Saturday, May 19, 2012

Spain bombshell Friday night as they adjust budgetary deficit to 8.9% from 8.5%/ LCH raises European bank margin requirements/Ireland in need of another bailout/

Good morning Ladies and Gentlemen:

Before commencing, we had another bank failure last night:

U.S. regulators closed a bank in Alabama on Friday, bringing the nationwide tally of bank failures to 24 for the year.
Sylacauga-based Alabama Trust Bank ...

Gold closed higher today by $20.30 to finish the comex session at $1595.10.  Silver finished the session at $29.14.

In the access market we are the weekend closing prices:

gold: $1592.10
silver: $28.74

the Dow fell badly for a loss of 72 points.  Most of the loss occurred after the comex closed and this caused our gold and silver to fall in the access market.  The big news occurred late Friday night as the Spanish government announced a revision in the 2011 budgetary deficit from 8.5% to 8.9%.  This was preceded by announcements from the banking regulator that they are raising all margin requirements on LTRO seeking banks.  Of course, both of these events will cause huge additional margin requirements even though the cupboards are bare.  Monday is going to be a scary day.  Also we learned that the swap spreads between the USA/Euro are widening indicating the USA is charging higher rates to support European banks who are having a huge problem funding USA dollars assets. Ireland is also in trouble this weekend as they seek another bailout for the ailing banking industry.  We will go over all of these details
this morning, but first let us now head over to the comex and assess trading yesterday:

The total gold comex open interest rose by an astonishing 16,891 contracts from 416,956 to 433,847.
No doubt the bankers were desperately supplying the needed short paper.  The non official month of May saw its OI rise from 34 to 57 for a gain of 17 contracts.  We had 0 deliveries on Thursday so in essence we gained 17 contracts or 1700 oz of additional gold standing.  We are less than 2 weeks away from first day notice and here the OI rose from 170,453 to 176,283 for a gain of 5830.  The gain in the front month is astonishing by itself as many are rolling over to August.  Someone may be very anxious to obtain physical gold metal.  The estimated volume on Friday at the gold comex was good at 192,851.  The confirmed volume on Thursday was excellent at 242,692.

The total silver comex continues to baffle the bankers and CME officials. It seems that the big bad Wolf (JPMorgan) has huffed and puffed trying to blow down the silver longs from the silver tree to no avail. On Friday, the total OI rests at 113,766 a rise of  133 contracts from Thursday.  These longs are resolute and ready to take on the bankers in July (after they do battle with the gold shorts in June). The front delivery month of May saw its OI surprisingly rise by one contract despite 3 delivery notices on Thursday.  So again we slowly increased additional ounces standing by 4 contracts or 20,000 oz.  It seems that the modus operandi of these stoic longs is a slow and sure approach and obtaining as much silver as there is available.
The next delivery month for silver is July and here the OI  fell by a tiny 528 contracts as some of these boys decided to stay in the game but roll to September. The estimated volume at the silver comex on Friday was 44,860 which is still quite good.  The confirmed volume on Thursday was astounding at 55,373.  The high volume and constant OI means our bankers are not happy campers this weekend.

May 19.2012


Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
64.30 (HSBC,Manfra)
Deposits to the Dealer Inventory in oz
Deposits to the Customer Inventory, in
32.15 (Brinks)
No of oz served (contracts) today
(35)  3500 oz
No of oz to be served (notices)
  22  (2200)
Total monthly oz gold served (contracts) so far this month
(505) 50,500
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month


We had almost nil activity inside the gold vaults on Friday.
We had no dealer activity whatsoever.
The customer only had a tiny 32.15 oz enter Brinks.

The customer had the following withdrawal:

1.  Out of HSBC  32.15 oz
2.  Out of Manfra;  32.15 oz

total withdrawal:  64.30 oz.

We had no adjustment.
The registered or dealer gold inventory rests this weekend at 2.426 million oz or 75.4 tonnes of gold.

The CME notified us that we had 35 notices filed for 3500 oz of gold.  The total number of notices
filed so far this month is represented by 505 contracts or 50500 oz of gold.
To obtain what is left to be filed upon, I take the OI for May (57) and subtract out today's delivery notices (35) which leaves us with 22 notices to be filed upon or 2200 oz.

Thus the total number of gold ounces standing in this non official month of May is as follows;

50,500 oz (served )    2200 (oz to be served upon) =  52,700 oz or 1.639 tonnes of gold.
we thus gained another 1700 oz standing.

If you add last months official deliveries at 12.5 tonnes of gold plus this month's  deliveries we have north of 15 tonnes of gold delivered upon.

Please look at the accumulative gold withdrawal from the registered or "for sale" column:  a biggy zilch.
Please look at the total customer or eligible withdrawal of gold :  156,000 oz or 4.8 tonnes.
I think our trolls should be puzzled as to where the missing gold is located.  Also remember that gold transferred from one customer to another customer is in these figures.


May 19.2012:

Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory1,207,963.52 (Brinks,HSBC Scotia)
Deposits to the Dealer Inventorynil
Deposits to the Customer Inventory606,536.48 (Brinks)
No of oz served (contracts)21 (105,000)
No of oz to be served (notices) 175  (875,000)
Total monthly oz silver served (contracts)2317 (11,585,000)
Total accumulative withdrawal of silver from the Dealers inventory this month583,065.04 oz
Total accumulative withdrawal of silver from the Customer inventory this month 4,843,472.30

My goodness we had considerable activity again in silver.
We had no dealer activity as all the movement was with the eligible or customer category.

The customer at Brinks received 606,536.48 oz.

The customer withdrew the following silver:

1. Out of Brinks:  188,249.04 oz
2. Out of HSBC:  301,352.000 oz  (again highly suspicious)
3. Out of Scotia:  718,362.48 out of Scotia.

what are the odds of any bars of silver add up exactly to 301,352.000 oz?
I will leave that up to you, our good readers.

The total number of silver withdrawal on Friday total 1,207,963.52.
We had zero adjustments and thus the dealer inventory rests this weekend at 35.766 million oz
and the total of all silver rests at 141,713,563 oz.


Friday night saw the release of the COT report which is from Tuesday May 8 to Tuesday May 15.2012
The last 3 days of gold and silver advance is not included in these figures.

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, May 15, 2012

Our large speculators:

Those large speculators that have been long in gold pitched 2079 contracts from their long side.
(please remember that this report goes up to this past Tuesday).
Those large speculators that have been short in gold added a dramatic 7082 contracts to their short side and these guys were the dominant suppliers of the paper gold.

Our commercials;

Those commercials that have been long in gold added a monstrous 9579 contracts to their long side.
Those commercials that have been short in gold covered a healthy 2959 contracts from their short side.

Our small specs:

Those small specs that have been long in gold, pitched a large 2096 contracts from their long side.
Those small specs that have been short in gold added a fair amount of 1281 contracts to their short side.


the commercials have bailed out as they massively covered.  This is extremely bullish and will explain the huge gain in gold on Thursday and Friday. The upcoming June delivery month will be exciting and we have good seats to watch these events in earnest.
I view this plus the massive addition in "gold" and "silver' at the GLD and SLV extremely bullish that both of these metals will resume their northerly  trajectory leaving the likes of JPMorgan mortally wounded.


and now the silver COT:

Silver COT Report: Futures
Large Speculators
Small Speculators
Open Interest
non reportable positions
Positions as of:

Tuesday, May 15, 2012

  I have never seen such a moribund silver COT.  Please take notice of these movements:
Large Speculators:

Those large speculators that have been long in silver succumbed slightly to the tune of 757 contracts.
Those large speculators that have been short in silver added a very tiny 332 contracts to their short side.

Our commercials;

Those commercials that have been long in silver and close to the physical scene added a very tiny 83 contracts to their long side.

Those commercials that have been short in silver covered a rather healthy 1908 contracts from their short side.

