One of the indicators I follow here @ the Undertow is the appearance of new Ambrose Evans- Pritchard articles. New articles indicate bad news in the Eurozone:
An internal memo at the time showed that BaFin feared write-offs might top €800bn (£688bn), twice the reserves of Germany’s financial institutions. Nobody paid much attention. But the regulator’s shock move on Tuesday night to stop short trading on banks, insurers, eurozone bonds – as well as a ban credit default swaps (CDS) on sovereign debt – has left markets wondering whether the slow fuse on Germany’s banking system has finally detonated.
BaFin spoke of “extraordinary volatility” and said CDS moves were jeopardising “the stability of the financial system as a whole”. It is unsettling that the BaFin should opt for such drastic measures a week after EU leaders thought they had overawed markets with a €750bn rescue package and direct purchases of Greek, Portuguese and Spanish debt by the European Central Bank. BaFin’s heavy-handed move seems to proclaim that the rescue has failed.
“The market is left asking what skeletons are lurking in the cupboard,” said Marc Ostwald from Monument Securities. The short ban follows a report by RBC Capital Markets that circulated widely in the City accusing German banks of failing to come clean on 75pc of their €45bn exposure to Greek debt.
German lenders have the lowest risk-weighted capital ratios in the world after Japan. They were slow to rebuild safety cushions after the sub-prime crisis, and now face a second set of losses on Club Med holdings. Reporting rules have let Landesbanken delay write-downs, turning them into Europe’s “zombie” banks.
Even so, nothing adds up in this BaFin episode. Germany acted alone, prompting a tart rebuke from French finance minister Christine Lagarde. “It seems to me that one should at least seek the advice of the other member states concerned by this measure,” she said. Brussels was not notified. The deep rift between Berlin and Paris has been exposed again, leaving it painfully clear the European Monetary Union still lacks the fiscal and governing machinery of a viable currency union.
It’s like the rats are throwing the other rats off the sinking ship!
Far from stabilising markets, BaFin’s move set off a nasty sell-off in credit markets. Markit’s iTraxx Crossover index – measuring risk in mid-level corporate bonds – jumped 57 basis points to 586. Markit said BaFin had caused liquidity to dry up in “febrile conditions”. The Libor-OIS spread watched for signs of strain in interbank lending widened further.
The ‘finance markets’ have been constrained for decades by the ‘natural markets’ that have been kept in the closet like so many evangelical conservative Republican Congressmen who are actually drag queens.
If the purpose of BaFin’s action was to drive wolfpack “speculators” off Greece’s back, it failed. Yields on 10-year Greek bonds rose 37 basis points to 7.918pc. What it showed is that CDS contracts barely matter. The issue is whether “real money” investors such as the Chinese central bank are willing to buy Greek and Portuguese debt.
The short ban set off instant capital flight to Switzerland. BNP Paribas said €9.5bn flowed into Swiss franc deposits in a matter of hours on Wednesday morning.
The Swiss central bank intervened to hold down the franc. This caused the euro to shoot back up against the US dollar after an early plunge. The euro had already bounced off “make-or-break” technical support at $1.2135, the 50pc “retracement” of its entire rise since 2000, but any rally is likely to be short-lived.
“As a German citizen, I wish to apologise for the stupidity of my government,” said Hans Redeker, currency chief at BNP Paribas. He said the CDS ban deprives reserve managers of a crucial hedging tool for non-securitised loans and will scare away global investors needed to soak up Club Med bonds.
Who are these (phantom) global investors – with money – who will invest in Greece or anyone else in Eurolandia? I’d like to meet someone with enough money to invest in a country to actually make a difference. I doubt such investors exist. Someone should put up the ‘Bat Signal’; perhaps Bruce Wayne can invest in euros.
The real issue with regards to the CDS ban is that it makes it more difficult for vampire capitalists to bet on the fall of economies they can manipulate into collapsing by virtue of making the bets. The ban does not change the vulnerable fiscal structure of the Eurozone; it only seeks to keep it temptingly out of reach of vampire capitalists.
“The European market is likely to become utterly dysfunctional. Just as the market showed signs of stabilisation with real money starting to buy euros, the Germans have destroyed this glimmer of hope,” said Mr Redeker. “The BaFin ban is a desperate political move by a government battling for survival. Angela Merkel needs the support of the Left so she has given in to a witch-hunt against banks and speculators.”
Right! Any day now! Why would anyone with real money buy euros? The problem is out of the conceptual range of the ordinary economist/analyst. The relationship between crude oil and the US dollar makes that currency a defacto oil- backed hard currency. The crude/dollar relationship ‘incentivizes’ value away from the euro and does so permanently. The euro was a finance hedge against rising real fuel costs. Obviously, that (cheap and easy) experiment has failed: another mispriced input. Having failed at its primary purpose, the euro is extinguished. What responsible trader/investor would throw more than a penny or two at the euro out of pity? The only hope is for an orderly liquidation. Says Evans- Pritchard:
Six members of the FDP Free Democrats in Germany’s ruling alliance are to vote against the EU’s rescue fund. Chancellor Merkel must reach out to Social Democrats and Greens to secure a safe majority.
