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In what is sure to be met with cries of derision across the European Union, in line with what the IMF had previously recommended (and we had previously warned as inevitable), the Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help. As Reuters reports, the Bundesbank states, “(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required.” However, they note that they will not support an implementation of a recurrent wealth tax in Germany, saying it would harm growth. We await the refutation (or Draghi’s jawbone solution to this line in the sand.)
Germany’s Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.
The Bundesbank’s tough stance comes after years of euro zone crisis that saw five government bailouts. There have also bond market interventions by the European Central Bank in, for example, Italy where households’ average net wealth is higher than in Germany.
“(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required,” the Bundesbank said in its monthly report.
It warned that such a levy carried significant risks and its implementation would not be easy, adding it should only be considered in absolute exceptional cases, for example to avert a looming sovereign insolvency.
The German Institute for Economic Research calculated in 2012 that in Germany a 10-percent levy on a tax base derived from a personal allowance of 250,000 euros would add up to around 230 billion euros. It did not give a figure for crisis countries due to lack of sufficient data.
Greece has been granted bailout funds of 240 billion euros from the euro area, its national central banks and IMF to protect it from a chaotic default and possible exit from the euro zone. Not all funds have been paid out yet.
In Germany, however, the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth.
“It is not the purpose of European monetary policy to ensure solvency of national banking systems or governments and it cannot replace necessary economic adjustments or bank balance sheet clean ups,” the Bundesbank said.
In considering some of the potential measures likely to be required, the reader may be struck by the essential problem facing politicians: there may be only painful ways out of the crisis.
There is one thing we would like to bring to our readers’ attention because we are confident, that one way or another, sooner or later, it will be implemented. Namely a one-time wealth tax: in other words, instead of stealth inflation, the government will be forced to proceed with over transfer of wealth. According to BCG, the amount of developed world debt between household, corporate and government that needs to be eliminated is just over $21 trillion. Which unfortunately means that there is an equity shortfall that will have to be funded with incremental cash which will have to come from somewhere. That somewhere is tax of the middle and upper classes, which are in possession of $74 trillion in financial assets, which in turn will have to be taxed at a blended rate of 28.7%.
The programs BCG (and the Bundesbank) described would be drastic. They would not be popular, and they would require broad political coordinate and leadership – something that politicians have replaced up til now with playing for time, in spite of a deteriorating outlook. Acknowledgment of the facts may be the biggest hurdle. Politicians and central bankers still do not agree on the full scale of the crisis and are therefore placing too much hope on easy solutions. We need to understand that balance sheet recessions are very different from normal recessions. The longer the politicians and bankers wait, the more necessary will be the response outlined in this paper. Unfortunately, reaching consensus on such tough action might requiring an environment last seen in the 1930s
From Russ Certo, head of rates at Brean Capital
Two Roads Diverged
As we know, it has been a suspect week with a variety of earnings misses. Although I have been constructive on risk asset markets generally, equities anecdotally, as figured year end push for alpha desires could let it run into year end. New year and ball game can change quickly. Just wondering if a larger rotation is in order.
There is an overall considerable theme of what you may find when a liquidity tide recedes as most major crises or risk pullbacks have been precipitated by either combination of tighter monetary or fiscal policy. Some with a considerable lag like a year after Greenspan departed from Fed helm, or many other examples. I’m not suggesting NOW is a time for a compression in risk but am aware of the possibility, especially when Fed Chairs take victory laps, Bernanke this week. Symbolic if nothing more. Cover of TIME magazine?
I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints. First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more. This is a healthy departure from YEARS of artificiality. Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to tightening financial conditions, adverse expectations of economic activity, and the great rollover….of both financial and non-financial debt financing. Boy, what a week in the IG issuance space with over $100 billion month to date, maybe $35 billion on the week. Debt rollover on steroids.
Beneath the veneer of market aesthetics, I already see fundamental (and technical) relevance. This could be construed as an optimist pursuit or reality that markets are incrementally transcending reliance and/or dependence on the wings of central bank policy prerogatives. The market bird is trying to fly on its own with inklings of a return to FUNDAMENTAL analysis. A good thing, conceptually, and gradualist development of passing the valuation baton back to market runners. A likely major pillar objective of policy despite more than a few critics worried about seemingly dormant lurking imbalances created by immeasurable policy and monetary and fundamentally skewed risk asset relationships globally.
This exercise of summarization of ebb and flow and comings and goings of markets and policy naturally funnels a discussion to what stature of central bank policy currently or accurately exists? Current events. What is the accurate stage of policy?
