Cash for Christmas

Courtesy of The Automatic Earth 

Ilargi: Over the course of the next few weeks, we will shift our efforts increasingly towards our new site, which should soon be ready to go. This will inevitably result in less hours put into the present site. Which will mean we will slim down the amount of material presented, though not the frequency (that would be pretty silly given what’s going on out there). Please bear with us.

So I had this idea that I call "Cash for Christmas". Very simple, and no need to make it more complicated. My suggestion is for everyone, but certainly for those of you who live in Europe, to take out the amount of – cash – money you plan on spending on Christmas items, presents, food, charities etc. And then don’t spend it, but keep it in your wallet. Pay for all your Christmas spending with anything you like, plastic, cash, or whatever, but not the money you just took out. Keep it. 

I know many people will have thought I meant giving cash as a present for Christmas, instead of toys and trinkets. That’s good too. But, preferably, don’t use the cash you withdrew for yourself for that.

The reason behind my idea is the rising uncertainty in the banking system. There no longer is any reason to be overly confident that you will have continuous access to the money in your bank account. So it would be good to have cash available for at least some period of time, a week, maybe even a month, when other means, debit cards, credit cards, may be of limited use.

For many, if not most, this may -still- sound like a far out or far away scenario. And I’m not saying it absolutely WILL happen. And I have no secret inside information. Nor do I have the intention of unnecessarily scaring people. But things being what they are and where they are, I do think it’s appropriate for The Automatic Earth to encourage people to think beyond the idea that no such thing could ever happen.

In this excellent video, Kyle Bass argues a point that I think we should all be aware of. Namely, that governments don’t forewarn of drastic measures, if only because they can’t really do that. They will always insist that all is well until it is not, or they would risk causing a stampede. The take away from that insight at this point is that we can’t feel safe because our governments – or the main media that move in lockstep with them- haven’t warned us.

We will need to inform ourselves. Which of course is what The Automatic Earth started helping you with close to four years and a 1000 posts ago.

What we’ve seen over the past few days is another, and this time especially, lukewarm summit in Europe. That ended with few concrete results other than a definite rift between Merkozy and British PM Cameron. All measures that were officially announced will be under legal scrutiny, both at EU level and at individual countries’ level. A process, or multitude of processes, that can take years, during which time a zillion things can change or go outright awry.

What’s more, nothing has been announced to help out European banks; but these are still in a lot of trouble. At the time of the coordinated central bank action a few weeks ago, there was a persistent rumor that a major financial institution had been about to fall over. Or even a whole group of large funds. That rumor hasn’t died.

On top of that, on Friday, Moody’s downgraded the top French banks, BNP Paribas, SocGen and Crédit Agricole. Also on Friday, news services in Holland reported that BNP Paribas will withdraw from the global mortgage market on January 1, 2012; that is, it will no longer accept new loans. A dramatic step for a bank with a substantial mortgage portfolio. 

Like many European banks, BNP needs to either boost its reserves or shrink its balance sheet. First, because the EU requires them to do so, and second, because they need to cover losses. Still, to kill off one of your main revenue streams is a remarkable step. So, by the way, is the fact that BNP reportedly sold some $2 billion in swaps on France’s sovereign debt. It may be legal to use public funds to bet on the demise of public funds, but it does raise a question or two. Desperate times, desperate measures, yeah, we get it, but …..

An indication of how bad the situation in the European banking world has become comes from Harry Wilson at the Telegraph:

Eurozone banking system on the edge of collapse

The eurozone banking system is on the edge of collapse as major lenders begin to run out of the assets they need to keep vital funding lines open. Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a "collateral crunch" was looming. "If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks," said one London-based executive at a major global bank.

Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding. [..]

Bank deposits with the ECB now stand at their highest level since June 2010 at €905bn (£772bn) as lenders withdraw deposits held with their peers and put them into the central bank. At the same time, banks in major eurozone countries such as France and Italy have become increasingly reliant on central bank funding. This follows the trend seen in smaller countries like Ireland where lenders have effectively becomes taxpayer-funded "zombie" banks.

Alastair Ryan, a banks analyst at UBS, said: [..] "The system at the moment hasn’t got funding of a duration that allows it to function, so it’s failing," [..]

Others think the eurozone banks are heading for a catastrophe and the worry is growing that a major bank could collapse within weeks. The results of the fourth round of European Banking Authority (EBA) stress tests conducted in just under 18 months pointed to a €115bn capital shortfall in the eurozone financial system, with German banks showing the most notable deterioration in their core capital ratios. [..]

The fear is the European authorities do not have the financial firepower to deal with the banks’ problems. Analysts at BarCap say that even if the European rescue funds were able to raise €1 trillion of funding this would only meet the needs of the Italian and Spanish government and banks.

The European banking sector’s problems are being exacerbated by a wave of asset sales as lenders look to dramatically shrink their balance sheets. UBS estimates eurozone banks could sell off between €3.7 trillion and €4.5 trillion of assets in the next three years.

Ilargi: These are the same banks that the same Harry Wilson reported earlier this week hold $2.35 trillion of toxic assets, $721 billion for British banks, and $700 billion for German banks. That last bit is reason for Germany to ponder nationalizing Commerzbank. Just like Spain wants to clean up $236 billion in "impaired" real estate assets in its banks. It’s also why Greeks are emptying their bank accounts.

Friday’s EU deal constitutes a – very sloppy – attempt at preventing future losses and deficits; it does nothing to address the true and most urgent problem: present losses. But that makes them no less real, or biting. And because they were once again not addressed by the politicians, they will be dealt with by the ratings agencies (expect a flurry of activity soon, certainly over the next 4 weeks) and the bond markets (who will have one field day after the other).

And in case you feel good because you happen to live in Britain, outside of the Eurozone, check out this chart from Morgan Stanley (via Business Insider) and tell me what you see.

Or if you feel good because you live in Holland, in the rich part of the Eurozone, by all means take a good look at this graph:

So there’s why I thought "Cash for Christmas" might be a good thing to suggest to you. Not just in Europe, but certainly there. It’s not going to hurt you. Well, unless you were planning to spend your last penny on gifts and/or booze, but then that wouldn’t have been a great idea anyway. 

Take out in cash from your ATM what you plan so spend for Christmas. And then pay for Christmas with other means and keep that cash in your pocket. Until at least, say, January 10 2012. At that moment, see what the world looks like. 

Look, I know it’s not for everybody, for various reasons. I realize many people are in a hard place financially. But if a major bank or financial institution fails soon, there’s no predicting what will happen next. And a little bit of cash could go a long way. In helping you and your family get by, and also your friends and neighbors and those around you who are in need.