Will Upcoming European Sovereign And Banking Funding Needs Be Supplied?

I … Upcoming Eurozone Government and European Financial Institutions have funding needs in early 2011. Given the sovereign debt and bank debt symbiosis crisis, can those needs be satisfied?

I … News from OpenEurope in their December 10, 2010 press summary:

The Economist’s Charlemagne argues in article Fighting Fire With Fire: “Using the ECB to back sovereign debt might be seen in some quarters as another stealthy step towards fiscal union. One more foundation stone quietly being laid is the first issuance next year of common bonds, for Ireland, by the European Financial Stability Facility. One way or another, say enthusiasts, a Eurobond is just a matter of time. That might provide an insurance policy for the future. But what of the current inferno?”

And in article Power Shift, the Economist notes that the euro crisis has shown that power in the EU has shifted from France to Germany.

And in article The Last Idealists, the Economist documents that banks in the core nations such as France have increasingly invested in periphery banks to sustain their liquidity as other investors are fearful of the periphery countries’ solvency and are unwilling to finance any of their banks.

Dutch magazine Elsevier‘s EU correspondent Carla Joosten argues that “EU member states should really question whether the eurozone countries have sufficient economic potential to maintain a strong euro. If the answer is negative, the question on how to realise the divorce is on the table. But that discussion is being postponed as long as possible, just as in real life.”

II … News from EuroIntelligence in the December 10, 2010 daily morning news briefing:

France And Germany Agree: No To E-bonds: Sarkozy follows Merkel in her rejection of European bonds; Mario Draghi says e-bond are not the answer, but also plays down impact and scope of bond purchases; Wolfgang Munchau says e-bond is a necessary and sufficient step in crisis resolution; Germany and France are also pushing to stitch up the top ECB jobs, according to a news report; the ECB warns that banks are over-reliant on ECB funds, and pressure on funding is growing as banks are competing with sovereigns for limited finance; Barry Eichengreen says the periphery’s internal devaluation strategy requires debt restructuring; Joseph Cottrell relates funding pressure on European banks will increase dramatically in January; bond spreads, meanwhile, are edging up again.

Concerns about sovereign credit risk have hampered access to capital markets. Money markets had improved, but access to inter-bank lending remained limited. Banks have issued fewer debt instruments than in previous years. The drop in issuance has been pronounced in 2010 across several debt instruments, the ECB said according to Reuters. The ECB also said that many smaller hedge funds will struggle to survive, whereas bigger funds are expected to grow.  Les Echos titles that the ECB worried about competition between banks and states for capital funds. The financial stability report notes that banks in the eurozone will need to raise more than €1300bn over the next two years. This has been more or less stable since 2005. But this time banks will compete with eurozone states, which are expected to need more than €850bn next year alone.

III …Kirsten Donovan in December 10, 2010 Reuters article Euro Government, Bund Yields Rise As Focus Shifts Back To Euro Zone:

Bund yields rise as rally looses steam and as non-German yields edge up as politicians disagree.

German government bond prices fell on Friday, failing to build on the previous session’s rally, as politicians disagreed over measures to resolve the euro zone’s sovereign debt crisis.

Higher equities also lessened the appeal of Bunds, which had attempted to extend gains in early trade after U.S. Treasuries, the main driver for the market this week, rebounded after a strong auction of 30-year debt.

“The year-end environment is not providing material support for Bunds which suggests systemic and fundamental risks are still driving forces,” said Lena Komileva, head of G7 economics at Tullett Prebon, adding a rise in riskier assets was undermining support for safe-haven bonds.

Analysts said that although economic fundamentals pointed to higher euro zone and U.S. yields, this week’s sell-off, which pushed 10-year Bund yields above 3 percent, had been overdone.

“There could be more selling going into the quieter year-end period but we think 10-year Bund yields should continue to find support at the 3 percent mark, while next week’s European Council meeting poses an event risk,” said Norbert Aul, rate strategist at RBC Capital Markets.

March Bund futures were flat at 124.95, having earlier risen as far as 125.33. The contract marked record highs in September of 134.77 but has sold off sharply since, partly on concerns over how much it would cost Germany if more euro zone countries needed financial assistance.

This week’s slide in Treasuries added momentum.  “The growing positive correlation between core and peripheral bonds maintains concerns about the possibility of a negative feedback loop if German collateral is extended to contain the spreading sovereign debt crisis in 2011,” Tullet’s Komileva said.

The area around 3.08 percent — Wednesday’s high — is seen as strong resistance for 10-year yields — representing the 38 percent retracement of the fall in yields since the start of the financial crisis in late 2008.
Non German bond yields edge higher.  

Bonds issued by highly-indebted euro zone countries underperformed German counterparts. Ten-year Spanish bonds were the worst performers, with yields up 8 bps at 5.4 percent ahead of auctions next week.

