Inflation vs deflation vs stagflation

The primary business of banks is lending.

  1. In a recession, not many people and businesses borrow, hence lending tends to be a poor business.
  2. In order to make money off of lending assets you need a reasonable return.
  3. When ZIRP (Zero Interest Rate Policy) is applied, said reasonable return does not exist unless banks dramatically mark up the cost of the loan which brings up back to point one.

In the states I made this point when most analysts insisted that ZIRP was good for the banks, to wit...

Now remember, I've been very bearish on the EU and thier banks and sovereign debt in particular, since Q! 2010 - way before most - reference Pan-European sovereign debt crisis. Yesterday morning if you were to Google the term EU recovery, you would see something like this in return... 

Well, somebody better tell Draghi, as per Bloomberg: ECB Cuts Key Rate to Record Low to Fight Deflation Threat

The European Central Bank cut its benchmark interest rate to a record low after a drop in inflation to the slowest pace in four years threatened its mission to keep prices stable.

Policy makers meeting in Frankfurt today reduced the main refinancing rate by a quarter point to 0.25 percent. The decision was predicted by three of 70 economists in a Bloomberg News survey. The ECB kept its deposit rate at zero and trimmed the marginal lending rate to 0.75 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m.

The ECB now has just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s target and unemployment is at the highest level since the currency bloc was formed in 1999.

“There comes a point where inflation is so weak, and coming in weaker than anticipated, that the case for loosening policy becomes too hard to resist,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London, who predicted the cut. “Bad unemployment numbers only make the case stronger.”

Does it seem like I've predicted the future hear once again as that Financial Nostradamus Dude???

Quantitative Easing

A Fed-style quantitative easing program has repeatedly been ruled out by ECB policy makers. The central bank is barred by European Union treaties from financing state debt, making large-scale purchases of government bonds open to a legal challenge.

While Draghi has floated the prospect of a negative deposit rate, the rate for commercial lenders who park excess cash at the central bank, policy makers have said that its effects can’t be adequately predicted. A negative deposit rate could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.

“If inflation stays low, as seems likely, and the threat of inflation expectations becoming unanchored to the downside increases significantly, then all the tools in the box can come into play,” said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “But knowing the way the ECB operates and how long it has taken to try and get support for a refi rate cut, doing the big stuff could take some time.”

Well, I believe QE has already been implemented by the ECB accepting trash sovereign debt as marketable collateral, but that's a discussion for another day. Just listen to the Financial Nostradamus dude when he warns what happens when a larger, admitted QE program is instituted. For one, you'd probably eliminate that inflation problem... replacing it with...

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Four months ago I posted the self explanatory piece aptly titlted "Bernanke's Bluffing Because A True QE Pullback Will Cause Fundamentals To Reassert In Banking Sector". In it I stated the obvious... 

Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down???

Today, ZH reports:

Just out from Fed "hawk" Dick Fisher:

    • FISHER: FISCAL SHENANIGANS HAVE `SWAMPED' QE TAPER PROSPECTS
    • FISHER: HARD TO NOW ARGUE TO CHANGE COURSE OF MONETARY POLICY
    • FISHER HAS FAVORED TAPERING FED MONTHLY BOND PURCHASES
    • U.S. FED'S FISHER REPEATS BEST TO 'STAY THE COURSE' ON BOND BUYING AT OCTOBER FOMC MEETING

For anyone who is surprised by this, don't worry... I have this levered deal to by this Bridge in Brooklyn, real cheap too, near zero percent interest! 

 

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I like Professor Shiller and respect his work. Really, I do, but... Massive bubbles, the sort of the proportion of the 2008 crisis, are nigh impossible to miss if you can add single digits successfully and are able to keep your eyes open for a few minutes at a time. Yes, I truly do feel its that simple. I saw the property bubble over a year in advance, cashed out and came back in shorting - all for a very profitable round trip. Was I a genius soothsayer? Well, maybe in my own mind, but the reality of the situation is I was simply paying attention. Let's recap:

  1. The housing market crash in the spring of 2006 and publicly in September of 2007:Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
  2. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
  3. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?

