Archives for June 2012

Can Greece Buy Freedom From Debt For a Mere €3,000 Per Person?

Courtesy of Mish.

Greek shipping heir Peter Nomikos has a plan wipe out Greek debt. His idea is to buy all the Greek bonds then forgive the debt.

Given that Greek bonds sell for 12 cents on the dollar, on the surface his plan may seem like a reasonable idea. First let’s consider the idea, then potential problems.

Der Spiegel interviews Peter Nomikos who says ‘For a Donation of 3,000 Euros, Every Greek Can Buy Freedom’

Greek shipping heir Peter Nomikos has taken matters into his own hands. While EU leaders wrangle for a solution to Greece’s problems, Nomikos started a non-profit to wipe out the country’s debt. If all of his countrymen do their part, he tells SPIEGEL ONLINE, they will be able to shore up the country’s finances.

SPIEGEL ONLINE: Mr. Nomikos, you have just started a campaign to free Greece of debt. Your organization buys up Greek bonds and then forgives the debt. Are you serious?

Nomikos: Professionally, I deal with distressed debt. And it struck me that Greece has a historical opportunity. In the euro, the Greeks have a very strong currency, while the price of their government bonds has collapsed. That makes it possible to buy back debt at very low prices and reduce the Greek debt burden with relatively little expenditure.

SPIEGEL ONLINE: You are asking your countrymen for donations. What do you tell them?

Nomikos: If you break down the national debt, each Greek owes around €25,000 ($31,485). So I am telling my fellow citizens to make themselves debt-free. Greek government bonds with a nominal value of one euro currently trade for around 12 cents. For a donation of around €3,000, every Greek can buy his freedom.

SPIEGEL ONLINE: How many bonds has your foundation already bought?

Nomikos: We always buy those bonds that have the deepest discount. So far we have invested €273,000 ($343,816) and hold €2.2 million ($2.8 million) in Greek debt.

SPIEGEL ONLINE: And then you cancel the debt?

Nomikos: Not immediately. If we did that, we would decrease the impact of our project. When the GDP-to-debt ratio goes down, bond prices go up. If the movement becomes a great success, this could become a problem, because we cannot buy debt as cheaply on the markets. So we hold these bonds for a while and use any profits to buy more bonds. We plan to amass as many bonds as possible and then cancel the debt all at once.

Problematical Math

Continue Here

Germany Cries: "Europe Is Coming For Our Money", Greece Promptly Obliges

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

"Greece is an exception in the Euro Zone" – Angela Merkel, December 9, 2011

"Exception from ESM Seniority only applies to Spanish aid" – Angela Merkel, June 29, 2012

 

It took about a year, but finally Germany, with a little assistance from Merkel on Friday morning, has figured it out. And is now blasting it on the front pages of its various newpapers:

Translated:

Europe is coming for our money!

What else does Die Welt say:

When economic historians in a few years determine the turning point at which the euro zone turned into a debt community, they may refer to the last Thursday night. In those dramatic hours when Angela Merkel after massive pressure from Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy buckled – and agreed to an agreement whose scope is now very difficult to estimate.

Specifically, what is now painfully clear to everyone in Germany is that if indeed Merkel's declarations over the past few days are to be taken at face value, then Germay has just lost control over European supervision: a topic very near and dear to all Germans' heart, as up until this point money would be handed out only in exchange for conditionality. A move whie Welt calls a paradigm shift: "To date the Germans insisted that the €-aids come equipped with shackles. Money was always associated with reform programs that were monitored by the Troika of the EU, European Central Bank (ECB) and International Monetary Fund (IMF)." That is now no longer the case. At least according to conventional wisdom:

Precisely for this reason were countries like Portugal and Ireland long afraid to apply for assistance. Now dipping into the bailout pot will be far easier… The federal government has always stressed that any bailout will come with strict conditions. Now all has changed, partly because of pressure from the financial markets. Italy and Spain struggling with risk premiums at record levels. So far, however, they refused to implement emergency measures. That could now change. Monti has already cheered: "the Troika will never come to Rome."

Die Welt may be on to something: while in the case of the Spanish bailout, the European action opened the door for proactive demands for future assistance, what happened last week has also activated the retroactive lever, and the cries for equitable EFSF/ESM treatment (where there is no seniority for bondholders despite Citi's clear explanation the EFSF and ESM will always have implied seniority over other private sector bondholders no matter what promises politicians throw around) will now come from all the other countries bailed out by Europe. Because what kind of union is it if among the countries in distress some are more equal than others. After all, first it was only Greece who was an exception. Now it is Spain. Who will be the next exception?

But before we pretend to even answer that rhetorical question, we already know how long it took Greece to demand the same treatment as that offered to Spain: 24 hours.

From Kathimerini:

Athens to ask for EFSF deal to apply to Greece, too

The government is considering to ask for the European Council agreement of Thursday for banks to get direct funding from the European Financial Stability Facility (EFSF) to apply to Greece, too, even though the recapitalization of local lenders was agreed to be included in the state’s bailout agreement.

The issue was discussed, according to reports, during a meeting at the Prime Minister’s residence in Athens on Saturday evening, ahead of the visit of the representatives of Greece’s creditors from Monday.

And since in Europe now every beggar is empowered to be a chooser, there is no stopping how much Germany will have to pay out of pocket to keep the insolvent ones content.

Main opposition leader Alexis Tsipras urged the government on Saturday to press for local banks to benefit from the new system of direct recapitalization from the EFSF, or threaten to veto the European Union’s Treaty for Stability Co-ordination and Governance and refuse to accept the visit of the creditors’ inspectors in Athens.

Expect many more demands from Ireland and Portugal next. Also expect many more and far angrier headlines out of Germany.

All of this means, that as we calculated last July, with Germany no longer able to kick the can, Merkel will soon have to front well over 30% of its GDP and likely over 50%, just to keep the Eurozone alive. it also means that, as we said last July, spreads of core European bonds will soar in a great compression trade where the PIIGS become the core and vice versa, an outcome that will anger Germany even more as it bring the implied outcome of Eurobonds without Eurobonds ever having been activated.

There is however a catch: earlier today we speculated that Merkel's move was merely one that puts the Constitutional Court, and thus a broad referendum, in action. Already numerous parties are demanding that the highest court scrap the ESM as it is both undemocratic and unconstituional.

From Deutsche Welle:

The European Stability Mechanism (ESM) and the Fiscal Pact have been approved by the German parliament. But thousands of Germans have joined forces to take legal action against these measures.

The Euro Stability Mechanism's capital stock of 700 billion euros is intended to provide a buffer against the convulsions of the euro debt crisis. The 17 signatory states will each pay a proportional amount into the ESM – irrevocably and without restrictions – or set the money aside to be handed over, if required.

The signatory states came to an agreement on the ESM because, as is stated in the treaty, they are "committed to ensuring the financial stability of the euro area".

But opponents say that this should not be done at any cost, and using any means available. Dissenters are calling for more democracy, and there are a lot of them. More than 12,000 German citizens have joined "Mehr Demokratie" ["More Democracy"], the "Alliance for Constitutional Objections to the ESM and the Fiscal Pact".

They plan to file suits with the German Constitutional Court in Karlsruhe against the instruments being deployed to save the euro. Christoph Degenhart, a Leipzig-based expert on constitutional law, and Herta Däubler-Gmelin, a former federal justice minister, are spearheading the alliance, which also includes some of Germany's smaller political parties.

Another prominent critic is Peter Gauweiler, a parliamentary representative of the conservative Christian Social Union who has experience with lawsuits against euro bailout funds. He is fighting the bailout on two fronts: with a constitutional complaint, and with legal action against the federal government. He says, to date, parliament has not discussed the bill because important passages on the ESM are missing.

The Left party has launched a similar action against the government, and its delegates have also lodged constitutional complaints.

Also as we reported earlier, both Schauble and Weidmann would be delighted if things get to the referendum stage. And in the aftermath of last week's massive optical loss for Merkel, so will she. If it indeed gets to a referendum, Mario Monti may be far less exuberant with the outcome.

However, assuming that there was no grand master plan behind last week's decision, here is, once again, our math from last July showing just how much of Europe's bailout funding Germany has just footed. Keep in mind the context then was just Greece, as Italy and Spain were both "safe", now that is no longer the case. What hasn't changed one bit is the logic behind the amounts that Germany will have to backstop between Italy and Greece. To wit, from over 11 months ago:

  • An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This number is even bigger now.

And what is truly hilarious is that all of this was already at the forefrunt of debate last summer, when the EFSF was once again the bailout ex machina, only then the world and capital markets were a little bit smarter, and realized that there was simply not enough cash to cover the funding needs of both countries. This in turn led to the whole 3x-4x leverage debate that would bring the EFSF to €1 trillion: a plan which was scrapped some time in October and promptly forgotten once it was deemed unfeasible.

In other words we are right back where we started one year ago! Next up: cue the debate over how to increase the funding ot the EFSF/ESM bailout complex. Just like last year. And cue the 3x-4x bailout fund leverage expansion discussions for August-September 2012, once again in carbon copy replica of 2011, all only to be quickly forgotten. Because institutional memories sure are short. And because there is just no more money left.

So for all those who have forgotten last year's full mathematical analysis (because math still trumps politican lies and empty promises any day), here it is. All over again.

* * *

The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP

A funny thing happened in Euro spreads today. While the bonds of all PIIGS countries surged higher in price (and plunged in yield) upon the announcement of the second Big Bang bailout, the reaction in core Eurozone credit was hardly as exuberant, and in fact spreads of the two core European countries pushed wider by the end of the day, and over the last week. Why? After all the elimination of peripheral risk should have been seen as favorable for everyone involved, most certainly for those who had been seen as supporting the ever more rickety house of European cards. Well, no. Basically what happened today was a two part deal: the i) funding of future debt for countries that are currently locked out of the market (all the PIIGS and possibly core countries soon) or in other words the "liquidity mechanism" which is being satisfied by the EFSF "TARP-like" expansion, and ii) the roll-over mechanism for existing holders of debt which "allows" them to "voluntarily" transfer existing obligations into a "fresh start" Greece which can then emerge promptly from the Selective Default state that is coming from Moody's and S&P any second, and supposedly allow the country to access markets as a non-bankrupt country.


For all intents and purposes the second can be ignored, because as has been made clear over the past few days, and as will be demonstrated below, the actual rollover from non-Peripheral banks will be de minimis, the bulk of impaired debt being held by banks in the host countries as is, and used as collateral with the ECB in the form of par instruments for cash.

