“…nobody would claim that their own thinking was ideological, just as nobody would habitually refer to themselves as Fatso. Ideology, like halitosis, is in this sense what the other person has.”

“Ideology” by Terry Eagleton. P.2

We all see the world through a lens of ideas and assumptions. The courageous man admits this to himself and checks with others who see things differently. The ideologue is the man who ignores and even denigrates anyone who does not see things as he does.

In almost every Western Democracy we are in the grip of dangerously arrogant and selfish ideologues.

Such people are not fast learners and are least inclined to try just when it is most urgent that they do. The ideologue whose world view centres on the ‘nail’, when faced with the screw, having seen them in action and been given a fair summary both of their uses and advantages, will turn to his assistant and say, “Bring me a much larger hammer.”  That is where we are today. It is the imperial, brute power stage.  It is the stage when what matters most about the hammer to those in power, is who has it.

Ideologies, world views, paradigms, whichever term pleases, do not go quietly in to the good night. Those whose power and position arise from and depend upon a particular arrangement of laws and assumptions will defend them no matter what the cost. Those in power can usually arrange matters so that the cost of defence falls on others while they know the cost of loss will fall on them.

Debt is the hammer of our age. Its original purpose was to accelerate growth. Which it does. But like many such accelerants, like steroids or speed, it has disastrous side effects which are never slow to manifest. In the case of debt the problems arise from a basic misunderstanding of what debt does. It is often suggested that debt increases growth. It does not. It hastens it. You can save up what it will cost you to build a new factory or you can borrow and build the factory sooner. The debt allows you to start growing sooner. But at the cost of siphoning away a little of the growth to pay the interest on the debt. So actually debt decreases your growth by the interest you pay on your debt. And that is the kernel of the disaster.

It will be argued that the cost of the interest on the debt is far outweighed by the profits that come from getting to market sooner. And this is of course true, as long as the demand is there when your factory opens. If it is, then you will grow sooner than your more cautious competitor and by growing sooner will grow for longer. So in good times, of growing demand, debt is the wonder tool that hammers all opposition. Everyone understands it, everyone wants it and those who sell it are as gods. Thus in good times of expanding demand, cheap energy and technological innovation, the amount of debt increases and with it, the pace of growth.

It doesn’t take a genius to realize that just as debt can speed up production so it can accelerate consumption as well. Don’t wait till you’ve saved up for your new widget. Borrow and have it now. Which innovation seems to double and triple the genius of debt. Not only can producers expand production quicker but consumers can consume, excrete and consume again all the faster too. And of course each encourages the other, with debt as the necessary laxative. For as long as the happy state flows freely, the sellers of the debt laxative, become immensely rich from the interest and fees they charge to both sides, and powerful from being seen as masters of the miracle of debt which only they can make work.

Sadly the side effect, unseen in the good times, is how dependent the whole miracle becomes on continuing to grow and to do so ever faster and faster, in order to keep ahead of the increasing cost of the interest on the ever growing amount of debt. As soon as the rate of growth falters the instability of a system where both production and consumption have been accelerated by debt become apparent. But by then it is too late. The stupid but seductive answer is to pile more debt on the consumption-side to off-set any ‘temporary’ slow down. Advocates will always say, a slow down, even a crisis, will be temporary, just some animal crisis of confidence, bad weather, bad karma, communists, environmentalists  or sun spots. Whatever it may be it will pass. All that is required is a ‘bridging’ loan to get across the little dip and then normal debt fueled service will resume. Advocates and defenders always say the ‘dip’ is small, contained, local, temporary and will definitely be over by Christmas. All these things were said in the first months of the present Bank and Debt Crisis. They were all absolutely wrong.

Nevertheless the ideologues recommended that if no one wanted mortgage backed securities right now, borrow to set up shell companies who will ‘buy’ the securities no one wants and give the appearance that all was still as it was supposed to be. The banks followed their own advice and did exactly this. And then, they went on, when confidence, buying and growth resume, just sell the stuff you bought in the moment of crisis.