I actually think this is a more delicate nuance than I perceive viewed in overall market sentiment. Granted, we have taken a major step for mankind, which is the topical engagement of some level of scope or reduction of liquidity provisioning,” not tightening.” Tip of the iceberg communique with markets to INTRODUCE the concept of stepping off the gas but not hitting the break. Reeks of fragility to me but narrative headed in right direction to stop medicating the patient, the global economy.
Some markets have logically responded in kind. The highest beta markets as either beneficiaries or vulnerable to monetary policy changes, the emerging markets, have reflected at least the optics of change with policy. More auditory than optics in hearing a PROSPECTIVE change in garbled Fedspeak. The high flyer currencies which capture the nominal flighty hot money flows globally affirmed the Fed message.
In literally the simplest of terms, the G7 industrialized, not peripheral; interest rate complex has simply moved the needle in form of +110 basis point higher moves in nominal sovereign interest rates. And there are a bevy of other expressions which played nicely and rightly conformed to the messages coming out of the central bank sandbox. But there are ALSO notable dichotomies, which send a different or even the opposite message.
I perceive a deviation in perception of message as some markets or market participants appear to be betting on taper or a return to normalcy in global growth or U.S. growth outcomes??? OR no taper, or conversely QE4 or whatever. Sovereign spreads have moved materially tighter vs. industrial and supposed risk free rates (Tsys, Gilts, Bunds) both last year and in the first three weeks of 2014. Something a new leg of QE would represent, not a taper. A different year!!!
There have been VERY reliable risk asset market beta correlations over the last 5 years and sovereign or peripheral spreads have been AS volatile and correlated as any asset class. These things trade like dancing with a rattle-snake. Greece, Spain, France etc. They can bite you with fangs. They have been meaningfully more correlated to high yield spreads and yields and to central bank balance sheet expansion as nearly any asset class. So, the infusion of central bank liquidity into markets has seen “relief” rallies in peripherals and one would think the converse would be true as well. The valuations have represented the flavor and direction of risk on/risk off or liquidity on/liquidity off reliably for many months/years.
But I THOUGHT markets were deliberating tapering views and expressions as validated by some good soldier markets BUT that is not necessarily what the rally in riskiest of sovereign “credits” is suggesting. The complex seems to be decoupling with Fed balance sheet correlation and message. Some are OVER 100 standard deviations from the mean! They are rich and could/should be sold. Especially if one was to follow the obvious correlation with the direction of central bank as stated.
But look to other arena’s like TIPS breakevens which also have been correlated with liquidity and risk on/off and central bank balance sheet expansion. Correlated to NASDAQ, HY, peripherals and the like. BUT this complex COUNTERS what peripherals are doing. They haven’t shown up to the punch bowl party yet. Not invited. This is a departure of markets that have largely and generally been in synch from a liquidity and performance correlation view.
Like gold and silver which got tattooed vis a vis down 35%+ performance last year MOSTLY, but not exclusively, due to perceptions of winds of central bank change. BUT even within a contrary, the fact that rallies in Spain, France, Greece, and Italy reflect more of central bank easing notions, the opposite of taper. In essence, the complex has gone batty uber-appreciation this year. Sure, many eyeball the Launchpad physical metals marginal stabilization no longer falling on a knife but the miner bonds and the mining stocks are string like bull with significant appreciation. This decidedly isn’t the stuff of taper which had the bond daddy’s romancing notions of 3% 10yr breaks, 40 basis point Green Eurodollar sell-offs, emerging market rinse, and upticks in volatility amongst other things.
Equity bourses appear to be changing hands between investors with oscillating rotations which mark the first prospective 3 week consecutive sell-off in a while. New year. This is taper light. Somewhere in between and further blurs the correlation metrics.
So, which is it? Are we tapering or not and why are merely a few global asset classed pointed out here, why are they deviating or arguably pricing in different central bank prospects or scenarios or outcomes?
I’m not afraid but I am intrigued as to the fact that there may some strong opinions within markets and I perceive a widely received comfortability with taper or tightening notions, negative leanings on interest rate forecasts, a complacency of Fed call if you will. And all of these hingings occur without intimate knowledge of the most critical variable of all, what Janet Yellen thinks? She has been awfully quiet as of late and there are many foregone conclusions or assumptions in market psyche without having heard a peep from the new MAESTRO.
Moreover, looking in the REAR view mirror within a week where multiple (two) Fed Governor proclamations, communicated and implicated notions which arguably would be considered radical in ANY other policy period of a hundred years. How to conduct “monetary policy at a ZERO lower bound (Williams) ” and “doing something as surprising and drastic as cutting interest on excess reserves BELOW zero (Kocherlakota).”
