Saturday, July 31, 2010

commentary July 30.2010..important.

Good morning Ladies and Gentlemen:
Yesterday we had a plethora of data and economic stories that will shape the financial landscape for years to come.
But first, I must report our newest entrants to the banking morgue:

3 bank failures so far this weekend

Bank Closing Information – July 30, 2010 
These links contain useful information for the customers and vendors of these closed banks.

Coastal Community Bank, Panama City, FL 
Bayside Savings Bank, Port Saint Joe, FL 
NorthWest Bank & Trust, Acworth, GA

OK let us begin. 
Gold closed up by $13.30 Friday to 1181.70  Silver rebounded firmly to 17.99 rising by 39 cents.
The gold comex OI for the entire gold complex fell again yesterday by 5909 contracts to 532,234.
The silver comex OI fell a bit to the tune of 629 contracts to 117,514. Gold and silver rose on Thursday so this continued contraction
is very enlighteneing.  It seems to me that we have everybody trying to cash in their paper obligations as the world scours for whatever real
silver and gold can be obtained.
Before going into the delivery notices and inventory levels, I would like to give you the COT report released at 3:30 pm yesterday.
To say the least, the report is very bizarre.
In gold:
the large speculators that were long in gold increased slightly their positions to the tune of 288 contracts.
the large speculators that were short on gold decreased significantly their shorts by a large 10,306 contracts ( i.e. they covered their shorts)
and now the commercials in gold 
the commercials that are involved in gold and are thus long in gold unexpectedly sold massively to the tune of 15,266 of their long positions.
and our notoriously short gold commercials like JPMorgan etc increased their short positions but by a tiny 3375 contracts.
and now the small speculators who are coming to the party late:
those speculators that were long on gold increased those positions to the tune of 5009 contracts. 
those speculators that were short on gold  increased those positions to the tune of 3712.
This data is of Tuesday night.
It is extremely difficult to ascertain what happened to those commercials that are normally long to liquidate such a massive quantity of the long positions.
In silver we got a much different picture:
In the large speculator category:
those large speculators that are long in silver  increased those positions to the tune of 658 contracts.
those large speculators that are short on silver increased those short positions to the tune of 1950 contracts.
and now the commercial category:
those commercial players that are long in silver and thus close to the physical scene increased those long positions to the tune of 931 contracts.
and those commercial players that are short and are the major suppliers of the paper comex silver contracts, decreased their shorts to the tune of 261 contracts..very tiny.
and now the small speculators:
those small speculators that are long in silver reduced by a tiny fraction to the tune of only 211 contracts.
those small speculators that are short in silver reduced their shorts by 316 contracts.
So we have witnessed a complete change in thinking in gold and silver with respect to the large speculators.
In gold they have covered their short positions big time; in silver they have increased their short positions.
In the commercial field in gold, those that have been long for quite a while decided to lighten up on their longs
yet in silver those that have been long increased those positions.
We have not gleaned too much information from the COT report.
Now let us go to the all important comex inventory and notices:
OK here are todays figures:
Withdrawals from Dealers Inventory   455,553oz
Withdrawals from customer Inventory   N/A
Deposits to the dealer Inventory  N/A
Deposits to the customer Inventory  29oz
No of oz served  1 contracts served  5,000 oz
No of oz to be served   xxxxx
Withdrawals from Dealers Inventory   zero
Withdrawals from customer Inventory   29,366 ox
Deposits to the dealer Inventory  N/a oz
Deposits to the customer Inventory  N/a oz
No of oz served  3685    368,500oz
No of oz to be served 5022 502,200 oz
COMEX Warehouse Stocks July 30, 2010
I will now try and give you the facts and try to make a determination as to what is going on. First, let's delve in the gold comex as we are
now enter the August delivery month.
Before commencing, we got for the first time an internal transfer in the gold comex. The exchange
notified everyone that there was a massive 367,716 oz of gold transferred from the customer to the dealer.  There is no question
that the amount in question was a lease where the customer was provided with a handsome payment or fee for leasing his gold with the promise
that the gold will be returned to him shortly.  It is interesting to note that the transfer coincided with almost exactly the number of notices served upon our new entrants to the physical gold.  Please refer to the no of 3685 notices served, which represents 368,500 oz of gold. We will have to wait and see if 368000 oz of gold is removed from the dealer inventory.
In another strange event, these numbers were released late Thursday instead of late Friday.  This constituted a 3,685 contraction in OI as these guys are not longer
standing, they have been served.
It does not explain the massive contraction of 22,000 contracts of Thursday and another 5900 contracts on Friday.
I will wait until Monday to give you more conclusive evidence, but it seems that the banking cartel fleeced many of the long holders who have now vacated
the comex gold arena. They did not roll nor did the stand for delivery.  They just left the scene.
The total number of gold contracts that looks like they will stand will be:
368,000 oz (already served) + 502,200 oz (to be served) = 90,000 oz of July options  =  960,200 oz which is very light for the massive volume on the comex
the last week.
However in another strange development the Sept contract traded at a twenty cent backwardation to the August delivery contract in gold.
Very unusual!.
I am having a hard time understanding why so many longs decided to give up all at once.
I am intrigued that on day one, the comex had to resort to the lease from a customer as zero oz have entered any registered vault in 3 months.
I am intrigued by the backwardation on the Sept to August gold which has never happened before.
Lease rates are now positive in gold in all months.
There are many more stories on the BIS swap and on IMF sales that I will report to you today which detail massive physical demand for gold
which is somewhat counter to the demand shown for physical gold at the comex.
If those OI numbers are correct and a massive amount of long holders gave up, you can be sure that the bottom of gold has been reached as many of these longs were thus fleeced again. The commercials however have a long way to go to cover all of their massive gold shorts.
On now let us go to silver:
Before proceeding to the August silver, I reported to you that on Thursday only 36 contracts were served leaving 76 contracts to go or
380,000 oz of silver. The removal of the 455,553 oz of silver is probably to satisfy the 76 remaining longs and part of the 36.
In silver only one contract was served upon options exercised to the tune of 5000 oz .
Thus so far we have 5000 oz of silver standing for this non delivery month of August.
There is no question that we have turmoil in both silver and gold comex with internal transfers now occurring in both metals.
The IMF has announced that for the month of June, a total of 17.4 tonnes of gold was sold and they also reported that the month of May saw 15.2 tonnes of gold sold. At this rate,
the IMF will be finished in its gold sales  by January 2011.
It is very strange that the IMF has decided to delay reporting sales of gold conducted by itself.  Normally they repeat the same announcement of pending sales over and over again.
Now they decide to hide these sales.  I guess their gold was swallowed in seconds so they just do not like to report on it.
I would also like to report that in physical gold markets in Viet Nam and China gold is trading at a healthy premium to spot:
In Viet Nam the premium is $25.00 per oz and in Shanghai it is $6.90 per oz.
I would like to give you a great paper by Adrian Douglas on the BIS swap.
It now seems that he and Reg Howe have got it correct as to what happened.  Here is his paper:

Adrian Douglas: What's unravelling is gold price suppression


By Adrian Douglas
Friday, July 30, 2010

Yesterday the Financial Times published an article headlined "BIS Gold Swaps Mystery Is Unravelled" in an attempt to clarify the recently discovered gold swaps undertaken by the Bank for International Settlements with European commercial banks:

I recently published my interpretation of these gold swaps and concluded that they were most likely a secret bailout of one or more bullion banks that do not have enough physical gold to meet burgeoning demand:

Lawyers always tell their clients to shut up and not speak to the press because the more they say without proper legal consultation, the more likely they are to incriminate themselves. One has to wonder why lawyers at the BIS didn't offer similar advice to the spokespeople at the BIS, because they have opened their mouths and inserted both feet.

The FT reports that "Jaime Caruana, head of the BIS, told the FT the swaps were 'regular commercial activities' for the bank."

The FT also reports that "'the client approached us with the idea of buying some gold with the option to sell it back,' said one European banker, referring to the BIS."

So we are led to believe that the BIS just casually called up some commercial banks and proposed a "regular commercial" activity of a 346-tonne gold swap.

The only problem with this story is that this is the biggest gold swap in history. It was anything but a "regular commercial activity."

The FT tries to palm off the biggest gold swap in history as just a matter of the BIS earning a little return on $14 billion.

