Saturday, February 25, 2012

Dexia bank/Deutsche Bank/Greece/Silver and Gold Standings at the Comex/ Iran

Good morning Ladies and Gentlemen:

Before beginning, I would like to report that we had only one bank join the ranks of fellow morgue honourees:

These links contain useful information for the customers and vendors of these closed banks.

The price of gold fell today courtesy of a raid orchestrated by our bankers.  The object of the exercise was silver as again the OI for the front Feb month increased with no delivery notices filed on Thursday and again yesterday.  The price of gold finished the comex session at $1775.10 down by 9.80 dollars.  Silver finished
at $35.33 down 11 cents, as the raid had little effect on silver.  There is no question that the object of the raid was to loosen some of the silver leaves from the silver tree but that failed.
The front March contracts are now off the board and all options exercised will stand for delivery when the long holder deposits his money into his account.

Let us head over to the comex and assess trading, inventory levels and position levels by our major players.

The total gold comex open interest rose by a rather large 4333 contracts from 465,922 to 470,255.
Generally when you see a high rise in OI coupled with a languish in equity prices you know that a raid was upon us.  Another clue was the exact rise in gold of 2% on Tuesday, 1% on Wednesday and 1% on Thursday. The planning of the raid was in full swing by our bankers. The front delivery month of February saw its OI rise from 208 to 259 for a gain of 51 contracts.  We had 42 delivery notices yesterday so we gained 93 contracts or 9300 oz of gold ounces standing.  The next delivery month is April and here the OI rose by 6744 contracts from 257,506 to 264,250 contracts.  The estimated volume today was a rather weakish 134,473.  The confirmed volume yesterday was much better at 169,165 contracts.

The total silver comex OI has finally broken from his narrow band width rising another 4871 contracts from
111,003 to 115,874 contracts. This  rise in silver comex OI is surely bothering our bankers as well as other details which I will point out.  The February non delivery month saw its OI rise from 125 to 175 despite zero deliveries on Thursday and to boot zero deliveries on Friday. Some entity is badly in need of silver.  First day notice on the March contract is the 29th of February.  The OI for the front month fell from 24,966 to 21,393 which is quite normal.  Late Tuesday night, we will get the intent on delivery notices and on Wednesday, I will get the first glimpse on what will stand in silver.  Judging from the two previous non delivery months of January and February we may receive a 10 plus million oz of physical silver standing.  The estimated volume on the silver comex was good at 72,380. The confirmed volume yesterday was huge at 102,616.

Now let us begin with February inventory movements  in Gold

  February 24.2012                               :

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
95 (9500)
No of oz to be served (notices)
Total monthly oz gold served (contracts) so far this month
2962  (296,200)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


The CME reported that we had 95 delivery notices filed last night for a total of 9500 oz.
The total number of delivery notices filed so far this month is represented by 2962 for 296,200 oz
To obtain what is left to be served upon, I take the OI standing (259) and subtract out today's deliveries (95)
which leaves us with 164 notices or 16400 oz of gold left to be served upon.  The CME has until Feb 29.2012 to serve notices on these longs.

Thus the total number of gold oz standing in this delivery month of February is as follows:

296,200 oz (served)  +  16,400 (oz to be served upon) =  312,600  oz or 9.72 tonnes of gold
we gained  9300 oz of additional gold oz standing.

the silver chart: February 24. 2012:

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory426,072 (Brinks,HSBC)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory213,413(Delaware)
No of oz served (contracts)0  (zero)
No of oz to be served (notices)175 (875,000 oz)
Total monthly oz silver served (contracts)766 (3,830,000 oz)
Total accumulative withdrawal of silver from the Dealers inventory this month2,727,692
Total accumulative withdrawal of silver from the Customer inventory this month 7,306,065

The CME reported that again we had zero notices filed last night.  It is also strange that
the OI rose by 50 contracts despite the zero notices filed and we went off the board last night.
The total number of notices filed remain the same at 766 for 3,830,000 oz.  To obtain what is left to be served upon, I take the OI standing for February (175) and subtract out Friday deliveries (0)
which leaves us with 175 notices or 875,000 oz left to be served upon.  Again the banks have until Feb 29.2012 to serve upon these longs.

Thus the total number of silver oz standing in this non delivery month is a follows:

3,830,000 oz (served)  +  875,000 (oz to be served upon)  =  4,705,000
it seems we are getting closer and closer to the 5.0 million  oz mark.

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.

Feb 24.2012:

Total Gold in Trust



Value US$:73,390,036,951.54

Feb 23.2012

Total Gold in Trust



Value US$:73,266,582,467.61

we gained 1.81 tonnes of gold into the GLD today.   I guess demand for shares continues as the world seeks out metal.  Investors will get the shock of their lives when they realize that the GLD is a fraud.


And now for silver Feb 24 2012:

Ounces of Silver in Trust309,692,696.100
Tonnes of Silver in Trust Tonnes of Silver in Trust9,632.52

Feb 23.2012:

Ounces of Silver in Trust307,700,912.000
Tonnes of Silver in Trust Tonnes of Silver in Trust9,570.57

we gained 2.262 million oz of silver back into the SLV.
(This update 6:30 Friday night)

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

1. Central Fund of Canada: traded to a positive 3.9 percent to NAV in usa funds and a positive 4.1% to NAV for Cdn funds. ( Feb 24.2012

2. Sprott silver fund (PSLV): Premium to NAV rose today  to  8.2% to NAV  Feb 23.2012 :
3. Sprott gold fund (PHYS): premium to NAV rose slightly to  2.61% positive to NAV Feb 24. 2012). 

Let now head over to the COT report and see how the players line up this week:

First the Gold COT:

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, February 21, 2012
Our large specs that have been long in gold added a monstrous 14,011 contracts to their longs  taking on the bankers.
Our large specs that have been short in gold added a very tiny 470 contracts to their shorts.

Our commercials;

Those commercials who are long in gold and are close to the physical scene covered a very tiny 814 contracts from their long side.
Those commercials who have been short from the beginning of time and are the prime manipulators in gold, added a super humongous 19,080 contracts to their short side.

Our small specs:

The small specs that have been long in gold added a huge 7,127 contracts to their long side as these guys joined their smarter and wealthier cousins the long specs in the pursuit of gold.
Those small specs that have been short in gold added a small 774 contracts to their short side.

Conclusion: the large and small specs piled into gold and our banker friends supplied huge amounts of non backed paper gold.  This COT report is from Tuesday the  14th to the 21st of February. The attempted raids on Thursday and Friday were orchestrated due to the massive buildup of long positions by our specs.  It had nil effect.  The bankers retreated to higher ground and will attack again.

Now our silver COT

Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, February 21, 2012

 Large Specs:

Those large specs that have been long in silver added a rather large 1,959 contracts to their long side.

Those large specs that have been short in silver added a fair 962 contracts to their short side.

Our commercials:
Those commercials that have been long in silver and are close to the physical scene added
a tiny 308 contracts to their long side.

Those commercials that have been short in silver and subject to the silver probe, added a good sized 2186 contracts to their short side.

Our small specs;

Those small specs that have been long in silver added a rather large for them 1,270 contracts.
The small specs that have been short in silver added another 389 contracts to their short side.

