IRISH FINANCIAL CRISIS

UPDATE

Growth in economy for 2011 cut by half in latest forecast Irish Times

• The Irish Government downgraded:

  • Downgraded outlook for economic recovery - Domestic economy is now expected to remain in recession this year and next. GDP was cut by more than half from 1.8% to 0.8%
  • Forecast fewer jobs expected to materialise - Employment is expected to fall by a further 30,000 this year. From the current rate of 15 per cent, joblessness will now decline only very gradually to 10% by 2015.
  • Indicated the national debt is anticipated to rise further - Public Debt peak was increased from 103% of GDP in December to 118% in 2013.

• EMPLOYMENT: More than 300,000 jobs have disappeared in the recession. With a jobs turnaround predicted next year, in the four years from 2012, the Government expects the number at work to increase by 100,000.
• INFLATION: April inflation figures for the euro zone reported at 2.8 per cent. ECB target is 2%.
• MORTGAGE RATES: The probability of another rise in mortgage interest rates has increased. A quarter-point rise in the ECB rate would add €32 a month to a typical €250,000 tracker mortgage being repaid over 30 years, exerting further pressures on borrowers and the beleaguered Irish economy alike.
  
• BANK WEAKNESS:
  • Total deposits, which include those of households, businesses, and financial institutions, stood at €630 billion. This is almost one-third down on August, immediately prior to the most recent bout of jitters about the banking system.
  • Most of the withdrawals have been accounted for by foreigners pulling their cash out of banks here.
  • Deposits in all banks in Ireland declined by a further €16 billion in March compared to a month earlier.
  • Household deposits fell by just €438 million, the smallest decline since December.
• GROWTH: Export sector will continue to be the only source of growth

Ireland cuts growth forecast but questions remain Reuters

• 2011 deficit 10% versus 9.4% in december
• 2013 debt peak will be 118% of GDP versus 102.5 four months ago
• IMF says peak will be 125% with Moody's saying 120% is sustainable limit.
• Ireland says it wiil have a deficit of -2.8% by 2015 versus -3% EU Target.

• The finance ministry said it saw exports as driving growth, with exports growing 6.8% this year and an average of 5% over until 2015.
• Analysts said those projections may suffer if international growth falters and the euro continues to strengthen.
• "To achieve anything close to 2.8 percent (deficit target) by 2015 we would need even deeper cuts," said Constantin Gurdgiev, a lecturer in finance at Trinity College Dublin, who described the forecasts as extremely optimistic. "How they will materialise is under very significant question."

KEYNESIAN GROWTH DISCOUNT

The results of our three-year economic experiment are in..

For three long years, the U.S. has been undertaking an experiment in economic policy. Could record levels of government spending, waves of new regulation and political credit allocation, and unprecedented monetary stimulus re-ignite growth? The results have been rolling in, and they represent what increasingly looks like an historic mistake that deserves to be called the Keynesian growth discount.