Now the second part of the mechanism was never an issue further demonstrated by the plunge in net notional in Greek CDS as core banks no longer needed to hedge exposure and instead opted to divest their holdings. This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub. In a just released report by Bernstein, which has actually done the math on the required contributions to the EFSF by the core countries, the bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium. As AB says, "its firepower would have to rise to €1.45trn backed by a total of €1.7trn guarantees." And here is where the whole premise breaks down, if not from a financial standpoint, then certainly from a political one: "As the guarantees of the periphery including Italy are worthless, the Guarantee Germany would have to provide rises to €790bn or 32% of GDP." That's right: by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!

The Europarliament, ECB and IMF may have won their Pyrrhic victory today… But what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly.

Below is Bernstein's full breakdown:

Continuation of the current strategy with a materially enlarged EFSF and private sector participation in liquidity support

Despite the failure of the current strategy, there is still a theoretical option of an extension of the current liquidity support with a materially enlarged EFSF that would also be buying government bonds in the secondary market. We believe this is the least likely option given the size of the fund required to achieve the objective.

An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This strategy is not only unlikely to succeed but would also run into some serious structural difficulties. To cover 100% of the roll-over for Greece, Portugal, Ireland, Spain, Italy and Belgium as well as an allowance for bank support at 7% of the banks' balance sheets until the end of 2013, the support mechanism(s), would need to be able to deploy a total of €2.4trn in available funds.

Assuming the Greek Loan facility and the EFSM remain in place, the EFSF would have to increase its deployable funds from currently about ~€270bn to €1,450bn.

Given the 20% overcollateralization requirement on the current EFSF structure and the fact that countries that receive EFSF support are not able to provide valid guarantees mean that in order to create a €1.45trn funding capacity, the total fund would have to be €1.7trn. The guarantees to be provided by Germany would have to be €791bn or 32% of GDP.

There is a legitimate question whether in particular Germany would see the point of committing that kind of support to a concept that has so far been extremely unsuccessful. It also would expose Germany to a worst case scenario of a French downgrade. Without France, the guarantee need would rapidly move towards the whole of the €1.7trn. As the market is getting increasingly concerned about France, the odds are heavily stacked against an extension of the EFSF as a pure liquidity support mechanism.

If Banks were to participate in a liquidity expansion their contribution would be minimal

Within the current strategy one of the open questions is whether or not the private sector can participate by providing liquidity to the periphery countries. We believe this to be a fundamentally marginal discussion despite its enormous political importance.

Based on the stress test data released on Friday, we find that whilst the banks account for the majority of the very short term paper, their total share of the funding requirement into 2013 is just 23% and 16% of the total EFSF.

The question is how big the private sector participation could be. Taking the "French proposal" as a guide, the private sector participation would reduce the size of the EFSF by €137bn or 9% of the €1.45bn EFSF funding, assuming 70% of the debt is rolled over, 30% collateralization and 75% of banks participate.

The problem with this private sector participation so far has been the risk that this may be regarded as a default by the rating agencies. As a consequence the banks would have to write down these exposures to market prices. This exercise would lead to reported write-downs for the European banking sector of €75bn, 0.55 times more than the liquidity support that the EU is seeking. And in particular in Portugal and Greece the fallout of the MTM losses far outstrips the increase in liquidity.

Even more importantly, more than half of these losses would occur in the banks of the periphery countries themselves. In the absence of an open market for these banks, the losses would have to be made up by the governments themselves and subsequently added back to the EFSF utilization.


And there you have it: the cost of the euro not plunging today as a result of the ECB not proceeding with outright monetization, is that Germany is now the ultimate backstopper of all of Europe's risk. And while before, when the EFSF was just over €400 billion or so, the market could largely ignore the risk, a €1.5 trillion "upgrade" certainly changes the equilibria dynamics. In an attempt to avoid the appearance of inviting inflationary pressures on Trichet's central bank, Germany has directly onboarded the risk associated with terminal failure of this latest and riskiest "bailout" plan and in doing so may have jeopardized anywhere between 32% and 56% of its entire annual economic output. One wonders if the risk of runaway inflation is worth offsetting the risk of a plunge into the worst depression in the nation's history? It sure isn't for the Fed.

The most ironic outcome would be if the eurozone, in an attempt to prevent further contagion at the periphery, simply invited the vigilantes to bypass Italy (recall how everyone was shocked that instead of attacking Spain, it was Italian spreads that got destroyed in a manner of days), and head straight for the country on whose shoulders lies the fate of the entire EUR experiment?

Is Atlas about to shrug and topple the entire oh so heavy house of cards?

Germany Cries: “Europe Is Coming For Our Money”, Greece Promptly Obliges

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

"Greece is an exception in the Euro Zone" – Angela Merkel, December 9, 2011

"Exception from ESM Seniority only applies to Spanish aid" – Angela Merkel, June 29, 2012

 

It took about a year, but finally Germany, with a little assistance from Merkel on Friday morning, has figured it out. And is now blasting it on the front pages of its various newpapers:

Translated:

Europe is coming for our money!

What else does Die Welt say:

When economic historians in a few years determine the turning point at which the euro zone turned into a debt community, they may refer to the last Thursday night. In those dramatic hours when Angela Merkel after massive pressure from Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy buckled – and agreed to an agreement whose scope is now very difficult to estimate.

Specifically, what is now painfully clear to everyone in Germany is that if indeed Merkel's declarations over the past few days are to be taken at face value, then Germay has just lost control over European supervision: a topic very near and dear to all Germans' heart, as up until this point money would be handed out only in exchange for conditionality. A move whie Welt calls a paradigm shift: "To date the Germans insisted that the €-aids come equipped with shackles. Money was always associated with reform programs that were monitored by the Troika of the EU, European Central Bank (ECB) and International Monetary Fund (IMF)." That is now no longer the case. At least according to conventional wisdom:

Precisely for this reason were countries like Portugal and Ireland long afraid to apply for assistance. Now dipping into the bailout pot will be far easier… The federal government has always stressed that any bailout will come with strict conditions. Now all has changed, partly because of pressure from the financial markets. Italy and Spain struggling with risk premiums at record levels. So far, however, they refused to implement emergency measures. That could now change. Monti has already cheered: "the Troika will never come to Rome."

Die Welt may be on to something: while in the case of the Spanish bailout, the European action opened the door for proactive demands for future assistance, what happened last week has also activated the retroactive lever, and the cries for equitable EFSF/ESM treatment (where there is no seniority for bondholders despite Citi's clear explanation the EFSF and ESM will always have implied seniority over other private sector bondholders no matter what promises politicians throw around) will now come from all the other countries bailed out by Europe. Because what kind of union is it if among the countries in distress some are more equal than others. After all, first it was only Greece who was an exception. Now it is Spain. Who will be the next exception?

But before we pretend to even answer that rhetorical question, we already know how long it took Greece to demand the same treatment as that offered to Spain: 24 hours.

From Kathimerini:

Athens to ask for EFSF deal to apply to Greece, too

The government is considering to ask for the European Council agreement of Thursday for banks to get direct funding from the European Financial Stability Facility (EFSF) to apply to Greece, too, even though the recapitalization of local lenders was agreed to be included in the state’s bailout agreement.

The issue was discussed, according to reports, during a meeting at the Prime Minister’s residence in Athens on Saturday evening, ahead of the visit of the representatives of Greece’s creditors from Monday.

And since in Europe now every beggar is empowered to be a chooser, there is no stopping how much Germany will have to pay out of pocket to keep the insolvent ones content.

Main opposition leader Alexis Tsipras urged the government on Saturday to press for local banks to benefit from the new system of direct recapitalization from the EFSF, or threaten to veto the European Union’s Treaty for Stability Co-ordination and Governance and refuse to accept the visit of the creditors’ inspectors in Athens.

Expect many more demands from Ireland and Portugal next. Also expect many more and far angrier headlines out of Germany.

All of this means, that as we calculated last July, with Germany no longer able to kick the can, Merkel will soon have to front well over 30% of its GDP and likely over 50%, just to keep the Eurozone alive. it also means that, as we said last July, spreads of core European bonds will soar in a great compression trade where the PIIGS become the core and vice versa, an outcome that will anger Germany even more as it bring the implied outcome of Eurobonds without Eurobonds ever having been activated.

There is however a catch: earlier today we speculated that Merkel's move was merely one that puts the Constitutional Court, and thus a broad referendum, in action. Already numerous parties are demanding that the highest court scrap the ESM as it is both undemocratic and unconstituional.

From Deutsche Welle:

The European Stability Mechanism (ESM) and the Fiscal Pact have been approved by the German parliament. But thousands of Germans have joined forces to take legal action against these measures.

The Euro Stability Mechanism's capital stock of 700 billion euros is intended to provide a buffer against the convulsions of the euro debt crisis. The 17 signatory states will each pay a proportional amount into the ESM – irrevocably and without restrictions – or set the money aside to be handed over, if required.

The signatory states came to an agreement on the ESM because, as is stated in the treaty, they are "committed to ensuring the financial stability of the euro area".

But opponents say that this should not be done at any cost, and using any means available. Dissenters are calling for more democracy, and there are a lot of them. More than 12,000 German citizens have joined "Mehr Demokratie" ["More Democracy"], the "Alliance for Constitutional Objections to the ESM and the Fiscal Pact".

They plan to file suits with the German Constitutional Court in Karlsruhe against the instruments being deployed to save the euro. Christoph Degenhart, a Leipzig-based expert on constitutional law, and Herta Däubler-Gmelin, a former federal justice minister, are spearheading the alliance, which also includes some of Germany's smaller political parties.

Another prominent critic is Peter Gauweiler, a parliamentary representative of the conservative Christian Social Union who has experience with lawsuits against euro bailout funds. He is fighting the bailout on two fronts: with a constitutional complaint, and with legal action against the federal government. He says, to date, parliament has not discussed the bill because important passages on the ESM are missing.

The Left party has launched a similar action against the government, and its delegates have also lodged constitutional complaints.

Also as we reported earlier, both Schauble and Weidmann would be delighted if things get to the referendum stage. And in the aftermath of last week's massive optical loss for Merkel, so will she. If it indeed gets to a referendum, Mario Monti may be far less exuberant with the outcome.

However, assuming that there was no grand master plan behind last week's decision, here is, once again, our math from last July showing just how much of Europe's bailout funding Germany has just footed. Keep in mind the context then was just Greece, as Italy and Spain were both "safe", now that is no longer the case. What hasn't changed one bit is the logic behind the amounts that Germany will have to backstop between Italy and Greece. To wit, from over 11 months ago:

  • An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This number is even bigger now.

