Worsening European Debt Poses Major Threat To British Banks ... Tighter Rules In Europe Drive European Financials Lower

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I am not an investment professional. I do not engage in stock or currency trading. I am a blogger and investor who believes the failure of credit has created an investment demand for gold, and that gold bullion is the sole means of wealth preservation.

Financial Market Report for June 24, 2011.

1) … World stocks, ACWI, fell lower today. Loss leaders included Italy, EWI, Norway, NORW, Junior Gold Mining, GDXJ, Silver Miners, SIL

European Bank: Llyods Bank United Kingdom, LYG,

European Bank: Royal Bank of Scotland, RBS,

European Bank: Netherlands: ING Groep NV, ING,

European Financials, EUFN,

2) … In Today’s News
The Telegraph reports Greece's Olympic Dream Has Turned Into a Nightmare for Village Residents. The vast glass edifice was once the gleaming entrance where the world's athletes signed in for the 2004 Olympics but it now stands empty, stripped of all assets including copper piping, electricity points and marble tiles. "I don't know why we're here now," said one guard smiling behind his Ray-Bans. "Thieves took everything of value, I guess we're just here to stop the squatters moving in." Seven years after the outpouring of national pride and delight as Athens showcased its new public works to the world, the Olympic Village, 12 miles north west of the capital in the shadow of mount Parnitha, is now a symbol of national shame. (Hat Tip to Between The Hedges)

Financial Times Deutschland reports the European Banking Authority has stiffened criteria in stress tests and is demanding lenders to consider the possibility of default of Greek government bonds. (Hat Tip to Between The Hedges)

Kathimerini reports officials form the European Union and IMF assessing Greece's efforts to cut its budget deficit have expressed doubts about the viability of $5.4 billion of measures slated for this year. The officials are also pushing for the reintroduction of measures, such as a reduction in the income tax threshold, dropped by former Finance Minister George Papaconstantinou after pressure from lawmakers in the ruling Pasok party. (Hat Tip to Between The Hedges)

ZeroHedge reports Number of European Banks Resorting to 1 Week ECB Liquidity Jumps to Two and a Half Year High. (graph)

Taipan Daily reports The PIIGS' $616 Billion Time Bomb Credit Writedowns European Bank Exposure To Greece  … Wall Street Journal reports Tighter Rules In Europe … New York Times Worsening Debt Is Call Major Threat To British Banks

Bloomberg reports Italian banks slumped in Milan trading amid concern the European debt crisis may spread just as lenders face scrutiny from regulators over capital levels. UniCredit SpA (UCG), Italy’s biggest bank, and Intesa Sanpaolo SpA (ISP), the second-largest, led lenders lower, tumbling as much as 8.9 percent and 7.2 percent respectively. Both stocks were briefly suspended after breaching limits on intraday swings. Italian 10-year bonds fell, increasing the additional yield investors demand to hold the securities instead of benchmark German bunds to the most since the euro was introduced in 1999.

“Contagion fears keep re-emerging as long as credible, lasting solutions in Greece are pending,” said Christian Weber, a Munich-based strategist at UniCredit.

Prime Minister Silvio Berlusconi said today the country’s banks are “well capitalized.” Speaking at a summit of European leaders in Brussels, Berlusconi said he wasn’t worried about Moody’s comments about the country’s banks.

The European Banking Authority yesterday updated its stress tests to take into account extra trading losses that banks may face on their holdings of sovereign debt from crisis-hit European Union countries including Greece.

Italian banks are also seeking to raise money from investors to bolster capital. Unione di Banche Italiane ScpA (UBI), Italy’s fourth-biggest bank, fell as much as 5 percent to 3.628 euros. The lender may struggle to lure buyers to its 1 billion- euro ($1.4 billion) rights offering, which closes today. The bank is offering investors eight new shares at 3.808 euros for every 21 held.

Reuters reports Greece In Deal With EU/IMF On Austerity Plan. Greece's new finance minister grappled with EU and IMF officials over gaps in his austerity plans on Thursday, with European leaders insisting on deep spending cuts and more tax hikes if Athens wants to secure funds and avoid potential default. Euro zone governments are meanwhile talking to European banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a possible second rescue for Athens.

