Mish's Global Economic Trend Analysis

Spain Plans to Merge All Nationalized Banks Into Gigantic Bad Bank; Merging Small Cesspools Creates Bigger, Deeper, Smellier Cesspools

noreply@blogger.com (Mike Mish Shedlock) — Thu, 24 May 2012 19:21:00 +0000

After repeated denials of the creation of a combined "bad bank", Spain's economy minister Luis de Guindos is discussing creation a public body merging all the smaller bad banks into one gigantic bad bank, equivalent to 20% of the entire Spanish banking sector.

Courtesy of Google Translate from Libre Mercado, please consider large public bank under state control.

The Government is considering the possibility of creating a public bank that brings together institutions nationalized by the state, which include BFA-Bankia, Caixa Catalunya and Novacaixagalicia, Europa Press reported financial sources.

The Ministry of Economy examines delaying the auction and Caixa Catalunya Novacaixagalicia, waiting to know the binding offers to be submitted to the process of awarding the Catalan and that, if adopted, will be very tight.

The department headed by Luis de Guindos is aware that the latest sanitation requirements established by the Government through new provisions on healthy property portfolio have cooled the already low interest of potential buyers.

The economy minister said on Wednesday in the House of Representatives that after the nationalization of Bankia has opened a new stage in the Spanish financial sector, and that the Government weigh all alternatives before the next auction.

Merging Small Cesspools Creates Bigger, Deeper, Smellier Cesspool

Bear in mind that Bankia, one of the banks in this cesspool merger was formed on December 3, 2010 as a result of the union of seven failed Spanish financial institutions.

In 2012, Bankia was the third largest lender in Spain and the largest holder of real estate assets at 38 billion euros. Bankia is once again in trouble, along with Caixa Catalunya and Novacaixagalicia.

Allegedly the merger of three cesspools into a bigger, deeper cesspool will make the water drinkable. I have news for Luis de Guindos: It won't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Containment Theory Blows Sky High: German Manufacturing PMI Plunges to 45; French Manufacturing PMI Plunges to 44.4, Sharpest Contraction in 3 Years

noreply@blogger.com (Mike Mish Shedlock) — Thu, 24 May 2012 17:10:00 +0000

The Pollyannas who thought the European recession would be short, shallow, and contained to the periphery have another thing coming. All three ideas were downright silly as I have long stated.

French Manufacturing PMI Plunges to 44.4, Sharpest Contraction in 3 Years

Markit reports French private sector output falls at sharpest rate for over three years.

Key points:

Flash France Composite Output Index drops to 44.7 (45.9 in April), 37-month low

Flash France Services Activity Index unchanged at 45.2

Flash France Manufacturing PMI falls to 44.4 (46.9 in April), 36-month low

Flash France Manufacturing Output Index declines to 43.6 (47.5 in April), 36-month low

Latest Flash PMI® data signalled that the decline in French private sector output accelerated further in May.

Marked declines in activity were recorded in both the manufacturing and service sectors during May. In the former, output decreased at the fastest pace in three years, while in the latter the rate of contraction was unchanged from April’s substantial pace.

Lower activity reflected a further marked reduction in new business during May. The latest drop in new work was at a rate broadly unchanged from April’s three-year record. Panellists commented on weak market demand, lower client activity levels and economic uncertainty as factors leading to the latest fall in new business. Manufacturers reported a particularly sharp reduction in new orders, with the latest decline the fastest for just over three years.

Outstanding business fell at the sharpest rate since July 2009, with declines recorded in both manufacturing and services. Employment also decreased at a faster pace in May, with the latest drop the sharpest for over two years. Job shedding was broad-based across both sectors, with manufacturers indicating the steeper decline in payroll numbers.

German Manufacturing PMI Plunges to 45

Markit reports German private sector returns to contraction.

German private sector returns to contraction. Manufacturing output falls at sharpest pace for nearly three years, offsetting resilient services growth.

Key points:

Flash Germany Composite Output Index at 49.6 (50.5 in April), 6-month low.

Flash Germany Services Activity Index at 52.2 (52.2 in April), unchanged.

Flash Germany Manufacturing PMI at 45.0 (46.2 in April), 35-month low.

Flash Germany Manufacturing Output Index at 44.6 (47.3 in April), 35-month low.

Manufacturers in Germany pointed to a drop in output for the second month running, and the rate of reduction was the steepest since June 2009.

May data highlighted divergent employment trends across the manufacturing and service sectors. Net job hiring returned to the service economy, but manufacturers signalled the greatest degree of workforce reduction since February 2010.

German private sector input cost inflation was robust and slightly faster than in April, while output charges increased at the sharpest pace since July 2011. The indices measuring inflationary pressures also showed a divergence between manufacturing and services during May.

Manufacturers reported the lowest level of input price inflation for four months, but service providers signalled a much sharper rise in their cost burdens over the month. Moreover, output price inflation in the service economy hit a 14-month high, while factory gate price inflation across the manufacturing sector was the weakest since November 2011.

European PMI Plunges

For a look at the European PMI in general please see Eurozone PMI Disaster - Worst Downturn Since Mid-2009, Manufacturing and Composite at 35-Month Low; Expect Numerous GDP Downgrades, Missed Budget Targets

In the above link I stated "Europe is in a full-blown recession and for the first time in about a year we did not see any Pollyanna comments from Markit economists. Perhaps the news has sunk in that as I have repeatedly said, this recession will be long and deep and Germany would not escape."

More Pollyanna Comments from Markit

I spoke way too soon. Check out this nonsense from Tim Moore, Senior Economist at Markit on the German PMI report:

"Services growth held its ground during May, highlighting resilient domestic demand, but weakening manufacturing output brought the German economy at large into mild contraction for the first time since last November. The underperformance of manufacturing relative to services has not been as extreme since the low point of the recession in early 2009, with a key driver then as now being a steep downturn in export sales. May’s drop in manufacturing production was the steepest in nearly three years, and the current period of falling new orders now almost matches the length, though not the depth, of the contraction in 2008/09.

“Continued service sector growth and job hiring is therefore providing an important counterbalance to manufacturing weakness. May’s upturn in service providers’ confidence about the year ahead outlook is especially encouraging given the headwinds facing the manufacturing sector and ongoing worries among firms about how the euro crisis will play out.".

Service Sector Sap

Please, spare me the sap about service sector confidence in the face of severe manufacturing weakness, plunges in new orders, and an overall collapse in the European economy. The German service sector is going to follow manufacturing in due time, probably sooner rather than later.

Every step of the way pollyannas cling to the slightest hope that somehow Germany is going to avoid a recession or will decouple from the European economy. Mathematically it is nearly impossible.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone PMI Disaster - Worst Downturn Since Mid-2009, Manufacturing and Composite at 35-Month Low; Expect Numerous GDP Downgrades, Missed Budget Targets

noreply@blogger.com (Mike Mish Shedlock) — Thu, 24 May 2012 15:35:00 +0000

Markit Reports Eurozone PMI Suffers Worst Downturn Since Mid-2009

Flash Eurozone PMI

Composite Output Index at 45.9 (46.7 in April). 35-month low.

Flash Eurozone Services PMI Activity Index at 46.5 (46.9 in April). 7-month low.

Flash Eurozone Manufacturing PMI at 45.0 (45.9 in April). 35-month low.

Flash Eurozone Manufacturing PMI Output Indexat 44.7 (46.1 in April). 35-month low.

The Markit Eurozone PMI® Composite Output Index fell to a near three-year low in May, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index fell for the fourth month in a row to 45.9, down from 46.7 in April, to signal the fastest rate of decline of private sector economic activity since June 2009. Output has fallen eight times in the past nine months

Activity fell at the fastest rates for seven months in services (and the second-fastest in 34 months), while manufacturing production dropped at the steepest rate since June 2009. The goods-producing sector posted the stronger overall rate of contraction.

Incoming new business in the Eurozone private sector declined for the tenth successive month in May. Moreover, the pace of contraction was the fastest over this sequence, and the strongest since June 2009. Manufacturers continued to post a steeper drop in new orders than their service sector counterparts. France posted a steeper drop in new business than Germany, while the rest of the Eurozone continued to see a stronger average rate of decline than the ‘big-two’.

Reflective of the sustained fall in new workloads, private sector firms in the Eurozone continued to post declining outstanding business mid-way through Q2. The rate of decline was little-changed from April’s 33-month record. By sector, manufacturing and services registered broadly similar rates of contraction. The ‘big-two’ both posted weaker falls in backlogs than the rest of the Eurozone.

Private sector employment in the Eurozone declined for the fifth successive month in May. The rate of job shedding was close to April’s 26-month record, but modest overall. This reflected a return to workforce growth in Germany, albeit at a marginal rate. Jobs were cut for the third month running in France, and for the twelfth consecutive month outside the ‘big-two’ on average.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: “The flash PMI indicated that the Eurozone downturn gathered further momentum in May, with business activity and new orders both falling at the fastest rates for just under three years. “The survey is broadly consistent with gross domestic product falling by at least 0.5% across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany.

Full-Blown Recession

Europe is in a full-blown recession and for the first time in about a year we did not see any Pollyanna comments from Markit economists.

Perhaps the news has sunk in that as I have repeatedly said, this recession will be long and deep and Germany would not escape.

Expect Numerous GDP Downgrades, Missed Budget Targets

All GDP estimates from the Eurozone to-date have been pure bunk. Expect numerous downgrades after this disastrous report. If countries are to meet debt-to-GDP targets still more austerity measures will be forthcoming which will mean more layoffs, higher unemployment, and lower revenues.

In short, Spain, France, Italy will find it impossible to meet budget targets as the recession picks up steam.

Containment Theory Blows Sky High

For a look at just released PMI reports from Germany and France, please see Containment Theory Blows Sky High: German Manufacturing PMI Plunges to 45; French Manufacturing PMI Plunges to 44.4, Sharpest Contraction in 3 Years

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

China Manufacturing PMI Softens Again, In Contraction For 6 Months; Defaults and Deferrals on Commodity Contracts; As Long As Pigs Have Wings

noreply@blogger.com (Mike Mish Shedlock) — Thu, 24 May 2012 06:13:00 +0000

Defaults and Deferrals on Commodity Contracts

The Financial Times reports China buyers defer raw material cargos

Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.

The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices.

A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.

China’s economy grew 8.1 per cent in the first quarter from the same period of 2011, the weakest rise in nearly three years but still pointing to a so-called soft landing.

Fantasyland Scenario

Pray tell how or why does any of this portend a soft landing?

The next two paragraphs are more realistic.

Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.

Soft commodities such as soybeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said.

China Manufacturing PMI Softens Again, In Contraction For 6 Months

China shows modest deterioration in operating conditions during May according to HSBC Flash China Manufacturing PMI.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow. Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption.

As long as the easing measures filter through, China will secure a soft landing in the coming quarters.”

"As Long As Pigs Have Wings"

The question of the day is: How does Markit find these perpetually bullish clowns every month for every country?

Here's my "as long as" thesis: As long as pigs have wings, they will fly.

I am amused that the vast majority of economists still have not figured out that pigs don't have wings and neither does the China soft landing theory.

For further discussion, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Cash Crunch Hits Greece, Government Stops Paying Pharmacies, In Turn Pharmacies Make Patients Pay Full Cost

noreply@blogger.com (Mike Mish Shedlock) — Thu, 24 May 2012 00:59:00 +0000

The Troika wants Greece to make another cut in health-care spending including drugs. However, the government is already not paying pharmacies. In turn pharmacies demand 100% payment or patients do not get drugs. Please consider Greeks pay full price for medicines

Millions of Greeks are being forced to pay full price for essential medicines because the state health system has run out of cash to pay pharmacies for supplying prescriptions, health officials said on Wednesday.

Pharmacy owners staged a 24-hour nationwide strike to press the government to start paying arrears of €250m for prescriptions issued in March and April after last-minute talks on Tuesday between Panagiotis Pikrammenos, the prime minister, and union officials broke down.

The dispute highlights Greece’s mounting cash flow problems amid recent political turmoil. While the finance ministry achieved spending targets agreed with international lenders, social insurance funds used up half their annual budget allocations in the first four months, according to official figures.

“There is a cash crunch. … The state has stopped funding [the National Organisation for Health Care Provision] EOPPY, and they have stopped paying us,” said an official from the PanHellenic Pharmaceutical Association. ‘We cannot continue to subsidise the health service out of our pockets.”

The move to make patients pay the full cost of prescription medicines started last month when state payments were suspended as Greece headed for elections. Pharmacies are owed a total of €520m by EOPPY and other social insurance funds for prescriptions supplied in the past year, the same official said.

Patients who previously paid prescription charges of between 10 and 25 per cent are now having to pay the full price for medicines, including those used to treat cancer and heart conditions, and seek refunds from social insurance funds that are members of EOPPY.

More Blood From Turnips

Greece is going to miss its next budget targets and in response will have to hike taxes or cut more spending. More tax hikes will mean more business failures and still lower revenues.

Just what does it take for the idiots in Brussels to see that Greece is insolvent and the current plan to extract more blood from turnips cannot possibly ever work?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Housing Debate: Economist Gary Shilling Expects Another 20% Drop, PIMCO's Mark Kiesel's Says Time to Buy; Mish Says Debate a "Mixed Bag"

noreply@blogger.com (Mike Mish Shedlock) — Wed, 23 May 2012 17:25:00 +0000

In a Housing Showdown on Bloomberg TV, Economist Gary Shilling & Mark Kiesel Go Head-to-Head.

Housing bear Gary Shilling and housing bull Mark Kiesel of PIMCO debated the state of the U.S. housing market on Bloomberg Television’s “Street Smart” with Trish Regan and Adam Johnson.

Shilling said that housing prices will decline 20% this year because “there are 2 million inventories, both visible and shadow inventories, over and above normal working levels”, which is “a tremendous overhang.” He went on to say that “excess inventories are the mortal enemy of prices.”

Kiesel justified his bullish stance on the market, saying that, “all inventories you look at, whether new existing or shadow, they are coming down” and “there is only 144,000 new home sales for sale. That’s at a 49-year low.”

Transcript

Kiesel on purchasing a home in California and whether he’s having buyer’s remorse:

“No. I will say it is a little chaotic because there are a lot of boxes around. I think after renting for six years, my view is that housing prices have fallen about 35% and the inventories are coming down and banks are starting to lend again gradually. U.S. housing looks very cheap relative to international housing. I feel good about putting some money into housing right now.”

Shilling on why housing prices will decline 20% this year:

“Because of excess inventories. We estimate that there are 2 million inventories, both visible and shadow inventories over and above normal working levels. That is a lot. Back in normal times, we built about a million and a half houses a year, so two and a half million is a tremendous overhang. Excess inventories are the mortal enemy of prices. What may happen here is that now that the robo signing flap is settled and the big banks settled for $25 billion with the various state attorneys general and the federal government, they have been holding off on foreclosures because they had enough bad PR. Now they have settled that, I think they will go back to foreclosures. The National Association of Realtors says that when foreclosed houses are sold, they sell at a discount of 19% to existing houses and that drags everything down when you get a big dumping of these houses on the market. I'm looking for another 20% decline and that is what it would take to bring them back to the long-term averages. They go back to 1890 in terms of median single-family house prices.”

Kiesel on how he factor in those inventory levels:

“Currently, we have 2.5 million homes in existing inventories which is down in the last seven years from 4 million. There is only 144,000 new home sales for sale. That’s at a 49-year low. The existing inventory is at a seven-year low. If you look at the shadow inventory, there were 3.6 million homes that were 90+ days delinquent two years ago. Today, there is only 2.9. All inventories you look at, whether new existing or shadow, they are coming down.”

Shilling’s response:

“They are coming down, but they are still huge…Yeah, they are down, but when you count in the shadow, and particularly this category that the Census Bureau has, which are houses held off the market for other reasons, very descriptive. This includes foreclosed houses that are vacant, but not yet sold. It includes houses that people have listed, but they couldn’t stomach the bids they got so pulled them off the market. You count all of that in and you are still over a working inventory of about 2.5 million. You are still 2 million above that when you count everything in.”

Kiesel on what number he’s tracking:

“What I was quoting was the 90+ day delinquencies. If you add that with the foreclosures, you do get to the 3.9 level. The thing about housing is that it’s very much a regional market. The homes that your viewers and people actually would want to buy, you need to look at the existing inventory that is quality. Go out and look for a house now. There is less quality inventory on the market today than a year ago. That shadow inventory will get absorbed quicker than you think because the implied rental yields is roughly 5%-12% in a lot of markets, so investors will line up. Gary, I respect your work and I read your books and if housing goes down 20%, I will back up the truck and likely PIMCO will, too.”

Shilling’s response:

“That's right. At that point the percentage underwater of mortgages would go from now 23% to our estimate is 40%. The equity of people who have mortgages which has come from almost 50% in the early eighties to 17% would go down to about 7%. Virtually nobody with a mortgage would have any equity. What that would do to consumer spending to say nothing to mortgages and mortgage-backed securities derivatives, that is pretty heavy duty stuff. That is recessionary kinds of things. We think that will happen over the next three-four years, one way or the other.”

Kiesel on whether employment levels are at a stage at which consumers are feeling confident enough to make an investment in buying a home:

“If you look at it, we have added 2 million jobs in the private sector over the last year. Confidence is picking up. The U.S. economy is doing well in numerous states and sectors like energy pipelines, technology, autos, manufacturing. There are many areas in the country where there is a housing shortage. The shadow inventory and the amount of homes underwater, there are 11 million homes but it is concentrated really in three states: Arizona, 61%, Florida, 45%. Yes, there are some weak areas, but the fact is that in certain areas, housing is picking up and prices are going up and so again, it’s very regional.”

Shilling’s response:

“You and I can remember almost a decade ago as this problem was developing and we were on top of it and you were too, that people initially said, the problem was only in subprime mortgages and those are loans that luckily people will never have to meet. Then, they said it is only in Arizona and Florida and Phoenix. Then as it expanded, they said it is bicoastal, don’t worry. Everyone else is safe. Tip O’Neill said that all politics is local and you can say the same thing about real estate. Somehow, the composite, the national numbers are made up of those local pieces. There are a lot of shortages here or the other place. That I think is begging the question, overall, there is still a tremendous excess inventory.”

Kiesel on whether he’ll lower his assumptions about the economy:

“We are looking at basically 1-1.5% real GDP, but you don't necessarily need superfast GDP to get housing to recover. Housing again is down 35%. The inventories are coming down. We are gradually employing more people. Housing relative to other asset classes—equities, bonds—looks attractive.”

Shilling on the New York-area housing market and whether Wall Street money not being what it used to be has affected real estate:

“I think it very much does. If you look at what is happening to the stock markets and related securities in the last month--if this continues, I think we will see a lot of softness in Manhattan and in the Hamptons and other places influenced by that. If you read off the employment verses GDP curve, if you're looking at even 2% real GDP growth, that says that the unemployment rate would chronically rise about 1% point a year.”

Kiesel on the West Coast housing market:

“Housing is very much based on jobs, based on consumer confidence. We were in the subprime capital of the world in parts of Orange County and we can show you houses that are down 50-60%. In my neighborhood, housing prices fell 20-30% from the peak. The economy is not a recession, we are growing, and banks are flush with cash willing to lend gradually and the Fed is set to reflate. The key here is that you want to own a hard asset in a world of very low to negative real interest rates where the Fed is going to print money. You have to own something tangible.”

Kiesel on the opportunity cost of buying a home:

“I think stocks are looking at basically nominal GDP, which is 4% plus dividends of maybe 2, so you are looking at 6. There are rental yields in housing out there above that. Plus, you get the benefit of actually living in the house. From my perspective, I still think that housing beats a lot of asset classes.”

Kiesel on whether PIMCO is looking at housing as an alternative to bonds:

“We own non agency mortgages and those securities benefit from a housing recovery. If Gary is right and we do see housing prices go down 20%, the U.S. will be one of the cheapest housing markets in the world. It is already near one of the cheapest.”

Shilling’s response:

“Actually, it would take a 22% decline in median single-family house prices to bring them back to the long-term trend that Bob Schiller has identified going back to 1890. That has been corrected for CPI, general inflation, and for the tendency for houses to get bigger over time. That would bring them back to the norm. They might seem cheap but there are only where they would have been for over a century.”

End-Transcript

Debate a "Mixed Bag"

Mish Points

I do not think the bottom is in. Yet, I doubt another 20% decline is coming nationally.
Some high-priced markets may see huge declines, other areas may have already bottomed.
Inventories are down but still high, especially if one counts shadow inventory and pent-up demand for retiring boomers to downsize.
Shadow inventory and changing demographics will suppress prices for a long time. Student debt will suppress housing formation for years to come as well.
Attitudes have changed. Housing is once again considered a place to live, not a retirement savings plan.
Exuberant attitudes reached a multi-decades peak in 2005. Some overshoot to the downside is expected and it will take years for attitudes just to return to normal.
I side with Kiesel on the idea that "housing beats a lot of asset classes." In relative terms it is certainly possible to envision housing declines of 10% and equity markets declining 33% or more. While not a prediction, that seems like a reasonable possibility so forget about relative terms and concentrate on the absolute.
In absolute terms, housing is only a very good buy in areas at or near bottom, and then only if one has a stable job.
Looking ahead, where are home prices going even after they bottom? My answer is nowhere fast. Yet nowhere fast, is likely to beat equities.
Gold is a very nice hedge here against many possibilities.

