Mish's Global Economic Trend Analysis

Latest Idiotic Plan: No Losses for Banks or Bondholders because "Losses Undermine Confidence"
Do It Yourself Interactive Eurozone Bank Stress Test
Not your grandfather’s Republican Party; President Obama and Mitt Romney are Nearly One and the Same!
UK Banks Brace for Eurozone Break-Up; Eurogeddon and the Death of a Currency
Home Prices Crash 62.5% Since September in Erdos, a Chinese "Ghost Town"
European Bond Selloff Continues: Italy 2-Yr Yield 7.90%, Belgium 5.22%, Portugal 18.38%; Greek 1-Yr Yield 310%

Latest Idiotic Plan: No Losses for Banks or Bondholders because "Losses Undermine Confidence"

Posted: 25 Nov 2011 03:33 PM PST

In an attempt to improve confidence, yet another hare-brained scheme was launched by France to spare bondholders any losses.

Please consider Euro zone may drop bondholder losses from ESM bailout

Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from July 2013 - could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

"France, Italy, Spain and all the peripherals" are in favor of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands." Austria is also opposed, another source said.

Germany and some other member states were hoping to bring the ESM, which will have a lending capacity of 500 billion euros, into force as early as July next year, but disagreement over its structure could delay that.

That's right folks, we are going to bail out the banks and no one has to take any losses (except taxpayers of course who will "share" 100% of the risk). Otherwise there will be a "loss of confidence" in the same banks that plowed into Greek, Spanish, Irish, and Portuguese debt because supposedly there would be no losses on sovereign debt.

Now they have taken a no-loss idea that has already blown sky high, and want to expand it to the next level: "no losses on bailouts".

This plan is so stupid only government bureaucrats could dream it up.

The only true way to restore confidence is to punish banks that make stupid lending decisions. Thus, 100% of the losses should go to the bondholders, not zero percent.

Addendum:

Reader Jim writes ...

A buddy of mine tells a story about being in the Army. Each time they asked their commanding officer why they had to do the latest unpleasant assignment, he would reply "It builds character." One day a lonely voice in the back said "Sir, we have enough character already."

In that spirit let me inform the politicians "I have enough confidence already."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Do It Yourself Interactive Eurozone Bank Stress Test

Posted: 25 Nov 2011 11:36 AM PST

Reuters has an interesting Interactive Eurozone Bank Stress Test

Adjust the Tier 1 Capital Ratio and Sliders for Haircuts and out pops an answer. This is what I came up with. It is hard to get the sliders to stop exactly on the spot you want.

A Political Problem?

Please consider Franco-Prussian flaw

The barriers to a proper recapitalisation of Europe's banks look political, not economic. That's the conclusion of Reuters Breakingviews' latest bank stress test, which analyses what would happen if governments have to fill the entire capital hole required to restore confidence in Europe's financial system.

The shortfall created by a tougher stress test is certainly large. Take the 90 banks that participated in the European Banking Authority's now-discredited exam in July. If banks were forced to mark their sovereign debt to market and achieve a core Tier 1 capital ratio of at least 7 percent under a stressed scenario, they would need 93 billion euros. Raise the pass mark to 9 percent, and the hole is 260 billion euros.

That's a giant leap from the gap of 2.5 billion euros identified by the EBA in July. However, when judged against the economies of the 21 countries whose banks sat the test, it's still manageable. A 93 billion euro capital injection is equivalent to only 0.7 percent of the countries' expected GDP for 2011. Even with a 9 percent pass mark, the bill is still just 2 percent of GDP.

Peripheral states would still suffer. At a 7 percent pass mark, Greek and Cypriot banks would need a combined 36 billion euros of extra capital. Footing the bill would push Greece's 2011 debt-to-GDP ratio to 171 percent, from 157 percent. Cyprus' post-recap debt would be 86 percent of GDP, 26 percentage points higher than before. But both those countries' banking systems always needed help to cope with a Greek default.

The real question is whether Spain and Italy, which face a combined bill of 22 billion euros, need bailout money as well. However, financing the recap will only add 1 percent to their respective debt-to-GDP levels.