IV … Andrew Davis of Bloomberg inGermany Won’t Back Sale of Euro-Region Bonds, Westerwelle Tells Corriere on December 10, 2010:

Germany is pro euro “head to toe” and won’t relinquish sovereignty over its debt management to support the sale of euro-region bonds, Foreign Minister Guido Westerwelle said. The possibility of euro-region countries pooling their national debt to collectively share risk is “unacceptable,” Westerwelle said. Such a plan wouldn’t give more profligate countries “an incentive to maintain discipline” if they knew that others were guaranteeing their borrowing, he said.

V … Shaun Richard in December 8, 2010 blog article:

We have seen rises in longer-term interest rates around the world recently. There have been individual examples of surges in places like Greece, Ireland and Portugal and problematic increases in Spain and Italy that have left the Euro zone with something of a headache. Well there are always cross-currents in matters like this and the German ten-year bund now yields just over 3% which is up more than 0.8% on its lows. This is significant as so much in the Euro zone is priced off the German benchmark, for a start the various rescue packages are! So “rescue” may not be quite so cheap in future. A general rise in longer-term interest rates is exactly what the Euro zone does not need.

In the UK our ten-year government bond yield went below 2.9% in the summer but closed last night at 3.46% so in spite of the fact that we have performed relatively well there has been a cost here for us. Regular readers will know that I have often compared this yield with our inflation rate and our prospective inflation rate and questioned on this basis the yield. Perhaps events are finally catching up.

Recently we have got used to a world where short-term interest rates have approached zero in what has been nicknamed ZIRP or Zero Interest Rate Policy. In most countries there is little prospect of a rise. However longer-term interest rates are rising and we will have to see if this is a trend which continues. Next year the developed world in one form or another has a lot of money to borrow and it could do without a rise in the cost of this. I realise that there is little debate or media attention on longer-term interest rates but they are in fact often more important than short-term ones. Just because something grabs a headline does not mean it is more important than something else. One of the factors behind the economic growth over my time period of analysing markets has been a fall in longer-term interest-rates.

II  … The sovereign bank symbiosis crisis has evolved to the point where the head of the IMF has called for a comprehensive, and non traditional solution, to provide for both the sovereign funding needs of Eurozone Countries as well as for European Financial Institutions.

Ingrid Melander and Harry Papachristou of Reuters report: The head of the International Money Fund, Dominique Strauss-Kahn said:  “The eurozone has to provide a comprehensive solution to this problem … The piecemeal approach one country after another is not a good one.”

III …. Two comprehensive and non traditional solutions to the current bank sovereign crisis.

A … Toni Straka of Prudent Investor in Zero Hedge article relates there MUST be an alternative to the Euro Until The Endsieg.

Brussels has to arrive at the conclusion that not all banks are systemically relevant and let the economic down cycle work through the over-capacities in the sector. Banks are no exception to the rules of profit and loss and irresponsible support actions that saddle the sovereigns with intra-generational debt will inevitably lead to more social turmoil on the old continent.
Europe’s time for a hard awakening has come.

B …  I believe that it will only be out of crisis, that strong political and banking leadership will emerge. A Sovereign, that is a Chancellor, and also a Seignior, a Banker, will arise to provide a comprehensive solution to all of Europe’s Funding needs as well as to present what level of government service will be provided.

I believe the Strauss-Kahn call for a comprehension solution will go unanswered.  

A catastrophe is coming out of rising sovereign debt interest rates, as well out of further global competitive currency devaluations at the hands of the currency traders, resulting in a financial market place implosion, where the European Financial Institutions, EUFN, will fall quickly falling in value, taking the entire global financial system down, resulting in Götterdämmerung, an investment flame out, bringing forth a new age.

Bible prophecy of Revelation Chapter 13 gives insight that out of this soon coming crisis, a Sovereign-Chancellor, Revelation 13:5-10, such as Angela Merkel or  Herman van Rompuy or John Redwood;  and also a Seignior-Banker, Revelation, 13:11-17, such as Wolfgang Schäuble, or Olli Rehn, or Jean-Claude Trichet, or Gordon Brown, with establish fiscal sovereignty to control deficit spending, enforce internal country devaluations, provide a common EU Treasury for both taxation and transfer payments, assure mutual guarantees of the EU debt, and as Timothy Geithner called for, implement unified regulation of banking globally. All seigniorage, both credit and fiscal will come and go through the Seignior who will make decisions on where money is spent.

Yes, I foresee two leaders in Europe for two roles. The Sovereign will be responsible for political solidarity and the Seignior responsible for economic, fiscal, and banking solidarity.  The Sovereign will lead along the lines of EU Council President Herman Van Rompuy’s  stark warning against nationalism across the EU, as he related that it as a key threat to peace in Europe.  There is no longer the monopoly of a few countries. In every member state, there are people who believe their country can survive alone in the globalised world and to that he said: “It is more than an illusion: it is a lie.”

