It’s beginning to look like the ‘Summer Doldrums’ are coming to an end all over the world, maybe this means the long suspension of disbelief is also coming to an end.

In Washington, the apparent political gains to be had from tipping the United States into default seem to be evaporating as ‘B- as in Bankruptcy’ day approaches:

Mr. Obama, who arrived from Camp David shortly before the Sunday evening session, appeared to have made headway in at least one regard: lawmakers from both parties pledged not to let the United States default on its debt. That is what the Treasury said would happen after Aug. 2, when the government would lose its authority to borrow.

“Nobody is talking about not raising the debt ceiling; I haven’t heard that discussed by anybody,” the Senate minority leader, Mitch McConnell of Kentucky, said on “Fox News Sunday,” adding that he had an unspecified “contingency plan” to raise the ceiling if the talks fell apart.

Just as Mr. Obama was sitting down with Mr. McConnell and other leaders shortly after 6 p.m. on Sunday, with the men wearing open-collar shirts and blazers, he was asked whether he could get a deal done in 10 days, leaving enough time to draft and pass legislation before Aug. 2.

“We need to,” he replied.

Time passes and ambition shrinks, all sides are ‘Doing the Paulson’ and nothing is getting accomplished. Look for Congress to quietly lift the debt ceiling a small amount – less than $100 trillion – and get out of town.

Meanwhile, it looks as if the debt unwind is gathering steam in Europe.

Italian bank sell-off gathers pace

By Neil Dennis (Financial Times)

Concerns over Italy continued to fester on Monday, hitting the European banking sector and leaving the region’s equity markets nursing heavy losses.

Fears that Italy may be the next eurozone economy to become embroiled in the sovereign debt crisis were heightened after unconfirmed reports that the eurozone’s bail-out fund may have to be doubled to €1,500bn to cover a debt crisis for Rome. Italian bond yields climbed to new highs, forcing yields on other periphery debt higher, while the cost of insuring Italy’s sovereign debt against default reached a new record.

The problem is stupid non- policy and unwillingness of everyone in Europe to face the truth. Europe has its own version of the American Waste-based Economy built entirely around the automobile, highways and shopping for stuff nobody needs. This bills for this have fallen due and the waste-based economy cannot pay onrunning costs much less pick up its own lengthy tab.

Unlike Congress and the US administration, there is no way for the EU to punt and buy time. Somebody either has to pony up a couple trillion for euro-bailouts or the borrowers default leaving the rest to take their lumps. The EU has enough resources — $16 trillion GDP — pay enough debts to take the heat off for awhile. It will have to examine the ‘carz first and last’ approach then back away from the petroleum waste.

It is the hundreds of billions of euros sent every year to Saudi Arabia and Russia that are posing the finance difficulties for the EU.

In China, who knows what is going on? Chinese borrowers cannot find lenders at ‘controlled’ rates in rigged auctions and the Shibor is going bananas!

China Three-Year Local Government Debt Fails

(Bloomberg)

China’s finance ministry failed to sell all of the three-year debt offered at an auction on behalf of local governments as a cash crunch curbed demand.

The ministry sold 23.9 billion yuan ($3.7 billion) of bonds at a yield of 3.93 percent on behalf of 11 provinces and municipalities, falling short of its 25 billion yuan target, said a trader at a finance company required to bid at the auction. The Shanghai interbank offered rate, or Shibor, for three-month yuan loans, was fixed at 6.24 percent today, near a record high of 6.46 percent reached on June 28.

“While the interbank borrowing cost is so high, investors won’t spend money on local government debt,” said Huang Yanhong, a bond analyst at Bank of Nanjing Co. in Nanjing. “Demand is low also because the debt’s secondary-market trading isn’t active. After you buy it, you can only hold it till maturity.”

Demand for debt is also cooling after the central bank raised its benchmark one-year lending and deposit rates last week for the third time this year to help stem gains in consumer prices. Inflation accelerated to a three-year high of 6.4 percent in June, from 5.5 percent in May, the statistics bureau said on July 9.

Last week, the finance ministry failed to sell all of the bonds offered at an auction of 182-day bills. The ministry also sold less debt than planned at a June 17 auction of one-year notes, and sales of 182-day bills and one-year bonds on May 13.

The central government will sell 200 billion yuan of bonds on behalf of local authorities this year. Today’s auction was the first involving this type of debt in 2011 and 25.4 billion yuan of five-year notes were sold at a yield of 3.84 percent.