We all know what happened after this part. Well, 5 years later, before we even ran off the effects of the last crash, things are looking bubblicious again and again very few are facing facts. Reuters/CNBC reports "Nobel Prize Winner Says Housing Market Looking A Little Bubbly":

Robert Shiller, who shared the 8 million Swedish crown ($1.25 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the U.S. Federal Reserve's economic stimulus and growing market speculation were creating a "bubbly" property boom.

You think so?!

The Royal Swedish Academy of Sciences lauded the economists' research on the prices of stocks, bonds and other assets, saying "mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy."

This was the case in the collapse of the U.S. housing market, which helped trigger the 2008-2009 global financial crisis. Markets are at risk of committing the same error now, Shiller told Reuters after learning he had won the Nobel prize.

"This financial crisis that we've been going through in the last five years has been one that seems to reveal the failure to understand price movements," Shiller said.

Bubbles are created when investors fail to recognize when rising asset prices become detached from underlying fundamentals.

Shiller and other economists warn that prices in some markets have risen too far, too fast due to the Fed's ultra-easy monetary policy. The benchmark U.S. Standard & Poor's 500 index hit a record in September, though it is generally not considered overvalued based on expectations for corporate earnings results or economic growth.

Shiller's work led him to suggest in 2005 that the U.S. housing market might be overheating. He helped create a closely watched gauge of housing prices, the S&P Case/Shiller Index.

In June this year, he pointed to a potential new housing bubble in some of America's largest cities. 

"It is up 12 percent in the last year. This is a very rapid price increase right now, and I believe that it is accelerated somewhat by the Fed's policy," he said.

China, Brazil, India, Australia, Norway and Belgium, among other countries, were witnessing similar price rises. "There are so many countries that are looking bubbly," he said.

The Fed has held U.S. interest rates near zero since late 2008 and almost quadrupled its balance sheet to around $3.7 trillion through a campaign of bond buying, or quantitative easing, to hold down long term borrowing costs.

Bloomberg TV & Reggie Middleton on the Flawed Case Shiller Index: "That's what they said in Japan about 12 years ago, look where they are now!"

Previous opinions on the topic...

Is There A Bubble In The Canadian Condo Market? We Drill Down Into The Facts To Find Out

The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales....

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Bernanke's Bluffing Because A True QE Pullback Will Cause Fundamentals To Reassert In Banking Sector

A little over two years ago I queried "Is Another Banking Crisis Inevitable?". This post attracted the attention of certain ING executives who apparently were asking themsevles the same question. I was invited as the keynote speaker at their valuation conference in Amsterdam wherein I dropped the negative reality bomb! Interest rates were GUARANTEED to spike and when they do, those banks with fictitious bank sheet values and business models predicated upon credit bubble metrics were GUARANTEED to start collapsing. 

It's not just the European banks either. In 2009 I queried "Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?". Then there's real esate in both the US... CNBC's Fast Money Discussing Hopium in Real Estate...

 

hat visual relationship is corroborated by running the statistical correlations...

Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 

Crain's New York illustrating Reggie's BoomBustBlog and the followup article in Crains illustrating his accuracy in calling real estate and the European debt debacle,"

“His work is so detailed, so accurate, it's among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton's research.

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 As per Bloomberg: IMF says Greece will miss bailout target

The International Monetary Fund published a report predicting that Greece's 2014 budget surplus will fall 0.4 percentage points short of the 1.5 percent gross domestic product mark required by the terms of the country's international bailout. Greece was previously thought to be on track to meet the surplus target, but the forecasts were overoptimistic.

Get the hell outta here! Optimistic! Really? From the IMF???!!! As I channel my post from 2010, aptly titled "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!"

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Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

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... The EU/EC has proven to be no better, and if anything is arguably worse!... If the IMF was wrong, what in the world does that make the EC/EU?

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!...

Alas, I digress. Back to the Bloomberg/IMF snippet...

Tax collection is sagging; Greece is still in recession; and privatization is proceeding much slower than planned.