• The latest evidence is yesterday's disappointing report of 1.8% in first quarter GDP. At this stage of recovery after a deep recession, the economy is typically growing by 4% or more as consumer confidence returns and businesses accelerate investment as their profits revive. Yet in this recovery consumers are still cautious and business investment remains weak.
• Some of the first quarter's growth slump is due to seasonal factors such as bad weather and weaker defense spending. In the silver lining department, the private economy grew faster than the overall GDP figure because government spending declined. But even maintaining the 2.9% growth rate of 2010 would mark an historic underachievement for a recovery after a recession that was as deep as the one from late 2007 to mid-2009.
• The most recent recession of comparable depth and job loss was in 1981-1982, when unemployment hit 10.8%. Huge chunks of industrial America shut down and never re-opened. Yet once the recovery began in earnest in the first quarter of 1983, the economy boomed. As the nearby table shows, growth exceeded 7.1% for five consecutive quarters, and it kept growing at nearly a 4% pace for another two years. Growth didn't dip below 2% in any quarter until the second three months of 1986. This was the Reagan boom.
• Now look at the first seven quarters of the current recovery. Only briefly has growth hit 5%, in the fourth quarter of 2009 as businesses rebuilt inventories that had been pared to the bone. Growth has been mediocre ever since, sputtering to a near-stall in the middle of last year, accelerating modestly late last year, and now slowing again. This recovery is as weak as the much-maligned "jobless recovery" of the last decade, which followed a mild recession and at least gained speed after the tax cut of 2003.
• Most striking is that this weak growth follows everything that the Keynesian playbook said politicians should throw at the economy. First came $168 billion in one-time tax rebates in February 2008 under George W. Bush, then $814 billion more in spending spread over 2009-2010, cash for clunkers, the $8,000 home buyer tax credit, Hamp to prevent home foreclosures, the Detroit auto bailouts, billions for green jobs, a payroll tax cut for 2011, and of course near-zero interest rates for 28 months buttressed by quantitative easing I and II. We're probably forgetting something.
• Imagine if President Obama had introduced his original stimulus in February 2009 with the vow that, 26 months later, GDP would be growing by 1.8% and the jobless rate would be 8.8%. Does anyone think it would have passed?
• Liberal economists will blame this latest slowdown on spending cuts across all levels of government, and government spending did fall in the first quarter. But those modest declines follow the biggest government spending binge since World War II that was supposed to kick start the economy and then stop. Remember former White House chief economist Larry Summers's mantra that stimulus spending should be timely, targeted and temporary?
• With deficits this year estimated to hit $1.65 trillion, are we really supposed to believe that more deficit spending will produce faster growth? Would $2 trillion do the trick, or how about $3 trillion? Two years after the stimulus debate began, the critics who said all of this spending would provide at most a temporary lift to GDP while saddling the economy with record deficits have been proven right.
• The good news is that the private economy seems to have enough momentum to avoid a recession in the near term, but the danger is that growth will continue to be subpar. The evidence is that the combination of spendthrift fiscal policy and a wave of new regulatory costs and mandates are restraining business expansion and hiring.
• Then there's the threat of higher tax rates on investment and business that we dodged for two years after the GOP won Congress but that President Obama has now promised for 2013 if he is re-elected. This too deters the animal spirits necessary for robust growth. The great risk is stagflation, a la the 1970s, when easy money tried to compensate for bad fiscal and regulatory policy, which led to sluggish growth, rising prices and declines in real wages.
• The contrast in results between the current recovery and the Reagan years is instructive because the policy mix was so different. In the 1980s, the policy goals were to cut tax rates, reduce regulatory costs and uncertainty, let the private economy allocate capital free of political direction, and focus monetary policy on price stability rather than on reducing unemployment. This is the policy mix we need to rediscover if we are going to escape our current malaise and stop suffering from the Keynesian discount.

SOURCE: The Keynesian Growth Discount WSJ

JOBLESS versus PRODUCTIVITY

SOURCE: Federal Reserve Study

Roughly 1 million people in the U.S. were unable to find work after exhausting their unemployment benefits over the past year, Labor Department data released Thursday suggest. Economists said the back-of-the-envelope calculation is yet another sign that the labor market remains weak.

• About 8.2 million idled workers were receiving unemployment benefits as of the week ended April 9, the Labor Department said in its weekly jobless claims report.
• This compares with about 10.5 million individuals at the same time last year, resulting in a decline of roughly 2.3 million people.
• The federal government estimates that the economy created 1.3 million jobs during the 12 months ended in March.
• “That leaves, roughly speaking, about 1 million people who have exhausted their unemployment benefits and have very likely not yet found a job,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York.
• But Nicholas Tenev of Barclays Capital said a precise figure is hard to calculate. He estimated the labor force has shrunk by 638,000 since March of last year, largely because of a demographic shift as baby boomers retire. “While we don’t have an estimate of our own of how many people have exhausted all their benefits and are unable to find work, 1 million sounds high to me,” Tenev said.

GALLUP SURVEY - April 20-23, 2011

More than half of Americans say the U.S. economy is in a recession or a depression despite official data that show a moderate recovery, according to a poll released on Thursday.

• The April 20-23 Gallup survey of 1,013 U.S. adults found that only 27 percent said the economy is growing.
• Twenty-nine percent said the economy is in a depression and 26 percent said it is in a recession, with another 16 percent saying it is "slowing down," Gallup said.
• The poll findings have a 4 percentage point margin of error, according to Gallup.
• The health of the U.S. economy is expected to be a major issue as President Barack Obama, a Democrat, seeks re-election in 2012.
• The government reported on Thursday that U.S. economic growth slowed more than expected to 1.8 percent in the first quarter of the year, as soaring food and gasoline prices drained consumer spending power.
• A slowdown in first-quarter growth was acknowledged on Wednesday by the Federal Reserve, which described the U.S. economic recovery as proceeding at a "moderate pace." That was a step back from the "firmer footing" that Fed officials cited for the recovery in March.
• The Gallup poll found that Democrats are the most likely to say the economy is growing. Forty-three percent of Democrats said the economy is in a recession or depression, 13 percent said it is slowing down and 42 percent said it is growing.
• Sixty-eight percent of Republicans and supporters of the conservative Tea Party movement said the economy is in a recession or a depression. Fourteen percent of Republicans and 13 percent of Tea Party supporters said the economy is growing.
• Fifty-seven percent of independent voters -- a crucial segment of the electorate for Obama's re-election bid -- said the economy is in a recession or depression and 24 percent said it is growing.