And what is truly hilarious is that all of this was already at the forefrunt of debate last summer, when the EFSF was once again the bailout ex machina, only then the world and capital markets were a little bit smarter, and realized that there was simply not enough cash to cover the funding needs of both countries. This in turn led to the whole 3x-4x leverage debate that would bring the EFSF to €1 trillion: a plan which was scrapped some time in October and promptly forgotten once it was deemed unfeasible.

In other words we are right back where we started one year ago! Next up: cue the debate over how to increase the funding ot the EFSF/ESM bailout complex. Just like last year. And cue the 3x-4x bailout fund leverage expansion discussions for August-September 2012, once again in carbon copy replica of 2011, all only to be quickly forgotten. Because institutional memories sure are short. And because there is just no more money left.

So for all those who have forgotten last year's full mathematical analysis (because math still trumps politican lies and empty promises any day), here it is. All over again.

* * *

The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP

A funny thing happened in Euro spreads today. While the bonds of all PIIGS countries surged higher in price (and plunged in yield) upon the announcement of the second Big Bang bailout, the reaction in core Eurozone credit was hardly as exuberant, and in fact spreads of the two core European countries pushed wider by the end of the day, and over the last week. Why? After all the elimination of peripheral risk should have been seen as favorable for everyone involved, most certainly for those who had been seen as supporting the ever more rickety house of European cards. Well, no. Basically what happened today was a two part deal: the i) funding of future debt for countries that are currently locked out of the market (all the PIIGS and possibly core countries soon) or in other words the "liquidity mechanism" which is being satisfied by the EFSF "TARP-like" expansion, and ii) the roll-over mechanism for existing holders of debt which "allows" them to "voluntarily" transfer existing obligations into a "fresh start" Greece which can then emerge promptly from the Selective Default state that is coming from Moody's and S&P any second, and supposedly allow the country to access markets as a non-bankrupt country.


For all intents and purposes the second can be ignored, because as has been made clear over the past few days, and as will be demonstrated below, the actual rollover from non-Peripheral banks will be de minimis, the bulk of impaired debt being held by banks in the host countries as is, and used as collateral with the ECB in the form of par instruments for cash.

Now the second part of the mechanism was never an issue further demonstrated by the plunge in net notional in Greek CDS as core banks no longer needed to hedge exposure and instead opted to divest their holdings. This is merely a red herring that attempts to confuse the issues associated with the first, and far more important concept: the nuances of the EFSF and its imminent expansion. And expand it will have to, because in reality what is happening is that the net debt of the countries will end up growing even more over time for one simple reason: this is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF. Therein lies the rub. In a just released report by Bernstein, which has actually done the math on the required contributions to the EFSF by the core countries, the bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium. As AB says, "its firepower would have to rise to €1.45trn backed by a total of €1.7trn guarantees." And here is where the whole premise breaks down, if not from a financial standpoint, then certainly from a political one: "As the guarantees of the periphery including Italy are worthless, the Guarantee Germany would have to provide rises to €790bn or 32% of GDP." That's right: by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!

The Europarliament, ECB and IMF may have won their Pyrrhic victory today… But what happens tomorrow when every German (in a population of 82 very efficient million) wakes up to newspaper headlines screaming that their country is now on the hook to 32% of its GDP in order to keep insolvent Greece, with its 50-some year old retirement age, not to mention Ireland, Portugal, and soon Italy and Spain, as part of the Eurozone? What happens when these same 82 million realize that they are on the hook to sacrificing hundreds of years of welfare state entitlements (recall that Otto von Bismark was the original welfare state progentior) just so a few peripheral national can continue to lie about their deficits (the 6 month Greek deficit already is missing Its full year benchmark target by about 20%) and enjoy generous socialist benefits up to an including guaranteed pensions? What happens when an already mortally wounded in the polls Angela Merkel finds herself in the next general election and experiences an epic electoral loss? We will find out very, very shortly.

Below is Bernstein's full breakdown:

Continuation of the current strategy with a materially enlarged EFSF and private sector participation in liquidity support

Despite the failure of the current strategy, there is still a theoretical option of an extension of the current liquidity support with a materially enlarged EFSF that would also be buying government bonds in the secondary market. We believe this is the least likely option given the size of the fund required to achieve the objective.

An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany

This strategy is not only unlikely to succeed but would also run into some serious structural difficulties. To cover 100% of the roll-over for Greece, Portugal, Ireland, Spain, Italy and Belgium as well as an allowance for bank support at 7% of the banks' balance sheets until the end of 2013, the support mechanism(s), would need to be able to deploy a total of €2.4trn in available funds.

Assuming the Greek Loan facility and the EFSM remain in place, the EFSF would have to increase its deployable funds from currently about ~€270bn to €1,450bn.

Given the 20% overcollateralization requirement on the current EFSF structure and the fact that countries that receive EFSF support are not able to provide valid guarantees mean that in order to create a €1.45trn funding capacity, the total fund would have to be €1.7trn. The guarantees to be provided by Germany would have to be €791bn or 32% of GDP.

There is a legitimate question whether in particular Germany would see the point of committing that kind of support to a concept that has so far been extremely unsuccessful. It also would expose Germany to a worst case scenario of a French downgrade. Without France, the guarantee need would rapidly move towards the whole of the €1.7trn. As the market is getting increasingly concerned about France, the odds are heavily stacked against an extension of the EFSF as a pure liquidity support mechanism.

If Banks were to participate in a liquidity expansion their contribution would be minimal

Within the current strategy one of the open questions is whether or not the private sector can participate by providing liquidity to the periphery countries. We believe this to be a fundamentally marginal discussion despite its enormous political importance.

Based on the stress test data released on Friday, we find that whilst the banks account for the majority of the very short term paper, their total share of the funding requirement into 2013 is just 23% and 16% of the total EFSF.

The question is how big the private sector participation could be. Taking the "French proposal" as a guide, the private sector participation would reduce the size of the EFSF by €137bn or 9% of the €1.45bn EFSF funding, assuming 70% of the debt is rolled over, 30% collateralization and 75% of banks participate.

The problem with this private sector participation so far has been the risk that this may be regarded as a default by the rating agencies. As a consequence the banks would have to write down these exposures to market prices. This exercise would lead to reported write-downs for the European banking sector of €75bn, 0.55 times more than the liquidity support that the EU is seeking. And in particular in Portugal and Greece the fallout of the MTM losses far outstrips the increase in liquidity.

Even more importantly, more than half of these losses would occur in the banks of the periphery countries themselves. In the absence of an open market for these banks, the losses would have to be made up by the governments themselves and subsequently added back to the EFSF utilization.


And there you have it: the cost of the euro not plunging today as a result of the ECB not proceeding with outright monetization, is that Germany is now the ultimate backstopper of all of Europe's risk. And while before, when the EFSF was just over €400 billion or so, the market could largely ignore the risk, a €1.5 trillion "upgrade" certainly changes the equilibria dynamics. In an attempt to avoid the appearance of inviting inflationary pressures on Trichet's central bank, Germany has directly onboarded the risk associated with terminal failure of this latest and riskiest "bailout" plan and in doing so may have jeopardized anywhere between 32% and 56% of its entire annual economic output. One wonders if the risk of runaway inflation is worth offsetting the risk of a plunge into the worst depression in the nation's history? It sure isn't for the Fed.

The most ironic outcome would be if the eurozone, in an attempt to prevent further contagion at the periphery, simply invited the vigilantes to bypass Italy (recall how everyone was shocked that instead of attacking Spain, it was Italian spreads that got destroyed in a manner of days), and head straight for the country on whose shoulders lies the fate of the entire EUR experiment?

Is Atlas about to shrug and topple the entire oh so heavy house of cards?

Devalue the Euro?

Devalue the Euro

Courtesy of Bruce Krasting

Holy smokes! The EU technocrats have finally pulled out the big guns! The agreement on Friday was to take the incredibly bold step of avoiding subordination in the Spanish bond market. The money needed for the busted Spanish banks will now be made available directly from Brussels with few strings attached. Wow! What a breakthrough!

Global markets have taken a quick look at what has been offered up by the deep thinkers in Euroland and said, “WE LOVE IT!”

Me? I think it’s a spit in the bucket. The half-life of this bailout will be measured in weeks.

We have seen this play out time and again the past four years. The capital markets are forcing policy decisions. 

“Wise” people like Paul Krugman have said for years that “Bond Vigilantes” don’t exist. There is no doubt any longer that they exist and are alive, well and hungry. The vigilantes are also armed with highly sophisticated robots that can execute attacks on multiple fronts and across markets in milliseconds. The war going on in the bond markets is not over by a long shot.

My read of the EU summit is that Spanish banks are going to get a “soft” bailout. Existing common shareholders and subordinated bond holders will not get wiped out (as they should). The bankers must love this result. They get to keep their jobs for a few years longer, all the time praying for a miracle.

Where does this go? Directly to Italy. Which Italian bank would love to have some of that cheap equity money that Brussels is doling out? All of them.

But here’s the deal, France’s banks are in desperate need of new equity too. They have been selling off assets left and right. That’s no way to keep up employment in Socialist France. There are some very big balances sheets in Paris that need a new slug of 3% Perpetual Preferreds. If Italy’s banks get the "Sweet Deal," then the French banks will have their hands out too.

Talking about re-caps of banks in Spain, Italy and France, we might just as well include a few dodgy banks in Brussels. A couple of German banks are also thin on equity.  Add a few of them to the list.

Ah… I’m sorry to rain on the parade, but the number derived from all that bailing starts with Euro 1 Trillion, and could easily push to E2T.

Where is this big sum of money coming from? A three-letter entity that doesn’t really exist yet? One whose charter requires votes from EU countries? The “savior” that is going to do the trillions of bank-bailing actually doesn’t have a penny to its name.

And can I ask someone about the timing of all these things getting sorted out? Look at the calendar. Europe is on holiday. See you in September before any of this is inked and the money is flowing. The vigilantes are not on Vaca.

If I'm right, after a few weeks things turn south again in the capital markets. Then what?

More LTRO. No – there is no more collateral. All of the swill loans have already been hocked.

Cut ECB % rate. Doesn’t matter. It won't change conditions in Italian or Spanish funding markets one bit.

A spending plan of <1% of GDP. That won’t put a dent in the recession that is building.

Brussels buys more sovereign bonds to avoid a catastrophe of Italian 10-year exceeding 7% (capitulation). Sorry. There are “wise men” in Germany who will simply not allow this to happen in the scale that is required.

The ECB goes Defcon 1 and launches a E2T QE program. No – same answer as above.

– Merkel does a 180 and embraces Euro bonds. No chance in hell.