For the merchants of debt and those who worshiped them, our political servants, it was clear. The problem was just a wobble in confidence. People were worried about the cost of the debt they had and were not sure about taking on more debt to out-grow it. Because they weren’t sure, so they didn’t take on more debt and this caused the very slow-down in growth that then did indeed imperil the ability of the entire system to stay ahead of the cost of its own debt. To the merchants of debt this was a self inflicted wound and the answer was to break the disastrous circle of doubt with a massive injection of easy credit and cash which would restore confidence and growth.

And so QEI. It was global but its center piece was in the USA. QEI (USA) From 14th of December ’08 until 30th March 2010

The Fed bought:
$300 Billion of Longer term Treasuries,
$175 Billion of Fannie and Freddie Debt
$1.250 Trillion of Fannie and Freddie Mortgaged Backed Securities (MBS). That was QEI.

All this was debt forced upon the tax payer. It failed. The ideologues said, ‘No it didn’t, it was just not enough.’ So they did it again. That too failed. The ideologues said again. ‘No it didn’t. It would have been so much worse if we hadn’t done all this.’  Then last week, a senior banker told me that the huge French bank, Societe Generale, came within a hair’s breadth of running out of cash and this was the trigger for the sudden opening of the Fed swap lines and the general sudden return to ‘easing’ (think laxative) in money supply.

The ideologues, like the man with the hammer, have learned nothing and have no intention of trying to learn. Why would they. As long as the hammer is unchallenged then as the owners of said hammer they are top dogs. Should they admit the hammer has had its day then they are ripe to fall.

Now you might object that I am wrong about the bankers and their attitude to debt. You might well point out that the bankers have come to recognize how dangerous too much debt can be and hence their insistence on cutting public debt. A hurtful but, as our leaders tell us through crocodile tears, oh-so-necessary imposition of ‘austerity’. Surely this is proof that the bankers have learned?

I think not. You see in the banker’s world ‘public debt’ as they scrupulously refer to it, is absolutely different from the private debt of the financial world. Private, bank-held debt is what they might call, ‘productive’ debt in that, to their mind, it is what fuels the growth of the Private sector. It is what allows growth and consumption to be accelerated and commissions at banks to be engorged. Whereas, according to their ideology, public debt is unproductive in that it does not support growth but only welfare. I use welfare is its general dictionary meaning not the narrower meaning of ‘welfare state’. And welfare does not swell the bonus pool, nor the bottom line of banks nor bring forward consumption or growth.

It is this categorical difference in two kinds of debt which explains how the bankers can roar and threaten about the evils of public debt levels but see nothing contradictory at all in at the same time advocating further easing, printing, borrowing and general bailing out of banks. One is good debt – private growth fueling, the other just a waste of money. Which they might benevolently overlook if it were not that public debt competes directly with private debt, and taxes (seen as allied with public debt) compete with taking on private debts.

In good times such competition can be tollerated but in tough times, when bankers must look to their own welfare, then public debts must be eradicated so that private debts can be made safe and then increased.

This is the hammer of debt. Our leaders worship it while the bankers own it.

At this moment many of us can clearly see the hammer of debt is now no longer a wonder tool nor the answer to our present predicament. Growth and the debt that accelerated it were inventions of the world of steam and then oil and all the technologies of petrochemistry, electricity and computation. It was the wonder tool of the brief moment when we were still small in number and the world was still big. Today we are very many and the world relative to our powers of consumption and destruction is small and shrinking.

But debt is a hammer and at this moment it is a weapon more than a tool. Notice how little now is said of ‘confidence’. It is no longer ‘confidence’ the bankers are primarily concerned to ‘restored’ but discipline. Since people have refused to return to ‘ confidence’, they must now be disciplined.  And debt is the means of enforcement. The hammer of debt has changed from tool to weapon.

We are being bludgeoned with debts and the austerity deemed necessary to pay for them. The Irish have just this evening been told they must suffer yet another two billion euros in austerity cuts to education and health. Yet the bail out of their worthless banks remains firm and will increase. In March the Irish state will still run out of money and more austerity will be called for while their banks will ‘require’ yet more ‘aid’ and ‘support.’