One thing is for sure, when attitudes change to "it's better to rent" (and they have), a bottom is reasonably close.

This is how I currently see things.

click on chart for sharper image

For further discussion, please see New American Dream is Renting; Reflections on Renting Houses, Cars, Books, Clothes; Will Rentership Fuel the Next Boom? What About Home Prices?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Flight to Safety: German 2-Year Bonds Yield Hits Zero; Eurozone Officials Tell Countries to Prepare for Greece Exit

noreply@blogger.com (Mike Mish Shedlock) — Wed, 23 May 2012 14:57:00 +0000

The once taboo subject of a Greek departure from the eurozone cracked in the past couple of weeks, primarily with threats to Greece.

Today the exit discussion dam broke wide open as Eurozone tells members to make contingencies for "Grexit"

Euro zone officials have told members of the currency area to prepare contingency plans in case Greece decides to quit the bloc, an eventuality which Germany's central bank said would be "manageable".

Three officials told Reuters that the instruction was agreed on Monday by a teleconference of the Eurogroup Working Group (EWG) - experts who work on behalf of the bloc's finance ministers.

"The EWG agreed that each euro zone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro," said one euro zone official familiar with what was discussed.

For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not huddled beforehand to agree positions, marking a significant shift in the Franco-German axis which has traditionally driven European policymaking.

Instead, new French President Francois Hollande met Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit.

A German two-year debt auction gave a stark illustration of how money is dashing for safe havens. Investors snapped up the 4.5 billion euros of paper on offer even though it came with a zero coupon - offering no return at all.

One proposal on the table is for the euro zone's rescue funds to be allowed to recapitalize banks directly, rather than having to lend to countries for on-lending to the banks.

But that is another idea with which Germany is uncomfortable, even though Merkel said on Tuesday a way should be found to dismantle banks across borders, a possible nod to a pan-euro-zone bank restructuring scheme

Here is one for the surprising candor and honesty department:

Dutch Prime Minister Mark Rutte said "The hard truth is that there are no magic solutions to solving this crisis. We will all have to keep our spending in check, pay off our debts and swiftly introduce healthy reforms. This is what will kickstart growth."

The one major thing missing is that bondholders, not taxpayers need to take a substantial hit. Only after equity holders and bondholders are 100% wiped out should any public funds come into play.

Addendum:

Reader Donn replies "public pensioners should take a haircut before taxpayers in general", an idea of considerable merit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Japanese Debt Downgraded by Fitch; No Urgency for Japan (Until Sudden Panic Hits)

noreply@blogger.com (Mike Mish Shedlock) — Wed, 23 May 2012 08:02:00 +0000

With Japan's public debt about to hit 240% of GDP, Fitch Downgrades Japan's Sovereign Rating

The ratings agency Fitch on Tuesday lowered its assessment of Japan’s sovereign credit to A+, an investment grade just above the likes of Spain and Italy, and criticized Tokyo for not doing more to pare down its burgeoning debt.

Japan’s public debt will hit almost 240 percent of its gross domestic product by the end of the year, Fitch warned.

The new rating also heightens the pressure on Prime Minister Yoshihiko Noda to rein in spending and raise taxes at a delicate time, when the Japanese economy is still recovering from natural and nuclear disasters last year.

Mr. Noda has warned that Japan could eventually face a debt crisis akin to that afflicting Europe and is staking his job on a plan to double the consumption tax rate to 10 percent by late 2015. That increase, he has argued, is necessary to pay for soaring welfare costs and pension payments.

But lawmakers even within his own party have attacked the plan, saying it would put a damper on growth just as Japan’s recovery gets on track. Even if Japan does double its sales tax, the revenue will most likely not be enough to balance in the medium term.

According to the statement, Fitch lowered Japan’s long-term local currency rating to A+ from AA. It also cut the country’s foreign currency rating to A+ from AA. Fitch said the outlook was negative for both.

The A+ rating puts Japan four notches below the ratings of other major economies like the United States, Britain, France and Germany, which all retain the top AAA rating from Fitch. Japan’s grade is now just one notch above Spain’s and two above Italy’s, countries that have struggled in the European debt crisis. Two other global ratings agencies, Standard & Poor’s and Moody’s Investors Service, lowered Japan’s credit rating last year.

No Urgency for Japan (Until Sudden Panic Hits)

As Japan's debt careens out of control, Keynesian clowns do not want to do anything about it for fear of hurting the recovery. They have been saying the same thing for over 20 years.

Nonetheless, the rally cry remains No Urgency for Japan to Deal With Debt.

With Japan awash in cheap funding provided by domestic savings and local banks continuing to park their cash in government bonds, analysts tell CNBC the country faces no urgency in dealing with its rising public debt, despite the latest ratings cut by Fitch.

The likelihood of a Europe style debt crisis for the world's third-largest economy remains low, say analysts, because over 90 percent of government debt is domestically owned.

"For as long as Japan's debt is well-held by local savers and local investors - 93 percent - the impact, I think, on risk assets is going to be quite marginal," John Woods, Chief Investment Officer, Citi Private Bank told CNBC's "The Call" on Wednesday.

Those low yields, however, also mean policy makers are under no pressure to deal with total debt that is more than twice as large as the country’s $5 trillion economy. Japan’s government has submitted plans to double the sales tax by 2015 but the law could split the ruling party and force early election, according to Reuters.

"As long as these yields remain at such historically low levels, the impetus for the government to meaningfully change and reform its environment is going to be quite limited," Woods said.

Thomas Bryne, senior vice president at Moody’s Investor Service, said on CNBC’s “Asia Squawk Box” Wednesday that his firm had issued plenty of negative commentary since it downgraded Japan in August last year.

“We’re concerned about the slippage in exports, perhaps the slippage in current account surplus, probably more concerned about the slippage in the fiscal deficit and we also note that attempts to put Japan on a long-term sustainable fiscal track are still partial and tentative,” he said.

"As Long As ..."

The words "as long as" appeared twice in the above article. The key phrase was "As long as these yields remain at such historically low levels ...".

Japan will go from no sense of urgency to panic urgency in a short sudden burst. Unfortunately, I cannot tell you when. However, I can say that the slippage in exports and current account surplus is very important.

Given Japan's aging demographics, pension plans became net sellers of bonds last year.

For now, Japanese corporations purchase enough bonds to stem the tide. However, if exports collapse or interest rates rise significantly for any reason, the party will be immediately over.

Bear in mind that "significantly" means a mere hike in the 10-year rate to 2.5% or so, perhaps less. Such a hike would consume 100% of Japan's revenues just to meet interest on the national debt.

At that point, whenever it is, the choice for Japan will be print or default. Either way, panic will set in along with a full-blown global currency crisis.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Germany Rules Out Eurobonds for 104th Time; Damned if They Do, Damned if They Don't

noreply@blogger.com (Mike Mish Shedlock) — Tue, 22 May 2012 21:21:00 +0000

I have no idea what the actual number of times Germany Has ruled out Eurobonds. It could be 504 or even 1004. I Made up the number 104 which simply means "a lot".

Nonetheless, the Eurobond idea resurfaces every other week or so, and every time, someone from Germany (typically Merkel, the Bundesbank, or the Finance Minister) rules them out.

Once again, this time under pressure from French president François Hollande, Germany rules out common euro bonds.

Germany refused to share the debt burden of stressed eurozone peers on Tuesday, ignoring two of the most influential international economic bodies which offered support for proposals championed by Paris, Rome and Brussels ahead of a summit.

Angela Merkel, Germany’s chancellor, has argued that any co-mingling of eurozone debt would remove incentives for southern economies to adopt structural reforms. The calls from the International Monetary Fund and the Organisation for Economic Co-operation and Development came on the eve of Wednesday’s EU summit.

François Hollande, France’s new president, has strongly backed common eurozone bonds – which would ease funding constraints for the eurozone’s stressed periphery but potentially raise German borrowing costs by diluting its creditworthiness across the currency union.

German officials made clear the idea was a non-starter in Berlin.

“There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them,” one senior German official said, adding Berlin would not drop its opposition in the foreseeable future. “That’s a firm conviction which will not change in June.”

Diplomats said the summit, which just last week looked like it would be a highly scripted affair on European growth, had become increasingly unpredictable, with leaders struggling with how to respond to the havoc wreaked by political instability in Greece. Officials emphasised that no formal decisions would be taken.

The euro bonds debate could produce fireworks between Mr Hollande and Ms Merkel – a possibility that has captivated officials involved, given the comparatively harmonious Franco-German relationship in the latter years of Nicolas Sarkozy’s tenure. But most diplomats believe Ms Merkel would succeed in blocking any proposal, producing more smoke than fire.

Damned if They Do, Damned if They Don't;

“They say that when Germany and France don’t co-operate, we have a problem,” one senior diplomat from a smaller EU country said. “And when they do, we have a problem, too.”

The paragraph from the article sums up the situation nicely. Europe is scrambling madly for a solution acceptable to everyone, but the only solution that works is the one no one wants to hear: a breakup of the eurozone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gold Does Not Pay Interest (Neither Do Dollars in Your Wallet); Questions On Swapping Gold For Silver; Gold and Gold Shares Bottoming?

noreply@blogger.com (Mike Mish Shedlock) — Tue, 22 May 2012 16:37:00 +0000

Please consider an interview with Adam Fleming and James Turk on precious metals and mining. James Turk is founder of GoldMoney.

Interview Synopsis

Adam Fleming, Chairman of Wits Gold and Fleming Family & Partners, discusses the gold bull market with GoldMoney's Chairman James Turk. Topics include metal price action, the eurozone's debt crisis, and mining in South Africa.

Adam points out that gold bull markets usually result in a 1:1 Dow/Gold ratio, something that he expects to see happen in the coming years. In other words, it is still a great time to buy gold.

Adam is pessimistic about the eurozone, and thought plans for European Monetary Union were delusional, on account of the differences in culture and political economy between different European Union countries. He also discusses his mining experience in South Africa, and why – contrary to much negative press the country gets – it is actually still a great place to live and work. He expects companies to increase their mining investments in the Witwatersrand Basin, and thinks that this region will remain the world's premier gold mining location.