France and Germany have recently squabbled about whether the recapitalisation of their banks should be financed by the countries themselves, or by the European Financial Stability Facility. With self-help perfectly plausible, it suggests the real problem is justifying further bank rescues to voters.

The Problem is Political

I came up with a shortfall of 557 billion Euros. I suspect the answer is a lot more, say one trillion euros (not counting real estate loans, personal debt, and corporate debt writeoffs). However, there is absolutely no political will to allow that to happen, except via extend-and-pretend.

The problem is indeed political. The bondholders (that means banks), not taxpayers need to take those losses. Politicians (led by Nicolas Sarkozy) refuse to accept that.

Yet, the market will force it one way or another. The preferred way would be for banks to take a huge up front hit, right here, right now. The slow, painful way would be to stretch this mess out for decades like Japan did.

Politicians always want to avoid up-front pain. They will opt for slow-and-painful, no matter what the amount is. However, as I have said Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Not your grandfather’s Republican Party; President Obama and Mitt Romney are Nearly One and the Same!

Posted: 25 Nov 2011 09:31 AM PST

Not your grandfather's Republican Party

My lifelong friend and high-school classmate had an wonderful op-ed on iPolitics today. Please consider Not your grandfather's Republican Party by David Wise.

One of the most negative things to have happened to the increasingly dysfunctional political system in the United States has been the transformation of the Republican Party over the last generation into the party of fiscal deficits. At one time, the bastion of balanced budgets and no free lunches, 70% of gross public debt through the last fiscal year was accumulated under the last three Republican presidents who ran deficits twenty out of twenty years averaging 3.9% of GDP.

Having inherited a budget surplus from Bill Clinton, George W. Bush presided over a doubling in federal debt, simultaneously cutting taxes while running two wars on credit. Railing against domestic spending, the same administration implemented a large new unfunded prescription drug benefit. Yet now, as the opposition party, Republicans pontificate about the dangerous levels of gross public debt (now at 101.1% of GDP) and last summer set about playing chicken with a possible default on our financial obligations. In now trumpeting national debt as a paramount evil, the Republicans approach the debate by taking tax increases and defense spending off the table – which is somewhat like resolving to set about losing weight by eschewing dieting and exercise.

Conservatives are right to raise issues about what they see as a tendency to throw money at domestic programs, yet refuse to apply the same logic to spending on the military. In a world with no existential threat such as we faced during the Cold War and in which 85% of global defense spending is by the US and its allies, the US defense budget is higher now on a constant dollar basis than it averaged during the Cold War. There is probably no part of the Federal government that is more poorly and wastefully managed than the US weapons acquisition programs where massive cost overruns are common.

The current situation is dangerous and unsustainable. This year the US government will collect taxes equal to 14.4 of Gross Domestic Product (GDP) – the lowest level since 1950 – yet spend 25.3% of GDP. Serious people know in their hearts what has to be done. ....

Here again is the link to the entire article: Not your grandfather's Republican Party.

President Obama and Mitt Romney are Nearly One and the Same!

I do not know which candidate my friend backs, if any. It is easy enough to make a case that every candidate is flawed.

However, I am in 100% agreement with the central thesis of his article: "Serious people know in their hearts what has to be done."

To that idea, I have a few questions.

Do You Want More Bailouts? More War-Mongering? More Nation Building? More Federal Spending? More Status Quo?

Let me phrase the above in a single question: Do you want more of the same?

Polls suggest you don't. Your votes say you do. So which will it be?

If you want more of the same, then vote for President Obama. If you want more of the same you can also vote for Mitt Romney or Herman Cain.

Whether you voted Democratic or Republican in the last election, it did not matter. The non-super budget committee proves it as does Obama's carry-over of Bush's bank bailout policies.

The sad fact of the matter is a vote for Obama is a vote for Mitt Romney. Likewise, a vote for Mitt Romney is a vote for Obama.

Certainly a few details will change, and a small set of "beneficiaries" will be different (for the one percent). However, for the average person, it simply will not matter. The average person will be ruined by the war-mongering, anti-free trade policies of all of the Republican candidates but one.

The latest Republican debate offers strong evidence of my statement.

Link if video does not play: Ron Paul Highlights in 11/22/11 Debate

Do You Want More of the Same?

As preposterous as it may have sounded at first glance, Obama and Romney are nearly One and the Same!