Our leaders believe in the miracle of debt fueled growth. And indeed so deep are the debts that the banks and financial system are in, that only debt fueled growth of the most insanely leveraged and reckless nature will save them now. So it is, that far from reigning in the recklessly unstable gambling of the financial system, it increases month on month. To take just one example, the financial trade in over-the-counter derivatives accelerated in the last six months by a collossal 18%. The total amount of such contracts at the end of June 2011 was $707 Trillion.

The high priests and princes of the ideology of debt and debt fuelled growth are not learning, not about to change or give away their power and position. They are becoming more agressive and more ready to use debt as a weapon to simply bludgeon any perceived problems and batter in to silence any preceived opposition.

Bring me a much bigger hammer!

So many people have donated I am left feeling a little lost for words.  This new blog format is itself a donation from Marcus Cox.

All of you who come here and read the blog support it. All of you who mention the ideas and arguments put forth here, support it. All of you who write comments support it. All of you, in one way or another, make this blog what it is.  I thank every one of you.

You are the people who make me feel that all is not lost, the selfish and the greedy are not unopposed and are demonstrably wrong when they claim that their morally stunted and rotten way of behaving is ‘just human nature’.  It’s not. It is simply one of the less admirable ways in which human nature can be molded.

The selfish and the greedy will always be among us much like athletes foot and halitosis. But we have no need to celebrate let alone emulate them. We don’t need to pay attention to their shrewish, bitter complaints either. Instead we should look to each other and take heart, as I do every day, from the intelligent, open, generous minded people who show themselves here.

Thank you.

GolemXIV

But there is one and Dexia, which I wrote about just a few days ago, is at the centre of it.  In short there is the chance the Dexia could pull down both Fortis and ING – or at least knock them off their feet.

Here’s what is happening.  Dexia’s share price has been dropping.It has lost a fifth of its share price in the last month and lost 6% today. And that is causing something called Communal Holdings to teeter on the edge of bankruptcy. Communal Holdings is the investment vehicle for many if not all of Belgium’s communes and cities.  In fact Dexia grew out of the semi privatization of part of Communal Holdings/Credit.

Communal Holdings has, therefore. always held a great deal of its wealth in Dexia stock. Dexia, like Northern Rock and RBS believed it could become a tiger. Not a Celtic one, a Belgian one. Grrr!

Sadly Belgian tigers are laughed at more than feared. Dexia was bailed out not only by Belgium but quietly by the FED and the ECB as well. It also seems that during the first part of the crisis Communal Holdings may have bought more Dexia shares as a way of supporting/bailing it.

But that isn’t the real problem. The present danger is because it turns out that the Belgian communes used their Dexia shares as collateral for taking on loans. And now as the share price collapses the amount of collateral is similarly disappearing. The banks from whom the communes took the loans are Fortis and ING. Very probably Fortis and ING swapped out the Dexia share-backed loans for shorter term debt and /or used the income as collateral in yet more loans.

With the collapse in Dexia share price ING and now Fortis are making Margin calls on Communal Holdings. Margin call simply means that Fortis and ING ask Communal Holding to provide more collateral against the loans to make up the value that has been lost from the originally pledged collateral. What always makes ‘Margin calls’ hit the headlines is that in a world of high leverage borrowers very often don’t have any more collateral lying around and so the dreaded ‘Margin Call’ often presages a fire sale. And because investors know this, a Margin Call often also sparks investor sell off, which of course makes the original short fall due to share price decrease worse.  And sometimes the share price and margin calls get locked into a self destroying spiral.

Apparently the Belgian government has already had to step in to bail out Dexia today. I doubt it will be the last time. And in this story is a pattern of bank to bank contagion that we might be seeing more of as share prices in the French, Italian and Greek banks continues to plummet.

Greece was rumoured to be about to default because the IMF and ECB would not release the next tranche of bail out cash.  Athens denied it but hurriedly announced a new ‘temporary’ tax on property would plug the several billion Euro gap in its funding. Not that there was any problem and this problem which didn’t exist, was not the cause of any hold up in bail out cash being released.

Today the rumour is that Greece is about to return to the Drachma. Could there be a vision of dual currency? One for internal use and one for international?  Surely not.

