Mish's Global Economic Trend Analysis

Dexia, Belgium's Largest Lender About to Become First Casualty of Greek Default; Emergency Meeting to Split Bank Now in Progress
Greek Haircut Under Review, No Aid Until November, October 13 Finance Meeting Canceled
Bank of America Website Malfunctioning "Again" Amid Volume Surge Following Debit Card Fee Hikes; New 52-Week Low of $5.60; Time to Switch Banks
Manufacturing ISM Nothing to Crow About
Schaeuble Claims German EFSF Contribution Has Maxed Out at 211 Billion Euros; Why Should Anyone Believe Him?
Bond Bears Plow Into Treasuries; Six Reasons to Fade PIMCO Revisited; Bill Gross Exorcised

Dexia, Belgium's Largest Lender About to Become First Casualty of Greek Default; Emergency Meeting to Split Bank Now in Progress

Posted: 03 Oct 2011 07:13 PM PDT

In recent (and totally useless) "stress-free" tests, Dexia passed with flying colors. Dexia passed those tests only because the tests did not include any writedowns of Greek debt. Tonight, an emergency board meeting is underway because Dexia is massively undercapitalized as a result of its Greek bond position.

Please consider Dexia Board Said to Meet as Sovereign Debt Crisis Curbs Funding

The board of Dexia SA, Belgium's biggest lender, is meeting to discuss options including a possible breakup after Europe's debt crisis reduced its funding, a person with knowledge of the talks said.

Dexia, which finances municipalities in France and Belgium, may split off its French business partly under the oversight of state-owned Banque Postale SA, said the person, who declined to be identified because the matter is confidential. The discussions are complex because Dexia is based in Brussels and Paris, and has both governments as shareholders. An announcement may come as soon as tonight, the person said.

"Dexia is an extremely complicated file," said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets with a "hold" rating on the shares. "The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash."
In September 2008, France and Belgium led the first rescue of Dexia, buying a combined 3 billion euros of stock. The bank's existing shareholders, which include Caisse des Depots et Consignations and Belgium's Holding Communal SA, provided an additional 3 billion euros.

Less than a month later, Dexia also obtained as much as 150 billion euros of debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. The bank stopped issuing government-backed debt in June 2010. It still had 29 billion euros outstanding at the end of last month.

Belgian Finance Minister Promises Another Bailout

Euronews provides additional details in Dexia dragged down by Greek debt worries

The French and Belgian government will do the right thing to support bank Dexia in the current turbulent markets. So said the Belgian Finance Minister Didier Reynders.

It is now looking more likely that Dexia's state shareholders will have to consider a second bailout of taxpayers' money.

Dexia is not the only European bank facing a need for capital as regulations become tougher, profits sag and lenders face losses on sovereign bonds if the euro zone crisis isn't resolved.

Banks face a 148 billion euro capital shortfall under a base case and a 227 billion shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit , Deutsche Bank, Lloyds, Societe Generale and Barclays each face a deficit of over seven billion euros under its stressed scenario.

Dexia, which received a six billion euro bailout from Belgium, France and other major shareholders at the height of the financial crisis in 2008, held 3.8 billion euros of Greek sovereign bonds at the end of June and had a credit risk exposure to the country of 4.8 billion euros.

Dexia's market capitalisation is only 2.5 billion euros, and its core capital is seen as insufficient to absorb big hits.

The company has taken a 338 million euro hit to cover a 21 percent loss on Greek sovereign debt maturing by 2020, part of a plan agreed by private sector investors in July.

But with market prices indicating investors could suffer a loss of 50 percent or more, Dexia's Greek bill could be more than one billion euros more.

Bondholders Do God's Work

Logically speaking, Dexia bondholders should have been wiped out in 2008. They should be wiped out again now. Instead, look for Belgium and France to throw more taxpayer money at bondholders.

