NEW YORK (MarketWatch) — U.S. stocks soared on Thursday after a surprising fall in jobless claims curbed worries about the economy.

I’m really supposed to believe that because the US  jobless claims decreased by a whole 7000, in a nation where 43 million are on food stamps, that this was the cause of the Dow regaining 293 points?  I cannot bring myself to believe this piffle.

The only credible reason for the global rally is slightly more important ‘news’ – a rumour that the Swiss are going to peg the Swiss franc to the euro. In Europe that news caused a big drop in the value of the Swiss franc versus both the dollar and the Euro.  The drop was 600 Pips.  A Pip for those of you not sad enough to know already, is 1/100th of a percentage point.  So 600 Pips is 6 percent. Which in currency trade terms that is BIG.

That, in my view is what caused the rally.  The reason it caused the rally is probably because the speculators, AKA the Big Banks, fairly salivate at the opportunity this would present them for speculating against the Swiss Central Bank.

The other effect of any peg, and probably nearer to why the Swiss might contemplate such a move at all, is that it might save the collapse of all those countries who are currently approaching default due to the strength of the Franc relative to their currencies: Hungary and Romania in particular.  I really do think the banks I have mentioned repeatedly in this context are feeling very insecure right now and would love some Swiss relief.

What this says to me is that the two questions in front of us are: 1) Will the Swiss really peg to the Euro at any level which means something?  And 2) if they do how long for? The answers to those two questions will tell you exactly how long this rally will last.

This is what I have been wondering. And then in response to the Jubilee article, a regular contributor to this blog, Hawkeye, wrote to me and suggested I take a look at “The Great EU Debt Write Off”.

The web site contains details of a ‘proof of concept’ study of the Jubilee idea done by Professor Anthony  Evans and his colleagues at The ESCP Europe Business School. The study used up to date figures from the IMF and the Bank of International Settlement (BIS) to see what would happen if Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany simply cross cancelled all the foreign debt they owed each other – a Sovereign debt jubilee.

The web of mutually destroying debt they studied looks something like this. The image is from a New York Times article called Europe’s Web of Debt. (The original article has a larger version)

Professor Evans said what he and his colleagues found “was astounding”.

• The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
• Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
• Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
• France can virtually eliminate its debt – reducing it to just 0.06% of GDP

Among the ‘debtor’ nations a Debt Jubilee means Ireland reduces its debt load to from 130% of GDP to under 20%! That would virtually wipe out the crippling cuts being forced upon the Irish. While even among the ‘Creditor’ nations France benefits by nearly eliminating its debt. So the French people too would benefit. Which does beg the question – who is benefiting by enforcing all the debts? I’ll give you one guess.

Of course there can always be a devil lurking in the detail ready to spoil a happy ending, so I called Professor Evans and asked him about his methods and their limitations.

First thing he pointed out is that by ‘All Foreign Debt” he included foreign debts held by Private banks. But as he also said, considering that in many countries the Tax Payer owns large chunks of the Private banks in question and so the line between truly sovereign and private bank debt is already blurred and sadly we ‘own’ both.

Professor Evans said the main limitation they had was not being able to determine the duration or rates of the different bonds for different countries. So he was cancelling debts which although of the same capital amount would have been worth different amounts because of different interest rates and durations. Understandably this makes him wary of making too much of his results. However he did agree that on such large gross amounts, such interest rates and duration differences could be considered marginal. In the grand scheme of the massive debt reductions achieved the differences of rate and duration could be justifiably seen as a small cost to bear for the over all gain.

So there are grounds for criticizing his findings. BUT the criticisms are not so large that they derail the force of the findings.  The simple fact of the matter is that the PEOPLE of all our nations would be immensely better off. They would not be facing crippling austerity cuts, nor be being forced into selling their National heritage and wealth at Fire Sale prices to the very banks who are the cause of the debt crisis, and who will profit from the fire sales.

Which brings us back to the reason there has been no discussion at all of a Debt Jubilee. Keeping the debts is going to profit the banks and their bond holders. Not only that, but making sure there is no discussion of mutual debt cancellation, and thereby keeping sovereign debt levels as high as possible,   gives those on the political Right, the perfect crowbar they have wished for but never had, for forcing through a political agenda of privatizing and destroying the social fabric of welfare. An agenda for which they never quite got a mandate through the ballot box.

That is why the debts are being maintained and why there has been no discussion of any alternative.  Our politicians are ‘protecting’ the debts and those whose will profit from their payment over and above the welfare of the people they are supposed to serve.

The bankers don’t want any discussion of mutual debt cross cancellation because it would force a necessary deleveraging. The bankers do not want deleveraging because leverage is the secret of how the bankers make their profits and without it they wouldn’t look nearly so smart. The reason debt cancellation would force deleveraging is because much of the debt which would be cancelled is currently being held on bank books as an ‘asset’ serving to underpin yet more loans and debt. So start cancelling debt and the bankers pyramid of leveraged debt begins to crumble. The fact that it has to crumble if we are to recover without being crippled with trying to pay unpayable debts never gets a mention in banker-world.

A second reason bankers don’t like cancelling debt is that what would quickly get revealed is which banks are the walking dead kept alive by transfusions from us. At the moment they are all hiding each others debts.

Think about it – they all want the debts they owe each other to be paid in full – but since they can’t afford to pay them, they have got our politicians to make US pay all the debts they owe to each other, for them.

I don’t think our government’s have any interest in protecting us. They may say they do, and may make noises about ‘necessary measures’ but they seem mind-blind to any alternatives to what the bankers whisper in their ears. So here are a few ideas the bankers won’t like AT ALL.

As a start let us say that we will only consider paying debts which we can see. What I mean by that is the debts we are expected to pay must be transparently clear to us. They must be in an auditable form not held in mystery SIV’s in off-shore in tax havens. They must be held on balance sheet, not off it and on shore where we can inspect and audit them.

These are perfectly reasonable and entirely enforceable requests. We, the public simply want to be sure that what  we are being asked to pay, is in a place and form such that we can verify for ourselves that the debts are legal, above board and ours to pay.

