by David Malone
The only thing more unwise to speculate about than finance is politics. So I thought I’d do both.
You know those times when you see things which just don’t look right and seem to all be at right angles to the official or assumed news narrative? Well I’m having one of those times.
The Danes started it on Feb 7th. Bloomberg reported that what has for so long been declared unthinkable was done – senior bond holders were made to suffer a loss when Dutch bank, Amegerbanken collapsed under bad debts. A 41% loss in fact. Until now senior bond holders have been sacrosanct. Irish leaders told their people senior bond holders could not be allowed to take a loss or Ireland would shrivel and die.
In fact both senior bond holders and depositors who had above the protected limit have lost money. Now of course Denmark is a sovereign nation. But I don’t think this would have been done without some serious discussion with the ECB. Small though the losses are – just a couple of billion – compared to what we have become used to, this is still a landmark. It is a precedent. The new laws for making senior bond holders share the pain have now been tested and the bond market didn’t start screaming “I’m melting!” Even though the collapse has caused losses to ripple out to other Danish financial institutions. Nykredit, Denmark’s largest mortgage lender lost about 290 million kroner or 38 million euros. This was allowed to happen.
If the authorities wanted to test a new and ‘dangerous’ idea where would you want to do it? Denmark maybe? Nordic, dependable, small and containable if it went wrong.
This came as all sorts of debt and bond gyrations generally, are beginning.
Portugal’s borrowing costs continue up and up to hit new all time highs. What Portugal is paying to borrow now is well above hoped for growth levels which means every euro borrowed will produce much, much less than one euro of new income. Portugal is sinking into debt not getting out of it.
Ireland has ‘discovered’ another 12 billion euros of bad and defaulting loans that the tax payer will have to ‘buy’ from Allied Irish Bank and Bank of Ireland that its eagle-eyed regulators and bank geniuses hadn’t noticed in the last three years. If ever a nation’s regulators proved that wankers really do go blind, it’s Ireland’s.
Meanwhile, today in America, strange things have been happening with its debt auctions. Yesterday foreign central banks bought virtually none of the 3 year treasuries. Which is unusual. Normally foreign central banks buy the whole range of long and short dated debt. Then today at the 10 year auction those same banks bought 71% of the whole thing, which is massive. This weirdness caused Zerohedge to ask,
“We wish someone smarter than us could explain to us how there is such a huge aversion to the short end by indirects [foreign central banks], and such a sudden love affair to the 10 year …”
Now I am not smarter than the people at Zerohedge. But it does seem to me that the US Treasury has seen the slow rise of rates and is also becoming spooked at the simply vast amount of its debt that is now in short dated debt which has to be constantly rolled back into the market and resold. Both problems mean the US would dearly like to sell some longer dated debt. It would help keep rates on the all important 10 year down and ease the growing tension about not just its over all level of debt but the increasing instability of the debt pile. Which now looks more and more like an upside down pyramid. Far too much unstable, short term debt sitting on top of far too little stable long term debt .
There is simply too much debt floating to the surface in America. There is a wave of it at state and now at municipal and city level as well. I also note the “sudden” departure from Wells Fargo of its chief financial officer. For purely personal reasons of course. On the other hand it has been standard practice thoughout this entire crisis to ‘retire’ or move abroad key people who might be otherwise called upon to answer questions from about-to-happen nastiness. Look at how many risk managers were moved and changed right around ’07. I could name a few from European banks. Not that Wells Fargo is sitting on many tens of billions of toxic HELOC loans of course.
But back to the US Treasury’s larger debt problems. The answer to the Treasury’s problem with selling its longer term debt, may be what I have written about for a year or more now – that America gets other nations’ central banks to buy up the debt it cannot sell. In return the US is no doubt paying for the favour with its own purchases of our debt and/or keeping generous dollar swap lines open to funnel dollars to needy European banks. Don’t forget the UK has now purchased something like a quarter of a trillion in US debt while telling the people here that there is no money to spare for helping them, educating them or looking after them when they are sick and or old.
And of course back in Continental Europe we should just add the minor detail that both Greece and Ireland are insolvent and so are their banks.
All of which says to me, everyone is preparing for an ‘event’. Not perhaps an uncontrolled one. Though with food prices rising, wages falling and inflation on the move, people-powered regime change could upset all the best laid plans of dictators and their western supporters, making something uncontrolled quite possible.
I think the event could be that Europe is preparing to let some banks restructure. I would guess in Portugal and Greece and possibly even in the cajas in Spain though that really would be dangerous to the financial class. The cajas and the regional governments, developers and land owners who are very often all the same people, are still lying about and hiding huge additional losses. And Spain is having increasing trouble selling its debt again.
I think the ‘hesitation’ over how or if, to beef up the EFSF (the bail out fund) and over the proposed idea of pan-European bonds and the wrangling between Germany and France is also none of it what it seems. I wonder if the wrangling is over the terms of how France and Germany will cooperate in a mini coup. A sudden agreement to let some banks in peripheral nations restructure and force losses onto some of the senior bond holders and depositors in those nations, as has just been tested in Denmark. Such a plan will have to happen at some time. And that time will more than likely come if Germany does force a balanced budget rule on to countries that simply cannot do it in their present state such as Greece. And when it does, the self-styled ‘core’ nations will need to be carefully agreed about how to stand together and protect their interests above anyone else’s.
Are the financial class preparing for a peristaltic push on some of the backed up debt? If so, some nation or nations are going to have a very nasty mess dumped on them.
I have no evidence at all for this. I am speculating.
But I do note that Germany is pushing with renewed purpose for the European commission to allow German banks to ignore critical parts of the Basel III agreement. They want to allow German banks to count as ‘core’ capital certain kinds of assets Basel III does not allow. Certain German banks need to count these assets as ‘core’ because if they don’t they will be insolvent. Simple as that really. Need to get those German banks thoroughly protected and solvent before anything happens.
And lastly I look at the UK and the corporate tax decision by Tory Boy One and Two to reduce corporate taxes count on foreign earnings against tax, and what I see is the City of London clearly getting its tax rules in order to allow it to take from Ireland its position as the place all US and global corporations have their global HQs. Ireland has been the low tax and profit haven where global profits can be booked and taxes avoided. One look at the details of the UK plan tells me this is exactly what it is about. The City will have told the Twaddle twins that if all the corporates re-locate to our new low/no tax regime we will somehow get more tax over-all not less.
What they may not have mentioned as clearly is that we will also become as Ireland was. A brothel for horny corporates and bankers to screw around and pass on their communicable diseases. While our regualtors will have to amuse themselves, till they go blind.
France and Germany have each other for protection they think. The UK is going to try Ireland’s trick. Worked so well for them.
All in all I wonder if all the gyrations aren’t a repositioning ready for the next big event which we have not been told about – for our own good of course.
David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: http://www.debtgeneration.org/index.php