I think we are going to see European bank funding, both short term (overnight) and the coming wave of bond/debt to be rolled over, becoming intensely political. The political battle is between Washington DC and Berlin, with the ECB in the middle.
This battle will start once the spiralling funding needs of Europe’s private banks rise like bloated corpses to the surface of the news.
The banks of Italy and Spain all have very large and looming funding needs. Made larger and more pressing because many of the least stable made themselves even less stable in the last few months by actually increasing leverage. UK banks are in there too.
Sadly for European banks much of their recent source of funding from US money market funds is drying up. The US money market funds had vast amounts of cash poured in to them in recent weeks. Money that was pulled from the stock markets. BUT at the same time as these funds have been stuffed with cash, less and less of it is coming to fund European banks. Unless sentiment in the US changes, and money flows back, the European banks are going to be hurting for short term funding and bond buyers in general. At precisely the moment their funding needs really start to press.
I don’t see the Spanish or the Italian banks even risking coming to the bond markets for funding lest they be turned down and face the massive pr disaster of a failed bond offering. But they can’t survive long without funding and outstanding debts being rolled over.
That leaves them with their own governments and the ECB.
Their own government’s however are impotent due to being broke. That leaves the ECB caught between an increasingly desperate France and an increasingly angry Germany.
The banks and the global financial class need a new injection of easy money. They have a shortish time table because of the leverage on some of the deals and debt coming due. The Europeans might be tempted to complain to the US Money Market Funds that they are the cause of the problem by withholding cash. The Money Market funds will reply that the ECB is the problem because until there is a plan in place to convince the Money Market Funds and the Banks, that the governments are ready to cover all short falls in funding, The Money Market funds don’t want to risk their cash in banks that might go down.
The Money Market Funds aren’t however, disinterested spectators on the sidelines of this argument, however, because they are still largely exposed to Europe’s banking sector. So they are pushing for a bail out of Europe’s banks. America’s banks will be pushing too because many of them will have serious counterparty risk with European derivatives.
The FED will be drawn in to this argument as well. The FED does not want European banks to go down because of the damage it would do to US financial players. The FED would like to see firmer signals from the ECB and from Berlin that Europe will not let any of its banks go down and is ready to bail them out as necessary. Because if the ECB and Europe did not bail them out would that leave the FED feeling obliged to step in not out of love for European banks but to prevent the collapse crossing the Atlantic.
And so as European bank funding becomes more and more critical and the news of the growing debt finding crisis begins to effect bank stocks and stock markets more broadly we will have an escalation of the Berlin/Washington stand off.
The ECB will be in the middle being pressured from both sides. The EFSF will also be kicked from one end of the pitch to the other as more proposals and counter proposals surface to find a way to get Germany to accept Euro TARP II.
But Germany is going to be less and less amenable to what it sees as blackmail 9bail us or we take you down too) without seeing some really iron booted austerity being seen to crush the life out of those with their hands out for, as they see it, German cash. Which leaves the whole thing hanging on Spain and Italy being able, and being seen to be able to, enforce draconian cuts on people who are more and more angry and inclined to resist.
Spain is running up to an election. Berlusconi is trying to avoid one as his proclamation of austerity measures have already been met with promises of vast industrial action. Personally I think Rome can pass laws all day but I doubt they can actually make the measures happen.
And while all this politics plays out, the European the banks will run out of money on a quite different time scale.
I think this is not over by a long way. In fact I think this is just starting.
Any thoughts on a sensible way forward here Golem?
I'm kind of stumped. Some kind of temporary ECB solution while Germany and whoever else leave the Euro?
It makes you think of the aftermath of WW1, in contrast to WW11, when the League of Nations required reparations from Germany that were
Impossible to meet. How Germany went on a printing spree and the mess that resulted from that saw the election of a "strong man".
We truly live in frightening times.
Golem,
Will the German people accept the Eurobond ? Do they have a choice?
