MFGlobal and our vaporizing 1.2 billion dollars/Greece and Portugal/Gold and silver raid prior to first day notice

Good evening Ladies and Gentlemen:

I guess our boys decided that a raid on silver and gold was necessary prior to first day notice.  The object of the exercise was to dampen the spirits of the long holders into taking cash and depositing it into the brokerage account in order to take delivery of gold and silver.  Gold closed down by 3.00 dollars to $1729.80 whereas silver fell by 25 cents to $33.50.  I would have to say that the raid was a total wipe out for our bankers.

Let us head over to the comex and assess trading.  First day notice is tomorrow.  However I still do not have delivery notices going into tomorrow.  This will be important so I will post it tonight in my comments sections.
The total comex gold OI today fell by 3551 contracts from 433,710 to 430,159.  On Friday we had a very good day for gold so again a few bankers bit the dust. The front options expiry month of January is now complete.  The big delivery month of February saw its OI rest tonight at a monstrously high 29,103 contracts.  I will still need tomorrow's OI data to see how many rolled into April.  The next front month of April saw its OI rise from 175,305 to 213,997 for a rollover of 38,692 contracts.  This snapshot would be as of Friday as all OI numbers are 24 hours back.  The estimated volume at the gold comex today was very very light at 184,065.  I would have thought that more rolled to the April month today.  The confirmed volume on the gold comex on Friday was very high at 343,879 but many were rollovers.

The total silver comex OI fell marginally by 121 contracts from 102,006 to 101,885.  Since silver had a great day on Friday we again lost some bankers who could not stand the heat.  The front options expiry month of January is now off the board.  The new front options expiry is now February and here the OI rose from 124 to 159 as these guys will be given a futures contract for February and thus automatically stand for metal.  The next big delivery month for silver is March and here the OI stayed quite constant rising by 500 contracts to 49,053.  The estimated volume at the silver comex today was anemic at 31,583 contracts.  The confirmed volume on Friday was also anemic at 34,752.

Final amount of gold oz standing for January:

Gold	Ounces
Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in oz
No of oz served (contracts) today	6 (600)
No of oz to be served (notices)	zero
Total monthly oz gold served (contracts) so far this month	1197  (119,700)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

We had one more delivery notice filed by the CME for 6 contracts.
Thus the total number of notices filed for the month of January is now complete:

1197 notices x 100 oz per contract  =   119700 oz or 3.723 tonnes of gold.



Now let us begin with February inventory movements:

Gold	Ounces
Withdrawals from Dealers Inventory in oz	97 (Scotia)
Withdrawals from Customer Inventory in oz	32,056 oz(Scotia)
Deposits to the Dealer Inventory in oz	nil
Deposits to the Customer Inventory, in oz	nil
No of oz served (contracts) today
No of oz to be served (notices)
Total monthly oz gold served (contracts) so far this month
Total accumulative withdrawal of gold from the Dealers inventory this month	6114 (complete for January)
Total accumulative withdrawal of gold from the Customer inventory this month	357,459 oz complete for January)

We had no gold deposited to the dealer and 97 oz of gold was withdrawn by the dealer by Scotia.

We had one one big withdrawal by the customer and that was a monstrous 32,056 oz from the Scotia vault.
We had a tiny adjustment of a negative 3 oz from Scotia as well.
Thus the total number of gold oz in inventory resting at all registered dealers is 2.377 million oz or 73.93 tonnes.

If we were to add the delivery month of December to the two non delivery months of January and November we have a total of 74.403 tonnes of gold notices served against an inventory of 73.93 tonnes or 100.64%
Later tonight I will start to give you delivery notices filed for first day notice.  Tomorrow we will get a good glimpse of what will stand in gold oz for February.

end

Month of January is now complete:

Silver	Ounces
Withdrawals from Dealers Inventory
Withdrawals fromCustomer Inventory
Deposits to theDealer Inventory
Deposits to the Customer Inventory
No of oz served (contracts)	30 (150,000)
No of oz to be served (notices)	zero
Total monthly oz silver served (contracts)	1243  (6,215,000)
Total accumulative withdrawal of silver from the Dealersinventory this month
Total accumulative withdrawal of silver from the Customer inventory this month

The non delivery month of January is now complete as we had 30 notices filed late Friday night.

Thus the total number of notices filed for silver for the month of January is 1243 for a total of 6,215,000 oz of silver.

Thus for the record, the total number of silver oz standing in this non delivery month is as follows:

1243 notices x 5000 oz per notice =  6,215,000 oz.
Last month which is a delivery month we had 5.1 million oz stand.
Strange events.

Now let us see inventory movements for the start of the February month:

Silver	Ounces
Withdrawals from Dealers Inventory	21,144 (Delaware)
Withdrawals fromCustomer Inventory	62,397 (Scotia)
Deposits to theDealer Inventory
Deposits to the Customer Inventory	927,431 (Scotia)
No of oz served (contracts)
No of oz to be served (notices)
Total monthly oz silver served (contracts)
Total accumulative withdrawal of silver from the Dealersinventory this month	1,266,166 (January complete)
Total accumulative withdrawal of silver from the Customer inventory this month	5,413,068(January complete)

We had only one big deposit and that was 927,431 oz into Scotia.
We had one withdrawal by the dealer and that was 21,144 oz from Delaware
The customer had a withdrawal of 62,357 oz  due to the following:

1. one withdrawal coming from Delaware at 2036 oz
2. the second withdrawal  from Scotia at 60,321 oz.

we had an adjustment of 21,144 oz added to Scotia as an accounting error.  (a counting error?)
The total registered silver rests tonight at 36.543 million oz.
The total of all silver rests at 129.103.

I will bring to you late tonight the delivery notices filed for silver.

end

Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.

There is now evidence that the GLD and SLV are paper settling on the comex.

Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

Jan 30. 2012:

Total Gold in Trust

Tonnes:1,271.09

Ounces:40,866,777.14

Value US$:70,633,511,714.31

Jan 28.2012

TOTAL GOLD IN TRUST

Tonnes:1,271.09

Ounces:40,866,777.14

Value US$:70,513,224,606.52

we neither gained nor lost any gold at the GLD today.

And now for silver Jan 30 2012: 

Ounces of Silver in Trust	305,776,244.700
Tonnes of Silver in Trust	9,510.70

Jan 28.2012:

Ounces of Silver in Trust	305,776,244.700
Tonnes of Silver in Trust	9,510.70

Jan 26.2012 

Ounces of Silver in Trust	305,776,244.700
Tonnes of Silver in Trust	9,510.70

we neither gained nor lost any silver today in the SLV.

Again very strange with the huge activity in the price of silver 2 weeks ago, then  on all this week and yet no additions and then today.  I would guess that London is basically out of silver and they cannot buy any silver.

This is why this level has remained constant.  That is why the silver shorts at the SLV is now in excess of  26 

million oz. They are supplying non backed paper SLV to our new longs.  Mary Schapiro are you listening?

end.

And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 5.4 percent to NAV in usa funds and a positive 5.2% to NAV for Cdn funds. ( Jan 30 2012.).