Greek Finance Minister Evangelos Venizelos met inspectors from the European Commission, European Central Bank and the International Monetary Fund in Athens to try to iron out differences over the current bailout program.

"All conditions must be met," Luxembourg Prime Minister Jean-Claude Juncker told reporters as he arrived for a summit of EU leaders at which Greece's crisis will top the agenda.

"If Greece does what it has to do, we will do what we have to do. This is not a threat. It's just a confirmation that we're continuing our efforts."

While Papandreou has expressed confidence over the June 28 vote in public, Slovak Prime Minister Iveta Radicova said he had voiced uncertainty in a private telephone call on Wednesday.

"Papandreou has serious doubts about whether the necessary steps will pass in parliament," Radicova told the Slovak parliament's European affairs committee.

Janet Tavakoli in Huffington Post cites the Cook County State of Illinois debt problem. Our total debt for the municipality, education, county, sanitary, park, fire, township, library and special services is now $108 billion. That means the debt per person in Chicago exceeds $37,000 or more than $63,500 per household, and that is just local debt. The other problem is that the Illinois economy isn't growing. Many of those households have no income coming in other than government subsidies, and some have no income at all.

Unofficial unemployment numbers top 20%. State of Illinois taxes increased from 3% to 5%, an increase of around 67%. Taxes on real estate, utilities, sales, and more are expected to skyrocket. Businesses like the Chicago Mercantile Exchange are being courted by low income tax states (at least the income taxes are currently low) like Florida.  (Hat Tip to EconomicPolicy Journal)

New York Times in article Spain’s Building Spree Leaves Airports and Roads Begging To Be Used communicates ghost infrastructure leave burden of debt.

Mario Draghi, the former vice-chairman of Goldman Sachs International, and currently heads Italy's central bank, has been confirmed to head the European Central Bank, when Jean-Claude Trichet term expires on October 31.  (Hat Tip to EconomicPolicy Journal)

Bloomberg reports Trichet Says Risk Signals ‘Red’ as Debt Crisis Threatens Banks. European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks. “On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. BNP Paribas (BNP) SA, France’s biggest bank, and rivals Societe Generale (GLE) SA and Credit Agricole SA (ACA), may have their credit ratings cut by Moody’s Investors Service because of their investments in Greece, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch Ratings said last month.

“The most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system,” Trichet said. There are “potential contagion effects across the union and beyond.”

Jared Parden of The Bellingham Herald reports Gateway Pacific coal shipping terminal needs new environmental permit

Associated Press reports Budget talks suspended as Cantor bolts over taxes

Tyler Durden reports easy credit is driving Canada’s soaring housing prices.

Tyler Durden relates Identify the common characteristic of these three statements: 1. The Federal Reserve will never let the stock market decline, i.e. the "Bernanke put" … 2. The Chinese government will never let property prices decline … 3. The European Central Bank will never let Greece default, The answer of course is moral hazard -- Moral Hazard Now Exists On A Global Scale

3) … The U.S. dollar, $USD, gained 0.8% this week.  For the week on the upside, the Swiss franc, FXF, gained 1.8%, the South Korean won 0.7%, the Norwegian krone 0.6%, the Mexico Peso, FXM, 0.3%, and the Taiwanese dollar 0.3%.  On the downside, the South African rand, SZR, declined 2.0%, the British pound 1.5%, FXB, the Swedish krona 1.3%, FXS, the Australian dollar 1.2%, FXA, the Canadian dollar 0.9%, FXC, the Danish krone 0.8%, the Euro 0.8%, FXE,  the Brazilian real, BZF, 0.4%, the Singapore dollar 0.4%, Emerging Market Currencies, CEW, 04.%, the Indian Rupe, ICN, 0.3%, the Russian Ruble, XRU, 0.2%, and the New Zealand dollar, BNZ,  0.1%.

The currency yield curve, that is the ratio of the worlds major currencies, relative to the emerging market currencies, DBV:CEW, fell lower again this week evidencing that competitive currency devaluation, that is competitive currency deflation, is underway.

