Saturday, July 28, 2012

Draghi's put and the German Response/Wild trading day on Friday/Commercials cover like mad on their gold shorts/

Good morning Ladies and Gentlemen:

Gold and silver were on a roller coaster Friday. At the end of the day, gold finished at $1617.90 up $2.90 with silver up 5 cents to $27.48.  All events yesterday are geared to two headline reports:

i) at 5:47 am est: the first report from Le Monde where the ECB is preparing to purchase Italian/Spanish debt
ii  at 1:30 pm  est: reports that the EU is considering giving the new ESM a banking license (thus giving these guys authority to buy bonds like the Fed)



7/27/2012 5:47:57 AM - European Market rumour: Le Monde newspaper reports the ECB is preparing to purchase Italian / Spain debt
06:25 Follow-up : Le Monde newspaper reports the ECB is preparing to purchase Italian / Spain debt


 
According to Le Monde, the ECB and member states are preparing a concerted intervention on the market to limit the surge in interest rates in Spain and Italy.
We are also hearing unconfirmed talk that the German Finance Minister Schaeuble is planning to issue a general statement soon and that Hollande and Merkel will speak by phone today at 1pm CET.
* * * * *





13:31 Draghi said to favor giving ESM banking license in longer term - wires
Headlines note that Draghi's proposal is said to include bond buys, rate cut, new LTRO and is reaching out to Council members including Weidman for consensus ahead of 2-Aug meeting. 



Perhaps the best explanation of the wild events of yesterday and Thursday comes from Wolf Richter of www.testosteronepit.com.

1. Spain's troubles deepened this past week with their unemployment rate at 24.6% even higher than Greece with a 22.5% unemployment. In southern region of Andalusia the youth unemployment (16-24) is a record 53.3%. In all of Spain there are 1.7 million households where there is no breadwinner.


2. The Spanish economic minister de Guindos flew to Berlin on Thursday to meet the German finance minister Schauble to discuss a bailout and this is where a leak came that 300 billion euros of a bailout of Spain was needed. It was leaked that if Spain did not get its wish then default was on the table.


3. The ploy "worked" as Draghi did his famous put on European markets by stating that he will do anything he can to save the Euro if it means unconventional means i.e. buying Spanish and Italian debt.


4.  No word from Merkel yet.


5. On Friday with the default button ready to be pressed by Spain, Merkel and Hollande talked on the telephone about the situation and this was reported in the press La Monde.


6. Now rumours about a possible joint USA/Europe bailout of Spain as both nations would buy Spanish/Italian debt to lower their costs. This is where it was conceived that the ESM would be given a banking license and perform exactly like the Fed in buying up mortgage bonds and sovereign bonds.  This would totally anger Germany and this is why Jurgen Stark and Axel Weber resigned last year in protest that they may contemplate this action.


7.  The Bundesbank immediately stated that this action is "problematic"


8.  However funding from the ESFS will "not be problematic".


9.  The EFSF only has 138 billion euros left in the kitty and cannot possibly fund both Italy and Spain.


(courtesy Wolf Richter/www.testosteronepit.com


War Of The Central Banks?