But this was quite evident last year as Greece failed to achieve Primary Balance and was slipping ever so farther away from that rather lofty (at least to most of continental Euope on a real, applied basis) goal. Don't say you didn't know, because I told you so, and on a European broadcaster as well...

And back to our snippet of the day...

The Greek finance ministry immediately responded to the new IMF projection, saying the government would do whatever was necessary to achieve a surplus of 1.5 percent GDP: cut spending, step up tax collection or both.

Oh yeah, that will work just fine. Cut off your legs to reduce your weight and drag so you can run faster. Does anyone in these financial ministries know anything about FiNANCE???!!! 

Further cuts, however, may be politically untenable: The country is already in turmoil over the government's austerity measures. Meanwhile, failure to reach fiscal targets may delay further aid from both the IMF and the euro area. A new Greek crisis is a distinct possibility for next year.

Uhhh. PSSST!!! But, we haven't finsighed the "OLD Greek crisis" yet, you know the one I warned you about in 2010! From my 2010 article for subscribers, Greek Debt Restructuring Analysis - Professional, I excerpt as follows:

In 2012, Der Speigel ran an article stating what I told my subscribers for the two years previous - Greece was in a hole that it simply couldn't crawl out of. From the piece aptly titled "Greece Fulfills Its BoomBustBlog Derived Destiny - Shows This Time Really Isn't All That Different After All!!!":

I believe I was one of the very few to declare Greece a foregone default in February 2010 (I Think It’s Confirmed, Greece Will Be the First Domino to Fall and then with with more specificity a month later As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!).
By the 2nd quarter of 2010 I was one of the very few to clearly and articulately detail exactly how Greece would default with specific structures in play- What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. Due to a few institutions who were skeptical, I attempted to make it a bit more real - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Well, Greece defaulted according to plan, despite all of the "people in the know" saying otherwise -Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! - from government officials tothe EC and IMF - Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Even after the default, I made clear that this wasn't over for Greece, for the default actually left Greece worse off fundamentally, not better. Go wonder... I know I did, reference the warning from 5 months ago:

This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural
problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

..Subscribers can download my full thoughts on Greece's sustainability post bailout here - debt restructuring_maturity extension blog - March 2012. Professional and institutional subscribers should feel free to email me in order to receive a copy of the Greek restructuring model used to create these charts and come to these conclusions.

Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.

Alas, I digress. Back to the der Spegiel article...

According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a
privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.

I'm sorry, but I simply cannot resist. This article was posted on BoomBustBlog in July of 2011 - Greek Asset Sales Fall Short, As We Virtually Guaranteed They Would In Spring 2010.
In it I reviewed how the BoomBustBlog team detailed EXACTLY how bullshit the privatization plan was, in explicit detail - in the spring of 2010. THAT WAS MORE THAN TWO AND A HALF YEARS AGO, PEOPLE!!!
If a blog can have this much foresight, with this much specificity, than what does one make of this so-called troika??? As excerpted:

This is a tragic Greek comedy. Professional/institutional subscribers should reference the Greece Public Finances ProjectionsGreece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb in its entirety.
For those who chose not to subscribe, I am posting excerpts from pages 5 and 6 from said document, don't read this while eating or drinking for fear of spitting up your lunch!

Any subscribers who would have went heavily bearish into these banks when I first commented on the would have done quite well:


Okay, I digress - yet again... With such excessive bullshit, one does tend to get thrown off track. Back to the der Spiegel excerpts...

The news of the potentially greater financing needs comes at a sensitive time for the country. Many in Europe, particularly in Germany, are losing their patience and there has been increased talk of the country leaving the common currency zone. Over the weekend, German Finance Minister Wolfgang Schäuble reiterated his skepticism of additional aid to Greece. "We can't put together yet another program," he said on Saturday, adding that it was irresponsible to "throw money into a bottomless pit."


Well, my friend, if you had that BoomBustBlog subscription, you would have known before you spent that first euro that Greece was a bottomless pit. Let me reiterated what I pasted up top... This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. And guess what? Anyone who dips new money into Greece now will suffer the EXACT same fate!