Fog also blew in from Germany where rumour was thick and the denials thicker, that the government was actively at work on Plan B which was to ‘ring fence’ German banks against the immanent Greek default.  No one explained what ‘ring fencing’ actually meant. But my guess is the Bundesbank would cease stumping up cash for the ECB’s purchases of Greek, Spanish and Italian bonds and use its cash and credit to buy up those countrys’ bonds from German banks only.

And then came another fog bank from France. Rumour that Moody’s was about to downgrade the credit rating of the bog three French banks, Soc Gen, PNB Paribas and Credit Agricole. This last seems to be true.

The French paper Le Monde this morning reminded us that Moodys put the three banks on review back on 15th June.  The usual period between review and action is three months. So I expect Moodys decision will be Thursday and that it will be a downgrade.

Why? Two reasons.  First, since January of this year Soc Gen has lost 56% of its stock value, Credit Agricole 43% and BNP 37%.  Second, just this morning Soc Gen declared that on the one hand its exposure to not only Greece but also Italy, Ireland Portugal and Spain all together was only €4.3 billion while its exposure to Greek Sovereign debt on its own was a mere €900 million, while on the other said it was going to accelerate selling assets and businesses as well as start firing people in an effort to make savings of about 5% of its cost base and raise about €4 billion. All of which sounds to me remarkably like Greece and the measures it is taking to raise money to solve a problem it doesn’t have and raise money it doesn’t need because everything is already fine.

So either we are left wondering which set of proven knaves is the liar this time, Moodys or Soc Gen.?  I think Soc Gen is doing what banks always do. They are simply being morally sub Prime. What do you bet that they have shovelled a lot of debt off balance sheet into a couple of SIV’s which would still implode and for which Soc Gen would still be on the hook, but in morally Sub Prime accountancy speak is no longer on its books and therefore ‘does not have’?

Soc Gen also said nothing about any exposure it has to other Greek debts such as the debts of private Greek banks or other bad private debts which the bank carries and which will all get a lot worse when Greece finally defaults.

But for a moment lets imagine that the ECB and IMF tuck in to their giant shit sandwich like good boys and girls and the Greek financial system survives to cough up blood for a few more weeks. Does that do anything about the situation in Italy or Spain? The French and German banks are more peril from Italy’s bog of festering debt than they are to Greece’s. Nothing is solved by grinding the Greek people a little deeper into the dirt.

Greece is going to default. Moodys is going to downgrade the French banks and Germany, unless they have totally taken leave of their senses, is working on a plan B.

Meanwhile in the US I think the place to watch for the tremor which if it comes heralds the next collapse is in tech stocks.  No one wants to say it too loud, but everyone knows that a massive tech bubble has been growing. It has been seen as the last place where those who still have some cash are willing to spend it. But the departure of Steve Jobs from Apple created this strange sense of investors holding their breath. I think tech stocks are very delicately balanced between continuing to inflate beyond what is reasonable for some time yet, and beginning to collapse. I am waiting for a tremor.

The stock price charts of the major banks look like the brain trace of man having a series of violent seizures while slowly sinking towards a flat-line coma.

The US FHFA (Federal Housing Finance Authority – Fannie and Freddie’s overlord) filed suit against every major global bank in America and Europe for fraud – every trace went in to major, limb convulsing decline. The German court decided German participation in the first Greek bail out was constitutional – all the patients sat bolt, white-knuckle upright. Italy agrees to impose austerity measures upon its people to save its banks and the wealthy who own them – they restart ragged shallow breathing. Then U-turns on every aspect of austerity- eyeballs roll back and start choking. And then, while Greece continues its slow motion default on its bonds, Italy passes ‘austerity plan 2.0’ amidst union occupation of the Milan Bourse – the trace is all over the place and the patients don’t know what is happening, their veins stand out like ropes, muscles lock sold and teeth grind. The Swiss peg their currency to the Euro and say they will buy whatever amount of Euros and Euro paper it takes – speed-ball euphoria takes hold. But for how long?

And it’s not going to stop. Though thankfully this metaphor is.