Our small specs;
Those small specs that have been long in silver pitched a tiny 238 contracts from their long side.
Those small specs that have been short in silver  added another 664 contracts to their short side.

It seems to me that the commercials are vacating the arena as they have had enough with their silver shorts.  The July delivery month should be interesting as well.  However we must go through the June delivery month first and I suggest you get front row seats on this.

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.

May 19. 2012:

Total Gold in Trust



Value US$:65,548,614,661.31

May 17.2012:




Value US$:63,873,827,805.04

MAY 16.2012:




Value US$:63,543,181,223.30

my goodness, these guys are good.  They added a massive 4.23 tonnes of gold into their inventory overnight after a gain on Wednesday.  How these guys found physical gold this fast and loaded their coffers is beyond me.


And now for silver May 19/2012:

Ounces of Silver in Trust310,229,256.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,649.21

May 17.2012:

Ounces of Silver in Trust305,959,277.700
Tonnes of Silver in Trust Tonnes of Silver in Trust9,516.40

Wow:  these guys upped their inventory by an astonishing 4.27 million ounces of silver.

The boys at both the SLV and GLD were busy loading their "paper" gold/silver into the respective vaults.

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

1. Central Fund of Canada: traded to a positive 2.0 percent to NAV in usa funds and a positive  1.3%  to NAV for Cdn funds. ( May 19,.2012)

2. Sprott silver fund (PSLV): Premium to NAV  lowered   to  4.35% to NAV  May 19.2012 :
3. Sprott gold fund (PHYS): premium to NAV lowered to  2.07% positive to NAV May 19 2012). 

the latter not updated yet.


In physical stories today Bloomberg has interviewed Goldcore's Mark O'Bryne on the huge
Chinese demand for gold as well as global gold demand.
I outlined this for you on Thursday, but this may be a good review for you if you want to see this interview.

(courtesy Bloomberg/Goldcore)

Bloomberg Interview GoldCore on Chinese and Global Gold Demand

Gold’s London AM fix this morning was USD 1,588.00, EUR 1,251.08, and GBP 1,005.13 per ounce. Yesterday's AM fix was USD 1,547.00, EUR 1,217.44and GBP 974.00 per ounce.
Silver is trading at $28.53/oz, €22.55/oz and £18.12/oz. Platinum is trading at $1,465.00/oz, palladium at $603.80/oz and rhodium at $1,300/oz.
Gold climbed $34.30 or 2.23% in New York yesterday and closed at $1,573.70/oz. Gold began trading sideways in Asia then climbed over 12 points reaching a high of $1,589.31. Gold edged off a bit in Europe and is now trading near the $1,587/oz level at 1055GMT. 
Gold rose for its 2nd day on concerns that Europe’s debt crisis is growing and the yellow metal is once again seeing increased demand as a safe haven asset.
Fitch's downgrade of Greece's credit rating sent the euro to a 4 month low against the dollar and investors wonder if Greece will be able to continue in the EU fiscal union.  The gold price jumped over $30 yesterday its most since January, and news from a US report on manufacturing in Philadelphia showed contraction for the first time in over 2 quarters.
Moody's Investor Service downgraded 16 Spanish banks yesterday, including Banco Santander, the euro zone's largest bank.  All the banks' long-term debt ratings were decreased by at least one grade and some suffered three-grade cuts.  This is just days after Moody's downgrade of 26 Italian banks on Monday.
Spain's banks like those in other EU countries (PIIGS) have been left with a sea of bad loans after the real estate bubble burst and investors see a state bailout as extremely difficult in light of the country’s limited public finances.
Goldcore’s Mark O’Byrne was interviewed by Bloomberg yesterday discussing the World Gold Council Report, Gold Demands Trend (Q1 2012) - Enter The Dragon, on demand in Asia.  “We could be witnessing a paradigm shift from China on bullion demand”, Mark O’Byrne also notes, “that the gold market was liberalised in China in 2003 and prior to that gold ownership was banned in China by Chairman Mao.  The per capita consumption of 1.3 billion Chinese consumers, investors and central bank demand are very significant.” 
Please click here or on the image to listen to Mark’s full interview.


Ben Davies on KingWorld News states that the gold smash is over.
Eric Sprott believes (and so do I) that we will see massive bank runs:

(courtesy GATA/KingWorldNews/Ben Davies/Eric Sprott)

Davies says gold smash is over; Sprott sees bank runs

4:30p ET Friday, May 18, 2012
Dear Friend of GATA and Gold:
At King World News, gold fund manager Ben Davies describes what he sees as the mechanisms of the recent gold and silver smashdown and explains why he thinks it's over:
And Sprott Asset Management CEO Eric Sprott says Western central banks are struggling to prevent a "panic liquidation" event but it's happening anyway with bank runs:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Andy Borowitz on the phoniness of markets. His paper includes the Facebook IPO:

(courtesy GATA/Andy Borowitz)

Andy Borowitz on the phoniness of the financial markets

5:10p ET Friday, May 18, 2012
Dear Friend of GATA and Gold:
People wouldn't be investing in the monetary metals if they hadn't already concluded that the financial markets are now best described by the old song:
It's a Barnum & Bailey world,
Just as phony as it can be.
But at least the satirist Andy Borowitz of the Borowitz Report nails these circumstances uproariously with commentaries arising from Facebook's initial public offering and the bankruptcy of Greece.
Borowitz's commentary on the Facebook IPO is headlined "A Letter from Mark Zuckerberg" and it's posted here:
Borowitz's commentary on Greece is headlined "Greece No Longer a Nation; Announces Plan to Become a Social Network," and it's posted here:
Also, a clarification: The commentary about gold and silver market manipulation by Brett Heath of KSIR Capital, "Paper Gold and Silver Ponzi Exposed," brought to your attention this morning after its posting at MineWeb --
-- originally appeared in a longer form at the firm's blog, the Kwan Box, here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.


Now let us see some of the big paper stories of the day.
I thought you might like this one to start the commentary where the British firm De La Rue
is now warming up the printing machines to issue a "new drachma".  Reuters has reported that De La Rue has drawn up contingency plans to print drachmas should Greece exit the euro as  the EU trade commissioner Karel de Gucht stated that the European Commission and the ECB has been working on an emergency scenario in case Greece must leave the Euro zone. The confirmation of this means De La Rue is set to print drachmas if needed:

(courtesy zero hedge)

De La Rue Warming Up The 'New Drachma' Printer

Tyler Durden's picture

Now that the consensus seemingly is one that a Greek exit is inevitable, there was only one missing step: an actual New Drachma currency, not in When Issued, electronic 1s and 0s format, but real, based on cotton and linen. It appears UK banknote printer De La Rue is now on top of that. From Reuters: "De La Rue (DLAR.L) has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source told Reuters on Friday. The news comes as EU trade commissioner Karel De Gucht said on Friday the European Commission and the European Central Bank are working on an emergency scenario in case Greece has to leave the euro zone - the first time an EU official has confirmed the existence of contingency plans." Now as noted earlier, the "emergency scenario" was promptly denied by the EC, but as of now nobody has denied the drachma printing yet, which in the world of Venn Diagrams is the "big one."
The source, who asked not to be named, said that as a commercial printer De La Rue needed to be alive to the possibility of a Greek exit from the single currency and prepare accordingly.

Crisis-hit Greece will be led by an emergency government into new elections on June 17 which will ultimately determine whether it must quit the euro - possibly spreading financial devastation across the continent.

An exit from Europe's single currency would spark a major demand for the returning drachma and while the country's state printers could orchestrate its production, a handful of global firms like De La Rue could be called on to help.

Buffeted equity investors looking for respite from the Greek turmoil have been busy buying up De La Rue shares in anticipation, helping push them up 11 percent in the last month.

Panmure analyst Paul Jones said the firm would be in with a chance of work if extra capacity was needed and could also benefit from other work as Greek printers were less likely to be quoting for contracts elsewhere.

