(Reuters) - Countries in the euro zone will find it increasingly unattractive to stay in the single currency, if there is a German-led fiscal integration, the chairman of Goldman Sachs Asset Management said in a Sunday Telegraph interview. Portugal, Ireland, Finland and Greece could all pull out of the euro zone rather than operate under a single treasury, Jim O'Neill, whose division manages more than $800 billion (500 billion pounds) of assets, was cited as saying. He also called on the European Central Bank (ECB) to show more leadership to reassure "worried investors." "The Germans want more fiscal unity and much tougher central observation -- with the idea of a finance ministry," O'Neill said. "With that caveat, it is tough to see all countries that joined wanting to live with that - including the one that is so troubled here (Greece)." He added that only countries such as Germany, France and Benelux, were suited for a monetary union because their exchange rates were closely linked. But for others, it was questionable. O'Neill said countries such as Finland and Ireland that are neighbors of non-euro zone countries -- the UK and Sweden -- might prefer to quit the euro, which would bolster the strength of the single currency. He added that the Brussels bailout deal will not solve the crisis and that the ECB needed to buy bonds. Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs. Italy is seen as the next domino that could fall in the euro zone crisis, with yields on its 10-year bonds reaching 6.38 percent, close to the 7 percent threshold widely viewed as unsustainable. A member of the ECB was reported on Saturday as saying it frequently debated the option of ending its purchases of Italian bonds unless Rome delivers on reforms. O'Neill told BBC radio on Sunday that it will be "really interesting" to see how the markets react to the ECB's comments when they reopen on Monday. He said the comments gave the impression the ECB was not an eager participant in trying to support the Italian bond market and bringing about stability. "It would appear clear in that regard that they might also prefer a more of a unity type government to try and come up with a new economic policy for Italy," he said. "But it is all very fragile and the markets are requiring a stronger leadership from within these countries as well as from the ECB." http://www.reuters.com/article/2011/11/06/us-britain-euro-goldman-idUSTRE7A51P020111106
http://www.reuters.com/article/2011/11/06/eurozone-leadership-idUSL6E7M608O20111106 By Paul Taylor PARIS, Nov 6 (Reuters) - Europe has a new informal leadership directorate intent on finding a solution to the euro zone's debt crisis, but it has yet to prove its ability to come up with a lasting formula. Forged in the fire of a bond market inferno, the shadowy so-called Frankfurt Group has grabbed the helm of the 17-nation currency area in a few short weeks. The inner circle comprises the leaders of Germany and France, the presidents of the executive European Commission and of the European Council of EU leaders, the heads of the European Central Bank and the International Monetary Fund, the chairman of euro zone finance ministers, and the European Commissioner for economic and financial affairs. Europe's new politburo met four times on the sidelines of last week's Group of 20 summit in Cannes, issuing an ultimatum to Greece that it would not get a cent more aid until it met its European commitments, and arm-twisting Italy to carry out long delayed economic reforms and let the IMF monitor them. In a tell-tale recognition of the new ad hoc power centre, members wore lapel badges marked "Groupe de Francfort". U.S. President Barack Obama attended one of the meetings, getting what he joked was a "crash course" in the complexity of Europe's laborious decision-making processes and institutions. "He proved to be a quick learner," one participant said. Two people familiar with the discussion said he argued for the euro zone to make its financial backstop more credible by harnessing the resources of the ECB, but German Chancellor Angela Merkel and ECB President Mario Draghi resisted. Obama also supported a proposal to pool euro zone countries' rights to borrow from the IMF to help bolster a firewall against contagion from the Greek debt crisis, but Germany's central bank opposed this too, the sources said. The president referred obliquely to the debate at a news conference the next day, saying: "European leaders understand that ultimately what the markets are looking for is a strong signal from Europe that they're standing behind the euro." Hours earlier, a television camera in the Cannes summit conference room caught Obama and British Prime Minister David Cameron discussing the issue while waiting for the start of the final working session. Cameron, whose country is not in the euro, has called publicly for the ECB to act as the lender of last resort for the euro zone, as the Federal Reserve does for the United States, and the Bank of England for Britain. When Merkel entered the room, Obama pulled her aside for a private conversation. An open microphone caught his opening words: "I guess you guys have to be creative here." ON THE HOOF The Frankfurt Group came