So what next? Well late yesterday night ZeroHedge ran this story based on an article from DN.no which says simply that the gargantuan Norwegian Sovereign Wealth fund is suing Bank of America, CountryWide which Bank of America bought and KPMG (the auditors who saw nothing going wrong with sub prime securities at all, no nothing at all Your Honour) for fraud. Now that is very important. potentially heart fibrillating,  news. Why? Because there was the lurking suspicion, crystallized in this article on ZeroHedge that the FHFA suit might eventually be deliberately scuppered by higher powers in Washington in order to save the banks from certain justice and well deserved ruin.  It may sound fantastical but a cursory look at the political maneuverings concerning the State Attorney cases against the banks and how they are being pushed and seduced into settling for paltry sums makes it clear that such subversion of justice is the new American way. As, I hasten to add, it is here too.

The article simply pointed out that the politicians in DC could milk the political advantage from being seen to be tough on the only to make sure they lost on some technicality and settled out of court to ‘avoid losing’ and one such judgement would undermine, if not stop dead, all pending cases. The banks would get to keep their cake and the politician would be able to eat some of it too.

BUT the Norwegian case puts a troll in that ointment. Because its one thing to sort out a judge and some US Lawyers in a plush, quite Washington office. It’s quite another to stop a pissed off and still sovereign nation, which Norway still is.

It will be interesting to see how the markets react. I think it will take a few days for it to sink into their fevered crania.

In the mean time the FHFA suit has prompted me to take a look at what it might mean for one bank – RBS.  Not out of simple curiosity but because, if RBS were to lose, then as owners of 80% of the bank, our tax money is what would be on the hook. The bank is already on life support. Where do you think RBS would turn to get cash for a settlement? If it had to sell assets to meet settlement costs – it would do so at fire sale prices far below what we paid for them. The suit concerns $30.4 billion of Residential Mortgage Backed Securities sold by RBS between ’05 and ’08. How much would the FHFA would want paid back? Even a fraction of the 30 billion, say only 30 cents on the dollar – kills RBS without the tax payer being sacrificed –  again.

So, I have been at looking at two documents – which could not be more different, even though they are both about RBS. One the one hand is the FHFA law suit, which you can read in full here which paints a picture of not systemic but epidemic fraud.  And the other is the latest report from the UK government’s Asset Protection Scheme. The scheme under which the UK tax payer is ‘protecting’ £282 Billion of RBS ‘assets’ the bank could not insure in the market and which, if it had to keep on its own books, would kill the bank stone dead. The UK report essentially says everything is marvelous.

Now one way of reading the UK report is to say, well its written by professionals who have many years of experience in finance and banking, so they should know what they are talking about. The other way of reading it is to wonder if the financial experts involved are overly happy to not question any figures and assurances the bank gives them and collude in painting a positive picture that serves the interests of the financial industry they work in and come from. As well as please the politicians who want to make sure the public think only what the bankers want them to think.  I incline toward the latter reading.

It is hard to reconcile the Asset Protection report with the FHFA suit. Of course you could argue that the FHFA suit is based on RBS’s American activities and what was done there might have been unconnected with and unknown to RBS HQ.  Which might stand if the FHFA was suing some rustic outpost of RBS.

RBS in America was and is huge. The FHFA names as defendants RBS securities Inc (Formerly known as RBS Greenwich Capital), RBS Financial Products Inc and RBS Acceptance Inc.  as well as the principle officers of the above. In 2006 RBS Greenwich Capital securitized $102 billion in Mortgage backed Securities and was the 4th largest “non-agency mortgage backed security underwriter” in America and the third largest Sub Prime underwriter.

The law suit involves not just one or two rogue deals but 68 securities each of which is massive. And it was RBS committing the fraud – sorry doing the work – at every stage of the process.  The various parts of RBS chose the securities, evaluated them, guaranteed they were safe and well found, bundled them, underwrote them, costed them, set up the SIV’s in which they housed, before selling them on to Fannie and Freddie.

“Defendant RBS Group wholly owns RBS Holdings and is the ultimate parent of RBS Securities, RBS Financial Products, RBS Acceptance and FAS Corp.” (P.31)

“Unlike typical arm’s length securitizations, the securitizations here involved various RBS subsidiaries and affiliates at virtually every step in the chain” (P. 30.)