"If they (Greece) decide to pull out of the euro the first thing is it won't be an overnight job, partly because of the implications of what they are trying to do but secondly because of the sheer number of banknotes that are needed to replace a currency," Jones told Reuters.

"It will be a huge job which the state printing works will do, but they will probably pull in some additional volume from outside and De La Rue will be in with a chance."
Why would Greece need an outside printer one may ask? Well, the country ran out of ink...INK... when it had to print tax return forms. And ink just happens to be a crucial component of toner.
We hope that makes it clear.


In the following Bloomberg report, the Irish state may be in need of another bailout as losses continue in
its banking system.  According to Deutsche Bank may need another 4 billion euros to cover more bad loan provisions than was assumed in their stress tests last year.  The only bank in Ireland, the Bank of Ireland, to have avoided state control was downgraded yesterday by Deutsche bank.

(courtesy Bloomberg/Joe Brennan)

Irish Banks May Tip State Into Bailout 2, Deutsche Bank Says

Ireland may be forced into a second bailout by mounting loan losses in its banking system, according to Deutsche Bank AG.
Ireland’s bailed-out banks may need capital to cover as much as 4 billion euros ($5.1 billion) more bad-loan provisions than assumed in stress tests last year, Deutsche Bank analysts David Lock and Jason Napier said in a report published today.

“A new, even modest, increase in capital requirements could deter sovereign investor participation and tip the balance in favor of the sovereign requiring a second loan program,” the Deutsche Bank analysts said.
Ireland’s government, which sought a bailout in 2010, has injected about 63 billion euros into its banks in the past three years. The government’s plan for new personal insolvency laws introduces risks even as politicians and the financial regulator seek to avoid widespread residential mortgage debt forgiveness, Deutsche Bank said.
“Although resilient during 2009 and 2010, mortgage arrears have risen sharply over the past year, house prices are continuing to fall, market liquidity is limited, and over half of customers are now in negative equity,” the analysts said. “We fear the size of negative equity balances for some mortgage holders may greatly reduce their incentive to cooperate, pushing them towards default.”
Ireland’s largest 10 consumer lenders, including four overseas-owned banks, lost around 117.8 billion euros on soured loans in the four years through December, according to data compiled by Bloomberg News. Deutsche Bank today downgraded Bank of Ireland (BKIR), the only Irish lender guaranteed in 2008 that has avoided state control, to sell from buy.

‘Substantial Buffer’

Speaking at Bloomberg Link’s Ireland Economic Summit in Dublin on May 16, Michael Torpey, who helps manage the government’s bank stakes, said that the country’s lenders have a “substantial buffer” of capital to withstand growing mortgage arrears. Finance Minister Michael Noonan said in an interview at the time that the banks “as of today” don’t need any more capital.
The current aid program is due to run out at the end of next year, and the country’s debt agency has said it hopes to start selling treasury bills within the next three months, as a step towards regaining full market access.
“We do not envisage a second bailout,” a spokesman for Noonan said today in a telephone interview. “We’re meeting all our program targets and are working towards getting back into the markets in 2013.”
The yield on Irish October 2020 bonds rose 4 basis points to 7.41 percent. While Irish borrowing costs have risen as the Greek political crisis unfolded this month, it’s still about half the euro-era record of 14.1 percent in July.

Greek Events

“Ireland has made huge progress over the last year. It is really a pity what is happening in Greece is spoiling all this,” said former European Central Bank Executive Board Member Lorenzo Bini Smaghi in an interview with Dublin-based Newstalk radio aired today. “Without the Greek events, I think Ireland would be able to come back to the markets.”
The government said voters need to approve a European Union stability-pact referendum on May 31 in order to access the permanent euro-area bailout fund, the European Stability Mechanism, if needed.
Some 62 percent of Irish people who expressed a preference intend to vote in favor of the compact, Paddy Power Plc, the Dublin-based bookmaker said today, citing a poll carried out by Red C, the market research firm.
Ireland may get a second aid package, even if voters reject the treaty, economists at Citigroup Inc. in London said today.
“We believe a second program would be forthcoming if requested, probably initially without private sector involvement unless the Irish government itself insisted that PSI is needed, which is unlikely in our view,” said Citigroup economists including Juergen Michels and Michael Saunders in a note. “With Ireland’s high government debt level and low potential growth, the risk of eventual government debt restructuring (PSI, Official Sector Involvement or both) also is likely to persist.”
To contact the reporters on this story: Joe Brennan in Dublin at;
To contact the editor responsible for this story: Edward Evans at


From Bloomberg, the Irish 10 yr bond yield rose big time to 8.2% a rise of 47 basis points.

(courtesy Bloomberg)

Ireland Government Bonds 10 Year Note Generic Bid Yield

 Add to Portfolio


8.207000.47100 6.09%
As of 10/11/2011.


We now are finding out more on JPMorgan's CIO desk.  Not only have they built up huge derivative bets
( the big IG9 bet) but also they have built up positions in asset backed securities and structured products originating in Europe. They have been the biggest buyer of European mortgage backed bonds plus other complex debt securities (collateralized loan obligations) for the past 3 years.  We all know that these securities have fallen badly. It seems that JPMorgan made a conscious bet out of safer investments and into these higher risk securities.

(courtesy GATA/London's financial times/Sam Jones/Alloway, and T. Braithwaite of


JPMorgan unit has $100 billion in risky bonds

By Sam Jones, Tracy Alloway, and Tom Braithwaite
Financial Times, London
Friday, May 18, 2012
The unit at the centre of JPMorgan Chase's $2 billion trading loss has built up positions totalling more than $100 billion in asset-backed securities and structured products -- the complex, risky bonds at the centre of the financial crisis in 2008.
These holdings are in addition to those in credit derivatives that led to the losses and have mired the bank in regulatory investigations and criticism.
The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times.
The bank has said its derivative activities were intended primarily to help balance risks on its overall balance sheet, but the revelation that it has built up other large, risky positions is likely to raise further questions about the CIO's remit.
A spokesperson for JP Morgan declined to comment.
The CIO sprang into the spotlight with the revelation of more than $2 billion in losses on the complex derivative trades, a turn of events that has triggered a Department of Justice investigation and angered US lawmakers.
But the CIO has also dominated market activity and built up huge positions in other, equally esoteric markets, according to leading traders.
"I can't see how they could unwind these positions because no one can replace them in terms of size. It's a bit of the same problem they face with the derivatives trade," said a credit trader at a rival bank. "They pretty much are the market."
The unit made a deliberate move out of safer assets such as US Treasuries in 2009 in an effort to increase returns and diversify investments. The CIO's "non-vanilla" portfolio is now over $150 billion in size.
"Two years ago they kind of kicked off" renewed market activity in risky assets," said one banker who sells financial debt. "It was like they provided some kind of 'philanthropic' service to the market to encourage it to get going."
In November 2010, even the British Bankers' Association, a lobbying group, explicitly noted the scale of the CIO's activities in a warning on the fragility of the UK mortgage market.
The JPM CIO "has taken more than £13bn (or 45 per cent) of the total amount of UK RMBS" (residential mortgage backed securities) "that has been placed with investors since the market re-opened in October 2009," the BBA said.
The bank is planning to reduce its exposure to more complex products in the CIO and is likely to invest more of its $360bn in "excess deposits" in safer securities such as US Treasuries, according to people familiar with the matter -- a move that will be fraught with difficulties.


JPMorgan's stock performance yesterday on the NYSE:


-0.44 (-1.30%)
May 18 - Close
NYSE real-time data - Disclaimer
Currency in USD
Range32.97 - 33.99
52 week27.85 - 46.49
Vol / Avg.82.66M/43.72M
Mkt cap127.49B
Inst. own75%


The USA was waiting for the introduction of Facebook with an IPO pricing of $38.00. It was hoped that a successful trading day on FB would influence trading on NY. In the end the IPO of Facebook flopped.