2. Sprott silver fund (PSLV): Premium to NAV rose  to  9.15.% to NAV  Jan 30 2012:  great news..premiums coming back)
3. Sprott gold fund (PHYS): premium to NAV rose  5.45% positive to NAV Jan 30. 2012). 

It is great to see that the Sprott silver fund has returned to a decent premium.

Also notice that the central fund of Canada is also returning to a good premium to NAV.

end

Let us now see some of the big stories of the day which will shape the price of gold and silver.
It now seems that the MFGlobal money just "vaporized".No wonder the volume at the silver comex has dried to next to nothing.  The only volume are the high frequency traders and they are basically day traders:



(courtesy zero hedge)

3 Months After The MF Global Bankruptcy, We Find That $1.2 Billion (Or More) In Client Money Has "Vaporized"

Submitted by Tyler Durden on 01/29/2012 23:58 -0500

• Capital Markets
 
• Central Banks
 
• Commodity Futures Trading Commission
• Counterparties
 
• MF Global

On the three month bankruptcy anniversary of the company whose rehypothecation gimmicks will one day be seen as a harbinger of everything that is  broken with the multi-trillion ponzi system, but not just yet despite loud warnings otherwise, we are getting close to a final verdict of where the $1.2 billion (and possibly more as originally predicted by Zero Hedge - see below) in commingled client money may have gone. Note the use of the passive voice because using the active, as in money that MF Global executives stole from clients, is prohibited in a legal system in which nobody goes to jail for something as modest as $1.2 billion in theft. That verdict? "Vaporized." No really (and yes, in the passive voice of course). From the WSJ: "As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation." Uh huh... Because money simply vaporizes. Which means one of two things: i) the "vaporization" is merely the phrase that so called investigators use to avoid the far more troubling sounding "stolen" as it would imply guilt, something which the former NJ governor and Goldman CEO (and not to mention JP Morgan which most likely was on the receiving end of the $1.2 billion + transaction) will, under guidance from counsel, sternly disagree with, or ii) the capital markets are such an unprecedented and manipulated fraud, that nobody has anyclue at any moment, where any client money is, and that any residual capital still "invested" in mythical representations of "assets", which are likely rehypothecated so many times, that not even Bank of America's robosigning division would have a clue where to start unraveling, will promptly be converted into tangible manifestations of capital. So when someone asks what happened to stock market volume, and to investor confidence in the "stock market" feel free to use just that phrase: "it vaporized."

WSJ "explains" how $1.2 billion "vaporized"

Many officials now believe certain employees at MF Global dipped into the "customer segregated account" that the New York company was supposed to keep separate from its own assets—and then used the money to meet demands for more collateral or to unfreeze assets at banks and other counterparties as they grew more concerned about their financial exposure to MF Global.

Investigators also are examining other scenarios that have gained traction in recent weeks, such as the possibility that MF Global suffered steep losses on investments made using customer money. Officials investigating the case have looked into whether such investments were appropriate under rules at the time.

As money poured out of MF Global, much of it likely passed through J.P. Morgan Chase & Co. and other banks where the securities firm had accounts, as well as trade-clearing partners such as Depository Trust & Clearing Corp. and LCH.Clearnet Group Ltd., people familiar with the matter said.

Those companies have denied being knowingly in possession of any missing MF Global money, and any efforts to make them fill the hole would face daunting hurdles. And because the firms usually were middlemen between MF Global and other counterparties, the funds they touched were then scattered widely, complicating the search.

So one hand, nobody at MF Global was responsible becauseevery member of lower, to middle to upper management was responsible (and certainly not Jon Corzine), secondly, not one regulator was responsible, because every regulator was equally oblivious of the grand theft occurring right under their noses. Finally nobody on the receiving end of this fund flow was responsible, as the money could have ratably gone to one of an infinite number of destinations. And here we were thinking that dilution is only applicable to what the central banks do to their currency. Little did we know that it is the de facto global modus operandi for the systemic fraud endemic in modern finance, whereby not one person is held accountable, as otherwiseeveryone would be held accountable.

Brilliant.

Finally, it is becoming once again apparent that the final tally will be at least $1.2 billion. To wit:

But hundreds of millions of customer dollars are potentially snarled in litigation with other parts of MF Global, including its U.K. arm, and U.S. officials might never be able to recover those funds. As a result, Mr. Giddens believes the shortfall is at least $1.2 billion, though regulators at the Commodity Futures Trading Commission and CME Group Inc., parent of the Chicago Mercantile Exchange and New York Mercantile Exchange, have estimated the total is smaller than that.

Visually:

And from Zero Hedge November 1:

Doing some quick inverse addition and we get a (w)hole of $5.45 less $2.5 less $1.5 or $1.45 billion. In other words, the theft by MF Global was not stealing hunderds of millions form its customers: it has stolen a whopping $1.5 billion! For those confused, this is not a rogue loss of $1.5 billion, something which was enough to send UBS' Kweku to prison. This is outright theft resulting from illegally commingled accounts. Our only question is will $1.5 billion in theft be enough for the first real perp walk of an Obama-friendly Wall Street executive?

It is becoming increasingly difficult to even care anymore; it is also becoming increasingly certain that any client capital in the "markets" will sooner or later disappear in one of many comparable bankruptcies, and there just like here, nobody will be held accountable, as holding someone accountable will actually expose to everyone the whole scam that is modern ponzinomics, in which binary representations of money in the forms of ones and zeros, not only don't exist in the real world, but is in effect collateralized by the same ever smaller pool of dwindling hard assets. Not only that, but someone may actually, gasp, go to jail.

And that is not allowed under a legal system which is in bed with the very financial system that preserves it and funds it.

Ironically, it is the conspiracy theory movie, "The International" that captures precisely the interplay between the terminally broken and beyond corrupt legal system and modern financial markets:

WEXLER
Justice is not possible.

SALINGER
Why not?

WEXLER
Because, Agent Salinger, your idea of justice is an illusion. Understand the very system that you serve and protect will never allow anything to happen to Skarssen [i.e., Jon Corzine] or the bank [i.e., insert any current bank]. On the contrary. The system guarantees the IBBC's [i.e., insert any current bank] safety because everyone is involved.

And that should answer all questions about how $1.2 billion can simply "vaporize."

end

Today Israel warns the west that time is running out before it will launch an attack on Iran:

 (courtesy Jim Sinclair and Kim Sengupta)

Israel warns time is running out before it launches strike on Iran
Growing body of opinion suggests that Iranian response to an attack would be muted Saturday 28 January 2012
Kim Sengupta

Economic sanctions by the European Union and the United States can only be allowed a limited time period to prevent Iran from attempting to acquire a nuclear arsenal before a military strike must be contemplated, Israeli leaders have declared.

The tough public stance from Tel Aviv comes amid conflicting reports on the readiness of the Israeli military establishment to carry out an attack on Iran.

One account claims that Israel’s security agencies have concluded that the turmoil predicted from a strike, and the likely response from Tehran, has been widely exaggerated. However, a senior British official told The Independent that the hierarchy of the intelligence service, Mossad, and the armed forces continued to have deep trepidation about conflict in the region.