This doesn’t sound like no stinking taper? A tale of two markets. To be or not to be. To taper or not to taper. Two roads diverged and I took the one less traveled by, and that has made all the difference. Robert Frost.
Which is it? Different markets pricing different things. Right or wrong, the market always has a message; listen critically.
2013 was a year in which lots of imbalances built up but none blew up. The US and Japan continued to monetize their debt, in the process cheapening the dollar and sending the yen to five-year lows versus the euro. China allowed its debt to soar with only the hint of a (quickly-addressed) credit crunch at year-end. The big banks got even bigger, while reporting record profits and paying record fines for the crimes that produced those profits. And asset markets ranging from equities to high-end real estate to rare art took off into the stratosphere.
Virtually all of this felt great for the participants and led many to conclude that the world’s problems were being solved. Instead, 2014 is likely to be a year in which at least some – and maybe all – of the above trends hit a wall. It’s hard to know which will hit first, but a pretty good bet is that the strong euro (the flip side of a weakening dollar and yen) sends mismanaged countries like France and Italy back into crisis. So let’s start there.
The basic premise of the currency war theme is that when a country takes on too much debt it eventually realizes that the only way out of its dilemma is to cheapen its currency to gain a trade advantage and make its debts less burdensome. This works for a while but since the cheap-currency benefits come at the expense of trading partners, the latter eventually retaliate with inflation of their own, putting the first country back in its original box.
In 2013 the US and especially Japan cheapened their currencies versus the euro, which was supported by the European Central Bank’s relative reluctance to monetize the eurozone’s debt. The following chart shows the euro over the past six months:
For more details:
Euro rises to more than 2-year high vs. dollar; yen falls
The euro jumped to its strongest level against the dollar in more than two years on Friday as banks adjusted positions for the year end, while the yen hit five-year lows for a second straight session.
The dollar was broadly weaker against European currencies, including sterling and the Swiss franc. Thin liquidity likely helped exaggerate market moves.
The European Central Bank will take a snapshot of the capital positions of the region’s banks at the end of 2013 for an asset-quality review (AQR) next year to work out which of them will need fresh funds. The upcoming review has created some demand for euros to help shore up banks’ balance sheets, traders said.
“There’s a lot of attention on the AQR, and there’s some positioning ahead of the end of the calendar year,” said John Hardy, FX strategist at Danske Bank in Copenhagen.
Comments from Jens Weidmann, the Bundesbank chief and a member of the European Central Bank Governing Council, also helped the euro. He warned that although the euro zone’s current low interest rate is justified, weak inflation does not give a license for “arbitrary monetary easing.
The euro rose as high as $1.3892, according to Reuters data, the highest since October 2011. It was last up 0.3 percent at $1.3738.
The currency has risen more than 10 cents from a low hit in July below $1.28, as the euro zone economy came out of a recession triggered by its debt crisis.
Unlike the U.S. and Japanese central banks, the European Central Bank has not been actively expanding its balance sheet, giving an additional boost to the euro.
Here’s what a stronger euro means for France, the second-largest and arguably worst-managed eurozone country:
French Economy Contracts 0.1% In Third Quarter
The final estimate of France’s gross domestic product, or GDP, in the third quarter remained unchanged at the previous estimation of a contraction of 0.1 percent, indicating that the euro zone’s second-largest economy is struggling to sustain the rebound it witnessed in the second quarter with a growth of 0.6 percent.
The third-quarter GDP growth was in line with analysts’ estimates. According to data released on Tuesday by the National Institute of Statistics and Economic Studies, the deficit in foreign-trade balance contributed (-0.6 points) to the contraction in the third quarter, compared to the positive (0.1 percent) contribution made in the preceding quarter.
At the beginning of 2013, most of the eurozone was either still in recession or just barely climbing out. Then the euro started rising, making European products more expensive and therefore harder to sell, which depressed those countries’ export sectors and made debts more burdensome. So now, under the forced austerity of an appreciating currency, countries like France that were barely growing are back in contraction. And countries likeGreece that were flat on their back are now flirting with dissolution.
Recessions – especially never-ending recessions – are fatal for incumbent politicians, so pressure is building for a European version of Japan’s “Abenomics,” in which the European Central Bank is bullied into setting explicit inflation targets and monetizing as much debt as necessary to get there. The question is, will it happen before the downward momentum spawns political chaos that spreads to the rest of the world. See Italian President Warns of Violent Unrest in 2014.
Preface by Washington’s Blog: We documented in 2009 that fascism and our current crony capitalist economy are indistinguishable.