If the bond holders have nothing to hide then they have nothing to fear. Any bond holder who refused and any debt which was kept off-shore and un-auditable would not be payed. It would be not even be considered for counting against other debt it would simply be zeroed. Simple, fair, clear, transparent and legal.

First thing this would do is destroy tax evasion and avoidance. Every nation would get a colossal windfall of tax THAT SHOULD HAVE BEEN PAID IN THE FIRST PLACE.  That would help the austerity a bit.

Second there has been so much fraud, so much of it now clearly known and documented, that only a cretin would pay ‘debts’ on faith. Show me the paper or go away.

It is a fact that the vast bulk of the global stock pile of wealth and particularly debt backed ‘wealth’ is held off-shore in tax havens and Banking secrecy jurisdictions. Why? Why should we pay debts to people who won’t pay their taxes?

The dissident narrative is that this was never a technical crisis of money flow – liquidity – but one of insolvency due to the troubled asset classes being, in fact, vastly over valued. The collapse in value and the lack of buyers was not a temporary lack of confidence in an otherwise sound financial system, but a rational shunning of paper assets whose previous value was almost entirely due to the press of gullible buyers who were keen to partake in the buy, flip and buy some more ponzi scheme of speculation.

As long as the paper value was never questioned by all the players then no one feared reality intruding. Even those holding the worthless paper were happy as long as everybody else was signed up to the same grand fiction. Banks held the paper assets and used them as cheap ‘capital assets’ just so long as the lies they were based on remained wholly accepted. But of course as soon as someone defected from the grand lie, then the rational thing for everyone to do was to defect as quickly as possible. This is what every insider tried to do as quickly as they could which is why the collapse was as fast as it was and was led by the banks themselves.

The end game of such a scenario would have been the ruination of those left holding the worthless paper. And if those holding the paper had been you and me then this is what Wall Street and The City of London would have been happy to see happen. But in this case the collapse was so shockingly rapid and, in the preceding euphoria of the bubble, so much of the paper had been retained by the banks and super-wealthy that this was NOT going to be permitted to happen. Instead actions were taken to ensure that the worthless paper assets were transferred to the public purse. If it looked like they were going to recover their value the banks would re-purchase them in time to make a profit, but if not then, the ‘assets’ would be left where the loss would fall on people who were more accustomed to being poor and whose prior poverty has often been seen by the wealthy as an indication that they deserved to be poor.

The official narrative today is that the plan of recovery is working. The narrative focuses on the rise of the stock markets to almost pre-crash heights. The failure of housing or commercial property markets to recover and the fact that unemployment is hideously high is simply no longer part of the recovery narrative. These things have been dropped. What has been added has been the ‘shocking’ level of public, national debt. In the new narrative the cause of the ballooning of public debt has been steered away from facts about the cost of the bail outs or how the disintegration of the speculative bubble caused a subsequent collapse of real economic activity. The new story is that the debts we have now are nothing to do with the banks and their temporary difficulties. They are due to a deeper incontinence in public spending.

The narrative is being re-written so that the ‘debt crisis’ is seen as something that is under control and being solved, whereas the present and pressing problem in need of controlling is the cost of public services and the unreasonable expectations that underlie them. Public expectation of a free lunch for their children at school or a pension for their life’s work or a health service paid for through taxes – these socialist weapons of fiscal destruction are to blame for the vast public debt.  That is the narrative we are being fed. The bankers are being air brushed out of the story and certainly any mention of blame being attached to them is being described as backward looking if not downright suspect and dangerous. Not far, I suspect, from being vaguely alluded to as financial terrorism or a ‘financial hate crime’.

What we are left with in the official narrative is that our betters have one crisis under control – the cash flow/liquidity crisis and are now taking heroic steps to deal with the recently uncovered, deeper, systemic crisis – the ‘true’ crisis – of out-of-control public spending which is responsible for sovereign debt levels that are injurious to the efficient workings of the markets. Markets whose fearless leaders are trying, despite pubic profligacy and obstinate stupidity, to help us out of debt and back on to the true path of prosperity via necessary austerity and more ‘realisitic’ expectations of what we are worth and what we deserve.

The question for me is if the dissident narrative can hold its ground and find something more say. Or have we been been swept aside?

Certainly we are outgunned and alone. The press are supine collaborators, the rule of law has been bought and whored, and academia is either captured by the dominant ideology and too dimwitted to escape  or just too concerned with grovelling for tenure and a city sinecure.

The dissident narrative I advance says that what we are told are ‘temporary and extraordinary measures’ are nothing of the sort. The measures taken to ‘deal’ with the ‘crisis’ have in fact created, whether by accident design,  a new and very much more reliable system for ensuring that the super rich stay that way. The new system horrifies me because it has put finance above democracy, markets over governments. But it also appals free-marketeers, because it sets up an untouchable aristocracy within the markets who are not allowed to lose and who can therefore take what they want, when they want, from whomever they want and the law will not touch them. Neither the law of the land nor the law of the markets. Free marketeers and those on the left like me find ourselves in the unlikely position of sharing an abhorrence for what a global super elite are doing.

What we have in place now is a system of permanent and institutionalized acceptance that the largest accumulations of wealth and those who own, manage and serve them can never be imperilled or threatened either by the democratic rule of law nor even the workings of the markets themselves. Both perils have been removed for the super rich and their banks because it is now established that the purpose of government is to make sure the system and the hierarchy of wealth and power at its peak, remains untouchable and unchangeable.

With this accepted, the rules of sovereign democratic government and global finance have mutated beyond recognition. Today when banks need more of their assets purchased by the public purse in order to relieve them of possible losses, the public purse is opened without discussion.  What this means is that you and I are NO LONGER simply buying up, as a temporary, emergency measure, mistakes made in the bubble of three years ago. We are there to buy up the results of any greedy speculations made in the last two years.  Government purchases and the QE which fund them are no longer part of dealing with any ‘crisis’ at all. They are now part of how the banks do business. They are the new normal.

