This is a warning to prepare
for potential stealth bank runs cascading from North Africa and Ireland
through to EU regional banking centers.
Stealth bank runs are the
unrecognized and perilous serpent lurking presently below the European
financial surface. They prey on slower moving archaic bond vigilantes and
anyone else swimming in these dangerous uncharted waters.
Investors need to fully
appreciate that a modern bank run looks and operates differently than what is
depicted in the movies and what we most likely expect to occur!
For starters, it isn't the
individual depositor lining up, it's now Corporate
CFOs or Treasurers at their terminal en masse!
Secondly, it isn't driven by
local depositors; it is now driven internationally by Corporate Finance
committees!
Thirdly, there are no telltale
line-ups at bank doors. It is stealth, which will happen in an unexpected
electronic 'flash crash' panic blur!
Today, a triggering event
will initiate global 'key strokes' that will move unprecedented amounts of
money within hours.
The Council of Foreign
Relations just released a surprising report entitled: Sovereign Credibility and Bank Runs
"In the midst of the financial
crisis of 2008, governments helped to prevent bank runs by guaranteeing bank
debts. Yet as sovereign solvency itself becomes an issue, such guarantees
quickly lose their value. If Ireland provides a rule of thumb, bank runs
can be expected once sovereign credit default swap yields pass 3%. The
figure below shows that when Irish government CDS yields first passed 3% in
early 2009, foreign deposits fled the country. This happened again in late
2010. Now that Spanish CDS yields have broken the 3% threshold, there is
reason to be concerned about the stability of Spanish bank deposits as
well."
The Council's report
conspicuously leaves out Portugal which the following European CDS spreads
clearly identify as being above their 3% threshold line along with Spain and
long time banking problem Greece.
There is little doubt with all
the coverage on the European PIIGS that there is financial fragility present
in the EU and with all investors having money invested in European banks. Now
we must add the North Africa / Middle East event shock.
Egyptian CDS spreads have now doubled to over 400 bps This is well above the
300 bps threshold level. Is it any wonder that Mubarak immediately shut down all Egyptian banks for fear of both
domestic band international bank runs.
Egypt Banks Risk Run as Week of Protests Hits Economy
- Bloomberg 01-31-11
ITALY - The Invisible Elephant
The Italy / Spain = >
North Africa link is historically significant!
Italy has a cool 2 Trillion EUR
in debt and has much worse debt statistics than Spain (we will discuss this
below). Italy's debt-to-GDP ratio is 118% (2009). Greece got in trouble at
116%. Italy's deficit is smaller and has a high savings ratio. However,
nobody focuses on that as Spain is in the limelight with a debt-to-GDP ratio
under 60%. Should austerity measures result in a nominal GDP contraction in
Italy, its debt stats will worsen very rapidly.
Italy is the elephant in the
room followed closely by Spain.
Consider carefully the
following chart and remember that significant Italian & Spanish trade
& loans flow to North Africa.
TRIGGER POINTS
Nothing scares a Financial
Officer more than:
- Frightening Financial 'Headline News',
- Securities Counterfeiting,
- Government Financial Grabs &
Nationalization or
- False Accounting.
Let's examine each of these
from an international finance committee's perspective so you can appreciate
the 'buzz' around the table as they overlay the unfolding North African
events onto their major concerns with European Banking.
1- Frightening Financial
Headline News
Is a bank run about to bring Europe to its knees? -
Fortune
Some market watchers say yes,
pointing ominously to the torrents of money pouring out of Ireland. Irish
bank deposits declined in November for the fourth straight month, the central
bank said last week. Overseas deposits fled the country
at their fastest pace in more than a year.
The deposit flight compounds
the stress on a financial system whose massive property-lending losses
already have driven the government to accept an unpopular bailout from the European Union and the
International Monetary Fund. Worse yet, it shows that the solutions policymakers
slapped together in the fall of 2008 helped in some cases to create even
bigger problems -- ones that are now coming due.