We noted in 2011 that America’s public resources are being raped and pillaged … just like those of small debt-saddled countries like Greece.
The following short – but important – piece by Eric Zuesse shows that looting and privatization of public resources was a hallmark of fascist Germany and Italy … and America today.
Washington’s Blog is non-partisan. We believe that the war between liberals and conservatives is a false divide-and-conquer dog-and-pony show created by the powers that be to keep the American people divided and distracted. See this, this, this, this, this, this, this, this, this and this.
We can argue it either way, because we are ideologically neutral: allowing the private sector to own and manage resources is good … or allowing the public sector to do so is healthy.
Here’s the key: If these resources had always been in the private sector, that would be fine … that would be free market capitalism.
But if they were purchased on the people’s dime with our blood, tears, sweat and taxpayer funds – and then sold to the big boys for pennies on the dollar – that’s not capitalism … that’s looting. Unfortunately, that’s exactly what the Nazis, Italian fascists, and modern American “leaders” are doing.
-By Eric Zuesse
Conservatives support privatizing schools, prisons, hospitals, and other social services. The privatization-mania is also increasingly occurring in higher education, as conservatives in Congress push measures to raise the percentage of colleges that are owned by for-profit corporations, and to decrease the percentage that are either public or nonprofit.
The argument given for such privatization is that corporations are more efficient because they are “the free market” way of serving people’s needs. However, progressives argue to the contrary, that in these parts of the economy, where “profits” for the public are hard if not impossible to measure, government does a better and less-inefficient job than corporations do. And, now, even a conservative state’s governor seems to have switched to the latter conclusion.
On 3 January 2014, the AP reported an instance in which the Republican Governor of one of the three most-Republican states in the U.S., Idaho, is doing a 180-degree turn, and he announced that “the corrections department will take over operation of the largest privately-run prison in the state,” from Corrections Corporation of America. The AP’s Rebecca Boone, in Boise, reported, that, whereas “In 2008, he floated legislation to change state laws to allow private companies to build and operate prisons in Idaho,” he now is taking over operation of this CCA prison, because of “mismanagement and other problems at the facility.” Only a few months before, on September 16th, that same reporter had headlined “CCA in contempt for prison understaffing,” and she quoted the federal judge’s order, which said that, “For CCA staff to lie on so basic a point — whether an officer is actually at a post — leaves the Court with serious concerns about compliance in other respects, such as whether every violent incident is reported.” The judge found that CCA was lying because they wanted more of their income from the state to go toward boosting their bottom line for stockholders, and less of it to go toward feeding the prisoners and protecting them from each other. The judge’s order said, “If a prospective fine leads to $2.4 million in penalties, CCA has no one to blame but itself.” CCA had been caught by the judge in persistently lying to the state while shortchanging prisoners on the prison’s obligation to provide basic services to inmates. The tension between private profits versus public services was clear in this case. CCA had incentive to cheat inmates in order to raise profits, and now a federal judge was fining CCA for doing precisely that.
Similarly, countries such as France, Sweden, UK, and the OECD generally, where health care is entirely or largely provided by the government, have better health-care outcomes and far lower healthcare costs, on a per-person basis, than does the U.S., where the profit motive in medical care is far more encouraged.
However, many Americans prefer the privatization of government services, because they believe that such a movement toward “shrinking big government” is in the direction of greater freedom, and is the only ethical direction, a direction in favor of greater democracy, in accord with the U.S. Constitution. Though the U.S. Constitution is by no means a free-market document, and concerns political issues instead of economic ones, there is a strong belief, especially among conservatives, that it is primarily about economics. There is consequently a myth about privatization.
The Myth About Privatization: Privatization was introduced by two democracies, the USA and UK, in the 1980s, not by prior fascist regimes.
The Truth About Privatization: Privatization was, in fact, a big aim of the elite fascists, right from the very start of fascism.
Explanation of the Reality: Aristocrats control the private wealth. Privatization means that they get to control also what was previously public. Privatization moreover provides corrupt politicians (their politicians) an opportunity to pay off their contributors (themselves) by offering them an inside track on public-asset sales. So, it’s not surprising that privatization is the way of fascist countries.