The FT says it has learned that the swaps, which were initiated by the BIS, came as the so-called "central banks' bank" sought to obtain a return on its huge U.S. dollar-denominated holdings. The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits the banks were taking from the Basel-based institution.

And GATA has learned that the moon is made of Swiss cheese.

In central banking $14 billion is chump change. The U.S. Treasury auctions between $70 billion and $130 billion of Treasury debt very other week. Only a few weeks ago the European Central Bank created a trillion dollars out of thin air to defend the euro amid the Greek debt crisis.

There are two sides to a swap transaction, but one would have to have the IQ of a grapefruit to believe that the important part of this transaction is a piffling $14 billion and not the 346 tonnes of gold that make it the biggest gold swap in history.

But the BIS has given us another piece of information.

The FT says: "Three big banks -- HSBC, Societe Generale, and BNP Paribas -- were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads."

I had assumed in my last article that only one bullion bank was involved, but we now find that more than 10 banks were involved. The first on the list is none other than HSBC, which along with JPMorganChase holds 95 percent of all gold and precious metals derivative positions among U.S. commercial banks as reported to the U.S. Treasury Department. HSBC and JPMorganChase are also holding a massive short position in gold and silver on the New York Commodity Exchange. Further, HSBC is the custodian of the gold that is supposedly backing the exchange-traded fund GLD.

In my analysis of the BIS swaps I postulated that a bullion bank had made a swap with one or more central banks and had obtained bullion in exchange for $14 billion. I further postulated that the bullion bank made another swap with the BIS whereupon the BIS gave the bank $14 billion but the bullion bank did not hand over the gold to the BIS but instead credited the BIS with a ledger entry of gold in the BIS unallocated gold account. This would allow the bullion bank to have real gold to meet burgeoning demand while the accounts would show that the same gold had been credited to the BIS.

The FT says: "Officials said other commercial banks obtained the gold from the lending market, borrowing bullion from emerging countries' central banks."

So the tripartite nature of this shady transaction is confirmed -- central banks were a source for the real gold. But the real gold wasn't the "gold" that the BIS received as a swap for $14 billion. The FT explains:

"The gold used in the swaps came mainly from investors' deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called 'allocated accounts,' which restrict the custodian banks' ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper 'unallocated accounts,' which give banks access to their bullion for their day-to-day operations."

But unallocated gold is not gold at all. It is not gold that has been deposited that is loaned to someone else. It is gold that has been deposited that is loaned simultaneously to many other people. I have estimated that for each ounce in their vaults the bullion banks have loaned or sold 45 ounces.

So the FT's story appears to confirm my thesis that the BIS has been credited with 346 tonnes of ledger-entry gold in the BIS unallocated gold accounts held with the bullion banks. This makes the BIS an "unsecured creditor" of the bullion banks as defined by the London Bullion Market Association's description of "unallocated account" holders.

The FT story suggests that at least 10 bullion banks needed physical gold bullion desperately. This looks like a rerun of the 1960s London Gold Pool fiasco where central banks dishoarded gold to meet massive investor demand in a futile attempt to maintain a gold price of $35 per ounce.

I have spelled out in recent articles that there is a run on the bullion banks has begun and is gaining momentum. Investors and institutions are realizing that "unallocated gold" is not gold at all but just an unsecured promise for gold. So investors and institutions are starting to demand delivery of their metal, and as there is only 1 ounce backing each 45 ounces that are claimed, the situation is turning into what will be a short squeeze of epic proportions.

The FT says: "Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee."

As Jeffrey Christian of CPM Group has explained, the "physical" gold market is in fact a misnomer as that market is actually a paper market backed by only a small amount of physical gold:

So investors have bought a record amount of "physical gold," which is actually paper gold that they have never seen, and only about 2.3 percent of what has been sold actually exists. The bullion banks are "awash" with liabilities for the record amount of gold they are supposed to be holding. Investors are now distrusting the bullion banks and are asking for delivery, so is it surprising that the record amount of "physical gold" sales has led to a record gold swap being transacted to give the bullion banks liquidity?

The International Monetary Fund has been surreptitiously selling gold at a clip of around 15 tonnes per month since February without any official announcements and without disclosing the recipients. This is another sign that the bullion banks are in serious trouble.

