquially known as “Common Market”. The member countries agreed to dismantle all tariff barriers over a 12-year transitional period.”  The signatories of the historic agreement were Christian Pineau on behalf of France, Joseph Luns from the Netherlands, Pauh Henri Spaak from Belgium, Joseph Bech from from Luxemburg, Antonio Segni from Italy, and Konrad Adenauer from the Federal Republic of Germany. The Treaties were ratified by National Parliaments over the following months and came into force on 1st January 1958.

The Seignior will establish fiscal sovereignty, unified regulation banking of globally as described in the James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework, a common Eurozone Treasury, both credit and fiscal seigniorage, and enforce austerity resulting in internal devaluation. In the globally integrated future financial world, services from companies such as ACI Worldwide, Inc, ACIW, should be in great demand.

Its very reasonable to believe that out of the soon coming implosion of European Banking, that Jean-Claude Trichet could rise to rule in Europe as he frequently stated a need for strong economic governance.  France 24 International News in article Trichet Calls For United EU At The IMF reported on September 4, 2010: European Central Bank chief Jean-Claude Trichet called for Europe to hold a united position on reform in the International Monetary Fund. "I would urge the Europeans to have a united position," Trichet said when asked about the possibility of cutting the number of EU seats at the IMF. Speaking at a press conference at the Forum Ambrosetti, a political and economic gathering in northern Italy, Trichet said a common EU position on IMF reform is "very important for global governance".

And in address Global Governance Today, made before the Council on Foreign Relations, CFR, on April 26, 2010, Mr. Trichet called for a new financial state-of-being saying: “For the good and appropriate functioning of global finance it is extremely important that we, in this new ownership of global governance, have — particularly on both sides of the Atlantic — the implementation of the same rules in the same fashion.”    

Forbes reports on December 4, 2010 ECB's Trichet To Receive 2011 Charlemagne Prize. Wikipedia relates that the Charlemagne Prize (German: Karlspreis; full name originally Internationaler Karlspreis der Stadt Aachen, International Charlemagne Prize of the City of Aachen, since 1988 Internationaler Karlspreis zu Aachen, International Charlemagne Prize of Aachen) is one of the most prestigious European prizes. It has been awarded once a year since 1950 by the German city of Aachen to people who contributed to the ideals upon which it has been founded. It commemorates Charlemagne, ruler of the Frankish Empire and founder of what became the Holy Roman Empire, who resided and is buried at Aachen. Traditionally the award is given to the recipient on the Ascension holiday in a ceremony in the town hall of Aachen.

European Voice reports that Angela Merkel was awarded the Charlemagne Prize on April 30, 2008.

V … This Weeks News

Vinces Economic Blog relates: Millions In Secret Fed Bailouts For Global Corporations and presents the Senator Sanders remark from Bloomberg “Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined “ .... December 4, 2010

EuroIntelligence reports S&P Puts Greece On Downgrade Watch, Says ESM Will Damage Bondholders:  S&P issued a downgrade watch for Greece on the grounds that the new bailout mechanism will discriminate against private bond holders; the news is a bombshell because it provides evidence that the new EMS will lead to a generalised credit downgrade for the European periphery. &P last night debunked the view that Germany climbed down in the negotiations on the ESM. It said the regime is going to be detrimental to private bondholders, and duly put Greece on a downgrade watch. What really matters here is S&P’s interpretation of the agreement. Here are the important point from last night’s press release.

Here the main points. We quote direct from S&P: “We believe that the multilateral political prerogative to trigger private debt restructuring could be subject to political rather than objective financial considerations. We also believe that it is possible that European policymakers might, in the midst of a future crisis, make uncoordinated and even contradictory statements, potentially causing market distortions and jeopardizing funding access of individual sovereigns. Notably, the public statement by the Eurogroup finance ministers envisions that any post-2013 lending by the ESM will benefit from "preferred creditor" status, effectively subordinating non-official holders of sovereign debt to the ESM. We believe that such subordination could hurt the prospects of timely and full repayment of non-ESM sovereign debt and would likely lower recoveries on such non-ESM sovereign debt.”  In other words, the decision to make the loans under the ESM senior to private bondholder debt, and the political process to determine illiquidity or solvency, is likely to be extremely problematic. (The way the ESM is constructed, it is hard to see how even Italy and Spain can attract market funding at reasonable rates. The ESM is thus a peripheral Europe downgrade mechanism. We have always argued this, but the fact S&P makes the same criticism, in public, is going to have significant influence of the debate in peripheral countries. We would be very surprised if this whole thing just sailed through without any additional agreements. A quid pro quo for a process that might lead to a single European bond perhaps?) ….  December 3, 2010