Documentation of the Reality: In September 2009, the European University Institute issued their RSCAS_2009_46.pdf, titled “From Public to Private: Privatization in 1920’s Fascist Italy,” (subsequently retitled “The First Privatization: Selling SOEs” in the 2011 Cambridge Journal of Economics) by Germa Bel, who said in her summary: “Privatization was an important policy in Italy in 1922-1925. The Fascist government was alone in transferring State ownership and services to private firms in the 1920s; no other country in the world would engage in such a policy until Nazi Germany did so between 1934 and 1937.” Then, in the February 2010 Economic History Review, she headlined a study specifically about the German case, “Against the Mainstream: Nazi Privatization in 1930s Germany.” Here, she reported that, though “privatizations in [fascist] Chile [under Pinochet] and the UK, which began to be implemented in the 1970s and 1980s, are usually considered the first privatization policies in modern history, … none of the contemporary economic analyses of privatization takes into account an important, earlier case: the privatization policy implemented by the National Socialist (Nazi) Party in Germany. … Although modern economic literature usually fails to notice it, the Nazi government in 1930s Germany implemented a large-scale privatization policy.” Furthermore, “Germany was alone in developing a policy of privatization in the mid-1930s,” since Italy had finished its privatizations by then.
The purposes of these privatizations, in both cases, were chiefly “receipts from selling” the assets to finance rearmament, and also “the desire to increase support from” the major aristocrats (such as, in Germany, the armaments-making firms of the Thyssens, the Krupps, and the Flicks), who received sweet deals on these assets.
Much later, of course, Russia under Boris Yeltsin also privatized, while that nation switched from being communist, to becoming fascist. (Yeltsin was no fascist himself; he wasn’t intelligent enough to be anything, ideologically. He was just confused, mistaken.) China later did the same thing, when it, too, switched from being communist to being fascist.
Connection to Privatization in the U.S: To continue with prisons as the case: Huffington Post, on 22 October 2013, headlined a major investigative news report “Private Prison Empire Rises Despite Startling Record of Juvenile Abuse,” and reporter Chris Kirkham found rampant political paybacks in the privatizations of juvenile prisons. As a typical example of the consequences: Florida’s “sweeping privatization of its juvenile incarceration system has produced some of the worst re-offending rates in the nation. More than 40 percent of youth offenders sent to one of Florida’s juvenile prisons wind up arrested and convicted of another crime within a year of their release, according to state data. In New York state, where historically no youth offenders have been held in private institutions, 25 percent are convicted again within that timeframe.” Those children in Florida are experiencing the brunt of fascism. But so are taxpayers.
Investigative historian Eric Zuesse is the author, most recently, of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.
Finland has little room to deviate from a proposal to fill a 9 billion-euro ($12.3 billion) gap in Europe’s fastest-aging economy if it’s to avoid debt levels doubling in the next decade and a half, according to the central bank.
The northernmost euro member risks joining the bloc’s most indebted nations if the government fails to reform spending, according to calculations by the Helsinki-based Bank of Finland. Without the measures, debt could exceed 110 percent of gross domestic product by 2030, according to the bank. The ratio was 53.6 percent in 2012. Success with the plan would help restrain debt levels to about 70 percent by 2030, the bank said.
The central bank’s assessment shows that the government’s plan would have a “real impact,” Finance Minister Jutta Urpilainen said in an e-mailed response to questions via her aide. Structural reforms are needed if “the Finnish welfare state has a chance to survive,” she said.
The only euro member with a stable AAA grade at the three main rating companies, Finland’s economy is struggling to emerge from the decline of its paper makers and its flagging Nokia Oyj-led technology industry. Export demand has failed to offset weak consumer demand, as companies fire workers and the government responds to deficits with cuts. Lost revenue is hampering government efforts to set aside funds needed to care for the fastest-aging population in the European Union.
In the period August to November, Finland’s six-party coalition put together a package to streamline and reduce public spending to eliminate a gap of more than 9 billion euros in public finances by 2017. The package consists of several different measures, each to be sent to parliament independently. Some of the measures, including changes to pensions and health-care providers, are still being drafted.
Finland’s “costs related to aging will grow faster than elsewhere within the next two decades,” Petri Maeki-Fraenti, an economist at the Bank of Finland, said in an interview. Aging costs will be “decisive” in accelerating debt growth after 2020, he said.
The government reduced its economic forecasts on Dec. 19 for the 10th time since coming to power in June 2011. Even as exports look set to recover and rise 3.6 percent in 2014, GDP will grow only 0.8 percent after declining 1.2 percent in 2013, the Finance Ministry said.
The Bank of Finland’s calculations assume an average economic expansion of about 1.5 percent in the long term, compared with an average of 3.7 percent during 2003 to 2007, according to a February 2013 report by economists Helvi Kinnunen, Maeki-Fraenti and Hannu Viertola.
“We must get used to slower economic growth for an extended period of time,” Maeki-Fraenti said.
