Spain Default Probability at 100% — To Take the Whole European Financial System Down

Graham Summers from Phoenix Capital provides the nice summary of how deep in trouble Spain is, and how the default of Spain — a 100% probable event — will bring the whole Europe and its banking system to its long overdue collapse:

The fact remains that the EU will break up in time. And it will likely be Spain that brings this about.
The reasons? Among other things:

1. Spain's private Debt to GDP is above 300%.
2. A huge portion of Spain's banking system (representing over 50% of mortgage loans AND deposits) was totally unregulated up until just a few years ago.
3. Spanish banks are drawing over €400 billion from the ECB on a monthly basis (up from €377 in June) to fund their liquidity needs.
4. Spanish banks are now net sellers of Spanish sovereign bonds (leaving the ECB as the only buyer in the market)
5. Spain's banking system has lost 18% of its deposits in the last 10 months due to a staggering bank run.
6. The economy of Spain is a disaster with total unemployment over 25% and youth unemployment above 50%.
7. Spain is now facing a constitutional crisis with various regions looking to secede if they don't receive bailouts from the Federal Government "without conditions."
8. Spanish banks need to roll over (meaning renew terms on) more than 20% of their bonds this year.

So Spain will suffer a collapse, most likely of its banking system resulting in a sovereign default (barring a bailout). When this happens, some €1 trillion+ worth of collateral (still rated AAA by EU banks) will be sucked out of the system.

How the Plan for a Euro-Exit Would Rollout

RT interviews Roger Bootle, winner of the £250,000 Wolfson Prize for developing a practical plan to dissolve the Eurozone.

This is a very interesting interview and explains how the Grexit and the many other exits from the Eurozone to come will most likely happen.

The plan makes a lot of sense from a political point of view, as politicians will never allow for a real decline in wages and welfare. Even the case of a dual currency (say Drachma and Euro) is taken into account.

If you have any Euro exposure, you must watch this. The main thing to remember, is that if you have Euros in your account, and your country exists, you lose your Euro. But if you keep them outside of your country, you get to keep them. Be very careful about where you keep your money!

Nigel Farage: The euro Titanic has now hit the iceberg

Very interesting speech from Nigel Farage earlier today at the European Parliament, available on YouTube. The interesting part is how this bailout of Spain will actually further weaken Italy, which is already on the brink of collapse and a confirmation of something we had previously discussed on this blog: a Greece default of Euro-exit would make the ECB bankrupt.

Here's the transcript, with my highlights:

"Another one bites the dust. Country number four, Spain, gets bailed out and we all of course know that it won't be the last. Though I wondered over the weekend whether perhaps I was missing something, because when the Spanish prime minister Mr Rajoy got up, he said that this bailout shows what a success the eurozone has been.

And I thought, well, having listened to him over the previous couple of weeks telling us that there would not be a bailout, I got the feeling after all his twists and turns he's just about the most incompetent leader in the whole of Europe, and that's saying something, because there is pretty stiff competition. 

Indeed, every single prediction of yours, Mr Barroso, has been wrong, and dear old Herman Van Rompuy, well he's done a runner hasn't he. Because the last time he was here, he told us we had turned the corner, that the euro crisis was over and he hasn't bothered to come back and see us. 

I remember being here ten years ago, hearing the launch of the Lisbon Agenda. We were told that with the euro, by 2010 we would have full employment and indeed that Europe would be the competitive and dynamic powerhouse of the world. By any objective criteria the Euro has failed, and in fact there is a looming, impending disaster. 

You know, this deal makes things worse not better. A hundred billion [euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It's genius isn't it. It really is brilliant. 

So what we are doing with this package is we are actually driving countries like Italy towards needing to be bailed out themselves.

In addition to that, we put a further 10 per cent on Spanish national debt and I tell you, any banking analyst will tell you, 100 billion does not solve the Spanish banking problem, it would need to be more like 400 billion. 

And with Greece teetering on the edge of Euro withdrawal, the real elephant in the room is that once Greece leaves, the ECB, the European Central Bank is bust. It's gone. It has 444 billion euros worth of exposure to the bailed-out countries and to rectify that you'll need to have a cash call from Ireland, Spain, Portugal, Greece and Italy. You couldn't make it up could you! It is total and utter failure. This ship, the euro Titanic has now hit the iceberg and sadly there simply aren't enough life boats."

The Reason Why The European Leaders Trying So Hard to Keep Greece in the Eurozone

Nigel Farage has an eloquent speech about that:

Greece outside of the Eurozone may even be an inspiration for Portugal, Spain and many other countries.

There, you have it: the first reason, which we've mentioned many times here, is the belief that the whole banking sector of their respective country will collapse, and the second reason, is that the whole of the Euro might collapse, as countries start seeing the benefits of defaulting and leaving the single currency.