The best explanation I can come up with is as follows: bondholder of banks do "God's work" just as Goldman Sachs does.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greek Haircut Under Review, No Aid Until November, October 13 Finance Meeting Canceled

Posted: 03 Oct 2011 05:27 PM PDT

The sure thing bet that Greece would get the next tranche of bailout funds in October just vanished into thin air, as did the silly notion that haircuts would be limited to 21%.

Please consider Greek haircut under review, no new euro zone aid until November

Euro zone finance ministers are reviewing the size of the private sector's involvement in a second international bailout package for Greece, a move that could undermine the aid program and hasten the threat of a Greek default.

Ministers also agreed after a meeting in Luxembourg that Greece could wait until mid-November until it receives the next installment from its existing emergency aid program, piling more pressure on Athens to tackle its debt problems.

Jean-Claude Juncker, the chairman of the Eurogroup ministers, said they were reassessing the extent of the private sector's role in the planned second package for Greece, a centerpiece of the deal struck on July 21 to rescue Athens.

Despite more than six hours of talks, the meeting produced few concrete steps and is likely to provoke more uncertainty among investors, with expectations rising that Greece will end up having to default on its 357 billion euros of debts.

The next finance ministers' meeting on Oct 13, when they were expected to sign off on the next, 8 billion euro payment to Greece, has been canceled, and EU and IMF inspectors will have several weeks in which to report back on Athens' budget cuts.

The likelihood that Greece's funding needs next year will be greater than forecast when a second 109 billion euro rescue package was agreed in principle in July reopened a fraught battle over who should pay -- taxpayers or financiers.

STEEPER HAIRCUT?

Deutsche Bank chairman Josef Ackermann, head of the International Institute of Finance (IIF), which negotiated a "voluntary" bond-swap by investors as part of the bailout plan, warned at the weekend against changing the terms now.

"If we reopen the voluntary accord of July 21, we will not only lose precious time but quite possibly also private investor support," Ackermann told the Sunday edition of Greek newspaper Kathimerini.

"The impact of such a move will be incalculable. This is why I am warning in the most forceful way against any material revision," he said.

Private bondholders agreed to a 21 percent write-down on their Greek debt holdings but EU and German officials have suggested the "haircut" may have to be increased -- possibly to as much as 40 or 50 percent -- in light of a new funding shortfall and changed market conditions.

Self-Serving Ackermann Whine

Look at the self-serving whine of Deutsche Bank chairman Josef Ackermann. He warns against losing support of "private bondholders". Who is he trying to fool? The banks are the bondholders. Few others were stupid enough to buy Greek debt.

An 85% haircut would be a nice lesson to banks: "Don't do stupid things, and don't think the ECB and Fed will bail you out if you do".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bank of America Website Malfunctioning "Again" Amid Volume Surge Following Debit Card Fee Hikes; New 52-Week Low of $5.60; Time to Switch Banks

Posted: 03 Oct 2011 10:53 AM PDT

Bank of America has taken "proactive" measures to manage traffic following a bad decision to hike fees on debit cards.

The bank has been swamped with traffic and instead of increasing servers, has taken measures in the bank's words "could result in some customers experiencing slowness or temporarily having access issues."

Lovely.

Please consider BofA website malfunctioning again

Bank of America's website, plagued by problems Friday and Saturday but supposedly fixed on Sunday, wasn't working again Monday.

Many users trying to access bankofamerica.com get a message saying the home page is temporarily unavailable. But spokeswoman Tara Burke said customers who experience slowness or can't get into their accounts should keep trying.

Burke said the access problems are a result of the bank managing traffic volume during peak use.

"We've simply taken some proactive measures to manage customer traffic during peak hours during the day," she said. "That could result in some customers experiencing slowness or temporarily having access issues."

She declined to say whether volume has surged in recent days.

The problems began Friday, a day after the bank said it would start charging a $5 monthly fee for customers using debit cards. Burke insisted there's no connection. The delays and the home page message persisted Saturday, but Burke said Sunday that things were fine.