When 45 ounces of gold are sold but only 1 ounce is sourced, the result is a massive suppression of the gold price. But the converse is also true: When 45 ounces of gold are demanded for every 1 ounce that is in the vault, the price explosion is beyond imagination.

What is unravelling is not the mystery of the BIS gold swaps, as claimed by the Financial Times, but the unravelling of the gold price suppression scheme itself.


It looks like we were correct in our interpration as to the shenanigans that transpired.
First of all, the FT has now confirmed that 10 commercial banks were involved in the swap with central banks not one bank.
They also confirmed that the BIS has been credited with unallocated gold and this unallocated gold came from customer deposits at European banks.
Thus, the commercial banks used as collateral depositors gold and not their own and then swapped this unallocated gold with the BIS.  The BIS will thus be a creditor
to the commercial banks if the swap cannot be unwound. The central bank and/or the commercial bullion  bank would have complete use of physical gold that they are now dishoarding to meet the massive demand on gold that they are facing!!
In other words, they used their double accounting trick.  The BIS gets unallocated gold which is basically a paper claim on gold. The central banks mobilized
gold as demand from Europeans for physical gold caused tremendous grief for our bankers.
Adrian is correct..the bullion banks are "awash" in gold liabilities for the record number of oz that they are suppose to hold.  Investors are now mistrusting
the bankers and are asking for their metal back.  The unallocated ledger at the bullion banks is turning over as fast as possible to allocated gold.
Those who get physical first wins, those who delay have nothing but a paper obligation.
Now wonder, the BIS was silent on the matter. 
I would like to highlight the John Embry's paper where he highlights on the global mess and he believes that gold will become its
northernly trajectory immediately.  First here is his paper entitled:  Gold is on the cusp for a parabolic move
or here:
Now we shall proceed to the big stories of yesterday.
Many of you heard that the usa released its GDP figures for the 2nd quarter and it below expectations:

U.S. economic news:

8:31 Q2 GDP 2.4% vs. consensus +2.6% 
*Deflator 1.8% vs. SA +0.9%
* Price Index 1.8% vs. SA +1.1%
* Core Index 1.1% vs. SA +1.0% 

Not only that but they revised all figures for the past 3 years downward.
The usa debt has gone up 1.5 trillion dollars for a gain of 13% and for that privilege it gets a paltry 2.4% growth.  In other words, the usa needs 6 dollars of debt to get 1 dollar of growth.
It used to get 1 for one.  Not now.
What is also very troubling is that the entire growth is really the growth in inventories.  When that subsides, the usa will be in one sorry mess.
 from Jim Sinclair's commentar at

U.S. Economy Grew 2.4% in Second Quarter, Below Forecast 
By Timothy R. Homan – Jul 30, 2010 6:41 AM MST

Growth in the U.S. slowed to a 2.4 percent annual rate in the second quarter, less than forecast, reflecting a larger trade deficit and an easing in consumer spending.

The increase in gross domestic product compared with a median forecast of 2.6 percent of economists surveyed by Bloomberg News and follows an upwardly revised 3.7 percent pace in the first quarter that showed a jump in inventories, according to figures from the Commerce Department today in Washington. Business investment climbed at the fastest rate since 1997.

"The economy is muddling through," Ethan Harris, head of North America economics at Bank of America-Merrill Lynch Global Research in New York, said in an interview after the report. "We're probably not going to see a really strong number for a while. We need to see some pickup in job growth."

A slower pace of growth means employers may be reluctant to hire workers and more likely to keep a lid on prices in order to boost sales. Federal Reserve Chairman Ben S. Bernanke last week said the central bank is prepared to take further policy actions if the world's largest economy "doesn't continue to improve."

The Standard & Poor's 500 Index dropped 1.1 percent to 1,089.97 at the 9:36 a.m. in New York. The yield on the 10-year Treasury note fell 6 basis points, or 0.06, to 2.92 percent.

Median Forecast

The projected gain in GDP was based on the median estimate of 81 economists surveyed. Forecasts ranged from gains of 1 percent to 4 percent.

The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to the Commerce Department's annual revisions also issued today.



In an AP article by Jeanine Aversa, she states that the usa economy is in a deeper recession that originally believed:



The recession was deeper than the government previously thought.

The Commerce Department, in revisions issued Friday, estimates the economy shrank 2.6 percent last year, the steepest drop since 1946. That's worse than the 2.4 percent decline originally estimated.