Euro Shorts At a New All Time High

Sentiment wise, and position wise, the USD sentiment is a very elevated level, EUR bearishness at a very elevated level. A violent snap back should be expected soon, before the downtrend can resume.

(Bloomberg) May 21, 2012 — The euro has weathered the worst financial crisis since the Great Depression, bailouts of Greece, Ireland and Portugal, and falling interest rates. Now, investors are betting like never before that a Greek exit would be too much to keep the 17-nation currency above its long-term average. 

Hedge funds and other large speculators, which pared trades that would profit from a drop in the euro to the lowest levels since November, rebuilt them to a record high last week, figures released May 18 by the Washington-based Commodity Futures Trading Commission showed. The premium for options that grant the right to sell the euro has more than doubled since March. 

Through most of the financial and political turmoil in Europe, the euro held above the average since its January 1999 start as investors put their faith in German Chancellor Angela Merkel to keep the monetary union in place. While they currently forecast little change in the euro versus the dollar, a majority of the world’s biggest foreign-exchange trading firms surveyed by Bloomberg News say the loss of even a weak member such as Greece would risk more departures and send the currency lower.
“Financial markets’ great fear is that if one country left, it would not necessarily be the last,” Alan Ruskin, the head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank AG, the largest currency dealer as ranked by Euromoney Institutional Investor Plc, said in a May 14 telephone interview. “Removing one country, however weak, would not be a route to a stronger common currency.”

I don't understand the logic (or the lack thereof) of Alan Ruskin, yet another member of the "Super Incompetent Strategist Team", who thinks that removing the weakest links from a chain, makes the chain weaker...

Average Estimate
The average year-end estimate for the euro among the biggest trading firms is $1.28, ranging from as low as $1.15 at UBS AG to as high as $1.44 at HSBC Holdings Plc. Deutsche Bank forecasts a drop to $1.25 next month before rising to $1.30 by the end of December.
The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 1 percent since March against a basket of nine developed-market peers. It slipped 0.1 percent to $1.2765 as of 4:22 p.m. London time after weakening 1.1 percent in the five days ended May 18 to $1.2780 as post-election attempts to form a ruling coalition in Greece broke down.
“Having the history of an exit would make the market think it can happen again,” Greg Anderson, the North American head of Group-of-10 currency strategy at New York-based Citigroup Inc., the second-largest dealer, said in a May 14 telephone interview. “That would lead to endemic weakness.” 

CoT report, courtesy of ZeroHedge:

Greece’s biggest anti-bailout party, Syriza, said for the second time in as many days that it won’t join a unity government — ECB’s Honohan Says Greece Euro Exit Can Be Managed

Greece's anti-bailout party is sticking to its guns and won't join a unity government. It might become one of the first time in recent history that democratically elected people would actually respect their campaign promises!

(Bloomberg) May 13, 2012 — Greece’s biggest anti-bailout party, Syriza, said for the second time in as many days that it won’t join a unity government, pushing the country closer to new elections that have sparked concerns about a euro-area exit. 

“Syriza won’t betray the Greek people,” leader Alexis Tsipras said in statements televised on state-run NET TV after a meeting brokered by President Karolos Papoulias between the party and the leaders of the New Democracy and Pasok parties. “We are being asked to agree to the destruction of Greek society.”

The paragraph just above from Alexis Tsipras is a lifetime lesson in politics: "Syriza won't betray the Greek people": I hope it doesn't and stick to their campaign promises, but what Alexis Tsipras is asking for, is for Syriza to actually join the unity government, to save the banks, (and hence he's calling them to betray the people and their promises). And he calls that "not betraying the Greek people". 

The Greek society has been destroyed by the last 70 years of people like him leading the country to its financial and democratic bankruptcy. Yet, he's trying to push the burden on Syriza, and pretending they are the ones destroying their society.

Lifetime lesson for me, and I hope for everybody who's reading this. One thing you can be sure of, is that the media and history books will convey only Tsipras interpretation, instead of the truth.

After printing hundreds of billions of Euros, trying to save European banks from a Greek default, the money is down the sink now, and it seems like the ECB finally realised that this battle against the inevitable won't be won, and that the markets will prevail. I hope Trichet is watching this mess, the result of his arrogant, ignorant, and destructive policies.

It is now qualified as a "non-attractive" event, while 2-3 years ago, it was "the end of the world".

(Bloomberg) May 12, 2012 — A Greek exit from the euro could be “technically” managed yet would damage confidence in the monetary union, said European Central Bank Governing Council member Patrick Honohan. 

A departure by Greece would be “a rather destabilizing kind of event” for the rest of the euro area and all sides are working to try to avoid it, Honohan told a conference in the Estonian capital, Tallinn, today. “It is not necessarily fatal, but it is not attractive.”