Are we likely to see the PIIGS countries separated in a 2 tier euro or could we(piigs) be dropped out of the EU euro and left to look after our own sunken ships? For Ireland now I still think that this is our best hope depending on how our politicians handled it, is for default – Iceland style.
Am I right in thinking that if Eurobonds are created that this just expands the EU debt levels and moves the problem a bit further down the road but makes it far worse? There is nothing to back these bonds apart from the German economy which is going to be in enough bother if/ when the inevitable happens, what chance do you think there is of a Federal Europe?
I guess there is a much bigger game being played here, one that we will know little about until we are so deep in it that it is the best option to move forwards( or at least that is how it will be sold to us as usual) Do you have any ideas on the bigger picture Golem?
Reposting this from the previous thread, as it seems more appropriate here.
Guardian economics editor Larry Elliott on a system that's ready to blow:
http://www.guardian.co.uk/business/2011/aug/14/larry-elliott-global-financial-system?INTCMP=SRCH .
The message seems to be getting through in some quarters.
Paddy Fields, Patricia, myopia,
I do have some further ideas. But they are necessarily ideas rather than close and informed analysis.
I believe the German parliament will only accept the the issue of a euro bond IF it is acompanied by a very much greater power for Germany to impose its own fiscal ideas upon those nations who most need teh Euro bond – Greece, Italy Spain.
At the moment there is little chance of Federalization making it through the tortuous process of ratification in any useful length of time. Thus I belive there must be plans being worked on somewhere in the EU and the ECB for a new body and new power whereby Germnay could excercize intrusive fiscal oversight of other nations within the current EU framework. Some sort of 'emergency' regulatory regime connected with a super EFSF or some other new body.
I have ZERO evidence that anything like this is happening. My argument is purely one which proceeds from the proposition "If this is what was wanted, how could it be done in time."
The other possibility is the break up of the EU in to a two tier system. I think this is easier to imagine and achieve. Though not easy. I also think it could happen alongside the greater fiscal union and greater powers of interference for German fisccal policy.
I have not written about these ideas because it seemed too speculative and I thought people might think it 'not what they come here for.'
I also think we have to be clear that there is not a single big game being played here. There are, in my opinion, several competing and over-lapping agendas. But again I am specualting. I am happy to do so if people are interested. Otherwise I shall keep my notions private.
We are coming, I think, to an historic moment.
As a slight tangent to the discussion above and following Golem's recent posting re the possible pegging of the Swiss Franc to the Euro –
Trade Wars anyone?!? One of Switzerland's biggest supermarket chains has just announced the withdrawal of 95 foreign brands:
Swiss supermarket pulls expensive foreign brands – Euronews, this morning:
"A retail battle is raging between a Swiss supermarket chain and foreign manufacturers.
At the heart of the dispute is the increasingly strong Swiss franc.
The Coop chain has decided to withdraw 95 brands which it feels are overpriced now there is such a discrepancy between the franc and the euro.
Juerg Peritz, Director of marketing and purchasing for Coop said: “It is not acceptable that the manufacturers of international brands that are produced in the euro zone are keeping the exchange rate profit all for themselves.”
Coop want the manufacturers to lower their prices by up to 20 per cent giving a truer reflection of manufacturing costs in the euro zone.
Sara Stalder of the Consumer Interest Council:
“Prices in Switzerland are much too high. The reaction of the supermarket chain is a strong signal but in the end it is really just media friendly sales campaign. What we really need is strong support by the commission on competition.”
On the other hand the Swiss National Bank last week tried to curb the surge of the country’s currency which has risen against the euro by 40 per cent since 2008. The unequal exchange rates are hammering Swiss exporters."
http://www.euronews.net/2011/08/15/swiss-supermarket-pulls-expensive-foreign-brands/
PS
Apologies for the delay in responding to comments about my recent guest post on Golem's blog "Guest Post – WhistleblowerIRL – The Show Must Go On."
@ Shtove, Ken, Dave-from-france, Fungus FitzJuggler III
Thank you very much for your words of support; they are TRULY appreciated!