about on the hoof to try to fashion a crisis response in something closer to the short timespan of frantic financial markets. It seems destined to endure, not least because the growing imbalance between a stronger Germany and a weaker France means other players are needed to broker decisions. Crucially, it aims to bridge the ideological gulf between northern and southern Europe, and between supporters of the orthodox German focus on fiscal discipline and an independent central bank with the sole task of fighting inflation, and advocates of a more integrated and expansive economic and monetary union. The presence of IMF Managing Director Christine Lagarde gives the group greater credibility in the markets, as well as providing a reality check on what international lenders expect and the limits to their willingness to support the euro zone. It all began with a blazing row at the Old Opera House in Frankfurt on Oct. 19 that spoiled Jean-Claude Trichet's farewell party after eight years as president of the ECB. As the fallout from Greece's debt crisis singed European banks and panicky investors dumped euro zone government bonds, French President Nicolas Sarkozy, who had snubbed the ceremony in honour of Trichet, flew in at the last minute to meet a visibly irritated Merkel. Sarkozy himself said that day that France and Germany were at odds over how to leverage the euro zone's financial rescue fund. The French wanted to let the European Financial Stability Facility operate as a bank and borrow money from the ECB. "In Germany, the coalition is divided on this issue. It is not just Angela Merkel whom we need to convince," Sarkozy told lawmakers, according to Charles de Courson, who was present. At the Frankfurt meeting, described by one participant as "explosive", Merkel and Trichet firmly opposed the idea, which they said would violate the European Union's treaty prohibition on the central bank financing governments. Germany insisted on that clause when the ECB was created because of its own history of fiscal abuse of the central bank that fuelled hyperinflation in the 1920s and funded the Nazis' massive rearmament in the run up to World War Two. As French officials tell it, Merkel is not so hostile to the proposal as her finance minister, Wolfgang Schaeuble, and the head of the German Bundesbank, Jens Weidmann. The French are convinced that Merkel understands the ECB will have to be more centrally involved in fighting bond market contagion, but she cannot get it through her divided coalition for now. They see the ECB as the main centre of resistance. After hearing a chorus of Obama, Cameron and the leaders of India, Canada and Australia at the G20, Merkel acknowledged that the rest of the world found it hard to understand that the ECB was not allowed to play the role of lender of last resort. But the crisis may have to get still worse before the Germans and the ECB relent, if they ever do. LEGITIMACY VS EFFICACY The Frankfurt Group has already had an impact in euro zone crisis management but like all informal core groups it has begun to stir resentment among those who are excluded, and it has yet to prove its ability to craft a convincing longer-term solution. North European creditor countries such as the Netherlands, Slovakia and Finland, where public hostility to further euro zone bailouts is fierce, are already grumbling about decisions being taken behind their backs. In Greece and Italy, there has been strong criticism of the perceived arrogance of "Merkozy", as the Franco-German duumvirate are increasingly nicknamed, in summoning their prime ministers to receive ultimatums. German and French officials shrug off such complaints as inevitable, noting that EU partners are even more unhappy when France and Germany do not agree, since that paralyses Europe. "There is always a trade-off between legitimacy and efficacy," said an EU official involved in the Frankfurt Group. "The euro area institutions were not designed for crisis management so we need innovative solutions. "In an emergency like this, we have to have a structure that works," he said, adding that the presence of the European Commission and of European Council President Herman Van Rompuy guaranteed that the interests of smaller member states would be taken into account. EU officials had held conference calls with the 15 other euro zone states during the Cannes summit "to keep them in the loop". The head of the EFSF, Klaus Regling, was secretly flown to Cannes to brief the leaders on the state of accelerated preparations to leverage the rescue fund, one source said. Merkel long resisted French pressure to create more of an "economic government" in the euro zone, not least because she did not want Germany to be in a minority on issues such as bailouts, free trade or the EU budget. She also did not want to alienate German allies and neighbours such as Denmark, Poland and the Czech Republic, which are not in the euro zone. But recent problems in smaller countries that aggravated market turmoil -- Finland's demand for collateral on loans to Greece and Slovakia's parliamentary wrangling over increasing the EFSF's powers -- convinced her of the need for stronger leadership to impose order. Whether the Frankfurt Group will be the forum that finally convinces Germany to accept a bigger crisis-fighting role for the ECB, or the creation of jointly issued euro zone bonds, remains to be seen.