Marc Faber Interview on Bloomberg: "Bureaucrats in Brussels make US government look like an organization of geniuses"

Marc Faber was on Bloomberg TV on the 10th of May — Via Mish:

Transcript from Bloomberg

Faber on whether he still thinks that profit margins will shrink and record profits seen will be no more for U.S. corporations:

"Yes, if you look at the statements by corporations, it is very clear. Earlier on, you had a commentator who said the exports to Europe from the U.S. are irrelevant. I agree with that. What is relevant are the businesses of American corporations in Europe and the earnings they derive from these businesses. That is definitely slowing down. The revenue growth is slowing down and, in my view, you will have more and more corporations that report earnings that are actually good but they do not exceed expectations…The bottom line is I think the market will have difficulty moving up strongly on less we have a massive QE3 and if it moves here and makes the high above 1422, the second half of the year could witness a crash."

"A crash, like in 1987…because the market would become technically very weak. I would expect the market making a new high. If it happens, it would be a new high with very few stocks pushing up and the majority of stocks have already rolled over. The earnings outlook is not particularly good because most economies in the world are slowing down. People focus on Greece but Greece is completely irrelevant. What is relevant are two countries -- China and India -- 2.5 billion people combined. They are a huge market for goods and these economies are slowing down massively at the present time."

On whether more Fed stimulus will put a floor on the S&P 500 this year:

"Yes, I think we had a rally that began March 2009 at 666 on the S&P. We made an orthodox pop a year ago on May 2, 2011 at 1370. Then we made a new high on April 2 of this year. The new high was not confirmed by the majority of shares and many shares are already down 20% or so and every day, there are shares that are breaking down or they no longer go on good news which is a bad sign. I think maybe we have seen the high from the year unless you get a huge QE3. That may not be forthcoming."

On whether the Fed will issue QE3:

"I think that QE3 will come, but it depends on asset markets. If the S&P dropped here another 100-150 points, I think that QE3 will occur. But if the S&P bounces back and we are above 1400, I think the Fed will essentially be waiting to see how the economy develops. The economy in the U.S. consists of different economies, some of it is very strong. I was in southern California and there the economy is doing fine. In other places, it is not doing fine. It is not universally bad. Compared to other countries, it is actually doing relatively well."

On whether Greece will exit the euro:

"There is a very good chance they will exit the euro and it would have been desirable if the euro countries had kicked out Greece three years ago. It would have saved a lot of agony. As a result of the bailout, the problem has become bigger and bigger and bigger."

On whether policymakers can manage the exit properly:

"I think it would be much better for Greece and the entire euro area if Greece were kicked out. Spain kicked out. Italy out and even France should be out. At the end you just have Germany with the euro. The other countries can have their own currencies and still trade and use the euro as an international currency."

"The bureaucrats in Brussels and the media are brainwashing everybody that if Greece exited the euro, it would be a disaster. My view is the best would be to dissolve the whole euro zone and that the countries would go back to their own currencies and still use the euro as an international currency the way you travel through Latin America and with a dollar you can pay anywhere you with. In my view, that would be the best. These countries that have financial difficulties, you will have to write off their debts and make it difficult for them to access the capital market in the future. Just to keep bailing them out will increase the problem. It will not solve the problem."

On how economic catastrophe can be avoided if the euro is dissolved:

"Explain to me why there would be an economic catastrophe. Many countries have pegged currencies have given up the peg to another currency and it was not a catastrophe. The public has been brainwashed that the breakup of the euro would be a complete disaster when in fact, it may be the solution."

On whether there will be a race to the bottom among various countries to devalue their own currencies if the euro is dissolved:

"I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses. The bureaucrats in Brussels are completely useless functionaries and they want to maintain their power. They always talk about austerity being bad but if you look at the government expenditures of the EU, in 2000, it was 44% of GDP. Since then, it has grown by 76% under the influence of the Keynesian clowns and now it is 49% of GDP. That is the problem of Europe -- too much government spending and lack of fiscal discipline."

On whether it's a mistake to short the euro:

"I want to make this very clear -- the investment markets may move in different directions than the economic reality because if you print money. That's why in the Bloomberg poll, Mr. Bernanke is viewed so favorably because fund managers and analysts and strategists, they are only interested in having stocks up so their earnings increase and their bonus pool increases. But in reality, the economy can go downhill and stocks can go up just because of money printing and in Europe, the ECB has proven now that they are very good money printers."

On where to invest in Europe:

"Actually, usually when socialists come in or there is a crisis such as we have in Greece, it occurs usually near market lows. If someone really wanted to take speculative positions, he should look at quality non- financial stocks in countries like Spain, Italy, France, and Greece. I think rebound is coming. The market on a short-term basis is oversold. But if you look at the market action -- first of all, we made a low on the S&P last October at 1074. We went to 1422. The market is down from 1422 to less than 1360. The whole world is screaming we're in a bear market. This is a minor correction. I think it may become a more serious correction as the technical picture of the market has deteriorated very badly and as the S&P made a new high this year on April 2nd, all the European markets are lower than they were a year ago."