The Central Bank is now claiming that if they were to learn that UniCredit Ireland did indeed break the terms of their banking license in 2007, they might have to proceed with criminal charges. They did not really 'get it' until now; that is despite the fact that the ongoing breaches were described first by David Norris in the Seanad and then by Joan Burton in the Dail (lower house of parliament). After all, they are just the houses of parliament, nothing to take notice of, really.
Having said that, once UniCredit and the Irish Financial Regulator were named and shamed in the Austrian parliament at the end 2010, it got a bit harder for the powers that be not to notice. Hence inviting me and others to come forward. However, seeing as I am the one who officially notified them of a 1900% breach which they did nothing about, they could not possibly encourage anyone else to follow suit.
The link to the debate about UniCredit Bank Ireland and the ineptitude of the Irish Financial Regulator is UniCredit als Mitverursacher der irischen Finanzkrise
Some interesting comments on the Euro predicament by leading MMT academic Randall Wray in part two of an interview in May here:
http://neweconomicperspectives.blogspot.com/2011/08/interview-with-randy-wray-regarding.html
Also some interesting commentary there re China.
Part one of this interview was posted here:
http://www.mecpoc.org/2011/07/interview-with-randy-wray-regarding-the-next-crisis/#more-897
@WhistleblowerIrl
I take it that this means that you should be off the hook on being prosecuted yourself which is good news.I guess the fact that now Unicredit doesn't look such a strong player any more has given the opportunity to attack. It will be interesting to see if our Politicians or the regulator get a rap for this, not likely but we live in hope.
@ Golem
Thanks for the reply, I for one would be interested in your speculation on this, I think it is part of the reason that we are all here and maybe the best way to get to the facts, brainstorming is what I'm thinking I guess and it already happens here.
Although there are lots of different agendas happening in different countries do they all have the same end game? I've read some comments about a new international currency backed by the IMF, do you know anything about this?
The online bookies Paddy Power are offering odds on the next country to lose its AAA rating:
France 6/4
Australia 16/1
Germany 33/1
Canada 11/4
Singapore 20/1
Hong Kong 33/1
United Kingdom 11/4
Sweden 25/1
Switzerland 40/1
Austria 5/1
Norway 25/1
Guernsey 100/1
Denmark 12/1
Finland 25/1
Isle of Man 100/1
Netherlands 12/1
Luxembourg 33/1
Liechtenstein 100/1
http://www.paddypower.com/bet/politics/other-politics/us-politics?ev_oc_grp_ids=489132
#Neil thanks for previous link.
Surprise surprise!
BCA Research Finds "QE Is Good For The Rich, Bad For The Poor"
Hey, can't miss this one:
http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=4
Osborne? Are you listening, mate?
Truth be told, this is denial nudging towards panic – a vortex of vacuity hanging on by it's fingertips by empty threats of doom and Armageddon if we let them fail.
In fact it is they who are causing the doom and disaster – time to call their bluff.
Time for a re-appraisal of our value as individuals and the values we want as benchmarks for our societies, communities and nations.
Any system that is fundamentally corrupted and flawed as the present monetary system is not worth the time and effort needed to sort it out. Let those who have used, exploited and manipulated it keep all their ill-gotten gains but confine their trading amongst themselves with no licence to trade in our markets.
Elitism feeds off the envy and awe of the spectator – without these reactions their avarice looks and will eventually feel ludicrous.
If we do that it wont be long before hindsight has us wondering why we put up with the idiocy and the pain it caused for so long.
Angela, between a rock & a hard place.
http://www.telegraph.co.uk/finance/financialcrisis/8703147/Germanys-Angela-Merkel-faces-eurobond-mutiny.html
"Auditor PricewaterhouseCoopers admitted to years of mistakes relating to the failure of investment bank JP Morgan to ensure that billions of pounds of its clients' assets had been properly ring-fenced.