Conclusion: the large specs certainly entered the arena but the bankers did not supply too much of the paper silver.  They allowed the price to rise and thus the bankers retreated to higher ground.  They will try again to attack next week.


Late last night, the CME sent down their final intent to deliver notices for both gold and silver:

for gold  114 notices for 11400 oz.  (we had 164 notices to be served upon so we probably lost a few more contracts to cash settlements)

in silver:  180 notices or 900,000 oz.  (we had 175 notices left to be served upon so we gained an extra 5000 oz.

It looks more and more likely that most of our silver and gold contracts are paper served through the GLD and SLV.  Most of the players probably are satisfied to keep their metals in registered comex vaults.  Thus these players are paper served.
All others who know the crookedness of the comex (M.F.Global) and want no part of this,   will demand their physical metals and ship it out.  We have a fractional gold/silver fiat/ponzi scheme at the comex.

I will give a final chart on both silver and gold on Monday.


This week we have seen the Bloomberg report on the huge amount of silver imported into India to the tune of 5,000 tonnes or 160 million oz.  The total amount of silver
produced by all the miners throughout the world and including China is around 700 million ounces.  Demand for silver is a little north of 900 million oz with scrap silver playing the equilibrium card bringing everything into balance. The Canadian mints and the USA mints use 65 million oz of silver to make their eagles and maples and yet both countries produce only 55 million oz and thus must import silver.  Mexico is probably the choice of importing country. In 2010, the USA reported this import of Mexican silver:

Mexico … US$1.2 billion 

Mexican silver exports have been in a slight decline these past two years.

With an average price of around 25.00 dollars in 2010, we can now assume this year, that Mexico probably exported to the USA no more than 48 million oz of which anywhere from 5 million to 10 million oz went to the making of the silver coins.  The remainder of the Mexico exports to the USA must satisfy demand for the metal for pharmaceuticals, xrays, film, solar panels. TV's, electric conductivity companies etc and finally to our comex dealers.  It does not seem possible that the comex can obtain the necessary silver that they need to satisfy the demands of investors who are wishing to hoard as they know this metal is rapidly disappearing from the bowels of the earth.

The missing piece in the equation is China.  Up until 2005 China was the dominant silver
refiner as they minted close to 80% of the world's silver.  Many mining operations would send their sludge to China for refining due to the toxicity in the process.  As China grew
and the nation needed the silver for its own use, exports of silver dropped into the 40% area:

(zero hedge   Oct 20 2010)

Chinese Silver Exports To Drop 40%

Tyler Durden's picture

After outperforming pretty much every asset class, most certainly stocks, and even gold, year to date, the "poor man's gold" may surge even more. The reason: China may cut silver exports by as much as 40%. As Bloomberg reports: "Shipments may decline from about 3,500 metric tons in 2009, said Feng
Juncong, chief analyst at the state-owned Antaike, without providing a
specific forecast. Customs data show exports plunged almost 60 percent
to 970 tons in the first eight months. Cancellation of an export rebate
in 2008 is also hurting shipments, she said." This is in line with recent expectations from the World Gold Council which haspreviously stated that China will likely become an increasingly greater buyer of gold both institutionally and at the retail level. And while we have discussed the impact that China's (temporary) ban on exports of rare earth minerals will have on prices (hint: not down), this will also end up driving silver prices higher. The catalyst, as usual, inflation: "There are Chinese investors now hoarding silver, along with other
resources, amid anticipation of higher inflation. 
China is
short of resources so these investors believe the metals will be more
valuable in the future." These investors are correct.
More from Bloomberg:
Reduced exports may bolster prices that are trading near a 30-year high on speculation that governments worldwide will take further steps to stimulate their economies, weakening currencies and increasing demand for assets that are a store of value. China, the third-largest producer after Peru and Mexico, revoked export rebates in August 2008 to curb use of natural resources.
“There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished,” said Ng Cheng Thye, head of bullion at Standard Bank Asia. “The demand is coming from all areas, including jewelry, investment and fabrication and this has resulted in a physical market shortage in the Far East.”
“China may sharply reduce its silver exports this year following the scrapping of the rebate and as domestic demand picked up amid expectations for higher inflation,” Feng said. This year’s 5,100-ton quota is unlikely to be fully used, she said.
China’s silver production, including mined, by-product output and recycled material, grew by an average 14.9 percent every year in the 20 years since 1990 to 10,348 tons in 2009, Feng said. Growth was mainly because of the fast-growing production of lead, zinc and copper, which generates silver as a by-product, Feng said.
The country’s silver output dropped 1.9 percent in the first eight months to 7,445 tons, she said. About 60 percent of China’s silver mined output is in the form of by-product of base metals, according to Antaike estimates.

The latest data we have from  China is a net import of silver of around 3,500 tonnes
or approximately 112 million oz. The data is from 2010.

BEIJING (Commodity Online): Silver is getting hot in China as imports of the white precious metal is soaring thanks to increasing demand for the commodity for industrial use and jewellery purposes. 

For the first time, China's net imports of silver hit a record high as it quadrupled in 2010 to 3,500 tonnes (112 Million ozs). Precious metals analysts view this as a shift in the Chinese demand for silver as traditionally China used to be a silver exporter. 

Lee Kui, a precious metals dealer in Beijing, said that a few years back, China used to export silver in big quantities. “For instance, in 2005, China made net exports of 3,000 tonnes of silver. In five years, the exporter of silver has become the importer of silver. This shows that Chinese demand for silver is soaring,” he said. 

China was a net exporter of silver for many years and the Chinese export used to be a major component of global silver supply. This changed in 2007 when China became a net importer of silver. The demand figures being released by the General Administration of Customs in China has been showing the massive turnaround in China from large silver exporter to large silver importer.

China has gross exports of 1,575 tons of silver in 2009, down 58 percent from a year earlier. China’s gross imports of silver increased 15 percent to 5,159 tons in 2010. 

A longer term perspective is as ever important as are the net figures. In 2005, China was a net exporter of nearly 3,000 tonnes (3 million kilogrammes) of silver. Last year, in 2010, China imported more than 3,500 tonnes of silver. Incredibly, Chinese net imports of silver surged four fold in just one year from 2009 to 2010.

Demand for silver in China has risen sharply in recent months and years. Growing middle classes and savers in China, India and other Asian countries have been turning to “poor man’s gold” and using silver as a store of value. Gold has risen above its historical nominal high in local currency terms internationally and silver is seen by many as a cheaper alternative. 

Buyers in China, Asia and internationally can buy some 50 ounces of silver for every one ounce of gold. The gold silver ratio today is 49.3 (gold at $1,342 per ounce divide by silver at $27.20 per ounce) meaning that 49.3 ounces of silver can be bought with every one ounce of gold. 

Gold is increasingly unaffordable to the “man in the street” in China and wider Asia and this is leading to increased purchases of silver as a store of value, rather than gold. With the price of gold set to remain high in the coming years, this will continue. 

Chinese and most Asians have experienced the decimation of their life savings through currency debasement and hyperinflation and unlike westerners understand the importance of owning gold and silver. 

Besides huge demand for silver as a savings vehicle and a store of value in China, there is also very significant industrial demand in China and internationally. 