The economy's plunge underscores why the unemployment rate surged to 10.1 percent in October, a 26-year high.

The revisions in gross domestic product, or GDP, now show zero growth in 2008. That compares with a 0.4 percent gain previously estimated. The economy also grew less in 2007 (1.9 percent) than earlier thought (2.1 percent).

For all three years, consumers spent less and home builders cut more deeply than had been thought. Those factors help explain the downward revisions on the economy.

The revisions also show that struggling state and local governments cut spending more last year than previously thought. And they spent less in 2007 and 2008.

The economy slid into its worst recession since the Great Depression in late 2007. Many economists think the recession ended last summer, although a panel of academics that dates the start and end of recessions hasn't declared when this one ended. The panel usually does so well after the fact.

From the start of the recession in December 2007 until the April-to-June quarter of 2009, the economy sank 4.1 percent. That was deeper than the 3.7 percent decline previously estimated for the recession.

GDP is the broadest gauge of the economy's health. It measures the value of all goods and services from machinery to manicures produced in the United States.

The Commerce Department's latest revisions reach back to 2007. They're based on more complete data and on methodology thought to be more accurate.

Here is this article on the revisions to the GDP. The article is from the Economic Policy Journal/2010/07/it-was-much-worse-bea-revises.html.
you can find the site at

FRIDAY, JULY 30, 2010

It Was MUCH, MUCH WORSE: BEA Revises Downward 2007, 2008, 2009 GDP Data

Most focus from the latest Bureau of Economic Analysis GDP data will be on the current slowed GDP number of 2.4%, but what is of further significance is that the BEA revised downward data for 2007, 2008 and 2009.

As Rick Davis at Consumer Metrics points out:
Apparently the "Great Recession" has been worse than our government has previously reported. And the recovery's brightest moment, Q4 2009, has been revised down from 5.6% to 5.0%. Similarly Q3 2009 dropped from 2.2% to 1.6%. And so on. The bottom of the recession was shifted back one quarter, with Q4 2008 now reported to have contracted at a -6.8% rate, revised down from the previously reported -5.4% rate. Most quarters of 2007, 2008 and 2009 have been revised down substantially, shifting the recession shown in the chart above back in time.
Again, this supports the thesis that economic data collected by the government is done in a very antiquated fashion. If they are still "revising" data from 2007, then what value can be put in current numbers (especially given the extremely limited value of GDP numbers in the first place). 

Keep in mind that, while these revisions are going on, Rick Davis at Consumer Metrics Institute is measuring consumer durable goods activity in real time. Consumer durable goods is a much more important data piece than overall GDP since it is a very good indication of where the economy is relative to the business cycle (Climbing consumer durables indicates strong central bank manipulation of the economy, i.e. heavy money printing. Declining durable goods tends to indicate an economy adjusting away from a manipulated money printing "boom" period). This is all much more valuable and timely data for businesses and investors than the government data, and you get it in real time.
How about this Reuters article that states that consumer sentiment has fallen to its lowest level since November:

NEW YORK, July 30 (Reuters) - U.S. consumer sentiment plunged in July to its lowest level in 9 months on bleak prospects for jobs and income a year since the economic recovery began, a private survey released on Friday showed.

There was a slim improvement in late July from early July, but the month-over-month deterioration in confidence signaled weak consumer spending in the months ahead, according to Thomson Reuters/University of Michigan's Surveys of Consumers.

This consumer report followed the government's initial estimate on the second-quarter gross domestic product growth, which slowed to a 2.4 percent annual pace from a 2.7 percent rate in the first quarter.

July's reversal in consumer sentiment was dramatic after it hit its strongest level nearly 2-1/2 years last month, prompted by hopes of better job and credit conditions.

"Rather than an economy gaining strength, consumers now anticipate a slowing pace of growth, and rather than economic policies acting to improve prospects, economic uncertainty among consumers has greatly increased," Richard Curtin, director of the surveys, said in a statement.

The survey's final July reading on the overall index on consumer sentiment dropped to 67.8 from 76.0 in June. This compared with an early July figure of 66.5 and a median forecast of 67.0 among economists polled by Reuters.