Bank of America (BAC) Plunges Below $6

click on chart for sharper image

Shared of Bank of America have solidly taken out the "Buffett is Buying" low reached in August. The spike to $8.79 was a good time to unload if you were still holding this turkey in any size.

Warren Buffett did not buy Bank of America shares, he got a sweet deal to buy debt that came with a free option to buy shares. The move was an obvious ploy by Bank of America to put a floor on the share price. It did not work.

Time to Switch Banks

My recommendation is that if you are at any bank that raises debit card fees, switch banks. That Bank of America's servers are flooded is a welcome sign that customers have had enough.

Adding insult to injury, the "proactive" way Bank of America handled this maneuver suggests blatant incompetence.

Addendum:

"PT" who lives in Seattle writes ...

Is this blatant incompetence and/or an effort to slow customer transfers? It's time for BofA customers, such as myself, to take some of our own proactive measures and move our accounts to a bank which is capable of handling "peak traffic".

I bank with BofA in Washington, which has a totally separate portal for accessing accounts. It has been offline since 7:00 am Seattle time, when I first tried to access my account, and that is hardly what I would call a "peak traffic" hour. An electronic run on the bank prompted by customers fed up with their incompetence and, most recently, their plan to impose a fee on debit card usage.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Manufacturing ISM Nothing to Crow About

Posted: 03 Oct 2011 10:33 AM PDT

The Institute for Supply Management released the September 2011 Manufacturing ISM Report On Business®

The PMI registered 51.6 percent, an increase of 1 percentage point from August, indicating expansion in the manufacturing sector for the 26th consecutive month, at a slightly higher rate. The Production Index registered 51.2 percent, indicating a return to growth after contracting in August for the first time since May of 2009.

MANUFACTURING AT A GLANCE SEPTEMBER 2011
Index	Series Index Sep	Series Index Aug	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI	51.6	50.6	+1.0	Growing	Faster	26
New Orders	49.6	49.6	0.0	Contracting	Same	3
Production	51.2	48.6	+2.6	Growing	From Contacting	1
Employment	53.8	51.8	+2.0	Growing	Faster	24
Supplier Deliveries	51.4	50.6	+0.8	Slowing	Faster	28
Inventories	52.0	52.3	-0.3	Growing	Slower	2
Customers' Inventories	49.0	46.5	+2.5	Too Low	Slower	30
Prices	56.0	55.5	+0.5	Increasing	Faster	27
Backlog of Orders	41.5	46.0	-4.5	Contracting	Faster	4
Exports	53.5	50.5	+3.0	Growing	Faster	27
Imports	54.5	55.5	-1.0	Growing	Slower	25

OVERALL ECONOMY				Growing	Faster	28
Manufacturing Sector				Growing	Faster	26

A Bloomberg writer managed to managed to spin those ISM numbers into the headline U.S. Stocks Fall as Concern Over Greek Debt Crisis Offsets Economic Data stating "Earlier today, stocks rose as a report showed that manufacturing in the U.S. unexpectedly accelerated in September as production picked up, easing concern the world's largest economy is stalling."

That is complete silliness. Exactly whose concern is eased?

A new concern ought to be the expansion in hiring and production while orders and especially backlog of orders is contracting.

Manufacturers are producing at an unsustainable rate. The global economy is rapidly cooling led by Europe, Asia, and Australia. That is a lot of downside leadership. The US is not immune and indeed is likely in recession already as noted in ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Schaeuble Claims German EFSF Contribution Has Maxed Out at 211 Billion Euros; Why Should Anyone Believe Him?

Posted: 03 Oct 2011 09:38 AM PDT

On Saturday, German Finance Minister Wolfgang Schaeuble ruled out larger German EFSF contribution

Finance Minister Wolfgang Schaeuble was quoted on Saturday ruling out a higher German contribution to the euro zone's rescue fund beyond the 211 billion euros approved by parliament last week.