The global markets were still digesting all of the JPMorgan news of their derivatives imploding.
In the Asian time zone, Asian equities fell with the Nikkee falling the hardest with a loss of 266 points or huge 3%.  They were reacting to the 16 Spanish bank downgrades.  The Euro which set a low early Thursday evening at 1.2664 rallied througout the night and finished at 1.277. The British FTSE was the hardest hit in Europe falling by 1.33% followedd by the German DAX with a loss of 37 points or .6%.  The Paris CAC saw a tiny loss of 4 points or .1%.  The biggest European stock equities only fell by .1% (STOXX)

In the following article we see that JPMorgan and cohort Goldman Sachs sold more credit default swaps on European debt as risks were perceived to be rising. The total notional increase in these CDS rose 10% in the quarter to 567 billion USA dollars according to figures issued by the BIS.  These are bets or insurance ( underwritten predominately by JPM, Goldman Sachs and Bank of America) on whether a European country will default on its sovereign bond. Note in this report that JPMorgan has stated that they bought more CDS than they have sold which we now know is completely false due to the blowup of the IG9 credit default swap  vehicle.

Also remember this:  the BIS is only interested in risks to the world banking system.  The 10% gain in CDS is an increase risk to the banking system.

(courtesy Y. Onaran/Bloomberg)

U.S. Banks Sold More Swaps On European Debt As Risks Rose

U.S. banks increased sales of protection against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the last quarter of 2011 as the European debt crisis escalated.
Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose 10 percent from the previous quarter to $567 billion, according to the most recent data from the Bank for International Settlements. Those guarantees refer to credit-default swaps written on bonds.
 J.P. Morgan and Goldman Sachs Group Inc., two of the top CDS underwriters in the U.S., say they have bought more protection than they sold, indicating they may benefit from defaults in the region. That outcome is called into question by JPMorgan’s $2 billion loss on similar derivatives, which shows that risks don’t vanish when offsetting bets are taken, said Craig Pirrong, a finance professor at the University of Houston.

“All these hedges trade one risk for another,” said Pirrong, whose research focuses on derivatives markets. “The banks say they’re flat on European risk, but that’s based on aggregated positions. We don’t know how those will hold off if the European crisis blows up.”

JPMorgan Chairman and Chief Executive Officer Jamie Dimonsaid last week that the bank was trying to reposition a portfolio of corporate credit derivatives and used a flawed trading strategy. The lender, the largest in the U.S. by assets, is believed to have sold protection on an index of corporate debt and bought protection on the same index to hedge its initial bet, according to market participants who asked not to be identified because their trading strategies aren’t public.
The two bets moved in opposite directions this year, causing losses and proving that even hedges that look perfect can break down, Pirrong said.

JPMorgan, Goldman Sachs

JPMorgan said in a regulatory filing that it purchased $144 billion of CDS related to the five European countries as of the end of the first quarter, while it sold $142 billion. Goldman Sachs (GS) bought $175 billion of protection and sold $164 billion, the firm said in its filing. Spokesmen for the two New York- based banks declined to comment. Bank of America Corp.Morgan Stanley (MS) andCitigroup Inc. (C) report only net CDS exposures.
The five banks together account for 96 percent of the credit-derivatives market in the U.S., according to the Office of the Comptroller of the Currency. JPMorgan has written a quarter of the total, the OCC data show.

Matched Protection

Not all protection sold by banks is matched exactly by protection bought. CDS purchased and sold on Spanish sovereign debt can have different expiration dates. Banks also can net a swap on a Spanish bank with one on another lender. Even if those two firms are in a similar condition at the time of the trades, one could deteriorate faster, increasing the cost of CDS.
Some of the swaps sold by U.S. banks were bought by European lenders trying to reduce exposure to the five so-called peripheral countries. Since it’s considered insurance, a German bank can subtract the value of the contracts it purchased on Spanish debt from the total value of its holdings, with the understanding that if Spain doesn’t make good on its payment, the CDS underwriter will pay instead.
British, German and French banks’ loans to the five countries were reduced by 5 percent in the fourth quarter to $1.33 trillion, according to the BIS data. That was a $73 million decrease compared with the $53 million increase in U.S. banks’ CDS exposure to the periphery.

Spanish Debt

The cost of insuring Spanish sovereign debt increased to a record 552 basis points yesterday, meaning it would cost 552,000 euros ($700,000) to insure 10 million euros of debt from default for five years, according to data compiled by Bloomberg. Contracts on Italy’s bonds climbed to a four-month high of 515 basis points. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
“As the JPMorgan example showed, these are all relative- value trades, and the legs might go in different directions,” said Paul Rowady, a New York-based senior analyst at Tabb Group LLC, a financial-markets research and advisory firm. “It’s not surprising that these relations are being tested today because of the dislocation in credit markets.”
JPMorgan and other banks rely on proprietary models to gauge the risks of such correlations in their derivatives positions. Dimon said last week that some of those models had proven wrong.

Bank Losses

More than half of the CDS related to Spain, Italy and Portugal were to protect defaults by companies in those countries, not the government, according to data compiled by the Depository Trust and Clearing Corp., which runs a central registry for over-the-counter derivatives. About a quarter of the total in each country was protection on bank debt.
As banks in the five countries face mounting losses and funding strains, it’s impossible to model accurately how the risk on different institutions will change, Rowady said. Government and central bank interventions in markets can also upset correlations in those models, he said.
Last week, Spain’s government took control of Bankia SA (BKIA), the country’s third-largest lender, and asked banks to increase provisions for souring real estate loans. Losses of Spanish banks could top 380 billion euros, according to the Centre for European Policy Studies. Moody’s Investors Service downgraded the credit ratings of 16 Spanish banks yesterday and 26 Italian lenders earlier this week.

Counterparty Failure

Counterparty failure is another risk for banks selling insurance on the debt of the five counties. When a swap is triggered by default, a bank could find that a client who sold the protection can’t pay. The firm still has to make good on its promise to pay whoever bought protection.
Lenders try to mitigate this risk by asking for collateral from their counterparties as the value of CDS or other derivative changes. Dexia SA (DEXB) failed in October when the bank faced 47 billion euros of such margin calls on interest-rate swaps it sold. If Dexia hadn’t been bailed out by Belgium and France, it wouldn’t have been able to put up the collateral, causing losses for its unidentified counterparties.
U.S. banks didn’t suffer losses when swaps on Greek sovereign debt were paid out in March because prices of CDS had surged and collateral was collected in advance, according to Francis Longstaff, a finance professor at the University of California Los Angeles. While collateral protects middlemen from counterparty risk, there could be unexpected losses if the price of CDS doesn’t rise to reflect an imminent default, he said.
“Sudden defaults would shock the market because then you wouldn’t have the collateral to cover the full payment,” Longstaff said.
Banks also may discover that collateral they hold might not be worth as much, said University of Houston’s Pirrong. That happened in 2008 when banks saw the value of mortgage-related securities held as collateral plummet.
“Collateral is a great way to protect yourself,” Pirrong said. “But when the financial system is in a crisis, you might end up holding an empty bag.”
To contact the reporter on this story: Yalman Onaran in New York at or @yalman_bn on Twitter
To contact the editor responsible for this story: David Scheer in New York


The USA was waiting for the introduction of Facebook with an IPO pricing of $38.00. It was hoped that a successful trading day on FB would influence trading on NY. In the end the IPO of Facebook flopped.