There remain a huge range of industrial applications for silver. While demand from the photography sector has declined, demand from the medical, solar energy, water purification and many other sectors continue to rise significantly. 

Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow. 

According to a new research report from China Research Intelligence (CRI), an important feature of China's silver market is that the domestic price is higher than international market price. 

“Domestic price of silver in China is not completely synchronized with the international price and it lags behind with too large fluctuation, resulting in increasing risk of downstream silver consuming enterprises,” said the report. 

The CRI report said that China urgently needs to improve the formation mechanism of domestic silver price and seek appropriate trade modes to maintain values and avoid risks. It will be the general trend to introduce silver futures.


With imports of gold tripling into China this year, we can also assume that citizens are importing
greater supplies of silver than before. My guess is that the net imports of silver into China would be north of 200 million oz.this year.

We thus have the following:

India imports  160 million oz of silver to satisfy their huge demand for precious metals.
China imports; 200 million oz
USA and Canada Mint usage:  65 million oz.

total  425 million oz or  60% of mining production.

It seems that the comex will have a tough time finding the necessary physical silver as demand
for this important metal is certainly having its effect.


Let us now see some of the major stories that will have an effect on the price of gold and silver:

 In the following commentary Graham Summers of Phoenix Research Capital does a great job in analyzing Deutsche Bank and its exposure to first Greece and then other PIIGS nations. In summary this one bank has exposure to around 60% of their net equity position.

(courtesy Graham Summers/Phoenix Capital Research/


Greece (and the PIIGS) Are a MAJOR Problem… Even for the Strongest German Banks

Graham’s note: this is an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the real threats Greece poses to the world financial system. The primary point is that the mainstream media is massively underplaying the true threats here. To learn more about Private Wealth AdvisoryCLICK HERE.
Now let’s take our analysis from yesterday a step further.
Deutsche Bank trades on US stock exchanges and so has to publish SEC filings on its balance sheet risk. Well, according to Deutsche Bank’s own filings, it had 1.6 billion Euros’ worth of credit exposure to Greece at the end of 2010. True, this is credit exposure not direct exposure to sovereign debt… but it’s still four times what theGuardian claims to the case.
More interesting that this, the term “Greece” is only mentioned twice in Deutsche Bank’s 2010 416-page annual report. Remember, this was the year in which the Greek Euro Crisis nearly took the system down: between January 2010 and June 2001, when the first Greek bailout was announced, the Euro lost 17% if its value. Worldwide, stock markets cratered despite central bank intervention. And it was only the Fed’s promise of QE lite and QE 2 that got the global equity rally rolling again.
So it’s a bit odd that Deutsche Bank’s 2010 416-page annual report would only mention the term “Greece” two times. Regardless, let’s fast forward to Deutsche Bank’s Third Quarter 2011 filing (its most recent) for some more recent data.
This time around, the term “Greece” shows up six times in the 100-page report. And this time around Deutsche Bank states it has 881 million Euros’ worth of exposure to Greek sovereign debt (TWO TIMES what The Guardian claimed).
By the way, Deutsche Bank has only 59 billion Euros’ worth of shareholder equity, so this position alone is worth roughly 1.5% of the banks’ equity. True, this is not a huge percentage, but if Greek creditors take a 70-80% haircut, Deutsche Bank wouldneed to raise capital.
On a side note, I want to point out that we’re completely ignoring the fact that if Greece defaults so will Italy and Spain whose sovereign debt and financial institutions Deutsche Bank has 14.8 BILLION EUROS worth exposure to: an amount equal 23% of Deutsche Bank’s TOTAL EQUITY.
But let’s just focus on Deutsche Bank’s exposure to Greece for now. According to its Third Quarter 2011 filing, aside from the 881 million Euros’ worth of exposure to Greek sovereign debt, Deutsche Bank also has 665 million Euros’ worth of exposure to Greek financial institutions, and a whopping 1.3 BILLION Euros’ worth of exposure to Greek corporates (plus a negligible 8 million Euros’ worth of exposure to Greek retails) for a total of 2.8 BILLION Euros’ worth of exposure to Greek debt and businesses.
So… having taken our analysis one step further, we find that one single German bank, one of the alleged strongest I might add, has in fact, far, far more exposure to Greece and its economy than both the Bank of International Settlements and the mainstream financial press indicates.
Bear in mind, the numbers presented in Deutsche Bank’s are simply those that Deutsche Bank’s executives have told the company’s accountants are acceptable for public disclosure (we have no clue about the banks off-balance sheet risk).
It’s also worth noting that in 2010 Deutsche Bank claimed to have only 1.6 billion Euros’ worth of credit exposure to Greece, whereas by late 2011 the number has swelled to 2.8 billion Euros.
I have to ask… how exactly does a bank, which is supposedly managing its risk levels and adjusting its exposure accordingly, manage to increase its credit exposure to something as financially toxic as Greece by 75% in a nine month period?
This hardly strikes me as good risk management. But here’s how Deutsche Bank’s accountants try to explain that none of this (even the 2.8 billion Euros’ worth of exposure) is  a big deal (click on image for larger version).
If the above chart sounds like it’s written in obfuscating language, let me translate it for you. According to Deutsche Bank’s accountants, once you include collateral held (likely garbage assets valued at mark to model fantasy land valuations), guarantees received (from GREEK institutions!?!?!), and “risk mitigation”, Deutsche Bank’s “actual” exposure to Greece drops from 2.8 billion Euros to only 1.2 billion Euros.
So… this is a bank whose credit exposure to Greece increased by 75% as the Greek Crisis worsened from 2010 to 2011… now claiming that thanks to their risk management, their “real” exposure to Greece is only 1.2 billion Euros.
Ok, well if we’re going to play by those rules, let’s consider that when we include the rest of the PIIGS countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.
At these levels, and using the currently proposed Greek 50% haircuts as a model for future defaults in the EU, Deutsche Bank could very easily see 10-15 billion in write-downs from its PIIGS’ exposure.  This would wipe out 16%-25% of the bank’s entire equity and render it borderline insolvent.
And we’re talking about one of the biggest, most “solvent” banks in Germany here.
Make no mistake, the situation in Europe is far far worse than 99% of investors realize. Even if the second Greek Bailout is finalized (the details are still emerging) we’ve still got Italy and Spain to deal with: two problems that are far too big for any of the current troika (ECB, IMF, and EU) to handle.
On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.
I can show you how with my Private Wealth Advisory newsletter.
Private Wealth Advisory is my bi-weekly investment advisory designed to help investors outperform the market and avoid critical portfolio risks at all times.
Case in point, my clients MADE money in 2008. They also profited beautifully from the May 2010 Euro Crisis, outperforming the S&P 500 by 15% at that time.
And in 2011, while most investors were whipsawed this way and that, the Private Wealth Advisory model portfolio returned 9%, crushing the S&P 500’s 0%.
Every annual Private Wealth Advisory subscription comes with 26 bi-weekly investment reports (usually 15-20 pages each). These reports all feature my best research regarding macroeconomics, financial developments and geopolitical impact on the markets.
In plain terms I lay out what’s really happening in the markets as well as which investments to buy and sell to insure you’re maximizing your returns.
In this manner, my clients are always abreast of what’s happening behind the scenes in the markets. Even more importantly they’re making REAL money on their investments, while avoiding risk (again, we’ve just closed out 34 straight winners).
To find out more about Private Wealth Advisory and how it can help you grow your portfolio during these trying times…

Graham Summers;


Geold Report - Positions as of
The next commentary is a must read.  The author Wolf Richter has just analyzed the huge loss that the big Belgian-French bank Dexia had in this latest quarter.  As you will recall,  the country Belgium struck a deal to cover 60% of the losses in this giant bank, with the French at 36% and Luxembourg the rest.