The US or China are going to start buying EU bonds? Lunacy – not happening.

-The IMF will come to the rescue? No way – the IMF does not have the resources to solve anyone’s problems.

There are more bullshit things that could be added to this list, but they either will not work, or are too politically unacceptable to happen. If the steps taken on Friday fail to stem the crisis beyond a few weeks, what else is on the table for consideration? The answer is that whatever may be coming, it must meet the following criteria:

-must be able to be implemented in a very short period of time (e.g. a Sunday night announcement).

-must have a global component. Europe does not have the resources to address the problems it faces alone.

-can’t be subject to political approval. That process takes too long, and the politicians can’t agree on anything of substance.

What policy steps meet these requirements? There is only one. The next significant step out of Europe will involve changes in FX rates around the globe. A number of possible currency steps have already been discussed, including:

1) Peripheral countries re-establish their legacy currencies. Spain will reintroduce the Peseta, Italy will bring back the Lira etc.

2) The Euro is split in two. There would be a Northern and a Southern Euro.

3) Germany leaves the Euro and re-establishes the Deutche Mark.

These are possible outcomes. But I consider them to be unlikely. Too much effort has been taken to create and preserve the Euro for the deciders to throw in the towel anytime soon.

There is one currency option left. Devalue the Euro by 20++%.

This would make a difference. It would go a long way towards stabilizing the real economies of Europe. It would create inflation, something that is sorely needed to devalue the real size of Europe’s debts. Germany would agree to this as it preserves their export-competitive position within the EU, and improves it outside of the EU. The technocrats in Brussels would love it; it’s the only thing left that would preserve the monetary union.

Is this feasible? I say it is. It has happened twice before in history. In 1985 the world got the Plaza Accord that devalued the dollar and in 1987 we got the Louvre Accord that revalued the dollar. In both cases, the global central banks (CBs) and acted together.

With Plaza Accord, the CBs made a joint announcement on a Sunday evening that they would be selling the dollar against major currencies until such time as a meaningful devaluation had been achieved. It worked.

A devaluation of the Euro (versus the Yen, Sterling and the Dollar) would be approved in Brussels in a heartbeat. Germany would be reluctant because of the inflationary implications, but it would reap the benefits of a cheaper currency too. The USA and China would absolutely hate to see a devaluation of the Euro. It would hurt their respective economies. But the deciders in China and Washington also know that a complete breakdown of the EU economy would lead to a global depression.

The timing of something like this is critical. Would Obama instruct the Treasury Department to intervene in the currency markets (via the Federal Reserve)? He would, if it happened in the next few months. The consequences would not be felt, in a meaningful way, by US exporters until after the November election. Obama also understands that if the EU goes belly up before the election, his chance of winning goes down. If the EU tanks, so will the S&P.

China and Japan would have some say in this in order for it to be successful. The CB interventions would have to be coordinated. If the UK and US go along with it, then Japan will be forced to join in.

China is a wild card. If China participated, it would be devaluing its own Euro reserves. It would cost China a few hundred billion dollars. But it would cost China far more if the EU went into the crapper for the next five years.

I’ve been out of the FX markets lately. I’ve been concerned about “event risk”, where something is accomplished in Europe that actually made a difference. I think that this kind of event risk is now behind us. I bought some puts on the Euro Friday afternoon. We shall see.

The idea of a coordinated central bank response ala the Plaza and Louvre Accords may seem far-fetched. But tell me another option that has a chance of working.

What is the “fair” value of the Euro? Whatever the central banks want it to be. Is the Euro over valued today? Visit the EU and make your own judgment. I say it is. The following articles go a long way towards answering the question of the Euro’s value versus the dollar. When EADs puts up $600m to build a manufacturing facility in Mobile Al., you know the Euro is over-valued.

.

.

.

Given what is happening in Europe these days, I'm surprised that Airbus is doing this. Places like Spain could use the $600m investment in plant, equipment and jobs that goes with this. Good for Mobile, not so good for Europe.

.

 
 
.
 .
 

Foie gras and Illegal Immigrants

Courtesy of ZeroHedge. View original post here.

Submitted by testosteronepit.

Wolf Richter   www.testosteronepit.com

The other day, we were doing one more time what on Sunday will become illegal in California: eating foie gras in a restaurant. Pan seared foie gras “traditionally raised in Sonoma, California,” served with poached local apricots. I’d go to jail for this anytime. We were sitting at the edge of San Francisco, looking at the Bay and the Bay Bridge draped across it, and we were talking—when we weren’t preoccupied by the divine, unctuous foie gras—about sweet corn and illegal immigrants.

Foie gras is a dish the Greeks already enjoyed, and I don’t mean the austerity Greeks under Prime Minister Giorgios Papandreou, but the Greeks that fought off the Persians. And it’s one of the many paradoxes in California—a state that has absolutely everything except a decent government and a balanced budget. Lobbied by well-meaning people, I suppose, Republican Governor Arnold Schwarzenegger, in his infinite wisdom, signed a law in 2004 that made the sale and production of products derived from force-fed birds illegal. But he gave us some time to adjust to this harsh new life: the law wouldn’t take effect until July 1, 2012. OK, it’s banned in other countries too—Italy, the UK, and Germany for example—and Chicago experimented with a ban for a couple of years.

Force-feeding hapless geese and ducks—gavage as it’s called—is certainly gruesome, but so is just about anything else that has to do with meat. Ever watch an orca hunt and eat a sea lion? It’s brutal out there, and the food chain knows no mercy and has no human sentiments. We use drones to bomb people in distant countries, but when it comes to the sensuous pleasure of two slices of foie gras, we get squeamish.

A lugubrious moment: eating the final but to-die-for products of a mini-industry that had been exterminated by the government; and California still has double-digit unemployment. There were a number of us. The guy across from me was in charge of the wine. He knew his way around Bay Area vintners, was a farmer, and had a degree in economics.

He was talking about sweet-corn and the harvest that had started some time ago. If you’re a city guy like me, listening to a farmer over superb wine and foie gras is fascinating. Sweet corn, the result of careful crossbreeding, is very fragile, he said. Unlike other varieties of corn, it has to be harvested by hand because machines damage it. And it has a short shelf life. To extend the shelf life—the secret to doing business with big customers like Costco and Safeway—you have to harvest it at night. If you cool sweet corn from 72° to 34°, it lasts a lot longer than if you have to cool it from 107° to 34°.

One of the biggest challenges, he said, was lining up the farmworkers, 75 of them a day during harvest season. Subcontractors hired and took care of the workers, but every year it was getting more difficult. Most, if not all of them, were illegally in the country, he said. They worked from 7 PM till 3 AM under floodlights. It was piecework, averaging about $15 per hour. But with the crackdown on illegal immigrants, finding enough workers has become difficult, he said.

“Can’t you hire some people from Oakland or Stockton who’ve been out of a job for years?” someone asked.

“We tried, but man, no one wants to do this kind of work. It’s hard. After an hour, they give up … if they even come out in the first place.”

“But 15 bucks an hour, that’s pretty good, compared to minimum wage.”

“They don’t have the skills, the stamina. You’ve got to be very productive to make this kind of money.”

Pink clouds drifted across the evening sky. A group of girls rollerbladed by. Life was good.

“And if the government ever gets rid of the illegals, or if they get scared and go back to Mexico on their own,” he said as he poured everyone some more wine, “we have to shut down our farm.”

And that’s where we all had conflicted thoughts. We loved sweet corn and couldn’t envision summer without it—and whatever we thought about illegal immigrants, we did want to have our sweet corn.

“Everyone who grows anything that has to be picked by hand,” he said, “has the same problem.”

It didn’t take long for the conversation to link this issue to the demise of the California foie gras industry, and which government would be willing to kill yet another and this time much bigger industry, and people wondered about our politicians who were now, more than ever, the best that money could buy. But it isn’t just a US phenomenon. It’s universal, as we can see in this hilarious video by my two favorite Australian comedians, Clarke & Dawe,…. “The Key to Good Governance.”

Euro Game Changer?

Euro Game Changer? (6/30)

Courtesy of Springheel Jack of Channels and Patterns

With the close just over the 100 daily moving average (DMA) on SPX, and just under the current rally high from the June low, there are now three main possibilities for the S&P 500 from a TA perspective:

  1. SPX tops out here and very soon, creating a double-top from the June low with a target back at that low.
  2. SPX makes it to the inverted head and shoulders pattern target in the 1403-5 area, topping out somewhere in the 1400-1445 range to make a much larger double-top with a target slightly above the October 2011 low.
  3. SPX makes new highs, breaks with confidence over the 1442 area pivot resistance and rises to test the 2007 highs over 1500.

Of these possibilities, the first now looks unlikely. I’m favoring the second option slightly over the third option, which was brought back from the dead by the EU Summit on Thursday and Friday. Here’s the SPX chart, with a healthy looking uptrend support trendline and with the close over the last of the key DMAs on Friday (click on charts to enlarge):

So what changed at the EU summit? Well the big debate there was whether Germany would be forced through intense peer pressure to guarantee much of the debt of its  insolvent neighbors through Eurobonds. Most of Europe is in favor of the bonds, while the Germans are adamantly against the idea. To avoid Eurobonds, it appears that the Germans have agreed, as a lesser evil, to relax the restrictions on the ECB assisting troubled EU sovereigns.

It’s hard to overstate the possible importance of this concession by the Germans. It opens the path to potentially huge quantitative easing by the ECB, something that had previously been ruled out by German opposition. We could see the ECB respond to problems in Greek, Spanish and Italian bonds by printing enough money to buy all of those troubled bonds. Does that sound unrealistic? In terms of overall Euro-area debt outstanding, such a move would only bring the ECB roughly into line with the Bank of England, held up as a model of caution in these strange looking-glass times. (But note, the ECB does not have the authority (yet) to simply print money, so the question of where is this money coming from is swirling around in the Financial Universe.)

How with the eurozone solve its problem with un-payable debt? Bruce Krasting argues that the most likely course for the EU is to devalue the Euro: “There is one currency option left. Devalue the Euro by 20++%. This would make a difference. It would go a long way towards stabilizing the real economies of Europe. It would create inflation, something that is sorely needed to devalue the real size of Europe’s debts. Germany would agree to this as it preserves their export-competitive position within the EU, and improves it outside of the EU. The technocrats in Brussels would love it; it’s the only thing left that would preserve the monetary union.