"He added that only countries such as Germany, France and Benelux, were suited for a monetary union because their exchange rates were closely linked. But for others, it was questionable." why would Germany want to hang out with France and Belgium?
The reversion to local currencies, complete with more autonomy taken back by individual central banks, will demonstrate a strong DECENTRALIZATION TREND. Even the new Northern Euro currency will feature greater decentralization. Those who feared a continental Amero currency for North American usage, a sustained Euro currency for European usage, and an emerging Yuan currency for Asian usage, must go back to the drawing board or replace the perceptual prisms. Prepare for several gold-backed new currencies. China is talking of a gold component to the Yuan currency. So is Russia. My hunch is that Russia will either participate in the new gold-backed Northern Euro currency or launch its own gold-backed Ruble currency. ITALY NEXT ON THE BLOCK The Italian Govt debt picture is seriously distorted. Financial analysts point to more favorable debt ratios as a proportion to their larger economy. The debt volume in Italy to be refinanced this year alone is almost ten times that of Greece. The important factor is the volume of short-term debt to be financed, that must come from the bond market. Regardless of more favorable debt ratios, the money is not available. Over half of all the 2010 total finance needs for PIGS nations plus Ireland are derived from Italy alone. The needs for Italy diminish somewhat in following years, but the volume remains grand. Unlike other European nations, the Italian vendors and shopkeepers have maintained a stubborn habit of showing sales receipts in both Euro terms and Lira terms over the years. The Italian Govt debt is under market assault. During this week, the sovereign risk returned with a vengeance as the Italian Govt debt took heavy blows. The reminder is stark, that sovereign debt is a major contagion across all of Europe. The Credit Default Swap contract, which insures the 5-year bond, rose in a big way on Monday. MarkIt reports the Italian CDSwap went from 200 basis points to 250 bpts in a single day, to mark a new record high level. The new story to replace Greece has arrived to take away attention in the financial news media. The contagion is spreading globally now, even to South Korea, far beyond Iceland from two years ago. An important new trend evident in the last few months is the appearance of sovereign nation debt as the most actively moving in the official CMA reports. The trend of national debt struggles and deep distress will continue until a true monetary anchor can be designed to provide stability. SPAIN NEXT ON THE CROWDED BLOCK The Spanish Govt debt picture is seriously distorted, in different ways. The banks in Spain have chosen to ignore the reality of lower property prices, and have carried credit assets at unreasonably high values. It is safe to say that the Spanish banks are ready to enter freefall. A major shock comes to Spain. For well past a year, they have refused to mark down much of any credit assets tied to property. Furthermore, their property markets have refused to mark down prices seeking buyers on the open market. The result has been a great reduction in sales volume, as sellers want prices that buyers are unwilling to offer, with huge price gaps that are sometimes described as comical. Reality is set to strike, and strike very hard. The Greek focus will soon turn to Spain, and also Italy. Not being an expert, this analyst regards the Caja sector of the Spanish banks to be the large group of savings banks. They are all operating in a fantasy land, as their credit portfolios have been shattered for a long time. The common practice of carrying lofty valuations has encountered the wall of reality. The Spanish Govt has been attempting to enforce a grand restructure process among its cajas. They are in deep debt and teetering. Merger with larger banks is seen as a potential solution, but that constitutes fusion of insolvent pieces with bad resin. The Govt has created a Fund for Orderly Bank Restructuring, (FROB) to facilitate the process. Usage of the fund comes with a timetable, as the savings banks have until June 30th to make formal requests for the money urgently needed. The FROB fund has a total value of �99 billion and is funded with �9 billion of capital and up to �90 billion of new government supported debt. Yet more monetary inflation enters the picture. The savings banks within the Spanish Caja system total 45 in number. They, like the bigger banks, have stalled on taking proper liquidation and writedown action. The Bank of Spain has stirred things up with a recent seizure of troubled Cajasur one week ago. Other merger announcements have followed. Cajasur had a distinction, since its board of directors contained some stubborn priests, who refused to merge with the bigger Unicaja. Bank analysts are coming to the conclusion that the collective costs of the bailouts in Spain by