The second bailout of Dexia thus had the country of Belgium guaranteeing 54 billion euros  Dexia SA debt or 14% of Belgium GDP. Belgium nationalized the subsidiary Dexia Banque Belguique (DBB) and assumed toxic liabilities of 4 billion euros plus other toxic junk. Altogether, Belgium assumed or guaranteed 138 billion euros or 35% of its entire GDP plus an additional injection of 16 billion euros into DBB. Together with all of the above guarantees, assumption of debt and re-liquefying the banks, the total amounts to 162 billion euros or 41% of GDP.

Dexia SA lost 11.6 billion euros of which Belgium taxpayers must eat 60% of that. Now the opposition parties are getting cold feet as they want to bail out of this agreement as mounting losses can bring Belgium to equal Greece:

(courtesy Wolf

a must read....

Belgians Get Cold Feet as Bailout Queen Dexia Drags them toward the Abyss

testosteronepit's picture

Wolf Richter
Bailout queen Dexia, the Franco-Belgian mega-bank that collapsed twice and was bailed out twice within three years—in 2008 and last October—is turning into a nightmare for the tiny Kingdom of Belgium and its taxpayers.
As part of the second bailout, Belgium guaranteed 60.5% of €90 billion in debt—€54.5 billion, or 14% of Belgium’s GDP. France and Luxembourg guaranteed the remainder. Belgium then nationalized the local subsidiary, Dexia Banque Belgique (DBB) for €4 billion and assumed whatever toxic assets were fouling up the air inside. Belgian bailout manna also rained on other worthy banks, including BNP Paribas and Fortis Banque. In total, Belgium guaranteed €138 billion in debt, 35% of its GDP! In addition, it injected €15.7 billion in capital and €8.6 billion in loans into the financial sector. For a total exposure of €162 billion—gasp—41% of its GDP! For that immense taxpayer ripoff and how finally someone is going after the CEO of Dexia, read.... "Not A Bank But A Hedge Fund".
Belgians have a love-hate relationship with the left-over parts of Dexia. They employ 10,000 Belgians, but they’re also threatening to pull the country into a financial abyss. And now bad news for taxpayers is piling up. Dexia SA released its fourth-quarter results today: a monumental loss of €11.6 billion ($15.3 billion), which includes write-downs of its Greek bonds and other crappy assets, plus hefty operating losses. Of that loss, Belgian taxpayers will eat 60.5%. At the end of December, it owed €48 billion on its emergency lines of credit with central banks.
On March 1, DBB will report similarly horrid results, impacted by the usual suspects: operating losses and write-downs—among them Greek bonds, assets in its legacy portfolio, derivative products, and the liquidation of its subsidiary Holding Communal. It is still dependent on the ECB for funding. And now, the newly installed administrators found out that, despite state-ownership and the amount of money Belgium plowed into it, it is still bleeding deposits at a rate of €20 million a week. The run on the bank continues. Layoffs will become inevitable. And more capital may have to be injected.
But resistance is mounting in Belgium. Today, after the losses were announced, the opposition party Ecolo came out swinging. It accused the then outgoing federal government of having been lackadaisical when it negotiated the bailout deal and Belgium’s 60.5% share of the guarantees. In a statement released today, Representatives Meyrem Almaci and Georges Gilkinet demanded that the federal government renegotiate these guarantees—in light of the dangers they pose for Belgium’s public finances, and in light of the austerity measures foisted on the people because of the bailouts. "In the case of Dexia, it is time that the interests of the Belgian citizens are finally taken into account," the statement said.
And there is a legal challenge underway. ATTAC (Association pour la Taxation des Transactions Financière et pour l’Action Citoyenne) and CADTM (Committee for the Abolition of Third World Debt) appealed the Royal Decree of October 18 that had granted Dexia the guarantees. “Several democratic principles were violated in this case,” said their lawyer Olivier Stein. In particular, the federal parliament never voted on the guarantees though it could have. By comparison, the French parliament passed a law allowing the guarantees on the French side.
Alas, yesterday, Dexia, which would die a rapid and natural death without the guarantees, responded. It filed an application with the Council of State to intervene in the case in support of the Belgian government. Goal: get the judges to reject the appeal. The case is expected to be argued before the Supreme Court in several months.
This mayhem could have been avoided. Not with a silly stress test—Dexia passed one with flying colors a few months before it collapsed. But through regulators doing their jobs. And they weren’t blind. Unbeknownst to the public at the time, French regulators had been investigating Dexia for years and had sent its executives numerous warning letters. In the summer of 2010, they finished a report chock full with damning results and threatened to put the bank "under special supervision." And then? Nothing. But now the report has surfaced. Read.... Regulators Knew of Dexia's Problems But Were Silenced.


Mark Grant  comments on the huge losses in Dexia and adds that this huge bank was allowed to underwrite 23 billion euros of state debt without any collateral.  This bank is waiting for an accident:

In the second part of his commentary, he claims that it will be impossible for Greece to assemble the necessary 75% participation rate in its PSI.

(courtesy Mark hedge).

Guest Post: The Dexia Effect

Tyler Durden's picture

From Mark Grant, author of the financial commentary: "Out of the Box"
The Dexia Effect
As the banks in Europe report out earnings; or the lack thereof in most cases, it becomes clear that the LTRO is helping with liquidity but not with solvency past some very short term point. This is always the case of course but it is beginning to hit home. The balance sheets for many European banks have now swelled on the liability side with more and more debt piling up courtesy of the ECB while their assets decrease due to the Basel III mandates so that the financials of these banks begin to deteriorate. It is not just the losses from their Greek debt holdings that are coming into play but also their potential future losses from sovereign debt write downs markedly for Portugal soon I think but also perhaps for Spain and Italy in the near term as the recession in Europe brings new problems to the fore which will further reduce the value of sovereign and bank credits in Europe.
Nowhere is this more pronounced than for Dexia which reported out a loss of more than $15.5Bn for the quarter as they warned that they might be forced to “go out of business.” The governments of France, Belgium and Luxembourg had promised to provide capital of approximately $117Bn but to date the bank has received less than half of this amount. Dexia, is in fact, failing and rapidly and this is about to cause a significant problem for Belgium as I suggest either the avoidance of this country’s bonds or a more aggressive short here. Bloomberg reports this morning that there is a new accord that relaxes rules applied to Dexia and allows it to sell around $23 billion of state-backed debt without providing collateral in return. This, in my estimation, is an act of desperation as France and Belgium do not wish to take any further hits to their balance sheets but it is only a delaying tactic and one that just increases their contingent liabilities. I realize, of course, that Europe no longer counts contingent liabilities but I continue to use the old playbook when evaluating credits. As we all focus on the antics with Greece and wait and watch to see just what comes next as rhetoric finally gives away to facts, keep your eye on Belgium because they could be in for quite a rough ride as the liabilities of Dexia may overcome the country.

