The EU banking system is in big trouble. That’s why European Central Bank (ECB) head Jean-Claude Trichet continues to purchase government bonds and provide "unlimited funds" for underwater banks. It’s an effort to prevent a financial system meltdown that could wipe out bondholders and plunge the economy back into recession.
"We have the best track record on price stability over 11 1/2 years in Europe and among the legacy currencies,” Trichet recently boasted. “What we have done and what we do with the same purpose is to help restore an appropriate functioning of the monetary-policy transmission mechanism.”
Nonsense. EU banks and other financial institutions are presently holding more than 2 trillion euros of public and private debt from Greece, Spain and Portugal. All three countries are in deep distress and face sharp downgrades on their sovereign debt. The potential losses put large parts of the EU banking system at risk. Trichet knows this, which is why he continues to support the teetering system with "unlimited funds". It has nothing to do with restoring the "functioning of the monetary-policy transmission mechanism". That’s deliberately misleading. It is a straightforward bailout of the banks.
Imagine that you are deeply in debt, but the bank offers to lend you as much money as you need to keep you from bankruptcy. To help maintain appearances, the bank agrees to accept the worthless junk you’ve collected in your attic in exchange for multi-million dollar loans. Does the bank’s participation in this charade mean that you are not really broke after all? Does it increase the value of the garbage collateral you’ve exchanged for cash?
The ECB is providing billions of euros per week to maintain the illusion that the market is wrong about the true value of the bonds. But the market is not wrong, the ECB is wrong. The value of Greek bonds (for example) has dropped precipitously. They are worth less, which means the banks need to take a haircut and write down the losses. More liquidity merely hides the problem.
This is from Reuters:
"Despite the open-arms approach, outstanding ECB lending has fallen more than a third since the start of July to 592 billion euros…. Liquidity remains abundant though. Over 120 billion euros was deposited back at the ECB overnight, the latest figures show."
Seven of Europe’s 91 largest banks would struggle to survive an unexpected decline in economic growth or a sharp deterioration in the value of European government bonds, and will need to raise more capital, regulators said Friday in releasing results of closely watched bank stress tests.
Banks to flunk were Hypo Real Estate, a bank based in Munich that is already government-owned after a bailout, ATEBank of Greece and five Spanish savings banks.
Several other banks passed the test, but narrowly enough that they may also face market pressure to increase their reserves. That group included Postbank, one of Germany’s biggest publicly traded banks, which is 25 percent owned by Deutsche Bank.
Like our own stress tests last year, European regulators came up with a few different scenarios, one of which was supposed to mirror sovereign default. The problem being it doesn’t exactly do that.
In the last scenario, banks will publish their estimated losses on sovereign debt held in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document dated July 15.
Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said.
The sovereign-shock scenario doesn’t assume a European nation will default, said a person with knowledge of the matter, who spoke on the condition of anonymity because the information is private. Instead, it will assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person.
Ambrose Evans-Pritchard already called the tests toothless over at the Telegraph. I say that’s being kind.
Again, when we did the whole stress test thing last year the numbers were strange and scenarios incredibly optimistic. Since Treasury had to act sketchy about what they were up to,…
European banks need to roll over €1 trillion (£877bn) of debt over the next two years at a much higher cost and in direct competition with hungry sovereign states, according to a report by Morgan Stanley.
The bank has advised clients to prepare for chillier times as monetary tightening begins in the US and China, causing major spill-over effects in Europe.
Roughly €560bn of EU bank debt matures in 2010 and €540bn in 2011. The banks will have to roll over loans at a time when unprecedented bond issuance by governments worldwide risks saturating the debt markets. European states alone must raise €1.6 trillion this year.
Earlier this week, we got further evidence of just how quickly China’s economy is slowing down (hard landing anyone?) when the March manufacturing PMI printed in contraction territory, the employment sub index dove to Lehman levels, and rail freight fell 9%. While disconcerting, this isn’t all that surprising given that if one looks at what really matters (i.e electricity usage, rail freight volume, and credit growth), it’s pretty clear that China’s economy isn’t expanding at anywhere near the targeted 7% and hasn’t been for quite some time:
Much of the commentary from the more liberal leaning media has continued to tout that the rise in asset markets over the last few years are clear evidence of economic prosperity in this country. However, is that really the case?
In order for rising asset prices to be reflective of overall economic prosperity, the "wealth" generated by those rising asset prices should impact a broad swath of the American populous. Let's take a look to see if that is the case.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show last night. As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. (And get this, Obama - the President - is following Phil on Twitter.) ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
On Thursday, Stifel issued a report on Apollo Education Group Inc (NASDAQ: APOL) as the stock's volume has not recovered. Stifel lowered its target price from $35 to $25, but still rates Apollo Education as a Buy.
The S&P 500 dropped at the open, despite a good jobless claims report, and hit its -0.75% intraday low. A slow rally took the index to its 0.30% intraday high in the early afternoon. But subsequent selling pushed the index back into the red. It closed with a modest 0.24% decline, the forth consecutive daily loss.
The yield on the 10-year Note rose 8 bps to 2.01%.
Here is a 15-minute chart of the past five sessions.
Here is a daily chart of the index, where trading volume was right at its 50-day moving average.
A Perspective on Drawdowns
Here's a snapshot of selloffs since the 2009 trough.
Well, it didn’t take long for the bulls to jump on their buying opportunity, with a little help from the bulls’ friend in the Fed. In fact, despite huge daily swings in the market averages driven by daily news regarding timing of interest rate hikes, the strength in the dollar, and oil prices, trading actually has been quite rational, honoring technical formations and support levels and dutifully selling overbought conditions and buying when oversold. Yes, the tried and true investing clichés continue to work -- “Don’t fight the Fed,” and “The trend is your friend.”
In this weekly update, I give my view of the cur...
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While I'm not going to argue the point about the possibility that Bitcoin drops to $1, or less, (that could happen yet, but not for the reasons you propose) I felt it necessary to point out something you seem to have overlooked.
While it's likely that the US government watching Bitco...
Bullish trades abound in Cypress Semiconductor options today, most notably a massive bull call spread initiated in the July expiry contracts. One strategist appears to have purchased 30,000 of the Jul 16.0 strike calls at a premium of $0.89 each and sold the same number of Jul 19.0 strike calls at a premium of $0.22 apiece. Net premium paid to put on the spread amounts to $0.67 per contract, thus establishing a breakeven share price of $16.67 on the trade. Cypress shares reached a 52-week high of $16.25 back on Friday, March 13th, and would need to rally 4.6% over the current level to exceed the breakeven point of $16.25. The spread generates maximum potential profits of $2.33 per contract in the event that CY shares surge more than 20% in the next four months to reach $19.00 by July expiration. Shar...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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