The global markets were still digesting all of the JPMorgan news of their derivatives imploding.
In the Asian time zone, Asian equities fell with the Nikkee falling the hardest with a loss of 266 points or huge 3%.  They were reacting to the 16 Spanish bank downgrades.  The Euro which set a low early Thursday evening at 1.2664 rallied througout the night and finished at 1.277. The British FTSE was the hardest hit in Europe falling by 1.33% followedd by the German DAX with a loss of 37 points or .6%.  The Paris CAC saw a tiny loss of 4 points or .1%.  The biggest European stock equities only fell by .1% (STOXX)

Here is your opening European overnight sentiment which provides the early sentiment for trading on the NYSE:

(courtesy zero hedge)

Overnight Sentiment: Face(Book)ing The Selloff

Tyler Durden's picture

And so the unthinkable has happened: the FaceBook IPO has priced (at $38 as noted yesterday) into the ugliest possible tape imaginable, combining continuing bad news for JPM, ongoing deterioration for European risk markets (nothing new here), the need for the EU Commission to deny it is working on emergency Greek exit plans (we all know what that means) a request by Spanish banks to reinstate the short selling rule (as we predicted back in February), and a #Ref!-ing circular demand by Spain that banks deposit €30 billion into a deposit-protection fund. In other words more of the same. And yet FB has to trade up... or else. Which is why at least for the time being futures are soaring, on that, as well as on the rumor that Europe may close again today at 11:30 am Eastern. However, if 13 out of 14 previous trading days are any indication, expect the the rumor to then resurface that Europe will be opening again on Monday which will wipe out all of the day's gains since who on earth will want to be long risk over a weekend  in which many things in Europe can go bump in the night.
Overnight summary from BofA:
Market action
Overnight, Asian equity markets fell sharply, with the regional MSCI Asia Pacific Index sliding 2.6% after weaker-than-expected US economic data yesterday, downgrades of 16 Spanish banks and four of the Spanish regions by Moody's, and the continuing uncertainty surrounding Greece's fate in the Euro area. After a strong start to the year, the regional benchmark index now has fully erased this year's gains. 
Looking at the individual markets in the region, the worst performer was the Korean Kospi, down 3.4%. The Japanese Nikkei fell 3.0%, while the Shanghai Composite lost 1.4% and the Hang Seng fell 1.3%. 
European equities are set for their biggest weekly sell-off since September. In the aggregate, European equities are down 1.0%. Shares in London are underperforming, down 1.2%, while blue chips are outperforming, down only 0.2%. At home, futures have been fluctuating all morning, but currently point to a 0.4% rebound in the S&P 500 later today. That follows yesterday's 1.5% sell-off in the index. 
In bondland, Treasuries are selling off modestly across the curve. After hitting an all-time low of 1.697% yesterday, the 10-year yield is trading at 1.74% today. Meanwhile, the long bond is trading 5bp higher, at 2.83%. Despite a modest rally today, Spain's 10-year yield remains elevated, at 6.17%. 
The dollar is trading marginally higher, with the DXY index up 0.1%. WTI crude oil is basically flat, trading at $92.63 a barrel. Over the past several weeks, crude prices have fallen on fears that the European sovereign debt crisis will sap global demand.
Meanwhile, the yellow metal is up $16.38 an ounce, to $1,590.58.  


You know when this happens we get a return to conditions like we witnessed in the USA in 2008.
Rumours of a short selling ban is rife in Europe:

(zero hedge)

Short Selling Ban Returning To Insolvent European Countries Near You

Tyler Durden's picture

"Insanity: doing the same thing over and over again and expecting different results."

                                                             - Albert Einstein

Back in August 2011 Europe ushered in the totally idiotic idea of reinstating a short selling ban in financial stocks. We predicted at the time that the result would be a sheer disaster: "To those who may have forgotten, on September 18, the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued... The same chart is coming to Europe first. End result: 48% drop in under a month." Sure enough, a week later we were right: "European banks are already unchanged compared to the day of the ban and in France they are now negative! What next: selling is illegal or "Speculation" is a felony? We expect to find out soon..." Why do we bring this up? Because according to Spanish daily Cinco Dias this last sugar high recourse of a collapsing system is soon coming back to an insolvent European country near you. From MarketWatch: "Spanish stocks rebounded from a sharp opening loss on Friday lifted by gains across the banking sector and led by a 26% rise for Bankia SA ES:BKIA +26.37% after a media report on a possible ban on short selling of banks. The IBEX 35 index defied losses across Europe to gain 1% to 6,596.40. Spanish daily Cinco Dias reported Friday, citing banking sources, that banks in the country want market regulator, CNMV, to reinstate a ban on short selling of domestic banking stocks."
At this point we are going to go out on a limb and say that if indeed true, and if it happens in Spain it means it will have to happen everywhere in Europe as well for it to be effective, the ramp higher will last for all of 48 hours tops, just as it did last time, and realistically will be shorter due to the habituation side-effects of a liquidity addicted market, and then proceed to lead financial stocks to new lows, resulting in the same outcome we saw after the last short selling ban: another coordinated global intervention to save the world from collapse. Only this time the OIS is already at +50, cut from +100 previously. What next: the Fed will hand out USDs in FX swap at no cost, or even better, negative?
And when this now biannual intervention fails, what then?


In this commentary we see that the Eur/USD cross currency swap spreads were falling badly.  With LTRO funding now fading as well as the sustainability of the European banks with the ECB refusing to listen, the USA banks are now charging ever higher rates for Eurozone banks to borrow.  Even though it seems that there is enough USA liquidity out there, the European banks have now run dry of good USA dollar good collateral to unwind.  European banks need a fresh new swap lines.  Trouble on Monday:

(courtesy zero hedge)

Europe Is Knock, Knock, Knocking On Chairman's Door

Tyler Durden's picture

In the middle of the European crisis last fall, EUR-USD cross-currency basis swap spreads were on the tip of every trader and media-personality's tongue as the critical means for providing banks with access to short-term USD liquidity was ratcheting lower and lower. This means the European banks were willing to pay a higher and higher premium to be able to offload their EUR funding into USD funding. With LTRO funding now faded and perception of the sustainability of European banks becoming dismal, US banks are charging ever higher rates for Eurozone banks to borrow. What is more worrisome is that with the relative liquidity of USD assets, it would appear that the widening in the basis swap spread means the European banks have run dry of money-good USD collateral to unwind. This repricing of USD liquidity costs (now at 4 month highs and increasing rapidly) suggests that the Fed-provided swap lines could get a fresh calling to save the day and/or just as we have noted so many times in the past, the collateral squeeze continues to be the critical part of Europe's demise (and thus negates anything but absolute monetization by the ECB as a solution for the banking system).
EUR-USD basis swap spreads plummet back to crisis levels...
Chart: Bloomberg

Late last night we received this bombshell that the Spanish economy 
imploded further as they have revised their 2011 budgetary deficit fall from 8.5% of GDP to 8.9% of GDP.  The euros overspent totaled 95.5 billion.  Their GDP is just north of 1. trillion euros so in essence their true 2011 budgetary collapse was 8.9%.  This no doubt will put pressure on the Spanish bonds for money causing more collateral to be issued back to the ECB as yields rise.  All of that LTRO collateral issued earlier must be increased and the remaining collateral remains sparse. What is even more troubling is that the huge spending did nothing for its GDP which will contract north of 6% this year (fiscal 2012).  Expect another downgrade shortly!

(courtesy zero hedge/Reuters)


Friday night saw two big events happening with respect to Spain.

The first event was the regulator (LCH.Clearnet) raising of margin requirements on the Spanish banks
with a duration of 1.25 years or longer.  Banks will need to post higher margin requirements beginning on May 25.2012.  Only one small little problem:  they have no collateral left.

The second bombshell occurred very late Friday night when the Spanish government announced that the previous 2011 budgetary deficit of 8.5% was actually 8.9%.  This will surely cause the bonds to fall again in price (rise in yields) and force more collateral to the ECB, collateral of which is none.
Zero hedge posted this important commentary in late April and this was forwarded to you as extremely important.  Zero hedge reposted the discussion.