their government will be an order of magnitude higher than what it anticipated. The Spanish Govt deficit ran at 11.2% of GDP in 2009. That ratio must come down. My forecast is that it will rise, not fall. The reason is simple. Just like with the United States and United Kingdom, no constructive initiatives or reform have been embraced, and the same scoundrels remain in charge at their posts. So the banks will face continued losses. So the housing market will face continued declines. So the economies will face continued recession. Rumors swirl that Caja Madrid said to ask for �3 billion of aid from the official rescue fund. The news has captured much attention since it is the second largest among the cajas. By the way, caja in the spanish language means box, cage, booth, register, teller unit, or repository. Confirmation came in the form of an official denial by the bank, calling it speculation. The savings bank did reveal last week as being in talks to merge with several regional cajas. Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia, and Caja Rioja were mentioned. COMPARTMENTALIZED PERCEPTIONS Think nation, not bank! Until 2008, perceptions and evaluations of the banking sector were specific. Talk was about Santander in Spain, their big bank, and not about Spanish Govt bonds. Talk was about Societe General in France, and not about French Govt bonds. Talk was about Royal Bank of Scotland and Northern Rock and Lloyds in Great Britain, but not about UK Gilt bonds. Talk never was much about individual Italian or Greek or Portuguese banks. But now, talk is replete with Italian and Greek and Spanish Govt debt securities, and not of private banks. The line of thinking, the analysis, the focus is much more directed at national debt exposure, the sovereign debt. The insolvency of big banks has been transferred to insolvency for entire nations and their governments, along with outsized leverage. After 18-20 months of shifting the debt risk from individual banks to the government balance sheets, the impact has finally come to be felt. The sequence of formal debt downgrades hints of a funeral procession, mostly concentrated on the distressed nations and their sovereign debt. It has become a global phenomenon, since Korean debt, Brazilian debt, and other nations have joined the sovereign debt crisis. Remember that the popular financial analysts called the Dubai debt default isolated, quite incorrectly. My analysis actually forecasted the Dubai debt event over three months in advance. My analysis also pointed out the interwoven nature of the sovereign debt exposure, since banks across London, France, Switzerland, and Germany share the debt risk as underwriters and investors. We have vividly seen the interwoven debt exposure. The Spanish Govt debt situation has come over the horizon to cloud the banking system once again. Last week, Fitch Ratings became the second major ratings agency to downgrade Spanish sovereign debt. They marked it down to AA+ from AAA. Standard & Poors had cut the same Spanish debt rating back in April, lower than AAA. In their formal announcement, Fitch stated belief that the unemployment rate in Spain over 20%, along with the reversal of fortune tied to the construction boom, will weigh heavily on their economy struggling under extremely high debt burden levels. Neither the Spanish Govt nor their banking leaders have any firm resolve or grip on the situation. Recall that delay to remedy and reform always results in much worse bank losses and much deeper economic recession. Their government has delayed on bank accounting practices, and only last week worked the austerity measures through the Parliament by a single vote. Fitch offered a bland shallow statement about how the special FROB fund to clean up their banks should be sufficient, in a total denial of the depth of the problems and future losses. The FROB fund is designed to aid the caja banks heavily exposed to the real estate and construction sectors. Fitch noted that their restructuring process is progressing slowly, which means not quickly enough. The politicized wrangled process could intensify constraints on the supply of credit and affect the pace of economic recovery for the country, so claims Fitch rightfully so. The next three big big shoes are about to hit the floor. The bang will reverberate around the world. The Spanish, Portuguese, and Italian banks are at great risk of failure, as they sink with PIGS debt and other credit assets tied to fallen property. Spain will make the most shrill sounds, for a simple reason. They were the worst offender in their delays toward bank writedowns and reduced property values. Their bank books have the biggest drop to realize, after re-entry to reality. The crises underway in the remainder of PIGS nations will continue unabated, and usher in magnificent events where a legitimate gold-backed currency arrives, urgently needed to provide stability.