Unconditionally guaranteeing
bank deposits is just such a policy, in a country where loan losses made the
banks insolvent, job loss left many taxpayers penniless and deposits now at
least double annual economic output. And this time, given the unpopularity of
bailouts and dysfunctional European politics, there is ample reason to fear
the banking mess won't so easily be swept aside.
"Facing facts like
these, each morning when I wake up I have to wonder, 'Why is today not a good
day for a wholesale run on the Irish banking system?' And if there is a
wholesale run on the Irish banking system, then what stops the same scenario
from cascading into Portugal, Greece, Italy, and most importantly,
Spain?" -
Scott Minerd, chief investment officer at
Guggenheim Partners.
Bank runs "will
seriously undermine the prosperity of this country for a generation. The
first steps to stemming the run would include "a big external aid
package and steps by the Irish government." - Pimco's Mohammed
El-Erian said in November.
When you consider that similar
trends could easily play out in the other euro countries, you have the recipe
for a hangover-inducing New Year that is likely, in the view of Minerd, to see the euro plunge anew against the dollar.
He expects the euro to test its decade long low against the dollar of 85
cents before all is said and done, compared with a recent $1.33.
"As sovereign credit
downgrades continue to flow in and deposits in Europe's weakened banking
system flow out, a broader crisis in Europe appears to be imminent in
2011," says Minerd.
This chart from SocGen makes very clear that in Europe, the perceived
credit risk of various banks is tightly linked to the credit risks of the
countries in which they preside. That magnifies the risk significantly, and
truly creates a notion of systemic risk. In the US it's conceivable to have
lots of defaults without a follow-on systemic crisis.
SPAIN - Pressure on Spanish Banks
Are credit markets predicting a
bank run in Spain? (Pressure builds on Spain's banks Fortune)
The cost of insuring Spanish
government debt climbed above 3% this month for the first time. Credit
default swaps referencing 5-year Spanish government bonds traded at 340 basis
points Wednesday, according to CMA data, meaning it costs $340,000 annually
to protect $10 million of Spanish debt against default. But as the cost of
the Irish bank bailout soared late last year, the Irish sovereign CDS spread
surged past 3% again, and foreign deposits resumed flowing out.
It is that flow that makes some
investors think 2011 will be the year of the European bank run, starting in Ireland
- whose CDS spreads now exceed 6% -- and moving on to Portugal (5%) and then,
perhaps, much bigger Spain.
Of course, it is early yet to
say there will be a run on Spain's banks. While Spain and Ireland both had
huge property bubbles, Spain's biggest banks, Santander (STD)
and Banco Bilbao (BBVA), have substantial international businesses
and thus appear to be in much better shape than their Irish counterparts,
such as the fraud-ridden Anglo Irish or the simply deflated Allied Irish (AIB).
The bad news is that there have
been signs of a deposit pricing war that could add to
the stress on the smaller regional banks, which are seen as the weak link in
the system. There are few indications the government is moving aggressively
to clean up the bad loans everyone knows are out there.
Even if all goes well, the
Spanish banking system is going to need time to earn its way out of years of
property-lending misery. But if deposits start fleeing the country in
earnest, the government will need to step in with costly actions, such as
mergers and recapitalizations and takeovers. And as the Irish experience shows, a rising tab for taxpayer
support of the banks isn't a recipe for making anyone happy -- let alone for
keeping money from heading for the exits.
2- Securities Counterfeiting
The international corporate
finance committees and every CFO / Treasurer are reading that for the first
time in the global fiat currency system we have a European government
printing money 'un-backed' in any way including the issue of government debt
instruments (even if those instruments are a worthless shame). This is
nothing short of outright financial counterfeiting.
Ireland Prints 25% of its GDP in German Euro's -
Barnes
The Irish Central Bank has crossed the Rubicon in
European Union currency terms. They have printed up about 25% of their GDP in
electronic credits, and stuffed those credits into their banks. These
deposits, if you will, do not have new debt issued behind them.
This is a form of
hyperinflation if you will, at least in context that a Central Bank, with no
actual printing press, or a functioning bond market, has now electronically
printed up new currency units for their banks without issuing debt behind
these actions.