Speaking at the Davos economic summit yesterday, the Israeli Defence Minister, Ehud Barak, yesterday warned that a situation could be rapidly reached when even "surgical" military action could not block the Tehran regime from getting the bomb. "We will know early enough whether the Iranians are ready to give up their nuclear weapons," following measures such as the recently announced EU oil embargo, he said.

Mr Barak continued, "We are determined to prevent Iran from turning nuclear. It seems to us to be urgent, because the Iranians are deliberately drifting into what we call an immunity zone where practically no surgical operation could block them".

More…

end.

From Debka files: a buildup of military on two strategic islands:

(special thanks to Robert H. for sending)

Obama (Also) Prepares for War

Massive US Military Buildup on Two Strategic Islands:Socotra and Masirah

While quietly casting lines to draw Tehran into talks on their nuclear dispute, PresidentBarack Obama is reported exclusively by DEBKA-Net-Weekly’s military and Washington sources to have secretly ordered US air, naval and marine forces to build up heavy concentrations on two strategic islands – Socotra, which is part of a Yemeni archipelago in the Indian Ocean, and the Omani island of Masirah at the southern exit of the Strait of Hormuz.
Socotra is situated 80 kilometers east of the Horn of Africa and 380 kilometers southeast of the Yemeni coastline. It lies athwart the Red Sea and the Gulf of Aden. A military base there is in a position to oversee the shipping moving in and out of those strategic naval waterways.
Lushly verdant, Socotra is approximately 120 kilometers long by 40 kilometers wide. Its population of 55,000 has its own distinct language and culture. Since 2010, the US has been quietly building giant air force and naval bases on Socotra with facilities for submarines, intelligence command centers and take-off pads for flying stealth drones, as part of a linked chain of strategic US military facilities in the Indian Ocean and Persian Gulf.
The Socotra facilities are so secret that they are never mentioned in any cataloguelisting US military facilities in this part of the world, which include Jebel Ali and Al Dahfrain the United Arab Emirates; Arifjan in Kuwait; and Al Udeid in Qatar – all within short flying distances from Iran.
Additional US forces are also being poured into Camp Justice on the barren, 70-kilometer long Omani island of Masirah, just south of the Hormuz entry point to the Gulf of Oman from the Arabian Sea.
US military facilities were established there after the signing of an access agreement with Oman in 1980.

Up to 100,000 US troops present by early March

For the new buildup on Socotra, Washington had to negotiate a new deal with Yemen's ousted ruler Ali Abdullah Saleh.
Injured in an assassination attempt last year, Saleh demanded permission to travel to the United States for medical treatment. The Obama administration first refused, then relented whenSaleh made it his condition for consenting to additional troops landing on the island.
Western military sources familiar with the American buildup on the two strategic islands tellDEBKA-Net-Weekly that, although they cannot cite precise figures, they are witnessing the heaviest American concentration of might in the region since the US invaded Iraq in 2003.
Then, 100,000 American troops were massed in Kuwait ahead of the invasion. Today, those sources estimate from the current pace of arrivals on the two island bases, that 50,000 US troops will have accumulated on Socotra and Masirah by mid-February. They will top up the 50,000 military already present in the Persian Gulf region, so that in less than a month, Washington will have some 100,000 military personnel on the spot and available for any contingency.
US air transports are described as making almost daily landings on Socotra and Masirah. They fly in from the US naval base of Diego Garcia, one of America's biggest military facilities, just over 3,000 kilometers away. The US military presence in the region will further expand in the first week of March when three US aircraft carriers and their strike groups plus a French carrier arrive in the Persian Gulf, the Gulf of Oman and the Arabian Sea: They are theUSS Abraham Lincoln, USS Carl Vinson, USS Enterprise and the Charles de Gaulle nuclear-powered aircraft carrier.
A fourth US carrier will be standing by in the Pacific Ocean, a few days' sailing time from the water off Iran's coast.

Obama may debunk Republican charges that he is weak on Iran

By early March, therefore, America will have piled up enough military strength within reach of Iran to exercise its consistently avowed military option.
Tuesday, Jan. 24, in his State of the Union address, the president said: “Let there be no doubt: America is determined to prevent Iran from getting a nuclear weapon, and I will take no options off the table to achieve that goal. But a peaceful resolution of this issue is still possible, and far better, and if Iran changes course and meets its obligations, it can rejoin the community of nations.”
Our military sources have also picked up reports of British and French air, naval and special forces landings this month in Saudi Arabia and the United Arab Emirates.
All these military concentrations and Obama's latest word on the Iranian nuclear issue tend to confirm that nothing has changed since DEBKA-Net-Weekly’s sources in Washington first reported in November 2011 on the US president's resolve to attack Iran's nuclear facilities in the course of 2012.
(See DEBKA-Net-Weekly 515 of Nov. 4: Targeting Tehran: Obama Set to Attack Iran’s Nuclear Sites by the fall of 2012),
The only difference may be the possibility of the date moving up from fall to spring, depending on three developments:
1. The outcome of the secret exchanges taking place between Washington and Tehran on which we have reported exclusively;
2. An Israeli decision to go ahead with a unilateral strike against Iran's nuclear facilities.
President Obama has not been able to convince Israel to drop this option and leave military action entirely to the United States.
3. The US presidential election campaign: Obama may decide to go for an attack to cripple Iran's nuclear program and preempt its production of a bomb to gain a winning hand for trumping his Republican rivals' accusation that he is weak on Iran.

Saudi Arabia versus Iran

As a day commenced in Europe, the USA stock futures were heading southbound due to lack of progress on the Greek PSI and on concerns that the new bailout for Greece has now risen to 145 billion euros from 130 billion euros

(courtesy  Bloomberg)

U.S. Stock Futures Decline Before EU Summit

Q

By Cecile Vannucci - Jan 30, 2012 7:22 AM ET

By Cecile Vannucci - Jan 30, 2012 7:22 AM ET

U.S. stock futures dropped, indicating the Standard & Poor’s 500 Index will fall for a third day, as European leaders prepared to meet in Brussels amid concern Greece is struggling to finalize a debt-swap deal.

Exxon Mobil Corp. fell 0.7 percent in early New York trading after agreeing to sell its Japanese business for $3.9 billion. JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, lost 1.1 percent, whileBank of America Corp. (BAC) declined 1.9 percent. Apple Inc. (AAPL),Google Inc. (GOOG) and Microsoft Corp. (MSFT) slid even as Facebook Inc. was said to plan to file for its initial public offering this week.

Futures on the S&P 500 expiring in March retreated 0.6 percent to 1,304.5 as of 7:21 a.m. in New York. The benchmark gauge has risen for the past four weeks, the longest streak since October, as the Federal Reserve’s plans to keep interest rates low through at least late 2014 offset lower-than-forecast economic growth. Dow Jones Industrial Average (INDU) futuresdeclined 69 points, or 0.6 percent, to 12,545 today.

“The situation is, overall, not solved,” Herbert Perus, who helps oversee about $36 billion as head of equities at Raiffeisen Capital Management in Vienna, said in a telephone interview today. “There is a risk that some decisions of that summit will lead into market movements.”

European Union leaders gather in Brussels today for their first summit in 2012 to put the finishing touches on a German- led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year.