PwC is now expected to face a heavy fine over its role in the client asset scandal which could have wrought unnecessary mayhem had the bank collapsed at the height of the financial crisis in October 2008. At that point, JP Morgan's futures and options desk held $23bn (£14bn) of client money, largely belonging to hedge funds, which was not segregated from the bank's own funds."
More here http://www.guardian.co.uk/business/2011/aug/15/jp-morgan-pricewaterhousecoopers-clent-assets .
Tyler has called it…..
http://www.zerohedge.com/news/guest-post-%E2%80%9C-sequel%E2%80%9D-how-2011-repeat-2008%E2%80%94only-bigger-longer-and-uncut-bailouts
Neil,
Nice spot. I wouldn’t underestimate how profound and potentially pernicious this sort of conduct is.
It is not just about the risk to ownership of assets during insolvency, but the ability to game the system.
Here’s a post of mine from June last year, which somewhat curiously was banned by the BBC moderators:
———————————
So JP Morgan has been caught with its hands in the till (so to speak):
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7800471/UK-hits-JP-Morgan-with-record-33.3m-fine.html
Will this get a mention on Newsnight?
"JP Morgan has been hit with the largest fine ever levied by the UK market regulator for risking its clients' money by failing to put the balances into accounts separate from the US bank’s own funds."
They admit to doing this from 2002 to 2009. Could this be an admission of the accusation made by Max Keiser a few weeks back:
http://www.zerohedge.com/article/max-keiser-big-banks-allocate-losing-trades-clients-keep-winning-trades-themselves
"Max Keiser – journalist, former Wall Street broker and options trader – claims that the big banks retroactively allocate losing trades to their clients, and keep the winning trades for their own proprietary trading desks"
Very easy to do if you fail to keep accounts separate. Could this sort of behaviour explain why many banks consistently have perfect trading days every day (on their own account) whilst client funds risk taking the losses?
————————————
Thanks to proprietary trading, the game is probably rigged in the “market making” banks’ favour.
If properly investigated by regulators this conduct may well have unveiled systemic fraud.
But of course, fraud never happens in finance!
I’ve just been pondering the lack of appropriate ring-fencing of client money by JPM, as mentioned above.
In the real world, there are clear dividing lines marking people’s property. Hence when rioting occurs in the street we can all see clearly how and when someone crosses the line and steals / loots.
But if banking has developed a sloppy sense of demarcation between it’s own money and it’s clients’ then how can one be confident that there hasn’t been a few internal forays into someone else’s assets.
There are some informative comments by posters on the Zerohedge site. One is anecdotal "duh, call the order to the floor and follow up with the tickets with account numbers later. We used to do it all the time.", whilst others provide statistical methods for ascertaining the credibility of this claim, e.g. "look at profitable trading days for the banks at 100% of the time (suspicious by itself), and compare with the stop-outs and failures associated with 'recommendations' by the firms for their clients."
It’s easy to see how Looting can occur within a bank when there’s no clear dividing line between the assets and trades it makes and those it conducts on behalf of clients.
If that’s not upscale looting my friends, then by golly I’m a dreamed-up hologram of Nancy Pelosi.
From the interview with economics professor Randall Wray that Mike Hall gave a link to above:
"The worst corruption in the world is on Wall Street. People talk about the corruption in Latin America or Africa or China, but it is nothing compared to what is going on. The biggest scandal in human history without any question at all; the whole thing is fraud, everything they do is fraud."
http://neweconomicperspectives.blogspot.com/2011/08/interview-with-randy-wray-regarding.html
The USA was the engine for this, as their post 9/11 measures show. The fraudulent securities being liar loans packaged as AAA, will require restitution and this has yet to be factored into USA Govt debt as lender of last resort and facilitator, deliberately over riding state provisions to protect from reckless loans.
This is an off balance sheet asset that will in no way make up for the on BS assets represented by those securities, but will enable special pleading behind the scenes, to keep Euro institutions inc banks, ins cos afloat. Germany is not going to like the inflation, but as it is now in zero growth mode, it really has no choice. Who is the Bismark behind this scheme?