Monday, July 23, 2012 – There Are Problems With Spain And Greece And Germany

There Are Problems With Spain And Greece And Germany 
– by Sinclair Noe

DOW – 101 = 12,721
SPX – 12 = 1350
NAS – 35 = 2890 
10 YR YLD – .02 = 1.44%
OIL + .10 = 89.81
GOLD – 7.30 = 1577.70
SILV -.27 = 27.16
PLAT – 17.00 = 1404.00

There are problems with Spain. We’ve been talking about the problems for quite some time; they had a housing crash; a whole bunch of real estate is underwater; the banks were clobbered; the unemployment rate jumped up to more than 25%, which is in line with unemployment during the Great Depression. The IBEX 35, the Spanish equivalent of the Dow Industrials finished the day down 1.1% after trading as low as -5.8%, and the FTSE MIB (Italian index) was down 2.76% on the day. 

Spain announced that it is banning all short selling for the next three months. Italy announced it would ban short selling for banks and insurers.  The move echoes decisions in August last year by the two nations plus France and Belgium after European banks hit their lowest levels since the credit crisis of 2008 and 2009. The ban worked, sort of; the IBEX rose 6% last year during the ban, and the financial stocks that were covered under last year’s ban they gained 10%. Most bank stocks extended their decline once the bans were lifted. Last time around it didn’t really have any lasting impact. They artificially propped up prices but they didn’t correct the underlying problems. This is trying to avert hedge fund speculation; think of the hedge funds as sharks and they smell blood; the ban on short selling is designed to keep the sharks from ripping off your arm, but the sell-off is not really about speculation.

Last week, Valencia announced it needed a bailout; now there are reports that another half dozen of Spain’s 17 regional authorities might be ready to ask for bailouts. Spain has already set up $121 billion in  bailouts for its banks. Last week, the International Monetary Fund demanded an unequivocal commitment to the euro from member governments and urged the European Central Bank to purchase sovereign bonds. In other words, Spain was supposed to be a firewall, where the financial crisis was to be contained. It doesn’t look contained. 

Spanish bond yields continue to climb to very dangerous levels. The 10-year yield hit an all time high of 7.5%, a 3% intraday rise. The two-year yield rose 77 basis points on the day to 6.53%. As Spanish yields make new highs, US government bonds yields continue to make new all-time lows. The US 10-year fell as low as 1.40%, finishing the day down 2 bps to 1.44%. The euro traded below its lifetime average against the dollar, and hit a 2 year low on concern the debt crisis is growing.

After the close of trade, Moody’s Investor Services cut the Aaa credit rating outlooks for Germany, the Netherlands, and Luxembourg. Moody’s cited the risk that Greece  may leave the 17-nation euro currency and “increasing likelihood” of collective support for European countries such as Spain and Italy. The burden  would fall most heavily on the more highly rated member states of the euro zone if the euro zone is to be preserved in its current form.

While there was never going to be an easy path out of the interconnected Euro-crisis, since lasting solutions would require fundamental changes in institutional arrangements, there seems to be an increase in national prejudices. The northern countries appear to hold surpluses but they’re unwilling to rescue of periphery countries which in turn should rescue their own banks and export markets.  So they continue to punish the supposed laziness of the periphery countries, unable to see that their economic morality play will visit retribution on all the actors. A pound of flesh comes at a heavy price. 

Germany is insisting on continued austerity for Greece, even though it is clearly a massive fail. Prime Minister Antonis Samaris said over the weekend that his country is a depression on a scale of the US Great Depression, and he wants relief from the conditions imposed in a 130 billion-euro rescue package in March. He wants the money for Greece, but the conditions are unacceptable. It’s pretty clear that Greece will fail to meet its fiscal targets and will need even more relief before year end. This is exactly what you expect to see in a deflationary spiral: budget cuts shrink the economy, tax receipts shrink deficits grow, and debt to GDP becomes unsustainable – it’s a downward spiral. As conditions in Greece become even more desperate, Germany has become more rigid.

The immediate trigger is inspectors from the Troika are due back in Greece this week to “assess” progress towards meeting targets. Since there is no way for a patient in an intensive care ward to starve himself back to health, it is not at all obvious how Greek leaders can convince their new economic lords and masters that they can do the impossible. So, it looks less and less likely that Greece will be approved for the bailout. Athens risks being cut off from aid and could run out of cash as early as August. It has sought emergency funding from Europe to cover a bond redemption in late August.

Greece faces a much more important deadline in September, when international creditors are due to make their next aid payment, which they delayed in June as the elections played out. The political situation in Greece hasn’t really changed. Extending the deadline could require even more aid to support Greece while it delays more cuts. So, in addition to the problems with Spain today, there were concerns about a possible Greek exit from the Euro. 

The Greeks should thumb their nose at the Germans, maybe the Germans will exit the Euro-union. Would that be something? The currency misalignment in the  EMU would be cured instantly. There might even be a stock market rally. It would certainly be a better outcome than the current course of deflationary spiral.  Troika demands and loan packages for economies trapped with the wrong exchange rate, or even under the control of the technocrats, seem to lead to the inevitable result that one country after another will be thrown out of Euro-union in an attempt to stop the fires from spreading.