The Swedish Krona, FXS, is the currency loss leader since May 1, 2011 as is seen in this Finviz currency screener.

John Glover and Zeke Faux of Bloomberg report  “Relative yields on junk bonds, JNK, are rising at the fastest pace since the start of Europe’s sovereign debt crisis in May 2010 on rising concern that Greece’s debt burden will further roil Europe and depress the global economy.   The extra yield investors demand to own speculative grade corporate debentures instead of government debt has risen 56 bps this month to 568 bps on average, That’s the most since the spread widened by 142 last May.”

4) … Doug Noland writes Red Alert.  While Greece Prime Minister Papandreou’s government survived a no-confidence vote, this positive development provided little reprieve for the marketplace.  Contagion jumped the fire line thought to reside at Spain, as Italy arose as a cause for concern.  Yesterday, Moody’s lowered its outlook on 13 Italian banks and warned that 16 others were vulnerable to Credit ratings downgrades.  The Italian bank sector was pummeled today, with some of the leading stocks down as much as 5.0%.   Credit default swap (CDS) prices spiked dramatically throughout the Italian banking sector the past two sessions.  In reference to signals of financial stability, ECB President Trichet admitted things had turned to “red alert”.  The eruption of systemic risk within Italy should be viewed as a serious debt contagion escalation.

Following last Friday’s warning of a possible sovereign debt downgrade, Italy’s 10-year sovereign yields jumped 16 bps this week to 4.97%.  Yields were up 35 bps in three weeks to the highest level since early March.  Perhaps more noteworthy, Italian 2-year yields spiked 24 bps in the past two sessions to 3.27%, the high since late 2008.  

The price of Italy CDS jumped 34 bps in two days to surpass 200 bps for the first time since January.  Spain’s 2-year yields jumped 21 bps this week to 3.66%, the high since early January.  Ireland saw its 10-year yields jump 57 bps to a record 11.72%, as Portuguese yields surged 50 bps to a record 11.11%.

Greek contagion fears now cast quite a pall.  There were indications of ongoing de-risking and de-leveraging.  The energy and commodities sectors suffered another tough week, and the leveraged players certainly can’t feel better about the world.   

And it is an important part of the thesis that a debt crisis-induced tightening of financial conditions will particularly weigh on those economies suffering structural short-comings.  Italy fits the bill.

At 119%, Italian debt as a percentage of GDP is second only to Greece (143%) in the Eurozone (according to Bloomberg data).  In the best of market times, this debt appears sound; in the worst, its non-productive and a huge problem.  Fortunately, a highly accommodative global marketplace has to this point made Italy’s heavy debt-load manageable.  At about 5%, Italy’s annual deficit has looked favorable relative to many countries in and outside the region.  And with Italian banks having limited exposure to periphery debt, the market had believed the sector was largely immune to the crisis.

Yet Italy today hangs very much in the balance.  Contagion fears are pushing up Italy’s market yields, risking a problematic jump in future debt service costs (and deficits).  And as was demonstrated in Greece, when market sentiment changes and things turn sour…  The Italian system now confronts market, political, economic and social uncertainties these days associated with additional austerity measures.  Voting with their feet, the marketplace this week scampered away from the Italian financial sector.  A tightening of lending by the markets and the banking sector comes at an inopportune time for the moribund Italian economy.  GDP expanded only 1.3% in 2010, this following 2009’s 5.2% contraction and 2008’s 1.3% drop.

Not dissimilar to the United States of America, Italy’s debt mountain ($2.3TN) is sustainable only with decent and persistent economic growth.  When global market confidence is running high, liquidity abundant and risk-taking in vogue, envisaging an optimistic scenario comes easily for the marketplace.  But when the clouds darken, things turn dismal in a hurry.  And when folks become nervous about a debt-laden and structurally-challenged economy, they will quickly take a keen interest in capital ratios and the general soundness of that economy’s banking system.  Economic and debt structures suddenly move to the front burner.  That’s where we are with Italy, and others, these days, as contagion effects gain important momentum by the week.