While this has happened before
in history, it has not happened in the Euro currency project officially
before today. This act is going to move the monetary policy of the union, to
the individual capitals. The capacity to print electronic credits, with out the creation of cash currency or debt, is a new
wrinkle in the economic landscape.
The implications and
ramifications will take a while to appear, but "Mark" my words,
Germany both as a people, and as a political organization will notice this
event. The German people now find themselves captured in a currency where
neighbors who are in political and financial stress, have the capacity to
print up German Euros on demand. This is Germany's worse nightmare as both a
nation and a people. I dare say, you could not
design a more frightening prospect for the "United German States",
than to find their currency diluted on demand by reckless neighbors.
In the coming weeks, and I
say that because thing rarely happen quickly in life, Europe is going to have
a Sovereign crisis of epic size. They will have to decide what happens next,
and do so rather quickly.
EU politicians have known about
Ireland's decision to print currency for weeks now. They have had time to
consider their response to Ireland's dilution of the Euro. I do not expect an
initial reaction in the currency markets, as this kind of event takes time to
be absorbed by all stakeholders in the Euro.
The Celtic Tiger has made their
move and resorted to naked currency printing, to support its banks. The next
move belongs to Europe and it's going to be interesting to see how this plays
out in the public arena's. We know who is first,
what CB will be second?
Irish lenders besiege central bank for emergency loans
- Pritchard
The latest data shows that
Anglo Irish Bank and other lenders had borrowed €51bn (£43bn)
from the Irish central bank by the end of December, under an obscure progamme listed in the balance sheet as "other
assets". This comes on top of €132bn in loans from the ECB itself,
the figure normally tracked by analysts and itself
24pc of all ECB lending.
"This is a horror story:
it shows the cataclysmic condition of the Irish banking system," said
Tim Congdon from International Monetary Research.
"The banks have borrowed €183bn in total, or 110pc of Irish GDP.
They have burned through all their capital and a lot of their deposits as
well. This is going to end up on the national debt".
The actions of the Irish
central bank are authorized by Frankfurt, but fall into a grey area of
monetary policy since they appear to involve creation of money outside the
normal control of the ECB's governing council. The use of Ireland's emergency
liquidity assistance program (ELA) raises further questions since the quality
of collateral is unacceptable for normal ECB operations. The volume of
borrowing has begun to level off after a surge in November.
3- Government Financial
Grabs and Nationalization
Hungary, Poland, France,
Bulgaria and Ireland and are taking over citizens' pension money to make up
government budget shortfalls.
The Adam Smith Institute Blog
European nations begin seizing private pensions Hungary, Poland, and three
other nations take over citizens' pension money to make up government budget
shortfalls. Old women eat lunch in a retirement home in Budapest Dec. 13,
2010. Hungarian lawmakers rolled back a 1997 pension reform, allowing the government
to effectively seize up to $14 billion in private pension assets to reduce
the budget gap while avoiding painful austerity measures. People's retirement
savings are a convenient source of revenue for governments that don't want to
reduce spending or make privatizations. As most pension schemes in Europe are
organised by the state, European ministers of
finance have a facilitated access to the savings accumulated there, and it is
only logical that they try to get a hold of this money for their own ends. In
recent weeks I have noted five such attempts: Three situations concern
private personal savings; two others refer to national funds.
The most striking example is Hungary, where last month the
government made the citizens an offer they could not refuse.
They could either remit their individual retirement savings to the state, or
lose the right to the basic state pension (but still have an obligation to
pay contributions for it). In this extortionate way, the government wants to
gain control over $14bn of individual retirement savings.
The Bulgarian government has
come up with a similar idea. $300m of private early retirement
savings was supposed to be transferred to the state pension scheme. The government
gave way after trade unions protested and finally only about 20% of the
original plans were implemented.
A slightly less drastic
situation is developing in Poland. The government wants to transfer of 1/3 of
future contributions from individual retirement accounts to the state-run social security system. Since this
system does not back its liabilities with stocks or even bonds, the money
taken away from the savers will go directly to the state treasury and savers
will lose about $2.3bn a year. The Polish government is more generous than
the Hungarian one, but only because it wants to seize just 1/3 of the future
savings and also allows the citizens to keep the money accumulated so far.