And at every stage RBS took a fat, incentivised, bonus guaranteeing fee.

“Further, RBS Securities is included in RBS Group’s consolidated financial statements and, according to RBS Groups 2010 annual report, RBS Securities serves as RBS Group’s ‘U.S. broker dealer and one of its ‘U.S. brands’ and one of RBS Group’s Global Banking and Markets Division conducts its business in the United States ‘principally’ through RBS Securities.” (P.31)

Which means there was a very close working relationship between RBS UK and RBS America. The consolidated financial statements means the UK would have seen and studied the details of what was going on in RBS USA. In short it means that RBS in the UK would have been aware at all levels up to the top, what was going on in RBS in America. So if there was, as the FHFA claims, systemic fraud being perpetrated year after year, RBS in the UK would have known and if not actively condoned then made sure it was ignored on purpose. Which in turn says to me, that the culture of fraud was not confined to RBS in America. And if that is so, then WHY has nothing questionable been uncovered in the £282 billion in US, UK, European, and IRISH mortgage backed securities, derivatives, CDS and interest rate swaps which RBS dumped in the UK’s Asset Protection Scheme?

The UK document says they have done due diligence. I think they asked the bank and accepted what was written on the bits of paper. Fannie and Freddie did ‘due diligence’ as well. Fat lot of good it did. It has taken focused and determined research – finally – and the sort of statistical tools I have written about here which people like Propublica and later the US insurer Allstate whose related suit on systemic bank fraud I wrote about here, developed and used on the securities, to uncover the web of lies embedded in the securities sold not just by RBS but many other banks as well. Why have such tests NOT been done by the UK Asset Protection Agency on RBS’s assets?

Are we to believe that securities involving US mortgage backed securities sold to Fannie and Freddie and fraudulent from top to bottom but American deals and loans hidden in the Asset protection scheme are 100 pure? How likely is that?  For there to be no fraud in  we have to suppose that RBS UK was in fact wholly ignorant of US fraudulent practices, had a totally different moral culture in the UK bank to its America part. We’ve already seen how closely they worked and cooperated.

If you read the Asset protection document it says all is well, losses will be less than the 60 billion RBS will pay before tax payer money is on the hook, and anyway the assets plus the fees RBS are paying for the insurance are going to make the tax payer a profit.  It does not deal with where RBS would get even a single billion never mind 60 of them, were it called upon. RBS doesn’t have billions lying around. If RBS has to pay our for losses or law suits it sells assets are fire sale prices or thieves your tax money again.

I have no faith at all that the Asset Protection Scheme or those running it can be trusted. And frankly why should I trust them. They are the same financial people who created the mess and oversaw its creation.  You may think I am unfairly tarring people with prejudices. I am not. I am ‘criminal profiling’ as the FBI does, as UK Border force does as the MET does with its stop and search. You may not agree with it but it’s official policy.  Who are the people most likely to be guilty of lying and fraud in finance? The current financial class of experts and bankers. That is just a plane brute statistical fact.

I am not going to accept a banker’s word for it. I want open, public and verifyable proof. I want the RBS assets and the entire Asset Protection Scheme open to forensic scrutiny. I am after all being expected to underwrite it.

And one last thing while my blood is seething.  I would like to suggest a new category of cheap, public humiliation – the FASBO.  If the tenor of our times is to enjoy the public branding and humiliation that is so much a part of the ASBO idea, then I would like to see Financial ASBO’s slapped on Fred the Shred and those legions like him.  I would like them to be branded in the papers, have restrictions on where they can go – not within a hundred yards of the City Mile for example –  and to have to wear one of those ankle monitors which tell the police where the offender is.

If we are happy to treat stupid thugs this way let us also treat the clever thugs in the same manner.

This blog was never set up as a money making exercise. I started writing it because I was outraged and, sad to say, I still am. My only hope for the blog was that it prove useful to people and become a place for thoughtful people to meet, think, discuss and even feel empowered by each other.

The blog does take a lot of work and time but it is something I want to do.