Extremes on the Rise across All European Countries — Now Italy Talks About Euro-Exit

1- Extremes are on the rise everywhere in Europe. Ironically, the UE was founded in order to unite European countries and stop the wars, but now, political fools trying to keep it alive are actually making extremism rise in Europe, and will most likely be the cause for coming wars.

2- Interestingly, Euro-exit debate is now reaching Italy.

(Bloomberg) May 10, 2012 — Italians should consider exiting the euro amid rising public debt and no signs of economic recovery, said Beppe Grillo, a comedian-turned-politician opposed to Prime Minister Mario Monti’s austerity measures.
“Let’s face the issue, it can’t be a taboo,” Grillo, 63, said in an interview yesterday after his Internet-based political movement emerged as the third-biggest party in local elections this week. “As debt rises, spending isn’t under control, businesses close down, labor cost is up, salaries are down and we don’t even have the power of bargaining our debt.”
His 5 Star Movement, founded in October 2009, is the latest grouping to profit from rising anger in Europe over tax increases, budget cuts and joblessness amid the sovereign debt crisis.  [...]
Italy’s economy, which has trailed euro-area growth for more than a decade, is in its fourth recession since the single currency was introduced and will contract 1.2 percent this year, according to the government, which is implementing 20 billion euros ($25.9 billion) in austerity measures. Costs of servicing a debt of 1.9 trillion euros will climb to 5.3 percent of gross domestic product this year from 4.9 percent in 2011, government estimates show.

The Rise of the Fascist European Union

Since the markets topped back in 2007-2008, democracy has been losing ground everywhere in the Western world, but in Europe it's been probably worse than anywhere else.

Don't get me wrong, the most fascist country for now is the US, and they have been on the track since the late 1990s. But the US fascists have followed the the rule of law: law makers and government officials have embraced those ideas, and voted them through, and the Supreme Court has been basically shut down. In Europe, it's lawlessness and lies that are bringing the fascist ideas and actions, in complete disregard of the rule of law and democracy.

Here's a short list of the illegal and anti-democratic actions so far:

• Ireland: Irish people forced to bailout the European banks
• Greece: Prime Minister, democratically elected replaced by a non-elected Prime Minister
• Italy: Mario Monti, non-elected technocrat replaced the democratically elected Berlusconi as Prime Minister.
• ECB: buying sovereign bonds in complete illegality

Well, things have made another nasty and dangerous turn with the new "Greek Bailout" plan, which is nothing but a bailout of the French and German banks who are creditors to Greece, and a complete pillage of Greece:

• Greece Needs New Constitutional Provision Imposed by the Troika

Eurogroup Statement of conditions placed on Greece:

The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible. ....

• Troika Demands 38 New Changes in Greek Tax, Spending and Wage Policies in Next 6 Days

 And

• Growing Air of Concern in Greece Over New Bailout.

In the fine print of the 400-plus-page document — which Parliament members had a weekend to read and sign — Greece relinquished fundamental parts of its sovereignty to its foreign lenders, the European Commission, the European Central Bank and the International Monetary Fund.

“This is the first time ever that a European and probably an O.E.C.D. state abdicates its rights of immunity over all its assets to its lenders,” said Louka Katseli, an independent member of Parliament who previously represented the Socialist Party, using the abbreviation for the Organization for Economic Cooperation and Development. She was one of several independents who joined 43 lawmakers from the two largest parties in voting against the loan agreement.

Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and that future bonds issued will be governed by English law and in Luxembourg courts, conditions more favorable to creditors.

In the meantime, the UE officials are still asking for more lawlessness:

Feb. 10 (Bloomberg) -- The European Central Bank should participate in efforts to reduce Greece’s debt, said Luxembourg’s Jean-Claude Juncker, who leads the group of euro- area finance ministers.

“The ECB must look, within the framework of its independence, what sort of contribution it can make to the debt reduction of Greece,” Juncker told reporters in Brussels today. “I hope it will find something.”

And the ECB is obliging — see also Japan and the Myth of Independent Central Banks:

Draghi’s $158 Billion Free Lunch to Boost EU Bank Profits 

Feb. 13 (Bloomberg) -- Banks are benefiting from a European Central Bank subsidy that could reach 120 billion euros ($158 billion), enough to pay every bonus at financial firms in London for the next 24 years at today’s levels. 

Royal Bank of Scotland Group Plc, BNP Paribas SA and Societe Generale SA are among more than 500 banks that took 489 billion euros of three-year loans from the Frankfurt-based ECB at a December auction. The loans currently carry a 1 percent annual interest rate, less than a quarter of the 4.3 percent average yield on euro-denominated senior unsecured bank debt of all maturities in the past year, according to Commerzbank AG. 

With borrowing estimated to hit a record 1.2 trillion euros after a second auction later this month, banks may save 120 billion euros over three years. That could boost 2012 profit by about 10 percent for lenders in Italy and Spain, according to estimates by Morgan Stanley.  

