Wednesday, 09 June 2010 10:51

Nonsense in the MSM and Some Common Sense to Counteract It, June 9th 2010

We've got a particularly heavy dose of BS in the mainstream news channel this morning. I believe it to be my duty to throw some facts amids this boiling cauldron of fiction, fantasy, propaganda, marketing and straight up lies. First up (yeah, you guessed it), those gosh darn Europeans...

June 9 (Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

In a joint two-page letter, French President Nicolas Sarkozy and German Chancellor Angela Merkel sought proposals from European Commission President Jose Manuel Barroso on a ban on so-called naked short sales of “certain” stock and bonds, as well as on naked credit-default swaps on sovereign bonds. They call for proposals to be ready by the middle of next month rather than October as had been planned.

The letter shapes a common position between the leaders of Europe’s two largest economies after Merkel last month caught other EU leaders off guard when she unilaterally banned naked sovereign credit-default-swaps within Germany. She argued the actions of “speculators” exacerbated the European debt crisis that has rattled markets and driven the euro to a four-year low.

“The return of strong volatility in the markets makes it necessary to question certain financial methods and certain products such as naked short-selling and credit default swaps,” the leaders said in the letter, e-mailed by their respective offices in Paris and Berlin today.

While Sarkozy made greater market regulation one of his main rallying cries since the start of the financial crisis, he has so far refused to follow Merkel’s lead and instead pushed for EU-wide measures.

Hey, here's a novel idea. Let's ban sovereign states from lying about financial condition and using swaps (you know, that same category of instruments you would like to ban investors from using) to manipulate your the perception of you liquidity and solvency! That will go a long way in quelling volatility and quashing those sharp downward leaps your securities may suffer from as we "speculators" pile in short positions, puts and swaps. Reference "Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!" as we query...

Let's place bans on Portugal before we ban investors and "so-called speculators"...

Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank has executed currency swaps on behalf of Portugal between 1998 and 2003....

Let's place bans on France before we ban investors and "so-called speculators"...

In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France’s deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the pdf Laurent_Paul_and Christophe_Schalck_study for a background on the deal. I don’t necessarily concur with their conclusions, but it does provide some info


Let's place bans on Greece before we ban investors and "so-called speculators"...

According to people familiar with the matter interviewed by China Securities Journal, Goldman Sachs Group Inc. did as many as 12 swaps for Greece from 1998 to 2001, while Credit Suisse was also involved with Athens, crafting a currency swap for Greece in the same time frame.

Under its “off-market” swap in 2001, Goldman agreed to convert yen and dollars into euros at an artificially favorable rate in the future. This helped Greece to use that “low favorable rate” when it recorded its debt in the European accounts-pushing down the country’s reported debt load.

Moreover, in exchange for the good deal on rates, Greece had to pay Goldman (the amount wasn’t revealed). And since the payment would count against Greece’s deficit, Goldman and Greece came up with another twist: Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. And the two sides structured the loan as another kind of swap. So, the deal didn’t add to Greece’s debt under EU rules. Consequently, Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.

Another action that smacks of Hellenic manipulation, at least to the staff of BoomBustBlog:  for years it apparently and simply omitted large portions of its military-equipment spending from its deficit calculations. Though, European regulators eventually prevailed on Greece to count everything and as a result, in 2004, there was a massive revision of Greek deficit figures from 2000 (a budget deficit of 2.0% of GDP in 2000 to beyond the 3% deficit limit in 2004), by then Greece had already gained entrance to the euro. As in my trying to prepare for the coming sovereign debt crisis, timing is everything, isn’t it???

Let's place bans on Italy before we ban investors and "so-called speculators"...

As discussed in a recent ZeroHedge article, a 1996 Italian currency swap, arranged by J.P. Morgan, allowed Italy to receive large payments upfront that helped keep its deficit in line, with the downside of greater payments later.

In addition, to curbing their current deficits, countries are now using these swap agreements to push off their loan liabilities (related to swap agreements) to a later date through securitization, and Greece is one such example.

Under the 2001 deal brokered by Goldman, Greece swapped dollar- and yen-denominated debt for Euros at below-market exchange rates. The result was that the country got paid €1 billion ($1.35 billion) upfront on the swap in exchange for an obligation to buy the swaps back later. In 2005, this obligation was in turn securitized as part of a 20-year debt issue, further pushing off the day of reckoning.

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU’s Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose – the Ponzi! When Italy’s then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy’s budget deficit in time to usher the country into the common currency, Italy’s use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn’t until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries’ continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late 90’s till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovred. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fxed income investors.


Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn’t know better, one would have thought theses countries actually used magic to make such reductions. Hell, Italy practicaly cut their debt service (projected, of course) in half. It really makes one wonder. I’m just saying…

According to DERIVATIVES AND PUBLIC DEBT MANAGEMENT by Gustavo Piga, “The political stakes of the 1997 budget package were enormous. Therefore, it was no surprise that many countries were accused of ‘creative window-dressing’ in their budget through the use of accounting tricks to reach the desired goal. One contentious item was interest expenditure, which is the interest expense that governments sustain to finance their deficit and roll over their debt. Interest expenditure represents a high percentage of public spending and GDP in the European Union. It is highly variable over time, especially when compared to other components of the budget. Because of its relevance and because it is subject only to minimal scrutiny during budget law discussions (and many times even after its realization during the fiscal year), interest expenditure is an ideal target for reaching fiscal stabilization goals without incurring excessive political protest or opposition”.

Elsewhere in the news...
  1. IMF Says Global Risks Are Rising, Policy Makers Have Limited Room to Act [Duhh!!]
  2. Bankers Challenging Rules in Vienna Find an Ally in Sovereign Debt Crisis [Hey, we'll admit we're not lending if you tighten our reigns as opposed to pretending we're lending when we're really not. Come on people, you don't need new regulation, you need proper enforcement of existing regulation. Make the rampant fraud a criminal offense that forces one to do time, and enforce it, and problems will cease in 30 days...Guaranteed]
  3. Greek Default Seen by Almost 75% in Poll Doubtful About Trichet Is my blog finally starting to get some circulation. Have you finally read Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!?
  4. Bernanke Says Unemployment Unlikely to Fall Quickly : Because we have not organically pulled out of recession yet. The government literally "PAID" for the GDP points printed, and they overpaid as well. Spendign $1 to get 75 cents of GDP print is not progress, nor the stuff jobs are made of.
  5. China Passing Growth Peak Insufficient to Tame Prices Is this what they are calling inflation nowadays?
  6. BofA Sells $212 Million Loan at Discount to Developers: WSJ Link Mumbai Plans to Hire Rat Killers as Rodents Surge: This is one way to lift employment! Should I introduce my Indian friends to the American Rat Terrier?
Last modified on Wednesday, 09 June 2010 10:51