First:  the bank regulator LCH hiking of the margin requirements:

LCH Hikes Margin Requirements On Spanish Bonds

Tyler Durden's picture

A few days ago we suggested that this action by LCH.Clearnet was only a matter of time. Sure enough, as of minutes ago thebond clearer hiked margins on all Spanish bonds with a duration of more than 1.25 years. Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even more collateral beginning May 25. Only problem with that: it very well may not have the collateral.
And as a reminder: Ponzi PatriotismTM
Finally, tying it all together is our post from late April, titled The Next Circle Of Spain's Hell Begins At 5% And Ends At 10%:
Three weeks ago we discussed the ultimate-doomsday presentation of the state of Spain which best summarized the macro-concerns facing the nation and its banks. Since then the market, and now the ratings agencies, have fully digested that meal of dysphoric data and pushed Spanish sovereign and bank bond spreads back to levels seen before the LTRO's short-lived munificence transfixed global investors. However, the world moves on and while most are focused directly on yields, spreads, unemployment rates, and loan-delinquency levels,there are two critical new numbers to pay attention to immediately - that we are sure the market will soon learn to appreciate.
The first is 5%. This is the haircut increase that ECB collateral will require once all ratings agencies shift to BBB+ or below (meaning massive margin calls and cash needs for the exact banks that are the most exposed and least capable of achieving said liquidity).
The second is 10%. This is the level of funded (bank) assets that are financed by the Central Bank and as UBS notes, this is the tipping point beyond which banks are treated differently by the market and have historically required significant equity issuance to return to regular private market funding. With S&P having made the move to BBB+ this week (and Italy already there), and Spain's banking system having reached 11% as of the last ECB announcement (and Italy 7.7%), it would appear we are set for more heat in the European kitchen - especially since Nomura adds that they do not expect any meaningful response from the ECB until things get a lot worse. The world is waking up to the realization that de-linking sovereigns and banks (as opposed to concentrating that systemic risk) is key to stabilizing markets.
UBS: A 10% Tipping Point
Greater ECB use defers the point at which a sovereign or bank faces a funding challenge, but accelerates the point at which a return to private market financing is unlikely without external support. We continue to see a level of 10% of funded assets financed at the central bank as a tipping point beyond which banks are treated differently by the market and have historically required significant equity issuance to return to regular private market funding. Spain’s system just passed this figure, reaching 11% with the most recent announcement of ECB drawings

And a 'bad bank' ahead...

We believe that Spain will need an EU program to raise sufficient funds for what we believe needs to be significant further support for its banks and to provide external verification to regain credibility in the resulting financial system. A ‘bad bank’ to deal with the €323 billion in real estate assets is necessary, but not sufficient, in our view: the €545 billion shortfall in domestic savings compared with loans is likely to demand a “funding bank” in addition. We would view the likely loss content of this large headline to be a significant but smaller €100 billion.
Nomura: De-linking sovereigns and banks is key to stabilising markets
The most effective response for Spain would be to de-link sovereigns and their banks, following recent steady accumulation of sovereign debt by peripheral banks, in our view. Reducing the link between Spanish banks and the sovereign remains one of the key aspects for relieving pressure on Spain, whether this be by removing sovereign debt from balance sheets or ensuring sufficient capitalization to absorb losses. Unemployment out this morning at 24.4% shows the fragile state the economy is in, which is likely to keep pressure on Spanish yields. Against this backdrop the effect on the asset side of balance sheets is concerning, with expected weakness in non-core government bond prices coupled with a weak economy decreasing individuals' and corporates' ability to repay

If all agencies downgrade Spain to BBB+ or below, the ECB could increase haircuts by 5% on SPGBs

The key aspect in terms of the Spanish downgrade(s) is the ECB's LTRO. If all three rating agencies move Spain to BBB+ or below then under the ECB's current framework it moves into the Step 3 collateral bucket which requires an additional 5% haircut across the maturities. In classifying its risk management buckets, the ECB uses the highest of the ratings to determine an asset's position (unlike the sovereign benchmark indices which use the lowest rating, in general). Fitch and Moodys currently rate Spain at A and A3 respectively, with both having a negative outlook in place leaving only a small downgrade margin before Spain migrates to the lower ECB bucket.

Italy's position is marginally more precarious in that it shares Spain's A3 rating from Moody's but is rated lower at A- by Fitch, and is similarly outlook negative from both agencies. One would hope ECB pragmatism would prevail and move to be more accommodative on its collateral haircut rules on sovereign debt.

The weakness of the eurozone's growth outlook is undermining the efforts of many sovereigns to rein in budget deficits, thereby highlighting the self-defeating nature of the fiscal compact as currently defined. Including the political impact, this has potential to lead to further downgrades

LTRO funding is not suitable when collateral values are unstable LTRO, like all repo funding, should only have been implemented with quality assets to avoid excessive margin calls. In 2009-10, when the operations were used to good effect, the majority of European sovereign assets were still perceived to be 'risk free'. 5-year SPGBs rallied from 4.95% in mid-2008 to 2.62% in December 2009 and non-performing loans were at roughly half of their current levels. In 2009, despite economic weakness, risk had generally been contained through continued fiscal programs, and with the ECB providing continued cheap funding it was sufficient to allow some normalization. The key difference between then and now is that sovereigns no longer have the ability to utilize the fiscal side. When the ECB announced the twin LTROs at the end of last year the sovereigns were clearly in a different state from 2009.

If the ECB believes in the mandated reforms it should be comfortable with warehousing sovereign risk

If the ECB believes in the currently prescribed course of reforms and their implementation it should have little issue with holding a major sovereign's collateral on its balance sheet. Taking this a step further, the ECB is generally concerned with moral hazard, which along with subordination, is likely also a reason why we have yet to see the SMP program buying bonds recently. But this is a double-edged sword in that it gives investors little confidence in the sovereigns' recovery prospects if the central bank appears to be in internal turmoil and is showing no action besides utilizing measures that are more suited to a strengthening market.One of our common refrains during the crisis is that moral hazard should not frame the reaction function of central banks. Rather, the over-riding and immediate objective of policymakers during a crisis needs to be avoiding non-linear or dual equilibrium risk. This requires aggressive and bold policies to be enacted. Europe's policymakers have notably failed on this front, and, hence, we have a crisis that has entered its third year.

The ECB’s discomfort is no comfort to investors, eroding confidence

The key question remains in Spain as to who is the marginal buyer of debt beyond the domestic banks and primary dealers. Although the Spanish Treasury has sold a significant amount of its 2012 requirements, as things currently stand the country faces a multi-year funding problem. The extent to which domestic savings filtering through to bond buying is limited given that the general level of savings is likely at its limit. Banks, Santander and BBVA, have also said that they have no more capacity for further sovereign bond purchases given they are at the limit of their risk concentration limits (link), which we think was rather diplomatically put. One risk is that domestic institutions shorten their SPBG holdings and focus more on bills, which would likely be unaffected by any debt restructuring.

We will see a worse situation before any meaningful response is produced by the ECB: QE

Our view is that things will get significantly worse before any meaningful policy response occurs. From the ECB?s perspective this entails pre-announced QE in a size which is commensurate to the problems faced. If the ECB believes in the actions taken by sovereign governments, which it has largely mandated, then its current responsibility is to stabilize sovereign markets in order to facilitate sovereigns' continued financing. The key inhibitor is the deterioration in the political union and the consequent ability to formulate a political response. Absent a proportional policy response, euro breakup remains more probable than possible at this juncture.
Key takeaways for us are:
  • the 5% haircut that will force margin calls on the most cash-strapped banks;
  • the 10% funding level beyond which the ECB's intervention in the banking system becomes restrictive and self-defeating;
  • LTRO funding is not suitable when collateral values are unstable LTRO, like all repo funding, should only have been implemented with quality assets to avoid excessive margin calls;
  • greater ECB use defers the point at which a sovereign or bank faces a funding challenge, but accelerates the point at which a return to private market financing is unlikely without external support;
  • and finally, the most effective response for Spain would be to de-link sovereigns and their banks, following recent steady accumulation of sovereign debt by peripheral banks, in our view.