Greece and its private creditors said Jan. 28 they expect to complete a deal this week after bondholders signaled they would accept a bigger cut in their debt holdings.

Income, Spending

A Commerce Department report later today may show that consumer purchases rose 0.1 percent in December, while wages and salaries gained 0.4 percent, according to the average economist estimates in a Bloomberg survey. They both climbed 0.1 percent in November.

Exxon (XOM) lost 0.7 percent to $85.24 in early New York trading. The Irving, Texas-based oil company agreed to sell 99 percent of its Exxon Mobil Yugen Kaisha Japanese business, which produces and sells fuels, to TonenGeneral Sekiyu KK for $3.9 billion.

New York-based JPMorgan retreated 1.2 percent to $36.77 in premarket trading, while Bank of America, the second-biggest U.S. lender by assets, slid 2.1 percent to $7.14.

Apple lost 0.3 percent to $446 in early New York trading, while Google fell 0.3 percent to $578 and Microsoft dropped 0.8 percent to $29. Facebook, the world’s largest social-networking service, is aiming to file for its IPO as early as the coming week, two people with knowledge of the matter said.

To contact the reporter on this story: Cecile Vannucci in Amsterdam atcvannucci1@bloomberg.net

end

It seems  that the Greek debt problem is derailing the latest summit.

We find now that Greece needs not 130 billion euros but 145 billion euros. Yet the details of the  

deal has not been announced to the public, like what is the coupon rate and how many will 

other Greek bond holders will participate in the haircut.  Also involvement in the haircut process 

by the ECB is still a mystery:

(courtesy Bloomberg)

Greek Debt Talks Risk Derailing EU Summit Plan

Q

By Patrick Donahue - Jan 30, 2012 7:21 AM ET

European Union leaders gather for their first summit of 2012 as a deteriorating economy and the struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis.

EU chiefs arrive in Brussels at about 2 p.m. today to put the finishing touches on a German-led deficit-control treaty and to endorse the statutes of a 500 billion-euro ($656 billion) rescue fund to be set up this year. European finance officials yesterday discussed a deal thatGreece and its private creditors expect to complete in the coming days after bondholders signaled they would accept government demands for a bigger cut in their debt holdings.

Efforts to hold the 17-nation euro area together with bolstered fiscal rules and a stronger firewall are colliding with stalled progress in Greece, where the crisis began in 2009. To prevent a financial collapse, Greek bondholders have been pushed to cede more ground after agreeing in October to take a 50 percent cut in the face value of more than 200 billion euros of debt.

“The fact we’re still at the beginning of 2012 talking about Greece is a sign this problem hasn’t been dealt with,” U.K. Chancellor of the Exchequer George Osborne said at the World Economic Forum in Davos, Switzerland.

No Longer Enough

The summit follows warnings at the gathering that ended yesterday in Davos that it’s time to end the region’s debt crisis and that measures aimed at simply containing the turmoil are no longer enough. The euro economy is set to contract by 0.5 percent this year, according to the median of 19 economist forecasts compiled by Bloomberg.

The European Central Bank’s unlimited three-year loans to banks have helped buoy sentiment among investors in the euro area. Italian 10-year bonds gained for a third week, while Spanish two-year yields dropped to the lowest since November 2010. The euro gained against the U.S. dollar every day last week, climbing 2.2 percent on the week. The European currency was down 0.7 percent at $1.3123 at 12:26 p.m. in Brussels.

“We can say -- with caution -- that we see elements of financial stability in France, in Europe and in the world,” French President Nicolas Sarkozy said in a nationally televised interview in Paris yesterday. “Europe is no longer at the edge of the cliff.”

Debt Sales

That optimism will be tested this week as European nations including Italy, Belgium and Spain sell about 22 billion euros of debt securities. Italian borrowing costs fell as the nation sold 7.5 billion euros of debt today, near the maximum for the auction. Belgium sells as much as 3 billion euros of bills tomorrow, with Spain, Portugal, Germany and France issuing 13 different maturities during the week.

A draft of the summit statement showed that EU leaders will pledge to retarget unspent subsidies and consider boosting the lending of the bloc’s project-financing arm. No figures are given in the draft, which was obtained by Bloomberg News.

Attention before the Brussels summit turned to negotiations between the interim government of Greek Prime Minister Lucas Papademos and creditors. The two sides were “close” to an agreement outlined by Luxembourg Prime Minister Jean-Claude Juncker, the Institute of International Finance, negotiating on behalf of private creditors, said in a Jan. 28 statement after three days of talks in Athens.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. As recently as Jan. 23, creditors wanted an average coupon of about 4.25 percent, two people familiar with the talks said then. That offer equated to a loss of about 69 percent on the net-present value of Greek debt.

‘Last Minute’

The initial debt-swap agreement with creditors three months ago sought to scale back Greece’s debt to 120 percent of gross domestic product by 2020. The anticipated agreement on private sector involvement, or PSI, will open the way to a 130 billion- euro second bailout from Greece’s European partners and the International Monetary Fund for the country, which faces a 14.5 billion-euro bond payment on March 20.

“A deal on PSI will be reached at the last minute,” Niall Ferguson, a professor of economic history at Harvard University, said in a Davos interview. “The trouble for Europe is the crisis won’t be over as the Greek position remains unsustainable. Any PSI deal will bring only temporary respite.”

Greece now requires 145 billion euros for the second bailout, 15 billion euros more than was agreed in October, Der Spiegel reported Jan. 28, citing an unidentified official from the troika in Greece.

As a possible condition of the bailout, European policy makers are discussing plans to directly intervene in Greek budget decisions as the country struggles to cut its deficit, according to two euro-region government officials. Leaders are mulling responses to states that are “off-track,” German Finance Ministry spokesman Martin Kotthaus said in Berlin today.

U.K. Refusal

Patience with Greece “is really coming close to the limit,” Philipp Roesler, chief of Germany’s Free Democratic Party, the junior coalition partner, told Bild newspaper. “Time is running out. There can only be additional help if the Greek government carries out the necessary reforms.”

Another objective at the summit will be to complete a fiscal compact, which was negotiated in December in talks that exposed a rift in the EU after the U.K. refused to participate. The rules aim to provide stricter sanctions and closer cooperation on national budgets.

The latest draft, dated Jan. 27 and obtained by Bloomberg, requires governments to set up a “correction mechanism” to be triggered “automatically” when deficits stray from targets. The treaty caps structural deficits at 0.5 of GDP, allowing deviations in case of “exceptional circumstances” such as a “severe economic downturn,” according to the draft.

A call by Poland, the biggest country with aspirations to join the single currency, to take part in euro-area decision- making looms as the main obstacle to the deal, two officials said. Poland’s plea to take part in euro summits is opposed by a group led by France, which aims to turn the 17-nation monetary union into an exclusive policymaking club.

Future Action

“We will not express an acceptance of the present form in which the compact has been drafted, a compact that excludes or endangers the community-based method,” Polish Prime Minister Donald Tusk told reporters in Brussels today.

Over the weekend, senior officials worked to clear away lesser snags to the treaty, including the role of national parliaments and the ratification threshold. A draft last week foresaw the treaty taking effect after ratification by 12 of the 17 euro countries.