The average debt level in the euro area shot up more than 25 percentage points in five years after hovering around 70 percent for the majority of the last decade. Finland has followed suit, with the Finance Ministry estimating its debt-to-GDP ratio rising to 60 percent this year from 33.9 percent in 2008.
Euro-area debt reached 93.4 percent of GDP at the end of the second quarter, according to theEuropean Central Bank. Italy reduced its government debt to 103 percent of GDP in 2007. Since the debt crisis, its debt has begun mounting again, rising to 134 percent of GDP this year, the European Commission forecast Nov. 5.
Debt levels exceeding 90 percent hurt economic growth, Harvard University economists Carmen Reinhart and Kenneth Rogoff argued in a 2010 paper. Three years later, their claims were refuted by University of Massachusetts researchers, citing “serious errors” that overstate the significance of the boundary.
The World Bank set a similar “tipping point” at 77 percent in a 2010 paper, while a 2011 studyby the Bank for International Settlements identified a sovereign debt threshold of 85 percent. An IMF report from 2012 found “no particular threshold” that would consistently precede low growth.
Finding an absolute threshold for debt after which economic growth starts slowing is “quite impossible,” Bank of Finland’s Maeki-Fraenti said. Addressing sluggish growth and public debt is necessary for Finland due to the pressure from aging and the decline of its cornerstone industries, he said.
“As the debt level is still relatively tolerable and our unemployment hasn’t shot up in the same way, it has perhaps led some to believe that the problems shall be fixed on their own as export demand revives,” he said. “Our view is slightly more pessimistic.”
To contact the reporter on this story: Kasper Viita in Helsinki at firstname.lastname@example.org
To contact the editor responsible for this story: Christian Wienberg email@example.com
The ongoing debacle of Italy’s Banca Monte dei Paschi (BMPS) took a turn for the worst today. The bank’s largest shareholders (MPS Foundation) approved (read – forced through) a delay in a EUR 3 billion capital raise, which the bank needs to avoid nationalization, until May. The delay (which will cost the bank EUR 120 million in interest) allows MPS more time to liquidate their 33.5% holding before their stake is massively diluted. Management is ‘considering’ resignation and is “very annoyed,” but the city Mayor is going Nationalist with his delay-supporting comments that “we cannot let the third biggest bank in this country fall prey to foreign interests.” So Europe is recovering but they can’t even raise a day’s worth of POMO to save the oldest bank in the world?
Italy’s third-biggest bank Monte dei Paschi di Siena was forced to delay a vital 3 billion euro ($4.1 billion) share sale to raise capital until mid-2014 because of shareholder opposition, plunging its turnaround plan into uncertainty.
The bank’s chairman and its chief executive may now resign after their plan to launch the cash call in January was defeated at an extraordinary shareholder meeting on Saturday due to the vote of Monte Paschi’s top shareholder.
The world’s oldest bank needs to tap investors for cash to pay back 4.1 billion euros in state aid it received earlier this year and avert nationalization
Simple game theory really – why would the largest shareholder “guarantee” losses now when it can try and liquidate more of its exposure over time?
But the cash-strapped Monte dei Paschi foundation – whose stake in the bank is big enough to veto any unwanted decision – forced a postponement until at least mid-May to win more time to sell down its 33.5 percent holding and repay its own debts.
Antonella Mansi, a feisty 39-year-old businesswoman recently appointed head of the Monte dei Paschi foundation, said her insistence on a cash call delay did not amount to a no-confidence vote in the bank’s management.
But she said that carrying out the capital increase in January would massively dilute the foundation’s holding, leaving it with virtually nothing to sell to reimburse debts of 340 million euros.
“We have a precise duty to ensure (the foundation’s) survival. You can’t ask us to let it collapse,” she said.
Management is “very annoyed”…
Chairman Alessandro Profumo, a strong-willed and internationally respected banker who was formerly the chief of UniCredit, said he and CEO Fabrizio Viola would decide in January whether to step down.
“These are decisions one takes in cold blood and in the right place,” Profumo said at the meeting.
“What I have on my mind is a 3 billion euro cash call because we need to pay back 4 billion euros to taxpayers. Today this is uncertain and at risk,” he told a press conference.
Viola, sitting at his side, told reporters he would do everything “so that the ship does not sink”, but that he could not take responsibility for mistakes made by others.
Of course, there is risk either way…
“It’s important to carry out the capital increase as early as possible,” said Roberto Lottici, fund manager at Ifigest. “The risk is that the bank finds itself rushing into a cash call later at a lower price than what it could achieve now.”