testosteronepit's picture





Wolf Richter   www.testosteronepit.com
The coordinated confidence-inspiring words from the Eurozone’s fearless leaders yesterday and today about doing whatever it would take to save the euro wasn’t about Greece anymore. Its life support may get unplugged in September. Politicians have apparently given up. The tab isn’t that dramatic: default and return to the drachma would cost Germany €82 billion and France €62 billion (Ifo Institute PDF). Survivable.
The fearless leaders were afraid of Spain, whose vital signs were deteriorating. Unemployment hit 24.6%, worse than Greece’s 22.5%. In the southern region of Andalusia, it rose to a mind-boggling 33%. Youth unemployment (16-24) set a sobering record of 53.3%. Even more worryingly, in a country where family solidarity and multi-generational households are the norm, the number of households where no one worked climbed to 1,737,000. So, in the first half of 2012, over 40,000 Spaniardsemigrated—up 44% from last year. Instead of consuming and producing in Spain, they took their education that society had invested in and sought their fortunes elsewhere.
Despite repeated assurances that Spain would not need a bailout other than the €100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Schäuble ... to discuss a bailout. For €300 billion. And hours beforehand, “sources” told the Spanish media that if Spain didn’t get its wish list, whose top item was a massive bond-buying program by the ECB to force Spain’s borrowing costs down, Spain would consider “more forceful measures.” Because Spain had no money to meet its obligations in October, it would have to default! The D-word made into print. A scary message for the fearless leaders of the Eurozone [for that whole debacle, read... The Extortion Racket Shifts to Spain].
It worked! Thursday, European Central Bank President Mario Draghi caved: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Emphasis on believe me—as in “I beg you, please believe me”—because the other part of his pronouncement,within our mandate, is controversial. It’s where the ECB had clashed with the German Bundesbank and others who stubbornly clung to the notion that the treaties governing the ECB gave it only one mandate: price stability. Not propping up stock and bond markets.
Draghi outlined a way around that single-mandate limit: if high borrowing costs for certain countries “hamper the functioning of the monetary policy transmission channels, they come within our mandate,” he said. In other words, every time yields go up somewhere in the Eurozone, the ECB is free to “do whatever it takes” to force them down.
On Friday, with the D-word still hanging heavily in the air, German Chancellor Angela Merkel and French President François Hollande talked on the phone—for the first time? A call that wasballyhooed to the media. They were “fundamentally attached to the integrity of the Eurozone” and were “determined to do everything to protect it.”
Then it bubbled up that the ECB might take concerted action with the States to lower the cost of borrowing for Spain and Italy, though it might take a few days or weeks to finalize the mechanisms. According to “sources,” the ECB could re-launch its program of buying Spanish and Italian bonds in the secondary market. The EFSF bailout fund and its successor, the ESM, could be used to buy Spanish or Italian debt in the primary markets. And the ECB could take Fed-like action if the ESM were given a banking license. It would allow the ESM to borrow from the ECB and then buy debt in the secondary and primary markets. There would be “no taboos,” Draghi said. Debt crisis solved.
He’d thrown down the gauntlet. The ECB’s moderate bond-buying program last year caused a stir in Germany. ECB President Axel Weber, who’d been overruled, resigned over it. ECB chief economist Jürgen Stark retired in protest. Politicians launched attacks against the ECB, among them Frank Schäffler (FDP) who’d said, “If the ECB continues like this, it will soon even buy old bicycles.” In March, the ECB stopped the bond buying program.
A restart would be “problematic,” a Bundesbank spokespersonsaid dryly. On the other hand, the Bundesbank considered it “not problematic” if the EFSF bought Spanish debt. Hurdles remain. Such action would have to be approved by the Bundestag’s “Group of Nine” whose representatives are on vacation. And Spain would have to formally request a bailout before the EFSF could buy its bonds—but Spain is still denyingthat it’s even discussing a bailout. It would be the sixth of seventeen Eurozone countries to be put on life support.
In June, Cyprus had held its nose and requested aid. Now, European technocrats are swarming once again over Cyprus to find out how much it would need. And each time they do, billions are added. How can such a small country blow through so much money? Well, read.... The Ballooning Cyprus Fiasco.
And then, there’s the ultimate questions..... But Who The Heck Is Going To Do All The Bailing Out?
end


* * * * *


We will discuss in great detail what happened yesterday with respect to European and USA trading.
No doubt gold and silver played a significant roll in these events.  Before heading into major discussions on this let us head over to the comex and assess trading.  We will also relay to you positions levels of our major players as the COT report was released at 3:30 pm Friday:





The total comex gold open interest fell by 2203 contracts from 425,257 to 423054.  Gold had
a good day yesterday so we may have lost a few bankers shorts along the way.  The July delivery month
saw its OI fall from 10 to 7 for a loss of 3 contracts.  We had 7 delivery notices on Thursday so we actually gained 4 contracts or an additional 400 oz of gold standing.  The next big delivery month is August and here the OI fell by a rather large 25,258 contracts with most of these guys rolling to Oct and December.  The estimated volume on Friday was large and it had considerable rollovers.  The confirmed volume on Thursday was much lighter at 267,467. First day notice for the August contract is on Tuesday.  First day delivery notices are sent out late Monday night and I will report on that for you.  Tuesday afternoon we will get our first glimpse as to how many gold ounces will stand. It looks to me like about 10,000 contracts will stand which will represent around 31 tonnes of gold which will be quite good.  Monday night all monies must be in
so you can bet the farm that the bankers will raid gold/silver trying to convince you not take possession of physical metals.

The total silver comex OI continues to do the opposite of gold.  The total OI rose by 1279 contracts from 120,881 to 122,160.  I guess our bankers still wish to provide the necessary paper.  The front delivery month of July saw it's OI drop from 218 to 91 for a loss of 127 contracts.  We had 118 notices filed on Thursday so we lost 9 contracts or 45,000 oz of silver.  The next big delivery month if September and here the OI rose from 60,418 to 60,610.  The estimated volume on Friday came in at a very low 33,951.  The confirmed volume on Thursday was a little better at 47,579.


July 27-.2012

gold: 





Gold
Ounces
Withdrawals from Dealers Inventory in oz
nil
Withdrawals from Customer Inventory in oz
4,016.518 (Scotia)
Deposits to the Dealer Inventory in oz
nil
Deposits to the Customer Inventory, in
20,067.89 (Scotia)
No of oz served (contracts) today
(7)  700 oz 
No of oz to be served (notices)
 month complete
Total monthly oz gold served (contracts) so far this month
(739) 73,900
Total accumulative withdrawal of gold from the Dealers inventory this month
59,824.745
Total accumulative withdrawal of gold from the Customer inventory this month


 
61,438.918
Not much action in the gold vaults again on Friday.

We had no dealer activity whatsoever.

We had the following customer deposit:

1.  20,067.89 oz into Scotia.

(this arrived Friday from the withdrawal of a customer on Thursday at Scotia)

The customer at Scotia withdrew 4,016.518 oz on Friday.
We had no adjustments

Thus the dealer inventory rests this weekend at 2.58 million oz or 80.2 tonnes.
This level has been consistent despite settlements.

The CME notified us that we had 7 notices filed on Friday for 700 oz of gold. The total number of notices filed so far this month total 739 for 73900 oz. To obtain what is left to be served I take the OI standing for July (7) and subtract out Friday notices (7) which leaves us with zero notices to be filed and thus the month of July is now complete for gold.

Thus the total number of gold ounces that stood in July is now final at:

73,900 oz of gold  or  2.3 tonnes of gold.


A very good showing for an off delivery month.





July 25.2012:  silver

Silver
Ounces
Withdrawals from Dealers Inventorynil
Withdrawals from Customer Inventory 388,282.27 (HSBC, Delaware Scotia )
Deposits to the Dealer Inventory299,539.12(Brinks)
Deposits to the Customer Inventory934,368.22 (Brinks,JPM)
No of oz served (contracts)83  (415,000)
No of oz to be served (notices) 8  (40,000)
Total monthly oz silver served (contracts)1912 (9,560,000)
Total accumulative withdrawal of silver from the Dealers inventory this month323,844.55
Total accumulative withdrawal of silver from the Customer inventory this month8,699,869.6
Again the silver vaults were very busy.

The dealer at Brinks received the following silver deposit:

299,539.123

There were no silver withdrawals by the dealer.

We had the following silver deposit by the customer:

1. 299,874.42 oz into Brinks.
2. 634,493.80 oz was deposited into JPMorgan.

total deposit to the customer (eligible):  934,368.22 oz

We had one adjustment whereby 27,762.77 oz left the customer at JPM and entered the dealer.

The total registered or dealer inventory rests this weekend at 40,828 million oz
The total of all silver rests at 141.078 million oz.