This video was recorded on May 18 2012 in Jersey, British Channel Islands.

Relationship With GoldMoney

Once again I need to point out I have a relationship with GoldMoney.

I have no comment on the relative value of South Africa miners or any set of miners from any country vs. another country. Instead, I suggest in general that miners and gold are undervalued here.

The interesting part of the interview is where James Turk and Adam Fleming discuss interest rates and currencies.

Gold Does Not Pay Interest (Neither Do Dollars in Your Wallet)

The knock on gold is that it does not pay interest. However, as Turk points out, the US dollar bears no interest either. Nor does the Australian dollar, the Loonie, the Euro, or any other currency.

Currencies only bear interest if you loan the money out, thereby converting the currency into a financial asset. Financial assets have risk as we have seen with corporate defaults, bankruptcies of GM, Lehman, Worldcom, and especially the collapse of the housing market in the US.

A collapse of the housing market in Australia and China is underway now as well. In short, the only way to collect interest is to take risk.

Please note that aFull-Fledged European Bank Run is underway now and the reason is fractional reserve lending.

In the above link I explain ....

Why ECB Deposit Insurance is Not the Answer to a Run on the Bank
How FDIC Played a Part in the US Real Estate Bust
That Monetarist Fools are Everywhere
Why People Believe in Gold

As noted previously: For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them.

If anyone wants information about GoldMoney or investing in physical gold and silver in general, please Email Mish

Questions On Swapping Gold For Silver

Numerous people have asked about my post on May 1, I'm Swapping Some Gold for Silver.

There is little to tell. I decided for a portion of my assets I was willing to take the risk-reward setup of silver vs. gold.

While gold is money, I do not know if the free market would turn to silver as money or not.

Silver certainly has a major industrial component, while gold does not, and that makes silver more vulnerable than gold to a global slowdown.

After swapping all my silver for gold (See Taking Silver Profits - Swapping Silver for Gold April 27, 2011) I simply decided to take a little more risk in silver.

Clearly I was early. Should silver get to my original target of the low $20's I will swap more gold for silver. Perhaps silver gets to that price, perhaps not. I do not know, nor does anyone else. At least I do not pretend to.

There is little more that I can add other than silver is more volatile than gold and I still believe overweighting gold vs. silver substantially is a good idea.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greek Voters Need to Look Beyond the Lies of Bloomberg, Merkel, ECB, IMF, Ekathimerini; Greece Nightmare Coming or Already at Hand?

noreply@blogger.com (Mike Mish Shedlock) — Tue, 22 May 2012 06:14:00 +0000

A half-baked editorial on Bloomberg, full of one-sided distortion, warns Greek Voters Need to Look Beyond Syriza’s Dangerous Lies.

Tsipras and his Syriza party are selling the Greek people a falsehood: namely, that Greece can renounce the terms of its bailout agreements with the euro-area governments and still receive their money. If voters believe him, and he attracts enough votes in elections on June 17 to follow through with his threats, then his country, Europe and the global economy will live for years with the consequences.

Tsipras hardly has a mandate -- he won 16.8 percent of the vote on May 6, and may increase that to 20 percent or more in June. But polls suggest Syriza is now fighting for first place with the center-right New Democracy party. In Greece, that matters, because the top party gets an extra 50 seats in the 300-seat parliament.

Europe’s politicians, across the political spectrum, need to make clear the distinction between Syriza and other parties that disagree with Europe’s austerity strategy. They need to say, repeatedly, that they want to help Greece, but they cannot, and it cannot remain in the euro, if its leaders simply abandon the commitments the country signed.

Greeks need to know that when they vote on June 17. And they need to know that what Syriza and its young leader are telling them is a lie.

Snakeoil vs. Lies

It's certainly true that it is highly unlikely for Greece to stay in the eurozone if it defaults on debt.

I am not a fan of lies (and I have pointed out lies by Tsipras). However, I am not a fan of snakeoil, thievery, and one-sided analysis either.

Snake Oil and One-Sided Analysis

Check out the Bloomberg hypocrisy in this statement: "Other Greek politicians say they’ll seek to renegotiate the austerity package, and Europe may now listen."

Bloomberg knows full well those are blatant lies. Bloomberg could have and should have blasted the New Democrats and Pasok leaders for those lies (but chose not to).

Moreover, Bloomberg knows full well nearly all of Greece is dead set against more austerity measures. Bloomberg also knows full well if New Democracy and Pasok came flat out and said the deal will not be renegotiated they would be trounced to smithereens in the next election.

Bloomberg Hypocrisy

Bloombeg ignores the lies of Pasok and New Democracy while blasting a similar lie made by Syriza.

In essence Bloomberg wants to decide which set of lies is acceptable and which isn't.

In contrast, I have pointed out the lies made by all of them.

If Not Now When?

Merkel, the IMF, the ECB, and all the eurocrats in Brussels know another election is coming up. If terms of the bailout were to be renegotiated ever, logic would dictate now is the time.

Are we supposed to believe there will be a significant change of heart in Germany and Brussels after another Troika-clown is Prime Minister?

The rest of Europe is not doing anything to help Greece.

Lending Greece money in which most of the money goes straight back to the lenders to pay interest is not going to help Greece. Nor are hikes in the VAT and other taxes.

Certainly the Pact With the Devil Over Gold is not in Greece's best interest.

Simply put, Tsipras is correct in his desire to tell the Troika to go to hell. The rest of his message is clearly a lie, but at least Tsipras has the essential idea: The only way Greece can get out of its odious debt is to default.

Greece Nightmare Coming or Already at Hand?

The Greek website Ekathimerini is on a major fearmongering campaign as evidenced by Nightmare foretold if Greece heads for euro exit

In Athens, the homeless are on the streets in growing numbers, soup kitchens feed twice as many people as a year ago, and the poor are diving into garbage bins in search of scrap they can sell.

Greece is close to breaking point as it struggles with austerity targets set by creditors, but this is just a foretaste of the nightmare of unrest, hunger and even anarchy that could engulf the debt-crippled nation if it is forced out of the euro.

If the exact economic impact of such a move is hard to nail down - newly issued drachmas devalued by up to 70 percent, runaway inflation, a banking meltdown, a collapse in trade - the implications for ordinary Greeks crushed by the debt crisis are even harder to predict.

Without international bailout cash, salaries and pensions would go unpaid and violence, political extremism and uncontrolled emigration could quickly follow.

Dose of Reality

Let's stop right there for a little dose of reality. The first paragraph alone shows Greece is already in a nightmare scenario.

Greece would have been better off defaulting three years ago, two years ago, and last year.

Yet here we are with Bloomberg and Ekathimerini (among numerous others) fearmongering about a Greek exit.

They should have been equally adept at raising issues why Greece should not be in the Eurozone in the first place.

Since that is water over the dam already, the pertinent question is what is best for Greece going forward. I propose that another 10 years of austerity and depression is not the answer. I also believe that is what Greece is doomed to if it manages to stay in the eurozone that long.

Fearmongering by Ekathimerini Resumes With Intensity

Let's return now to Ekathimerini for some massive fearmongering.

Provopoulos warned as long ago as December that a return to the drachma would be «real hell», with Greeks forced to resort to barter during the transition period between the two currencies, «trading a kilo of olive oil for three kilos of flour».

"NIGHTMARE SCENARIO"

"There will be shortages in basic staples. Without fuel, the army and the police would not be able to move their vehicles.

A former finance minister, Yiannos Papantoniou, saw trouble ahead nearly a year ago: «Greece would not be able to support 11 million people so there will be huge emigration flows,» he told Reuters Insider television last July.

«Disruptions, social disruptions will come. I would say a regime of total anarchy."

What's Best for Greece

Greece needs to do what is best for Greece.

Short-term there will likely be intense breakup pain in Greece if it exits the eurozone. However, if Greece manages its cards correctly, Greece will recover far faster by telling the Troika to go to hell than by living the nightmare for 10 more years.

Icelandic Solution

Greece and Iceland are not the same. Iceland has exports and a work ethic. However, the facts show that Iceland recovered far faster because it had the courage to default, telling eurocrats where to go.

Simply put, Greece has nothing to lose and everything to gain by exiting the euro, the exact opposite of what Bloomberg and most of mainstream media would have you believe.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Comments from Italy on "Financial Terrorism", Taxes, General Economic Condition, and Mario Monti

noreply@blogger.com (Mike Mish Shedlock) — Mon, 21 May 2012 18:02:00 +0000

Financial Terrorism

Reader Andrea from Italy (who now lives in France) has some interesting comments regarding my post on Saturday Italy Deploys 20,000 Law Enforcement Officers to Protect Individuals and Sensitive Sites; Anecdotes From Italy via Canada: Taxed Out of House and Home.

Andrea writes ...

Hi Mish,

I would like to give your readers a better understanding of terrorism in Italy. Italy went through the seventies with a very hard season of terrorist acts.

In the worst period you could count one terrorist act per day: killing or bombing of politicians, managers, journalists and trade unions representatives. The main terrorist organization during those years were the "Brigate Rosse" (Red Brigades).

The climax happened when they managed to kidnap, jail and eventually kill the Italian PM Aldo Moro. Their "five point star" logo is still today symbol of fear and terror in the country.

Along with the "Brigate Rosse", other minor far-left armed organizations have been spreading terror in the country and also many far-right organizations. An involvement of Italian and US intelligence has sometimes been guessed for some these acts. Those years passed to history as the "years of lead", by the metal bullets are made of.

The period of terrorism roughly ended in 1982 with the liberation of US Army Gen. Dozier, kidnapped by Red Brigades. Most of their masterminds and killers have been caught and put in jail or spontaneously surrendered by that time.

Since then, from time to time, some acts are still claimed by Red Brigades.

So the matter of terrorist acts is very, very sensitive in Italy. Unfortunately, the difficult economic environment creates the conditions for a comeback of terrorism.

Best regards,
Andrea

General Economic Conditions, Taxes, and Mario Monti

In a followup on general economic conditions Andrea writes ...

Hi Mish,

I was in Italy a couple of weeks ago and so I have some fresh updates.

The article you mention is mostly correct, but it is worth to add some things and some facts to describe the full picture.

For starters, Italy has a very long and strong "habit" of tax evasion and tax fraud compounded by an extremely high level of criminal activities and presence of criminal organizations in the economy.

This "habit" goes far beyond the economically difficult circumstances, and includes professionals (dentists, doctors, lawyers), retailers and small business.