“Is this feasible? I say it is. It has happened twice before in history. In 1985 the world got the Plaza Accord that devalued the dollar and in 1987 we got the Louvre Accord that revalued the dollar. In both cases, the global central banks (CBs) and acted together. (Devalue the Euro)

It remains to be seen how far this concession will stretch, but this is definitely a potential game-changer, and could push any Euro crisis a year or two down the road, or more. Don’t buy any Euros however, as in the event that there is massive quantitative easing in Europe, that will effectively devalue the Euro in the same way that QE1 and QE2 devalued the US Dollar. The technical setup on EURUSD looks dire and this won’t improve the fundamentals. We might see the usual relationship between the Euro and equities invert, with equities rising as the Euro falls.

Here’s the technical setup on EURUSD, with the rising channel from 2001 broken and a possible H&S forming:

The prospects for the US Dollar looked golden before the EU summit, and the prospects for the Euro looked grim. That hasn’t changed. What may have changed is the prospects for equities, with what might effectively amount to QE3 coming from the ECB. We’ll see how that goes, but for the moment I’m treating equities as being in an uptrend until we see a break below the rising support trendline on my SPX chart above.

 

[Edited by Cycle Editing]

Headline in Spain: Government 'sacrificed' Bank of Spain in Exchange for Financial Sector Bailout; ESM Agreement Raises More Questions Than Answers

Courtesy of Mish.

In the wake of a huge market reaction on Friday, it’s interesting to see how the headlines read other places, especially Spain.

Here is one such viewpoint by El Confidencial: Government ‘sacrificed’ Bank of Spain in Exchange for Financial Sector Bailout

The clearest conclusion to the European Agreement made by Spain and Italy is that our government has preferred to sacrifice the sovereignty of the banking supervision enjoyed by the Bank of Spain in exchange for the bailout of the sector does not compute as debt or deficit and that The European rescue fund to buy Spanish debt when things get as ugly as this week. However, many unknowns are open, including the timing of the operation. Therefore, the FROB who will initially inject capital to entities that need it in September, with funds from European loan subsequently permutarán MEDE the money.

“The government has chosen to advance the loss of competition in banking supervision, it was inevitable sooner or later if you go to a European Banking Union in exchange for breaking the feedback loop between the banking and public debt, which is very positive and not only for Spain, “says an analyst.

Officials of both Economy and the Bank of Spain claimed yesterday that has not yet been defined how will such a monitoring mechanism or what the status of the former Central Bank. Some sources believe that it is logical that national central banks are the arms of the central agency in each country and to continue in office today, but accountable to a higher power who will make the final decisions.

Other experts, such as Eurointelligence, say that “it is far from clear that Germany is willing to give up their own banks to supervision by the ECB.” It is also unclear what will happen to insurance, which can not be monitored by the ECB according to the EU Treaty. Or if the conditions to be imposed in order to use the European Stability Mechanism (MEDE), conditions that likely will go beyond the financial sector despite yesterday again denying Mariano Rajoy.

A major uncertainty centers on the period within which this new monitoring system will come into force, which is the condition for the MEDE to inject money directly to banks. In principle, the idea is to reach an agreement in October to put in place before year end. But “it is unrealistic to expect an agreement by October? MEDE himself was delayed. The EU has consistently been too optimistic on the timing,” adds the analyst firm.

The terms do not match

And although respected, there is an inconsistency between this term and timing of the rescue plan by Spain. This includes the signing of the memorandum with the conditions for the sector on 9 July, the end of the audit work in each state on July 31 and defining the specific needs of each in September, when performing the new stress test bottom-up (bottom up). Thereafter, viable entities that need capital will have nine months to get their media, and immediately nonviable may receive the loan proceeds Europe.

Therefore, various sources claim that the FROB will perform the first injection of capital until the conditions for you to do the MEDE. So initially counted as debt itself. So then have to do a swap between the FROB and MEDE. Another option is to wait until the system is willing, but the markets probably will not have much patience, and as mentioned, is likely to be delayed.

A priori, it seems very complicated to start with the FROB and replaced by MEDE, but the text of the Declaration of the Summit opened the door this way, referring to Ireland: “The Eurogroup will review the status of the Irish financial sector with a view to further improving the sustainability of the adjustment program is working well. Similar cases are treated in the same way. ” That similar case would be Spain.

ESM Agreement Raises More Questions Than Answers

The above article certainly raises a lot of questions. Gavyn Davies at the Financial Times also says More questions than answers after the summit

Continue Here

Headline in Spain: Government ‘sacrificed’ Bank of Spain in Exchange for Financial Sector Bailout; ESM Agreement Raises More Questions Than Answers

Courtesy of Mish.

In the wake of a huge market reaction on Friday, it’s interesting to see how the headlines read other places, especially Spain.

Here is one such viewpoint by El Confidencial: Government ‘sacrificed’ Bank of Spain in Exchange for Financial Sector Bailout

The clearest conclusion to the European Agreement made by Spain and Italy is that our government has preferred to sacrifice the sovereignty of the banking supervision enjoyed by the Bank of Spain in exchange for the bailout of the sector does not compute as debt or deficit and that The European rescue fund to buy Spanish debt when things get as ugly as this week. However, many unknowns are open, including the timing of the operation. Therefore, the FROB who will initially inject capital to entities that need it in September, with funds from European loan subsequently permutarán MEDE the money.

“The government has chosen to advance the loss of competition in banking supervision, it was inevitable sooner or later if you go to a European Banking Union in exchange for breaking the feedback loop between the banking and public debt, which is very positive and not only for Spain, “says an analyst.

Officials of both Economy and the Bank of Spain claimed yesterday that has not yet been defined how will such a monitoring mechanism or what the status of the former Central Bank. Some sources believe that it is logical that national central banks are the arms of the central agency in each country and to continue in office today, but accountable to a higher power who will make the final decisions.

Other experts, such as Eurointelligence, say that “it is far from clear that Germany is willing to give up their own banks to supervision by the ECB.” It is also unclear what will happen to insurance, which can not be monitored by the ECB according to the EU Treaty. Or if the conditions to be imposed in order to use the European Stability Mechanism (MEDE), conditions that likely will go beyond the financial sector despite yesterday again denying Mariano Rajoy.

A major uncertainty centers on the period within which this new monitoring system will come into force, which is the condition for the MEDE to inject money directly to banks. In principle, the idea is to reach an agreement in October to put in place before year end. But “it is unrealistic to expect an agreement by October? MEDE himself was delayed. The EU has consistently been too optimistic on the timing,” adds the analyst firm.

The terms do not match

And although respected, there is an inconsistency between this term and timing of the rescue plan by Spain. This includes the signing of the memorandum with the conditions for the sector on 9 July, the end of the audit work in each state on July 31 and defining the specific needs of each in September, when performing the new stress test bottom-up (bottom up). Thereafter, viable entities that need capital will have nine months to get their media, and immediately nonviable may receive the loan proceeds Europe.

Therefore, various sources claim that the FROB will perform the first injection of capital until the conditions for you to do the MEDE. So initially counted as debt itself. So then have to do a swap between the FROB and MEDE. Another option is to wait until the system is willing, but the markets probably will not have much patience, and as mentioned, is likely to be delayed.

A priori, it seems very complicated to start with the FROB and replaced by MEDE, but the text of the Declaration of the Summit opened the door this way, referring to Ireland: “The Eurogroup will review the status of the Irish financial sector with a view to further improving the sustainability of the adjustment program is working well. Similar cases are treated in the same way. ” That similar case would be Spain.

ESM Agreement Raises More Questions Than Answers

The above article certainly raises a lot of questions. Gavyn Davies at the Financial Times also says More questions than answers after the summit

Continue Here

Support and Defend

TLP: "Support and Defend"

Courtesy of Jr. Deputy Accountant

rand oath

So, the Pauls don't like government, we get that, even though they both have found it convenient to collect paychecks and socialized medicine reimbursements from the U.S. Treasury. But it's one thing to want change, another to advocate anarchy.

From Rand Paul's Senate website

"Just because a couple people on the Supreme Court declare something to be 'constitutional' does not make it so. The whole thing remains unconstitutional. While the court may have erroneously come to the conclusion that the law is allowable, it certainly does nothing to make this mandate or government takeover of our health care right," Sen. Paul said.

Elsewhere on the site, Paul posted the U.S. Constitution, which says in Article III (after vesting judicial power in "one Supreme Court" and other courts) that,"The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States" and treaties, maritime cases,"Controversies" and other things having quaint but annoying capitalization.

Wonder which sections of the Constitution he thinks are worth following

America On Fire: Why Is The Number Of Wildfires In The United States Increasing?

America On Fire: Why Is The Number Of Wildfires In The United States Increasing?

As America watches large sections of Colorado literally burn to the ground, many are wondering why all of this is happening.  There have always been wildfires, but what we are experiencing now seems very unusual.  So is the number of wildfires in the United States increasing?  As you will see later in this article, the answer is yes.  2011 was a record setting year for wildfires and this wildfire season is off to a very frightening start.  Right now the eyes of the nation are focused on the Waldo Canyon Fire in Colorado.  It doubled in size overnight and it has consumed more than 300 homes so far.  It is threatening the city of Colorado Springs, and at this point more than 35,000 people have been forced to evacuate – including the U.S. Air Force Academy.  On Twitter and Facebook residents are describing what they are seeing as "the apocalypse" and as "the end of the world".  But this is just the beginning of the wildfire season.  We haven't even gotten to July and August yet.

The Waldo Canyon fire is rapidly becoming one of the most expensive and destructive wildfires in Colorado history.  The historic Flying W Ranch has already been burned totally to the ground by this fire.  Local authorities are struggling to find the words to describe how nightmarish this fire is.  The following are a couple of quotes from a CNN article….

Richard Brown, the Colorado Springs fire chief, described it as a "firestorm of epic proportions."

Gov. John Hickenlooper surveyed the Waldo Canyon Fire, telling reporters it was a difficult sight to see.

"There were people's homes burned to the ground. It was surreal," he said late Tuesday night. "There's no question, it's serious. It's as serious as it gets."

But this is not the only wildfire that is raging in Colorado.  Right now there are 10 wildfires burning in the state.  Overall, there are 33 large wildfires currently burning in twelve U.S. states.

If you will remember, New Mexico just experienced one of the worst wildfires that it has ever seen.  Conditions throughout most of the western United States are ideal for wildfires right now.  As USA Today reports, much of the western half of the country is under a "red flag warning" right now….

Throughout the interior West, firefighters have toiled for days in searing, record-setting heat against fires fueled by prolonged drought. Most, if not all, of Utah, Colorado, Wyoming and Montana were under red flag warnings, meaning extreme fire danger.

But wait, didn't this kind of thing happen last year too?

Yes it did.

In fact, 2011 was one of the worst years ever for wildfires in America.  The following is a short excerpt from an EarthSky article….

