Yesterday’s early bank bail out euphoria is gone. Investors realized quickly that the bail doesn’t solve the problems, especially not the Italian problems. Yields in both countries reversed, and are trading at “scary” levels yet again. The contagion is spreading. With the big underperformance of the MIB index, investors are now slowly shifting focus towards Italy, and don’t be surprised if Silvio Berlusconi comes back sooner than later. As we watch the developments take place in Spain and Italy, let’s not forget that France should be joining the camp later this autumn. From Businessweek.
The relief in Rome was short-lived. Italian bonds rallied early on June 11, the first trading day after European finance ministers’ weekend agreement on a $125 billion bailout for Spanish banks.
But within hours, Italian borrowing costs were creeping back up again, reflecting persistent market fears that the Continent’s third-largest economy could be the next to falter. “Contagion into Italy and other countries is a reality,” Joachim Fels, chief global economist at Morgan Staley in London, said in a Bloomberg Television interview as the bond rally petered out.
Still the best dummies video around explaining the European mess, is now presented in a German version. Maybe, zee Germans will understand now, what this whole situation is about.
Video below, courtesy Omid Malekan.
Guest post by Lance Roberts of Streettalk Live.
We wrote in our newsletter this past weekend that “While the market could certainly move lower in the short term, as there is currently no catalyst present to reverse the decline, it is very likely that some event will occur in the next week or two with regard to the Eurozone that will spark a rally in the markets. It will be short lived”.
Over the weekend this is precisely what happened as Spain received EU support of a financial assistance package of €100 Billion. This de facto bailout is roughly equivalent to 10% of Spain’s current GDP as compared to the $700 billion bailout in the U.S. which was 5% of GDP at that time. This was no small measure. The question remains whether this solves any longer term issues or if it simply postpones the inevitable conclusion for a while longer?
According to the de Guindos press conference, the bailout cash will go to the Fund for Orderly Bank Restructuring which is a fund set up specifically to fund insolvent banks. For Spain this means that it will be completely absorbed by the massive levels of failing real estate loans. Since the “bailout” will be a loan with better terms than the market, 3% or roughly half of the Spanish GGB’s, it will still result in a material increase in Spain’s total debt (National and European) to GDP pushing it well past 140%. Of course, therein is the real story. The bailout, in the eyes of sovereign creditors, just made the country a materially worse bet as Spain’s debt increases by up to 17% and the structure of the loan subordinates existing creditors. This is why we saw Spanish bond yields push higher after the bailout announcement was made.
So where is the money coming from. The EU announced that the sole source of cash would be the ESM (European Stability Mechanism) or the EFSF (European Financial Stability Fund). This is interesting when you consider that the ESM has yet to be ratified by Germany whose parliament has been steadfast against allowing the ESM to fund a direct bank bailout like that being done in Spain. Without German ratification of the ESM, which is highly doubtful in this case, and without having to give ESM Bonds “preferred creditor status”, the bailout will fall onto the EFSF which currently only retains about €200 billion in liquidity. However, the dilemma is that Spain’s obligation to the EFSF is about €93 Billion which is now unlikely to be contributed thereby leaving the EFSF with only about €7 Billion after the bailout is complete.
Hussman of Hussman Funds shares some good points on the markets and the central banker’s casino.
Over the past 13 years, the S&P 500 has underperformed even the depressed return on risk-free Treasury bills. Real U.S. gross domestic investment has not grown at all since 1999, and even as a share of GDP, real investment remains weak.
The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.
Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.
Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.
What is central here is that the government policy environment has encouraged this result. This environment includes financial sector deregulation that was coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice that included bailouts and opaque accounting. Deregulation and lower taxes will not fix this problem, nor will larger “stimulus packages.” The right solutions are to encourage debt restructuring (and to impose it when necessary), to strengthen capital requirements and regulation of risk taken by traditional lending institutions that benefit from fiscal and monetary backstops, to remove fiscal and monetary backstops and ensure resolution authority over institutions engaging in more speculative financial activities, and to discontinue reckless monetary interventions that encourage financial speculation and transitory “wealth” effects without any meaningful link to lending or economic activity.
Guest post by Azizonomics.
In the long run, all the hullaballoo about the various global banking crises is just hot air.
The old establishment banks — the ones that have been bailed out this week in Spain, and in 2008 in America — are unnecessary middlemen. This is because of the ludicrous spreads from which they profit. They borrow from central banks and from depositors at absurdly low rates of interest (that’s what ZIRP is all about) and lend at vastly higher rates. What useful function does it serve? At one time, banks generated value by being wise lenders, lending to businesses that they determined would add value. Today they prefer gamble up even bigger profits in the zero-sum derivatives casino and shadow banking whorehouse, requiring frequent bailouts when such schemes go awry. They are dinosaurs that offer no real value to their shareholders, their customers, or to society.
And for all their claims of systemic importance, for all the bailouts, all the whining, all the pontification they are gradually being sidelined by other forms of intermediation, specifically peer-to-peer lending wherein lenders and borrowers are matched directly often via the internet. The lender gets interest, the borrower pays interest, but because there is no middleman taking a (huge) cut both rates are more favourable — the borrower pays less interest, the lender receives more interest.
All 27 EU countries should submit their big banks to a single cross-border supervisor as part of a banking union to be enacted as soon as next year, the president of the European Commission has urged. In an interview with the Financial Times, José Manuel Barroso said the EU needed to go beyond the incremental legislative measures proposed by his institution last week and take “a very big step” towards deeper integration if the bloc is to learn the lessons of the sovereign debt crisis. http://www.ft.com/intl/cms/s/0/ccb2fda0-b3cd-11e1-8b03-00144feabdc0.html#axzz1xSNLBdRq
Spain’s big banks are breathing a sigh of relief. The twin news of a clean bill of health from a key International Monetary Fund report, combined with confirmation of a planned €100bn European bailout will, they hope, finally convince investors to make a proper distinction between strong and weak. “This is very good news,” said a board member of one big bank. “The big question investors had was where the money would come from to shore up the banks that need it. There was a need for a backstop. What we have now with this bailout money is the backstop.”http://www.ft.com/intl/cms/s/0/8341ac02-b3e6-11e1-8fea-00144feabdc0.html#axzz1xSNLBdRq
Chinese banks issued more loans than expected in May, providing an important indication that the government is making headway in its efforts to support the flagging economy. Banks lent Rmb793bn ($125bn) last month, well above April’s Rmb682bn and also topping most forecasts for a figure closer to Rmb700bn. More than any other fiscal or monetary weapon in its arsenal, the Chinese government uses its control of the country’s banks as a way of steering the economy. With growth down to its lowest in three years, Beijing has started pressuring banks to loosen the reins on their lending to ensure that businesses can get enough credit. http://www.ft.com/intl/cms/s/0/6cd6048e-b3b6-11e1-a3db-00144feabdc0.html#axzz1xSNLBdRq
Apple has struck a new alliance with Facebook to integrate the social network into its iPhone, iPad and Mac operating system at the same time as it introduces a range of new MacBook computers. The ability to post photos, map locations and links to Facebook directly from Apple devices marks a thawing in what has been seen as a potentially adversarial relationship and will bolster the two companies’ efforts to compete with Google. http://www.ft.com/intl/cms/s/0/74f43294-b3ed-11e1-8fea-00144feabdc0.html#axzz1xSNLBdRq