Mrs Merkel faced heckling as she tried to rally support for the EU rescue package in the Bundestag. “The current crisis facing the euro is the biggest test Europe has faced since the Treaty of Rome in 1957. This test is existential. The euro is in danger, and if we do not avert this danger, the consequences will be incalculable,” she said.
Tim Congdon from International Monetary Research said deposit data from the ECB shows that there was a “major run” on Club Med banks in the second week of May. Some €56bn of interbank lending facilities were withdrawn, probably as citizens in the South switched funds to banks in the eurozone core. Bank reliance on the ECB lending window jumped by €103bn – or 22pc – in a week.
Restructuring in the Eurozone means that all the citizens’ activities and obligations must be re- oriented, not just those who have no means to effect outcomes. As the (rich) citizens of the South switched funds to banks in the core, the question becomes, where are you going to finally wind up?
“It was extreme and very sudden, probably on Friday afternoon. The eurozone was undoubtedly in peril,” he said.
The question raised by BaFin is whether underlying damage to the eurozone banking system runs even deeper than feared.
Let’s face it, the entire so- called ‘modern’ world is insolvent. The next issue is when the collapse becomes a pop- culture phenomenon? Analysts suggest that the current crisis is a result of the mispricing of risk. The crisis is actually the result of the mispricing of inputs, which is also a lethal form of systemic risk.
The crisis is the result of the true costs of inputs finally emerging. The industrial concept cannot bear the input costs that reflect reality. The modern world is too expensive to return a profit unless the input costs are manipulated.
Says John Michael Greer conjuring the shade of Jimmy Carter:
What that leaves, to borrow a useful term from one of the most insightful books of the last round of energy crises, is muddling through. Warren Johnson’s Muddling Toward Frugality has fallen into the limbo our cultural memory reserves for failed prophecies; neither he nor, to be fair to him, anybody else in the sustainability movement of the Seventies had any idea that the collective response of most industrial nations to the approach of the limits to growth would turn out to be a thirty-year vacation from sanity in which short-term political gimmicks and the wildly extravagant drawdown of irreplaceable resources would be widely mistaken for permanent solutions.
Matisse could create value; all that was needed was paper and pencil. The modern world has rejected Matisse and has turned toward metering waste instead.
Here is US energy conservation, Ronald Reagan style:
Unless you stand next to one you can’t imagine how gargantuan this bulbous automotive bolus really is. The contradictions are built in and cultural. The US government being the ‘management’ of Chrysler and having promised the taxpayer a return on their ‘investment’ the US is compelled to promote this dinosaur. It is exactly what is not needed to solve the energy crisis that bankrupted Chrysler in the first place.
The identical process is repeated across the length and breadth of the entire global economy. Greece is insolvent because it actually had the nerve to borrow the money the Germans made available to them so as to purchase German exports. Unfortunately, neither the exports nor the loans made to fund them left behind any real value. The consequence is a mess that is almost impossible to clean up! Both the funding and the export mercantile policy the animated it were expedients designed to provide instant returns at minimal investment cost. Another mispriced input.
The same is true with the trillions of dollars of unfunded promissories extended by the US government to its hopeful citizens. The government has to steal/wheedle/cajole funds from one set of humanoids with the express intent of distributing them to a virtually identical set. It was a (political) expedient to gain a built- in constituency of dependents at almost zero cost. What is a future promise worth?
Yet another mispriced input.
At bottom is the reaching of the limit of Nature’s credit. Resource shortage means higher real prices and allocation of the most bitter kind. The higher prices allocate away from commerce so that the commerce function of the resources disappears. Nature is a version of a defunct bank that nobody has the means to bail out.
Everyone being insolvent means nobody is. Only the differentiation between the solvent and non- has potency. The comedy is one nation then another trying to distance themselves somehow from the other proles … while being identical and interlocked at the same time.
Greer’s piece is a recollection of Warren Johnson’s Muddling Toward Frugality, where:
Johnson’s hope that simple, day by day adjustments to dwindling energy and resource supplies would cushion the transition from an economy of abundance to one of frugality. His strategy, though, still has some things going for it that no other available approach can match: It can still be applied this late in the game; if it’s done with enough enthusiasm or desperation, and with a clear sense of the nature of our predicament, it could still get a fair number of us through the mess ahead; and it certainly offers better odds than sitting on our hands and waiting for the ship to sink, which under one pretense or another is the other option open to us right now.
Muddling through accepts the requirement for stringent energy conservation, resource waste being the foundation of the economy and the cause of the current – expanding – crisis at the same time.
It’s simple, it works, it’s cheap. It will happen voluntarily or will be forced on us humans by events. Another part of muddling through is for governments to begin to govern. That means telling people the unpleasant truth and preparing for sacrifices. Perhaps Germany is taking the first steps out of desperation, the road chosen leading to something other than steepening panic. Time will tell.