The phenomenon is so widespread and dramatic that a few figures should help explaining it. Statistics show that owners of luxury cars, yachts or private planes declare in average very few tens of thousands Euros income per year, much less of the value of the objects they own. Clearly, this is simply mathematically impossible!

So far, no government has been able to tackle this issue, for a lack of will and a lack of capacity at the same time. But increasing debt, pressure from financial markets and increasing spending has increased so much the fiscal pressure on those that cannot evade that the problem now could no longer be avoided.

The recent governments have put in place a more and more efficient organization to fight this phenomenon and Prime Minister Mario Monti has now empowered this organization with powers that are really at the limit of democracy, a kind of Orwellian powers including some of the things you see described in the article but also much more. For example, the state now has the power to look into your bank account at any moment without any intervention from your bank.

In principle I do not like these enforcements, as it sounds quite tyrannical but at the same time nothing else seemed to work so far.

Coming back to the point: restoring fiscal loyalty is absolutely necessary for Italy and those measures seem to have effect to this respect.

The problem is that this "fiscal machine" is not making any difference between a fiscal fraud or robbery and simple problems of people that cannot pay because they have no money and they have troubles with their firms.

The latter group should be helped to keep their companies alive during these troubled times. Instead, stories of people that commit suicide after getting a tough payment request from "Agenzia delle Entrate" can be heard almost every day in Italy along with weapon aggression to “Agenzia delle Entrate” employees.

While a fair tax system is needed, this way is going to kill Italian companies.

As I said, nearly every day you can hear and read about entrepreneur suicide stories in the mainstream media. Even Monti had to comment in a press conference.

A mix of things is responsible for this desperation.

Public Administration delayed payments. PA in Italy is currently years behind in payment.

Private customers payment delays or non-payments

Bank unwilling or unable to make loans

Taxes and tough demands from the new "fiscal machine"

Lack of demand in the wake of austerity measures, tax hikes, and general European slowdown

Note the injustice: Central and local governments are agonizingly slow (as in years late) in paying bills but now demand citizens to pay immediately.

Monti approval is now rapidly declining because of tax increases and because of waste of public money.

Best regards,
Andrea

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Full-Fledged European Bank Run; ECB Deposit Insurance is Not the Answer; How FDIC Played a Part in the US Real Estate Bust; Monetarist Fools are Everywhere; Believe in Gold

noreply@blogger.com (Mike Mish Shedlock) — Mon, 21 May 2012 06:58:00 +0000

One chart is all it takes to prove a full-fledged European bank run on the banks is well underway in the Club-Med countries and Ireland.

click on chart for sharper image

The above chart is from the Financial Times article The anatomy of the eurozone bank run by Gavyn Davies.

A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.

The fear of bank runs is deeply ingrained in all economists who know anything about the genesis of the Great Depression in the United States in the early 1930s. Then, the failure of the Bank of United States in December 1930 led to multiple bank runs across the country. Bank failures in the following two years wiped out personal savings and greatly exacerbated the collapse of demand in the economy.

The classic account of the crisis, by Milton Friedman and Anna Schwartz, concluded that the collapse was largely the fault of the Federal Reserve, which failed to provide enough liquidity to keep the banks functioning and thus end the panic.

Classical Nonsense

We need to stop right there for a bit because the "classic account" Davies believes in is complete nonsense. The crisis then and now is a crisis of solvency.

The culprit is fractional reserve lending coupled with fraudulent lending practices that allow banks to secure deposits for 2 years or less but lend money out for 30 years.

The way to stop runs on the bank is easy enough: stop fractional reserve lending and other fraudulent lending practices.

Davies continues with still more nonsense.

After the crash, the establishment of the Federal Deposit Insurance Corporation was intended to ensure that deposit holders never again had to live in fear that their savings would be in jeopardy. What are the lessons for the eurozone?

How FDIC Played a Part in the US Real Estate Bust

Clearly there was fear depositors would lose money and the run on Lehman and Bear Stearns is proof enough.

The irony is there was no fear for the longest time because of FDIC when fear should be a rational worry. That lack of fear led to depositors chasing the highest yields simply because they were government guaranteed.

For example, Corus bank (among numerous others) offered attractive rates and invested deposits in condo construction schemes in Florida, California, and Las Vegas. Were it not for FDIC, no one in their right mind would have put deposits at Corus and other such banks that went bust in the real estate crash.

The fools who did place deposits at such banks seeking higher yields deserved to lose those deposits.

End Fractional Reserve Lending

Under a full-reserve 100% gold-backed banking system, inflation would be nonexistent and bank failures would be few and scattered. Instead, we have seen boom-bust cycles of increasing magnitude with faith placed on FDIC, and that faith contributed to the magnitude of the bust and an enormous failure of hundreds of banks in a short period of time.

In short FDIC should be phased out along with the end of fractional reserve lending.

The rest of Davies' article is a hodge-podge of still more fallacies concluding with ...

Mario Monti apparently took a plan to the G8 summit to offer jointly-funded guarantees on bank deposits to apply across the entire eurozone. This would certainly help, but whether it would be sufficient to eliminate fears of exchange rate losses if the euro were to disintegrate is another matter. To fix that problem, belief in the integrity of the euro as a single currency needs to be restored. The bank run could bring matters to a head.

Belief in the Euro? Why?

Pray tell why should there be a belief in the Euro, especially when the "solution" proposed by Keynsian and Monetarist clowns is simply to print more money to cover fraudulent lending practices by banks, every time banks get into trouble?

Belief in Gold

Note that the US dollar index is right where it was over seven years ago.

The US$ index is at a spot first touched in late 2004. Gold was well under $500 an ounce at that time, so please do not tell me gold is a function of the US dollar.

One of the reasons gold is at $1600 with the US dollar index above 81 is precisely because central banks in general (notably the Fed, the ECB, the Bank of England, and China) have printed nonstop and the Fed and the ECB have initiated all sorts of liquidity and QE measures. In addition, the ECB's balance sheet is more bloated than the balance sheet of the Fed thanks to the LTRO program.

Integrity of Gold

The proper conclusion is that gold is a function of mistrust in fiat currencies in general, not just the US dollar. However, nothing moves in a straight line including faith (or lack thereof) in central banks' ability to handle this crisis.

By now it should be perfectly obvious the LTRO is a complete failure. Banks in Spain took the money and bought more of their own bonds and are now underwater on them.

Only monetarist fools want the ECB to do more of the same. Sadly, monetarist fools are nearly everywhere, and the chart of the price of gold says just that.

In conclusion, if the ECB was to take the action suggested by Davies (and they might), it certainly will do nothing for the "integrity of the euro", but it is highly likely to further the integrity of gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fear vs. Anger: Door-to-Door Fear-Mongering in Ireland on Merkozy Referendum; Expect Fear-Mongering in Greece as Well

noreply@blogger.com (Mike Mish Shedlock) — Sun, 20 May 2012 17:07:00 +0000

Door-to-Door May Drive Irish Towards Yes Vote in Referendum on Merkozy Pact.

In a hard-fought battle to convince Irish voters to back Europe’s unpopular fiscal discipline treaty, Ireland’s deputy finance minister has the task of convincing the leafy Dublin suburb of Templeogue.

Going door-to-door, Brian Hayes faces scepticism and occasional abuse. One constituent calls him “a waste of space”, another “just a yes man”.

“If Greece goes down we are next in the firing line. I know people who are trying to put their money into US dollars. We just don’t know what is going to happen here,” says Mr O’Reilly.

“This referendum is all about fear on the one side and anger on the other,” says David Farrell, professor of politics at University College Dublin. “Most people have no great deal of enthusiasm for it and will only vote reluctantly in this referendum.”

“The sight of soup kitchens in Greece on TV screens is concentrating minds,” says Mr Hayes, as he goes door-to-door hammering home his message.

The dominant theme of the campaign so far is a claim by the government that rejecting the treaty would bar Ireland from receiving funds from Europe’s new bailout fund – the European Stability Mechanism. Without this insurance policy, Dublin says, Ireland will struggle to exit its EU and International Monetary Fund bailout programme on schedule at the end of 2013.

“The government is scaremongering rather than arguing the merits of the treaty. Most people are opposed to this treaty but are scared out of their wits,” says Paul Murphy, a Socialist member of the European Parliament and prominent No campaigner.

Nothing bad can possibly happen if this treaty is rejected. Accepting more bailout funds from the IMF or ESM would be the absolute worst thing for Ireland.

Indeed, accepting funds from the Troika is one of the things that destroyed Greece, and it is pathetic that clueless, brainless, scare-mongering political shills for Brussels are now going door-to-door in an attempt to convince Irish voters the exact opposite.

Heading into the Greek June 17 national elections, expect to see door-to-door fear-mongering in Greece as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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First Time Ever - Majority of Unemployed Have Some College Education; Five Solutions to Education, Student-Loan Crisis

noreply@blogger.com (Mike Mish Shedlock) — Sun, 20 May 2012 06:42:00 +0000

Those who think the answer to the unemployment problem is more education might be surprised to learn the Majority of Unemployed Attended College.

For the first time in history, the number of jobless workers age 25 and up who have attended some college now exceeds the ranks of those who settled for a high school diploma or less.

Out of 9 million unemployed in April, 4.7 million had gone to college or graduated and 4.3 million had not, seasonally adjusted Labor Department data show.

click on chart for sharper image

In 2011, 57% of those 25 and up had attended some college vs. 43% in 1992. Those without a high school diploma fell from 21% to 12% over that span.

But along with the increasing prevalence of college attendance has come a growing number of dropouts, who have left school burdened by student loan debt but without much to kick-start their careers.

Among everyone up to age 24 who has left college or earned a two-year degree — including those not actively searching — the full-time employment-to-population ratio has plummeted from 69% in 2000 to 62% in 2003 to 54%.

This has occurred even as student lending and enrollment at community colleges has soared, elevating the student loan crisis to the center of political debate and a rallying cry for the Occupy Wall Street movement.

Those who graduated with a four-year degree fared better employment-wise but many of those still struggle with student loans. Many other end up underemployed in retail sector jobs as opposed to the curriculum they studied.

Student loans are a trillion dollar problem, and growing every quarter. President Obama wants more student loans, but all that does is make many graduates debt slaves for the rest of their lives.

The cost of education is preposterous and the solutions are easy to describe.