EU leaders plan to endorse the statutes of the permanent bailout fund, the European Stability Mechanism, to be signed in early February and sent to national parliaments to ratify. The ESM is scheduled to go into operation this year.

Leaders are unlikely to address mounting pressure to raise the ceiling on rescue lending from 500 billion euros once the permanent fund goes on line, the officials said.

To contact the reporter on this story: Patrick Donahue in Brussels atpdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

end

Credit default swaps on the rise this morning from Europe:

Europe Awakes To Sea Of CDS Redness

Submitted by Tyler Durden on 01/30/2012 07:40 -0500

• CDS
 
• default
 
• Italy
 
• Portugal
 
• Trigger Event

With a Greek default imminent, and this time ISDA having no chance to kill CDS as a hedging mechanism as the trigger event will be more than present, investors have once again jumped at the opportunity to close lucrative basis trade opportunities, as a result sending all of Europe broadly red in spread terms. Notable: Portugal CDS, which contrary to media reports elsewhere has been trading points up front for a few weeks now, just hit a record 40 pts up. And what is worse is that the 5/10s, whichshould be inverted for a country as distressed as this, isn't.

                         5Y                     10Y            5/10's Rolls                     

ITALY          416/426 +21        393/413      -23/-13
SPAIN          368/378 +20       342/362       -20/-10
PORTUGAL    39/40.5 +0.5      41.5/44.5      2.5/5.5
IRELAND     610/640 +5          440/510     -180/-120
GREECE        62/64   0              63/67         0.5/3.5
BELGIUM     238/248  +8         226/246       -14/0
FRANCE      169/174  +6.5    190.5/198.5     19/23
AUSTRIA     170/176  +5      184.5/194.5     14/19
UK                77/81   +2           92/98          14/18
GERMANY      88/91   +4.5    107.5/113.5     18/22

end

Today, Commerzbank CEO  Mueller stated that Greece should exit the Eurozone:


(courtesy zero hedge)_

Commerzbank CEO Says Greece Should Exit Eurozone

Submitted by Tyler Durden on 01/30/2012 15:42 -0500

• Bond
 
• default
 
• Eurozone
 
• Germany
 
• Greece

As if Merkel did not make it all too clear over the weekend that Germany no longer wishes Greece to be part of the Eurozone, and that the ball is now in Athens' court to accept what is a glaringly unfeasible demand, i.e., to hand over fiscal sovereignty over to "Europe" with Merkel having the cover of saying it did everything in its power to keep Greece in the union, here comes Commerzbank's CEO Mueller to pick up where Merkel left off:

• COMMERZBANK'S MUELLER SAYS GREECE SHOULD EXIT EURO ZONE
• COMMERZBANK'S MUELLER SPOKE TO DEUTSCHES ANLEGER FERNSEHEN

Presumably this means that German banks have sold off all their Greek bond exposure, and believe that the Eurozone would be better off without Greece in it. However, that Commerzbank, or one of the most insolvent banks in Europe, and only in line with Dexia, is confident that it can withstand the contagtion that would follow, only makes us even more skeptical that a Greek default and Eurozone departure will be contained, and in all likelihood will have scary implications for all European banks, not only German ones. Just ask DB's Ackermann...

Average:

end.

The following is a great article and is worthy of you spending some time with it.

Even though the Fed announced that it was not going to use QEIII yet, please note that the

balance sheet of the Fed has been rising and it is now close to 3.0 trillion dollars.  It has rise

due to the reinvestment of dollars from mortgages that are paying.

The importance of the following article is that the Fed is going to target interest rates through

the core Personal Consumption Expenditure and that rate is 2%.  If the rate falls below 2%, then

the Fed will step on the pedal by buy more assets to head off a deflationary debt default spiral.

If it rises above the 2% level then he must worry about hyperinflation as he must withdraw all

that liquidity.

(courtesy zero hedge)

Entering the Debt Dimension

Submitted by ilene on 01/30/2012 00:00 -0500

• Belgium
 
• Ben Bernanke
 
• Ben Bernanke
 
• Bill Gross
 
• Bond
 
• Carry Trade
• Central Banks
 
• Corruption
 
• Creditors
 
• default
 
• European Central Bank
• European Union
 
• Eurozone
 
• Fitch
 
• Germany
 
• Greece
 
• Insurance Companies
 
• International Monetary Fund
 
• Ireland
 
• Italy
 
• MF Global
• Monetary Policy
 
• PIMCO
 
• Quantitative Easing
 
• recovery
 
• Reuters
• Simon Johnson
 
• Tyler Durden
 
• Volatility
 
• Withholding taxes

Entering the Debt Dimension

Excerpt from Stock World Weekly

We ended last week’s newsletter explaining why we were not betting on an announcement for more quantitative easing by the Fed, although “consensus” economists claimed to be. We argued that additional QE was unlikely, citing our friends (Bruce Krasting, Lee Adler of the Wall Street Examiner, and Jon Hilsenrath - with his direct line to Bernanke). This week, those expecting easing were disappointed; there was no mention of launching any new program for large-scale asset purchases.

But the Fed did extend the period it anticipates keeping interest rates at or near zero percent (ZIRP). (See Wednesday’s press release here) The Fed also plans to continue its program to extend the average maturity of its holdings of securities, Operation Twist, and to maintain its policy of reinvesting principal payments from its existing holdings, including mortgage-backed and Treasury securities. It is currently holding nearly $3Tn in total assets. The returns from those assets are significant, and the Fed’s balance sheet is continuing to grow even after the end of its asset purchase programs. 

In response, Bill Gross (co-chief investment officer of PIMCO) tweeted that this announcement was the equivalent of “QE 2.5,” while Bruce Krasting wrote, “Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal. It’s ‘full speed ahead’ according to the Chairman. He's pushed things off until 2014 - a very long time from now.” Bruce goes on to explain the major flaw in Bernanke’s reasoning, and how this decision has made him “a slave to a single dopey statistic.” (Bernanke Goes All In)

Phil wrote, “The Central Bank's pronouncements came after a two-day policy meeting from which officials emerged still frustrated at the economy’s slow pace of growth, and a bit more confident that inflation is settling down after climbing last year. Fed Chairman Ben Bernanke signaled in a news conference after the meeting that the combination of persistent slow growth and low inflation, could give the Fed leeway to take more action to support the economy, though he didn't commit to it.” 

In Jesse's (of Jesse’s Cafe Americain) words:

“This statement shows a longer term commitment to de facto QE at least. The Fed does not need to further expand its balance sheet just yet, but rather deploy those funds strategically while engaging in swaps with other central banks to counter the financial risks globally.

.

“I suspect that before they formally announce a further expansion of their balance sheet, the Fed will go 'off-balance sheet' in the easing as financial firms are often wont to do when engaging in opaque accounting. The swaps and noncompetitive bidding for balance sheet assets may be a part of this.

.

“I do not object to stimulus per se, but rather this type of blunt policy that does not address or repair the problems that led to the financial bubble and collapse in the first place.” 

In Jesse's view, and we agree, the “yawning gap between productive labor and mere money manipulation” needs to be closed, and hard choices are required to resolve the unsustainable concentration of both power and risk.