SOURCE: Millions Set to Lose Unemployment Benefits.WSJ

• As of mid-March, about 8.5 million people were receiving some kind of unemployment payments, down from 11.5 million a year earlier.
• 5.5 million Americans are unemployed and not receiving benefits. Up 1.4M from a year earlier.
• The number of employed in March was up nearly 1 million from a year earlier
• About 14 million people were unemployed and looking for work, according to the household survey.
• More poeple exited the US labor force than entered.
• That suggests the 1.4-million-person change largely reflects people losing their benefits.
• For the more than 4 million Americans still receiving extended benefits, the picture isn’t encouraging. The longer they’ve been out of work, the harder it is to find a job. They’ve typically been unemployed for at least 26 weeks, and may have been out of work for as long as 99 weeks, which for many people is the limit.
• The number of people using up their regular 26 weeks of unemployment payments peaked in August 2009 at nearly 800,000 a month. That means a lot of people should be hitting their 99-week limit right about now.

SOURCE: May 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS Gordon T Long

SOURCE: May 2011: MARKET ANALYTICS & TECHNICAL ANALYSIS Gordon T Long

The market action since March 2009 is a bear market counter rally that is presently nearing a final end in a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force by late spring of 2011.

We presently have the early beginnings of a 'rolling top'. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen near major tops.  This is all part of a final topping formation and a long term right shoulder technical construction pattern.

The ending diagonal or wedge patterns are extremely difficult to trade as trading reversals are significant and frequent. This adds to the confusion about market direction. This market behavior should be viewed as the market forces in the process of systemically changing balance. It is very typically of major reversals.

Highlight examples of weakening analytics and warning signals continue to be the following:

- Rising Termination Wedge pattern in the Industrials and S&P 500 since the July 2010 lows.
- Elliott Wave, Gann and Weekly/Monthly Full Stochastic confirm ending rally highs near at hand.
- Asian & World Market Weakness which is leading the US Market.

- Over 80% of the S&P 500 stocks are above the 50 DMA and over 90% above their 200 DMA.
- Investors Intelligence is once again at an extreme reading of 54.2%
- Consumer Sentiment is suddenly plunged from 77.5 in February to 67.8 in April as consumers feel the pinch of inflation in food and energy.
- We have a major divergence between the S&P 500 rise and the Smart Money Index falling. This signals a significant reversal lies ahead.
- We have divergence between the S&P 500 and the NYSE Overbought / Oversold indicator. A decay pattern suggests a termination of this condition in the May-June 2011 timeframe.
- The OEX Open Interest (PUT/CALLS) suggests a topping pattern to this cyclical counter rally which will require a period of time to unfold similar to that in 2007. Expect a rounded topping formation.
- We are presently experiencing Margin Debt falling off significantly. This is highly unusual and a strong precursor of "risk off' beginning to creep into the market. The last time this occurred to such a degree was in early 2000 prior to the dot.com bubble implosion and in early fall 2007 prior to the financial crisis hitting. Something is seriously amiss here.
- The gap between the 10 Year Note Yield and the Forward Earnings Yield is excessive by any historical measure. It must and will be closed with i) a significant rise in bond yields, ii) a drop in stock earnings, iii) and increase in stock prices, iv) a combination of all these.

OUR CURRENT MACRO EXPECTATIONS FOR FINANCIAL EQUITY MARKETS
The following schematic best represents the US S&P 500 Stock Index

SOURCE: BLS Jobs Report: Nonfarm Payroll Headline Number Looks Good, Beneath the Surface, Awful Mish

Birth Death Model (as reported in January)

937 - 427 = 510 (Overstated by 46%)

Birth Death Model Revisions 2010 (as reported February)

Compare Revised Monthly Numbers

Difference Totals

47+23+16+44+24+36-10+24+18 = 242 (Further Adjustment of 26%)

Final = 937 - 427-242 = 268 (Overstated by 70%)

REFERENCE: Audio - Global Insights 

SOURCE: IMF Chief Strauss-Kahn Charged With Attempted Rape Bloomberg

FACTS

• Charged with a Criminal Sex Act, Attenpted Rape and Unlawful Imprisonment on a New York hotel maid
• Occurred Saturday May 14th against a 32- year-old female at a Sofitel hotel in midtown Manhattan
• The assault occurred about 1 p.m. saturday when the woman entered the $3,000-a-night suite -- Room 2806
• She managed to escape from the room and notified colleagues who called the police
• Strauss-Kahn, who was taken into custody aboard an Air France flight at John F. Kennedy International Airport
• Strauss-Kahn, 62, denied the charges and will plead not guilty
• New York police said Strauss-Kahn doesn’t have diplomatic immunity. The French Foreign Ministry in Paris said the IMF will have to examine what immunity Strauss-Kahn may have.