Five Solutions

Kill federally funded student loan program entirely. Student loans do nothing but drive up the cost of education. Anyone can get a student loan because the loans are guaranteed and cannot be discharged in bankruptcy. The beneficiaries of this horrendous setup are teachers and administrators, not the kids receiving loans.
Kill state aid to colleges as well
Increase competition by accrediting more online universities, even foreign universities. This will drive down costs immensely.
Public unions are a huge part of the reason for driving up teacher salaries, so collective bargaining (collective coercion actually), must end.
High school counselors and parents must educate kids that there simply are no realistic chances for those graduating with degrees in political science, history, English, art, and literally dozens of other useless or nearly-useless majors.

The deflationary overhang of student debt is enormous. Those in debt will postpone buying homes, getting married, starting families, and spending money in general.

The only solution is to ensure kids to not get into massive debt in the first place. The way to achieve that is to drive down the cost of education.

Sadly the Obama administration (like many before it and many at the state level as well) has done nothing but throw money at the problem, rewarding unions and administrators while making debt slaves of kids as education costs spiral out of control.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Apparel Sales by Price and Volume Provide Interesting Viewpoint

noreply@blogger.com (Mike Mish Shedlock) — Sat, 19 May 2012 16:11:00 +0000

Reader Tim Wallace provides an interesting chart of apparel sales in the US by price and by unit volume. In this case, volume is likely the more telling statistic.

click on chart for sharper image

Tim writes ...

Hi Mish

As always, I am watching imports, especially with fascination the apparel imports. In the attached graph we see that dollars and units run mostly in slope lock-step until the crash of apparel demand in 2009.

In 2010 we see a significant "recovery". One thing about apparel is it does wear out, so a year like 2009 will cause pent-up demand in a following year. Price did not recover as much however.

2011 and the 12 month historical rolling numbers ended in March of 2012 (government data lags two months) is more interesting.

Dollar amounts continue to "recover" but the units measure has turned well downward again, in fact off 6% from 2010.

Looking at the monthly data from this time last year we see a continued degradation of the units amount every month, while the dollars amount trends up.

This is in effect apparel inflation, caused partially by raw materials. Cotton has been replaced in a significant percentage of products, stripping out demand and lowering that cost.

China lost some market share due to labor cost competition with Vietnam. However, China still dominates with 41.2% of market share, Vietnam second at 8.5%, then Bangladesh at 6.4% and Indonesia at 5.4%.

Thus 61.5% of all apparel imports come from only 4 countries.

Regards,

Tim

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Italy Deploys 20,000 Law Enforcement Officers to Protect Individuals and Sensitive Sites; Anecdotes From Italy via Canada: Taxed Out of House and Home

noreply@blogger.com (Mike Mish Shedlock) — Sat, 19 May 2012 08:25:00 +0000

Italy Deploys 20,000 Law Enforcement Officers to Protect Individuals and Sensitive Sites

The Atlanta Journal Constitution reports Italy deploys 20,000 to protect sensitive targets

Italy increased security Thursday at 14,000 sites, and assigned bodyguards to protect 550 individuals after a nuclear energy company official was shot and letter bombs directed to the tax collection agency.

Under the enhanced measures, Interior Minister Anna Maria Cancellieri deployed 20,000 law enforcement officers to protect individuals and sensitive sites. In addition, 4,200 military personnel already assigned throughout Italy will be redeployed according to new priorities.

Authorities will also increase intelligence to "neutralize" the risk of subversive actions "that can be nourished in moments of tension," the statement added.

Taxed Out of House and Home

In response to Tax Collection Violence in Italy: Mail Bombs in Rome, Police Clashes in Naples, Molotov Cocktails in Livorno I received an email from Frank who lives in Canada but owns property in Italy writes ...

Hello Mish

Trust me, it really is that bad.

I have a condo on the Adriatic in Italy, and lots of family still there. The local municipal property tax, called Imposta Comunale Immobili (ICI), is paid by anyone who owns property or land, whether they are a resident or not.

Recently, property taxes have gone up fast. Property is now being reassessed at the "real" value instead of the "official" (wink) value.

TV shows highlight the plight of elderly who have had to move out of their own homes into nursing homes because they could not pay property taxes.

My uncle has 6 apartments which he's owned for many years. He and his children live in 4 and he collects rent on the other 2 to live on. He is getting hammered.

He lived and worked in Canada most of his life but returned to Italy because his daughter married an Italian.

Now he desperately wants to return to Canada, but it's impossible to sell now.

Frank G.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Merkel to Approach Greece with "Growth Proposals" while Asking for Referendum on Euro; Elections Provide Yet Another Attempt to Snatch Defeat From Jaws of Victory; New Democracy Leads Latest Poll

noreply@blogger.com (Mike Mish Shedlock) — Fri, 18 May 2012 19:36:00 +0000

Greek elections are set for June 17th following the impasse of the last election where no majority government formed.

The "Destroy Greece to Save the Euro" clowns led by German Chancellor Angela Merkel are out in force hoping to turn the vote into a direct referendum on the Euro. The election is of course a direct referendum on the Euro, but Greek citizens are under three Fantasyland ideas.

Three Fantasyland Ideas

The euro is a good thing for Greece
It is possible for Greece to stay on the euro but default on debt
Greece can recover in the eurozone

Merkel is doing her best to convince Greeks that number 2 is not possible and she is correct on that score. She is also promoting the Fantasland positions numbers 1 and 3.

Merkel Asks For Greece Referendum on Euro

MarketWatch reports Merkel Asks For Greece Referendum on Euro.

Germany’s chancellor reportedly proposed on Friday that Greece hold a referendum on its membership in the euro currency area, increasing pressure on the nation just as Group of Eight leaders are set to discuss the region’s debt crisis this weekend.

In a phone call with the Greek president on Friday, German leader Angela Merkel suggested that Greece could have a referendum on the euro when it holds national elections in June, according to media reports, citing a Greek government spokesman.

Whether she actually did make the proposal is in doubt — her spokesman denied it, but the Greek official then reiterated that Merkel made such a request.

Merkel Yields on Growth Measures

As a matter of political expediency (or do I mean political suicide) Merkel-Hollande Meeting Yields Greece Growth Signal

German Chancellor Angela Merkel and French President Francois Hollande said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro.

Requests for measures to bolster growth will be “considered” and the European Union may also “approach Greece with proposals,” Merkel said late yesterday at a joint press conference with Hollande during his first official visit to Berlin. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Is Merkel's Strategy Working?

The idea that Germany is going to consider anything for Greece but still more austerity measures is yet another Fantasyland notion. Is proof of her strategy in the polls?

The latest polls show pro-bailout conservatives leading

Greece's conservative New Democracy party, which backs the country's international bailout, has retaken the lead from the anti-bailout radical leftist SYRIZA, a poll showed on Thursday, the first published since a new election was called for June 17.

If elections were held now, New Democracy would win 26.1 percent of the vote compared with SYRIZA's 23.7 percent, according to the MARC/Alpha survey conducted on May 15-17.

Based on this result, New Democracy would win 123 seats, the pollsters said. Combined with the 41 seats projected to be won by the Socialist PASOK, Greece's two major pro-bailout parties would command a 14-seat majority in the country's 300-strong parliament.

Support for SYRIZA appears to have declined after the party refused to join a national unity government with all the other major parties, the MARC poll showed. In the previous survey by the same agency before the coalition talks collapsed, SYRIZA led with 27.7 percent, up seven points on New Democracy.

Money Will Flow Along With Propaganda

For those holding the common-sense position Greece needs to leave the eurozone to recover, this may be a bit disconcerting. However, There is likely to be movement in both directions on the polls and I think this is just a temporary snap-back.

Moreover, Greece is likely to run out of money before the next elections. Then again, if the polls show the Troika-clowns have a good shot at pulling this off, the money will flow right along with the propaganda.

To understand what the battle to "save Greece" is really about, please consider Euro area official sector exposures to Greece in excess of EUR 290bn Total; EUR 84bn Germany, EUR 63bn France, EUR 55bn Italy, EUR 37bn Spain

That link shows this has nothing to do with "saving" Greece, rather it is about saving German, French, and Italian banks (further destroying Greece in the process).

The irony is every bailout attempt so far has done nothing but increase European banking losses. This attempt should it succeed in another bailout will do the same: increase losses. Three years ago total losses might have been on the neighborhood of 40 billion euros.

Look at the losses now. The increased losses were caused by arrogant Troika-clown euroxcrats with asinine positions willing to repeatedly throw good money after bad.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spanish Bad-Loans Ratio at 8.37 Percent, a 17-Year High; CDS at Record High; Bankia Suffers Huge Losses Purchasing 15.5 Million Its Own Shares to Stabilize Price; Spain Hires Goldman Sachs to Value Bankia

noreply@blogger.com (Mike Mish Shedlock) — Fri, 18 May 2012 15:46:00 +0000

It's time for another roundup on Spain. Every day is time for another roundup on Spain. Today's report is on bad loans, and complete foolishness at Bankia buying its own shares hoping to stabilize its price.

Spanish Bad-Loans Ratio Hits 8.37 Percent

The Wall Street Journal reports Spanish Bad-Loans Ratio Hits 17-Year High

Bad debts held by Spanish banks rose to a 17-year high in March and the cost of insuring the debt of two major Spanish banks against default hit a record Friday a day after the sector was hit by a downgrade, underscoring the continuing challenges posed by the country's five-year property slump.

The central bank said that 8.37% of the loans held by banks, or €147.97 billion ($188 billion), were more than three months overdue for repayment in March, up from 8.3% in February and the highest since September 1994. The total number of non-performing loans is now almost 10 times higher than the level reported in 2007, just as Spain's decade-high property boom peaked.

The rapid deterioration of the loan books was one of four reasons cited by Moody's Investors Service for its downgrade of the credit ratings of Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and 14 other banks in the country late Thursday.

"Moody's announcement will increase speculation that the Iberian state will be forced to ask for external support in order to effectively tackle its banking crisis," said interest rates strategists at Lloyds Bank WBM.

At 0956 GMT, Spain's IBEX-35 blue-chip index was up 0.5%, following a negative start. Bankia's shares gained 19% after they fell 14% Thursday and had suffered 10 straight days of declines, while those of other banks including also bounced after deep losses earlier in the week.

Bankia Suffers Huge Losses Purchasing 15.5 Million Its Own Shares

For the "oops" file, courtesy of Google translate please note Bankia bought 15.5 million shares to try to stop its collapse

May 17, 2012

Bankia tried unsuccessfully to halt the collapse of its stock market price in the days when the crisis broke out of the entity. The bank bought 15.55 million of shares for 33,250,000 euros between 7 and 10 May, as has been reported to the National Securities Market. The result now is that accumulates heavy losses on these securities, which subtracts capital at a time when the bank is in need of them.