“Demagoguery and deception in support of the status quo seems to be the rule of the day in the financial sector and its associated professions and exclusive clubs. 

.

“Therefore self-regulation, restraint, and reform are a thin bet to say the least. The crisis is more like to continue to expand, and the taint of corruption and crime continue to spread.” (FOMC Statement - Targets 2% Inflation - Highly Accommodative Monetary Policy Until ‘Late 2014’)

One problem with large, public programs such as QE2 is that everyone jumps into the same side of the trade, e.g., going long equites in the famous “Tepper Put” that dominated the markets while QE2 was operating (buy stocks, you can’t lose). Using more low-key, less blatant ways of injecting liquidity into the financial system, Bernanke is continuing to provide stimulus while pretending to be an inflation hawk. 

On Friday, Fitch downgraded Italy, Spain, Belgium, Slovenia and Cyprus. Ireland was affirmed at BBB+, but received a negative outlook. Fitch maintained that the European leaders’ “gradualist” approach in tackling the crisis means that Europe will continue to face periodic episodes of severe financial volatility, and this will erode the governments’ ability to repay their debt obligations. “The eurozone crisis will only be resolved as and when there is broad economic recovery. It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration.” (Fitch downgrades 5 eurozone nations)

end

We are no further ahead today than on Friday with respect to the Greek problem.
Except the Portuguese bonds (the 10 yr) have yields of 15% and credit default swaps are raging northbound.

(courtesy zero hedge)

Pushing Non-Official Holders of Local-Issued European Debt into Subordination

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

I spotted some interesting commentary on the maturing March 2012 Greek bonds. After buying at 40-45 cents, it seems the hedge funds are trying to unload in a bidless 35-cent market. The ECB has the largest stake, bought at 70 cents. This official holder’s dominance of this market, and refusal so far to participate in haircuts, is making the whole exercise futile and severely subordinates any potential non-official holder or future buyer of European sovereign debt. Reuters reports that the ECB is split and confused on this issue. The IMF’s LaGarde says, “If the level of Greece’s privately held debt is not sufficiently renegotiated, then public creditors will also have to participate.” Apparently, the IMF was also confused as this was retracted or denied. As I wrote in Stick it to the Local Issued Bond Holders, this is one of two serious subordination fiascos, the second being a slew of UK-law non-local issues that restrict collective restructuring actions (see chart at the “Stick it” link).

The always-alert analyst Simon Johnson writes about this issue in Europe:

“In the event of default (i) any non-official bond holder is junior to all official creditors and (ii) the issuer reserves the right to change law as needed to negate any rights of the nonofficial bond holder.

.

“We should not underestimate the damage these steps have inflicted on Europe’s €8.4 trillion sovereign bond markets. For example, the Italian government has issued bonds with a face value of over €1.6 trillion. The groups holding these bonds are banks, pension funds, insurance companies, and Italian households. These investors bought them as safe, low-return instruments that could be used to hedge liabilities and provide for future income needs. It was once hard to imagine these could ever be restructured or default.

.

“Now, however, it is clear they are not safe. They have default risk, and their ultimate value is subject to the political constraint and subjective decisions by a collective of individuals in the Italian government and society, the ECB, the European Union, and the International Monetary Fund (IMF). An investor buying an Italian bond today needs to forecast an immediate, complex process that has been evolving in unpredictable ways. Investors naturally want a high return in order to bear these risks.

.

“Investors must also weigh carefully the costs and benefits to them of official intervention. Each time official creditors provide loans or buy bonds, the nonofficial holders become more subordinated, because official creditors including the IMF, ECB, and now the European Union continue to claim preferential status.”

The CDS cost on Portugal has blown out to 1350 points, and the 10 year is over 15%, suggesting that it’s exposed in its next financing rounds in May and June. Of course, in a world of gaming the credit insurance rules to avert default so as not have to pay claims and constantly subordinating nonofficial bondholders, one wonders if the hedge funds — let alone banks using LTRO — will be sucked in. About €25 billion in UK-law Portuguese bonds trade out of €104 billion and the ECB hold €20 billon, leaving €59 billion in the hands of local-issue holders, namely Tia Miriam (Aunt Millie) pensions and Portuguese and Spanish banks.

Perhaps anticipating problems ahead, Spain wants the Europe rescue fund to be bigger, thus allowing for even more subordination of non-official holdings. As one can see in my local bond issue article, Spain is a big issuer of UK-law bonds with €318 billion issued out of €505 billion. Against this condition, the ECB will make available a three-year loan (LTRO) at 1% for insolvent banks with tiny slivers of capital to go speculate on financing European debt.

Barclays estimates the European monetary authority purchased a total of €46 billion in Spanish debt since August, 22% of the total investment of its Securities Market Programme (SMP). Barclays also estimates that Italian debt purchases made up 43% (€90 billion) of the SMP, while Greek debt made up 17% (€36B), Portuguese debt made up 10% (€20B), and Irish debt made up 9% (€19B). In the year prior, the ECB plopped down an estimated €77.5 billion on Greek, Irish and Portuguese debt.

Open Europe’s end of 2011 estimates of ECB portfolio of PIGGS soverign debt exposure.

In addition, after the first LTRO, €832 billion was lent to financial institutions and the ECB has received a massive amount of asset backed securities as collateral in return. Contrary to popular belief, the ECB has already transferred substantial private risk to taxpayer backed institutions, and now there is talk of even more on Feb. 29.

Source: WSJ

There’s not much transparency or detail on the ECB balance sheet, but this is what it looks like at present, €2.7 trillion in assets against €81 billion as capital and reserves, leveraged 35 -1. This is a very large, very bad bank. The second chart shows where the bill is sent for new backing when this thin capital is wiped out. Italy gets 18.4% of the bill and Spain 12.2%. Presumbly, Portugal’s 2.6% contribution gets picked up by the others. Perhaps the ECB can send free rounds of such bills to member states before it loses all credibility and political support, but not for long. At that point, the ECB will be facing Italy and Spain, or worse. In this environment, some are asking for the ECB to increase bond purchases dramatically.

Source: Open Europe

It looks like the Fed is verbally trying to set up the same approach, and both central banks are accepting poorer and poorer sludge and collateral to back their various liquidity schemes. I doubt if financial institutions will do much if anything with this, other than transfer as much risk as possible on to the central banks and then duck. If so, it is nothing more than a social-loss sludge operation.

end.

The Baltic Dry Index continues to falter.  This measures the shipping costs of dry commodities.

The index has fallen off a cliff and this is a sure indicator of global economic problems.

Guest Post: Baltic Dry Index Signals Renewed Market Decline

Submitted by Tyler Durden on 01/30/2012 09:06 -0500

• Baltic Dry
 
• Credit Crisis
 
• Creditors
 
• European Union
 
• Fail
 
• Federal Reserve
 
• Guest Post
 
• headlines
 
• National Debt
 
• recovery
 
• Stagflation

Submitted by Brandon Smith from Alt Market

Baltic Dry Index Signals Renewed Market Collapse

Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping.  Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI.  Today, the BDI is on the verge of making headlines once again, being that is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows. 

The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends.  What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic derision in the market movements of the past.  That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on.  If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.

Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products.  However, it is also a measure of demand for said materials in comparison to previous months and years.  This is where we get into the predictive nature of the BDI…

In late 1986, for instance, the BDI fell to its lowest level on record, then, began a slow crawl towards moderate recovery, just before the Black Monday crash of 1987. 

Coincidence?  Not a chance.  From 2001 to 2002, a similar sharp collapse in the BDI preceded a progressive drop in the Dow of around 4000 points, ending in a highly suspect (Fed engineered) illegitimate recovery.  In 2008, the index fell to near record lows once again just before the derivatives and credit crisis hit stocks full force.  To imply that the BDI is not a useful measure of future economic trends seems like an astonishingly ignorant proposition when one examines its very predictable behavior just before major financial downturns. 

This is not to suggest that the BDI can be used as a way to play the stock market from day to day, or often even month to month.  MSM analysts rarely look further than the next quarter when considering any financial issue, and that is why they don’t understand the BDI.  If an index cannot be used by daytraders to make a quick buck in a short afternoon, then why bother with it at all, right?  The BDI is not an accurate measure of the daily market gamble.  It is, though, an accurate measure of where markets are headed in the long run and under extreme circumstances.

Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726.  Mainstream economists argue that the BDI’s fall in 2008 was a much higher percentage, and thus, a 65% drop is nothing to worry about.  They fail to mention that shipping rates never recovered from the 2008 collapse, and have hovered in a sickly manner near lows reached during the initial credit bubble burst.  By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as inconsequential because it is not a substantial percentage of decline when compared to that which occurred in 2008, even though the index is standing at rock bottom.  Yes, the useful idiots strike again… 

Looking at the rate and the speed of decline this past month, it’s hard to argue that the current 65% drop is meaningless:

Another subversive argument against the BDI is the suggestion that it is not the demand for raw materials that is in decline, but the number of shipping vessels out of use that is growing.  A smart person might suggest that these two problems are mutually connected.  An MSM pundit would not. 

In 2008, many ships were left to wallow in port without cargo, but this was due in large part to two circumstances.  First, demand had fallen so much that too many ships were left to carry too little raw materials.  Second, credit markets had sunk so intensely that many ships could not find trade financing necessary to take on cargo.  In either case, the BDI still falls, and in either case, it still signals economic danger.  The only way that the BDI could signal a major decline in shipping demand artificially or inaccurately is if a considerable number of ships under construction were suddenly released onto the market while there is no demand for them.  There have been no mass increases or extreme changes in cargo fleets this past month, or at all since 2008, which means, the BDI’s decline has NOTHING to do with the number of ships in operation, and everything to do with decline in global demand.

What is the bottom line?  The stark decline in the BDI today should be taken very seriously.  Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval.  All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving.  They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest.  They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely.  Is it any wonder that the Baltic Dry Index is in such steep deterioration?

Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities.  Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities.  Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation).  Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus.  Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us.  It must be watched with care and vigilance...

end

This scares me too:

(courtesy zero hedge)

This Is Europe's Scariest Chart

Submitted by Tyler Durden on 01/30/2012 11:24 -0500

• Bond
 
• European Central Bank
 
• Eurozone
 
• fixed
 
• Greece
 
• Gross Domestic Product
 
• Hyperinflation
 
• None
 
• Portugal
 
• Unemployment

Surging Greek and Portuguese bond yields? Plunging Italian bank stocks? The projected GDP of the Eurozone? In the grand scheme of things, while certainly disturbing, none of these data points actually tell us much about the secular shift within European society, and certainly are nothing that couldn't be fixed if the ECB were to gamble with hyperinflation and print an inordinate amount of fiat units diluting the capital base even further. No: the one chart that truly captures the latent fear behind the scenes in Europe is that showing youth unemployment in the continent's troubled countries (and frankly everywhere else). Because the last thing Europe needs is a discontented, disenfranchised, and devoid of hope youth roving the streets with nothing to do, easily susceptible to extremist and xenophobic tendencies: after all, it must be "someone's" fault that there are no job opportunities for anyone. Below we present the youth (16-24) unemployment in three select European countries (and the general Eurozone as a reference point). Some may be surprised to learn that while Portugal, and Greece, are quite bad, at 30.7% and 46.6% respectively, it is Spain where the youth unemployment pain is most acute: at 51.4%, more than half of the youth eligible for work does not have a job! Because the real question is if there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?

end

This is what Germany is planning to do with respect to Greece:
(courtesy the Irish Times/Reuters/Bloomberg):

Germany has 'budget control' plan

Germany has confirmed it drafted proposals to intervene directly in the Greek budget if it consistently fails to implement reforms.

European sources confirmed the plan yesterday, saying "several ideas are being discussed on how to react to a programme which is consistently off-track".

"If the Greeks aren’t able to succeed themselves with this, then there must be stronger leadership and monitoring from abroad, for example through the EU," said German economics minister Philip Rössler, the first member of chancellor Angela Merkel’s cabinet to confirm the proposal to appoint a "budget commissioner".

"We need more leadership and monitoring when it comes to implementing the reform course." Though the proposals would apply to all programme countries with a backed-up reform programme, the paper is focused on Greece as it struggles to cope with its €350 billion debt mountain.

Amid repeated failures to meet the terms of its current programme, agreed with EU partners, Athens is currently negotiating a second €130 billion package and a debt restructuring plan with its private creditors.

The German plan, leaked to the Financial Times , says that, "given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time."

European officials say a central problem is Greece's decentralised budget structure, which makes it "near-impossible for Athens to exercise fiscal discipline".

"One idea to cope with this is the introduction of a legal clause into Greek law to give deficit reduction absolute priority in the system," said the European official familiar with the document.

Another idea is to have external expertise on the ground, as well as the Troika, with some decision-making power.

This "external expertise" would have the authority to make sure Greece's programme gets back on track, giving debt-repayment priority over other government spending.

The European Commission said it wants to reinforce its monitoring of Greek finances, but that Greece should retain sovereign control.

Amid this sign of resistance from the European Commission, the official said the talks were at an early stage: "It’s all about stabilising Greece and helping it."

Greek officials rejected the proposal, saying it was contrary to national sovereignty.

Meanwhile, Greece and its private investors are close to a deal which will pave the way for a second bailout.

Greece and its private creditors are "very close" to an agreement on a debt-swap, government spokesman Pantelis Kapsis said this morning.

Reuters/Bloomberg 

end.

This is interesting...the chief banker for the BIS urges immediate Basel III.I guess they figure something is up!!
(courtesy New York Times and special thanks to Robert H for sending)

Top Central Banker Urges No Delay to Basel III

By JACK EWING

January 27, 2012, 11:24 am

Jamie Caruana, general manager of the Bank for International Settlements.

DAVOS, Switzerland — A top central banker on Friday damped the hopes of some in the banking industry that they might get more time to comply with new regulations.

Jaime Caruana, general manager of the Bank for International Settlements, said at a lunch sponsored by Credit Suisse that he was against extending the phase-in period for new global regulations.

“The timeline is very long,” he said of new rules formulated by a group of central bankers and national bank regulators, and endorsed by leaders of the Group of 20 countries.