• This is the second time since he took the helm of the IMF in November 2007 that Strauss-Kahn has faced allegations of misconduct.
  • In 2008, he had a relationship with Piroska Nagy, a female economist at the IMF, who quit in August of that year. An investigation by the IMF board, released in October 2008, concluded that while he had made a “serious error of judgment,” he shouldn’t be fired.
• Other women Strauss has been linked to:
  • -- An unnamed actress who said Strauss acted 'like a gorilla' after inviting her back to a Paris flat
  • -- Tristane Banon, a French journalist, who Strauss allegedly tried to rape, or at least sexually assault in 2002 -- The story comes via the French online citizen media Agora Vox
  • Thierry Ardisson, the host of the show where Banon first made her allegations, later commented: "Everyone knew. I have fourteen female friends who told me 'He tried it with me.' … I think this guy is sick. … He needs to go to rehab." French pundit Sylvie Pierre-Brossolette wrote: "His indiscretions are legendary, but are not reported in the press, because of the French tradition. His taste for the fairer sex has made him take many risks. He was almost sued for harrassment several times."

• Strauss-Kahn had been scheduled to attend a meeting of euro area finance ministers in Brussels tomorrow. The meeting will take place as officials discuss the possible increase of a 110- billion euro ($155-billion) loan package to Greece amid concerns the country may be unable to return to markets to finance its debt next year.

IMF

• For the fund, this is terrible news at a time when its leadership needs to portray stability, wisdom, and confidence
• John Lipsky, the first deputy managing director at the IMF, is in Washington and serving as acting managing director. He is scheduled to step down in August.
• Last month, officials from the Group of 24, which includes Brazil, China and Mexico, repeated a call for “an open, transparent, merit-based process” for choosing the heads of the World Bank and IMF, “without regard to nationality.” The IMF job is traditionally held by a European, while an American leads the World Bank.
• When he arrived, the IMF's emergency lending was $58.7 million in 2006. A record of $91.7 billion last year.
• Strauss-Kahn gained backing from the Group of 20 to triple the IMF’s resources, and the group has over the past two years given the agency a host of new missions to help avoid another crisis.
• Strauss-Kahn played a key role in efforts to stem the European debt crisis which started last year in Greece, with a pledge to contribute about a third of future bailouts in the region by the European Union.

FRENCH POLITICS

• Strauss-Kahn has juggled careers as an economics professor, lawyer and Socialist politician. He holds a law degree and a doctorate in economics from the University of Paris.

• In 1986, he was elected to the National Assembly and served as industry minister from 1991 to 1993. He returned to office as finance minister under Premier Lionel Jospin in 1997. He cut France’s budget deficit to below 3 percent in 1999, the level required for euro membership.

• In November 1999, he resigned as finance minister after magistrates began an investigation into financial irregularities at MNEF, a French student insurance group. The probe covered an allegation that the company had paid him about $100,000 from 1994 to 1996 for legal work on a property deal that he never performed. Strauss-Kahn denied wrongdoing and was cleared by a Paris court in November 2001.

• Strauss-Kahn, a former French finance minister and member of France’s opposition Socialist Party, has consistently been among the most popular possible candidates to contest France’s 2012 presidential election, opinion polls show.

• Strauss-Kahn took the helm of the IMF in November 2007, following his loss in the primaries of the French Socialist Party ahead of the 2007 presidential elections.

• Strauss-Kahn, whose term at the IMF expires next year, has in the past several months declined to say whether he was planning to run for office. The vote will be held in April and May 2012.

• President Nicolas Sarkozy would have trailed Strauss-Kahn by 5 percentage points in the first round of the presidential voting if the election had been held at the end of last month
• Mr Strauss-Kahn has no equal in France’s opposition Socialist party. But now it is almost inconceivable that he will throw his hat into the ring. There have, in any case, always been doubts as to whether socialist voters would pick him as their candidate in the party’s primary election later this year. The risk now is that the party will choose Martine Aubry, standard-bearer of the traditional left, or François Hollande, more pragmatic but lacking in fresh ideas. The socialists badly need to find a candidate with Mr Strauss-Kahn’s intellectual weight and centrist appeal.
• Sarkozy faces party wrath after poll defeats, the centre-right president, his re-election remains anything but certain.
• Recent surveys indicate that the far right’s Marine Le Pen may beat Mr Sarkozy in the election’s first round next April and eliminate him from the two-candidate run-off.
• If one effect of the Strauss-Kahn affair is to enhance Ms Le Pen’s prospects at the expense of mainstream candidates, it will be a black day for democracy in France.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Dominique Strauss-Kahn accused of sex attack on maid Guardian