Thousands of wildfires raged across the United States last year, 2011, burning a record amount of land, especially in the southern U.S. In fact, 2011 the third-most-active fire season since 1960 (when this record-keeping began) with respect to acres burned, according to preliminary data released from the National Interagency Fire Center (NIFC) in late December 2011. The NIFC will be releasing an official summary report detailing the 2011 wildfire season later in 2012, but for now you can read some of the details in the State of the Climate Wildfires 2011 report from NOAA.

During 2011, a total of 73,484 wildfires burned an estimated 8,706,852 acres (35,235 square kilometers) of land across the United States. Wildfire activity during 2011 was exceptionally high and was only exceeded in the historical record by wildfire activity during the years 2006 and 2007.

We have seen highly unusual wildfire activity throughout America in recent years.  In the article quoted above you can find a chart which shows that wildfire activity in the United States has been far above normal during the past decade.

Wildfire records have only been kept since 1960.  The 6 worst years on record for wildfires in the U.S. have all happened since the year 2000.  The following is from an Earth Island Journal article that I found….

In the United States, where some of the most accurate wildfire statistics are kept, the six worst fire seasons in the past 50 years have occurred since 2000. In Texas, nearly 4 million acres were burned in 2011, double the previous record. This included the Bastrop Fire last September that destroyed 1,600 homes and became the most destructive fire in Texas history. In Arizona more than one million acres were burned in 2011, a new record. The Wallow Fire, which destroyed nearly a half million acres, was the largest fire in Arizona history. The Pagami Creek Fire in northern Minnesota became the third largest fire in state history when it burned 100,000 acres in September 2011, most of this in an unprecedented 16-mile run on a single day.

So what does all of this mean?

It means that the number of wildfires in the United States is increasing and wildfires are becoming more powerful and doing more damage.

So what is causing all of this?

The truth is that this is happening because we are seeing exceptionally dry conditions throughout the western half of the United States.  In fact, according to the U.S. National Academy of Sciences, the U.S. interior west is now the driest that it has been in 500 years.

The eastern half of the country also gets very hot during the summer, but they don't have as many wildfires because they get a lot more rain.

Many areas in the western half of the country have been experiencing drought conditions for quite a few years, and there seems to be no end in sight for the drought.

If you go check out the U.S. drought monitor, you will see that almost the entire southwest United States is experiencing some level of drought right now.

So what will July and August bring?

It is kind of frightening to think about that.

Earlier this year I wrote an article that postulated that we could actually see dust bowl conditions return to the middle of the United States.  Many readers were skeptical of that article.

But as much of the western United States continues to experience bone dry conditions and continues to be ravaged by wildfires, perhaps more people will understand how bad things are really getting in the interior west.

Just because we have made great technological advances as a society does not mean that we know how to tame nature.  We can attempt to contain the massive wildfires that are popping up all over the place and we can attempt to deal with the drought, but in the end we cannot stop what is happening.

So do you live in any of the areas that are being affected by these wildfires?

Do you have an opinion about why so much of America is on fire?

Please feel free to post a comment with your opinion below….

Quelle Surprise! Fed Economists Side Firmly With Bank Criminality Over the Rule of Law

Quelle Surprise! Fed Economists Side Firmly With Bank Criminality Over the Rule of Law

Courtesy of Yves Smith at Naked Capitalism 

Although Dave Dayen and Abigail Field have already given a well-deserved shellacking to a remarkable piece of bank PR masquerading as “insight” at Reuters, “Evidence suggests anti-foreclosure laws may backfire,” it merits longer-form treatment as a crude macedoine of anti-homeowner messaging.

The way Big Lies get sold is by dint of relentless repetition. In the wake of the heinous mortgage settlement, foreclosure fatigue has set in. A lot of policy people want to move on because the topic has no upside for them. Nothing got fixed, the negotiation process took a lot of political capital (meaning, as we pointed out, it forestalls any large national initiatives in the near-to-medium term), and Good Dems don’t want to dwell on a crass Obama sellout (not that that should be a surprise by now). But the fact that this issue, which ought to be front burner given its importance both to individuals and the economy, is being relegated to background status creates the perfect setting for hammering away at bank-friendly memes. When people are less engaged, they read stories in a cursory fashion, or just glance at the headline, and don’t bother to think whether the storyline makes sense or the claims are substantiated.

Just look at the headline: “Evidence suggests anti-foreclosure laws may backfire.” First, it says there are such things as “anti-foreclosure laws.” In fact, the laws under discussion are more accurately called “Foreclose legally, damnit” laws. Servicers and their foreclosure mill arms and legs have so flagrantly violated long-standing real estate laws in how they execute foreclosures that some states have decided to up the ante in terms of penalties to get the miscreants to cut it out. As Dayen points out:

No state law in this country disallows legal foreclosures. If the banks cannot substantiate ownership of the property, why is the finger pointed at the state laws that force that substantiation, and not the banks themselves? Nobody told them to lose ownership of mortgages, prompting them to falsify documents in an attempt to foreclose.

And how does a requirement to obey the law “backfire”? The claim is that it prevents foreclosures, and that in turn is keeping the market from “clearing.” Never mind that we found out how well Andrew Mellon’s “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate” prescription turned out. Notice the failure to consider alternatives besides foreclosure. The story gives one example of a borrower who got a mod in Nevada, which it suggests was due the passage of a law criminalizing improper foreclosures. But this example just hangs there, while immediately preceding it is a broker complaining how they don’t have enough properties to keep bottom fishers happy, and a defense lawyer saying he sees prospective clients trying to game the law. Each of these anecdotes has colorful quotes and align with the overall narrative.

Funny how there is nary a mention of the reasons banks have for wanting to draw out foreclosures: more servicing and late fees, deferral of recognition of losses on second liens. Nor is there any mention of how, in Las Vegas, I have been told by informed insiders that there are entire blocks in affluent areas where pretty much no one has paid their mortgage in over two years as of late 2010 with nary a foreclosure notice sent. Read that date: a lot of big ticket properties were being kept in limbo before the new law was passed. Similarly, Keith Jurow wrote in February:

In November 2011, Minyanville.com posted my 30-page New York City Housing Market Report. The report included never-seen-before charts, graphs and data that revealed what has been going on there. The banks have not been foreclosing for the past three years. This started well before the robo-signing mess. On February 7, 2012 there were a total of only 242 repossessed properties on the active MLS in Queens according to foreclosure.com. This is a borough with a population of 2.2 million.

Because of this, the number of seriously delinquent properties throughout NYC has been soaring. Based on individual charts for each borough from the NY Federal Reserve Bank which I included in my report, there were roughly 80,000 properties where the mortgage had not been paid in more than 90 days as of June 2011.

He found similar patterns in Suffolk County and Connecticut.

But what does the Reuters author Tim Reid want you to believe?

At the request of Reuters, RealtyTrac compared three states where borrower protection laws had prolonged foreclosures – Florida, New Jersey and New York – with three with fewer protections and where foreclosure completion times were shorter – Arizona, California and Virginia.

In the three states with the shorter delays, the average sale price for foreclosed properties has been trending higher, suggesting a recovery that has underlying strength.

Funny, Jurow debunked that in a May piece:

We hear that California markets are showing signs of revival and that prices are rising in certain markets. Let’s see. Here are the latest figures from trulia.com.

In Los Angeles, trulia reports that the average price-per square foot for homes sold in February through April was down 9.3 percent year-over-year for 3-bedroom homes and down 8.7 percent for 2-bedroom homes.

In San Francisco, allegedly one of the hottest areas in the nation, the 3-bedroom average price-per-square-foot was down 4.7 percent year-over-year and 1-bedroom price-per-square foot was down 8.1 percent.

Price-per-square-foot statistics are the best way to compare prices because it does not matter how large the house is. Median prices are skewed by square footage as well as by the percentage of distressed properties sold.

And that recovery in Arizona? Banks are holding properties off the market:

Take a good look at this revealing chart for Phoenix from foreclosureradar.com.

Bank repossessions in Maricopa County plunged from 3,159 in April 2011 to a mere 767 a year later. Clearly, the banks are gambling that this will help to stem the decline of home prices….

During the height of the credit crisis in early 2009, 2/3 of all homes sold in Maricopa County were repossessed properties. That percentage was down to 40 percent a year ago. Take a look at this chart from Phoenix broker Leif Swanson.

In April, only 17 percent of all homes sold in the Phoenix metro were REOs on the active MLS. Banks are hoping that this cutback of foreclosed properties for sale will steady home prices.

What about that Fed study?

A study by three Federal Reserve economists compared the foreclosure processes and outcomes for borrowers in the 20 “judicial” foreclosure states – where banks must seek court approval before they can foreclose – and the 30 “nonjudicial” ones, where such court oversight is not required…

Their conclusion? States with judicial protection over the foreclosure process or the arrears system “indiscriminately” slowed down the foreclosure process, but with no measurable benefits.

In fact, delinquent borrowers were more likely to make good on their arrears in nonjudicial states than in states where they had more time to do so. These borrowers were also just as likely to be repossessed in a judicial state than in a nonjudicial one – it just took longer.

Notice how the message is pounded in again and again: longer foreclosures are bad because they interfere with market operation. There are no offsetting considerations allowed, such as the damage to the integrity of land records in this country. (And how was this study conducted, anyhow? Did the authors adjust at all for state unemployment levels, or wage trends?)

By contrast, look at how Wall Street Examiner’s Lee Adler characterizes the situation:

Meanwhile, the mortgage servicing bankster mafiosi have figured out that by holding rather than dumping massive numbers of foreclosed properties, and even by slowing down the foreclosure process while allowing a few cramdowns in the form of short sales, the market has begun to rebound on its own. The bankster mafia know that placing massive numbers of properties on the market at once would crash the market and destroy the value of their portfolios, and essentially crash the financial system. So they have made a wise strategic decision not to self immolate.

Indeed, the Fed authors provide information that undermines their thesis:

Lauren Lambie-Hanson, one of the Federal Reserve economists, said delays in foreclosures had scared off potential buyers because prolonging the process raised doubts about how clean the title to a property was.

The “scared off” is meant to suggest that the buyers who were deterred were irrational. Hogwash. Title insurance companies have backed away from guaranteeing properties sold out of foreclosure. The truth, which the Fed economists refuse to admit, is the buyers who are concerned about title problems are clear-eyed about risk, while the economists think it’s swell to stick buyers with bum properties.

And get a load of this:

Foreclosure protection laws also probably led to an increased incidence of blight, the economists found.