Aexander Rose-Innes writes issue of conjoined sovereign and financial sector risk in article Even More Euro: European banks need to finance €700bn for redemptions and interest in the next three years. This from DB back in June (H/T FT): According to our equity research team, European banks need to roll over approximately EUR700bn per annum over the next three years. Due to increased concerns about European sovereigns and lingering concerns about the overall level of capital in the European banking system, the ability of banks to access term funding has been curtailed … The inability to access capital markets is forcing weaker banks to be increasingly reliant on ECB funding which could potentially exacerbate their ALM mismatch (especially as the ECB has so far refrained from reintroducing the 1Y tender), and lead banks to deploy their balance sheet more conservatively  … The funding constraints for European banks are having an impact on asset prices and liquidity. Firstly, peripheral sovereigns are becoming increasingly dependent on their domestic banks to absorb new issuance while banks are increasingly dependent on sovereign support. The feedback loop has been highlighted a number of times in the past few months as a ratings downgrade of a sovereign is followed by a ratings downgrade of a number of domestic banks …
Nonresidents have reduced their holdings of Spanish government debt by about EUR 3bn since January this year. With over EUR 209bn (close to 45% of total outstanding debt) still held by non-residents a further loss in confidence and selling from this investor base could increase the pressure on Spanish government debt. In this context the recent although only marginal decline in the holdings of government securities of Spanish MFIs is worrying. Over most of the crisis Spanish government bonds have been well supported by domestic banks. If capital/liquidity pressures force Spanish MFIs to further reduce their holdings of government securities at the same time as non-residents are reducing their holdings it could result in a self reinforcing dynamic, push yields to extreme levels making it increasingly difficult for Spain the access the market … The situation is further exacerbated by the issuance needs of the Spanish banking sector itself. Spain’s banks need to refinance in excess of EUR 40bn over the rest of 2010 and about EUR 180bn in 2011-2012. The recent ratings downgrades and consolidation amongst the savings banks is likely to reduce the appetite for the Spanish banking sector to expand their balance sheet. It thus becomes critical to ensure that a quick and credible recapitalisation of the Spanish banking sector via the FROB takes place before the funding situation for the Spanish sovereign becomes prohibitive … In the height of the crisis, banks had access to the ECB's emergency lending measures and could borrow money very easily at 1% …  Consequently, as in the US, the carry trade of borrowing from the ECB at 1% and investing in their own government bonds was the best game in town. The result is that many Spanish banks now have enormous amounts of their own government's paper, which is increasingly unpopular … That there might be natural longs looking to exit positions is a given and explains the steady rise in the yields of many sovereigns. The trouble for the ECB is that there interventions seem only able to scare away shorts and stem only the most explosive widening moves in yields. The real aim should be to create an environment with ample liquidity and confidence to attract new natural longs like pension funds … December 3, 2010

Elisa Martinuzzi, Sonia Sirletti and Bryan Keogh of Bloomberg Italian Banks' Refinancing Costs Soar On Contagion Concern, Nation's Debts: Italian banks face higher borrowing costs as concern over the nation’s debt, the second-highest in the euro zone, erodes their perceived creditworthiness. The cost of insuring the debt of UniCredit SpA, Italy’s biggest bank, posted the largest monthly jump in November since February 2009, according to data provider CMA. UniCredit’s credit default swaps this week implied a junk rating to the company’s bonds for the first time, data from Moody’s Investors Service’s capital markets research group show. Swaps on Intesa Sanpaolo SpA, the No. 2 bank, posted a record monthly increase.  Intesa has the highest net exposure to bonds of Portugal, Italy, Ireland, Greece and Spain among the southern European banks, totaling 65.1 billion euros, according to Bernstein. The exposure represents 240 percent of its core Tier 1 capital, a measure of financial strength, and 9.6 percent of total assets, according to Bernstein .… December 3, 2010

Charles Wyplosz in Vox EU writes The Eurozone Slides Into A Vicious Cycle: The no-bailout clause was designed to make sure that each government would face, alone, the consequences of fiscal indiscipline. By breaking this centrepiece of the euro construction, policymakers have opened up a possibly lethal crisis … December 3, 2010.

John Redwood, the Member of Parliament for Wokingham in article Why A Currency Needs A Sovereign relates: We have the first issue of EU bonds with an EU sovereign backer, as they raise money for the Euro bail out fund. We have more support for Euro area banks announced by the ECB. They  now need to use the time they have bought to create a true sovereign … December 3, 2010