• Strauss-Kahn is suing a French newspaper that claimed staples of his lifestyle included luxury homes and sought-after works of art. In its report, France Soir also said he had several handmade suits made by Barack Obama's tailor, a claim hotly denied. The tailor, a 75-year-old Frenchman from Marseille, sells suits for between £4,300 and £21,000. Questions over Strauss-Kahn's wealth were raised two weeks ago after he was pictured climbing into a friend's £87,000 Porsche Panamera S outside his £3.5m Paris home alongside his heiress wife.
• Rumours of dangerous liaisons and sexual conquests have had little effect on Strauss-Kahn's chances of occupying the highest office in France, but last night's arrest may alter his future ambitions. Strauss-Kahn was expected to throw his hat into the election ring within weeks. He has been fighting off a very French furore over assertions his tastes are too luxurious to lay claim to the political left.
• Strauss-Kahn is suing a French newspaper that claimed staples of his lifestyle included luxury homes and sought-after works of art.
• In its report, France Soir also said he had several handmade suits made by Barack Obama's tailor, a claim hotly denied. The tailor, a 75-year-old Frenchman from Marseille, sells suits for between £4,300 and £21,000.
• Questions over Strauss-Kahn's wealth were raised two weeks ago after he was pictured climbing into a friend's £87,000 Porsche Panamera S outside his £3.5m Paris home alongside his heiress wife.
• In its report on Thursday, the newspaper said that since Strauss-Kahn and his wealthy wife, Anne Sinclair, had arrived in the US capital for his IMF job in 2007 they had lived a life of luxury. The couple was said to have bought a £2.5m home in the upmarket Washington district of Georgetown.
• Other reports revealed that Strauss-Kahn, who allegedly earns £22,000 net a month, also has a flat in the 16th arrondissement of Paris which was bought for £2.2m in 1990, another flat on the expensive Place des Vosges in the 4th arrondissement bought in 2007 for £3.4m, and a riad in Marrakech.
• Sinclair is the granddaughter of Paul Rosenberg, a celebrated dealer of modern art, and has inherited part of his collection, which is said to include at least one Picasso.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Why Growth is Dead Chris Martenson

• The end of the second round of quantitative easing (QE II) is going to be a complete disaster for the paper markets -- specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. 

• The only thing that will arrest the plunge will be QE III, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the "Muni Asset Trust Term Liquidity Facility" or the "American Prime Purchase Program," but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.  

•  Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity.

• the Fed is still pumping an average of $89 billion per month into the markets.

• When we compare the $370 billion that the Fed has printed and placed into the financial system year-to-date against the levels of money flows going into and out of mutual funds, exchange-traded funds (ETFs), and money market funds, we observe that the Fed's actions swamp those flows by a factor of roughly 2:1.
• While money printing can so some wondrous things in the short term it cannot fix the predicament of fundamental insolvency. 
• The United States has lived beyond its means for a couple of decades and promised itself a future that it forgot to adequately fund. 
• The choice that remains is between accepting an unpleasant but relatively steady period of austerity leading to a new lower standard of living -- and a final catastrophe for the dollar. The former is akin to walking down around the side of a cliff, and the latter is jumping off.

• "Total Credit Market Debt" covers everything - financial sector debt, government debt (fed, state, local), household debt, and corporate debt - and is represented by the bold red line (data from the Federal Reserve). 

• Debt has doubled five times in four decades (blue triangles).  

• If we perform an exponential curve fit (blue line), we find a nearly perfect fit with an R2 of 0.99 when we round up. That means that debt has been growing in a nearly perfect exponential fashion through the 1970's, the 1980's, the 1990's and the 2000's. In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again from $52 trillion to $104 trillion. 

• Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed in response to and are utterly dependent on exponential credit growth.   Of course, as you know, money is loaned into existence and is therefore really just the other side of the credit coin. This is why Bernanke can print a few trillion and not really accomplish all that much. It's because the main engine of growth is expecting, requiring, and otherwise dependent on credit doubling over the next decade.

• It explains why
  • Bernanke's $2 trillion has not created a spectacular party in anything other than a few select areas (banking, corporate profits) which were positioned to directly benefit from the money. 
  • It explains why things don't feel right, or the same, and why most people are still feeling quite queasy about the state of the economy.
  •  It explains why the massive disconnect between government pensions and promises, all developed and doled out during the prior four decades, cannot be met by current budget realities.

• To put that into perspective, a doubling will take us from $52 to $104 trillion, requiring close to $5 trillion in new credit creation during each year of that decade. Nearly three years have passed without any appreciable increase in total credit market debt, which puts us roughly $15 trillion behind the curve.

• What will happen when credit cannot grow exponentially? We already have our answer, because that's been the reality for the past three years. 