And now the second bombshell:

(courtesy zero hedge)

Friday Night Tape Bomb: Spain Hikes Budget Deficit From 8.5% to 8.9%

Tyler Durden's picture

Just when we though that nobody would take advantage of the cover provided by the epic flame out of the FaceBomb IPO and the ongoing market crash, here comes Spain. Because there is nothing quite like a little Friday night action following a market drubbing and an "IPO for the people" shock in which to sneak the news that, oops, sorry, we were lying about all that austerity. Because while it came as a surprise to the market back in December when Spain announced it would post a 2011 budget deficit of 8.5% instead of the previously promised 6%, the market will hardly be impressed that Spain actually overspent by another €4.2 billion, to a brand new total of €95.5 billion of 8.9% of GDP. So Monday now has two things to look forward to: the Spanish bond margin hike on one hand courtesy of LCH.Clearnet earlier, and the fact that despite spending even more than expected, GDP growth has disappointed and the country is now officially in a double dip. Hardly what the country with the record wide CDS needs right now.
From Reuters:
Spain was forced to revise its 2011 budget deficit upwards on Friday, after three of the country's regions restated their own figures, exposing the struggle the autonomous communities have had curbing spending even ahead of deeper cuts this year.

Spain said its 2011 public deficit now came in at 8.9 percent of gross domestic product, up from the 8.5 percent initially stated. The country had already widely overshot its deficit target of 6 percent for last year.

The country's treasury department, which disclosed the new figure late on Friday, said Spain was sticking by its 2012 budget deficit target of 5.3 percent of GDP, despite the setback with last year's numbers.

The move came after three of Spain's 17 regions - Madrid, Valencia together with Castilla and Leon - earlier revealed in their budget plans for this year that their own 2011 budget deficits were higher than initially stated.

The central region of Madrid said it finished 2011 with a deficit of 2.2 of gross domestic product, rather than the 1.13 percent it had initially released. Valencia's budget deficit came in at 4.5 percent at the end of 2011, instead of 3.78 percent.

Castilla and Leon's deficit was also slightly higher than previously stated.

The three regions are among the most important in Spain - Madrid is the second largest by GDP, and Valencia the fourth.

Though the autonomous communities have already struggled to rein in spending, deeper cuts now loom, after the central government on Thursday approved their plans to cut spending by 13 billion euros ($16.54 billion) and increase revenue by 5 billion euros.

Of the 17 highly-devolved regions, only Asturias, in the north-west of Spain, had its budget rejected, meaning it will have to present a new one for approval.

The communities' commitment to savings this year will be crucial for Spain to get its overall budget on track.

Fitch said on Friday the government's approval of the regions' budget plans was positive, adding that the willingness of autonomous regions to pass structural reform had increased, but warned there was still a risk they could yet miss 2012 targets.

"We ... expect the central government to put considerable pressure on the regions to cooperate," the rating agency said. "Nevertheless, in the current economic context we consider that there is a risk that potential reforms might have a limited impact on 2012 accounts."
In other words, more rating agencies, downgrades, which as we explained a month ago means that if all rating agencies have Spain at BBB+ or below, the ECB will demand another 5% collateral for bonds posted as repo. Add that to the toxic spiral of LCH bond margin hikes, and things start to look rather bleak.
But saving the best for last:
The change comes as Spain is racing to restore confidence in its banks
and reassure investors spooked by euro zone fears that it can meet
ambitious spending targets.


The closing Spanish 10 yr bond yield.  The closing occurred prior to the release of the margin hikes by LCH net and the release of the huge deficit miss by the Spanish government:

a touch lower in yield


Add to Portfolio


6.270000.04400 0.70%
As of 05/18/2012.

and now the Italian 10 yr bond yield:

basically the same as Thursay.

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio


5.810000.01200 0.21%
As of 05/18/2012.


And now here are some other big USA stories.
The first is from the Business Insider who reports on a very important Wall Street Journal
story where JPMorgan's Jamie Dimon personally approved the concept of the IG9 trade, and
his reaction in a board meeting when he found that it had gone bad.
We now learn that the losses right now may be 5 billion or so.

(courtesy BusinessInsider and WSJ)

BOMBSHELL REPORT: Jamie Dimon Personally Approved The Concept Of The Disastrous Trade, Losses Could Total $5 Billion

Read more:

 Details continue to emerge regarding JP Morgan's shocking multi-billion trading losses.
However, the biggest behind-the-scenes report so far was just published by The Wall Street Journal and written by Monica Langley.
Here's how Dimon first found out about the losses:
On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. "I want to see the positions!" he barked, throwing down the papers, according to attendees. "Now! I want to see everything!"
When Mr. Dimon saw the numbers, these people say, he couldn't breathe.
Here's the loss estimate the Langley reports:
Those trading positions have produced losses that could total as much as $5 billion...
Langley's sources appear to be very close to Dimon.  Her story includes an exchange between Dimon and his wife and also references an evening fueled by vodka.
More on those trades:
Mr. Dimon personally approved the concept behind the disastrous trades, according to people familiar with the matter. But he didn't monitor how they were executed, triggering some resentment among other business chiefs who say the activities of their units are routinely and vigorously scrutinized.
Langley's report includes a play-by-play of the drama that ensued after Dimon found out about the losses.
Read the whole article at


Look at what is happening to junk bond yields right after the news of a derivative bust at jPMorgan:

(courtesy Jim Sinclair and fellow supporter CIGA David)

Jim Sinclair’s Commentary
What about more Morgans, or is Morgan’s OTC derivative position totally out of control and still wide open?
Courtesy of CIGA David
I have been watching junk debt relative to nominal Treasuries (IEF/TLT) intraday. I began seeing some very wild intraday moves, with junk debt prices collapsing (yields spiking) while safer Treasuries were aggressively being bid up (yields dropping).The speed and magnitude of this credit spread widening on Wednesday was indeed meaningful. Thursday, that spread widened even further, in a way that suggests that a credit event may be underway in the U.S. and that contagion is here.
Here we are, 48 hours after the major movement began on Wednesday, and a look at the daily chart of junk debt and sovereign debt EMB -0.09% shows that a "crash" may actually be here in credit markets. I say "crash" in quotes because while the price decline may not seem like much, a crash should be defined by how far back in time an investment sends you in its decline relative to a short time frame.
Meanwhile, Treasuries have spiked, with 30-year Treasuries below the panic 3% level. To say that "credit leads the stock market" is too simplistic. It is widening credit spreads which lead risk-aversion, and vice versa. Credit spreads lead equities, not credit.
In the past 48 hours, the magnitude of the decline of junk debt and sovereign debt relative to Treasuries increasing suggests meaningful credit stress is occurring. If junk/sovereign debt doesn’t stabilize and improve shortly, the odds of a follow-through sudden break in stocks in the U.S. increase substantially.
Credit spread movement and improvement/deterioration is pretty much THE thing to focus on.
The move in debt spreads over the last 48 hours has increased the odds of something major to come.
Notice that this isn’t a prediction, but a statement about how such a scenario could occur if indeed junk debt deteriorates further beyond the last 48 hours, and under the assumption that the magnitude of a decline could lead equities lower.
The most important question in the world may end up being answered soon after all. I remain defensively positioned in bonds and still short the US and European stock markets with an emphasis on short financials. All positions held since March 14.


Bank of America in this Ambrose Evans Pritchard release expects a massive rally as all central banks unleash liquidity that we have never seen before.  And that point, be thankful you have plenty of gold and silver in your possession:

(courtesy Ambrose Evans Pritchard and the UKTelegraph)

Global banks see market rally on Greek exit

Major global banks are advising clients to prepare for a stock market rally and a resurgence of the euro if Greece is forced out of monetary union, betting that world authorites will flood the international system with liquidity.