This isn’t a crisis. This is the new business of profit without risk.  It isn’t even really a ‘bail out’. The new normal is a no risk machine for expropriating public wealth. The banks can now buy what ever they want, the higher the risk the better, because the new system guarantees that there is no risk for them. The banks can speculate on sovereign debt, currencies and commodities knowing that if they are in the elite, they will be bailed out. Not in the spectacularly embarrassing fashion of 07-08 but in the low key ways dreamt up in the last two years.  A plethora of ‘exceptional’ funding measures, bond purchases and  abrogations of the rule of law in favour of bank profit, which are all, in fact, bank bail outs at public expense.

Crisis? What crisis?

The only crisis for the elite and their banks will be if the next round of QE in America and of ECB bail outs for German and French Banks via Greece, Portugal and Ireland somehow do not happen. If there is a minor miracle and our leaders remember we exist – THEN there will be a crisis for the banks and the financial elite and some small hope for us.

“Munich prosecutors plan to file embezzlement charges against all members of Bayerische Landesbank’s former board….”

Having the words “all former members” and “embezzlement charges” in the same sentence just makes my day. Ever since the worlds’ banks told us they were suddenly short of liquidity, the authorities who were supposed to oversee them, have been even shorter on balls than the banks were on cash. In fact regulators in several countries appeared to have had theirs removed almost as a requirement for getting the job.

So the Bloomberg headline is a thing to behold. The only other thing the article says is that Beyerishe LB lost 3.7 billion euros as a result of acquiring, in 2007, the Austrian bank, Hypo Alpe Adria. Which economy of reporting covers over a manhole which leads down into what is one of the deepest little cesspits in Europe. I say ‘one of’ because only a congenital regulator would imagine that Beyerishe is the only entrance into the sewer of European banking that ran a river of financial and political corruption, money laundering and dangerously shady arms deals from Croatia and Serbia to Austria, Bavaria, Italy and on to Ireland.

Beyerishe LB was either the witless dupe who was left holding a huge shit schnitzel or just the last in a long line of greedy and corrupt bottom feeding institutions who wanted the chance to siphon some of that fetid  underground nourishment for themselves.  I personally feel the latter is the more likely explanation for the Europe wide enthusiasm for buying Austrian banks. Austria, with its anonymous accounts had made itself into a major portal for dirty money seeking onward transfer into European banks. And European banks were drawn to Austria like flies to a sewer.

The fact is Beyerische bought a bank for 1.6 billion euros into which it had to immediately pour another 2.1 billion euros just to keep it afloat.  Which although it sounds blunderingly stupid is, by Bavarian banking standards little worse than average. Compare Beyerische to the saga of inept incompetence which surrounded two other Bavarian banks Beyerische Hypotheken-und Wecshel Bank and Beyerische Vereins-bank, whose billions in losses forced the shot-gun wedding whose issue was HVB (see Dominoes Falling from the East) and you wonder how Germany has any banks at all?

Today there is still another 3.1 billion euros of bad debts to be paid at Beyerische. The open question vexing both sides of the German/Austrian border is who will pay? Since Beyerishe sold Alpe Adria back to Austria for a whopping 1 euro it might fall upon the Austrian people. But it might still land back on Beyerishe and therefore on the German taxpayers. Both sides would love to find a way of claiming they were just innocent victims of foreign fraud.

How could Beyerishe have been so stupid?  Well at the time, buying Austrian banks was the must have item for any megalomaniacal European banker. After all Hypo Vereins (HVB), that other Bavarian bank, had got itself Bank Austria to play with. Bank Austria was the number one Austrian bank.  Poor Beyerishe had to settle for Alpo which was only number five.

And it wasn’t just the Bavarians. UniCredit of Italy got its snout into what was running through Austria simply by buying HVB as a whole and so getting Bank Austria as a subsidiary.

A German banker told me the Austrians bitterly resented the Bavarians buying up their banks and that the Bavarians in their turn had a deep loathing for being acquired in turn by the Italians.

And lest it seem that the taste for Austrian banks was limited to some axis of corrupt Mitteleuropa imbeciles let’s not forget Anglo Irish also had its own Austrian subsidiary. A subsidiary which, thanks to Kathleen Barrington’s work, we know had in it 600 million in cash deposits which Anglo sold for just 141 million to Valartis bank which needed a loan of 24 million euros in order to make the purchase. A loan Valartis got from…Anglo.  Hmmm?

My question is if any other authorities or regulators will feel emboldened and feel they too can belatedly start questioning the bankers they are supposed to regulate? I know questions have been asked in the Austrian parliament. Will they be taken further than mere questions?  Will someone in Austria have the moral rectitude to lift the lid on their sewer and see where it leads? Will the German’s pressure them to do so or force them to do the opposite if it looks like some of the dirt has ended up in German banks being bailed out by German tax payers?

And what about the Irish?  So far the Irish regulator has been a stand out disgrace.  When Senator Norris tried manfully to read the list of Anglo’s bond holders which I wrote about, in to the public and parliamentary record he was shut up.

“The names are Aberdeen Asset Management (London) Limited, AGICAM, Aktia Asset Management, Aletti Gestielle SGR, AllianceBernstein (UK) Limited, Allianz Global Investors France, AmpegaGerling Investment, Anima SGR…”

was as far as he got before he was interrupted and told what he had to say was not relevant. He continued anyway adding, “One Swiss bondholder owns 40% of the bonds and will get millions of euro from us..” at which point the debate was terminated.

There is a trail of disturbing facts, like crumbs of dry excrement, running from bank to bank, country to country.  All it would take is courage and honesty to follow the trail.

So many of the details of the dishonesty and bottom feeding are already known but scattered in different countries, that it cries out for a prosecutor with Europe wide powers and authority to be charged with joining the dots.  Will it happen? Of course not. We will have do it ourselves – with the courageous help of the few honest men and women such as WhistleblowerIRL who have spoken up and who may just give others the courage to do the same.

In accordance with Zeno’s rules of paradox, no news will be allowed that is not positive: Thus good news will be exaggerated and bad news will be treated as if it were good news.  Every report on television, radio and in the newspapers will be about how some indicator or other is on its way up. And yet to those not staggered with optimism, it will appear, as it always does in nightmares, that for all the struggling and sacrificing, we will never seem to move from where we started.  The people of Ireland already know how bleak this feels.