  • Debts cannot be serviced,
  • The weaker and more highly leveraged participants get clobbered first (Lehman, Greece, Las Vegas housing, etc.). 
  • Money is piled on, but traction is weak. 
  • What begins as a temporary program of providing liquidity becomes a permanent program of printing money, which the system becomes dependent on in order to even function.
  • The dominoes topple from the outside in towards the center

REFERENCE: Tipping Points  

SOURCE: A colour-coded guide to the Greek crisis FT Alphaville

From Ralf Preusser and Sphia Salim at Bank of America Merrill Lynch. Unsurprisingly, perhaps, the analysts reckon the ‘muddling through’ options are most likely:

REFERENCE: Tipping Points 

SOURCE: Kicking the Can to the End of the Road John Mauldin

• It is all well and good to kick the can down the road, but what happens when you come to the end of the road? The European answer seems to be to haul in the heavy equipment and extend the road.
• The biggest bubble in history is the bubble of government debt. It is a bubble in a world full of pins.
• The rumors have been flying all this week.
  • GREECE: Greek is going to leave the euro. No, it won’t.
  • GERMANS: Germans are demanding debt restructuring, and then they say no.
  • MEDIA (BANKS): A German newspaper is reporting that the EU, IMF, and Germany want a Greek debt extension, while the ECB (holders of Greek debt) and France oppose it.
  • MARKETS: Greek two-year bonds are now paying 25% if you care to buy them in the open market, which is effectively the market voting for some type of debt restructuring or outright default.
• It is not a matter of pain or no pain; it is a decision as to who will bear the pain.

GREECE

• Both HSBC and Roubini assume there are options that can work to extend the debt maturities, lower the interest rates, and give Greece some room to work out its problems. But the solution to too much debt is not to increase the debt. No country save Britain at the height of its empire has ever recovered from a debt-to-GDP ratio of over 150% without a default. None.
• Roubini writes: “A haircut of 20-50% is required to achieve debt sustainability. To put things into perspective, it is worth considering the magnitude of haircut required to make debt clearly sustainable. For simplicity at this stage, we consider face-value haircuts in our debt sustainability analysis toolkit and find that a haircut of around 20% on the total stock of debt would allow Greece to achieve a debt-to-GDP ratio of 60% by 2030. This assessment is based on the macroeconomic projections in the IMF’s April 2011 WEO; however, more conservative macroeconomic projections suggest a haircut of around 50% could be necessary.”
• MAULDIN - "I think both Greece and the EU would be better off if Greece did default"

IRELAND

• Morgan Kelly is professor of economics at University College Dublin. He is not popular at times with the establishment, as he points out their foibles, but he has a very good track record of being right. He recently wrote a devastating piece for the Irish Times, which has gone viral in Ireland. (http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123_pf.html )

  He basically points out that the Irish cannot afford to pay the debts of their banks. He suggests they simply walk away.

• MAULDIN - "Ireland should not bail out their banks. They simply cannot afford to. Tell the EU and British banks to go pound sand. It will mean serious budget cuts; but like Iceland when it rejected baking its banks, it will mean a quick recession and then growth can start again."

KICK THE CAN TO THE END OF THE ROAD

• We are watching the biggest bubble of all time, the bubble of government debt, try to keep from popping. My bet is that it can’t.

• European leaders will continue to try to kick the can down the road. I would not be surprised to see no real “crisis” this year. But there is an Endgame. And I think it involves voters and not just leaders. The guy in the street can see that bailing out countries is really just a back-door way to bail out banks on the backs of taxpayers and the currency.

• In the end, this comes down to elections. It becomes not a matter of high finance and political will on the part of European leaders, but of how you convince the burghers in Germany and the practical Dutch (et al.) of the need to share some Greek pain. It requires convincing the Irish people to assume that bank debt, when they have already told their leaders no. I am glad that is not my job.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Why I Don't Support Europe's Bailouts Timo Soini

When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the bailouts of euro-zone member states. Europe is suffering from the economic gangrene of insolvency—both public and private. Unless we amputate that which cannot be saved, we risk poisoning the whole body.

To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them.

At the risk of being accused of populism, we'll begin with the obvious: It is not the little guy who benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever more money back to our governments.

In a true market economy, bad choices get penalized. Instead of accepting losses on unsound investments—which would have led to the probable collapse of some banks—it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund.

The money did not go to help indebted economies. It flowed through the European Central Bank and recipient states to the coffers of big banks and investment funds.

Further contrary to the official wisdom, the recipient states did not want such "help," not this way. The natural option for them was to admit insolvency and let failed private lenders, wherever they were based, eat their losses.

That was not to be. Ireland was forced to take the money. The same happened to Portugal.

