Accelerating Tremors May Indicate the Coming Financial Quake

Wednesday, January 27, 2010

Is the world rapidly spinning towards a monetary and financial quake never seen before?
A 48-hour snapshot of earth-moving news appears like a procession of dark grey swans.
The delays in Federal Reserve Chairman Ben Bernanke' reconfirmation and Paul Volcker's victory in major parts of the banking reform are the most visible signs of unprecedented strains in the financial system. Add in that Treasury Secretary Timothy Geithner may soon retire from his post for his role in the AIG scandal which must be stinking like fish in the sun after 3 days.
After all the SEC and the NY Fed mulled nothing less than "national security status" for AIG in order not to disclose the final receivers of $182 billion in government bailout money. Geithner was NY Fed president during this time, conferring frequently with his predecessor at the Treasury, Henry Paulson. Geithner and Paulson will testify today befor a House Committee on oversight.
Barry Ritholtz has a final conclusion:
Perhaps it would be best if someone showed Timmy to the door . . .

Fed Meeting is Bernanke's Last Chance to Shake an Ace Out of his Sleeve
Fed head Bernanke has today a last chance to shake an ace out of his sleeve in order to gain the necessary 50 Senate votes for his reappointment. Latest reports from Bloomberg say 49 Senators have declared to vote for him:

Federal Reserve Chairman Ben S. Bernanke juggled an interest-rate meeting with phone calls to senators as he rolled up more support for a confirmation vote Majority Leader Harry Reid said may occur tomorrow or Jan. 29.

“He has the votes to be confirmed,” Senator Judd Gregg, a New Hampshire Republican, told reporters in Washington.

Forty-nine senators have said they would vote for the 56- year-old Fed chief or were inclined to support him, while 20 were opposed. Republicans were split 13-13 on a second term for Bernanke, while Democrats favored the Fed chief by a 35-6 margin, according to a count by Bloomberg News. Thirty-one senators were undecided or declined to comment.
IMHO Bernanke will remain at the top of the Fed. Or would you, let alone anybody with real insider knowledge of America's debt problem, want to jump in his shoes?
Oh, and the outcome of today's FOMC meeting? Expect a continuation of ZIRP and few verbal changes with an emphasis of steady low inflation but worries about the job market.

US Overspends to the Tune of $4.38 Billion Every Single Day
To put the US deficit disaster in a few simple numbers, Stewart Dougherty, a specialist in inferential analysis,comes up with a mind-boggling claim. Even if the government would confiscate all private property to repay debts the nation would still owe a staggering $66 Trillion. A look into 2009 disastrous spending figures makes you look for the next man-hole. "Putting Fiscal Year 2009’s $9,000,000,000,000.00 ($9 trillion) deficit another way, 17% of America’s private wealth, accumulated over a period of 235 years, was wiped out by just one year’s worth of government deficit spending insanity," Dougherty wrote.
Excerpts from his article published on
One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.

According to the Federal Reserve’s most recent report on wealth, America’s private net worth was $53.4 trillion as of September, 2009. But at the same time, America’s debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the citizens’ net worth. Even if the government expropriated every dollar of private wealth in the nation, it would still have a deficit of $66,600,000,000,000.00 ($66.6 trillion), equal to $214,286.00 for every man, woman and child in America and roughly 500% of GDP.

If the government does not directly seize the nation’s private wealth, then it will require $389,610 from each and every citizen to balance the country’s books. State, county and municipal debts and deficits are additional, already elephantine in many states (e.g., California, Illinois, New Jersey and New York) and growing at an alarming rate nationwide. In addition to the federal government, dozens of states are already bankrupt and sinking deeper into the morass every day.

