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The European Central Bank's (ECB) unprecedented use of a three year, low cost LTRO (Long Term Repurchase Agreement) policy initiative may have removed some of the short term pressures from the EU Banking crisis, but like the Greenspan PUT, the unintended consequences are not yet fully understood. One is the moral hazard which is fostering financial "games" to be played with reckless abandon. Some of the mischievous and cunning games are frankly questionably as being even legal! But then, nothing is illegal if the regulators and those organizations charged with surveillance are not bothering to investigate. Extend > Pretend > Bend is the new approach. MORE>>

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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

GLOBAL PMI's' - About as Ugly as It Gets!

MARKIT PRESS CENTER - Global Detail

THOUSANDS OF COMPANIES AROUND THE WORLD REVEAL THE TRUTH ABOUT THE GLOBAL ECONOMY 06/01/12 BI

EUROPE: Manufacturing PMI sinks to near three-year low in May, as weakness spreads from non-core to core nations 06/01/12 Markit

GERMANY: Manufacturing PMI points to sharpest deterioration of operating conditions since June 200 .pdf 06/01/12 Markit

FRANCE: Manufacturing PMI Falls To 44.7, 'Staffing Levels Decline At Fastest Pace Since September 2009' 06/01/12 BI

Key points from Markit:

• Marked falls in both output and new orders
• Staffing levels decline at fastest pace since September 2009
• Price pressures ease further

CHINA: Down at Fastest Rate in 38 Months

Manufacturing PMI™ signals seventh successive month of deteriorating operating conditions 06/01/12 Markit

WEAK AGAIN: China's HSBC PMI Falls To 48.4, 'Employment Down At Fastest Rate In 38 Months' 06/01/12 BI

GLOBAL SLOWDOWN - Now clearly evident in the BRICS

The Other Slowdown Is Here 06/01/12 BI

We've been talking about the big Euro-led slowdown for awhile, but now there's another one: The economy is cracking all over the world in places that were assumed to be great growth engines, and right now the US economy (which isn't growing like gangbusters, but which is kind of hanging in there) is looking like the strongest of the lot, and the Fed appears to have the least pressure on it to ease, which helps explain why currencies around the world are collapsing against the dollar. And of course, this only helps drive US interest rates lower

BRICS - Brazil

Brazil's BOVESPA stock market index. This three-month chart, via Bloomberg, is ugly.

BRICS - Russia

the Russian Ruble. It's been collapsing against the dollar in recent days (as shown in this chart of the dollar surging via ADVFN).

BRICS - India

GLOBAL SLOWDOWN - Now clearly evident in the AIAN TIGERS

South Korea's Manufacturing PMI Falls To 51, Factory Output Slows To A 4-Month Low 06/01/12 BI

SPAIN - More Bank Failures to Follow Bankia

“We’re in a situation of total emergency, the worst crisis we have ever lived through” Ex-premier Felipe Gonzalez

Former Spanish PM: 'WE'RE IN A SITUATION OF TOTAL EMERGENCY'

“We’re in a situation of total emergency, the worst crisis we have ever lived through” said ex-premier Felipe Gonzalez, the country’s elder statesman.

The warning came as the yields on Spanish 10-year bonds spiked to 6.7pc, pushing the “risk premium” over German Bunds to a post-euro high of 540 basis points. The IBEX index of stocks in Madrid fell 2.6pc, the lowest since the dotcom bust in 2003. Ambrose-Evans Pritchard

Guardian: Spain's banks can't wait. Bankia is bleeding, and the property-related losses in the rest of the system may mean that as much as €100bn of new capital has to be found...

Spain: Bankia Down, Who Is Next? 05/30/12 Zero Hedge

Bankia is done: at this point the only questions left are:

i) what will be the final bailout cost 

ii) who will pay for these costs, and

iii) whether the bank has enough beach towels to satisfy the onslaught of manic

Spaniards desperate to hand over their €300 euros to the insolvent bank in exchange for some Spiderman-embossed linen. Oh, there is one more question: who is next.