Here are some of the reasons why I do not believe we are in a recovery.  I know I risk becoming a ridiculous figure, the man who refuses to see the dawn even as it breaks.  But I see no dawn.

America.
What exactly has turned around in the Land of the Free?

Housing prices have not risen. They are going to fall in fact, as foreclosures and bank sales rise like a stealthy tide. And this despite the on going legal debacle concerning fraudulent foreclosures and  even more fraudulent securitizations.

Unemployment has not fallen at all. The narrow definition, U3, still stands on the cusp of 10%. While the true misery measure, U6, stands like the stone rebuke that it is, at 17%.

The ONE and ONLY thing that has recovered is the stock market.  Breathless headlines ‘revealed’ that US markets are now back to ‘Pre-Lehman’s levels’.  So how can I possible doubt the robustness of the recovery?

Easy! There is still the unspoken assumption that these stock levels are a proxy for general well being and broad recovery.  This IS NOT TRUE.  Who owns all these stocks?

I doubt you own any. Because 90.3% of ALL the stocks, shares and Mutual fund ownership  (Which are large, pooled investment funds) are owned by just 10% of Americans. 50.9% of the stocks and shares are owned by a single, golden ONE PERCENT. That ONE PERCENT of the families of America runs, owns or works at Wall Street’s Banks, America’s largest corporations, including its largest, Congress inc. (Thanks to Rich for the link).

The same 10% who own the wealth, the stocks, the bonds, the banks, and the companies, ALSO run the government and sit in the courts. Which means that 90% of the rise in the stock markets enriches the same 10% who already own everything anyway. 90% of the stock market rally does NOT benefit ANYONE else in America.

Is it a coincidence that the people who engineered the ‘recovery’ with its miraculous stock market recovery turn out to be the people who also own all the stocks?

What this means is that watching the stock market tells you simply how fast the super wealthy are becoming even more super wealthy, how quickly they are leaving us behind.  It tells you nothing at all about the people of America and the economic distress in which they live.  A ‘recovery’ based solely upon a rise in the stock markets while wages and home prices remain collapsed is a recovery for the very few AT THE EXPENSE of the rest.

And that is exactly what we have had so far.

Company share prices have ‘recovered’ to pre-Lehman’s levels but wages for ordinary people have not shared in this recovery. Companies have not rehired. Production has not gone up.  Exports have not jumped to pre-Lehman’s levels.  Nothing has moved, except the prices of the shares traded back and forth between the banks of the rich.

Japan.
A little over a year ago at the end of 3Q of ’09 news was trumpeted out of Japan, that 3Q growth had reached 4.8%.  A fantastic figure for the world’s financial bulimic sumo. Was this finally the end of the two decade nightmare of alternatively helplessly gorging itself on trillions of yen in stimulus, only to violently puke the lot back up as it refused to consume or grow?

No, it wasn’t. It was a lie. Another one. From the staggering 4.8% it was ‘revised’ down to 1.3%. In fact growth in 3Q turned out to be just 0.3% which gives 1.3% as an annualized rate.

Since that ignominious admission that there had been none of claimed growth, things have only got worse for Japan.  Japan now has debts of 225% of its GDP. At the same time the cost of that debt, as a percentage of its TAX Revenue is just short of 60%.

So Japan’s recovery is to have very low, if any growth, with debts over over twice its GDP and servicing costs which take nearly 60% of it’s entire tax take.  And all that, is only the Yakuza’s smile.  The bad news is, in my opinion, terminal.

Just after Christmas Japan’s cabinet approved a new budget which plans to reign in government borrowing aiming to reduce it to ONLY 200%. And they will do this by SPENDING MORE than last year.  In fact Japan’s borrowing WILL, same as last year,  exceed tax revenue by 41 Trillion Yen.

Japan’s pathetic leadership will spend more, save nothing, borrow 41 trillion more than they take in taxes, spend 60% of what they do take paying the debts they have accumulated so far, before rounding off another stellar year of recovery, with more debt than they began with.

Japan is lost.  Japan will only pull off this slow suicide by raiding 7 trillion yen in one-time pots of money hitherto unnoticed –  such as money accumulated by the railways.

This plan is a monument to lies and failure.  It is without a shred of courage and it dishonours its own people.  Frankly, it soils the Japanese.

That is their plan.  A plan which still depends on selling huge amounts of debt. And therein lies the  killer problem.  Till now Japan has sold its debt to its own people via their pension plans.  The rpoblem is those pension plans, like the people in them, are now out of money.  Not only that but the largest pension plans as well as smaller investors are now moving their buying abroad.  So far the move has been slow. But all landslides begin slowly.  Without domestic buyers for their debt, willing, as they have be till now, to buy the debt at a third of the interantional market rate,  Japan cannot and will not survive.

I believe that 2011 will be the end for Japan.  Domestic buyers will not buy enough. Japan will have to offer its bonds on the open market. It’s costs will triple.  The market will also know that next year there will be no little pots of money to raid.  2011 is Japan’s last year to find the courage and new leaders it has lacked for more than 20 years. If it doesn’t then it is going to implode.

Hungary and friends  
In December, Hungary’s debt was downgraded by Fitch to ‘BBB-‘ with a negative outlook, which is just one grade above junk.  This on ‘worries’ that the government does not intend to cut its debts as fast as it has said it would in discussion with the IMF and EC.  And so it won’t.  Hungary has no hope of cutting its debts as the IMF would like it too, in large part, because it is not growing at the fantasy rates all and sundry told themselves it would.  Hungary, like its neighbors Romanian and Bulgaria is sinking.

And the other, compounding reason, if you’ll pardon the horrid pun, Hungary is doomed is because the Swiss franc is gaining value against every currency.  The Swiss franc is even gaining against the dollar as a safe haven investment.  So for the Hungarians who borrowed and owe their mortgages in Swiss Francs but have to earn and pay in Florints, their debts are growing and there is NOTHING they can do about it.