I am not looking to be paid. It is largely a labour of love (and anger). I am rather looking for a little help.
I do not want people to feel they have to subscribe, especially not those who may not have cash to spare.  But if there are people reading who are comfortable and if you have found this blog to be of value to you I ask you to consider making a donation once in a while.

The argument between the Turkish and Israeli governments over the Gaza flotilla  incident is intensifying.

Latest is Turkey has expelled some Israeli diplomats and there are now reports of breaking diplomatic, defence and trade cooperation. A quick read of the Israeli press and some blogs shows commentators keen to talk about how this is a ‘spat’ which will blow over because the Turkey/Israel partnership has been so firm and essential for so long.

And it is true that partnership has been both firm and vital to what little stability there has been in the Middle East. BUT I want to suggest that hto0se who say this will therefore continue may be wrong.  I think they may be wrong because I think Turkey has ambitions to replace Israel as the regional power. Till now, and I say this at the risk of offending Turkish pride, Turkey has played the supporting role. Israel has been the international lynch pin and Turkey has been one of the top regional allies along with Syria.

But I think times have changed for both Turkey and Israel. Israel’s power is waning. Turkey’s is rising.

The protests in Israel are, I think going to become a turning point for internal Israeli politics. Netanyahu and the politics he represents is being challenged forcefully by a broadly based movement of unrest and desire for social and moral change. Israel depends and always has done on American support. That support is not as free flowing as it once was.

But my major suggestions concerns Turkey. Turkey in contrast to its neighbor, Greece, has done and continues to do well economically.  Turkey controls the headwaters of much of the water that sustains countries south of it.  The Caspian gas pipeline runs through Turkey not Israel. Turkey has nurtured a wide network of very good diplomatic relations from Iran, to Syria to the EU and America. And Turkey has a large military.

With Egypt no longer the regional strong man it was under Mubarak and with Jordan in a fragile state not wishing to go the way of Assad in Syria Turkey is emerging as the regional power. I think Turkey already has sufficient economic and political authority to challenge if not replace Israel as THE regional power.

I think as Syria crumbles it is Turkey which will fill the vacuum. And I think as it does it will have an opportunity to take a far more intelligent stance regarding the Kurds.

Turkey has borders with Bulgaria and Greece to the West. Georgia to the North East and Iran, Iraq, Syria and Lebanon to the East and South. Turkey, I suggest, is perfectly placed to become what it was in the past, the power broker between Europe, the Middle East and the Balkans.

I think Israel is being eclipsed by a resurgent Turkey on all fronts.

“Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

Later, the CEO of Dexia, Belgium’s largest and most deeply troubled bank, resigned. The reason suggested by Belgium’s Het Nieuwsblad newspaper is friction between the Belgian and French arms of the Franco/Belgian bank. And so it might be. But the paper does also admit that Dexia is having a crisis of confidence with its investors and creditors.

I suggest the timing with Akerman’s comments may be more relevant for this reason ;

When Greek started on its road to default Dexia was in the spot light because of its exposure to Greek debt. Debt that Greece has now begun to default, asking bond holders to exchange bonds for new bonds at a loss of around 20%.  But Dexia’s exposure to Greek bonds is one fifth of its exposure to Italian bonds.

Dexia is sitting on 15.5 billion Euros of Italian sovereign debt. The point of Ackerman’s comment is this. Like ALL European banks it is holding all that debt on its Banking Book, meaning it is holding it all at 100% face value because – and this is a wheeze the ECB invented for the banks some while ago – it intends to ‘hold them to maturity’. And the idea is that if you are going to hold a bond to maturity, then  you do not have to mark the bond to the value it might have on the secondary markets.

And thus every European bank transferred as many assets as they could from the trading book where they would have to be valued at the market price, to the Bank book where they could be put in a glass case.

But now comes Ackerman to fart loudly in Dexia’s face in public. Imagine what would happen to Dexia if 14 billion euros of Italian bonds did have to be taken from their glass case and valued. Impossible?

Think of all the other news out of Italy today and then take a look at that chart again.

I leave it to you.

First Reuters says,

Italian economic growth is likely to fall short of the government’s official forecast of 1.1 percent in 2011 and 1.3 percent in 2012, probably coming in under 1 percent, a senior government source said on Monday.