“This is very much a free lunch,” said Arnd Schaefer, an economist at WestLB AG in Dusseldorf, Germany. “Banks can get money for just 1 percent and then lend it on for much more. That’s pretty good.”          

There's much more in the report, so you can read it in it's entirety if you're interested in what the ECB is doing.

And also, this other report about the ECB changing the rules of bond, creating subordinate versus senior level bonds on the very same instrument, depending on who is holding it:

Feb. 17 (Bloomberg) -- The European Central Bank’s plan to shield its Greek bond holdings from a restructuring may hurt private investors while paving the way for debt insurance contracts to be triggered.

The ECB will exchange its Greek debt for new bonds with an identical structure and nominal value, though they’ll be exempt from so-called collective action clauses the government is reportedly planning. That implies senior status for the ECB over other investors, according to UBS AG, and the use of CACs may lead to credit-default swaps protecting $3.2 billion of Greek bonds being tripped.

“It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders,” according to Chris Walker, a foreign exchange strategist at UBS, the world’s third-biggest currency trader. “If a coercive default does indeed eventually take place then a CDS event seems very likely with all the negative consequences for risk appetite that may bring.” 

Crisis Spreads the two Out of the Eurozone Scandinavian Economies: Norway and Sweden

The credit bubble will go bust in Sweden and Norway — even though the mainstream economists believe that these countries do not suffer from one, and that they resilient, and greatly managed by central planers and socialist governments.

Thanks to my friend SS for forwarding me these two Bloomberg reports:

Feb. 17 (Bloomberg) -- Sweden’s economy, Europe’s strongest as recently as 2010, will hardly grow this year as the crisis that started in Greece spreads north, killing jobs, sapping confidence and tipping the housing market into a decline. 

“Judging by the central bank’s outlook, the Swedish economy has shifted down to a dramatically lower gear,” Anders Kjaer, a senior analyst at Nykredit A/S in Copenhagen, said in a note. “Growth in the fourth quarter looks to have been negative.” 

The central bank yesterday cut its main interest rate a quarter point to 1.5 percent and abandoned plans to raise rates through the first quarter of 2013 as it predicted Europe’s debt crisis will hurt exporters more than first estimated. Sweden, which grew more than any other European Union economy in 2010, has been unable to protect its exporters from the fallout of the debt crisis, prompting the central bank to raise its forecast for unemployment as trade weakens.[...] 

At the same time, Sweden’s property values are declining from what Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, last month characterized as bubble levels. The European Union on Feb. 14 said Sweden is under review for “increasing household indebtedness,” after debt as a share of disposable incomes rose to a 170 percent last year from about 100 percent in 2000. 

“It’s not unreasonable to assume that house prices may fall a bit, or at least park at today’s level,” Ingves said yesterday in an interview in Stockholm. “The pace of lending is significantly lower now than before and we have a generally weaker economic development.” 

The International Monetary Fund said back in June that Swedish homes “appear overvalued with enduring price falls likely.” Property values fell 2 percent last quarter, sliding from a record that had been fueled by tax cuts, historically low central bank interest rates and the fastest economic expansion in four decades in 2010. 

Ingves said household debt levels remain “manageable” after borrowing slowed down. 

Feb. 14 (Bloomberg) -- Norway’s overheated credit and property markets are vying with export-eroding krone gains for policy makers’ attentions as officials risk fueling either an asset bubble or currency appreciation. 

According to Morten Baltzersen, director general of the Financial Supervisory Authority in Oslo, the country’s credit markets face “severe” imbalances as households continue to amass debt at unsustainable levels. At the same time, continued krone gains pose a “challenge” for the government, Trade Minister Trond Giske said this week. [...]

In September last year, Olsen warned that the bank was ready to take measures to prevent further krone appreciation, and signaled he would use the policy interest rate to do so. 

[...] Norway’s government boasts the biggest budget surplus of any AAA rated nation and has no net debt thanks to a $560 billion sovereign-wealth fund. [...] 

“Growth rates on household debt and house prices are not following a sustainable path,” Baltzersen said. “The longer these developments go on, the greater the risk is of a severe imbalance evolving.” 

Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, said in January Norway is in the grip of a house price bubble, while the International Monetary Fund on Feb. 2 warned of real estate and credit market risks in Norway. 

The central bank estimates private debt burdens will grow to about 204 percent of disposable incomes this year. The FSA in December turned a recommendation that credit standards be tightened into an official guideline and told banks to cap loan- to-value ratios at 85 percent from 90 percent. The decision has yet to filter through to credit markets.
[...]

Retail Sales in Euro Region Unexpectedly Declined in December

Feb. 3 (Bloomberg) -- European retail sales unexpectedly declined in December, led by Germany and France, as unemployment at a 14-year high and government spending cuts sapped consumer demand. 