The fourth example is Ireland.
In 2001, the National Pension Reserve Fund was brought into
existence for the purpose of supporting pensions of the Irish people in
the years 2025-2050. The scheme was also supposed to provide for the pensions
of some public sector employees (mainly university staff). However, in March
2009, the Irish government earmarked €4bn from this fund for rescuing
banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country.
The final example is France. In November, the French
parliament decided to earmark €33bn from the national reserve pension
fund FRR to reduce the short-term pension scheme deficit. In this way, the
retirement savings intended for the years 2020-2040 will be used earlier,
that is in the years 2011-2024, and the government will spend the saved up
resources on other purposes.
It looks like although the
governments are able to enforce general participation in pension schemes,
they do not seem to be the best guardians of the money accumulated there.
Partial Nationalization of Cajas Savings Banks (Spain plans partial nationalization of savings banks)
Estimates of the cost to
recapitalize the banks range from 17 billion to 120 billion euros with consensus falling in the 25 billion to 50
billion area, though Economy Minister Elena Salgado
says it will be much lower.
Spain plans a partial state
takeover of its weakest savings banks as it seeks to reassure investors a
rescue will not weigh on its deficit. The government would force debt-laden
regional savings banks to become conventional banks and seek stock market
listings to persuade skittish investors that they are good investments.
A bank recapitalization
worth 50 billion euros would amount to about 5
percent of Spanish gross domestic product, which could endanger the
government's goal of cutting the budget deficit to 6 percent of GDP this
year.
4- False Accounting
What is obvious to any CFO /
Treasurer following the banking situation in Europe is that the European Bank
Stress tests were at best a sham and possibly even bordering on outright
market manipulation by the powers to be. They are not convinced.
The EU 'Extend & Pretend'
program of hiding massive toxic debts, the avoidance of 'market-to market'
real estate accounting valuations to reflect (even approximate)
acceptable LTV ratios, extensive off balance sheet Structured Investment
Vehicle (SIV) bank debt obligations still in place and extreme bank leverage
ratios relative to the rest of the world, leaves most financial professionals
nervous. Very nervous.
EUROPE'S 2011 FINANCIAL PRESSURE POINTS -
Financial Times
DUE FOR A SOVEREIGN DEBT CRISIS
We Really Are Due For A Sovereign Debt Crisis Right
About Now - Clusterstock
Sovereign debt crisis are
actually pretty common so there's nothing particularly abnormal about the
current situation in Europe, according to Rabobank.
Their research shows that
sovereign defaults go all the way back to the fourth century B.C. It's only
been recently that everyone has forgotten and dismissed the threat of
sovereign default.
From Rabobank:
In fact, if anyone would speak
about it a few years ago, their economic understanding, and even possibly
their sanity, would be questioned by all. Sovereign debt crisis was a thing
of the past, or so the argument went. And if it did occur, it would most
probably be in a 'third world' country. The simple reason was that
industrialized countries had 'graduated' from periodic bouts of government
insolvency given that they did not opt for a default since the 1960s.
The bank's exhibit, a chart
from the economists Reinhart and Rogoff, showing
sovereign default is in no way abnormal. Notable, the absence of
"advanced economy" default since the 1960s. The eurozone
crisis could be about to end that.
"You will not know about, nor see these stealth bank runs until it
is far too late to react"
The movement of money is hidden electronically and reported long after the
fact.
Gordon T. Long
Tipping
Points
Mr. Long is a
former senior group executive with IBM & Motorola, a principle in a high
tech public start-up and founder of a private venture capital fund. He is
presently involved in private equity placements internationally along with
proprietary trading involving the development & application of Chaos
Theory and Mandelbrot Generator algorithms.
Gordon
T Long is not a registered advisor and does not give investment advice. His
comments are an expression of opinion only and should not be construed in any
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barring that, you are encouraged to confirm the facts on your own before
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© Copyright 2010 Gordon T Long. The
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