In an interview with the Super-Illu newspaper published on Saturday, Schaeuble said Germany would not contribute more than that amount to the 440 billion euro European Financial Stability Facility (EFSF).

"Germany will take on 211 billion euros in guarantees and that's it, that's really the end of it with the exception of the interest costs on top of it," said Schaeuble, who has faced criticism recently for revising upwards earlier pledges on ceilings for the guarantees.

"Really the End of It?"

Please consider Schäuble stratagem courtesy of Google Translate.

The euro rescue package is too small, a direct expansion is ruled out. Therefore the policy is looking for a tool to increase the sum in another way. Leaders of the G-20 have confirmed this long ago - only Finance Minister Schäuble denied on all channels. His motto: talk so ably beside the point that even half-truths do not apply later than grossest falsehood.

Leaders of the G 20 , including France's Finance Minister François Baroin, his colleague Timothy Geithner, U.S. and EU Monetary Affairs Commissioner Olli Rehn, have already confirmed that the debate over such "leverage". Schäuble, however, denied on all channels, while in reality he is doing just this: The liability framework for the German tax payer, he says several times on Thursday, will not increase - knowing full well that no one has claimed otherwise. On the contrary: The highlight of the "leverage" solution is precisely that this framework would remain formally unchanged.

On Thursday morning there Schäuble in an interview with Germany radio. "I have not used the word" replies Schäuble - what's true and yet not true, because although he has not used the word, but the discussion nonetheless indirectly confirmed: On the question of whether it costs to fund an expansion of the ECB think possible, he said in Washington saying: "There are other forms of leverage."

The fact of the matter is leverage puts more than 211 billion euros of German taxpayer funds at risk and he knows it. He denies using the word "leverage" but he never said it would not happen.

History of Schaeuble Lies

Please consider these Schäuble Flip-Flops courtesy of Google Translate.

21st December 2009
"We Germans can not pay for Greece's problems."

16th March 2010
"Greece has not asked for help, this is why there is no decision, and there is no decision had been taken."

11th April 2010
Four weeks later, on 11 April, he decided to finance the first Euro-Greece-aid package of € 30 billion.

16th April 2010
"We still believe that the Greeks are on the right track and that they may end up not even have to take the help."

22nd April 2010
"The country has had no problems in financing themselves this week in the markets. The agreement on the assistance in an emergency has been a purely preventive measure."

Greece officially asked for help April 23. In early May a rescue package of 110 billion € was in the works.

27th April 2010
"Rescheduling not an issue"

May 2010
The 110 billion euros in the first aid package "ceiling" is a one-time emergency assistance.

21st March 2011
The EU finance ministers decide on a rescue fund with legendary 750 billion euros (ESM) - with the voice Schäuble.

6th June 2011
Greece will receive a new package with more than 100 billion €. Schäuble said: Otherwise, "we face the real risk of the first disordered state of insolvency within the euro zone."

AND WHAT'S NEXT?
Previously, the Finance Minister is on his no to common bonds of all euro countries, the so-called Euro-bonds remained. But perhaps he thinks it is so different again next week .

There is no reason to believe Schaeuble. If perchance he is telling the truth it is by accident. What "accident" might that be? Simple. Greece defaults before Schaeuble commits more German funds.

Merkel Ally Says Greece Better Off Leaving Euro

The deputy leader of the Christian Social Union (CSU), one of three parties in Chancellor Angela Merkel's centre-right coalition, said on Sunday Greece 'may be better off' leaving

The deputy leader of the Christian Social Union (CSU), one of three parties in Chancellor Angela Merkel's centre-right coalition, said today Greece may be better off leaving the euro zone if it cannot restore its fiscal health.

Alexander Dobrindt told Deutschlandfunk radio that a Greek exit from the euro would be a last resort measure and that Greece would find it easier to recover outside the currency bloc.

