European Banks Fall Lower On Likely Downgrade Of French Banks As Default Of Greece Becomes Apparent … Are We Witnessing The End Of Traditional Banking As Well As The End Of Fiscal Sovereignty?

Report on the European Financial Institutions for September 12, 2011

1) … European Financials, EUFN, fell lower, as Bloomberg reports Moody’s is likely to downgrade BNP Paribas, BNP, and Crédit Agricole, ACA.PA, and Société Générale, SCGLY.PK.
EUFN -2.9
GERJ -4.1
SIL -4.0
CHIM -3.9
GDXJ -3.6
EWD -3.1
GDX -2.9
EMFN -2.5
COPX -2.1
ALUM -2.1
EWI -2.1
EWQ -2.3
EWO -1.8
EWP -1.6
EWN -1.4

Competitive currency devaluation brought debt deflation to a number of country shares as well as currencies today.
SCIN and INDY and EPI on a fall in the Indian Rupe, ICN
EWA and KROO and AUSE on a fall in the Australian Dollar, FXA,  
BRF, and EWZ on a falling Brazilian Real, BZF
EWD on a falling Swedish Krona FXX
EZA on a falling South Africa Rand, SZR
EWW on a falling Mexico Peso, FXM

Gold, GLD, is a currency; it fell 2.2%

2) … reports Austerity Measures are applied by Emergency Financial Management in the rust belt.
Illinois to close mental health facilities, lay off 1,900 Democratic Governor Pat Quinn announced September 8 that Illinois would close three mental health facilities, two centers for the developmentally disabled, and other crucial social services. And Detroit residents protest plans to close six branch local library. And Workers in Lawrence, Massachusetts, speak on jobs crisis Once a thriving mill town, Lawrence is among the poorest cities in Massachusetts, with an official jobless rate of over 18 percent.

3) … A Fiscal Trap, A Fiscal Black Hole, is Developing.
I recommend a subscription to EuroIntelligence which relates:
There are reports over the weekend that Germany is now preparing for a Greek default. The strategy seems to be to pay the next tranche and wait until the EFSF receives its new powers before forcing Greece into a default. The EFSF would then be in a position to stabilise European banks.

Wolfgang Münchau in FT relates that the verdict of the Constitutional Court is a disaster for the eurozone, as it rules out eurobonds. The Constitutional Court’s decision delineates what is legal and what is not. A temporary mechanism in which the Bundestag retains ultimate control, such as the EFSF, is legal. The permanent mechanism is clearly a borderline case, according to the judgement, as a result of which the ESM is likely to give rise to another, and possibly more serious challenge. A eurobond is clearly beyond what the constitution permits, because it involves a permanent transfer of fiscal sovereignty.

Holger Steltzner sees formation of national fractions within the ECB.
Commenting on Jürgen Stark’s resignation, Frankfurter Allgemeine’s economics editor Holger Steltzner says that rule breaking and a loss of all principles was not compatible with the ECB’s price stability mandate, according to Stark and the Bundesbank. “By buying debt from Italy, Spain, Portugal, Ireland and Greece, the ECB is pushing the transformation of the currency union to de debt community without limited liability”, Steltzner claims. “Stark no longer wants to be part of this. He is worn out also because national fractions have emerged within the ECB’s governing council.”

Le Monde argues the governments have forced the ECB to buy the debt of crisis countries.
In its front page editorial Le Monde argues that the euro governments didn’t leave the ECB any other option than to buy the debt of the crisis countries. “Without any doubt the ECB did not have a choice”, the paper writes. “It came to help those countries in order to avoid an explosion of the eurozone.” But the paper points out that “with or without reason the Germans are afraid of an ECB that spends billions without counting.” But it is not the ECB’s fault, Le Monde argues, but rather that of the member states which “have let their debt grow and that of the others who have never grasped the existential nature of the crisis that affects the euro.”

Mike Mish Shedlock relates: The humane thing to do to a rabid dog is put it out of its misery. The humane thing to do to Greece is the same. Instead, officials in Germany, the EU, and IMF insist on putting Greece through another round of austerity measures inhumane torture in return for “one more” tranche of money. Raising taxes on the dead cannot possibly help. Yet, that is precisely what Germany, the IMF, and the EU want Greece to do. Papandreou is not only willing to go along with the program, he gave a “we need to get with the program, rally speech” based on it. Papandreou effectively said “I am pleased to announce we are going to raise your electric bills so we can bail out French and German banks.” Papandreou is delusional and so is the IMF. There is no conceivable way hiking property taxes can help Greece. The real world seems to agree as the Greece 1-Year Government Bond Yield rises vertically to 139%. Please consider Kathimerini article Greek Finance Minister announces fresh property tax as PM uses annual speech as rallying call. Finance Minister Evangelos Venizelos heralded fresh austerity measures over the weekend, chiefly a new property tax, a day after Prime Minister George Papandreou insisted that his government would do everything necessary to plug a gaping budget deficit and secure the next installment of emergency funding on which the country’s solvency depends.Noting that the next two months would be “hellish,” Venizelos told a press conference earlier Sunday that the government had no option but to do “everything necessary” to cover a budget shortfall, estimated at 2 billion euros, following a deeper-than-expected recession.