Read that twice. You can’t make that sort of crap up. This claim alone makes it a candidate for theFrederic Mishkin Iceland Prize for Intellectual Integrity. (If you want to see on a textual level what a shameless piece of propaganda this article is, read Abigail Field’s shredding. She goes line by line, or at least until it becomes too painful to read it that closely.) No, it isn’t the failure of the party responsible for managing a foreclosed property, the servicer, to secure and maintain the homes, that leads to blight. No, it’s the government, erm, the law.

And that is perhaps the most remarkable bit, the failure to consider that gutting the protections to the parties to a contract undermines commerce. Borrowers in judicial foreclosure states paid higher interest rates due to the greater difficulty of foreclosure. So now they are to be denied what they paid for because the banks recklessly disregarded the procedures they set up and committed to perform? What kind of incentive system is it when we reward massive institutional failure with a bank-favoring settlement and supportive messaging from central bank economists? As Dayen stated:

So when these officials argue against laws like those in Nevada, which merely criminalize a criminal practice, or California, which provides due process for people having their homes taken from them, they’re arguing in favor of what amounts to a dissolution of justice.

Barclays On The Rally: "Fade It", Because The Summit Is "Not A Game-Changer For The EUR"

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

With everyone scrambling to buy into the bathsalts rally, and shorts rushing to cover with a panic bordering on a QE-announcement, it is somewhat ironic that today's voice of muted reason comes from none other than Liebor expert extraordinaire: Barclays, whose suggestion is simple: lock your profits: "We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD." Why? They have their listed reasons. The unlisted ones are the same that every other bank has for becoming bearish recently (we have recently listed Citi, Goldman, SocGen and DB to name but a few): for a real fiscal and monetary policy intervention to take place (i.e., a rescue package that lasts at least a few months, as opposed to today's several day max rally): the market has to be tumbling. That, as we have explained repeatedly, is the only way to get a powerful response. Everything else is (quarter end) window dressing.

From Barclays:

EUR: EU Summit is not a game-changer for the EUR

Very little progress, if any, on short-term measures was expected from this week's EU summit. However, the conclusions, so far, have exceeded expectations. Risk has rallied as a result. We expect the general improvement in sentiment to have legs because the measures announced tackle the dislocation in the banking sector. Also, later today further agreements on the roadmap towards fiscal integration are possible.  We suggest investors remain long cyclical, non European currencies, such as the AUD versus the USD. 

However, the news overnight is not a game changer for the EUR. The agreement to allow Spanish banks to be directly recapitalised from the ESM is conditional on a single supervisor for euro are banks being established. This is not expected until the latter half of this year. In the interim, aid to Spanish banks will continue to inflate Spanish sovereign debt levels. In addition, headlines this morning have already started to water down the other conclusions reached. For example, the agreement to deny seniority to ESM resources used to recapitalise banks has been limited to Spain and there is no agreement over the seniority of EFSF resources. Similarly, Mrs. Merkel's comments that "countries must fulfil conditions for bond-buying programmes that Troika must check" suggest the agreement on how to implement the conclusions reached is not as strong as headlines initially suggested.

As a result we expect investors to remain cautious. This will keep the risk premium on the EUR elevated. Moreover, euro area growth is very weak and structural change takes time. We continue to expect the ECB to keep monetary policy very loose for some time and to cut rates by 50bp next week, a move which is not fully priced in by the market. We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD.

Barclays On The Rally: “Fade It”, Because The Summit Is “Not A Game-Changer For The EUR”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

With everyone scrambling to buy into the bathsalts rally, and shorts rushing to cover with a panic bordering on a QE-announcement, it is somewhat ironic that today's voice of muted reason comes from none other than Liebor expert extraordinaire: Barclays, whose suggestion is simple: lock your profits: "We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD." Why? They have their listed reasons. The unlisted ones are the same that every other bank has for becoming bearish recently (we have recently listed Citi, Goldman, SocGen and DB to name but a few): for a real fiscal and monetary policy intervention to take place (i.e., a rescue package that lasts at least a few months, as opposed to today's several day max rally): the market has to be tumbling. That, as we have explained repeatedly, is the only way to get a powerful response. Everything else is (quarter end) window dressing.

From Barclays:

EUR: EU Summit is not a game-changer for the EUR

Very little progress, if any, on short-term measures was expected from this week's EU summit. However, the conclusions, so far, have exceeded expectations. Risk has rallied as a result. We expect the general improvement in sentiment to have legs because the measures announced tackle the dislocation in the banking sector. Also, later today further agreements on the roadmap towards fiscal integration are possible.  We suggest investors remain long cyclical, non European currencies, such as the AUD versus the USD. 

However, the news overnight is not a game changer for the EUR. The agreement to allow Spanish banks to be directly recapitalised from the ESM is conditional on a single supervisor for euro are banks being established. This is not expected until the latter half of this year. In the interim, aid to Spanish banks will continue to inflate Spanish sovereign debt levels. In addition, headlines this morning have already started to water down the other conclusions reached. For example, the agreement to deny seniority to ESM resources used to recapitalise banks has been limited to Spain and there is no agreement over the seniority of EFSF resources. Similarly, Mrs. Merkel's comments that "countries must fulfil conditions for bond-buying programmes that Troika must check" suggest the agreement on how to implement the conclusions reached is not as strong as headlines initially suggested.

As a result we expect investors to remain cautious. This will keep the risk premium on the EUR elevated. Moreover, euro area growth is very weak and structural change takes time. We continue to expect the ECB to keep monetary policy very loose for some time and to cut rates by 50bp next week, a move which is not fully priced in by the market. We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD.

Time-Lapse Interactive Graph Shows Stunning Rise in Anti-Euro Sentiment in Italy

Courtesy of Mish.

The rise of the Five Star Movement in Italy is the number one happening in Europe right now and mainstream media has not even begun to cover it in any depth. The movement is led by an Italian comedian, Beppe Grillo.

Main Rules for the Five Star Movement

  • Not be an elected politician prior to 5 Stelle
  • Commit to stay in charge for no longer than 2 terms
  • Commit to take a minimum salary and give the rest back to the community
  • Post a public platform on the internet
  • Be willing to hold a public debate on the platform

Beppe Grillo’s personal position, not a mandate for the Five Star Movement is “Get out of the Euro and default on debt

For more on the Five Star Movement please see Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement

Time-Lapse Interactive Polls

Following are some time lapse polls of the Five Star Movement and other political parties in Italy. Please give the graphs extra time to load.

The polls are from data gathered by data gathered by Termometro Polico (one on the best Italian poll-makers according to a friend who sent me the link.) The important poll is in tab number four.

Explanations and Comments on the graphs appear below.

For now, please click on tab number four. You may also wish to go to the link above for additional information (in Italian).

Graphs courtesy of Termometro Polico via tools from Tableau Software.

Continue Here

The Dummy's Guide To Healthcare

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Initially presenting the potential problems of our current healthcare environment, the creator of 'the bears that explained Quantitative Easing' provides much food for thought on the unintended consequences of Obamacare (in all its 2700 page glory). For everything you need to know about how it devolved to this ("To understand healthcare in America, you have to think about bananas") and how to think about the new tax's potential implications (e.g. lower quality of service, capped hiring rates among employers), seven minutes well spent.

The Dummy’s Guide To Healthcare

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Initially presenting the potential problems of our current healthcare environment, the creator of 'the bears that explained Quantitative Easing' provides much food for thought on the unintended consequences of Obamacare (in all its 2700 page glory). For everything you need to know about how it devolved to this ("To understand healthcare in America, you have to think about bananas") and how to think about the new tax's potential implications (e.g. lower quality of service, capped hiring rates among employers), seven minutes well spent.

Japanese Manufacturing Output Falls for First Time in 2012

Courtesy of Mish.

The short term effect of Japanese stimulus following the earthquake and tsunami has now worn off. All Japan has to show for that stimulus is a bigger pile of debt, proving once again the Broken Window Fallacy.

In the real world, Japan has a debt-to GDP ratio of 225% and rising. Japan’s export machine has stalled. So has Japanese manufacturing in general.

Markit reports Japanese manufacturing output falls for first time in 2012 to date

June data pointed to the first month-on-month reduction in manufacturing output since December 2011, as both new business and new export orders fell. Backlogs of work decreased as a result, while employment growth eased to only a marginal rate. On the price front, factory gate charges fell further in June, in response to a first reduction of average costs in 20 months.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) dipped fractionally below the neutral 50.0 threshold in June, to post its lowest reading in seven months.

Commenting on the Japanese Manufacturing PMI survey data, Alex Hamilton, economist at Markit and author of the report said:

“June data suggest that Japan’s manufacturing sector upturn is fading into mid-year, with output and new business falling simultaneously for the first time since December 2011.

Growth in the year to date has been supported by earthquake-related reconstruction projects. The latest survey findings indicate that the boost from these efforts is starting to ebb, however, with investment goods producers noting a particularly sharp fall in output during June. This bodes ill for growth heading into the second half of the year, especially given the fragility of demand in external markets – highlighted by an accelerated fall in new export business during June.”

Japan Doubles Sales Tax

The AP reports Lawmakers in Japan OK hike in sales tax

Japan’s lower house voted Tuesday to double the country’s sales tax to 10 percent over three years in a bid to rein in a bulging national debt as an aging population burdens the country’s social security system.

The vote, however, shook Prime Minister Yoshihiko Noda’s grip on power because of strong opposition from a group within the ruling party led by power broker Ichiro Ozawa that believes the tax hike will weaken the economy. Ozawa and his supporters have threatened to bolt the Democratic Party over the tax issue.

Continue Here

What really happened in Fast and Furious?

Most of what we've heard about the gun-trafficking scandal is wrong.

FORTUNE — One day ahead of a historic vote in which Congress may hold attorney general Eric Holder in contempt for failing to turn over documents in an investigation of a now-notorious ATF gun-trafficking operation, Fortune.com has released an article by Katherine Eban entitled "The Truth About the Fast & Furious Scandal" that questions many of the widely accepted and fundamental "facts" about the case.

Fast and Furious is typically portrayed as a flawed action in which ATF agents in Arizona intentionally allowed thousands of weapons to fall into the hands of Mexican drug cartels. But the Fortune.com article, based on six months of interviews with seven agents involved in the case, 32 other sources, and 2,000 pages of confidential government documents, concludes that the ATF never had such a policy. ATF agents consistently tried to interdict guns, Fortune.com reports, but were repeatedly hamstrung by a combination of weak federal laws and prosecutors who interpreted those statutes narrowly. ATF agents proposed the arrest and indictment of more than two dozen gun trafficking suspects in the case in 2010, but prosecutors did not act until two weapons tracked by the ATF were found at the scene of the murder of a federal agent.