Neither will tackle the budget deficit. Both will keep military spending intact. Both support the "un-patriot" act.

To be fair, Romney is more likely to start a devastating trade war with China (in fact he has guaranteed it), while president Obama is more likely to waste money on social programs and big labor.

Some choice!

The simple fact of the matter is: it does not matter much if you vote for Mitt Romney or Barrack Obama. Both will destroy the country. Both support wars. Both will spend the country into the ground (but perhaps in different ways).

Regardless of who wins the Republican nomination, I will not vote for either of them. Nor will I vote for Perry, Gingrich, or Cain. I certainly will not vote for President Obama.

If you want change, and polls suggest you do, there is precisely one candidate who will give you the change this country desperately needs. That person is Ron Paul.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

UK Banks Brace for Eurozone Break-Up; Eurogeddon and the Death of a Currency

Posted: 25 Nov 2011 03:15 AM PST

There are several good articles in The Telegraph today. Let's take a close look at two of them.

The Death of a Currency

Jeremy Warner writes Death of a currency as eurogeddon approaches

The market is starting to bet on what was previously a minority view - a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency.

The prevailing view was that the German Chancellor didn't really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.

But there comes a point in every crisis where the consensus suddenly shatters. That's what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady's not for turning.

All of a sudden, the pound is the European default asset of choice.

What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world's major reserve currencies. That promise today looks to be in ruins.

Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.

What they are preparing for is the biggest mass default in history. There's no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It's going to be anarchy.

UK Banks Brace for Eurozone Break-Up

Garry White quotes Andrew Bailey, a top UK regulator who says "UK banks must brace themselves for euro break-up"

Andrew Bailey, deputy head of the Prudential Business Unit at the Financial Services Authority (FSA), noted that British banks are not heavily exposed to the eurozone, but said they must prepare for some countries to exit the single currency – or a complete break up.

"We cannot be, and are not, complacent on this front," Mr Bailey said. "As you would expect, as supervisors we are very keen to see the banks plan for any disorderly consequence of the euro area crisis.

"Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the eurozone.

"I offer no view on whether it will happen, but it must be within the realm of contingency planning," he added. Failure to plan for the exit of a country from the euro would be "unsound risk management", Mr Bailey said.

Last week, Japanese bank Nomura said a euro break-up is a "very real risk" and advised bond holders to check whether they are likely to be repaid in other, reinstated European currencies if the euro crumbles.

Disorderly Death

Read that last paragraph above closely. The death of the Euro could be very disorderly.

It would be far better for Germany and other states against ECB printing to leave rather than suffer the consequences of a breakup fueled by Greece, Spain, and Portugal leaving.

If France wants to print (Sarkozy is committed to the Euro and to printing), then France can stay in. Will Sarkozy survive the next French election?

The next election may be moot. Things are unraveling far faster than I expected. The market is going to force some major action in days, not months.

"Plan C" Germany Exits the Euro

Several times recently I have linked to a discussion by Michael Pettis and Hans-Olaf Henkel (the former head of the Federation of German Industries), regarding "Plan C" a Eurozone breakup with Germany leaving instead of Greece, Spain, and Portugal leaving.

It is well worth another look. Please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) for a lengthy discussion.

Interestingly, Hans-Olaf Henkel was an early supporter of the euro but now says "I now consider my engagement to be the biggest professional mistake I ever made."

Steen Jakobsen is still sticking with his European "bank holiday" idea detailed in Perfect Storm the Most Likely Scenario; Is Europe Set to Declare a Chapter 11 in Early 2012?

If by some miracle the can is to be kicked farther down the road, it better happen soon. Promises to agree to agree will not work. Time is up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Home Prices Crash 62.5% Since September in Erdos, a Chinese "Ghost Town"

Posted: 25 Nov 2011 12:56 AM PST

Erdos is an inner-Mongolia city with rich natural resources. However, it's a ghost town with many buildings but few people. Home prices just crashed 62% in a few months.

Let's take this story starting from the beginning.

2011-07-11
China Times reports Housing bubble in Inner Mongolian city bursts

A property boom in the Chinese city of Ordos started in 2006, but became stagnant this year after banks tightened credit and coal enterprises in the region have consolidated.