The government continues to dig a deeper and deeper fiscal grave in which to bury its citizens. This year, the federal deficit will total at least $1,600,000,000,000.00 ($1.6 trillion), which represents overspending of $4,383,561,600.00 ($4.38 billion) per day. (The deficit during October and November, 2009, the first two months of Fiscal Year 2010, totaled $296,700,000,000.00 ($297 billion), or $4,863,934,000.00 ($4.9 billion) per day, a record.) Using the GAAP accounting method (which is what corporations are required to use because it presents a far more accurate and honest picture of a company’s finances than the cash accounting method primarily and misleadingly used by the U.S. government), the nation’s fiscal year 2009 deficit was roughly $9,000,000,000,000.00 ($9 trillion), or $24,700,000,000.00 ($24.7 billion) per day, as calculated by brilliant and well-respected economist John Williams ( Fiscal Year 2010’s cash- and GAAP-accounting deficits will likely be worse than 2009’s, given government bailout and new program spending that is on steroids and psychotic.

Putting Fiscal Year 2009’s $9,000,000,000,000.00 ($9 trillion) deficit another way, 17% of America’s private wealth, accumulated over a period of 235 years, was wiped out by just one year’s worth of government deficit spending insanity.

And you think this is gonna end like a Hollywood movie?

Europe's Banks Need €83 Billion Capital
But those were only the most imminent problems of the US financial sector. Don't think Europe fares any better.
FT Alphaville cites Morgan Stanley’s Huw van Steenis who reckons Europe’s big banks will need to find €83bn by 2012, or shrink their risk-weighted assets by 11 per cent, or €1,000bn.
van Steenis key expectations are bleak at the best:
  • We think the market has underestimated the impact of Basel proposals on distributions and this, plus political uncertainty, means dividends will be very constrained. We cut dividend forecasts for DBK, CASA, CSG, GLE, BBVA, UCG, ISP, BNP, POP & KBC.
  • Even with what banks view as the “obvious” amendments (eg minorities) the proposals could still hit European banks hard – and hence we think revisions or “national interpretations” are likely...
  • We think banks would be likely to reprice loans and reduce credit further – we already model less than 1% loan growth for European banks in 2010. We think Basel 3 and US proposals could mean – unless amended – corporates face a higher cost of credit and need to take on more liquidity risk, as the banks are asked to shed risk.
Europe Eyes Record Deficit Borrowing Around €2.2 Trillion
Banks will encounter a mighty competitor in credit markets though. FT Alphaville, one of my favourite newssites, tells us that,
European governments will need to borrow a record €2,200 Trillion from capital markets this year to finance budget deficits, according to Fitch Ratings. The projected borrowing is a 3.7% increase on the €2.120 Trillion raised in 2009, as governments continue to issue sovereign bonds and short-term bills. Fitch said France would be the biggest issuer this year, raising an estimated €454bn, then Italy at €393bn, Germany at €386bn and the UK at €279bn.
So we will see record borrowing and no reductions in deficits as European governments keep hanging on to their old way of deficit spending, guaranteeing a rise in European yields across the board. After downgrading Greece ratings agencies might for once try to spot payment problems in the next endangered EU countries like Portugal, Italy, Ireland, Austria and Spain. Find the full Fitch report here (PDF).

Japan Outlook Negative
Funding worries have a tendency to appear hand in hand with insatiable funding needs. In times of globalisation nobody seems to get away unscathed. It is again blog-style FT Alphaville bringing us the news that Standard & Poor's has downgraded Japan's outlook to "negative", focusing on fiscal consolidation:
Standard & Poor’s Ratings Services today revised to negative from stable its outlook on the ‘AA’ long-term rating on Japan. At the same time, we affirmed our ‘AA’ long-term and ‘A-1+’ short-term local and foreign currency sovereign credit ratings on Japan.

The outlook change reflects our view that the Japanese government’s diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures.

At a forecasted 100% of GDP at fiscal year-end March 31, 2010, Japan’s net general government debt burden is among the highest for rated sovereigns. Moreover, the policies of the new Democratic Party of Japan (DPJ) government point to a slower pace of fiscal consolidation than we had previously expected.