In the previous 30 days, Bankia just had bought just over 5 million shares, according to El Confidential, which was published this morning purchases of shares of the entity.

Bankia has failed in the attempt to halt the collapse, which today continues to fall that have become over 17% to 1.37 euros per share. At these prices, only purchases made during those four days, Bankia suffer losses of about 12 million euros.

But the losses are even greater in the previously performed operations to try to sustain the price at which the entity has accumulated treasury of 86.124 million shares, 4.319% of its own capital. In total, the bank has more than 100 million in losses to the treasury share transactions.

Bankia Share Prices

Today's rally looks pretty good but here is a little perspective on Bankia Share Prices.

Union Silliness

For the "where there's public unions, there's stupidity file" Unions urge Employees to buy shares in Bankia to prevent the collapse of the price.

Bankia unions urge their employees and clients to buy shares in the company to prevent the collapse of its stock market price and help ensure its future, according to a statement of the Boards and Professional Association (CACAM).

Under the slogan 'I buy Bankia. Do you? Are we united? ', These professionals Bankia broadcast a statement following an email I have received, the undersigned, with whom they want to send a message of confidence in the project entity.

Bankia Bleeds Cash

Meanwhile, Bankia bleeds cash and will not respond to questions.

El Economista reports Bankia has lost 1 billion euros in deposits in one week.

Bankia customers have withdrawn deposits worth over 1,000 million euros since the government announced its intervention last week, according to data presented suggest the board meeting yesterday.

On Wednesday, Bankia not respond to Reuters requests asking whether there were bank runs Thursday and no one has commented on the information published by the newspaper El Mundo in its paper edition.

Goldman Sachs Hired to Value Bankia

Please consider Spain Hires Goldman Sachs to Value Bankia

The Spanish government has hired Goldman Sachs to carry out an independent valuation of Bankia, the ailing bank taken over by the state last week, Spanish newspaper Expansion said on Friday.

The U.S. bank will review Bankia's and its parent company BFA's books and determine within a month how much the state should inject to refloat the lender, which had to be rescued after its auditor, Deloitte, identified several gaps in last year's accounts.

Expansion said without citing sources that Bankia's financial hole may reach 8 billion euros on top of the 10 billion euros it needs to set aside to cover potential losses on real estate assets, as required by two financial reforms passed by the government in February and last week.

Is this one of those deals where a consultant is hired to give give a predetermined opinion?

We will find out soon enough because no one can possibly determine "Bankia is a solvent entity". In fact, the entire Spanish banking system is clearly insolvent.

Here's the question of the day: Is there any reason Bankia shares will not or should not trade for pennies at some time in the near future?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

My Wife Joanne Has Passed Away; Stop and Smell the Lilacs

noreply@blogger.com (Mike Mish Shedlock) — Fri, 18 May 2012 04:35:00 +0000

Yesterday afternoon, my wife, Joanne went on to a better place. For those still on this planet, please remember to stop and smell the lilacs.

That picture is from our honeymoon on Mackinac Island, Michigan, about 27 years ago. Lilacs were her favorite flower.

In lieu of flowers or food, I ask the living to consider a donation in here name to support ALS research, the disease that took her life.

I wrote about the disease and an ALS fundraiser I sponsored twice previously.

April 2, 2012: My Wife Joanne Has ALS, Lou Gehrig's Disease
May 15, 2012: ALS Update; I Still Need Your Help; Money Contributions From 22 Countries!

Results as of Thursday 5-17-2012

Donations $14,931
Tickets $236,800
Corporate Sponsorships $20,000

Les Turner gets half of ticket sales so the direct benefit to Les Turner so far is $154,331.

Donations From 23 Countries

Donations have come in from 23 countries now. Click the second link above to see.

Over the years many people have asked me to put up a tip jar. I refused. I have always thought the best information is free. That philosophy has served me well. I have never asked for anything, but I am asking now.

If information from this blog, for free, 4-5 posts a day (for 7 years!) has made you money or kept you out of trouble, then please consider purchasing a raffle ticket or making a donation.

If times are tough, and they may very well be, then please consider a cash donation of $10 or more. Every bit helps.

Checks

To make a cash donation by check or money order, please send a check or money order to
Lacey Wood
Mish Campaign
Les Turner ALS Foundation
5550 W. Touhy Avenue, Suite 302 Skokie, IL 60077
847.679.3311 (Main)
Any questions, please call the above number.

Credit Card

You can make a donation or purchase raffle tickets by credit card on the raffle site.

Some people did not like entering the information fields required, however, the purpose is only to ensure the foundation knows how to get in touch with raffle winners.

People move, phone numbers change, and email addresses change. It's as simple as that.

Those who do not like disclosing personal information on a form (the site is secure) can send a check or money order for tickets or to make a donation.

Philosophic Point of View

Whether you make a donation or not, please stop and smell the lilacs. Joanne did, at every opportunity.

Goodbye Joanne we love you and miss you already.

Spanish Bank Debt With ECB Up 15.7% in April; Surprise VAT Hike Coming Up; Moody's Downgrades 16 banks; Capital Flight at Bankia; Scramble for Deposits Leads to System-Wide Cannibalization

noreply@blogger.com (Mike Mish Shedlock) — Fri, 18 May 2012 00:36:00 +0000

Courtesy of Google translate, please consider the following bleak reports from Spain.

Spanish Bank Debt With ECB Up 15.7% in April

El Confidencial reports The Spanish bank debt with the ECB increased by 15.7% in April

The debt of Spanish banks with the ECB shot up to 263.535 billion euros in April, that is 15.7% compared to 227.6 billion recorded in March, a new record, according to the Bank of Spain. This amount is outstanding entities resident in Spain still have yet to return to the European Central Bank as a result of the funding the agency has been granted previously.

The net financing granted in April by the Eurosystem to Spanish banks accounted for 68.8% of total Eurozone, which amounted to 382.712 billion euros. However, the gross amount of appeal does not collect the money that Spanish banks have borrowed from the ECB and have been redeposited in the body to receive a return of 0.25% a day.

The increasing difficulties of Spanish institutions to borrow from the interbank appreciate finding that the credit requested by Spanish banks headed by Mario Draghi school increased sixfold compared to that recorded in April 2011 (42.227 billion).

Surprise Vat Hike?

Hiking taxes in the middle of a recession is horrendous policy. Yet one should never underestimate the potential stupidity of bureaucrats.

El Economista reports The Government is preparing a surprise rise in VAT for up to three points by 2013

Mariano Rajoy's government is determined to adhere strictly and without delay the requirements of Brussels to get the unequivocal support of the European Union to reform measures taken and to try to appease the markets. This is the VAT in the rest of Europe: average at 20.9%.

So, on Monday, the minister Luis de Guindos, acceded to the wishes of Merkel and European Commission to be the European Central Bank (ECB) who audit the Spanish banks. And now, the chief of government has already committed to some partners of his confidence that the government might have to climb two or three points in the VAT, by surprise, without waiting for 2013, as planned.

Specifically, Rajoy met last weekend privately with the president of the CEOE, Juan Rosell. A meeting that was held at the Moncloa Palace and that was unveiled yesterday at the meeting of the Board of the Spanish employers that some attendees described as "a funeral" to the bleak picture of the business leaders to draw on our economy.

And the funeral was the scenario that Juan Rosell took the opportunity to ask business leaders support unreservedly to government reforms, despite the critical position CEOE has kept tax increases approved for the Income Tax and Companies.

And it was at that funeral in which some of the attendees told that during his speech, the president of the employers said that while Rajoy is not in favor of raising the VAT, may be forced to do it, and surprise.

Moody's downgrades 16 Spanish banks

Reuters reports Moody's downgrades 16 Spanish banks

Moody's Investor Service carried out a sweeping downgrade of 16 Spanish banks on Thursday, including Banco Santander, the euro zone's largest bank, citing a weak economy and the government's reduced ability to support troubled lenders.

All the banks' long-term debt ratings were downgraded by at least one notch, and some suffered three-notch cuts.

Thursday's move came after Moody's downgraded 26 Italian banks on Monday and followed a press report about a run at troubled lender Bankia, Spain's fourth largest bank. The Spanish government, which took over Bankia last week, denied the report.

Santander suffered a three-notch cut to its long-term rating to A3 from Aa3.

Moody's also cut BBVA's long-term rating by three notches to A3 from Aa3 and put the credit on a negative outlook. BBVA is Spain's second largest lender.

The government's borrowing costs shot higher on Thursday after data confirmed the economy was back in recession.

Prime Minister Mariano Rajoy said Wednesday his government, which is struggling to reduce the budget deficit, could soon have trouble financing itself in the bond market unless the pressure eases.

The government's strained finances are another risk for banks, since many have used cheap loans from the European Central Bank to buy three-year and five-year government bonds.

Through March, Spanish banks held almost 150 billion euros of Spanish government bonds, up from about 76 billion at the end of November.

Capital Flight at Bankia

Please consider Bankia have lost 1,000 million in deposits in one week

Bankia customers have withdrawn deposits worth over 1,000 million euros since the government announced its intervention last week, according to data presented suggest the board meeting yesterday.

On Wednesday, Bankia not respond to Reuters requests asking whether there were bank runs Thursday and no one has commented on the information published by the newspaper El Mundo in its paper edition.

According to this method, was at the meeting yesterday with senior management where the CEO, Francisco Verdú, brought the fact of multi withdrawal of funds: Bankia days would have lost a similar amount to 1,160 million withdrawn in the first quarter.

The withdrawal of money from customers Bankia is due to the mismanagement of the departure of Rodrigo Rato for the entity and the subsequent nationalization.

Scramble for Deposits Leads to System-Wide Cannibalization

Here are the key paragraphs from the above article.

The competition from the big banks is a point of concern to the entity. In fact Santander is showing particularly aggressive in trying to attract customers disenchanted with Bankia have decided to withdraw their savings from the entity.

For his part, Jose Ignacio Goirigolzarri, has not made any statement on these data and harangued their managers to work hard to retain customers. The new president of the organization claimed that "Bankia is a solvent entity, which continues to function quite normally and that offers total security."

Spain goes deeper in trouble every day. No one can possibly believe "Bankia is a solvent entity". In fact, the entire Spanish banking system is clearly insolvent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

German Finance Minister Wolfgang Schäuble Tosses Hat Into Ring Seeking to Become "Grand Keiser for All Europe"

noreply@blogger.com (Mike Mish Shedlock) — Thu, 17 May 2012 20:20:00 +0000

In the truth is stranger than fiction category, German Finance Minister Wolfgang Schäuble is calling for a political union "now" with a directly elected EU president (and of course he is the unstated logical candidate).