Why do people ever, ever listen to “government official forecasts”?  They are about as reliable as the rhythm method of contraception. Lots of to-ing and fro-ing with a success rate of around zero.

Hot on the heels of Reuters comes the FT’s Alphaville, with a rumour, attributed to Societe General, that Italy is now facing a credit rating downgrade from one or all of the ratings agencies. Such a downgrade would torpedo the already sinking Italian Banks whose credit rating would be tipped off a cliff shortly thereafter.  Banks whose shares have been stopped on the Italian market yet again today after getting another kicking.

The reasons given are: the lack of growth (without the fantasy growth Italy’s austerity measures will have failed before they start) and the fact that interbank funding in Europe has all but ceased.

It must be clear to everyone by now that Europe’s banks are going to run out of funding soon. The biggest banks have already raised most of the funding they need for the next 6 months at least. But that’s hardly the point. In the current state all it will take is for a couple of the weaker but still large European banks to run dry and the whole system will seize up. This point was graphically proved just over a week ago when the Greek banks who were themselves at that moment failing, had to find €200 million in order to ‘save’ the small Proton Bank. Had it gone down the rest would have followed like train carriages in a derailment. As it was Proton was ‘saved’ and days later two of its ‘saviours’ (EFG EuroBank and Alpha Bank) had to merge in order to stave off their own implosion. Apparently negative solvency times negative solvency equals positive solvency.

But the imaginary number accounting won’t last (thanks to Neil for providing the link to the source article at “The Street Light” blog, for this) because, as The Street Light article points out European financial institutions seem to have been withdrawing their cash assets from Europe’s banks hand over fist – about €700 billion in the last year.  The article matches this withdrawal to an increase in deposits in US banks of  $500 billion in the last 6 months.  The article asks where the rest has gone. I would suggest either National central banks or the ECB.

Wherever it’s gone it is clear that Europe’s banks are bleeding deposits which will mean their Capital base for liabilities is eroding fast.

And now from Bloomberg is news that,

Sept. 5 (Bloomberg) — Finance Minister Giulio Tremonti canceled a public appearance in northern Italy to rush to Rome for budget talks as bonds plunged amid concern the government may backslide on its latest austerity package.

“The minister received a request to head to Rome immediately to go to the Senate, just as he was coming to Piacenza,” Stefano Rodota, moderator of the conference 

Cue major showdown over Italy’s austerity measures. Politics and economics on a collision course.

The Italian bourse is down on the day just under 4%, as is France. While Germany is down 5.28%.

Two more pieces of Italian news.  Thanks to Mark for the link in his comment below showing Italian Trade Unions already occupying the Italian Stock Exchange in Milan in anger and opposition to the proposed austerity measures. Meanwhile inside the exchange our old friend UniCredit is making the news again.

This from Investment News – (sorry I can’t access the whole story)

Unicredit may sell Pioneer in pieces, sources say

FIRESALE!  I take this as a sure sign of the stress and worsening situation at Italy’s big banks. Pioneer is UniCredit’s massiver US subsidiary. UniCredti was going to sell Pioneer then said it wouldn’t after it got little interest. Now it looks like they have no choice and will sell it for scrap if they have to.

Do you remember when Greece and its debt first hit the headlines when it was revealed that Greece had been lying for years about its real level of debt? Not long thereafter the EU Commission wrote an utterly  damning report (quoted on P. 10 of this later report)  about the complete lack of trustworthiness of Greek government financial data, which found,

“severe irregularities .., including submission of incorrect data,… non-respect of accounting rules .., lack of independence of the National Statistical Service of Greece and the General Accounting Office from the Ministry of Finance… non-transparent or improperly documented bookkeeping, … significant, revisions of data by the Greek authorities over an extended period of time; lack of accountability in the individual provision of figures …, (e.g. absence of written documentation or certification in some cases, exchange of data by phone); unclear responsibility and/or lack of responsibility of the national services providing source data or compiling statistical data, combined with ambiguous empowerment of officials responsible for the data”.

 Following this evisceration the Commission published what it called a

‘Giving notice..to take measures..judged necessary’.  Seems pretty clear to me.