As excerpted from Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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Greece's default will hit an already bank NPA laden Spain quite hard: The Spain Pain Will Not Wane: Continuing the Contagion Saga and ditto with Italy "As We Assured Clients Two Years Ago, Italy's Riding The Broken Promise Express To Restructuring". Once Italy gets hit, the true bank runs will start as socialist France (the so-called half of the EU anchor) loses control of its banking system. Reference "As The French Bank Runs....": 

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

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Will Greece Set Off the Pan-European Sovereign Debt Crisis?

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About 6 months ago I said "Economic Depression Is The New Success". In said article, I forcast serial European bank runs, to wit:

From the BBC: Iceland's 'tenacity' lifts economy out of crisis

Whisper it - Iceland's economy is on its way back. The frozen island on the edge of the Arctic, which had 10 straight quarters of shrinking GDP, is suddenly on a steady run of seven quarters of growth averaging at 2.5% per annum - something that few European countries can boast. Unemployment has fallen to just below 5% and confidence is returning...

Ready! Set! Bank Run!!!

Cyprus contagion rawCyprus contagion raw

Subscriber downloads below (click here to subscribe):

Well, today Bloomberg reports "Icelanders Run Out of Cash to Repay Foreign Debts: Nordic Credit". Basically, as percieved to be cut off from foreign markets, Icelanders are running out of non-Krona denominated cash to pay off foreign debts. Here's more on the dilemma:

Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product.

The nation faces a “repayment risk of foreign debt by private entities in the economy, who don’t have access to foreign financial markets,” Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based central bank, said yesterday in an interview. “We view this as being exacerbated or made worse by the fact that our current account is actually declining.”

Prime Minister Sigmundur David Gunnlaugsson has said Iceland’s foreign exchange shortfall is “a matter of huge concern” as he tries to scale back currency controls in place since 2008. The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.


Wait a minute, if the Icelandic debt spikes, what happens to the Icelandic banks banks whose primary government bond (aka "risk free", ahem...) holdings happen to be Icelandic. Here's a hint: The Anatomy of a Europan Bank Run!

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Last week I queried "Is There A Bubble In The Canadian Condo Market?" We Drilled Down Into The Facts To Find Out and offered our researched opinion to paid subscribers (see below). Boombustblogger backwardsevolution has shared some interesting charts that appear to go straight into the heart of the matter..

Vancouver house prices - 40 years

All paying subscribers, feel free to download.

File Icon Is There A Canadian Condo Bubble? (Residential Real Estate)

Non-subscribers can purchase this report through a day pass subscription via PayPal or Credit Card

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The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales. The demand for housing overall is slowing down, with sales in the last few months of 2013 falling on y-on-y basis. In most major Canadian markets there is an increase in listings and decrease in sales (even though prices are still somehow rising, which should in and of itself be indicative of a problem).

However, what is holding the housing market from the “steep and prolonged fall” that the American and periphery EU markets experienced is the extremely low interest rate offered by the banks in a bid to maintain their top line and bottom line. (Note: ~>70% of the mortgages in Canada are insured by Canada Mortgage and Housing Corporation.  The banks therefore are more than motivated to lend for home mortgages). This “ZIRP” (Zero Interest Rate Policy) environment portends material volatility when it comes to an end, either voluntarily through the prospect of organic economic growth, or involuntarily through natural market forces coming to bear. The reason is that at no time in the history of the developed world has interest rates been this low for this long.

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The caveat is, economic growth, the primary reason for cutting rates this low for this long – has never materialized, dispute the flood of free or even negative interest rate money that's been flooding the markets. 

When (and that's "when", not "if") risky asset prices decide to revert to mean the snapback to bank balance sheets and economic profit has the potential to be devastating. Yes, even to those conservative Canadian banks.

Click to enlarge, and study carefully...

Reggie Middleton Canadian Condo Bubble

... and on the topic of "Bail-ins"

All paying subscribers, feel free to download.