Translation: Schäuble is running for "Grand Keiser of All Europe".

Please consider Schäuble calls for closer EU integration

Wolfgang Schäuble, Germany’s finance minister, called on Thursday for the EU to move decisively towards a political union in the face of the eurozone crisis, with a directly elected president in Brussels.

In a passionately pro-European speech delivered in Aachen, where he was awarded the annual Charlemagne prize, Mr Schäuble said the economic and financial crisis made it clear that closer European integration was needed.

“We must create a political union now,” he said. But he said that would not mean the creation of a European superstate, or a “United States of Europe”.

A debate was needed on precisely what responsibilities should be transferred to European level, on the principle that whatever tasks could best be done locally, regionally or nationally should not be changed.

One answer would be to give a face to European political union with a directly elected EU president in Brussels.

Mr Schäuble, who is regarded as the most pro-European member of the German government, said the EU urgently needed to improve its negotiating capacity on the world stage, with a more effective common foreign policy, and international treaties signed by all member states together.

“We must have the ambition to do more than simply protect the status quo,” he said.

Wolfgang Schäuble (centre) receives the Charlemagne prize on Thursday

Today the Charlemagne prize, tomorrow the crown of the "Grand Keisership"

Addendum:
I am aware of the correct spelling of Kaiser. Keiser is a joke spelling that has a personal meaning but also seems appropriate for the job.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Euro area official sector exposures to Greece in excess of EUR 290bn Total; EUR 84bn Germany, EUR 63bn France, EUR 55bn Italy, EUR 37bn Spain

noreply@blogger.com (Mike Mish Shedlock) — Thu, 17 May 2012 16:08:00 +0000

Via email I received an interesting set of facts from Barclays regarding banking exposures to Greece. Greece: Euro area official sector exposures in excess of EUR290bn

Euro area official sector exposure

According to the French Finance Minister, F. Baroin, Greece's exit from the euro area "would cost France EUR50bn net, in addition to the securities held by banks and insurers in their portfolios." In the German press, it is reported that a Greek exit would cost approximately EUR80bn (EUR16bn from bilateral KfW loans, EUR20bn from the EFSF, EUR12bn from the SMP and EUR30bn from Target 2, based on December 2012 data, source: FAZ).

Here, we estimate the euro area's official sector exposure to Greece (bilateral loans, EFSF guarantees and Eurosystem) and show that the cost estimations mentioned in the press match the exposure if you consider a 20% recovery rate on Greek holdings. 20% is rather low, but not unrealistic given the outcome of the PSI and devaluation of the new Greek currency in the event of an exit. However, because of the accounting treatment of the different exposures and the presence of some financial buffers within the Eurosystem, the one-off, year-end shock on public accounts will be much smaller, probably around EUR100bn (1% of GDP).

Euro area exposure via bilateral loans and EFSF guarantees:

As part of the first Greek bailout package (May 2010), EUR53bn has been disbursed by member states out of the EUR80bn committed over a three-year period. These disbursements are in the form of bilateral loans between Greece and the other member states. In February 2012, a second bailout package was signed, but this time funds would be transferred to Greece by the EFSF and the guarantees passed on to member states according to (adjusted) ECB capital key allocation. This second package has taken over the unused funds from the first package and no further bilateral loans have been made since then. To date, the EFSF has issued EUR73bn out of the EUR145bn committed by member states. Altogether, the euro area states currently have a total exposure of EUR126bn, representing 1.3% of GDP.

Euro area exposure via the Eurosystem's refinancing operations and interventions:

In a Greek exit scenario, the Eurosystem faces losses stemming from either direct holdings of Greek bonds in the SMP portfolio1 or from Target 2 claims on the Greek central bank. Based on anecdotal evidence and central banks' balance sheet movements, we estimate that the Greek SMP exposure is approximately EUR35bn and that Target 2 claims on the Greek central bank are around EUR130bn.

Indirect exposure via the IMF:

Even though the IMF prides itself on never having made any losses on a programme, a Greek exit would certainly challenge this record. Potential losses would be redistributed to IMF members according to their quota. With 20% of the quota (link) the euro area would be exposed to a further EUR4.4bn.

Altogether, we estimate that the total official sector exposure to Greece is somewhere in excess of EUR290bn (see table below), representing 3.1% of (nominal) GDP. Because ECB capital keys do not exactly match GDP weights, the exposure in GDP terms varies from one country to the other, between 1.8% (Luxemburg, excluding programme countries) up to 4.5% (Malta, Estonia, see table and chart below).

Total Exposures to Greece

click on chart for sharper image

Looking for a reason for all the pressure on Greece to stay in the Eurozone? There it is. Pray tell where is Spain going to come up with 37 billion euros?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Brain Drain: Businesses and Brightest Minds Flee Italy; Credit Crunch Italian Style

noreply@blogger.com (Mike Mish Shedlock) — Thu, 17 May 2012 08:39:00 +0000

Brain Drain

Courtesy of Google Translate, this time from Italy, please consider From the North-East and abroad, fleeing already 720 companies

Farewell, ungrateful Italy. In addition to brain drain, we'll get used to the migration of entrepreneurs. The news coming from the North-East lab are not at all encouraging.

Until 2010 no employer has had the courage to leave Italian soil. A sort of waiting anxiety that charge went through the last part of 2008 and the two following years.

Explains Daniele Marini, a sociologist at the University of Padua and the Director of the North East: "Entrepreneurs have felt a great loneliness. And 720 of them already internationalized and holding sizes above the threshold of 10 employees, in 2011 the companies have decided to move abroad.

It remains to be seen how many entrepreneurs make the same choice in 2012.

Marini argues that choice in the book "Innovator of the Border", just published by Marsilio, "In the face of an institutional environment essentially static, ie where no desired reforms take shape, the government is not modernization, the level of taxation remains unchanged, the preconditions favorable to business life are reduced to such an extent as to suggest some to place in other countries where the fiscal and administrative environment allows them to remain competitive."

It is as if suddenly the toy was broken, cracks in the same constituent elements Venetian economy: the capital first of all, based on the triad family, capital, labor. Marini explains: "The crisis has changed the DNA of the North-East. A society that puts its identity in the work today is to consider it as a hassle. The families, however thrifty and highly oriented economy, fear of not having resources available to address such a long period of recession."

The summation of all these elements outline the framework that has led entrepreneurs "secessionists" to set sail.

Credit Crunch Italian Style

Also courtesy of Google Translate, please consider The credit crunch? Ask the EBA

The solution to the crisis is growing. Virtually all agree on this. Even the Germans. The problem is that funding needed to grow. Especially businesses. But the credit supply to companies in Italy continues to be weak.

"They closed the taps, the banks have stopped doing," complained some time ago with emphasis Fancelli Mauro, president of the National Confederation of Craft Small and Medium Business in Florence.

The same bankers recognize the problem. "Not only have we reduced the new credits. But we're doing it furiously, "admits a senior executive at one of the five largest Italian banking groups.

The data reported by Mauro Fancelli for your region are dramatic: "In the first quarter of 2012 the bank has paid to Tuscan businesses for 33.5% less than the same period of 2011. The Monte dei Paschi di Siena, a leading institute in the region, has even been a decline of 70 percent."

"The worst of the credit crunch we have yet to see it," warns a second top manager at another establishment of the five largest in Italy.

With this investigation, Il Sole 24 Ore has wanted to find the reason for this phenomenon often referred to with two little words that English, along with spreads, are now common even in the chat at the bar: credit crunch - or credit crunch.

Anecdotes From Italy

My friend Francesco writes ...

Hello Mish

The banks in distress list gets longer.

Two banks on chapter 11 by Bank of Italy in a few days. Last Saturday it was the turn to the Bank Credit Cooperative Monastier and Sile suffer to be placed under protection by the Financial Regulator. Last Friday was the turn instead of Tercas bank, savings bank in the province of Teramo in the meshes of the extraordinary finish.

A customer of mine have been required to close his position with that bank, he will never be able to repay its loans to 1.5 million eur in 4 months.

I expect a very difficult summer and in September, many businesses do not reopen. German firms will detect the best companies in the north east, at a very cheap cost, the other will close in a year.

In Italy we have two realities, Germany and Greece, in the same borders. The North, particularly the North East, has a GDP per capita equal to or higher than Germany, the South is in a worse condition than Greece. Obviously you cannot find the solution without reexamining borders.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge

noreply@blogger.com (Mike Mish Shedlock) — Wed, 16 May 2012 22:39:00 +0000

Inquiring minds are reading an excellent report China Real Estate Unravels by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, China.

The report confirms many of the things I said would happen in regards to the Chinese real estate bubble and GDP.

Here are a few items of note.

Developers, burdened by 70% leverage ratios and loans threatening to come due, rushed to complete projects already in their pipeline, to put those units onto the market and raise cash.

That rush to complete inflated real estate investments, allegedly up 23.5% in the first quarter. Other statistics from the report tell the real story.

Year-on-year sales in Q1, for all real estate, was down 14.6%.
Residential property sales were down 17.5%
Office sales were down -10.2%
Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
Total amount of floor space “for sale” was up 35.5%, compared to the same date last year
Floor space of residential units “for sale” grew 47.4%.
At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold
A year and a half worth of excess inventory is hidden somewhere in the pipeline
New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
Housing starts fell -14.4% year-on-year and -23.4% month-on-month
Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year.

Clearly a crash is underway. The above stats also show the soft-landing thesis is written on toilet paper.

GDP Analysis

I like the analysis by Chovanec on GDP implications and the highly-overrated "soft landing" theory.

The “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all. It’s more like the last gasp of a market that’s running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.

Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%.

At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out. But the April numbers suggest it is already happening.

Chovanec notes if real estate investment drops by 10%, GDP will come in at 5.3%. What if real estate investment falls by 20% or 25%? Moreover, why shouldn't it?

Nails in the Hard Landing Coffin?

One of the sillier stories making the rounds earlier last month was China currency move nails hard landing risk coffin

I responded at the time with ...

The longer China puts off rebalancing its economy, the bigger the crash later on. Moreover, widening the band on its currency is a needed part of that rebalancing, and does not preclude in any way a huge slowdown in growth.

The structural imbalances in China are large and for now, still growing. However, huge cracks have appeared in real estate, and changes are coming up with a regime change. Finally, peak oil alone makes many of the growth estimates we have seen for China outright impossible.

The real estate crash has arrived. The GDP crash will follow. For details, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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