Events overtaking policies

We are on the approaches to another serious bank lending crisis. Once again it will be talked about as a liquidity crisis and once again the underlying illness, insolvency caused by debt, will be studiously ignored. The financial doctors will treat the pustules but not the infection causing them.

Our situation now, is we have both banks and nations which are insolvent. The only reason they have not died is that they are kept breathing by the life support machine known as the ECB. The ECB has spent the last year artificially pumping the oxygen of fresh cash into them, moving their chests in and out for them, with a series of loan programmes, the main one of which, the €442 Billion LTRO (Long Term Refinancing Operation) ends in a few days time. When it does European banks, about 1000 of them, have to return that borrowed 442 billion euros to the ECB. Leaving Europe and some of the individual banks very short of cash.

The Spanish banks in particular are panicking because without it they face runnning out altogether, of operating cash. The ECB is going to introduce a replacement operation but it is supposed to be smaller and will loan money for shorter periods. The Spanish banks are so rattled they have started to call the ECB’s judgement into question. Insulting the man giving you a hand-out seems unwise to me.

Debt and bank insolvency are not going to be confined to Spain. In the next few weeks the strains of the now endemic infection will spring up everywhere at once. Greece is actually going to try to return to the bond markets to sell 4 Billion in 3, 6 and 12 month debt. It is a terrible gamble. They are gambling that sentiment has turned positive enough that bond buyers are now getting greedy for high yeilds. I think the Greeks will lose what is left of their shirt on this. The ECB will be forced to peform its usual miracle and buy the lot.

Further East debts are also congealing in Bulgaria, Rumania and Hungary. All three are deteriorating quickly. Bulgaria is badly entangled with Greece’s fate. Rumania’s supreme court ruled unconstitutional cuts which were necessary for getting the next portion of an agreed IMF bail-out. But it is Hungary where the flash point looks to be coming.

The Florint is getting murdered on the exchanges. A very large amount of Hungarian debt is in Swiss francs which is appreciating hugely aginst the Florint. Thus making Hungarians pay a great deal more to pay off their mortgages and other debts. Hungary’s banks and corporations are all now facing the fact that their earining, being in Florints, are worth less and less and won’t pay off their debts either. Of which, I would like to remind you, they owe €38 billion to Austria’s banks, €32 Billion to Germany’s and €25 billion to Italy’s.

As a consequence of the Florint’s collpase in earning powerr versus debts owed in Swiss Francs, the Hungarian government is not going to raise from its banks the tax it was planning on. And at the same time HSBC and others are all dropping their estimation of the worth of Hungary’s corporate assets. So selling the railways and phone system as they were planning, isn’t going to save them either. In evident desperation, the government has now indicated it will try accounting tricks instead. They are now talking about removing cash debts of state owned businesses from the offical calculations of State debt. A strategy which worked so well for Greece. In fairness I should say it is a trick France, GB and Italy…everyone actually, routinely does. The critical difference, however, is that we are not yet in the cross hairs of the Bond market. Hungay firmly is.

So from that lot I see a Greek debt auction which will fail and have to be rescued, Bulgaria pushed further into the mire, Rumania already there, and Hungary floundering in quickly rising insolvency. All this will cause the Libor and Euribor to tighten. As it does we will have a full blown crisis on our hands again.

Interbank lending is presently making a strangled gasping sound. This should get worse very soon. If this critical moment isn’t the trigger for the next massive print and bail insanity, then it will be the one after that, or the one after that. They will keep coming. Like heart attacks for a super obese patient who just won’t stop gorging on junk food. Incapacity is permanent. Death is certain.

All this will combine with oozing debts in America which are resurfacing. America has huge state and local government debts. Many of these have to be funded in July. It’s just the way the Muni market works over there. California, for example, has to cut heading on for $20 billion or find debts to cover it. There are around 25-30 states with smaller but equally urgent debts right behind them. The Fed will have to take these debts onto itself or face rolling state and local goverment defaults which would finally detonate what is left of the wreak of the muni bond market.

In the UK too there is a submerged and unrealized lake of local and county council debt. Councils owe around £60 billion while their tax receipts fell last year by 24%. ( Thanks to Jim for the link and to “The Slog” for the story at http://nbyslog.blogspot.com/2010/06/analysis-fiscal-bulldozer-about-to-hit.html )

I don’t think Cameron has read that memo yet. When he does it will add to the savagery of the cuts he will try to inflict on the poor. I wonder which banks they owe?

The debts of the banks and now of nations as well is a vast mass in whose gravitational well we are trapped in an unstable and decaying orbit. Each time we circle it we are a little lower.

For the last two years, longer if you want to go back to the .com and tech bubbles, we have been trying to break free from our decaying orbit, but have failed in every attempt. For a simple reason. Every time we attempt to break free of the gravitational pull of all the debt, we do so by borrowing or printing yet more money, which adds to the mass of debt and increases its pull on us. We are doomed by stupidity. We have coverd this stupidity with nothing more than jargon. As if calling bankruptcy and debt – liquidity – somehow makes it go away.

A few decades ago in the Mid West of America they suddenly realized they had to have a plan for dealing with a vast backlog of toxic industrial waste from US chemical plants. The costs looked prohibitive. Industry said they would be ruined. They came up with a cheap and cunning plan. They called it deep-well injection. Instead of dealing with the waste properly and expensively, they said they were going to inject the waste into deep wells drilled between layers of ‘impermiable rock”. Out of sight out of mind but NOT out of pocket. A few years later the inevitbale happened. People started to notice their water was contaminated. Those water supplies are now permanently contaminated. In other places there were even reports of thick sludge oozing up out of the ground in unexpected places. I think you can guess the rest.