And do you remember who owns over a third of Hungary’s banking sector? Greece. So as losses and defaults grow in Hungary a chunk of those losses will be headed to Greek banks to deal with.  Another part of the losses from Hungary, as well as Romania and Bulgaria. will pass to Bank Austria and its luckily owner UniCredit.

I also expect that this year will also mark the beginnings of trouble of countries who have so far weathered this crisis better, such as Poland who also has large mortgage debts valued in Swiss Francs..

China.
China is still trying to reign in the property and banking bubble it has let grow but somehow do it without popping the bubble.  Good luck.  They also need to bring down inflation which is growing and fast.  So far the central authorities have failed to reign in anything at all. So the central government has now raised the bank rate.  Will this do what all other efforts have failed to do?  Who knows.  What I am more interested in is the effect of the uncertainly on Australia and Canada.  IF, and it is a bog if, China does in any way manage to stem the flow of hot money pouring out of China looking to buy properties in Canada and Australia, then this will have dire consequences for both those nations.  Chinese investment has been no small part of their ability to keep their property bubbles going.

Australia.
The first real warning signs have begun to flash for Australia,  Australian banks do not and cannot fund their lending from domestic deposits and interbank lending. ,Just like those in Ireland and the UK used to do, Australian banks have become dependant on foreign, often non-bank funding for their mortgage lending. Australia as a whole now owes foreign investors 352 billion Australian dollars. Which is 27% of  Australia’s entire economic output.

And for the first time some of those foreign investors are sounding warnings.

This is from the Australian financial press,

Gerard Fitzpatrick, global fixed income portfolio manager for Russell Investments, said he was increasingly cautious about lending to Australian banks.

Speaking from London last week, he cited the recent catastrophe in Ireland, where the house price bubble effectively broke the banks.

“I’m not saying Australia is the same as Ireland, but there are definitely similarities,” Mr Fitzpatrick said.

“You’ve had a booming housing sector and rapidly increased lending by banks. The two situations have enough in common for bond investors to consider the consequences for the Australian housing market – and the banks that are supporting it.”

When you are totally dependant for day to day solvency on suppliers of short term funding and those suppliers even START to mutter about feeling ‘increasingly cautious’ about lending to you, then you are one step away from becoming Northern Rock, Anglo Irish or Depfa.

It is my feeling that the property markets on Canada’s west coast as as vulnerable as Australia’s market.  It is only the blanket guarantee of the Canadian government which has kept the lid on the whole thing.

Portugal and Italy.
I think Italy will find itself slipping into company with Portugal partly as municipal debts surface and partly as UniCredit being to suffer as I think it is going to do this year.  UniCredit’s woes will be partly those of Italy as it’s ability to stay above the bond market carnage ends and is drawn in to its own funding crisis.

Great Britain.
This is the year the reality of our situation beings to pierce the fog of government and city lies which has blended so well with a self induced chemical defence of chronic drunkenness.  2011 is when GB will taste the bitterness and pain of sobering up.

This year there will be a wave of crime some of it not so petty.  That may sound trifling but it will unsettle the inner cities and the towns in a way the Tories are not ready for.  The cause of the crime wave will be the new policy of making people report regularly for work duties or lose their benefits.  There is an small army of Heroin addicts and chronic alcoholics who cannot and will not report for work, who will therefore lose their benefits and will, in all likelihood turn to petty crime as soon as the cramps kick them hard enough.  We have already seen a rise in household thefts in my area, according to local police.

To that wave of misery add a wave of  homelessness.  2011 will be a year of unrelenting cruelty when it comes to people losing their jobs and income, and shortly thereafter facing losing their house as well.  I expect the second half of this year to slowly force a wave of families out of their homes into homelessness. The problem will come when local authorities reveal that they just do not have the money to rehouse them.

These are some of the reasons I see no dawn of a better future.

Hungary was yesterday downgraded by Moodys.  The reason was that Hungary is quite obviously NOT going to hit its IMF/EU mandated ‘austerity’ targets.  Which will mean its debt will grow, its banks will face higher borrowing costs  and the country may not get any more help from the IMF or the EU.  Until it is about to fall over when help will forced on them Irish-style.

Not only that, but it is equally obvious that the Hungarian economy which was this year officially limping along at about 0.6% growth will now certainly contract as the global slow down starts to loom clearly out of the fog of denial.  Bulgaria will also contract. Bulgaria’s banks saw delinquency rates double this year from 6% last year to 12% of all loans now.  The situation is similar in Romania where the economy is set to contract 2% and the value of assets underpinning loans is declining rapidly.

In short, there is another train load of banking losses being loaded in the East. The question is where is the train headed to dump/deliver the debts?  Well, sadly, a third of Bulgaria’s banks are owned by Greek banks! They also own about 12% of Rumania’s banks. So as the Balkans default, their losses will fall upon Greek banks who will not be able to contain them.  They will give the Greek banks the final push and they will fall over in their turn.

So first stop for the debt train is Athens.  Where some of the Balkan debt will be dumped and will trigger a new crisis of Greek bank insovency and debt.  The combined debt will then be loaded together onto a new Greek debt train to continue west. That train, now loaded with a toxic brew of Balkan and Greek debt, will make two main stops.  Paris, where, eventually, it will unload about €100 billion of exposure to Balkan debt into French banks, and Frankfurt where it will unload a further €80 billion into German banks.

But we should return to the original Balkan train still loaded with debt, because it has further deliveries itself.  While the Greek train heads to Paris and Frankfurt, the original Balkan train will now head to Austria.  There it will have two main stops, Erste Group of Vienna and Bank Austria, the largest bank in Austria, which prided itself on being the largest western bank in Eastern Europe.

Bank Austria, is, I estimate, in a world of trouble.  It has loans throughout Eastern Europe from Poland to Bulgaria and as the downturn intensifies in Eastern Europe, so will its losses.  Austria has kept out of the spotlight, but I think its moment approaches. I think Austria, to mix my metaphors in an unforgivable manner, is the next domino to watch in the east.  But it is not the last.

Austria and its German neighbor Bavaria have a history of financial troubles, bankruptcies, write downs, dark allegations of political/financial corruption and exposure to bad loans, which are emerging into the light.  I think we will see bad debt exposure accumulating in Austria next year.