Bloomberg reports Greece’s chance of default in the next five years has soared to 98% as Prime Minister George Papandreou fails to reassure international investors that his country can survive the Euro crisis.

Bloomberg reports Bank default swap indexes hit record in Europe.

Der Spiegel in article German Finance Minister prepares for possible Greek Bankruptcy reports Bankruptcy Could Create Credit Crunch. The European bailout mechanism, the European Financial Stability Facility (EFSF), is playing a key role in those considerations. Soon the EFSF is expected to be given new powers agreed to by European leaders at a special euro crisis summit in late July. Two instruments at the EFSF’s disposal are at the forefront of the Finance Ministry’s scenarios. One of these key instruments would be credit lines provided to countries like Spain or Italy if investors stop lending them money after a Greek bankruptcy. If banks were forced to write off the billions in Greek government bonds on their books, they could become reliant on billions in rescue fund aid in numerous euro-zone countries. Both developments are to be expected in a Greek insolvency, regardless of whether the country exits the euro or not.

Reuters reports Merkel allies break taboo with Greek default talk. Senior politicians in German Chancellor Angela Merkel’s center-right coalition have started talking openly about a Greek default, reflecting mounting concern in Europe’s biggest economy about the debt crisis and pressuring Greece. “To stabilize the euro, there can no longer be any taboos,” Philipp Roesler, economy minister and leader of Merkel’s junior coalition partner, the Free Democrats (FDP), told Die Welt. FDP general secretary Christian Lindner went further, telling the Berliner Morgenpost his party had not ruled out the possibility of Greece leaving the euro zone. Even senior figures in Merkel’s conservative Christian Democrats (CDU) are leaving open the possibility of default. “The way things are looking, you can no longer rule out a possible Greek restructuring,” CDU budget expert Norbert Barthle told Reuters when asked about a default or euro zone exit. The stakes are high for Merkel who is battling to convince rebels in her coalition to vote for new powers for the European Financial Stability Facility (EFSF) on September 29.

Although she will get the law through due to support from opposition parties, if she fails to secure a majority from the ranks of her own coalition parties her authority will be seriously dented and she may even have to call elections. Some members of her party have raised questions about Greece’s continued membership of the euro zone. “If the Greek government’s efforts to make cuts and reform are not successful, we must also ask the question whether we do not need new rules which make possible the exit of a state from the currency union,” Der Spiegel quoted senior CDU member Volker Bouffier as saying. Merkel herself has ruled out an expulsion of Greece, saying it would trigger a domino effect, but rifts have been opening up in her coalition on the subject. On Saturday, the conservative Christian Social Union proposed threatening heavily indebted states with having to leave the currency union.

Merkel is in a bind as she tries to push an agenda of greater economic integration as Germans grow more skeptical. A poll this week found 76 percent of Germans opposed to granting any further aid to heavily indebted Greece. Former German foreign minister Joschka Fischer fed public concern, saying on Sunday the euro could even collapse.

Bloomberg reports Germany readies surrender in fight to save Greece. The plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next portion of Greece’s bailout is withheld, said the three officials, who declined to be identified because the deliberations are being held in private.

Bloomberg reports Merkel, Roesler Clash as prospect of Greek Default splits German coalition. German Chancellor Angela Merkel’s government lurched into open conflict over tackling the debt crisis, as Merkel called for Greece to get more time and her coalition allies suggested it may need to default and leave the euro area. The deepening divisions underscore Merkel’s challenge of keeping her three-party coalition united behind bailout aid for Greece as she seeks to prevent a breakup of the euro while prodding Europe toward more joint economic and fiscal policies. A state election in Berlin on Sept. 18, the last of seven this year that have seen the coalition parties punished amid bailout fatigue, further adds to the political pressure.