A second natural force has arrived in the gigantic bond marketplace. While as many political analysts as financial analysts promote the wisdom of a preserved European Union, and a shared Euro currency across that union, a natural force works to separate the entire group of PIGS nations. Refer to Portugal, Italy, Greece, and Spain. As much force comes from the Nordic Core power center to push the PIGS nations away from the common European financial structure, as does the force from the PIGS nations to sever ties and go it alone. A German banker contact has repeated an important point on numerous occasions. The European Monetary Union experiment has cost the nation of Germany over $300 billion per year, all for what clearly appears to be a welfare program directed toward the benefit of wasteful inefficient nations not deserving of a low bond yield. After ten years, the cost has been $3 trillion to Germany. It is not a matter of German willingness to continue the Southern Europe Welfare Program, as much as their ability to continue. They cannot continue. They cannot afford it. My forecast made since January was that Germany would not aid Greece, but would say all the right things. Their leaders did occasionally show human tendencies, like when some critics claimed Greece possessed innate specialty in dance, drink, and song. My longer standing forecast is that all PIGS nations would revert to their former currencies, the Greeks to the Drachma, the Italians to the Lira, the Spanish to the Peseta, and the Portuguese to the Escudo. The forecast is of decentralization and increased local autonomy. However, and very importantly, the path is a very slow one with political obstacles, face saving requirements, economic pressures, and social pressures too. Notice the Germans appeared to be cooperative in aiding Greece, but when money had to be committed, arguments ensued on cue. The German High Court will surely reject both the Greek aid and the Euro usage itself, all in time. ADVANTAGES OF REVERTED CURRENCY The political ideals of a unified Europe are all well and good, but might be fantasy built upon folly in ignorance of practicality. The national differences are significant in work habits, industrial efficiency, tax structure, credit practices, federal bureaucracy load, economic diversity, educational depth, native intelligence, demographic makeup, arable land & sunny climate, and more. The pursuit of a unified Europe has proved elusive for a millennium. Enter the London financial analysts and economics brain trust. They have entered the room with some interesting counsel, not the typical self-serving defense of their system. Instead, a prominent think tank suggests to Athens leaders a debt default and return to the Drachma currency. Greece is urged to leave the Euro currency. We are moving gradually toward a restructure of Greek Govt debt, and a corresponding stimulus to the Greek Economy via devalued currency. When tied to the Euro currency yoke, such a Greek stimulus is impossible. British economists advise Athens to abandon the Euro and default on its �300 billion debt under the basic motive to save its economy. The Centre for Economics & Business Research (CEBR) out of London has warned Greek Govt officials of the horrible bind. The CEBR believes Greece will be unable to escape a debt trap without devaluing their own currency to boost exports. Greece must pursue economic expansion, but cannot with the Euro straitjacket. The only workable path is for Greece to return to its own currency, the Drachma. To date, the EU Bailout is a poorly disguised rescue for German and French banks, even London banks. The dirty secret across Europe is that the major nations all own a huge raft of PIGS debt, and each nation within the PIGS group all own a huge raft of the same debt. Any departure by Greece from the Euro would create a grand shock for banks across all of Europe, cause great disruption, and subvert the trend whereby bankers receive magnificent governmental aid. These same banks had better gird their castle walls. Doug McWilliams is chief executive of the CEBR. He said "Leaving the Euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in Euros, this would raise the debt from its current level of 120% of GDP to 140% overnight. So part of the package of leaving the Euro must be to convert the debt into the new domestic currency unilaterally... The only question is the timing. The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious." McWilliams called the move virtually inevitable (in his words) but he minimizes the devaluation potential. See the Business Times article (CLICK HERE). The advantages are as numerous as they are deep, all significant. Defaulted Restructured Debt: A return to the Drachma currency would enable a restructure of the Greek Govt debt. Look for at least a 50% debt reduction, but against a currency devaluation. The Athens leaders can win a very large portion of debt forgiveness, or else threaten default. European banks will choose a writedown rather than a total wipeout loss. These bankers will realize the futility of carrying full debt on their books, all too aware of the poison pill nature of the compulsory austerity programs heaped upon Greece. Economic Stimulus: A return to the Drachma currency would enable a strong stimulus to the Greek Economy. Nothing is free, however. Currency devaluation is a double-edged sword. The benefit to be realized with cheaper exports (including tourism) will be offset by higher energy costs and other