Now the Erste consignment will have to be dealt with in Austria.  But the Bank Austria, the larger part of the problem will not. It will head onward to Italy and to Italy’s largest bank, Unicredit where it will deisgorge its freight of debt.  Because Bank Austria, Austria’s largest bank, is in fact, owned by Unicredit, Italy’s largest bank.  How and why the pride and jewel of Austria is owned by the pride of Italy, and why it will be Italy that has to deal with a trainload of Balkan debt is the next chapter of the story.

Chapter Two –  Too Big to Mention.
In this global debt crisis we have heard several new notions: Too Big to Fail (AIG) and Too Big to Bail (Spain) and now I would like to add one more – Too Big to Mention. And to that category I would like to assign Unicredit as its founder member.

Unicredit is an institution that never gets mentioned because it is SO big relative to its parent nation that their fates are one.  Whatever happens to Unicredit happens to Italy. Thus whatever problems Unicredit may or may not have, no one mentions them because everyone knows Unicredit has the 100% backing of the Italian State and Treasury.  You mess with Unicredit, you mess with Italy.

So…caution meet wind and here goes.

How Unicredit came to own Bank Austria is a story worth taking a minute to tell. It shows how interwoven East and West actually are.  And why I think the Balkan debt train will eventaully disgorge its cargo in Milan, endangering the stability of one of Europe’s largest banks and the nation it sits in.

The story starts in Bavaria with its two largest banks, Beyerische Hypotheken-und Wecshel Bank and Beyerische Vereins-bank .  Beyerische was a huge lender in East Germany. Back in 1998 Hypotheken and Vereins had a shot gun wedding.  An unusual one because both bride and groom were holding shotguns.  The reason, both had large losses to write down.  Hypo blew up first.  Not hard to imagine that the losses came from its exposure to East Germany.

The marriage was hardly consummated when the joint bank (now called Hypo Veriens Bank HVB) had to write down €3.5 billion inherited from the Hypo half.  The Vereins half held on for 7 more years before it too puked up its dowry losses.  So this was a bank, that though large, was obviously not overly well run.

Nevertheless only two years later the combined bank, HVB, bought the largest bank in Austria.  A German banker who was willing to talk to me on condition of annonymity, who had knowledge of the acquisition, said, it was rumoured at the time that HVB’s purchase was extremely aggressive and unwelcome. What was it HVB wanted to get their hands on?   Bank Austria were and I think still are, the largest western presence in Eastern Europe and the Balkans of any Western bank.  As such it was seen as the avenue to new markets, new money, Russian money, and the bubbling Eastern European property markets in places like Poland.

HVB continued to grow. Eastern money and eastern loans, thanks to HVB, now flooded as far as Bavaria. HVB became the largest real estate financier in Europe and Germany’s second or third largest bank by number of customers.  However, all did not go well. By 2003, according to a second very senior banker who was also willing to speak, and who claims personal knowledge, HVB had accumulated a vast pile of less than wonderful and non-performing assets.  He quoted a figure of 57 billion euros worth.  I have not been able to verify this figure of course.  So let’s say somewhere in excess of 40 billion euros of not-so-super loans, just to err on conservative side.  Either way it’s a lot.  HVB, he told me, wanted rid of this new bolus of bad debt.

Chapter Three – The Irish Connection
How to get rid of it became the question. 2003 was also, and not coincidentally, the year Hypo Real Estate (HRE) was born.  The infamous Hypo Real Estate which had to be bailed out first by the German taxpayer  and, now indirectly, also by the Irish Tax payer.

HRE (Hypo Real Estate) was spun out of HVB (Hypo Veriens bank) in 2003, at the moment HVB wanted rid of its non-performing loans.  In the event HVB decided to spin out all its non German residential business which, my source claims, included the very large majority of those pesky non- performing loans HVB wanted to get rid of.  So, HRE was the solution to the problem. HVB spun out this non German business and the non-performing loans but sweetened it with a large, very large, amount of cash.  Another source has told me that the deal was also done to allow Georg Funke to have his own bank.  He really, really wanted one of his own but couldn’t have HVB, so they created HRE and gave that to him instead. Again, I can’t verify the story but yet another banker (I know, I know, I need to get out more and meet other people) did say this sort of ego driven thing was “definitely part of modern banking.”  Make of it what you will.

Hypo Real Estate (HRE), was housed in Dublin by the simple expedient of giving it the banking license of HVB Ireland.  Same license, same bankers, new bank.  HVB Ireland became HRE.  Magic.  Over night Hypo Real Estate became Ireland’s largest bank.  It was Irish registered, Irish ‘regulated’, was bigger than any other Irish bank, including AIB, but was listed not on the Irish exchange but, via a holding company, on the Frankfurt stock exchange. It was that holding company based in Munich that controlled Hypo Real Estate and that is why the bail out when it came properly fell on Germany not Ireland.  It was not a case of Germany bailing out an Irish bank. Germany bailed out a German bank which had been squatting in Ireland to take advantage of low taxes.

But I am getting ahead of myself.

At the moment we are still in 03 and are just about to enter THE property and debt boom.  This means that HRE, although it was born deformed, with non-performing assets, probably saw them recover as the boom years floated all boats.  The rest of HVB (from which HRE was spun out remember) also continued to grow and lend.

But by 2005 yet more bad banking was taking its toll.  This was the year the Vereins side wrote down €2.5 billion. I hope you are beginning to get the feeling that bad banking is an almost constant feature of this saga. According to the snappily entitled “Strategic planning for accountants: methods, tools and case studies.” by Dimitris N. Chorfas,  by 2005, “Analysts and investors,…, wondered how, with all these assets HVB was in danger of going under? Also, why did HVB’s exposure skyrocket?” (p. 556).  The author goes on to list “mounting losses”, “Tumbling credit ratings” and “A share price less than half of what it was a year earlier” as symptoms of the rotten and parlous state of HVB.  My question, is what sort of bankers manage to make one enormous lot of losses after another and never learn?

Stay with me now. We’re nearly there.