Why did the Brussels-Frankfurt extortion racket force these countries to accept the money along with "recovery" plans that would inevitably fail? Because they needed to please the tax-guzzling banks, which might otherwise refuse to turn up at the next Spanish, Belgian, Italian or even French bond auction.

Unfortunately for this financial and political cartel, their plan isn't working. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them.

Setting up the European Stability Mechanism is no solution. It would institutionalize the system of wealth transfers from private citizens to compromised politicians and failed bankers, creating a huge moral hazard and destroying what remains of Europe's competitive banking landscape.

Fortunately, it is not too late to stop the rot. For the banks, we need honest, serious stress tests. Stop the current politically inspired farce. Instead, have parallel assessments done by regulators and independent groups including stakeholders and academics. Trust, but verify.

Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.

If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.

For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country's debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.

This is not just about economics. People feel betrayed. In Ireland, the incoming parties to the new government promised to hold senior bondholders responsible, but under pressure they succumbed, leaving their voters with a sense of disenfranchisement. The elites in Brussels have said that Finland must honor its commitments to its European partners, but Brussels is silent on whether national politicians should honor their commitments to their own voters.

I was raised to know that genocidal war must never again be visited on our continent and I came to understand the values and principles that originally motivated the establishment of what became the European Union. This Europe, this vision, was one that offered the people of Finland and all of Europe the gift of peace founded on democracy, freedom and justice. This is a Europe worth having, so it is with great distress that I see this project being put in jeopardy by a political elite who would sacrifice the interests of Europe's ordinary people in order to protect certain corporate interests.

Mr. Soini is chairman of the True Finn Party in Finland.

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: US-Iran Escalation: Iran Arrests 30 US Spies As It Builds Venezuelan Missile Base; America Sends A Third Aircraft Carrier To Persian Gulf Zero Hedge

A week ago Die Welt reported that, in what may soon be a repeat of the Cuban missile crisis,

US arch-enemy Iran, following a secret agreement signed on October 19, 2021 of strategic cooperation, Venezuela has allowed Iran to commence construction of a missile base on Venezuelan soil.

The base, which will be located on the northernmost peninsula de Paraguana, 120 kilometers from the Colombian border, has recently been visited by a group of leading engineers from the Iranian Revolutionary Guard-owned construction company Khatam al-Anbia, is unofficially designed "to help develop an infrastructure to protect against air attack. Also planned is the construction of a command and control station, residential areas, watchtowers, and bunkers, in which warheads, missile fuel and other items can be stored.

In cooperation with its Venezuelan partners, Iran also intends to build missile silos at a depth of about 61 ft." The project appears to be funded by Iran: "Information gathered by Die Welt also suggests that on their visit to Venezuela, members of the Iranian delegation carried cash in their luggage for the project’s initial funding.

Western security circles suspect that this involved tens of millions of dollars siphoned off from Iran’s burgeoning oil profits." But most importantly is the discovery that while presumably defensive, Venezuela has told Iran, that it will be granted use of the base when completed: "According to the secret agreement between the two countries, Venezuela pledged to Iran that it will be able to strike its enemies from the joint missile base. Iran is attempting to boost its strategic threat to the U.S., similar to the Soviet strategy in Cuba during the 1960s." And while skeptics may say that the base located about 2,400 miles from DC has no chance in striking the US capitol, the reality is that the Iranian long-range ballistic missiles Shahab 5 and 6, are rumored to be a three-stage system, which has a range of anywhere between 3,000 and 10,000 miles. So with missile base supplies most likely to come by sea (Venezuela is a few hundred miles away from Cuba), is a recreation of the 1961 Cuban missile crisis the next big political diversion?

Location of the base per Die Welt:

A move that is sure to tip the scales to an outright confrontation even more, is the just announced by Al Arabiya arrest of 30 suspected US spies: a move which will certainly lead to executions, and the complete collapse of any diplomatic ties between the two countries.

Iran has arrested 30 people it said were spying for the United States.

“Due to the massive intelligence and counter-intelligence work by Iranian agents, a complex espionage and sabotage network linked to America’s spy organization was uncovered and dismantled,” an intelligence ministry statement read out Saturday on the television said.

“Elite agents of the intelligence ministry in their confrontation with the CIA (Central Intelligence Agency) elements were able to arrest 30 America-linked spies through numerous intelligence and counter-intelligence operations,” it added.

According to Iran’s semi-official Fars news agency, the suspects had passed information to US officials at embassies and consulates in third countries, including Malaysia, Turkey and the United Arab Emirates.

It said Iran had identified 42 US intelligence officers in such countries, saying: “They engage in collection of information regarding Iran’s nuclear, aerospace defense and bio-technology fields,” among other areas.

Spying in Iran usually carries the death penalty, often implemented without a full trial.