Too Much Ouzo

The Greek government said today that they expected at least an 85% participation from debt owners in their bond swap. These people have been living in La-La land for months but their proclamation only proves that they have left this place and have moved to the land of fairies and make believe. It must be that they sit in these meetings and continually tell lies to themselves and eventually believe what they have all given each other to swallow. There is way too much ouzo being served I suppose as I can personally count institutions that I know of with more than 15% of Greek bonds that are definitely not going along with the European plan. Once again in Europe it will be rhetoric bowing to reality in the end and the end now has a definitive date of March 20. Manufactured headlines only function until the data rolls in and then we will all see just who is in the bus and who has been thrown underneath it.
With Greece officially kicking off their debt swap moments ago it is important to examine the facts. The haircut is 53.5% of the principal value of the bonds. The average coupon is 2.63% for the first eight years and then 3.65% for the balance of the thirty year maturity. The ultimate net present value loss (NPV) will be almost 80% as close as I can determine it. I was particularly taken with the comment of the CEO of Commerzbank this morning when addressing the voluntary nature of the Geek swap as he said that it was about as voluntary as “a confession during the Spanish Inquisition.” There is an honest man in Europe afterall. Next we shall await the real percentage of people willing to go along with all of this, watch the law suits as they pour in and then glare intently to see if the CDS is triggered. Unanswered question are about to finally be answered and speculation will give way to hard data.
Also keep your eye on the role of the IMF in all of this. Currently the debt taken on by them is up against their legal limits for Greece and they have indicated that they will only put up around $17Bn for the new Greek loan. This will cause a 20% shortfall in funding which then must be assumed by the EU when the countries of Europe have not approved this amount of money. Before it was a promise of money but now it must be funded and I expect some major problems on this front. I also note that the Netherlands, in particular, has demanded additional funding for the stability funds in order to go along with the new Greek funding while Germany has refused to add new capital so that a show down of sorts is in the making. Here is another potential blow-up that may develop as promises of giving money run into the reality of squaring up with what was promised and then the costs to the sovereign balance sheets which could cause more downgrades as the new liabilities are assessed.


As many of your know, this Wednesday we get the second LTRO refinancing initiated by ECB chief
Mario Draghi. This next Ambrose Evans Pritchard commentary cautions the globe on its toxic effects
as banks swap their junk for collateral with an additional 65% haircut.  Also the ECB is senior to all
debt which is certainly having its effect on traders. "Liquidity today comes at the price of subordination tomorrow".  Spanish and Italian banks are using the LTRO to buy their host nations bonds as long as those bonds mature in less than 3 years in what is becoming a " leveraged option on sovereign risk".

This is a must read for all:

(courtesy UKTelegraph/Ambrose Evans Pritchard and special thanks to Robert H for sending this down to me)

ECB's Mario Draghi magic corrupts bond markets - Telegraph

8:58PM GMT 22 Feb 2012

ECB boss Mario Draghi has sparked a blistering rally in global asset markets by lending banks as much as they want for three years at 1pc, but bond experts say the side-effects are toxic and the benefits are wearing off.
"It's a sugar rush," said Alberto Gallo, European credit chief at RBS. "It lowers the risk of defaults, but also lowers recovery rates if things go wrong."
Lenders must provide the ECB with collateral, at a haircut of up to 65pc, using up ever more of their balance sheets. The ECB has first claim on these assets, pushing other creditors down the pecking order. The longer it goes on, the worse it gets.
"There is no such thing as a free lunch. Liquidity today comes at the price of subordination tomorrow," said Mr Gallo, warning that BBVA, BNP, Commerzbank, Intesa, Santander and Unicredit are all vulnerable.
Banks took up €498bn (£421bn) in the first long-term refinancing operation (LTRO) in December. Mr Draghi said the loans had averted a "crunch" in the first quarter of this year as banks struggled to roll over debt. Markets are enraptured by Draghi's "bakooza", convinced that it is a long-awaited "game-changer" that eliminates the danger of an EMU death spiral.
However, investors may have been lulled into a false sense of security. If the second LTRO next week is too big – with some forecasts of €1 trillion – it may even threaten the global rally.
Mr Gallo said the LTRO has badly eroded the capital structure of banks, pushing many over the edge towards junk status. Spanish and Italian banks are using the ECB money to buy more of their own governments' debt than is covered by equity, becoming a "levered option on sovereign risk".
At the same time, the ECB has set off bond market tremors by exerting 'droit de seigneur' to shield itself from losses on its €40bn holding of Greek bonds. This has automatically reduced other creditors to junior status.
"If the ECB is going to take that kind of action in Greece, it could do it elsewhere," said Ian Stannard from Morgan Stanley. "This is very bad for psychology and could deter global investors from buying any peripheral debt."
The ECB holds €220bn of Greek, Irish, Portuguese, Spanish and Italian bonds. Private investors have been relegated overnight to junior status in each case.
Huw Van Steenis, Morgan Stanley's bank strategist, said the bazooka is no panacea even though it has averted a shock as lenders slash loan books in a frantic rush to meet core tier one capital ratios of 9pc by June. "The LTRO will not stop the Great Deleveraging," he said.
He expects European banks to delevearge by up to €2.5 trillion over the next 18 months, and €4.5 trillion over the next five years, matching the pattern seen in Japan.
Monetarists say the bazooka is likely to feed through into money supply growth over coming months, lifting Europe out of the doldrums, though proof of the pudding will be in the January data. All key measures of the money supply contracted late last year, a potentially dangerous development.
Simon Ward from Henderson Global Investors said the bazooka is better than nothing but a bad way to inject liquidity. The ECB would have got more bang per buck and avoided a host of problems if it had launched quantitative easing (QE) for the whole eurozone. "Their back door method is a form of disguised QE but it's a less efficient way to inject cash into the economy, it subordinates bondholders, and concentrates the ECB's credit risk in the periphery," he said.
By forswearing QE as an Anglo-Saxon vice, the ECB has inadvertently resorted to a more insidious vice.

And now some USA economic news.  The following is not good for the jobs scene:

(courtesy Bloomberg)

U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut


by Angela Keane  Feb 23 2012:

Th e U.S. Postal Service, which predicts an annual loss of $18.2 billion by 2015, plans to eliminate 5.4 percent of its workforce by closing almost half its mail-processing facilities to decrease costs.

The service plans to shut 223 of its 461 mail-processing plants by February 2013, Postmaster General Patrick Donahoe said in a telephone interview today. The closings will cut about 35,000 jobs, said David Partenheimer, a spokesman.
The service is shutting post offices and seeking congressional approval to end Saturday mail delivery as more people use the Internet to correspond and pay bills. Mail volume fell 6 percent in the quarter ended Dec. 31 and may drop 14 percent by 2016, led by declines in first-class mail, the most profitable, the Washington-based service said this month.
“We have capacity in our processing plants to process about double the letter mail we have in our system now,” Donahoe said.
The changes probably won’t affect United Parcel Service Inc. and FedEx Corp. (FDX) much because of differences in delivery schedules and prices, said David Vernon, a New York-based analyst with Sanford C. Bernstein & Co.