File Icon Is There A Canadian Condo Bubble? (Residential Real Estate)

Non-subscribers can purchase this report through a day pass subscription via PayPal or Credit Card

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Last year I wrote "The "Believe In Germany Bailing The EU" Trade: Go Long Magic Wand Raw Materials & Harry Potter Paraphernalia" wherein I warned of both the risk in Germany as a save all, and the risks posed to European FIRE sector companies (and insurers in particular) as a result of this believe in magic over math. 

Well, now Bloomberg reports that Poland has literally confiscated private pension manager's bonds with essentially no compensation, ex., they stole them, as per Bloomgerg - Poland to Cancel Bonds From Pension Funds in System Revamp:

Poland will take over and cancel government bonds held by its privately managed pension funds, stopping short of fully “nationalizing” the system as it seeks to curb public debt, Prime Minister Donald Tusk said.

Whaaaat!!!??? Cancel bonds? Outright theft! Listem carefully here. It's not as if I didn't tell you so. Now, what happens to those insurers whose pension funds under management were robbed? Again, revisit "The "Believe In Germany Bailing The EU" Trade: Go Long Magic Wand Raw Materials & Harry Potter Paraphernalia". This plain as day and easy to see coming, and there's a lot more coming!

Remember my many warnings this year on the Irish and EU banking system:

Transparency In The European Banking? Madness, I say! Sheer, Utter Madness!!!

If I Provide Proof That The Entire Irish Banking System Is A Sham, Does It Set Up A Much Needed System Reboot? Let's Go For It...), the chances of there being any recovery is somewhere between zilch and nil, give or take a euro or two - reference LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%? and The Anatomy of a Serial European Banking Collapse to realize that once a counter party driven bank run starts, there may be less than nothing to divy up in the end. Lehman Brothers' US creditors received roughly 10 to 40 cents on the dollar, but after 5 years of wrangling, the European International arm was full repaid. Hey, do you feel lucky with your life savings? Even if you do feel lucky, you'll still need 5 years to spare and a ton of cash for legal fees.

However, some member states have not ruled out the possibility that insured deposits, i.e. deposits under €100,000, would be forced to bear losses in the event of a bank collapse even though these deposits would be likely to be protected by the deposit guarantee scheme.

As stated earlier, this ain't AAA coverage!

This year Jeroen Dijsselbloem, head of the group of 17 euro zone finance ministers, said that losses on bondholders and depositors could form part of future bank bailouts as euro zone officials seek to move the burden of bailouts away from taxpayers – as was the case in the Irish bailout – and on to private investors.

The European Commission argues that this switch from so-called “bailouts” to “bail-ins” would result in an allocation of losses that would not be worse than the losses that shareholders and creditors would have suffered in regular insolvency proceedings that apply to other private companies.

Ahem, that non-sense only works on the uneducated and/or the unassuming. The major difference is that creditors that would be subject to regular dissolution proceedings AND that are unsecured, would demand considerably higher rates of return. A borderline solvent bank whose officers AND regulators admit publicly is in need of additional capital infusions after receiving three thus far, and 96% losses in its publicly traded equity, would have to borrow money at 18%, not 2% - and that's being generous. See the bank deposit rate calculator below.

While the inclusion of large savers in future bank bailouts is now widely accepted, significant differences still remain between member states.

While the new rules governing bank resolution were first intended to come into place in 2018, since the Cypriot bailout there have been calls from senior EU figures such as European Central Bank president Mario Draghi and EU economics affairs commissioner Olli Rehn to introduce the new regime as early as 2015.

The Irish presidency of the European Council is hoping to reach a common position by the end of next month.

The little app below calculates what return you should expect to receive to take on the risk of a potential 40% haircut. The second tab offers what recent Cyprus bank rates were. Do you see a disparity???