This steep pullback in sentiment is ominous for the U.S. economy, which is showing signs of slowing. Consumer spending accounts for 70 percent of the U.S. economy.

In the government's latest GDP report, consumer spending grew 1.6 percent in the second quarter, compared with 1.9 percent in the first quarter.

The latest survey showed favorable attitudes to buy durable items like cars fell to 58 percent in July from 67 percent in June. The drop reversed nearly all the gains in the past year. "Overall, the survey data suggest that the current slowdown in spending is likely going to persist well into 2011," Curtin said.

The survey's barometer of current economic conditions fell to 76.5, the lowest since November 2009. This compared with 75.5 reported earlier this month and 85.6 in June, which was the highest since March 2008. Analysts had predicted an end-July figure of 76.0.

The survey's gauge of consumer expectations slipped to 62.3, the lowest since March 2009. This compared with 60.6 in early July and 69.8 in June; analysts had predicted a reading of 61.3 in late July.

The measure on consumers' 12-month economic outlook plunged to 66 in late July, which was the lowest since April 2009. It stood at 65 in early July and 79.0 in June.

Amid jitters over jobs and household finances, consumers expected short-term inflation to ease in the coming months.

The survey's one-year inflation expectations measure dipped to 2.7 percent in July from 2.8 percent in June, but the five-to-10-year inflation index firmed to 2.9 percent from June's 2.8 percent.

There are two big articles that I would like to bring to your attention on the huge debt problems in Europe and in Japan.
First this great article by Ambrose Pritchard Evans on the 3o trillion euro funding crisis:

Europe's €30 trillion headache

European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years as authorities withdraw emergency support, according to a new report by Standard & Poor's.


By Ambrose Evans-Pritchard, International Business Editor

Published: 6:00AM BST 29 Jul 2010


Europe's banks still face a funding threat as governments slowing withdraw the scale of stimulus.


The rating agency said banks are at risk of a vicious circle as sovereign debt fears and financial stress feed off each other. "Banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks," said S&P.


"The collective funding needs of Europe's banks are vast. The industry is much larger than America's or Asia's. Most of their mortgages and other personal loans stay on their balance sheets and require funding. This contrasts with the US, where financial institutions securitize (these) loans and which do not require balance sheet funding," said Scott Bugie, S&P's credit strategist. Total liabilities are €23 trillion for the eurozone and €8 trillion for the UK, Sweden, and Denmark.


S&P said the European Central Bank's emergency lending had inadvertently created a snare. Its three-month loans have had the effect of concentrating roll-over risk for large amounts of debt. Banks will eventually have to refund these loans in a crowded market, competing with debt-hungry states. "ECB loans have contributed to a shortening of liability maturities. The result is a growing funding mismatch for the European banking industry. This is happening as regulators prepare to introduce tougher liquidity standards. This is one of the greatest vulnerabilities of the industry," it said.


The Netherlands has already ended state debt guarantees, forcing its banks to go the market as bonds fall due. Others are following suit. Roughly €1 trillion of such debt in the eurozone and Britain will come due by 2012. "The need to refinance the maturing guaranteed-debt looms over many banks," said the agency. Stronger banks can cope: weaker ones will be left floundering in "a two-tier funding market".


S&P said Greek banks have seen a leakage of €10bn to €20bn in customer deposits since the crisis began, or 5pc to 10pc of the total. They are shut out of the capital markets. The ECB is propping up the country with €140bn of exposure to Greek debt in one form or another. It has €126bn of exposure to Spain and €71bn to Ireland, mostly in loans to weaker lender such as Spain's cajas. The exit from this will be a minefield.


The EU's €750bn "shock and awe" rescue has gained time but not conjured away underlying concerns about the fiscal health of the EU states themselves. The report came as the ECB's latest bank survey showed that credit conditions had tightened sharply in the second quarter, with a net 11pc of lenders restricting loans. The survey was carried out in late June, after the €750bn rescue but before the stress tests for banks.


"What it shows is that the sovereign debt crisis had a measurable effect on lending," said Silvio Peruzzu from RBS, adding that rebound will lose steam if the banks are unable to boost lending as companies exhaust their cash buffers and start to borrow again. "There is a risk of a double-dip in 2011."