Sales dropped 0.4 percent in the month after a similar decrease in November, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 0.3 percent, the median of 16 estimates in a Bloomberg News survey showed. Sales slipped 1.6 percent from a year earlier.

Most Eurozone countries are insolvent, many on the verge of financial collapse, including Ireland, Greece, Spain, Italy.

Taxes are soaring in all these countries and the rest of the Eurozone as well.

The only thing soaring as fast as taxes in these countries are unemployment and insolvencies.

YET, economists expect retails sales to RISE. One must be an economist to be so foolish.

Danish Credit Crunch Deepens

My friend SS sent me the following Bloomberg report.

Feb. 6 (Bloomberg) -- Denmark’s credit crunch is getting worse as businesses accuse banks of withholding funds and the financial regulator warns that deteriorating asset quality may put more lenders out of business. 

“When we ask our companies, small- and medium-sized, they say they are experiencing a credit crunch and it has become worse in the last month,” Karsten Dybvad, chief executive officer of the Danish Confederation of Industry, said in an interview in Copenhagen.  

Dybvad’s group, which represents 10,000 Danish firms, wants the financial regulator to give banks more leeway in meeting capital requirements so they don’t call in loans and fuel a vicious circle that’s stifling the $300 billion economy. In a December survey of confederation members, two thirds said they had limited access to financing, while one in five said an absence of funds was the biggest obstacle for growth. 

Three Danish banks, including Amagerbanken A/S, failed last year after the FSA required them to restate bad loans, leaving them in breach of capital rules. Two of the failures pushed losses on to senior creditors and exacerbated a funding squeeze that’s frozen most of Denmark’s 120 banks out of debt markets. 

[...] The Organization for Economic Cooperation and Development warns an absence of credit may fuel a vicious circle in which businesses lack the funds to run their operations, leaving them unable to pay their debts.
[...] 

Denmark is also struggling to recover from a property bubble that burst in 2007, throwing the economy into a recession and killing jobs. House prices fell an annual 8.5 percent in November as the gap between bid and ask prices widened. Prices will have slumped 25 percent by 2013 since the crisis started in 2007, the government-backed Economic Council estimates.

[...] Denmark has the highest household debt load in the world, at 310 percent of disposable incomes, Exane BNP Paribas estimates.

Amazingly, credit addiction is deeply entrenched in Denmark as well, as this unbelievable statement from Dybvad group, which is asking the regulator to allow bankrupt banks to stay in business so that they can push on more loans... By the way, it looks like Mark-to-Fantasy has some limits in Denmark, while it's unlimited in the US, where the corruption of the system is far deeper than anywhere else in the developed world.

If you need to borrow money every month to keep your business running... Guess what? You're business should be closed long time ago and you're insolvent!

The OECD is saying that — I take a shortcut — if you don't lend the businesses money, they will go bankrupt... Eeeerrrm... How to put in a easy to understand statement? Well business, like states and countries, which rely on borrowing and spending and fail if no more credit is allowed are already insolvent. In addition to what, these kind of businesses have a name: Ponzi Schemes. One must be really from a communist country like France to believe otherwise.

What an amazing closing sentence... Now flashback in march 2011:

Denmark’s mortgage bond market is about 1 1/2 times the size of the country’s economy and more than seven times the size of the government bond market, according to the central bank.

And, flashback in 2009: I wrote a post titled Denmark the next country to default? where I basically made the same kind of forecasts.

Finally, flashback just a month ago, in January 2012:

 Jan. 19 (Bloomberg) -- Billionaire George Soros’s assertion that Denmark’s $480 billion mortgage credit system can weather any crisis better than any country where mortgages are bought and sold is proving the rule for international investors.

George Soros might be right, but weathering better doesn't mean that you're not going to make losses. I actually think losses will be substantial when banks default and debt is marked down.

The Nykredit Mortgage Bond Index, which includes the largest, most-traded of the securities, rose to a record this month, holding up through a real estate slump, a banking meltdown and Europe’s debt crisis. Home-loan bonds have gained 29.2 percent since 2007, beating U.S. Treasuries. 

[...] Denmark’s benchmark mortgage bonds have gained almost as much since the U.S. subprime collapse triggered the global credit seizure in 2007 than in the prior five years. Demand is surging even as home prices are projected to fall 25 percent by 2013 since the crisis, economic growth slows and unemployment rises, with investors gravitating to a country that’s one of only 12 nations in the world with AAA ratings at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. 

The Danish mortgage bond market differs from other countries in several key respects. When a homeowner in Denmark takes out a loan, the mortgage is immediately converted into a security of the same amount. A homeowner can then retire a mortgage either by paying off the loan or by purchasing an equivalent face value of the bonds at the market price.

Danes call this the balance principle. Mortgage issuers take all the credit risk, providing reserves in case a borrower defaults. Investors face a risk only on interest-rate fluctuations. Another difference with the U.S. is there are no government-sponsored companies involved in the market.