Keep reading: What really happened in Fast and Furious? – Fortune Features ~ Intro to the article:  

The truth about the Fast and Furious scandal

Laughable Text of EU "Memorandum of Understanding"; ESM Not Been Ratified Yet Already Requires Changes; How Much ESM Firepower Is There?

Courtesy of Mish.

Futures are flying over a “breakthrough” that supposedly will lower borrowing costs for Italy, Spain, and Ireland.  The “breakthrough” is a modification to the terms of the ESM to allow “the possibility” to recapitalize banks directly.

Amusingly, the existing ESM agreement has not even been ratified. The agreement is still on hold in Germany (numerous other countries have yet to ratify as well).

Yet the “Memorandum of Understanding” worked out at the summit today appears to require changes to the ESM.

Other ambiguous statement from the eurogroup committee are simply laughable. Here is the complete text. Emphasis added in places.

EURO AREA SUMMIT STATEMENT – 29 June 2012 –

• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.

We task the Eurogroup to implement these decisions by 9 July 2012.

ESM Under Review by German Constitutional Court

Bear in mind that ESM ratification in Germany has already been delayed subject to Review by German Constitutional Court

Germany’s highest court asked the country’s president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel.

The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. German President Joachim Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government — the permanent bailout fund known as the European Stability Mechanism (ESM) — would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.

More Challenges Coming

Continue Here

Laughable Text of EU “Memorandum of Understanding”; ESM Not Been Ratified Yet Already Requires Changes; How Much ESM Firepower Is There?

Courtesy of Mish.

Futures are flying over a “breakthrough” that supposedly will lower borrowing costs for Italy, Spain, and Ireland.  The “breakthrough” is a modification to the terms of the ESM to allow “the possibility” to recapitalize banks directly.

Amusingly, the existing ESM agreement has not even been ratified. The agreement is still on hold in Germany (numerous other countries have yet to ratify as well).

Yet the “Memorandum of Understanding” worked out at the summit today appears to require changes to the ESM.

Other ambiguous statement from the eurogroup committee are simply laughable. Here is the complete text. Emphasis added in places.

EURO AREA SUMMIT STATEMENT – 29 June 2012 –

• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.

We task the Eurogroup to implement these decisions by 9 July 2012.

ESM Under Review by German Constitutional Court

Bear in mind that ESM ratification in Germany has already been delayed subject to Review by German Constitutional Court

Germany’s highest court asked the country’s president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel.

The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. German President Joachim Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government — the permanent bailout fund known as the European Stability Mechanism (ESM) — would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.

More Challenges Coming

Continue Here

Germany Blinks After All-Night Fight; Italy and Spain Still Not Happy; For Now, Futures Are

Courtesy of Mish.

It’s a love-fest in Asia futures once again, but will it hold on Friday or through the weekend?

One thing’s for sure, sentiment was so sour about this 19th summit, that any bit of good news stood a decent chance of temporarily igniting the market.

You can actually credit German chancellor Angela Merkel for that sour sentiment because she repeatedly stated Germany would not give in. The latest reports suggest Germany did blink, but not enough to please Italy, Spain, and France.

The fact remains that Italy, Spain, and France all want something that is virtually impossible. They demand actions that are against the German constitution. Simply put, it’s not going to happen.

Meanwhile, let’s tune in to what has the futures all excited.

All Night Fight

Please consider the Financial Times report Eurozone officials in all-night aid fight

German officials gave their clearest indication to date that they were prepared to intervene to shore up Italian and Spanish borrowing costs, saying eurozone leaders should use existing powers with their €440bn rescue fund for short-term help.

After weeks of insisting they would not budge on short-term measures, the sudden German acquiescence led to a flurry of activity in Brussels, where EU leaders gathered for the latest in a series of high-stakes summits intended to solve the crisis.

Unexpectedly, senior officials from all 17 eurozone finance ministries met on the sidelines of the summit to weigh emergency plans for Rome and Madrid which focused on using the rescue fund to buy Italian and Spanish bonds to reverse the recent spike in yields.

That certainly isn’t much.
Indeed this next snip seems far more meaningful in a negative sense.

The political stakes for Mr Monti also rose on Thursday. Giorgio Napolitano, the Italian president and a strong Monti backer, said that political support for his technocratic government was slipping – an implicit warning to European leaders that Mr Monti needed to return from Brussels with assistance.

“Conflicts and political polemics among the forces that support this government are increasing,” Mr Napolitano said a written statement.

Euro Surges After EU Leaders Renounce Seniority

Continue Here

Other Fat Tail Risks Beside Europe

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

The European situation has now morphed into a scene where rumor after rumor is flung out,  and then algos ramp up in response.  We have seen this time and time again, like clockwork, whenever the markets come under pressure.   One might actually begin to think that Europe’s mess is some how bullish.  What in the world would markets do without the rumors, and rumors of rumors? Thursday 15 point reversal on work that Merkel “cancelled a press conference” took the cake.

Then overnight we hear Europe has some sort of “breakthrough”, the main item being not utilizing pari passu:

– EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS -Bloomberg.  Translated this means the Troika will lose equally with the private holders.

-Agree to open funds (from an un-ratified ESM) without austerity.

– Agree to open funds (from a now underfunded EFSF) to govts “meeting conditions.”

-Recaping of banks directly with aid funds (from the un-ratified ESM and underfunded EFSF) , this is not new.  The big “unnoticed” news of the night, Monti said bailout funds will not be increased, which to me suggests Germany has indicated this is all you have to work with.

-Leaders agree to create a single supervisory body for banks by year’s end as a condition to allow them to be recapitalized directly. The seniority may help Spain and Italy at the expense of Germany, watch the yields. Apparently Merkel went home in a tizzy and without comment.

The whole notion of Germany (only 30% of Europe’s GDP) being willing to dilute its Bund market, without very strong fiscal controls (that Germany runs) over the insolvents, is really a non-starter.  The insolvents don’t seem to want to play along, and the Germans know it.  And Germany well knows it is too small to be the savior of Europe.  Polls in Germany show 79-14 opposition to eurobonds. This scene is being called a “deadlock”, but the odds are now high that everything breaks down.

Elsewhere, all the stresses around the world has resulted in a situation where USD reserves held at the Fed are being returned home. In the past that has always been a precursor to a major crisis in the world, Mexico 1982, Soviet Union 1990, Asia crisis 1998-99, and the tech bust 2001. Although Europe is the obvious source of this, I wonder about China as well.

Europe has gotten so absurd, that in some respects, other news has my attention. Nike (NKE) was down 12% after hours on an earnings short fall. When Nike was discussing China, the terms used vacillated between perfect storm and speed bump.  Ford also confirmed that costs in Asia were running higher than volumes.  Perfect storm seems more suited to just about everything going on globally.

Now that the very expensive disease care system is all ready to deliver a final blow to the Treasury,  the sistema primes more sick people via a food stamps program with no restrictions on what “food” one can buy [The Big Business of Food Stamps]. Totally ludicrous.

 

For additional analysis on this topic and related trades subscribe to Russ Winter's Actionable – risk free for 30 days.The subscription fee is $69 per quarter and helps support Russ.s work on your behalf. Click here for more information.

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to The Wall Street Examiner.

Charting The End Of 'Stock-Picking' Alpha

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We recently commented in detail on (and often discuss) the extreme high correlations across not just asset-classes but across all individual stocks. As Goldman notes today, correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages.

There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers (for instance, the severity of the great recession and the ongoing deleveraging in developed economies which maintains a high risk of another recession given the lack of fiscal and monetary flexibility) that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced and adding value by stock-picking is reduced (as evidenced by the notable drift lower in long/short hedge fund performance). This introduces a chicken-and-egg problem with regards to the growth in index investing and trading – while it has likely contributed, it is more likely a symptom than the cause of higher correlations. With currently elevated macro risks investors have a better chance to generate alpha by focusing on 'trading' and picking equity indices rather than stock-picking. Only with a sustained improvement in macro conditions are equity risk premia and correlations likely to decrease.

Equity correlations in developed markets reached new highs since the “Great Recession” and have stayed elevated since then.

 

S&P 500 1-month rolling correlations exhibit some seasonality—they drop at the beginning of the year and during earnings seasons.

S&P 500 ETF values traded are much larger compared underlying cash equity values traded for the index.


More focus on macro investing—higher ETF and index trading volumes might be symptom rather than the cause of higher correlations. Equity correlations are driven by current macro conditions and risks.

Traditional stock-picking (or alpha generation) can get more difficult with higher equity correlations. Equity long/short hedge funds tend to perform less well in periods of high correlations.

With currently elevated macro risks investors have a better chance to generate alpha by focusing on trading and picking equity indices rather than stockpicking – especially with ETF volumes now dominating individual stock volumes!

Charting The End Of ‘Stock-Picking’ Alpha

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We recently commented in detail on (and often discuss) the extreme high correlations across not just asset-classes but across all individual stocks. As Goldman notes today, correlations across equities reached new record high levels during the financial crisis and remain extremely elevated compared to long-run averages.

There are both structural (for instance, the dramatic rise in popularity of ETFs) and cyclical drivers (for instance, the severity of the great recession and the ongoing deleveraging in developed economies which maintains a high risk of another recession given the lack of fiscal and monetary flexibility) that are causing this shift. This high level of equity correlations has huge implications for the investment community as opportunities for diversification are significantly reduced and adding value by stock-picking is reduced (as evidenced by the notable drift lower in long/short hedge fund performance). This introduces a chicken-and-egg problem with regards to the growth in index investing and trading – while it has likely contributed, it is more likely a symptom than the cause of higher correlations. With currently elevated macro risks investors have a better chance to generate alpha by focusing on 'trading' and picking equity indices rather than stock-picking. Only with a sustained improvement in macro conditions are equity risk premia and correlations likely to decrease.

Equity correlations in developed markets reached new highs since the “Great Recession” and have stayed elevated since then.

 

S&P 500 1-month rolling correlations exhibit some seasonality—they drop at the beginning of the year and during earnings seasons.

S&P 500 ETF values traded are much larger compared underlying cash equity values traded for the index.


More focus on macro investing—higher ETF and index trading volumes might be symptom rather than the cause of higher correlations. Equity correlations are driven by current macro conditions and risks.

Traditional stock-picking (or alpha generation) can get more difficult with higher equity correlations. Equity long/short hedge funds tend to perform less well in periods of high correlations.

With currently elevated macro risks investors have a better chance to generate alpha by focusing on trading and picking equity indices rather than stockpicking – especially with ETF volumes now dominating individual stock volumes!