The CME notified us that we had only 83 notices filed for 415,000 oz.  The total number of notices
filed so far this month total 1912 for  9,560,000 oz.  To obtain what is left to be filed upon I take the OI standing for July (91) and subtract out today's notices  (83) which leaves me with 8 notices or 40,000 oz
They have until Monday night  to settle upon these 8 contracts.  My bet is that they will cash settle upon these guys.

Thus the total number of silver ounces standing in this official delivery month of July is as follows:

9,560,000 oz (served)  +  40,000 oz ( to be served upon)  =  9,560,900 oz



end


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.


Jul28/2012:





Total Gold in Trust

Tonnes:1,248.61

Ounces:40,143,933.39

Value US$:64,941,300,859.00





July 26.2012:

TOTAL GOLD IN TRUST

Tonnes:1,252.53

Ounces:40,270,038.66

Value US$:65,136,015,173.47









On Friday, with gold advancing we lost another 3.92 tonnes of gold
It looks to me like China is enjoying their stay in London as they are
pulling as much physical out of there as possible.  They are joined by the Russians and other countries who realize the situation in Europe is not good.





And now for silver:


July 28.2012:



Ounces of Silver in Trust309,914,477.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,639.42



July 26.2012:


Ounces of Silver in Trust309,914,477.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,639.42


July 25.2012:

Ounces of Silver in Trust309,914,477.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,639.42



July 24.2012:


Ounces of Silver in Trust309,914,477.500
Tonnes of Silver in Trust Tonnes of Silver in Trust9,639.42



Our silver inventory at the SLV remains the same.



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






(both of these funds have 100% physical metal behind them and unencumbered and I can vouch for that)



1. Central Fund of Canada: traded to a positive 4.1percent to NAV in usa funds and a positive 4.0%  to NAV for Cdn funds. ( July 28-.2012)

2. Sprott silver fund (PSLV): Premium to NAV  rose to  3.03% to NAV  July 28 2012   :
3. Sprott gold fund (PHYS): premium to NAV lowered to    3.41% positive to NAV July 28 .2012). .


Please note the following:

the premiums with the central fund of Canada rose to 4.1% today.  This fund is almost equal parts of gold/silver. It shows that investors are willing to pay a premium to own a fund with strictly physical backing.

Note also that the Sprott silver fund is now inching back.  In two weeks it will be back to its former high premium to NAV of 6 -7%.

Also note the high premium in the Sprott gold fund at 3.41%.
Both GLD and SLV trade below the spot price of gold and silver respectively.
You should pay close attention to that fact!!

And now for our COT report released at 3:30 pm Friday which gives position levels for our major players

First the gold COT:

Oh my goodness, wait till you see this!!



Gold COT Report - Futures
Large Speculators
Commercial
Total
Long
Short
Spreading
Long
Short
Long
Short
166,085
53,108
33,793
166,448
302,693
366,326
389,594
Change from Prior Reporting Period
-14,389
1,593
1,300
3,878
-18,696
-9,211
-15,803
Traders
153
59
71
51
43
229
158


Small Speculators




Long
Short
Open Interest



53,970
30,702
420,296



-1,810
4,782
-11,021



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, July 24, 2012


Our large speculators:

Those large speculators that have been long in gold again got ripped off as they pitched 14,389 contracts from their long side.

Those large speculators that have been short in gold somehow did not see the tea leaves correctly as they added 1593 contracts to their short side and got burnt in the process.

And now our commercials with this stunning position levels:

Our commercials that have been long in gold and are close to the physical scene saw the tea leaves and
added a huge 3878 contracts to their long side.

Our commercials who have been short in gold basically had enough and covered a monstrous 18,696 contracts.