import costs (like cars, cellphones, and machine equipment). The historical effective tool is for a currency devaluation, one that leads to valid stimulus but with a steady dose of price inflation. Greece, like other European nations, is no stranger to socialist solutions to spread the pain. Poison Pill Revenge: A return to the Drachma currency would enable a national rejection of the IMF/EU poison pill solution. The austerity measures have no precedent of effectiveness. They are ruinous, lead to greater federal deficits, worse unemployment, and more social disorder, yet such non-solutions continue to be pushed. Rejection of the austerity programs would incite a national rally of pride and celebration. Obviously, when Greek reverses the austerity cuts, the maneuver would ensure a second thump one year afterwards. Bloated government payrolls would remain, at a heavy cost. The Drachma would suffer a continued devaluation later on. Stimulus would be required in additional doses. The shared pain from price inflation would follow. Autonomy & Control: A return to the Drachma currency would enable a national movement for the Greek people to take control of their fate. Their population feels on the receiving end of dictums and forced solutions, complete with massive job layoffs and budget cuts. They detect duplicity, since other nations in Europe are in violation of guidelines. Nevermind that something like 11% or 12% of all Greek jobs are located within the government sector, and countless citizens pay for tax favors, certain blemishes among many in Southern Europe. The psychological benefit to a reversion to the Drachma is to defy the bankers and to take the reins of national control. This has a value in national pride and spirit, which ironically would avoid most internal reform.
PRECURSOR TO NEW NORTHERN EURO Prepare next for a Euro currency with a more trim look, one with the PIGS fat trimmed off. The next three big big shoes are about to hit the floor, with severe crises erupting much worse for Spain, Portugal, and Italy. Banks in those nations will suffer failures, liquidations, stock declines, CDSwap contract rises, rescue requests, mergers in desperation, and more. These three nations represent the remainder of the famed PIGS descriptor, as Greece has captured far too much news and attention. When the Greek Govt debt news broke out and was developed from February through May, clearly Spain was committed not to reform, and was not involved in liquidations and bank asset writedowns. They delayed. Greece has served to distract attention not just from the other PIGS nations but from the United States and United Kingdom as well. Sovereign debt default will not end as a story until the USTreasurys and UKGilts are the center of attention. All four PIGS nations will be removed from formal Euro currency participation. Economics and nationalism dictate it. Prepare next for a Euro currency with a more trim look, one with the PIGS fat trimmed off. As the PIGS sovereign debt is discharged, written down, and defaulted, the demand will increase for the survivor Euro core, the healthy strong core. The new Northern Euro currency will initially be comprised of a PIGS-less Euro, which awaits. The PIGS-less Euro currency will have much less debt to refinance in the short horizon. The PIGS-less Euro currency will have much stronger fundamentals with smaller annual deficits and better looking debt ratios versus economic size. The PIGS-less Euro currency will have a much healthier trade surplus picture. The PIGS-less Euro currency will realize much greater respect in a faith-based fiat world. But it is a transition vehicle. The events in the next few months regarding the European Monetary Union are set to accelerate rapidly. The Greek Govt debt situation was replete with delay, debate, deliberation, confusion, distortion, false starts, deceptive fixes, reversals on decision, difficulty in endorsement, revealed lies on debt volume, blame on speculators, harsh criticisms, low blows, violence, and much more. The new few months will be different. One well connected banker source told me a few months ago that the Greek debt situation will come to a resolution, all rescues will fail, as default is inevitable, complete with a return to the Drachma currency, but afterwards, the default of Italy and Spain will occur with lightning speed. He expected the events to occur in a fast chain reaction. We are beginning to see it. The transition currency stripped of PIGS fat-ridden lining will eventually make way for the new Northern Euro. It was described in last week's article. It will contain much more independence among its members and their central banks. An embedded gold component is planned. Watch in the future for a crude oil component, even possibly OPEC oil sales tied to new Northern Euro currency payments. Time will tell. Events are moving rapidly. The PIGS-less Euro currency forces the monetary issue, as it demands a better and more perfect form of currency. An old maxim goes "A paper currency cannot be replaced by another paper currency, but rather by a metal currency." How true!! Regard the PIGS-less Euro currency as a vehicle whose arrival will serve as a penultimate event in the