Combined with other social policies that are not likely to raise medium-term trend growth and with persistent deflationary pressures, we forecast that Japan’s net general government debt to GDP will peak at 115% of GDP over the next several years.

The affirmation of the ‘AA’ sovereign ratings on Japan rests on the country’s strong net external asset position, the yen’s status as a reserve currency, the financial system’s resiliency throughout the recent global recession, and the economy’s diversification.

We believe that these strengths will keep the government’s rating in the ‘AA’ category, even if further fiscal consolidation leads to a one notch downgrade. A strong net external asset position and the yen’s key international currency position provide ample external liquidity and good access to global capital markets.

Japan is the world’s largest net external creditor in absolute terms with projected net assets of an estimated 309% of current account receipts at the end of 2009. The country’s current gold and foreign exchange reserves of over US$1 trillion are second only to China’s. Standard & Poor’s expects Japan’s net external assets to rise further in the coming years due to continued current account surpluses.

The ratings on Japan could fall by one notch if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country’s high government debt burden and its weak demographic profile.
Another intercontinental act of desperation is in the line. Reportedly Greece is going on an Asian roadshow, trying to raise $10 billion there. Today Greek government paper traded up to a record spread of 331 basis points compared to German Bunds.Find the details of Greece's intentions in the Wall Street Journal.The European Central Bank is still complacent despite banks on the brink all over the world.
In an interview with the WSJ, published on the ECB's website, ECB President Jean-Claude Trichet again tried to promote trust in a world full of banks on the brink. Here an excerpt:
Question: What lessons have you learned from past crises as you deal with the fallout of the current one?

Mr. Trichet: Lesson number one: We have to considerably reinforce the resilience of the financial system. I understand the infuriation of our public opinion because the global financial system was much too fragile. That being said I would guard against scapegoating. As a matter of fact the full system has to be improved and redressed and not only some parts and parcel of it. To fix a systemic failure, you have to fix the whole system.

Another lesson of those crises is the necessity of rapid decisions when and where needed. The ECB proved a capacity to decide rapidly when the crisis started and I have to say hat the central banks all over the world avoided the depression because we, together did not lose time. It was a matter of weeks and, at certain moments a question of days.

A third lesson valid for all crises and particularly for the present one is that institutions and individuals have to remain calm and never to lose sang-froid. Keeping composure in very demanding circumstances is always necessary to handle correctly the unfolding of a crisis.

Question: Do you think that it might make sense to have some kind of mechanism within in euro zone to allow the ECB or some other body in the EU to take more control of a country’s budget as a way of giving the markets more confidence and helping guide that country, such as the case of Greece?

Mr. Trichet: The Governing Council of the ECB has always been very vocal, very strong in defending the Stability and Growth Pact at a time where some governments were opposing the Pact and wanted to dismantle it. We call for a rigorous implementation of the Stability and Growth Pact by all countries. We also call for all data, facts and figures to be audited appropriately at national and, when judged necessary, at the European level by Eurostat. I expect the European Commission to take very soon a number of proposals in that sense

As an example at the moment we see one government – the Irish government - is looking energetically at what it has to do. Ireland was in a situation that was difficult and a number of courageous and convincing decisions have been taken.

I expect and I am confident that in the demanding situation in which Greece is, its government will also take the right and necessary decisions to implement the goal which has been fixed, namely to have a public deficit below 3% (deficit as a share of GDP) as early as 2012.

Question: Do you think that’s realistic?

Mr. Trichet: It is what the Government has committed to do. I trust it is not only realistic but also necessary in the present demanding circumstances to take the right decisions to meet the goal. I approve the ambition. I approve the 2012 deficit target of below 3 %.
Is this the next case of a central banker being too optimistic, blaming future different problems on an unforeseeable changes?
One prediction is highly likely to come true: A toned-down Davos World Economic Forum, overshadowed by the death of the security chief in the night before the opening, will not come up with the bold resolutions it will take to reform the global financial fiat money system which proves one more time in the last 300 years that unbacked money has never been working.


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