Chapter Four –  Last stop, Milan
In 2005 Unicredit enters our story.  As a German banker said to me last week, “There is no way the Bavarians would give the Italians the keys to the vault, unless the alternative was death.”  HVB was near death.  But this was not a simply rescue of a sick bank by a healthy one.  Unicredit had to offer 5 shares in Unicredit for every one of HVB.  And after the marriage, who should emerge as Chairman of the new, vaster Unicredit but a Dieter Rampl, CEO of HVB – A German/Bavarian banker.  The Italian nationalist element in Unicredit were, I am told, very unhappy.

The share swaps and Rampl’s ascendancy together, tell me Unicredit had some of its own weaknesses.  To which it had now added a sick, bad-debt riddled HVB.  What it had also got however, was now a huge presence in Germany AND, via Bank Austria, – the largest banking presence in Eastern Europe and the Balkans.

Fast forward to today, and we can now see why the debt freight train is headed for Milan. Unicredit owns HVB and its losses and Bank Austria and its Balkan losses.  My question is –  is Unicredit robust enough contain its own losses plus those of HVB, and Balkan losses out of Bank Austria?

To which we need to add one more detail.  In the boom years, Unicredit also bought Pioneer Asset Management in the USA.  Through Pioneer Unicredit also bought Vanderbilt Capital Advisers.  Vanderbilt were in the CDO business. In fact they were up there with Bear Stearns in terms of how many CDOs they managed.  And not all of them fared well.  A coinsiderable number of those they managed collapsed, and some were the object of law suits. A recent estimate put Vanderbilt’s expected losses on its CDOs at about 4 billion dollars. And now Unicredit is trying to sell Pioneer.  Wonder why?

Oh,  and Pioneer were and may still be one of the bond holders of Anglo Irish Bank. See the bond holder list I posted previously.  That they used to buy up Irish Bonds was also confirmed for me by a former insider.

So… what this very long journey has been about is to say there is a line of dominoes in the Eastern ‘periphery’ waiting to start falling towards those falling from the West. When they do we should look for the first signs of real trouble in Austria and if we see it, we should then turn to Italy which is the joker in the pack.

Less catchy I admit. But a great deal more accurate.

Back in June of this year I wrote this.

Basically it boils down to this. The system of finance, globally, must lower its level of indebtedness. The obvious place is bank bad debts. That has been ruled out by the financial class via our oh so compliant politicians. The other way to lose indebtedness is to use a country or countries as a conduit for debt reduction – a sphincter through which to shit out as much debt pressure as possible. Ireland is already in that ignominious position.

And so it has come to pass for Ireland.  European and UK banks are now going to use Ireland as their sphincter. And the Irish people are going to clean it up for them.  Ably volunteered for the job by their loyal political class. Loyal to who and what is another question.

We, the people of these various countries need now to be very careful.

Over the next few weeks we are going to be treated to a carefully incubated efflorescence of xenophobic bile and blame throwing. As tabloid papers in every nation try to whip up ill feeling and blame into an obscuring fog of ethnic bigotry whose main purpose will be to hide the bankers, of all our nations, pissing themselves with glee.

The British are being told “we” are going to help Ireland to the tune of €7 billion. Which, we are quickly assured we expect back. No doubt the “Why should we pay” squad will be roused from their easy chairs to fart out some ethnically oriented observation.  But the truth is “we” are not helping the Irish, nor even the Irish banks. “We” will be stumping up the cash to ‘help’ UK banks. RBS being one of those near the front of the queue. We will ‘give’ money to the Irish banks who will promptly give back most of it to the British banks to whom they owe the money. And  the Irish people will find themselves charged interest for having facilitated this bail out. THAT is what is happening.

Let’s all be careful and clear about this.  Irish banks are being used as a sphincter to for European bank debts.  European and British banks are horribly exposed to to Irish debt.  Which means, when translated into English, that private banks in many countries lent money into the well known Irish property bubble in order to chase high returns during the bubble years.  Irish private banks accepted the money in order to lend unwisely so they too could chase high returns. Entirely PRIVATE contracts between two sets of equally greedy bankers.

There is nothing in those contracts that pertains to or involves the people of any of our nations. And yet all our bankers with the connivance of all our politicians are engineering  things so that we ALL pay the bankers’ private debts.

The Irish people have not bankrupted Germany’s banks.  German banks in partnership with Irish banks and the Irish ‘regulator’ (to abuse the word yet again) bankrupted Germany’s banks through deals the German banks were delighted to make.  British banks have left themselves with massive unpaid loans to Irish  banks. Neither the British nor the Irish people had any say in the idiot deals done.

This IS NOT people against people. We, all the peoples of all these nations, are being forced to pay off all the banks.  It may seem that German and British tax payers are bailing our ‘the Irish’, but it is not true. We are bailing out OUR own banks through Ireland.  And the greatest losers will be the Irish people because they are the orifice through which we are going to squeeze the bankers  present to us all.

So let’s ask who it was took a dump in Ireland?

First, the suspects.

Ireland has three big insolvent banks and several other smaller, equally insolvent financial institutions we won’t bother to mention by name.

Ireland also has a large number of subsidiaries of European, British and American Banks.These subsidiaries are often registered as Irish and therefore on Ireland’s tab not the nation of the parent bank.  This often gets forgotten in the excitement. But it is KEY.

Ireland also houses a very large chunk of the world’s Structured Investment Vehicles (SIV’s) which are the shell companies which house trillions and trillions of dollars and Euros and pounds worth of Collateralized Debt Obligations (CDOs). These are what Warren Buffett described as “weapons of financial mass destruction'” And they are in their own way as hard to find and disarm as the ones we had a fraudulent war over. Anyway I digress.

These CDOs, in turn, house an equal or greater nominal value of Credit Default Swaps (CDS) written upon the CDOs.  I can’t tell you the figures because only the Irish Stock exchange has the otherwise completely confidential paper work and I have serious doubts (from what I have been told in the last week by an insider with first hand knowledge) that the Irish regulator and stock exchange have much of a clue themselves.

So, to the crime.