Competing Currency Wars. The arbitrage will continue to pull apart paper currencies, tethered to profligate money printing and faded trust. The PIGS-less Euro currency will open the door amidst crisis and invite a currency formed in a golden crucible. The reversion to local currencies, complete with more autonomy taken back by individual central banks, will demonstrate a strong DECENTRALIZATION TREND. Even the new Northern Euro currency will feature greater decentralization. Those who feared a continental Amero currency for North American usage, a sustained Euro currency for European usage, and an emerging Yuan currency for Asian usage, must go back to the drawing board or replace the perceptual prisms. Prepare for several gold-backed new currencies. China is talking of a gold component to the Yuan currency. So is Russia. My hunch is that Russia will either participate in the new gold-backed Northern Euro currency or launch its own gold-backed Ruble currency. The Americans and British will be last on board, as their nations risk a tumble into the Third World. Gold will be the stability mainstay, the common anchor applied across the world, but its application will enable decentralized power to be managed. Those nations first to embark on true remedy and reform will be the new global leaders. Those nations stuck in stubborn refusal will be relegated to monetary backwaters. ITALY NEXT ON THE BLOCK The Italian Govt debt picture is seriously distorted. Financial analysts point to more favorable debt ratios as a proportion to their larger economy. The debt volume in Italy to be refinanced this year alone is almost ten times that of Greece. The important factor is the volume of short-term debt to be financed, that must come from the bond market. Regardless of more favorable debt ratios, the money is not available. Over half of all the 2010 total finance needs for PIGS nations plus Ireland are derived from Italy alone. The needs for Italy diminish somewhat in following years, but the volume remains grand. Unlike other European nations, the Italian vendors and shopkeepers have maintained a stubborn habit of showing sales receipts in both Euro terms and Lira terms over the years. The Italian Govt debt is under market assault. During this week, the sovereign risk returned with a vengeance as the Italian Govt debt took heavy blows. The reminder is stark, that sovereign debt is a major contagion across all of Europe. The Credit Default Swap contract, which insures the 5-year bond, rose in a big way on Monday. MarkIt reports the Italian CDSwap went from 200 basis points to 250 bpts in a single day, to mark a new record high level. The new story to replace Greece has arrived to take away attention in the financial news media. The contagion is spreading globally now, even to South Korea, far beyond Iceland from two years ago. An important new trend evident in the last few months is the appearance of sovereign nation debt as the most actively moving in the official CMA reports. The trend of national debt struggles and deep distress will continue until a true monetary anchor can be designed to provide stability. SPAIN NEXT ON THE CROWDED BLOCK The Spanish Govt debt picture is seriously distorted, in different ways. The banks in Spain have chosen to ignore the reality of lower property prices, and have carried credit assets at unreasonably high values. It is safe to say that the Spanish banks are ready to enter freefall. A major shock comes to Spain. For well past a year, they have refused to mark down much of any credit assets tied to property. Furthermore, their property markets have refused to mark down prices seeking buyers on the open market. The result has been a great reduction in sales volume, as sellers want prices that buyers are unwilling to offer, with huge price gaps that are sometimes described as comical. Reality is set to strike, and strike very hard. The Greek focus will soon turn to Spain, and also Italy.
Not being an expert, this analyst regards the Caja sector of the Spanish banks to be the large group of savings banks. They are all operating in a fantasy land, as their credit portfolios have been shattered for a long time. The common practice of carrying lofty valuations has encountered the wall of reality. The Spanish Govt has been attempting to enforce a grand restructure process among its cajas. They are in deep debt and teetering. Merger with larger banks is seen as a potential solution, but that constitutes fusion of insolvent pieces with bad resin. The Govt has created a Fund for Orderly Bank Restructuring, (FROB) to facilitate the process. Usage of the fund comes with a timetable, as the savings banks have until June 30th to make formal requests for the money urgently needed. The FROB fund has a total value of �99 billion and is funded with �9 billion of capital and up to �90 billion of new government supported debt. Yet more monetary inflation enters the picture. The savings banks within the Spanish Caja system total 45 in number. They, like the bigger banks, have stalled on taking proper liquidation and writedown action. The Bank of Spain has stirred things up with a recent seizure of troubled Cajasur one week ago. Other merger announcements have