Mr Peruzzo said the eurozone is at a delicate juncture. Germany has been powering ahead, lifting the much of the eurozone with it, but the recovery is not yet entrenched. There are signs of a slowdown in the US and Asia that could prove infectious. The risk is that a renewed growth lapse would put the spotlight back on the austerity policies in Club Med. "Fiscal consolidation is not a one-off event. They go on for years. If down the line the markets start to question the debt trajectories of these countries, the banking systems will be tested again. There is €1 trillion of private debt in Spain linked to just one asset: property," he said.
Much depends on whether the global recovery lasts long enough to lift Europe's weakest states off the reefs, rescuing their banking systems.
and this article  on problems in Japan.  The author is V. Katsenelson of Zero Hedge:

Japan: Land of the Rising Debt


Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores.

The prelude to the current crisis began in the early 1990s, after Japan's housing and stock market bubbles burst and its economy slipped into recession. For the next 20 years, using flashy names like Fiscal Structural Reform Act, Emergency Employment Measures and Policy Measures of Economic Rebirth, the government cut taxes, increased spending and borrowed money to finance itself. Today, Japan's ratio of debt to gross domestic product stands at almost 200 percent, more than twice that of the U.S. and Germany and second only to Zimbabwe.

A country with ballooning debt needs to have an expanding economy to outgrow the burden. Economic growth is driven by two factors: productivity and population growth. Although the Japanese economy may continue to reap the benefits of productivity gains, population growth is not in the cards.

Japan has one of the oldest populations in the developed world — every fourth person is 65 or older — and its number is on the decline. The Japanese birth rate is one of the lowest in the world, a meager 1.2 children per woman. To maintain its current popu lation level, the average woman in Japan would need to give birth to 2.1 children. (Of course, only economists know how a woman can give birth to a fractional child.)

The severity of the debt problem in Japan has been masked by the fact that government spending on interest payments has not changed over the past two decades, as the average interest rate paid on the country's debt declined to 1.4 percent in 2009 from more than 6 percent in the 1990s. This is about to change. Historically, more than 90 percent of Japan's government-issued debt has been consumed internally by its citizens, directly or through its pension system. But the savings rate in Japan, which was in the midteens in the 1990s, today is approaching zero and will likely go negative in the not-so-distant future.

The Japanese economy operates on the assumption, soon to be proved false, that the government will always be able to borrow at low interest rates. As internal demand evaporates, the government will have to start hawking its debt outside Japan — in a more realistic world, where interest rates are a lot higher. Japanese ten-year Treasuries currently yielding 1.3 percent will not stand a chance against U.S. or German bonds of the same maturity, which yield 3.5 percent and 3 percent, respectively. Japan will have to offer rates far in excess of its U.S. and German counterparts. Although they have their own set of problems, the U.S. and Germany still have much lower indebtedness and superior demographic growth profiles.

Higher taxes and the austerity measures that undoubtedly will follow, combined with higher interest rates, will further slow Japan's economy and drive the country toward insolvency. Unlike Greece, which because of its size could be bailed out by Germany and friends — with a little help from the ever-willing International Monetary Fund — Japan is too big to be bailed out. Defaulting on its debt, especially when the majority of it is held by its own citizens, is a political impossibility. But unlike European nations that socialized their currencies and cannot print euros on their own, Japan has complete control over its currency printing press. And print it will! Decades of deflation will turn into hyperinflation, which will destroy the purchasing power of Japanese citizens' savings and collapse the yen.

The consequences of the economy's slow but sure unraveling in Japan will spill over to the rest of the world. Japan is the second- largest holder of U.S. government debt, and most likely it will start selling Treasuries. To make matters worse, Japan will start competing with the U.S., not just in cars and electronics but for buyers of sovereign debt. As Japan exports inflation, interest rates around the globe undoubtedly will rise.

Timing bubbles — and Japan is in the late stages of an enormous debt bubble — is very difficult. They tend to last longer than rational observers expect. But as Japan's debt continues to swell, the eventual bursting of the bubble grows more catastrophic.

Japan is proof that a country cannot borrow itself to prosperity. The U.S. and other developed nations still have a chance to make the politically difficult but right decision to cut fiscal spending and stop looking for government to be the source of sustainable growth — which it never is.


I hope you all have a grand weekend. I will report to you on Monday.

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