John Glover and Shannon D. Harrington of Bloomberg report Bank Stresses Reach Highest Levels Since June:  Derivatives traders are more concerned than at anytime since June that European leaders will fail to address the crisis engulfing the region’s single currency, driving up the cost to borrow for financial companies. Contracts used to bet on the future premium banks will charge each other for dollar loans in London over the federal funds rate almost doubled in November. The so-called FRA/OIS spread soared to 42.75 basis points, before easing back to 39.25 yesterday, UBS AG data show. The measure shows banks are still wary of lending to each other, even as European Central Bank President Jean-Claude Trichet steps up his response to the region’s debt crisis by delaying withdrawing emergency liquidity from the system. The ECB said earlier this year that European banks’ ability to sell bonds may be hampered as governments seek to finance fiscal deficits amassed in part to finance a bailout of the banking industry. “You come back inexorably to the link between sovereigns and financials,” said Matteo Regesta, an interest-rate strategist in London at BNP Paribas SA, the world’s biggest bank by assets. “Financial companies have issues with non-performing loans, fueling the idea they might need government help, which puts pressure on the sovereign, which the banks are also exposed to.” The premium European banks pay in the currency swaps market to borrow in dollars has almost doubled in the past three weeks, reaching the highest level since May on Nov. 30. The cost to protect against losses on their bonds jumped to a 20-month high before paring the increase yesterday ….  December 2, 2010

Mark Thoma relates The Rogoff Report On The Euro: Here is where the latest Irish bailout is particularly disconcerting. What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem. ... Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen? … By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America. There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it. Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle … December 2, 2010

Simon Johnson of Baseline Scenario questions Imminent Eurozone Default: How Likely? ... December 2, 2010

John Redwood writes on The Euro And The State Of EU Banks: Yields on 10 year Greek debt have risen to 12% and on Irish to over 9% compared to 2.5% on German. Banks do lose money on their holdings as well as on their trading books, if you mark the bond value to market prices. There is also an impact on confidence and the valuations of other assets like property in the affected countries which might also damage the banks … December 2, 2010

Corporate Financing Week reports European Sovereign Woes Impact On Corporates: The Markit iTraxx Europe index, which follows the default risk premium of 125 investment grade European companies, has risen to 117.0 on 1 December from 95.38 on the 4 November … December 1, 2010

John Waters in the Irish Times relates, "For as long as prosperity lasted, we were told that it was down to the benefits of membership of the euro zone, but it seems our failures are the consequences of our own stupidity …  But let us at least be clear among ourselves: whatever craziness may have overcome the Irish public in the past decade or so was an all but unavoidable by-product of the changes taking place as a result of the spectacular economic shifts instigated by the introduction of the common currency. We voted for this, but did not understand what it would mean". (Hat Tip to Open Europe Press Summary)  … December 3, 2010

Alexandra Harris and Brendan A. McGrail of Bloomberg report:  “U.S. states and cities scheduled sales of $22.6 billion in debt this week, almost the highest level in five years.” … December 3, 2010 (Chart of municipal bonds, MUB) My comment is that the issues have waited much too long to go to market; they should have brought these up for sale months ago.


George Irwin of EUObserver questions Could The Euro Disappear? … December 1, 2010

Robert Peston of BBC News writes on The Perilous Condition Of Portugal's Banks ... November 30, 2010

Market News International Norges Bank: Norway Banks Vulnerable To External Fin Turmoil … November 30, 2010

VI … Conclusion

Europe's debt woes are not a top concern for most investors but should be as Cliff Risk emerged in the European Financials, EUFN, on November 5, 2010 as sovereign and corporate interest rates rose and as currency traders sold the Euro and other currencies. It was on this date that the world pivoted from the age of prosperity and into the age of deleveraging, as is seen in the MSN Finance six month chart of world government bonds, BWX, the 30 Year US Government bonds EDV, and the 10 to 20 Year US Government Bonds, TLT.   

This week, European Financial Institutions, EUFN, were restored to life by ECB announcement of ongoing purchases of debt. World government bonds, BWX, and international corporate bonds, PICB, rose, which contrasts with US Treasures, EDV, and TLT, as well as US based corporate bonds, LQD and BLV, which fell lower.

The European Financial Institutions, EUFN, in particular these eight: Deutsche Bank DB of Germany  …..  Banco Santander, STD, Spain  …..  ING Groep NV, ING, Netherlands  .….  Credit Suisse, CS, Switzerland, ….. Royal Bank of Scotland, RBS,  Scotland ….. HSBC, HBC, United Kingdom ….. Barclays, BCS, The UK …... UBS, Switzerland ….. have gone beyond the tipping point and are at cliff risk ….. as the liabilities of the  bank-sovereign debt symbiosis grow stronger.

Soon the European Financial Institutions will be going over the cliff, as the sovereign crisis deepens and bond vigilantes call interest rates higher, the market insiders short sell the banks, and as currency traders sell the Euro, FXE.  

Out of Götterdämmerung, that is a investment flameout, a Sovereign, that is a European Chancellor, a leader like Herman van Rompuy, and a Seignior, a top dog banker, like Olli Rehn or Jean Claude Trichet, will emerge from Europe’s Core, to provide fiscal sovereignty and both credit and fiscal seigniorage through a common EU Treasury and implement strong economic governance like the world has never known or even thought possible.

The investment application is to purchase and take physical possession of gold and silver bullion.