FedEx, UPS

“I wouldn’t expect a lot of volume to actually migrate,” Vernon said in a telephone interview.
The closings will save the service about $2.5 billion a year, Donahoe said. That’s down from an estimate of $3 billion in September, when the service said it was seeking to close 252 plants.
The service posted a $3.3 billion loss for the quarter ended Dec. 31. It had about 650,000 employees at the end of the year, the service said in a filing this month.
Most of the quarterly loss came from a U.S. law requiring the service to pay about $5.5 billion a year toward the health- benefit costs of future retirees. To date, the Postal Service has contributed $38 billion into the retiree health-benefit fund, Partenheimer said in an e-mail.
The agency had predicted it would reach its $15 billion debt limit last year until Congress deferred the 2011 retiree health benefit payment to this year. The Postal Service, which borrows only from the U.S. Treasury, said this month it has $2.1 billion in borrowing capacity this year.
Plants in Brooklyn and Staten Island, New York, Chicago and Los Angeles are among those approved for closing, according to a list posted on the Postal Service's website.

Operating Efficiency

The service wants the processing facilities to operate for 18 hours a day to improve efficiency, instead of the average 10 hours to 12 hours they run now, Donahoe said.
The labor cuts will occur through attrition, he said. The service will eliminate about 30,000 full-time jobs with benefits, Partenheimer said. It will cut about 5,000 temporary positions, which include contract and part-time work and don’t carry full benefits, he said.
The closings are needed to return the service to solvency so it can keep running, said the head of a postal-customer group whose members include JPMorgan Chase & Co. (JPM) and AT&T Inc. (T)
“The news that the Postal Service is finally doing something to eliminate the redundancies that have inflated the costs of its physical infrastructure is good news,” Association for Postal Commerce President Gene Del Polito said. “Eliminating needless and wasteful costs is the only way to ensure the continued viability of the nation’s postal system.”
The agency has closed 214 mail processing facilities since 2005, including 26 since the September announcement, according to data provided by Sue Brennan, a Postal Service spokeswoman.

No Approval Needed

While lawmakers led by Senator Bernie Sanders, a Vermont independent, are seeking to amend a postal bill moving through the Senate to prevent mail-processing plant closings, the service doesn’t need permission from Congress under current law.
While the Postal Regulatory Commission has an appeals process for people to challenge post-office closings, it doesn’t have a similar procedure for processing plants. Congress must approve changes such as cutting a delivery day or allowing the service to leave the federal employee health plan it’s currently using to manage its own benefits.
Congress should address the service’s mounting losses in ways that don’t require closing plants where the union’s members work, said Sally Davidow, a spokeswoman for the American Postal Workers Union.
“Congress can fix this,” Davidow said in a telephone interview. “They made this mess, they can fix it. That is what is killing the Postal Service.”
She declined to specify what the union would do to challenge the plant closings.
To contact the reporter on this story: Angela Greiling Keane in Washington at
To contact the editor responsible for this story: Bernard Kohn at


This Fed President is very worried about conditions inside the uSA:

(courtessy Dow Jones newswires)

DJ Fed's Williams: Current Economic Conditions Call For Strong Fed Response
Fri Feb 24 10:45:10 2012 EST
NEW YORK (Dow Jones)--Continued problems in housing and in the broader economy call for an aggressive policy response action, a top central bank official argued Friday.
"I entirely agree" with the idea that the nature of the challenges now facing the economy requires aggressive stimulus from the Fed, and from other parts of the government, Federal Reserve Bank of San Francisco President John Williams said in the text of a speech prepared for a conference held in New York by University of Chicago Booth School of Business.
Williams is a voting member of the monetary policy setting Federal Open Market Committee this year, and in recent remarks he has been a strong advocate of the Fed working actively to spur better levels of growth and employment. He has been open to the idea that the central bank may even expand its balance sheet further this year with new asset purchases, although the recent spate of good economic data has led many in markets to conclude expanded Fed stimulus may no longer be necessary.
In his speech, Williams was evaluating a paper presented at the conference that sought to make sense of the slow recovery in light of the highly troubled state of the housing market. In his remarks, Williams said he was open to targeted action to help achieve better overall economic performance.
"Aggregate-demand shortfall is something monetary policy can be, should be, and is addressing," Williams said.
He also said "the partially clogged transmission mechanism" of monetary policy "could suggest that you don't do more of everything across the board, but concentrate on policies that affect particular problem areas." Williams said "purchases of mortgage-related securities appear to have reduced mortgage rates significantly, making them particularly useful given the weakness in the housing sector."
Williams also said "fiscal policies could directly address the housing-related headwinds, potentially yielding two benefits -- a stronger housing recovery and more powerful effects from the existing monetary stimulus."
The central banker said that housing problems are clearly part of why the recovery hasn't been better, but trouble there doesn't tell the whole story.
Williams said the link between house prices and regional economic activity is much clearer in the downturn than in the recovery. "In 2011, the pace of employment growth was similar for states that had large home price declines and those that did not," he said.
"Housing was important in explaining regional differences during the downturn," Williams explained, adding "once the downward adjustments took place, the disappointing pace of recovery has been similar across regions, suggesting broad-based factors have been at work."


This Fed President is very worried about the threat of inflation with the massive amount of paper dollars the USA has pumped into the system:

(courtesy Dow Jones newswires)

DJ Fed's Plosser: Worried By Support Of Higher Inflation To Devalue Debt 
Fri Feb 24 13:30:02 2012 EST
--Plosser says "deeply skeptical" of letting inflation rise to stimulate growth --Points to Europe as cautionary example of what markets do when confidence is lost in politicians
--Calls for more streamlined profile for Fed
NEW YORK (Dow Jones)--Those who advocate allowing a rise in inflation to stimulate growth and reduce real debt levels are misguided, a key Federal Reserve official said Friday.
"Despite the well-known benefits of maintaining stable prices, there are calls in both Europe and the U.S. to abandon this commitment and create higher inflation to devalue outstanding nominal government and private debt," Federal Reserve Bank of Philadelphia President Charles Plosser said in the text of a speech prepared for delivery before a conference held by the University of Chicago Booth School of Business in New York.
"I am deeply skeptical of such a strategy," the official said. "Inflation is a blunt and inappropriate instrument for assigning winners and losers from profligate fiscal policy or excessive borrowing by private individuals and firms," Plosser said.
The central banker does not hold a voting role on the monetary-policy-setting Federal Open Market Committee this year. He did last year and served as one of the most persistent critics of the stimulative policies pursued by the central bank. His worry that some would allow inflation to rise as a price of getting growth back on track has been made public before.
"Proposals to use inflation to fix the debt overhang problem are nothing more than a call for debt monetization to solve a problem that is fundamentally fiscal in nature," Plosser said.
The official's speech did not make forward-looking comments about monetary policy. Instead the remarks were mostly about restoring the Fed to a more traditional policy-making profile. He also warned that fiscal authorities around the world need to get their respective houses in order, and their failure to do so was degrading growth levels.
Plosser said "prolonged debates" about curtailing deficits "impede economic growth, in part, due to the uncertainty they impose on consumers and businesses." He added, "until fiscal authorities choose a path, uncertainty encourages firms to defer hiring and investment decisions and complicates the financial planning of individuals and businesses," while causing "damage ... to the economy in the near term."
The policy maker also warned events in Europe show how punishing markets can be when confidence is lost in politicians. He observed "while some have argued that preventing Greek default would keep the crisis from spreading, that argument has proven false."
"Financial market participants remain skeptical about whether the political process can come to grips with the problems," Plosser said. "So far, this skepticism appears to be wholly justified," he added.
Plosser also used his speech to again argue for a more streamlined profile for the Fed, one that would move it away from many of the emergency interventions it became involved in over recent years.