Bloomberg reports Europe may need to bail out, nationalize some banks, Westpac’s Jones says. European officials may have to bail out and nationalize some private banks to avoid another global recession, said Russell Jones, global head of fixed-income strategy at Australia’s second-biggest lender. “The last thing really the global economy needs now is a major banking crisis in the euro zone,” Jones, of Sydney-based Westpac Banking Corp., said in an interview yesterday on the Australian Broadcasting Corp.’s “Inside Business” program. “The governments are going to have to put their hands in their pockets.” A European banking collapse is “the sort of shock to the system when things are very fragile, as they are at the moment, that could really push us back into the sort of downturn we experienced in 2008 and 2009,” Jones said, according to a transcript of the interview. Nationalization is possible, “at least temporarily so,” he said.

4) … We are witnessing the liquidation of banks as economic and investment entities. Banks as providers of credit will soon be nonexistent.
The Bank of Greece, NBG, reports household and corporate deposits declined for the 7th month in a row, dropping by €1 billion euros in the July. Since January 2010, total deposits have declined from €233 billion to just €187 billion, or €46 billion, or 20% of the entire deposit base. Chart shows National Bank of Greece and Intessa fell strongly today.

Tyler Durden reports that European bank liquidity has evaporated The Euribor-OIS (spread between central bank and interbank borrowing ), the 3M USD LIBOR (or the funding need for USDs), and the ECB Deposit Facility Usage (lack of safe alternatives). Well, the first is at 84.9bps, +2.9, the widest since March 19, 2009, the second is at 0.343, up from 0.338%, and the widest since August 18, 2010, and deposit facility usage is at €182 billion, the widest since July 2010.

Between The Hedges reports the Eurozone Investment Grade CDS Index is surging +9.05% to 190.28 bps, which is a new record high. The Greece, Spain, Belgium, Portugal and Italy sovereign cds are hitting all-time highs today. The France and Germany sovereign cds are very close to their record highs. The Eurozone Financial Sector and Western European Sovereign CDS Indices are making new all-time highs

Automatic Earth writes Who’s ready for the fall?

5) …Tyler Durden writes UBS’ George Magnus says European “Viability is far from assured”  
The immediate problem, which policy makers have been unable or unwilling to address successfully, is the negative feedback loop between diminishing sovereign creditworthiness and weak, undercapitalised banks. Improving sovereign credit through austerity is a long process, and, in any case, hard to pull off in recessionary conditions and when all one’s major economic partners are also in austerity mode. It is also accepted now, if grudgingly, that debt relief and restructuring are essential to that improvement process … To break the loop, significant and mandatory bank re-capitalisation is required, as recently stated by Christine Lagarde, and in short order.  

Ideally, the EFSF would perform this task, as envisaged by Heads of State at their summit on 21st July. Even if the EFSF redesign is approved by all 17 parliaments by the end of September, its limited financial capacity is widely acknowledged, and boosting this would become the next urgent task. Several proposals are circulating as to how this might be done without having to ask all the sovereign shareholders to cough up more money or collateral up front, though most involve further complex negotiations to redesign the EFSF further. Assuming there is time to do it, one of the more interesting is based on turning the EFSF into a bank, with access to the ECB, and the ability to leverage up its resources considerably. What to do when the euro crisis reaches the core, Daniel Gros and Thomas Mayer, Centre for European Policy Studies, 18th August 2011).

But if, for one reason or another, bank recapitalisation doesn’t happen or is inadequate, it is hard to see how the negative feedback loop can be broken. And if European policy makers prove unable or unwilling in this regard, and the Eurozone debt crisis becomes more intense and damaging, what then? In a thoughtful piece, published recently in the Financial Times, it was suggested that the US, the IMF and China would all have strong vested interests to come to the rescue of the Eurozone, embarrassing as it would be for its leaders (It is Time for outsiders to save the single currency, Barry Eichengreen et al, Financial Times, 5th September 2011).

Bank recapitalisation is the most important tool/technique that needs to be implemented, but this still leaves open the related but more structural problem, which is to how to provide a lasting solution that fills the chasm between the interconnected financing needs of sovereigns and banks, and the inadequate amounts available from private lenders. As an example, the reason Italy has found itself in trouble this year is not only because of contagion shock, but also because its current account deficit has been widening steadily all year (4% GDP, and 7% GDP annualised over the last 6 months), creating the demand for larger capital inflows, at a time when lenders are backing away from the periphery of Europe.