Side note: 

The video below was the result of a collaborative effort to bring Mr.Middleton to Ireland through a crowdfunded campaign. While the effort fell through, we have recycled some of the material to ascertain interest in his visiting Ireland on an independent basis.  If you're Irish, from Ireland or simply find this financial/ethical malarkey disagreeable and would be interested in seeing Reggie Middleton visit Ireland to disseminate his research, create new resarch, hold town hall style discussions on how to "occupy the banks" or simply have a good, old-fashioned breaking of the bread, let us know of your willingness to contribute to a crowdfunded project on Indiegogo. If there is enough interest to make this happen, we will create a project to fund Reggie's trip and create saleable research. Let Reggie know directly by contacting him via email: reggie at boombustblog dot com

Other hard hitting pieces on the resurgent EU banking crisis

"Till default do us part, A half-hearted banking union raises more risks than it solves". To wit:

Almost a year ago, as the euro crisis raged, Europe’s leaders boldly pledged a union to break the dangerous link between indebted governments and ailing banking systems, where the troubles of one threatened to pull down the other. Yet the agreement that seems likely to emerge from a summit later this month will be one that does little to weaken this vicious link. If anything it may increase risks to stability instead of reducing them.

Almost everyone involved agrees that in theory a banking union ought to have three legs. The first is a single supervisor to write common rules and to enforce them uniformly. Next are the powers to “resolve” failed banks, which is a polite term for deciding who takes a hit; these powers also require a pot of money (or at least a promise to pay) to clean up the mess left by bust lenders and to inject capital into those that can get back on their feet. The third leg is a credible euro-wide guarantee on deposits to reassure savers that a euro in an Italian or Spanish bank is just as safe as one in a German or Dutch bank. National insurance schemes offer scant reassurance to savers when sovereigns are wobbly and insured deposits make up a big chunk of annual GDP (see chart).

 

Allegations of Fraud, 20% Drop In Stock Price, Market Manipulations, Internal Investigations: Nothing To See Here, Move On...

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Following up on my timely post "Here Come Those Municipal Defaults That Everyone Said Couldn't Happen, Pt 2", I comment on Meredith Whitney's OpEd in the Financial Times. If you remember, she - like I - warned of municipal defaults years ago and was ridiculed for such. Ms. Whitney is quoted as saying:

"As jarring as the reality may be to accept, Detroit's decision last week to declare bankruptcy should not be regarded as a one-off in the U.S. municipal market." she said.

"There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions."

"The bill for promises past is now so large for some cities and towns that it is crowding out money for the most basic of services – in the case of Detroit, it could not even afford to run its traffic lights," she said.

"Will [lawmakers] side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk."

In the case of Detroit, elected officials, for the first time in a very long time, are siding with residents, Whitney said. This is a new precedent that boils down to the straightforward reality of the survival and sustainability of a town or city, she said.

"After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough,"

Well, this is the problem. Defaulting on revenue bonds where the underlying asset (ex. a housing project, utility, or infrastructure project) is not generating the sufficient cash flows is part and parcel of the risk of investing in said class of bonds. This is widely accepted and understood, which is likely why those bonds have a slightly higher yield.

For some obscene reason, defaulting on the general obligation bonds which purportedly carry the "full faith and credit' of the municipality as a back stop is deemed as wholly different affair. The reason? Who the hell knows? This is a point I tried to drive home in the original  Here Come Those Municipal Defaults That Everyone Said Couldn't Happen article in 2011. Backing by the full faith and credit of a public entity does not make an investment risk free. To the contrary, if said entity is fundamentally insolvent, the investment is actually "riskful"as opposed to risk free.

Treating these bonds as unsecured in the bankruptcy is essentially the way to go. If you don't want to do that, well you can still consider them backed by the full faith and credit of the insolvent municipality, which is essentially unsecured - and move on anyway - particularly as many potential collateral assets of value would have likely been encumbered by agreements with a little more prejudicial foresight.

A GO default from a city the size of Detroit will dramatically change the face of GO bonds going forward. Now that the hoi polloi and tax free investing masses have been awakened, a true accounting of the risks involved will cause a much more realistic risk premium to be placed on GO bonds everywhere.  This wll be in addition to the natural increase of rates coming from the end of a 28 year natural bull market in bonds, in addition to the economic and market snapback borne from the end of the artificial eztension of said bull makret through ZIRP and direct credit market maniputlation by the Fed.