Some of this will, for legal reasons have to be done in generalized terms with names left out to protect the Innocent – me. But to start with let’s be reasonably specific. Germany was and is very very angry with Ireland for ruining its banks.  That is what a German banker told me this week. She spoke on the guarantee of anonymity as she would suffer all sorts of legal problems if she was identified.  I am sorry that this leaves you just having to trust that I’m not just making this up, but I hope many of you know me well enough to go with it.

In fact it was rumoured in German banks that at the time of the  collapse of Hypo Real Estate, an angry  call was made from the German Premier to the Irish, to complain, to which the answer was … well it was short.  Now this is nothing but a rumour. But it was a rumour in Germany which indicates that some in Germany were and perhaps still are very angry and blame Ireland.

So are they right in their blame?

The same banker told me this. She was aware of instances, and so was everyone else, of banks, German banks, who used to fly their people from Germany to Ireland in order to do deals that were not allowed in Germany.

German banks set up subsidiaries in Ireland.  These subsidiaries were often registered as completely Irish companies.  Back in Germany the German regulator (BaFin) had strict and enforced rules.  Very good rules for the most part. Far, far better than Britain or Ireland.  But these good rules, properly enforced meant German banks could not do many of the most lucrative and in hind sight reckless kinds of deals.

So the German banks would do the figures and work it all out in Frankfurt, then send a banker over to Ireland, get them to sit at ‘their’ desk in Ireland, in the Irish bank, and do the deal there. The legal registration of the deal and the ‘oversight’ were all Irish.  This is known in the financial world as jurisdictional arbitrage.  You and I would call it cheating if we were feeling charitable and lying if we weren’t.

The Banker flies back to Germany, where the German bank hasn’t  done any deal, and therefore has done nothing wrong. The deal was properly overseen and approved by the appropriate Irish financial authorities and the profits would be banked at a very happy Irish bank.  If any management of the ‘deal’ was required an Irish company would be hired, there are many, and an Irish manager often living not far from Cork, would ‘manage’ the money in and out.  I have spoken to such people. Usually I can hear the sweat coming off them as they ask how I got their number and where did I get my information.  To which I would reply that the Internet is a very large place and never, never forgets.

Now my question to you is this.  If it’s a German bank and a German banker doing the deal is it Germany who made the mess?  Or, equally justified, if the deal was actually done in Ireland in an Irish company allowed and no doubt welcomed by Ireland’s financial world, and overseen by Ireland’s wonderful regulators, is it Ireland who made the mess?

Should Germany, have pulled the plug on this racket?  Should Ireland?  Whose losses when they finally came, are they?

If the bank is registered in Ireland as an Irish bank/business, then the loss is on Ireland’s tab.  Depfa was an Irish bank. Just months before its collapse in 2007 it was bought by Hypo, a German bank.  Had that not happened the €180 billion euro loss at Hypo Real Estate would have been Ireland’s loss, dwarfing all other losses. Why was Hypo Real Estate bought by Germany at that moment?

I can’t say for sure. But think about this.  Sachsen Landesbank collapsed due to around $30-40 billion in bad sub prime loans its Irish subsidiary called Ormond Quay had made in the U.S. OrmondOrmond’s collapse caused the immediate collapse of one of Germany’s Landesbanks. Which suddenly sent ripples of fear through all the other Landesbanks as the world woke up to the rampant idiocy that the Landesbanks had been getting up to …in Ireland.

Germany had to step in and bail Sachsen out.  Now lets think about Depfa.  Depfa started life as a German bank. It became listed in London and then in 2002 moved to and registered itself in Ireland in the newly set up  IFSC (Irish Financial Services Centre)  This was like a legal gated community or financial maquiladora. The IFSC was in many ways supposed to be the regulator of what went on in its grounds.  I leave you to decide how well it must have done.

By the way the IFSC was created by Dermot Desmond with the help of Charles Haughey.

So Depfa is now an Irish registered bank.  But it has very close ties to Germany and many German banks and landesbanks. If ever Depfa went down it would certainly have plunged a vast swathe of German banks and landesbanks into a storm of insolvency, that would have dwarfed the fall out from SachsenLB. .  Depfa must not be allowed to go down.

So when in 2007 Depfa was suddenly bought by Hypo Real Estate was it because news of financial problems hadn’t reached Germany and they bought it because they thought it was a great deal and were cheated by those crafty Irish?  OR might Germany have known that a massive crisis was ticking away in Depfa and could see the clock was running down close to zero hour, and realized that if left in Ireland it would not, could not be rescued by Ireland and so would be left to start a chain reaction that would move straight to Germany?  If they thought the latter, do you think it likely that Germany would have just said “Oh Scheisse” and sat waiting for Armageddon, or do you think they would have taken emergency action to bring Depfa under German ownership and jurisdiction where German pockets were deep enough to bail it out and thereby save the rest of Germany’s banking system?

You decide.

So let’s return to our question? Whose fault?  Would Germany be right to be bitter about Depfa/Hypo and others? Or does the blame lie with the Germany banks and Bankers who flew to Ireland to do their mess?  Is it Ireland’s banks mess or Germany’s?  I don’t think we can disentangle the blame.. maybe when the Irish Banks’ books are finally opened we could. But I bet you no one outside the top bankers and politicians, the people who oversaw the creation of the bomb in  the first place, will ever be told what’s really in there.

I can’t say and neither can you,  if the losses are Irish or German. But we can say, the losses never were, and should not ever be,  yours and mine. We, the people, who were told nothing, were not asked nor consulted, whose laws were either ignored, set aside or re-written, we should not be expected to pay for those losses now.

They are bankers losses.  It is NOT a question of Irish or German. It is question of wealthy bankers from all countries not just Germany (almost every nation, Germany, America, Russia, France Britain, we did dirty work in Ireland) and their corrupt Irish helpers versus the people. It is not a question of should the Irish people or the German people pay. Neither people should. It should be the bankers who made the losses who should take them.

DO NOT allow the bankers to set us against each other as a cover for their crime and guilt.

For anyone interested in a very different take on the financial crisis, the failure of the policy of bailing out the banks and what it means for us,  the book, The DEBT GENERATION is now finished and shipping.