It’s a small part of Europe’s imbalances problem, and policy makers find it hard to talk about systemic problems, not least because a smoothly functioning Euro system now requires even higher levels of economic and fiscal integration, which intrude uncomfortably into the sovereignty of both creditors and debtors. Creditors are becoming increasingly powerful and assertive and debtors too are at serious risk of becoming austerity-weary, while already anxious about ceding more sovereignty to creditors and European institutions. Germany’s dominance in the Eurozone as the biggest economy and strongest creditor, makes last week’s strong judgement issued by the German Constitutional Court last week, all the more telling. The ruling, which dismissed the plaintiffs’ case, insisted, nevertheless that the sovereignty of the German state cannot be subsumed by or handed over to any third party, permanent institution, such as the EFSF’s successor from 2013, the European Stability Mechanism, or, for that matter to the proposed issuing authority of any future E-bond scheme.

The dilemma over where to draw the lines between integration and sovereignty lies at the core of the fiscal union debate. The policy agenda has to recognise this, and not assume that fiscal union, one way or another, is eventually a ‘gimme’, even though logic would say it should be. Parallel to the logic are the politics and vested interests, the German Constitutional Court notwithstanding, which say fiscal union only one theoretical outcome, and maybe a long shot. Most likely, the political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms.

We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured.

6) …  The European Banks cannot be and will not be recapitalized. An inquiring mind asks who and what will provide for the fiscal needs of Greece once it defaults?  Who and what will be the basis of the Greeks fiscal authority? Where will the money come from to operate the Greek economy? What is the future of the European Union? Where will moneyness come from?
One thing is for certain. The European Banks cannot be and will not be recapitalized. This means we are witnessing the End Of Traditional Banking.

An inquiring mind asks, who and what will provide for the fiscal needs of Greece once it defaults?  Who and what will be the basis of the Greeks fiscal authority? Where will the money come from to operate the Greek economy, and pay the Greek state workers?

Might we be witnessing the End Of Traditional Fiscal Sovereignty? By market action, we are witnessing the end of Greek fiscal sovereignty. For now, the fiscal needs of Greece are likely to be met through seigniorage aid as the IMF officials say Troika expected to approve Greek loan tranche this month.

I do not know if Greece will be forced from the EU. I do know that Austrian Economists and Anarcho Capitalists are drooling with the hope that the currency union will fall apart and sovereign nations arise and issue their own currencies, so that people can rise as sovereign individuals.  

The Free To Choose Regime of Neoliberalism was built upon one; it was fathered by Milton Friedman, whose call was to investing in floating currencies and carry trade lending.

The Beast Regime of Neoauthoritarianism is built upon many; it is fathered by the 300 luminaries of the Club of Rome, whose 1974 Call is clarion, compelling, and comes with authoritarian imperative for regional economic government, as an answer to the chaos coming from unwinding carry trades and deleveraging stocks, as well as the failure of sovereign debt.  The Club of Rome’s Call is very timely, as Doug Noland of Prudent Bear writes in Crumbling Pillars “The eurozone is unraveling, as global market de-risking and de-leveraging intensifies … Whether it’s monetary or fiscal policy, at home or abroad, there seems to be confirmation everywhere that policymaking has become largely ineffectual and, increasingly, incapacitated.”

I am one who believes that while the Euro system is not about to break up, its viability can only be assured, and will be assured by diktat of leaders, who in framework agreements, waive national sovereignty and form a fiscal union, together with other components of a true economic government, with a Leader, as called for in August Joint Communique by Angela Merkel and Nicolas Sarkozy. relates that  German Chancellor Angela Merkel has spoken out in favour of the euro. It was “much, much more than a currency”, she said. It was “the guarantor of a united Europe”, she explained in the budget debate in the Bundestag. “If the euro fails, Europe will fail.” Even Finance Minister Schäuble defended the euro as the only alternative. “What we need in a globalised world is a common European currency”.

The die has been cast. Fate it seems, yes, destiny is at work, destroying nations, so that  regional sovereignty of the Beast Regime of Neoatuhoritarianism can be revealed, which will rule in all of mankind’s seven institutions, and as state corporatism in ten world regions. This Ten Toed Kingdom of regional economic government will be imposing austerity and debt servitude. Sovereign leaders will be replacing sovereign individuals. Freedom and choice are illusions on the Neoauthoritarian desert of the Real..

Soon out of the soon coming global sovereign debt and banking crisis, a new European Super Government will arise. It will be like a revived roman empire. A new moneyness, will come from the word, will, and way of both a European Chancellor, the Sovereign, and His Banker, The Seignior. One leading candidate for the Sovereign is Herman Van Rompuy, who the Daily Mail reports as saying, the age of the nation state is over and the idea that countries can stand alone is an ‘illusion’ and a ‘lie’

The people will be amazed by this new seigniorage, that is a new moneyness, and follow after the Beast Regime of Neoauthoritarianism, giving it their allegiance


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