5) … Failure of European sovereign debt will lead to a banking collapse and a Chancellor, The Sovereign, and a Banker, rising to power in Europe to impose great austerity, and a new seigniorage that is more political than financial.

Stephanie Bodoni of Bloomberg reports: “The Greek crisis has ‘radically intensified’ and risks turning ‘the entire euro zone on its head,’ Luxembourg Prime Minister Jean-Claude Juncker said. ‘If we make mistakes in the way we handle the Greece crisis, it will jump to other euro countries and will bit by bit turn the entire euro zone on its head,’ Juncker, who also leads the group of euro-area finance ministers, said.”

Briefing.com reports that sovereign debt risks are soaring
Illinois Municipal Debt Credit Default Swap 203.0 +2.89%
Western Europe Sovereign Debt Credit Default Swap Index 235.83 +4.97%
Emerging Markets Sovereign Debt CDS Index 188.92 +12.41%
Euro Financial Sector Credit Default Swap 130.16 +12.22%

Chart of EUFN, KRE, XLB, COPX, PSCE shows the failure of the seigniorage of the US Federal Reserve and the European banks.

Tyler Durden reports on the Greek Leader Papandreou: With the resurgence of Greece back to the top of global news, incompetence and labor strikes charts (just like back in 2010 at roughly this time, which is to be expected since 2011 has been following the 2010 script to the dot) there has been far too little focus in the mainstream media on the family whose actions were responsible for Greece's rise to glory and subsequent collapse into default. As Associates Press notes in its report the ruling family, "One family has dominated Greek politics for more than half a century: the Papandreous." For all those who are wondering who the men behind the curtain, or as the case may be, front and center, are, the following expose is for you

I relate that the rating agencies have communicated time and time again that the rollover by banks constitutes a default. And now, European Sovereign Debt held by banks poses systemic risk not only in Europe but in the UK as well. A self imposed deadline of German and French leaders for announcing the Vienna Initiative is July 3, 2011.  Abigail Moses of Bloomberg reports “European policy makers are on a collision course with the bond market as they seek to resolve the Greek debt crisis without triggering payouts under credit-default swap insurance contracts.  European Central Bank chiefs are determined to ensure any Greek debt restructuring won’t be deemed a credit event enabling buyers of protection to seek compensation from swaps sellers. A debt restructuring that doesn’t trigger swaps would be more damaging to the market as it would devalue contracts, according to analysts at JPMorgan… and Merrill Lynch. Such a move would leave banks with unprotected, or unhedged, holdings, forcing them to sell bonds and ultimately drive sovereign borrowing costs higher.  ‘The ECB fears having to admit a colossal mistake when it declared euro zone governments as undefaultable,’ said Georg Grodzki, head of credit research at Legal & General Investment Management.  ‘The ECB wants to protect its balance sheet and reputation.’  The ECB’s total exposure to Greece may be between 130 billion euros ($184 billion) and 140 billion euros, Dutch Finance Minister Jan Kees de Jager said  The ECB provided 90 billion euros of liquidity to Greek banks, he said.”

Failure of European sovereign debt will lead to a banking collapse and a Chancellor, The Sovereign, and a Banker, rising to power in Europe to impose great austerity, and a new seigniorage that will be more political than financial. Seigniorage, that is moneyness, will come from the word, will and way of the Sovereign and the Seignior, as European Leaders will waive national sovereignty and establish a region of global economic governance, by means of Framework Agreements as called for by the Club of Rome in 1974. The Sovereign’s and the Seignior’s power will rival that of Charlemagne as they rule in diktat establishing for all practical purposes, a revived Roman Empire.   

6) … Keywords
Mario Draghi, Jean Claude Trichet, Seigniorage, The Sovereign, The Seignior, Competivive Currency Deflation, Competitive Currency Devaluation, Neoliberalism, George Papandreou, Club of Rome, Charlemagne, Revived Roman Empire, Framework Agreements, Currency Yield Curve, Systemic Risk, Gateway Pacific Terminal, Moral Hazard, Global Moral Hazard, Cook County, Municipal Debt,

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