And The Seignior oversee all matters of credit and banking. Debt sovereignty will belong to him and not any individual nation. This will be in stark contrast to the convictions of Germany’s Foreign Minister Guido Westerwelle who was quoted by Andrew Davis of Bloomberg as saying that Germany is pro euro “head to toe” and won’t relinquish sovereignty over its debt management to support the sale of euro-region bonds. The possibility of euro-region countries pooling their national debt to collectively share risk is “unacceptable,” Westerwelle told the newspaper. Such a plan wouldn’t give more profligate countries “an incentive to maintain discipline” if they knew that others were guaranteeing their borrowing, he was cited as saying. Westerwelle, leads the Free Democratic Party, Chancellor Angela Merkel’s junior coalition partner.

The Seignior will provide a new moneyness (moneyness is the liquidity and tradability of an investment or currency) to replace the current ones. Doug Noland writes: “John Law’s experimentation with paper “money” in France ended with the spectacular bursting of the Mississippi Bubble in 1720.  Today’s backdrop is much more complex:  The Fed and global central bankers are working diligently to control an experiment in electronic “money” and Credit gone terribly awry.  If it were only the printing press, it would be easier to appreciate what was developing and how to administer some restraint.  Instead, the Fed has banked everything on its capacity to inflate marketplace liquidity, sustain massive government debt issuance, and maintain market perceptions of moneyness.”  The Sovereign will provide money good, that is an approved and tradeable investment or currency.

And, I foresee national sovereignty passing away throughout the world, as Leaders’ Framework Agreements establish ten regions of global governance as called for by the Club of Rome in 1974; hence people will no longer be citizens of sovereign nation states, rather residents living in a region of global government.

Some final thoughts are based upon the Brad DeLong In Europe: Balanced Deflation, or More Depression which provides Barry Eichengreen’s thoughts, that are well-organized on the subject of a comprehensive solution to the sovereign debt symbiosis.

He writes that government debt must be restructured. However my take is this cannot be done, as any new debt issue will not be auctionable … that is the new government treasuries will find on buyers, due to the risk that the new issue, will itself, at some time be restructured.

Any he suggests bank debts converted to equity, will that will simply be sold short by short sellers.

And he suggests that mortgages debts be written off; this would only lead to a run on mortgage-backed mutual funds; and the write off would also preclude the issuance of new debt issue.

Undeniably, the future holds debt deflation, which is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

I believe that banks and countries are going to be faced with the specter on unbought debt as currently investors are short selling European bank debt as well as buying credit default swaps on the banks.

I see a strong down draft in world stocks, ACWI, and in European Financial Institutions, EUFN, in particular; as well as increasing sovereign debt interest rates such as the Interest Rate on the 30 Year US Government Bond, $TYX, and the Interest Rate on the 10 Year Us Government Note, $TNX, and thus a decrease in Treasury Bonds, such as EDV and BWX.

Not only will there be debt deflation but there will also be internal devaluation.

Internal devaluation is planned for Detroit, as its mayor announces termination of services for many neighborhoods.

The Detroit Works Program is based upon the concept that Detroit is too far gone revitalize and that services will be provided only to sustainable neighborhoods.

Andrea Peters of  WSWS.org in article Detroit Mayor Plans To End Services To One-third Of The City reports that in a recent press interview, Mayor Dave Bing announced his Detroit Works Program, which is a plan to downsize Detroit by depriving residents living in large swathes of the city of essential services.
People would be “inncentivized” rather than “forced” to relocate.

The supposed incentive is that those who relocate to one of the neighborhoods slated for survival will actually have access to such things as public schools, transportation, fresh water, gas, electricity, and emergency services. Those who remain outside of these seven to nine neighborhoods will go without.

Speaking to the Detroit Free Press, Bing stated, “We’re going to be encouraging [people] to move and put themselves in a better situation. They are much better moving into a more dense area so that we can provide them with the services they need: that would be water, sewer, lighting, public safety—all of that.”

In order to underscore his point, the mayor made clear that those who did not relocate “need to understand that they’re not going to get the kind of services they require.” He added, “I don’t want people to think that, if they hold out, there’s going to be a pot full of money somewhere, because there’s not.” In other words, the city will not provide any financial aid to residents being forced with the choice of losing their homes or living in pre-20th century conditions.

Karen Dumas, a spokeswoman for the mayor’s office, further emphasized this point to the Detroit Free Press, which reported that she “said the opportunity for a better life in a neighborhood that provided improved city services should encourage people to move and, by itself, provide an incentive.”

Alan Ackerman, a local eminent domain attorney interviewed by the online area news source Mlive, indicated that he expects that Detroit will enlist the help of Michigan’s incoming Republican governor, Rick Snyder. With the aid of the state legislature, Snyder could push through a law fabricating a legal basis for Bing’s plans.

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