Ordos, a city in central-west Inner Mongolia, has deposits of coal and oil. A recent report by China's Ministry of Housing and Urban-Rural Development showed that the GDP per capita of Ordos surpassed that of Hong Kong.

The number of the rich people with more than 100 million yuan (US$15.468 million) is over 7,000. One out of every 15 people in Ordos has more than 10 million yuan (US$1.546 million). Those who have only one million yuan (US$154,680) are considered poor.

With so much wealth floating around, housing prices have skyrocketed. According to the newspaper Southern Weekend, this third-tier Chinese city once had real estate prices that averaged 7,000 yuan (US$1,082) per square meter.

Several buildings sold recently for as high as 13,000 yuan (US$2,010) per square meter. Home prices in Erdos have climbed to over half the price in Beijing, one of China's most expensive property markets with an average of 22,914 yuan (US$3,544) per square meter.

However since February, home sales have stalled, with only around 10 percent of properties on the market being sold.

In addition, underground financing is rampant in Ordos. Every housing project has to seek funds from the private sector, which has taken a 40-50% share of the lending market.

A developer in Ordos said that some in his industry have invested all their money into real estate. Now, with new homes still being built, developers must pay their bills monthly, but since they cannot sell the properties, they are forced to continue to dump in money. Once banks refuse to offer loans, they have to borrow from the private sector, forming a vicious cycle of dependency.

Kang Bashi, the well-known ghost town in Ordos, represents the epitome of China's housing bubble.

The town, which cost 17 billion yuan (US$2.629 billion) to build, was originally intended to become a city with a population of around one million, but the number of people actually living there is less than 20,000.

Chinese media has described the town as "quite barren, with only a few vehicles passing through the multi-lane highway. Some government offices open in the daytime. Pedestrians that appear every so often look like illusive beings, dragging their heavy feet along, like a lone survivor after a catastrophic event from the movies."

2011-09-29
China Loan Shark Market Crashes; Scores of Chinese Business Owners Unable to Pay Black Market Loans Commit Suicide or Disappear

Here is an interesting email from reader "Kevin" regarding the crashing loan-shark market in China.

Hello Mish

I am a long time reader and want to bring to your attention on a new development in China: private business owners are disappearing or jumping off buildings because they can no longer pay off black market shark loans.

According to national new paper Economics Information (part of state media Xinhua), on 9/22, Hu Fulin, owner of the biggest eyeglass manufacture of the city of Wenzhou disappeared, leaving behind 2 billion RMB debt.

On 9/25, 3 more business owners in Wenzhou disappeared (owners of copper, steel and shoe manufacture).

On 9/27, owner of "Zhengdeli", a shoe manufacture jumped off of a 22 story building and killed himself.

....

2011-11-24
China Financial Daily reports Erdos "Ghost Town" property market crash, ten thousand yuan housing price drop by 70%

Living in the edge of the Ordos storm , Ordos was beset with a different version of real estate lending Wenzhou panic . For example, local " Jinxin Han Lin Yuan " project , its second-hand house prices are around 10,000 yuan , while the market price now only is 3750 yuan.

The example given is a 62.5% decline but some properties may have fallen 70%. Either way, that is one hell of a price decline since September.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

European Bond Selloff Continues: Italy 2-Yr Yield 7.90%, Belgium 5.22%, Portugal 18.38%; Greek 1-Yr Yield 310%

Posted: 25 Nov 2011 12:17 AM PST

The European bond selloff continues unabated, once again led by surging yields on 2-Year bonds pretty much across the board, especially Italy, Belgium, and Portugal.

Italy 2-Year Government Bonds

Note: these charts are all from 3:00AM central or so.

At 5:30 AM central the two-year yield on Italy hit a whopping 5.90%

Belgium 2-Year Government Bonds

Portugal 2-Year Government Bonds

Note: these charts are all from 3:00AM central or so.

At 5:30 AM central the two-year yield on Portugal hit a whopping 18.30%
Spain 2-Year Government Bonds

Germany 2-Year Government Bonds

I failed to mention previously that the yield on Greek 1-Year bonds soared over 300% on November 23. Here is the chart.

Greek 1-Year Government Bonds

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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