Can mortgage issuers take all the credit risk? How stupid is that statement, specially in 2012, when we saw what happened to similar schemes in the US? Fannie and Freddie anyone? If the mortgage guarantor defaults, what are your chances of getting back your principle?

Car sales plunge 27% to 45% year over year in France

My friend blbl sent me a report from Le Figaro, a french newspaper. Here's a quote:

En janvier, les constructeurs français ont particulièrement souffert. Les ventes de PSA Peugeot Citroën ont baissé de 27,4%, celles de Renault ont chuté de 32,7%. Inquiétant, sachant que l'Hexagone, premier marché des deux groupes, est clé pour eux tant en termes de volumes que de rentabilité. Preuve qu'il prévoit que la demande demeurera faible, PSA va mettre plus de 20.000 salariés de quatre usines au chômage partiel pendant une semaine en février ou en mars pour réduire ses stocks.

De manière générale, les grands bénéficiaires de la prime à la casse -qui avait stimulé la demande de petites voitures- sont ceux qui subissent aujourd'hui le plus fort contrecoup. Opel et Fiat traversent aussi une mauvaise passe, avec des baisses de ventes de respectivement 45% et 33%.

Google Translate gives us:

In January, French manufacturers were particularly hard hit. Sales of PSA Peugeot Citroen fell 27.4%, those of Renault fell 32.7%. Worrying, given that the Hexagon, the first market of the two groups is key for them in terms of both volumes and profitability. Evidence that he expects demand will remain weak, PSA will put more than 20,000 employees in four plants to short for a week in February or March to reduce inventory.

In general, the major beneficiaries of the cash for clunkers, which had boosted demand for small cars today are those who suffer the greatest backlash. Opel and Fiat also pass through a bad patch, with declines in sales of 45% and 33%.

Car sales plunge 27% to 45% year over year in France, and we've already seen the same patterns in the other countries in  Europe. They collapsed in three euro zone nations that have received international bailouts: 35.7 per cent in Greece, 40.5 per cent in Portugal and 51.8 per cent in Ireland (source).

But hey, we're not in a recession, right? And we won't be in one neither, as the Central Banks and Politicians will "save" us — if only by faking the numbers. 

CFTC Euro Net Speculative Short Positions at Record High

Euro pessimism has been extreme for some time, and even though last week saw a nice bounce in the Euro vs most other currencies, the negativity and pessimism as monitored by the net speculative exposure monitored by the CFTC has increased  while net USD long rose slightly — see chart below from ZeroHedge. We are now at what look like a major record short position, that could create a massive rebound in the Euro should a short covering or squeeze begin.

full disclosure: I increased my long EUR short USD position by buying more call options.

Portfolio Update — Closed Euro Shorts

Before Christmas, I posted about the Euro and wondered whether it was time to close the shorts and expect a bounce. I decided in the end to hold onto my shorts and wait for the end of the year break, in case anything serious happened during the public holidays. I was lucky on this one as the Euro kept on dropping.

Sentiment has been very negative on the Euro — for good reasons! — and the drop quite dramatic, from 1.50 to 1.26 USD. I am happy to take my profits here (closed my options at 1.2660).

Where to from here? Here's what I think about doing:

• If the Euro keeps on dropping, well, I won't short it at these levels, and I will actually consider going long the Euro.
• If the Euro stabilises at these levels, I will also consider shortly to go long, with tight stops and short term views.
• In any case, I will now consider deploying the capital freed against a short the AUD vs the USD. If anything serious and major happens, the risk-off trade should make a major blow the bubble currency of the bubble economy that is Australia.

Mish Interview on RT

Mish was interviewed on RT's Capital Account last week.

Mish mainly discusses the European situation.

The 20min odd video is available on YouTube and embedded below:

James Grant 20 Minute Interview on Capital Account

James Grant was interviewed on Capital Account on October the 24th, and he discusses the Euro mess, the ECB, free markets, fiat currencies vs gold and the mess the Fed has created.

It's a very approachable interview and hence very well worth sending to your friends and family if you want to spread the truth, and the sad reality of our current monetary system.

To Call The End of the Real Estate Bubble in France

With the liquidity and insolvency more and more apparent in the Eurozone banking sector, and the French bank decimated by the Greece debt woes, I think the banks will not be able to fuel the credit bubble en France and that the most obvious consequence, will be the long awaited collapse of the real estate bubble there.

The good news is that there are now some facts to back this assumption that I have been making for the past couple of months. See this quote from ZeroHedge:

Some data points on this from Thompson Reuters Loan Pricing Report today:

• French banks have been notably absent from high-profile EMEA loans including the US$6bn loan for commodity trader Xstrata and a $4.7 billion loan for Qatar's Barzan project financing.
• In Asia, BNP Paribas pulled out of an A$2.075 billion (US$2.14bn) refinancing for Australian media company Seven West after being shortlisted as one of the leads.
• In the US, Societe Generale declined to participate in a $15 billion, 364-day bridge loan for United Technologies Corp.
• The $6 billion loan for commodities trader Xstrata had no commitments from BNP Paribas, Societe Generale, Intesa and ING. "Banks structuring deals are mindful of the reduced demand for dollars - you have to factor in a big drop in appetite from French and Germans." a senior banker said.