followed. Cajasur had a distinction, since its board of directors contained some stubborn priests, who refused to merge with the bigger Unicaja. Bank analysts are coming to the conclusion that the collective costs of the bailouts in Spain by their government will be an order of magnitude higher than what it anticipated. The Spanish Govt deficit ran at 11.2% of GDP in 2009. That ratio must come down. My forecast is that it will rise, not fall. The reason is simple. Just like with the United States and United Kingdom, no constructive initiatives or reform have been embraced, and the same scoundrels remain in charge at their posts. So the banks will face continued losses. So the housing market will face continued declines. So the economies will face continued recession. Rumors swirl that Caja Madrid said to ask for �3 billion of aid from the official rescue fund. The news has captured much attention since it is the second largest among the cajas. By the way, caja in the spanish language means box, cage, booth, register, teller unit, or repository. Confirmation came in the form of an official denial by the bank, calling it speculation. The savings bank did reveal last week as being in talks to merge with several regional cajas. Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia, and Caja Rioja were mentioned. COMPARTMENTALIZED PERCEPTIONS Think nation, not bank! Until 2008, perceptions and evaluations of the banking sector were specific. Talk was about Santander in Spain, their big bank, and not about Spanish Govt bonds. Talk was about Societe General in France, and not about French Govt bonds. Talk was about Royal Bank of Scotland and Northern Rock and Lloyds in Great Britain, but not about UK Gilt bonds. Talk never was much about individual Italian or Greek or Portuguese banks. But now, talk is replete with Italian and Greek and Spanish Govt debt securities, and not of private banks. The line of thinking, the analysis, the focus is much more directed at national debt exposure, the sovereign debt. The insolvency of big banks has been transferred to insolvency for entire nations and their governments, along with outsized leverage. After 18-20 months of shifting the debt risk from individual banks to the government balance sheets, the impact has finally come to be felt. The sequence of formal debt downgrades hints of a funeral procession, mostly concentrated on the distressed nations and their sovereign debt. It has become a global phenomenon, since Korean debt, Brazilian debt, and other nations have joined the sovereign debt crisis. Remember that the popular financial analysts called the Dubai debt default isolated, quite incorrectly. My analysis actually forecasted the Dubai debt event over three months in advance. My analysis also pointed out the interwoven nature of the sovereign debt exposure, since banks across London, France, Switzerland, and Germany share the debt risk as underwriters and investors. We have vividly seen the interwoven debt exposure. The Spanish Govt debt situation has come over the horizon to cloud the banking system once again. Last week, Fitch Ratings became the second major ratings agency to downgrade Spanish sovereign debt. They marked it down to AA+ from AAA. Standard & Poors had cut the same Spanish debt rating back in April, lower than AAA. In their formal announcement, Fitch stated belief that the unemployment rate in Spain over 20%, along with the reversal of fortune tied to the construction boom, will weigh heavily on their economy struggling under extremely high debt burden levels. Neither the Spanish Govt nor their banking leaders have any firm resolve or grip on the situation. Recall that delay to remedy and reform always results in much worse bank losses and much deeper economic recession. Their government has delayed on bank accounting practices, and only last week worked the austerity measures through the Parliament by a single vote. Fitch offered a bland shallow statement about how the special FROB fund to clean up their banks should be sufficient, in a total denial of the depth of the problems and future losses. The FROB fund is designed to aid the caja banks heavily exposed to the real estate and construction sectors. Fitch noted that their restructuring process is progressing slowly, which means not quickly enough. The politicized wrangled process could intensify constraints on the supply of credit and affect the pace of economic recovery for the country, so claims Fitch rightfully so. The next three big big shoes are about to hit the floor. The bang will reverberate around the world. The Spanish, Portuguese, and Italian banks are at great risk of failure, as they sink with PIGS debt and other credit assets tied to fallen property. Spain will make the most shrill sounds, for a simple reason. They were the worst offender in their delays toward bank writedowns and reduced property values. Their bank books have the biggest drop to realize, after re-entry to reality. The crises underway in the remainder of PIGS nations will continue unabated, and usher in magnificent events where a legitimate gold-backed currency arrives, urgently needed to provide stability. http://www.gold-eagle.com/editorials_08/willie060310pv.html