Yes, a triple whammy coming to a bankrupt (or soon to be) state, city, town, or political subdivsion near you!

The good news? Those pension funds that hold municipal assets (due to the uneccesary tax shielding from muni's in a qualified account, not many) will get a higher yield on their bonds. The bad news? That yeild likey will not get paid!

This may push rates higher in general, after all they're artificially low to begin with. ZIRP has done it's fair share of damage, and a snap back to market rates will hurt all the more...

And then there's those monolines who're just working out that 90x leverage problem from the housing crisis (reference A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton)...

And then...

Of course, we can't leave out those rating agencies who warned us all about the impending doom...

And from the must read post, Banks, Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street Hustlers! Its a Sucker's Bet, Who's Going to Fall for it in QE2?

Three Card Monte is a scam designed to separate a fool from his/her money. It is quite efficient, particularly when fools are involved!

The Boogie Down Bronx

The big secret to the Morgan Monte Scam is that it is 10% sleight of hand and 90% teamwork. Even if you are not deft enough to capture the sleight of hand, the key in avoiding it is to recognize the team players, whose key player is often YOU - The Mark!

The retail/typical qualified fund investor = "The Mark"

Monolines/FIRE sector= The Operator/Hustler!

Sell Side analysts = "Jess"

Rating agencies = "Paul"

How its done in the UK

Reenactment of 2009's entire year of Wall Street earnings

How its done on Wall Street, see outset...

Next, up we let the late Biggie school you on how Wall Street banks follow the Ten Crack Commandments!

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Last Wednesday I posted BS... Defined: Bernanke Seeks (BS) to Divorce QE Tapering From Interest Rates - OR - Economic Prestidigitation! wherein I ridiculed the notion of being able to withdraw economic financial aid while expecting rates not to spike. The fact of the matter is we are the at the end of a 33 year old bull market in credit. Or, to put it more accurately, we are at the end of a 5 year synthetic extension of a 28 year old credit market bull run....

I urge readers to keep in mind what I expoused in Apple Bonds Proven To Have A Nasty Taste wherein Apple bonds lose 9% in six weeks:

We Clearly & Obviously Ending A 3 Decade Bull Market, Likely At The Tail End Of The Largest Global ZIRP Experiment Ever!

And this final aspect is the kicker. We are likely culminating the end of a three decade secular bull market in bonds. Why in the world would anyone want to buy debt now, in a good, bad or mediocore company? Reference a chart of ten year rates over time, and you will see that once you get this close to zero (and the applied end to excessive ZIRP), there's no way to go but up. As excerpted from theMarket Realist site:

Yes, this goes for muni investors as well! Municipalities have a dual edged sword up the ass. Not only are higher funding rates to be expected from a shifting market, but the actual fundamentals of municipalities are in the crapper as well, putting an even larger premium on what is already a steep increase in funding costs. What do  you think happens next?

It's not as if we couldn't see this coming a mile away - or at least 2 to 5 years ago...

Wednesday, 14 May 2008 The Municipal bond market and the securitization crisis

ARS market – composition as on 31 December 2007

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Student loans? Ruh Oh!

Saturday, 24 May 2008 The Municipal Bond Market and the Asset Securitization Crisis, pt 2

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Thursday, 20 January 2011 Here Come Those Municipal Defaults That Everyone Said Couldn't Happen

In the multifamily housing segment, default rates increased significantly and were extremely high for the period 1987-90, i.e. at the time of the S&L crisis when real estate lending was reckless due to declining lending standards by banks and other financial institutions. The default rate peaked in 1988 in the eleven year period reviewed to 4.31%, followed by 3.41% in 1989.

 Don't let me say I told you so. Will those monolines start feeling part 2 of credit crunch?

Ambac is Effectively Insolvent & Will See More ... 

What is the Fallout of the Ambac Bankruptcy on the ...

My Analyst's Comments on MBIA/Ambac/Moody's ...

Moody's Affirms Ratings of Ambac and MBIA

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