Two Interesting Analysis about the EFSF

This is a follow-up on my posts from last Thursday and Friday about the EFSF:

• A Great Shortcut To The End of the Euro and the UE
• The Whole Plan Is Just Smoke And Mirrors

We are now starting to see the realisation that it's all smoke and mirrors and nothing has actually been accomplished...

Here a couple other comments from respectable market participants:

Hussman's comments on the EFSF:

So to start with, the EFSF is not actually an operating "bailout fund" at present - it's a shell corporation with a business plan and a certain amount of promised capital - not yet in hand - from European governments, in search of additional funding from private investors. 

Its intended business is to a) partially insure European debt, using capital from European governments, which these governments will obtain by issuing debt to investors, or b) to purchase European debt outright, by issuing EFSF debt to investors, leveraging capital obtained from European governments, which these governments will obtain by issuing debt to investors. 

In effect, European leaders have announced "We have agreed to solve our debt problem, leveraging money we do not have, to create a fund, which will then borrow several times that amount, in order to buy enormous amounts of new debt that we will need to issue." As Jens Weidmann, the President of the German Bundesbank objected about this plan last week, "It is tied to higher risks of losses and to increased sharing of risks. The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks." Moreover, the benefit to private investors is suspect. 

The basic idea of leveraging the EFSF is to provide enough "credit enhancement" to make European debt attractive. What is the value of that credit enhancement? Well, if the expected recovery rate is 80% or more, and the probability of default is fairly low, then the insurance (a promise to take "first loss" of 20%) isn't really needed in the first place. If you do the math, the expected effect on yields is something on the order of 1-2% on 1 year debt, and a fraction of a percent for longer dated debt. 

Unfortunately, when the insurance really is needed (assuming more typical recovery rates around 50% and default probabilities higher than 15% or so), a 20% first-loss provision does little but reduce an extremely high interest rate to a lower, but still intolerably high interest rate. Given debt-to-GDP ratios of 100% or more, that protection does nothing to avoid certain default except to delay it for a small number of years. 

On that note, don't look now, but even if you were to assume an optimistic 80% recovery rate, Portugese yields already imply certain default within less than 2 years. Assuming a more typical 60% recovery rate, the probability of a Portugese default within 2 years was 68% as of Friday (that same recovery rate produces an implied default probability of 88% within 3 years, and 100% within 5 years). 

Bob Januah, via M3 Financial Analysis:

This latest bailout relies on the market not calling what I see is a huge "bluff", because if the market does call it, the bailout simply won't be credible or even deliverable. It is instead akin to a self-referencing ponzi scheme, and I can't believe eurozone policymakers have even considered going down this route. After all, we all have recent experience of how such ponzi schemes end, and we all remember how eurozone officials often belittled and berated US policymakers for their role in the US housing/CDO/SIV financial bubble.

The Whole Plan Is Just Smoke And Mirrors

Here's a quote from Stewart Richardson, the CIO of RMG Wealth Management, which I believe explains clearly the European plan is just noise and wind, and nothing concrete behind it, as I stated before already:

So, what of the European plan. First, it would appear that Europe is not putting up any money to save the system. Not one Euro as far as I can see. Clearly, the haircut on Greek debt is a "voluntary" agreement from bondholders in the private sector - no EU money there. On the bank recapitalisation fund, the EU are asking banks to raise new capital first from private investors, then from national Governments and then from the EFSF. With regard to the EFSF, this fund has no capital in the first place. It can raise funds from the markets because of a total of EUR780 billion in guarantees from the member countries. These guarantees allow the fund to lend a total of EUR440 billion which will be financed by borrowing funds from private investors. 

Furthermore, out of the EUR440 billion of lending capacity in the EFSF, some EUR190 billion has been accounted for already with the bailouts of Greece, Portugal and Ireland. Therefore, only some EUR250 billion of lending capacity is left. This amount will be leveraged up to create a fund with EUR1 trillion of capacity for guaranteeing new sovereign borrowing (mainly Italy and Spain). So, here we have a fund that has no paid in capital that can guarantee EUR1 trillion of bond issuance to solve the Eurozone Sovereign debt crisis. The fact is that the debt that existed before the EFSF could not be serviced by Sovereign issuers (who collect revenue via taxation) and the thought that it can be solved by creating EUR1 trillion of new debt with no capital is fantasy, and this is why we believe the whole plan is nothing but smoke and mirrors.

Stewart Richardson Chief Investment Officer of RMG Wealth Management