The announcement of the arrests comes two days after US President Barack Obama made a speech on the Middle East, reiterating Washington’s view that Tehran sponsors terrorism and is developing nuclear weapons, charges that Iran vehemently denies.

REFERENCE: Tipping Points  Audio - Global Insights 

ITALIAN CDS SPREADS HEADING HIGHER

ITALIAN 10 YEAR BOND SPREADS BREAKOUT - BOND SELLING ACCELERATES

ITALIAN STOCK MARKET BREAKS CRITICAL SUPPORT

REFERENCE: Tipping Points Audio - Global Insights 

SOURCE: Exclusive: China to clean up billions worth of local debt Reuters

• China's regulators plan to shift 2-3 trillion yuan ($308-463 billion) of debt off local governments, sources said, reducing the risk of a wave of defaults that would threaten the stability of the world's second-biggest economy.
• As part of Beijing's overhaul of the finances of heavily-indebted local governments, the central government will pay off some of their loans and state banks including some of the "Big Four" will be forced to take some losses on the bad debt, said the sources, both of whom have direct knowledge of the plans.
• Part of the debt will also be shifted to newly created companies, while private investors would be welcomed in projects previously off-limits to them, sources said.
• Beijing will also lift a ban on provincial and municipal governments selling bonds, a step aimed at bolstering their finances with more transparent sources of funding.
• Many analysts see China's pile of local government bad debt as a major risk to the economy, especially as the economy slows, but few see widespread banking fallout as they believe cash-rich Beijing can step in to soak up losses.
• The clean-up plan could boost investor confidence in Chinese banks, which have provided many of their loans as part of the massive economic stimulus program launched by Beijing in late 2008 to counter the global financial crisis. The program resulted in unfettered lending to local government financing vehicles, hybrid government-company bodies that governments used to get around official borrowing restrictions.
• After a months'-long investigation into local government liabilities, Beijing has determined that local governments have borrowed around 10 trillion yuan, said one of the sources. Chinese media have reported that the governments may default on around 2 trillion yuan worth of those loans.
• The source said that three government bodies -- the bank regulator, the Finance Ministry and the National Development and Reform Commission, China's state economic planner -- plan to start cleaning up the debt in June and finish in September. The second source said the program may take longer. "It's to rescue local government finances, not banks. It's different in nature from the bailout of the four big (state) banks in the late 1990s before they listed (on stock markets)," the first source told Reuters, requesting anonymity because he is not authorized to talk to reporters.
• In 1999, China set up asset management companies to clear 1.4 trillion yuan in bad loans off the books of the large state-owned banks, which were saddled with piles of debt after decades of politically motivated lending. The Big Four are Industrial and Commercial Bank of China (601398.SS) (1398.HK), Bank of China (3988.HK) (601988.SS), China Construction Bank (0939.HK) (601939.SS) and Agricultural Bank of China (1288.HK) (601288.SS).
• The banking regulator, the Finance Ministry and the state planner declined immediate comment when reached by telephone.

CLEANING

• UP Planners are still ironing out details about how the sour loans would be written off, the source said. "The central government will swallow some of it," he said, and "some local governments will be allowed to issue bonds." "The government hopes to resolve this problem before the 18th Congress next year," the second source said, referring to the Communist Party's key conclave where a leadership reshuffle is expected.
• Details on the firms that will be created to manage the debt were not immediately known, but the first source said they may receive funds from private investors.
• State-owned China Development Bank accounts for about one-third of all local government loans, said one of the sources, with the rest being extended by big state-owned banks and city commercial banks.
• Worried these loans could strain China's public finances if they sour, China's cabinet has instructed banks to clamp down on lending to local governments, an order which Chinese banks say they are abiding by.
• State media previously reported that as part of Beijing's clean up of the local government debt mess, it will consolidate about 3,800 local government financing vehicles.
• Guo Tianyong, an economist at the Central University of Finance and Economics, said that while the debt overhauling exercise might take the bad debt off the local governments' books, it wouldn't necessarily resolve the question of who would ultimately pay.
• "I feel it won't fundamentally solve the problem by hiving off and selling the debt to other investors," Guo said.
• Underscoring worries that China's public finances may be strained by bad debt, Fitch last month cut the outlook for China's local currency rating to "negative."
• Standard & Poor's said this month the non-performing loan ratio among Chinese banks could reach 5-10 percent in the next three years.
• Some analysts also believe China's central bank is wary of raising interest rates too forcefully for fear of burdening local governments with growing interest payments.
• The stash of local government debt is still growing, however. The Economic Observer newspaper said it may hit 12 trillion yuan by the end of 2011, citing unnamed experts.
• ($1 = 6.483 yuan)

REFERENCE: Tipping Points Audio - Global Insights