And now back to Greece:

The PSI threshold has now been reverted back to 75% due to an "oversight".The chances that they achieve this is very slight:

(zero hedge) 

Greece Issues Exchange Offer Terms; Raises Minimum Acceptance Threshold To 75% From 66%; €10 Billion Buys PSI Killer

Tyler Durden's picture

Three days ago we recoiled in terror at the stupidity of Greek leaders, when we learned that the Greek exchange offer would be deemed satisfactory if only 66% of bondholders accept it as valid, as it would mean an immediate abrogation of UK-law bonds which have a 75% minimum covenant threshold as specified in the indenture. Apparently this was a "small oversight" on behalf of the gross amateurs in charge of this process as according to the just released full exchange offer doc, this threshold was mysteriously raised to the proper minimum acceptance threshold of 75%. Of course, it is needless to say that at least 25% of Greek bondholders will decline the offer, either in the current Greek law exchange, or the forthcoming UK-law one, which would throw the whole process into a tailspin.  Because here is the kicker, from the release: "if less than 75% of the aggregate face amount of the bonds selected to participate in PSI are validly  tendered for exchange, and the Republic does not receive consents that would enable it to complete the proposed exchange with respect to bonds selected to participate in PSI representing at least 75% of the aggregate face amount of all bonds selected to participate in PSI, the Republic will not proceed with any of the transactions described above." So here's the math: if one has 25% +1 of the €177 billion in Greek-law bonds, they can smash the entire process (and give Germany a way out, wink wink). At today's price of about 20 cents on the dollar, this means that one can hold Greece, and thus Europe (assuming Europe wants Greece in the Eurozone and Germany itself is not the biggest shadow hold out) hostage for less than €9 billion. Or better yet, since the total bonds subject to PSI are about €206 billion, this means UK law bonds of just €29 billion are part of the deal, and one can buy a blocking stake there, at roughly 30 cents on the euro, for a meager €2 billion in cash out today. Furthermore since many hedge funds already have built up blocking stakes, this almost certainly means that Greece will not get the requisite needed votes to pass the exchange.
And 75% is just the absolute minimum threshold: somehow Greece thinks it has a realistic chance of getting 90% to agree to get raped, run over, and crammed down by 4 other classes of senior noteholders:
In addition, unless bonds representing at least 90% of the aggregate face amount of all bonds selected to participate in PSI are validly tendered for exchange, the Republic will not be required to settle any of the exchanges. However, if the Republic receives consents to the proposed amendments that would result in at least 90% of the aggregate face amount of all bonds selected to participate in PSI (including bonds tendered for exchange) being exchanged on the terms proposed by the Republic, the Republic intends, subject to all other conditions being satisfied and in consultation with its official sector creditors, to declare the proposed amendments effective and to complete the exchange of all bonds selected to participate in PSI that would be bound by the proposed amendments.

If at least 75% but less than 90% of the aggregate face amount of all bonds selected to participate in PSI are validly tendered for exchange, the  Republic, in consultation with its official sector creditors, may proceed to exchange the tendered bonds without putting any of the proposed amendments into effect.
And that, ladies and gentlemen, is the German "out", because since Greece will at best get an absolute minimum passing threshold, Germany will just say Nein and call the process abusive.
The full terms of the post-reorg bonds are below but they are completely meaningless as it is almost certain that we will not get to there.


The chart below is terrific, written by the French bank, BNP Paribas, as it gives probability of events as he follow the redemption of the PSI.  Maybe you should print this out and follow events. In all probability
we will get some sort of hard default as the CAC will be forced onto certain players:

(courtesy BNP Paribas and zero hedge)

One PSI Chart To Rule Them All

Tyler Durden's picture

As the Greek PSI deal rears its ugly head on our screens once again with Merkel, Schaeuble, and Papademos all pulling from one angle or another (and Dallara disquietingly silent in his uselessness), BNP created a simple flowchart of the various steps and probabilities of participation rates, retroactive embedded CACs, CDS triggers, and actual debt reduction that may (or may not) occur in the next week or two. The price action in Greek CDS and Bonds strongly suggest the CDS will trigger (as we have been vehemently explaining for weeks/months now) but there is a long way between here and there.

The Greek CDS-Cash basis package has risen dramatically - implying the market's expectation of a CDS trigger in the short-term is rising rapidly.



From Reuters:

Juncker does not rule another another bailout for Greece:

The head of the Eurogroup of euro zone finance ministers, Jean-Claude Juncker, said on Friday he could not rule out that Greece may need a third bailout.

Asked in a television interview if he could be sure Greece would not need a third bailout, Juncker said: "You cannot really exclude that, although we should not have as a starting assumption that a third program will be (needed)."

"We made it clear last Tuesday in Brussels that we are standing ready to support Greece even beyond the time period of this program but I have good reasons to believe that we should now not engage ourselves in a debate on a 'maybe' third program. We should now ... implement the second one," he said, interviewed by David Frost on Al Jazeera.

Asked about some experts' view that a Greek default is inevitable, Juncker said: "I don't see that Greece would go for a default."

Many think that China is going to bail out Europe.  Guess again with this explosive
commentary from Wolf Richer:

China Tightens The Vise On Eurozone Bailout

Wolf Richter
The European Union has filed a laundry list of complaints against Chinese dumping, from shoes to fasteners. Ceramics, for example. Household ceramics got hit last week. In 2011, it was building ceramics. In 2010, it was ceramic tiles, which led to a punitive tax of 69.7%—punitive for consumers who ended up having to pay higher prices, though it was a nice gift to European producers. Now, it has chosen another target, Chinese steel. But with nearly half of the world’s steel production, the Chinese steel industry is the bully on the block. And it flexed its pumped-up muscles—putting at stake the very manna that European officials have been praying for: Chinese bailout billions.
Rumors of the Chinese savior appearing on the horizon goosed financial markets innumerable times. China, out of the goodness of its big heart, would use its $3.2 trillion in foreign exchange reserves to bail out the Eurozone with the stroke of a plastic pen. Turns out, China didn’t have a big heart but a list of unpalatable demands—so unpalatable that even a desperate European panhandling delegation sent to Beijing in November turned them down. For this “slap in the face” and the fiasco that followed, read.... Chinese Money and the Quid Pro Quo.
Ten days ago, another top-level EU begging expedition tried to lure Premier Wen Jiabao into plowing part of China’s foreign-exchange trillions into the European bailout fund, a dreadfully convoluted and opaque creature that they passed off as a rose. But rather than kick the conniving beggars out, Wen declared soothingly that Europe was an important partner, and that China and the EU would work together to solve the debt crisis—and the delegation left once again empty-handed. Read.... Bitter Irony of the EU Begging Expedition.
But yesterday, it was brutal. It was an unnamed official at the Commerce Ministry who slugged the EU and everyone who was still steeped in some sort of hope that China would, out of the goodness of its heart, bail out debt sinner countries in the Eurozone.
The trigger: earlier this week, the European Commission opened an anti-subsidy investigation of Chinese organic-coated steel (galvanized and pre-painted) of the type used in household appliances. In December, the Commission had already launched an anti-dumping investigation of the same products. Two separate investigations and two complaints with the World Trade Organization on the same products.
The instigator: Eurofer, the European Steel Association. In January, it whined to the Commission about Chinese steelmakers that didn’t respect the rules of free trade—they received a range of subsidies, such as tax exemptions, preferential loans, and below-market cost of materials that the government purchased for them.
The European steel industry is in trouble. Demand cratered. Producers from ArcelorMittal to ThyssenKrupp have shut down steel mills to prop up prices—but all it did was invite Chinese steelmakers.
And they’re desperate. After years of explosive growth, they’re facing colossal over-capacity, just as demand is slumping. Premier Wen Jiabao acknowledged the problem during a visit to Hunan, where much of the steel is made, and he exhorted the industry to consolidate. So the trade complaint came at a very inconvenient moment.
"Launching an anti-subsidy investigation at this time sends the wrong signal of trade protectionism that will not only cast a shadow over China-EU steel trade, but also damage China-EU efforts to respond to the crisis," said the unnamed Ministry of Commerce official. "With ... many European countries deeply trapped by the sovereign debt crisis, all countries should have a more open, cooperative and forgiving attitude in facing the crisis."
Open, cooperative, and forgiving towards China—the new rules that China is imposing on the game. Or perhaps just a re-write of very ancient rules. Those with the money get to set the terms when those who need it are desperate. Remains to be seen if someday the Eurozone will be desperate enough for Chinese money to compromise on the support for its coddled industries.
Meanwhile, life in China goes on in its crazy manner: all heck broke loose when Zhejiang's Provincial Administration announced that 30,000 blood nests, the rarest and most expensive bird's nest, contained high concentrations of sodium nitrite. Well-off Chinese were suddenly worried about an insidious food-safety scandal that has changed ... nothing. Read: Poisonous Blood Nests—Still a Delicacy in China.

Jim Sinclair on the meaning of notional sums of derivatives. This is an important commentary as it outlines the total amount of derivatives underwritten and if BIG BANG occurs what will be the risk to the globe:

(courtesy Jim Sinclair)

When Does Notional Value Become Real Value?

My Dear Friends,
There are various points that I feel are critically important to define so that going forward we can better understand the implications of developments.
1. Definition of ‘Notional Value: The total value of a leveraged position’s assets. This term is commonly used in the options, futures, derivative and currency markets because a very small amount of invested money can control a large position (and have a large consequence for the trader). (From…)
2. Keep in mind the notional value of the total amount of OTC derivatives outstanding reported by the BIS was reduced by 50% about two years ago when the BIS changed their computer basis for valuation by considering all derivatives as going to closure as value to maturity. The actual total value of all outstanding OTC derivatives that was then carried for two reporting periods on the books of the BIS is one quadrillion, one hundred and forty four trillion US dollars notional value. This is fact. The $700 trillion US dollars that is quoted now has not changed since it was manufactured by a change in the method of accounting for notional value by reducing the number by approximately 50%.
3. The size of notional value of derivatives outstanding granted by US banking entities is reported to the US Controller of the Currency. US Banks that have non-US financial entities on their books as non consolidated subsidiaries do not report to the US Controller of the Currency.
Now for the most important concept to understand:
When does notional value become real value? That is, under what circumstance would a credit default swap require financing to 100% of its insurance undertaking? The answer is in default. You can equate this for understanding purposes to the soybean trader with a faulty memory who holds a long contract into settlement day and does close it or roll it over into a future month. All the soybeans that contract represents will either be delivered or for the short must be delivered to the contract owner according to the storage arrangements of the contract. No ifs, ands, or buts. This example is given simply for the purpose of understanding.
Should the International Swaps and Derivative Association credit event committee deem a credit event to be a credit default as an involuntary occurrence, then the notional value of the credit default swap granted by the American bank to a speculator or holder of the defaulted bonds then that instrument has guaranteed that bond’s full value as defined in the CDS. This is how notional value becomes full value. It was this same committee at the International Swaps and Derivative Association that ruled in favor of Paulson’s short of securitized debt instrument OTC derivatives. Those derivatives resulted in his multi-billion dollar profit even though exactly how you would be short such an instrument seems to be to be very creative.
This is another reason why the can must be kicked down the road, not only at the February or March payments due by Greece, but to infinity. This is why QE is going to infinity. Once you have kicked the first can down the road you cannot stop. Your hope is that business conditions become ebullient and by earnings, the balance sheets that are truly a disaster are rebuilt. This is not the case now nor will it become the case. The can is going to get kicked forward again and again until in 2015 when it simply becomes too big a number to imagine. QE is the only way to create unlimited liquidity in less than one second without the help of anybody or anything. There is no other tool in the tool bag of the US Federal Reserve, the global lender of last resort, other than QE that can provide such liquidity in such a way. Operation Twist is a silly little thing in comparison.
Since there is no strong economic recovery out there and the can must be kicked as there is no other choice, liquidity has but one direction to go and that is higher. Because liquidity can only go higher, gold cannot do anything but go higher on balance because of the fact that liquidity must go higher. The equities market is a better buy on a break than short sale on a point of temporary overvaluation. Because the desire for a strong economic recovery depends both on lenders ability and willingness to lend, there is no significant business recovery on the horizon.
The only way out is the historic way out. That is the instillation of a new monetary system based on commodity money, gold. This need will remain intact to its strongest period in mid 2015 when the need will be critical. Gold is headed into the system and not away from it. Gold will be the last man standing in terms of asset categories when the piper must be paid, more than likely in June of 2015.
This is why I am so confident in what I am doing in TRX and some others are doing in other companies such as McEwen in MUX. Acquiring mineable gold in the ground and moving towards production is the correct direction to go. Mining money is the final goal. The leverage exists in upgrading gold in category and nature held. A discovery is just that. A total windfall is this without the use of margin. This was my plan in 2001 when interviewed by Forbes. It is set in cement in that article which you can easily research. The book I wrote in the 1990s, "Boom" outlined the country selection and business plan. I have made that plan and worked it without any deviation. I will succeed without the use of margin in what I think will be my maximus opus and last great business before I return to purely trading markets, my love, and exchanging notes with my dear friend, Harry Schultz.

 from Iran:

(courtesy IAEA report)

12:00 Iran rapidly expanding nuclear work -IAEA report
The IAEA quarterly report on Iran's nuclear program said the country has rapidly ramped up production of higher-grade enriched uranium over the last four months, and now has nearly 110 kg of 20% enriched uranium.
The report also said Iran has failed to give a convincing explanation about a quantity of missing uranium metal. The IAEA expressed "serious concerns regarding possible military dimensions to Iran's nuclear program."
WTI: +$0.81 to $108.64 


I guess it is time to press the send button.
I wish you all to have a grand weekend and
I will report to you on Monday.


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