Now, as we showed earlier today, in the aggregate the answer is simple: everyone. Because as JPM said "if a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn." At roughly a third of its GDP, this is, needless to say, more money than Spain can procure. But, in a very Stalinesque sense, where everyone is merely a statistic, that is essentially the same as saying no one.  It is also certainly not helpful to any Spanish readers who may be worried about their deposits (and investments) which in a world of total disinformation, will first be lost before the government advises caution and safety. So instead we go to Goldman Sachs which has conveniently constructed the following analysis, which replicated the loss provision calculation of Bankia, and applies it to the other listed banks. The result: in addition to the €19 billion in bail out costs for Bankia, Spain will need to spend at least another €25 in bailout funding for six other listed banks which include CaixaBank SA, Banco Santander, Banco Popular Espanol, BBVA, Banco Espanol de Credito SA, Bankinter SA.

Click to Enlarge

EU - Over-Banked!

Spain Is The Most 'Over-Banked' Nation In Europe 05/30/12 Zero Hedge

According to the EC's Stability Report, via UBS, one measure of bank sector capacity and efficiency (population per bank branch) shows Spain in a dismal worst place with the least efficiency (or highest over-capacity). Of course, we would suspect that whatever state-funded reach-around bailout the Spanish government comes up with next will not contain a 'revert staff/branch levels to European norms' provision - better to pay up for mis-allocation of capital. Nonetheless, the large number of local bank branches in countries like Germany, France, Italy and Portugal indicates a potential for further consolidation and restructuring there also.

LTRO-V-ELA: Proof of Degree of Banking Stress & Insolvancy

Big Shift in ECB Balance Sheet a Sign of Banking Stress? 05/29/12 CNBC

Tens of billions of funding support for European banks appears to have shifted to the emergency lending assistance program of the European Central Bank from the long-term refinancing operations, an indication that some European banks may be in dire financial straits.

This likely indicates the early repayment of low cost funds provided to banks in Europe. A bank would be forced to make early repayment if collateral for the loans became ineligible because of declines in market value and the bank were unable to offer additional or substitute collateral. Additionally, a bank deemed financially unsound would be ineligible for LTRO loans.

At the same time, the ECB’s financial statement showed that “other claims on euro-area credit institutions denominated in euro” (line 6 in the statement) rose by 34.1 billion euros to 246.6 billion euros ($39.4 billion to $309.9 billion) last week. The emergency lending assistance program, or ELA, is one of a variety assets included on this line item.

What appears to have happened is that one or more large European banks were disqualified from borrowing under the LTRO and are now receiving funds under the ELA.

The main difference between the LTRO and the ELA is that under the ELA, emergency funding is provided by the separate national central banks instead of from the ECB directly. The risk is borne by the national central bank instead of by the system as a whole. But since the banks are part of the ECB system, the loans show up as assets on the ECB balance sheet.

On May 17, the ECB confirmed it had moved some Greek banks onto the ELA program of Greece’s central bank until they are recapitalized.

This would have shown up in the previous week’s statement, however.

Spanish banks accounted for 27 percent of all ECB funding. If one of more Spanish banks were considered financially unsound or were short of eligible collateral, that could explain the growth of the ELA and the shrinking of the LTRO.

SPAIN - Bank Runs Worsen

Spain Sees €31 Billion Deposit Outflow In April 05/30/12 Zero Hedge

"The ECB released April deposit data today. Italian deposits in April were stable, with a moderate increase in retail (+€7 bn) more than offsetting a small reduction in corporate deposits. In Spain, April saw €31 bn (or 1.9%) deposit outflow from banks. Within this only half is attributable to corporate (down €7 bn or -3.4%) and retail balances (down €8 bn, or -1.1%). The residual outflow is attributable to deposit reductions by others (financial institutions / pension funds / etc)."

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EUROPEAN REDEMPTION PACT: A "Cash for Gold" Grab

EUROPEAN REDEMPTION PACT

Southern Europe’s debtor states must pledge their gold reserves and national treasure as collateral under a €2.3 trillion stabilisation plan gaining momentum in Germany.

The plan splits the public debts of EMU states. Anything up to the Maastricht limit of 60pc of GDP would remain sovereign. Anything over 60pc would be transfered gradually into the redemption fund. This would be covered by joint bonds.