The new rules, known as Basel III, will take effect gradually until the beginning of 2019. They will require banks to increase the amount of capital they hold in reserve and take other steps to become less vulnerable to financial crises. Banking industry representatives have complained that the rules will force them to reduce lending to business and consumers, and have pleaded for more time.

“You need to build resilience today,” Mr. Caruana said during a question-and-answer session. “Otherwise you will have to do it at the worst possible moment.” He said that banks that took steps to become less vulnerable after the financial crisis began in 2008 are now in better shape than banks that didn’t.

Besides serving as head of the Bank for International Settlements, which serves as a clearinghouse for the world’s central banks, Mr. Caruana is prominent in regulatory circles and is a member of the Financial Stability Board, one of the panels that advises the G20 on bank risk.

Mr. Caruana also warned that the extremely low interest rates that prevail in America and Europe could be damaging in the long term. For example, low rates mean that people have a difficult time earning a decent return on retirement savings, he said.

“We should be concerned about too low interest rates for too long,” he said. “It has unintended consequences.”

Copyright 2012 The New York Times  

end.
Finally, this commentary by Ambrose Evans Pritchard is quite revealing.He states that the money supply M3 has fallen badly for the past 3 months and that Italy, Spain and Portugal will have their economies contract and thus have higher Debts to GDP:

Mario Draghi has reportedly already boosted total credit to banks from €580bn to €832bn since early November, entirely reversing the Trichet tightening of late 201

By Ambrose Evans-Pritchard

6:28PM GMT 29 Jan 2012 

London Telegraph

Credit to households and firms shrank by €90bn in December alone. It is the biggest drop in a single month since the launch of the euro, worse than after the Lehman collapse in October 2008 or at any time during the Great Recession.

One dreads to think what would have happened to Europe’s banking system and to the solvency of Italy and Spain if Mario Draghi had not come to the rescue before Christmas with unlimited three-year funding at 1pc, against almost any collateral: that is to say, if the mad Hayekians had still been in charge of the European Central Bank.

“We know for sure that we have avoided a major credit crunch, a major funding crisis," said Mr Draghi in Davos.

Let us hope so. In the meantime, great damage has been done. The International Monetary Fund expects economic contraction of 2.2pc this year in Italy and 1.7pc in Spain, with further declines in 2013 - if all goes well.

This will play havoc with debt trajectories. Italy’s debt will rise to 127pc of GDP by next year. Spain’s will rise to 84pc, more than 11pc worse than forecast in September. There will be scant improvement to the budget deficit in either country. So much austerity for so little gain.

For Spain, it means yet more cuts. Citigroup has pencilled in 26pc unemployment this year. This would push the youth jobless rate to around 54pc nationwide, rising towards 60pc in Andalucia.

The bitterness is starting to show. Rodrigo Rato, head of Bankia and a former IMF chief, said the structure of monetary union is rigged in favour of Germany. “When the Germans are in trouble, the other EU members help it, and when the others have problems, Germany takes advantage to lower its own borrowing costs,” he said.

There is a core of truth to this. The ECB set rates too low over much of the last decade to help Germany out of slump, setting off credit booms that destabilized half of Europe. The favour was not returned in mid-2011 when the Trichet-Stark team raised rates even though real M1 deposits were collapsing across Club Med, with consequences that are now painfully apparent.

The IMF has not yet announced its new forecasts for Portugal. If the changes are anything like the Spanish revisions, Portugal’s public debt will peak at nearly 130pc of GDP next year instead of 118pc. This does not include an array of quasi state bodies that push the figure a great deal higher.

Olivier Blanchard, the IMF’s chief economist, blames Europe’s double-dip recession on the twin effects of fiscal cuts and tight credit as banks slash their books in a scramble to meet core Tier 1 capital ratios by June to avoid being nationalized.

“Decreasing debt is a marathon, not a sprint. Going too fast will kill growth. What is happening in Europe is making things worse,” he said. The rush to slash is “leading to a dangerous downward spiral“ for the system as a whole.

“If not contained, this downward spiral can lead to even worse outcomes, be it disorderly default or Euro exit, with major spillovers, first to the rest of the Euro area, and then to the rest of the world,” he said. It took 20 years to slowly purge the excess debt left by the Second World War. The IMF fears it may take even longer this time.

Mr Blanchard is a Keynesian. Those of a monetarist bent are less alarmed by fiscal contraction. I have no doubt that monetary stimulus a l’outrance - the classic remedy of Britain’s Ralph Hawtrey, Sweden’s Gustav Cassel and America’s Irving Fisher in the 1930s - can counter the effects of fiscal tightening if conducted in the right way. The debt-to-GDP burden falls faster that way and deflation is averted, a lesson that Japan forgot.

The great question is whether Mario Draghi is embarking on just such a policy, covertly, through his Long-Term Repo Operations (LTRO), starting with €489bn in three-year loans to 523 banks December and to be followed by another blast in February.

The LTRO is not entirely a free lunch. It is replacing funding that has dried up, but to the extent that banks in Italy, Spain, France and Portugal use the cheap money to buy government bonds at rich yields - the Sarkozy "carry trade" - they are not lending to business, as newly bankrupt Spanair can attest.

“It is a Pyrrhic victory,” says Guy Mandy from Nomura. It has prevented a liquidity shock and brought confidence back from the dead but “is increasingly punitive” because the haircuts on collateral are crowding out the banks’ balance sheets.

The more they use the facility, the more collateral they hand over to the ECB. Since the ECB has senior status, everybody else faces “subbordination”. At some point this dynamic may turn nasty, causing private credit to tighten. Mr Mandy frets about what will happen if Fitch and Moody’s join S&P in downgrading Italy to BBB+, triggering a 5pc margin call.

Fitch did downgrade Italy by two notches to A- with a negative outlook, citing “lack of clarity on the ultimate structure of a fundamentally reformed EMU; the risk of self-fulfilling liquidity and even solvency crises in the absence of a fully-credible financial 'firewall' against contagion”.

Yet, monetarists think Draghi is quietly pulling off a remarkable coup. “This is stealth QE: the impact is dulled because they are not making it clear what they are trying to do, but in the end it may ultimately be as powerful as QE in America and Britain,” said Lars Christensen from Danske Bank.

Tim Congdon from International Monetary Research said Mr Draghi had already boosted total credit to banks from €580bn to €832bn since early November, entirely reversing the Trichet tightening of late 2010.

This may rise to nearer €1.5 trillion this year. While it does not lead to a rise in broad money at first (just the monetary base), it is likely to feed through over coming months in complex secondary effects. “My conclusion is that the Draghi bazooka is such an aggressive example of monetary easing that Eurozone M3 growth will run at 5pc or more [annualized] in mid and late 2012.”

“I remain sceptical about the viability of the European single currency in the long run, but the day of the execution has been postponed once again,” he said.

If Mr Draghi really is the Latin bloc’s monetarist avenger, the Germans will find out soon enough. It is Germany that will overheat, inflate, and suffer a “Latin” credit bubble as EMU’s wheel of fortune turns. Europe’s crisis will take on a whole new political turn. But that is a chapter for tomorrow.

It is getting late so I better send this down to you.I will report later tonight on first day notice deliveries.
all the best
Harvey