Ms Merkel, leader of the Christian Democrats (CDU), and Finance Minister Wolfgang Schaeuble have spoken out against Greece leaving the euro zone. Merkel has warned that or a Greek default could trigger a domino effect

The Free Democrats (FDP), the third party in the centre-right coalition, also has spoken out against a Greek exit

But Horst Seehofer, the leader of the arch conservative CSU, has said he could not rule out Greece leaving the euro zone . It is an increasingly popular stance among the German public.

Mr Dobrindt went further than Mr Seehofer in the Deutschlandfunk interview on Sunday, saying he believed that many Greeks themselves would perhaps soon realise their country's fiscal health could be more quickly restored outside the euro zone.

"It's quite possible that it's dawning on Greeks that restructuring their economy outside the euro zone for a limited time period would be easier than inside the euro zone," Mr Dobrindt said. "And that's why we've been saying: it must be possible to leave the euro zone."

By supporting Merkel's "Domino Theory" and by refusing to rule out leverage, Schaeuble is clearly willing to go all in. Whether or not that happens depends on how fast Greece defaults.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bond Bears Plow Into Treasuries; Six Reasons to Fade PIMCO Revisited; Bill Gross Exorcised

Posted: 03 Oct 2011 01:28 AM PDT

Bill Gross at Pimco has had a change of heart. Bloomberg reports Bond Bears Piling Into Treasuries as Yield Forecasts Cut by Most Since '09

Eight months ago Bill Gross, manager of the world's biggest bond fund, said Treasuries "may need to be exorcised" and cleaned them out of his $245 billion Total Return Fund. The company then used derivatives to bet against the debt in March.

Now the Pacific Investment Management Co. fund has 16 percent of its assets in U.S. government securities as the debt posted the highest quarterly returns in almost three years.

"We've rebalanced," Mohamed A. El-Erian, chief executive officer and co-chief investment officer at Newport Beach, California-based Pimco said in a Sept. 27 radio interview on Bloomberg Surveillance with Tom Keene in New York. "The U.S. benefits the most from a flight to quality."

Bill Gross Exorcised

This is what I said on March 10, 2011: Pimco Dumps All Remaining Treasuries in Total Return Fund; Six Reasons to Fade Bill Gross

Pimco's Bill Gross has been dumping US government debt in favor of other alternatives including emerging-market opportunities.

Six Reasons to Fade Pimco

I view this setup as favorable for US Government bonds. For starters there is no Pimco selling pressure, only potential buying pressure when Gross changes his mind.

Second, everyone seems to think the end of QE II will be the death of treasuries. While that could be the case, sentiment is so one-sided that I rather doubt it, especially if the global recovery stalls.

Third, the US dollar is towards the bottom of a broad range and any bounce could easily wipe out gains in higher yielding emerging-market debt.

Fourth, the global macro picture is weakening considerably with overheating in China, state government austerity measures in the US, and a renewed sovereign debt crisis in Europe on top of a supply shock in oil. Emerging markets are unlikely the place to be in such a setup.

Fifth, chasing yield means chasing risk, and that is on top of currency risk. Chasing risk is highly likely to fail again at some point, the only question is when.

Sixth, several interest rate hikes are priced in by the the ECB this year. Will all those hikes come? I rather doubt it, and if the ECB doesn't hike, look for the US dollar to rally, perhaps significantly.

Neutral on Treasuries

Now that Pimco has "rebalanced", I am neutral on treasuries. The bulk of the treasury gains are in.

Yield Curve as of 2011-10-03

click on chart for sharper image

That is one hell of a rally (falling yields) for fixed-income treasury bears to miss out on, especially since the much ballyhooed "hard currencies" of commodity producers went the opposite direction taking into account currency moves.

Since March the Canadian dollar has fallen from 103 to 95 and the Australian dollar from 102 to 97 having hit a high over 110 in July. The Brazilian REAL plunged from a recent high near .65 to a low near .52.

Many hyperinflationists did far worse. They shorted the start of this treasury rally.

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

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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