If Germany, not Greece, were to exit the Euro, the results would likely be far worse for Germany; a revaluation shock and stiff losses for German banks and insurers. If the powers that be are balking at coming up with tens of billions for Greece, it is a sure bet they won’t come up with hundreds of billions for Spain, and hundreds of billions more for Italy. Maybe Germany should just accept the pain and move on. 

We seem to have been going through a lot of bankster fraud: there is the LIBOR scandal, the muni bond fixing scam, the JPMorgan London Whale trading fiasco and the Corzine-MF Global collapse, PFGBest (MFGlobal Junior), Capital One Credit Card schemes,  and any number of other scandals in recent months. In every case it was traders run amuck, fixing markets to make an easy buck at someone’s expense. 

I think the problems are more systemic than rogue traders.  So, what is the next show to drop? Shoes, plural. One problem is the price fixing and faked assays in the gold vaults of London; the other is we should see some perp walks in the Libor rate rigging case. 

The London Bullion Market Association’s price fixing scheme  may be coming to an end. The eventual move in gold and silver will literally frighten most people.  It is now beginning to be discussed, openly, that the unallocated gold is not at the banks. This is definitely the case with many of the allocated accounts as well. The reason I’m pointing this out is you have a more ‘open’ disclosure that’s taking place with regards to this.  It is difficult, so far as I am concerned, to describe the ongoing crookedness of the Western world’s leading financial institutions. Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go at fire-sale prices.

Meanwhile, agencies like the CFTC and the Securities and Exchange Commission do not have the authority to level criminal charges, although they do refer cases of possible criminality to the Justice Department. The Justice Department has been investigating allegations of Libor manipulation. The Barclays settlement makes it clear that regulators have evidence that allegedly show Barclays traders colluding with other traders in an attempt to rig Libor to benefit their derivatives trades. Barclays was fined but they are now required to tell all about their fellow banks to investigators. They only get immunity if they rat out their fellow banksters. The Sarbanes-Oxley Act of 2002, the reforms passed after the Enron scandal, expanded criminal sanctions under securities laws. It created a general criminal fraud provision that can cover almost any act of deception that might affect the price of the security of a public company.

A bank that willfully creates a false impression of its financial health by misstating its borrowing rates may have violated the first of these Sarbox fraud provisions. Since false information about a bank’s financial health would likely boost the stock price of a company, this probably runs afoul of the law. In legal terms, the bank may have executed “a scheme or artifice” intended “to defraud any person in connection with…any security” of a public company. Some traditional criminal law provisions may also apply against any derivatives traders who attempted to manipulate the Libor submission of their bank or another bank; that’s just plain old fraud. A derivatives trader with a financial institution on the other end of a Libor-linked trade, attempting to manipulate Libor is a pretty clear instance of bank fraud. Libor manipulators could also face criminal charges under an even older law: the Sherman Act, the U.S.’ principal antitrust statute. Under the Sherman Act, price-fixing conspiracies are illegal.

So, we should see criminal prosecutions coming out of the Libor rate rigging. We should see perp walks soon, but don’t hold your breath. 

The Tax Justice Network USA, which I’ve never heard of, has come out with a new report claiming there are two banking systems for the wealthy; private banks and pirate banks. “Pirate banks” form a large and fast-growing virtual banking system that has helped the wealthy hide more than $21 trillion offshore. That hidden wealth is costing governments $280 billion a year in lost tax revenue. The pirate banking system launders, shelters, manages and, if necessary, re-domiciles the riches of many of the world’s worst villains, as well as the tangible and intangible assets and liabilities of many of our wealthiest individuals. The report says that traditional offshore havens like Switzerland and Singapore hold substantial amounts, and much of the offshore fortune is held in a “virtual country” – a network of cross-border entities designed to shelter wealth.

The AP surveyed economists and for a consensus forecast that the poverty rate would rise from 15.1 percent in 2010 to as high as 15.7 percent. If the rate only increases by one-tenth of a percentage point to 15.2 percent, it will tie 1983’s poverty rate, which was the highest poverty rate since 1965. The highest poverty rate on record — 22.4 percent — was measured in 1959. The 2010 poverty level was $22,314 for a family of four, and $11,139 for an individual, based on an official government calculation that includes only cash income, before tax deductions. It excludes capital gains or accumulated wealth, such as home ownership. For the past 4 years, I’ve been saying we’re in a small “d” depression. I know that officially we were in a recession and then we came out of the recession.

The unique feature of the downturn is not just the high rate of unemployment, but the long duration of unemployment that millions of Americans have experienced. For a lot of these long-term unemployed, the job that they had won’t exist when they go back in to the labor market. The problems have been so pervasive that it has substantially increased poverty. We have a pretty good definition of recession. We have a pretty good denial of the definition of depression.

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