“It’s hard to think that the third largest Italian bank can’t find a pool of banks able to support the cash call after May 2014,” said Antonella Mansi, the president of the MPS foundation, at the shareholders’ meeting.
and given the number of jobs involved… local officials are now reacting in favor of the delay (hoping for domestic savior)…
But in Siena, where the bank is known as “Daddy Monte” and is the biggest employer, fears that the cash call might sever the umbilical cord between the lender and the city run high.
Siena mayor Bruno Valentini, whose city council is the top stakeholder in the Monte dei Paschi foundation, said on Friday a postponement might help keep the bank in Italian hands.
“We cannot let the third biggest bank in this country fall prey to foreign interests,” he said. “Monte dei Paschi is not just an issue in Siena, it is a big national issue.”
So, even after all the lqiuidty provision; yields and spreads on European debt back near record lows; calls from US asset managers that Europe is recovering and will be the growth engine; and hopes that Europe’s AQR stress test (and resolution mechanism) will be the gold standard for confidence in their banking system… they still can’t find a group of greater fools to pony up EUR3 billion in real (not rehypothecated) money to save the world’s oldest bank – that’s a day’s worth of Fed POMO!!!!
On an odd side note, we did note a major surge in ECB margin calls this week…
Iwas in St. Kitts last week for the Liberty Forum conference, where I was a speaker. I also moderated a debate pitting Peter Schiff against Harry Dent on the inflation-deflation question.
Things got really hot. There was some yelling, and at one point, Harry stood up and tossed his mic in frustration. I thought they might go at it.
I want to tell you about this debate…
Peter Schiff is the chief strategist at the brokerage firm Euro Pacific. He has a radio show and has written some books. He’s probably most known as calling for a collapse in the dollar and being generally bearish on the U.S. economy.
Harry Dent is also a well-known financial commentator. He writes a newsletter and is author of several books. He’s probably most famous for his predictions based on demographics. He’s also a vocal deflationist.
Inflation here means generally rising prices. Deflation means prices are generally falling. There are other consequences associated with each. For example, Peter believes interest rates will rise. Harry thinks they will fall. Peter thinks the dollar will lose value, Harry thinks not.
Peter’s argument essentially was that the Fed is printing a lot of money and would continue to do so. Hence, inflation.
Harry’s argument was that the debt deflation dynamics were the more powerful force. The economy has to delever, and as debts are repaid or written off, that process destroys money, more than offsetting the printing press.
They touched on a lot of other things in the course of the debate — past hyperinflations, China’s role and more.
The debate started out calmly enough, but after about 20 minutes, they really starting going at it.
Harry won the debate, in my view. He had a good command of the facts and presented them well. I had also watched the presentations of both before the debate. Harry had marshaled an impressive array of evidence and made a good argument.
My respect for Harry went up. For whatever reason, I had thought of him as a bit of a quack, but he has done a lot of good work on this stuff.
Before 2008, I was solidly in the inflationist camp. But think about what’s happened since 2008. If I told you back then that the Fed’s balance sheet would balloon fivefold — creating lots of money — what would you have guessed the world would look like in 2013?
Wouldn’t you be surprised to see the 10-year Treasury note pay just 2.8%? Wouldn’t you be surprised to find gold languishing at $1,235 an ounce? The inflationist view had interest rates and gold higher — not lower.
So something is clearly not right with the “Fed’s printing money and we’re going to have inflation” argument. At some point, you have to re-evaluate the way you look at the world. Or you just sit content to be wrong. In financial markets, that can be costly.
In this light, I appreciated Harry’s efforts, as his framework was the more challenging one to believe, but it has unquestionably been a better predictor of what’s happened post-2008.
Even in the course of this debate, though, it struck me how many assumptions get passed off as givens.
For example: Commodities will protect you in times of high inflation.
Well, they don’t have a history of doing that.
As James Montier of GMO points out in his most recent research note:
“Commodities are often seen as an inflation hedge; however, this is almost entirely due to the experience of the 1970s and the creation of OPEC, and the domination of energy in the generally used commodity indexes. If you had held the ‘wrong’ commodities, their inflation hedging performance would have looked very different (witness copper and grain).”
Here is the chart:
So during the highly inflationary 1970s, oil was a great investment, but copper and corn were terrible. Commodities generally have lost value over the last century at the rate of almost 2% annually, according to GMO. Yet I see it repeated again and again by various advisers telling their clients/readers to own commodities to protect against inflation.
The same is true of gold.
Here is Montier again:
“Gold is often held up as an inflation hedge. However, the data provide a challenge to this view. [The next chart] shows the decade-by-decade average inflation rate, and the real return to holding gold over the same decade. It doesn’t make pretty viewing for those who believe gold is an inflation hedge. That perception is down to one decade (the 1970s) when it held that inflation and gold were positively correlated. The rest of the time there isn’t a good relationship between gold and inflation.”