Europe’s debtors must pawn their gold for Eurobond Redemption 05/29/12 Ambrose Evans-Pritchard

This demand could enflame opinion in Italy and Portugal. Both states have kept their bullion, resisting the rush to sell by Britain and others. Italy has 2,451 tonnes of gold, valued at €98bn in March. Alessandro di Carpegna Brivio, a gold expert at Camperio Sim in Milan, said Italy should treat such proposals with care. "Everything being done at a European level is in the interests of Germany and France, to save their banks. It is not in the interest of Italy," he said. "We should use our gold to take care of our own debt, collateralizing bonds above 100pc of GDP. That would be a far more targeted approach," he said. David Marsh, author of books on the euro and the Bundesbank, said Germany is not yet ready for the redemption fund. "The Germans have to do something, but I don’t think it will happen before the elections next year. Spain will have to go through storm first," he said. Ultimately, a sinking fund cannot tackle the root cause of the eurozone crisis. It may cap debt costs but it does not alter the intra-EMU currency misalignment between North and South, or help the Latin states close the chasm in labour competitiveness. The South would still face the long grind of "internal devaluation" -- or wage deflation -- breaking societies on the wheel. Yet the Redemption Pact is at least a first step back from Purgatory.

Germany Has A Generous Proposal To The Broke PIIGS: "Cash For Gold" 05/29/12 Zero Hedge - Germany is quietly reminding the world that the stealthy, but voluntary, accumulation of gold is what it is all about. As part of a renewed push for quasi-Federalism, whereby Germany would fund a "European Redemption Pact", in which Berlin would, in the form of Germany-backed joint bonds, be responsible for any sovereign debt over the 60% Maastrtich limit, but with a big catch. The catch is that "a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said. Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal.

In other words: a perfectly legitimate, and fully voluntary scheme in which sovereign gold is pledged to a German "pawn broker" until such time as the joint bonds are extinguished, and if for some "unpredictable" reason, a country fails to meet its obligations, read defaults, all the pledged gold goes to Germany!

EU - Morgan Stanley's Likely Roadmap

"We think the ramifications of a Greek exit are more serious than the market anticipates", is how Morgan Stanley starts their European strategy report this week. They have raised their probability of a Euro break-up to 35% but the most likely outcome they foresee is a Euro divorce with Greece's exit preceded by strong contagion via three main transmission channels: the sovereign, the banking sector, and the political situation. Italy, Spain, Ireland, and Portugal are unsurprisingly the most at risk of material contagion and they recommend investors stay positioned defensively across risky assets as we remain in the 'Crisis' stage of the so-called C.R.I.C. cycle - and they note that unlike so many knife-catching US equity and Italian bond buyers, it is not sensible to try to pre-empt the Response phase of C.R.I.C. cycle. There appears to be four scenarios (and evolutions) for the future of Europe (from Renaissance to Divorce with Staggering On and an awkward 'Italian Marriage' in between) and we drill into the four additional possibilities under the divorce scenario for insight into the effects various risky asset classes will feel in each case.

The Four Eurozone Scenarios...

Click to Enlarge

and the CRIC Cycle...

SPAIN - At Critical Funding Inflection Point - 6.5% Yield and 4.5% Spread

BANKIA BAILOUT: 19B Euros

Spanish Bank Bailout Hits Nation's Bonds 05/29/12 WSJ - Country's Borrowing Costs Soar to 2012 High; Prime Minister Calls on EU for Action to Support Fragile Euro Members.

Spain-AAA Spread Just Broke 450 bps: LCH Margin Hike Alert 05/28/12 Zero Hedge

Spanish 10-Year Bond Yield Hits 6.5%, Spread to Germany Hits Record; Prime Minister Repeats Lie "Spain Does Not Need Bailout"; Backdoor Bailout or Ponzi Scheme? More Questions Than Answers

US TREASURY YIELD CURVE - Completely Negative Real Returns

What A Difference A Year Makes 05/30/12 BI

Given that government bond yields are plunging to record lows all around the world right now, it's nice to look at the US Treasury yield curve (the rate at which the government borrows over various durations) now as compared to 1 month and one year ago. As you can see, yields have fallen massively across the curve. And what's important to remember is that a year ago, when 10-year yields were over 3%, people were talking about those as being way too low, and how there was nowhere to go but up.

US SHADOW BANKING: Has Only Halfed

The Decline of US Shadow Banking 05/29/12 FT Alphaville

Notably, both agency-mortage backed securites and MMMFs were removed from the index when they fell under the US government’s conservatorship and guarantee respectively.

JAPAN COMPARISONS - If Japan was About De-Leveraging, then US & the EU are De-Leveraging.

The Mega-Bears Is Back 05/30/12 BI

The US market hasn't been on the Japan path for awhile (although it wouldn't stretch the imagination to see it return to the path) but Europe is almost perfectly playing out to form with Japan.

GOLD - Long Term Inlflection Point Near at Hand

Stocks Priced In Gold Since 1886 05/24/12 BI