Bank of America said it expects a "powerful short squeeze" in risk assets as speculative funds unwind positions, led by a rebound in battered bank stocks and Club Med bonds. The euro would surge 10pc to $1.40 against the US dollar after dipping first to $1.20 in the immediate panic.
The benign outcome assumes that the European Central Bank steps in with massive support, backed by the US Federal Reserve, the Bank of Japan, and key central banks along the lines of concerted action in 2008-2009.
Bank of America said EU authorities will pull out the stops to keep Greece in the system as they weigh the full dangers of contagion. Should that fail, it expects a series of dramatic moves.
The ECB would cut interest rates, launch quantitative easing (QE), and back-stop Spain and Italy with mass bond purchases; the authorities would inject capital into the banks and create a pan-European system of deposit guarantees. The combined moves would be a major step towards EU fiscal union.
"We think the worst is over for the euro," said David Bloom, currency chief at HSBC. "The central banks will have to step in massively and that will be a soothing balm for the markets. The Fed is already leaving the door open for more QE. We could see quite a powerful rally."

Mr Bloom said the ECB is playing a game of chicken by waiting until it has secured maximum compliance from EMU's wayward states before coming to the rescue. "Once again it is holding everybody over the edge of the abyss until they scream for mercy," he said.
A currency union without the encumbrance of Greece would be viewed as a stronger bloc by investors, but much would depend on events in Greece itself.
If a return to the drachma proved to be a "ruinous experience" for the Greeks – as HSBC expects – if would mightily deter Portugal, Spain, and other from such temptation.
The worst outcome for euro and monetary union would be a double whammy where the authorities fail to control EMU-wide contagion, yet Greece somehow manages to claw its way out of crisis and make a success out of a devalued sovereign currency, as Argentina did after breaking the dollar-peg in 2002.
"That would be the disaster scenario. The euro would fall dramaticatlly. We think this scenario is very unlikely," said Mr Bloom.
Gary Jenkins from the bond advisers Swordfish said those betting on a market crash should be careful. "The global central banks are going to respond with the biggest flood of liquidity the world has ever seen. It will make the LTRO (the ECB's €1 trillion lending to banks) look like small change," he said.
"They have to act. We have reached the point where the peripheral bond markets are going to implode unless the ECB and EU politicians show they have deep pockets and start buying the debt on the secondary market. It is a quasi-fiscal union or bust at this stage," he said.
Mr Jenkins said it would be fatal if Greece were forced out in acrimony, without any stabilising support. That would lead to a hard default with losses of up to €150bn to €200bn for the European system. Any such debacle would destroy the political consent needed to forge EU fiscal union and hold the rest of the eurozone together. "Whatever they do, it has to be an orderly outcome for Greece".
Leaked reports from Berlin suggest that Germany's finance ministry has already drafted such a plan to shore up Greece with EU funds after a return to the drachma.
Bank of America said a chaotic withdrawal by Greece, followed by contagion, would cause a 4pc fall in eurozone GDP, roughly equal to the damage after the Lehman collapse in 2008. Recovery would be slower this time. Scope for fiscal stimulus is largely exhausted. China and the emerging powers are no longer able to pick up the slack.
Bob Janjuah from Nomura, `Bob the Bear' to global fans, said the EU will not dare to push Greece out. "The Europeans will blink and renegotiate the bail-out terms. Whatever happens we think the Fed and the ECB will respond over the next week or two and trigger a short sharp rally," he said.
He expects a 15pc jump in the S&P 500 index of stock to 1450 by July, and a 200 point rally on the iTraxx Crossover index for bonds. It will be a last gasp before the reality of sputtering global growth hits in the late summer. That is a long way off.

I will leave you this weekend with this terrific paper written by Wolf Richter
of on Greece, its tourism and on the printing of drachmas:

(courtesy Wolf Richter)

Rumors, Denials, and Visions of Chaos

testosteronepit's picture

Wolf Richter
While the G-8 leaders are schmoozing with President Obama during their slumber party at Camp David, and while the parallel NATO summit and its protests and rallies are wreaking havoc on the streets in Chicago, Europe is re-descending into rumor hell—where good rumors, as we found out last summer and fall, are head fakes that cause huge rallies in the markets, and where bad rumors, though passionately denied by all sides, turn out to be true.
The latest was that the European Central Bank and European Commission were preparing contingency plans for Greece’s exit from the Eurozone. Actually, it wasn’t even a rumor. EU Trade Commissioner Karel De Gucht declared it during an interview: “A year and a half ago, there may have been the danger of a domino effect,” he said, “but today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn't make it.”
A momentous statement. The first time ever that an EU official admitted the existence of contingency plans—though everyone had long assumed that they existed. Clearly, Europe’s political power brokers, disparate as they are, have gotten tired of bending to Greece’s wily political elite and their threats. Read....The Greek Extortion Racket in its Final Spasm.
Alas, within hours, the very European Commission where De Gucht serves as the Trade Commissioner stabbed him in the back: “We completely deny that we are working on any such emergency plans,” said a spokesperson for the Commission. “We are concentrating all our efforts on supporting Greece and keeping it in the Eurozone. That is the scenario we are working on.”
Indeed. And then there was the rumor about printing money. Not the kind that the Fed, the ECB, and other central banks are printing, but real money. De La Rue, a British company that prints currency for 150 countries, among other business activities, has apparently been asked some time ago to prepare contingency plans for printing Greek drachma notes, according to unconfirmed rumors that just surfaced. People who got wind of it earlier have driven up the stock (DLAR.L) 11% since mid-April—possibly a confirmation.
Greece’s return to the drachma can’t be done overnight. It would be a complex and costly transition that would require time. The day Greece switches to the drachma, it will have to have huge quantities of drachma notes on hand; and preparations are apparently underway to print them. The Bank of Greece has its own printing outfit that has been printing euros ever since it stopped printing drachmas. It would pick up much of the volume, but any demand beyond its capacity would have to be farmed out to other printers. Hence De La Rue.
Banks have already been preparing for the drachma. Turns out, some banks never actually removed their drachma capabilities, perhaps because they lacked confidence in Greece’s ability to keep the euro, or perhaps because they—the banks, not the Greeks—were simply too lazy. And they’d be able to switch from one moment to the next. But it would still be a complicated mess laced with capital controls and all the banking nightmares associated with them. It would be fraught with risks, legal issues, and uncertainties.
A return to the drachma—and its rapid devaluation—would, however, do wonders for Greece's tourism industry, the second largest industry after shipping. In 2011, the number of international visitors actually rose by 9.5% from the prior year, and they spent 9.3% more. The industry is hugely important to Greece: it provides 18.4% of the country’s jobs and makes up 16.5% of the economy.
But now reservations for the summer have collapsed by a stunning 50%! "Political instability," explains Georgios Drakopoulos Director General of the Association of Greek Tourism Enterprises (SETE). And bad publicity, strikes, demonstrations, and images of Athens on fire—the only things foreign media showed, Drakopoulos lamented, though in the rest of Greece, “the conditions are the exact opposite.” And once those issues disappear from the media, a devalued drachma would turn Greece into an irresistible and highly affordable paradise for tourists of all types, including waves of budget tourists—all of whom would bring in hard currency.
“The Greeks are still debt slaves, and will be until they tell Brussels to take a hike,” said David Stockman, Director of the Office of Management and Budget under President Reagan. With similarly pungent flourishes, he talked of a “paralyzed” Fed that is in its “final days,” hostage of Wall Street “robots” trading in markets that are “artificially medicated.” For his awesome interview, read.... The Emperor is Naked: David Stockman.


I guess that about does it for this morning.

I will report to you on Monday.

I wish you all to have a grand weekend

and please ignore our trolls.

after reading this report, they must be getting quite nervous.

all the best


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