Released 11/28/13
Melt Up Monitor
The Draghi Dungeon is a worse predicament than the Bernanke Box!
How could this possibly be a 'Dungeon' when the STOXX is going parabolic,
the Current Account is surging and the Euro is strong? The answer lies in how
this could all occur during six quarters of recession, historic unemployment
and slowing exports? Because this is a Euro Currency hole from which Mario
Draghi cannot easily escape.
Why Would Draghi Lower Rates When Markets Look Like This?
... And Current Account Flows Look Like This?
... Because
Slowing Growth & A Strong Euro Are Making Bank Loans Rapidly Unpayable
We see the unresolved & 'papered' over banking crisis in the EU raising
its head once again. This time it will be with more vengeance!
The catalyst for the crisis is now stemming from the CEE (Central & Eastern
Europe). Critically, the forgotten money borrowed by Central and Eastern Europe
in Euro's during the EU 'good times' is quickly becoming unpayable.
A recent
SNB report warned:
Before the onset of the financial crisis, foreign currency loans to the
non-banking sector in Europe became remarkably prevalent. In particular,
households and non-financial firms were taking bank loans denominated in
lower-yielding foreign currencies and investing in high-yielding domestic
currencies (e.g., in the form of home mortgages or business investments),
even though these agents did not necessarily have a steady income in the
foreign currency concerned. Therefore these retail foreign currency loans
were usually dubbed 'small men's carry trade'. Since the crisis, the outstanding
volumes of foreign currency loans to the non-banking sector have been slowly
declining in some countries due to macro-prudential measures, deleveraging
of banks, and the continued slowdown of European economies. Nevertheless
a substantial fraction of households and firms still have foreign currency
bank loans.
The chart below shows that as of the second quarter of 2013 the majority of
the outstanding loans to the non-banking sector in many non-Eurozone countries
continue to be denominated in a foreign currency. For example, in Hungary,
Romania, Bulgaria, Croatia, Serbia, and Latvia, between 60% and 88% of the
outstanding loans to the non-banking sector are denominated in a foreign currency.
Share of foreign currency loans as a percentage of total loans to the non-banking
sector in Europe (2013:Q2)
While foreign currency loans offer some advantages to borrowers - such as
lower interest rates and longer maturities compared to domestic currency loans
- they also carry a significant exchange rate risk. A sharp depreciation of
the domestic currency can prevent unhedged borrowers from being able to service
their foreign currency loans. As a result, these loans are now creating
a substantial systemic risk to the European banking sector. Banks could fail
jointly as a result of their exposure to unhedged households and non-financial
firms which default on their loans when the domestic currency depreciates sharply.
Systemic risk measures show that foreign currency loans to the non-banking
sector create substantial risks to the banking sector from a 'common market
shock 'perspective. High persistence and low volatility of the systemic risk
measures indicate that short-term policies would be unable to swiftly reduce
this risk.
A strong Euro, falling CEE growth and investment and rising Current Account
deficits are taking the situation 'critical'.
The banking situation in the CEE (Central and Eastern Europe) is deteriorating
rapidly as can be seen by Poland confiscating Pensions, the Czech Republic
wanting the ability to debase their currency by deferring Euro usage, Slovenia's
'Cyprus like' banking problems etc. From the Balkans to the Baltic States the
problems are increasing and Draghi is acutely aware of what this means to EU
banks.
Draghi Debasement High Probability Outcome
The ECB must drive the Euro down soon or the Euro Banking crisis, which was
never resolved and only 'obscured', will take the banks into an even worse
crisis.
Carry Trade Consolidation Driver: Euro Likely to Weaken Temporarily
Relative to Yen
The Japanese Carry Trade (aka ABE-nomics) is consistently shown on a daily
basis to be a major controller of liquidity flows. The Japanese Carry Trade
Liquidity Pump of $65B/Month is being leveraged up significantly.
This is about to temporarily correct despite the Yen weakening as presently
expected by Carry traders.
- JPY Must Continue to Weaken Expected
- EUR Must not Weaken Expected The Surprise Factor
Draghi Dungeon
An ECB version of QE has now urgently been placed on the table.
Draghi is Running Out of Time
Remember: The EURJPY Carry Is Driving The Us Stock Market Meltup
Analytic Expectations - A Message in the Technicals
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