And here is the chart:
Yet people repeat — on faith, I guess — that gold will protect them during inflation. The record of gold on this front is spotty. It might. It might not.
Montier’s paper, by the way, concludes that there aren’t any good inflation hedges in the short term. But over the long term, stocks and real estate are good inflation hedges. (He says the best is TIPS — Treasury inflation-protected securities.) In fact, Montier shows that even in countries that have suffered high inflation (or evenhyperinflation) in the 20th century — such as Germany and Italy — stocks still delivered positive real returns. And real estate value correlates with replacement costs, which rise during inflationary times.
After the debate, I sat on a panel with several other speakers. Asked if we’d have inflation or deflation, my first answer was an honest one: “I don’t know.” Forced to guess, I think we have deflation first, inflation later.
In general, the long-term way to bet is that the U.S. dollar in your pocket will buy less tomorrow than today.
Even Harry’s own presentation had a chart that makes it hard to argue any other way:
It is true the dollar can do something different for years at a time. (I mean, look at the 1930s.) But as a long-term investor, I’d rather own businesses or real estate than cash. Then again, I’d rather own cash-spinning businesses and real estate than commodities or gold.
Whatever you do, though, don’t let an old assumption pass uncontested. If you think there’s going to be inflation, you could at least be in the right things. And keep an open mind as to what may happen in 2014. The only certain thing about investing is that there are no certainties. That was my main takeaway from the fiery debate in St. Kitts.
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Since Dec. 9, the Pitchforks Movement has been staging rallies across Italy, blocking highways and rail and subway stations and protesting in front of public buildings. The protests are relatively small, comprising a few thousand people in each city, but they are widespread, stretching from Italy’s poor south to its wealthy north. The Pitchforks Movement first gained notoriety in Sicily in January 2012 when a group of agricultural producers and trucking companies blocked highways on the island for nine days to protest rising fuel and fertilizer prices, a result of austerity measures instituted by the government of Prime Minister Mario Monti.
Originally, the Pitchforks Movement had a heavy Sicilian element; it criticized the central government in Rome and sought greater autonomy for the island. Over the past year and a half and for various reasons, the movement has expanded beyond Sicily. The Pitchforks Movement is part of a growing trend in Europe. As the unemployment crisis lingers, the traditional representative institutions — political parties and trade unions — are proving incapable of channeling social unrest. In turn, groups that originally represented specific sectors are increasingly receiving support from other parts of the population. In several European countries, such as France and Spain, these groups are gaining popular support and participation from already disgruntled youths, workers, retirees and the unemployed. The emergence of groups like the Pitchforks Movement will likely become more common, since the economic crisis in Italy is unlikely to go away anytime soon. Their biggest challenge is becoming coherent enough to produce a lasting impact.
Anti-austerity protesters in Rome threw eggs and firecrackers at the Finance Ministry during a march Saturday to oppose cuts to welfare programs and a shortage in low-income housing. Police said 11 people were detained.
More than 4,000 riot police were dispatched to maintain order as some 25,000 protesters marched through the capital on Saturday. There were moments of tension when demonstrators passed near the headquarters of an extreme-right group, but police intervened when a few bottles were thrown.
Later, demonstrators threw eggs, firecrackers and smoke bombs outside the Finance Ministry. Police reacted by dispersing the protesters, detaining 11 of the demonstrators. There were no reports of injuries.
Ahead of the march police detained some anarchists believed to pose a security threat.
The protests were accompanied Friday by a 24-hour nationwide strike that caused disruptions for travellers. Train service was guaranteed in most cities for morning and evening commutes, but airports in Rome, Naples, Milan and Bologna had to cancel some flights. Some school and health workers also went on strike.
The USB and COBAS unions organized Friday’s strike to protest austerity measures reducing transportation budgets. USB union co-ordinator Pierpaolo Leonardi accused the Italian government of imposing EU directives without concern for the impact on workers.
A smaller protest of about 600 workers was held in Milan.
- PHOTOS: Anti-austerity protest rips through Rome (photos.denverpost.com)
- Anti-austerity protesters throw eggs, firecrackers outside Finance Ministry in Rome (globalnews.ca)
- Italian anti-austerity protesters clash with police (scooprocket.com)
- Tens of thousands clash with Italian police in anti-austerity protests (theglobeandmail.com)
- Italian protesters take on police during mass march against austerity budget (PHOTOS) (giftoftruth.wordpress.com)