The finance ministry in January published a list of 59 underwriters required to bid at its debt sales, including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., China Citic Bank Corp., Postal Savings Bank of China, Industrial Bank Co., Guotai Junan Securities Co. and BOC International (China) Ltd.

I will be the first to admit I don’t know what is taking place inside China right now but I can ‘guess pretty good’. This (failed) offering was the central bank/local Chinese bank effort to liquify platform loans at (pathetic) published rates of interest (return) on the loans. @ 3.8% the loans are underwater before they are offered. Not even a communist would lend at that rate, particularly with money hard to come by.

What happens next?

The Chinese government can simply order its banks to provide the required (bailout) funding for local authorities and shift the cost to bank depositors. The Chinese have done this in the past, but only in crises. The Chinese are adamant about not being in a crisis. The central government is petrified/afraid of disturbances. If the prices of food rise too high the underclass will riot. If diesel prices get too high truck drivers will riot. If the banks screw savers whose accounts are in banks, the savers will riot. China geriatric leadership cadre is walking a tightrope.

Yes, China is in an inflation crisis and the loans will be made at a far higher rate of interest than the local authorities offered. Who will make the new loans?

The locals are stuck with using underground finance to roll over the loans at scalping rates. They really have no choice. If they cannot borrow from the ‘above- ground’ bond ‘investors’ they have to borrow from someone else … or default. The locals’ problem is probably cash flow diminishing relative to borrowing costs. Someone failed to instruct lenders that inflation is suppose to self-liquidate loans.

When the lenders are loan sharks who can charge 25% per month and loans come due every year the borrowing/inflation mechanism works in reverse. Inflation has to exceed the rate of interest charged by the sharks. The question is how much of the Chinese economy is on the hook to them? Keep in mind, all of this is me — Steve from Virginia — guessing, but this is a guess from the ‘wrong side of the tracks’ where I’ve spent a lot of time. Economists always ignore two things; energy and mafias. China is a mafia state with a veneer of modernity — banks and bond markets — pasted onto it. If inflation cannot keep up with the loan sharks the central government will have to use force to rein them in. The sharks will instantly ‘do the Paulson’ and hold the Chinese economy hostage. This will work if the dirty money economy in China is bigger than the above- ground ‘clean-ish’ version.

Instead of disturbances, China will have a civil war on its hands. China will deal with creditors the same way the French monarchy used to deal with them: cut their heads off.

China probs? Carz … and it has exercised itself cracking down on dissidents at the same time coddling crooks. Sounds like USA! Now, the crooks turn around and bite stupid government on the ass! This is a monster the Chinese have created for themselves trying to centralize control of everything. It cannot be done without ‘most reliable’ private figures who tend to be criminals.

Things that stand out here are the Shibor, the loan failure(s) and this:

China Trade Surplus Climbs to Seven-Month High as Import Growth Moderates (Bloomberg)

China’s trade surplus widened more than forecast to $22.3 billion in June, the highest level in seven months, as imports grew at the slowest pace since 2009.

So … China’s banks have an extra $22 billion and they won’t lend it to Chinese local government ‘entities’ that are building the infrastructure that the banks make use of? It’s all murky with no good answers. It is this sort of nonsense that gives me the idea that China has that ‘parallel economy’ that siphons off F/X for black market lending to fund at higher (market) rates. I’m perfectly willing to be wrong about this, but …

China has $2+ trillion in foreign exchange reserves. How do these reserves get into circulation if the central bank is sterilizing them? If not, howcum China has (hyper)inflation in the first place?

Finance crises tend to reveal all the dirty little secrets, the ‘dirty tricks’ played on well-meaning market fools during the Good Times. China’s finance secrets will be exposed soon enough. China is at an inflection point: they will either experience all-out hyperinflation as the Peoples Bank prints like mad to pull ‘X’ percent of its economy out of the Dark Side or their various bubbles will collapse under their own massive weight.

The bottom line is that something important in China appears to be broken right now and nobody in the rest of the world has a clue. If the Chinese government is truly cracking down on platforms the question will be who defaults first: Greece, Italian banks the United States or Chinese banks/local financing?

It looks like the ‘bank run’ advantage puts the Europeans in the lead in the ‘Great Bankruptcy Race’ but the Chinese are on the rail and closing … with the Americans well behind at the turn.