Our small specs:

The small specs that have been long in gold, pitched a small 1810 contracts from their long side.
The small specs that have been short in gold, added another 4782 contracts to their short side and are crying the blues tonight.

conclusion:  hugely bullish as our commercials covered 18,696 contracts plus bought 3878 contracts so in this week they traded net long by 22,574 contracts.


and now for our silver COT:


Silver COT Report: Futures
Large Speculators
Commercial
Long
Short
Spreading
Long
Short
30,291
22,132
25,417
47,198
62,653
1,860
1,357
1,261
-1,016
-696
Traders
60
51
43
38
32
Small Speculators
Open Interest
Total
Long
Short
123,661
Long
Short
20,755
13,459
102,906
110,202
-263
-80
1,842
2,105
1,922
non reportable positions
Positions as of:
122
109

Tuesday, July 24, 2012
  © SilverSeek.com  



Where is everybody?

Our large speculators who have been long in silver added another 1860 contracts to their long side
Our large specs who have been short in silver added another 1357 contracts to their short side and these guys are not too happy this weekend.

Our commercials

Those commercials who have been long in silver and are close to the physical scene pitched a tiny 1016 contracts from their long side.

Those commercials who have been perennially short in silver and are subject to the silver CFTC probe covered a very tiny 696 contracts from their short side.

Our small specs;

The small specs that have been long in silver pitched a very tiny 263 contracts.
The  small specs that have been short in silver covered a very tiny 80 contracts.

It seems that nobody moved.
Conclusion:  more bullish than last week as our commercials traded net long this week to the tune of 1712 contracts.



Let us now see some of the major physical stories:

Your early Friday morning commentary on gold from London courtesy of Ben Traynor of BullionVault:
This report comments on gold trading overnight prior to heading into comex trading:


(courtesy Ben Traynor/Bullion vault)




Gold Set for Gain on Week, Draghi's ECB "Is Robbing Savings of Citizens"



By: Ben Traynor


-- Posted Friday, 27 July 2012 | Share this article | Source: GoldSeek.com

London Gold Market Report

SPOT MARKET gold bullion hit a five-week high at $1625 an ounce during Friday morning's London trading, on course for a weekly gain that would see the pattern of alternating up and down weeks stretched to week number eleven.

Silver bullion also held onto most of its recent gains, trading around $27.70 per ounce for much of the morning.

A day earlier, gold and silver rallied following comments from European Central Bank president Mario Draghi that were taken to suggest the ECB could start buying government bonds again.

"We believe the risk [for gold] now lies with a move to $1640, the June high," says the latest technical analysis note from bullion bank Scotia Mocatta.

""There will be buyers now on any retracement to "1590."

"Technically the price action is starting to look a bit more constructive," agrees Credit Suisse analyst Tom Kendall.

"But that could fade as quickly as it appears to have been building... physical demand is still pretty soft [and] positioning is disinterested across much of the investment community.

Based on London Fix prices, gold bullion looked set for its biggest weekly gain in seven weeks by Friday lunchtime in London. A PM gold fix of $1626.75 or higher would make this the biggest weekly gain since the last full week in January.

With markets looking ahead to preliminary US GDP figures due to be published later, European stocks were broadly flat this morning, having rallied on Thursday after Draghi said the ECB "is ready to whatever it takes to preserve the Euro".

"It is a signal that the ECB is closer to reactivating bond purchases if all else fails," says Julian Callow, head of international economics at Barclays.

The ECB's Securities Markets Programme, which was launched in 2010, was used last year to buy Spanish and Italian government bonds on the open market.

"The thing we wonder here is exactly where the Bundesbank stands...[since it has] historically been resisting the reactivation of the SMP."

"The Bundesbank has not changed its opinion [on ECB bond purchases]," a spokesman for the German central bank told Dow Jones Newswires on Friday.

"[Draghi has] maneuvered himself into an extremely difficult situation," warns Carsten Brzeski, senior economist at ING Group.

"[Market] expectations are very high."

"I don't believe you will see government bond purchases yet," adds Jacques Cailloux, chief European economist at Nomura in London.

"We have some doubts about whether the interventions will be of the required scale," says Nick Kounis, head of macro research at ABN Amro in Amsterdam.

"It therefore seems likely that the bond purchases will just allow policy makers to muddle through unless much more financial firepower is put on the table."

Following Draghi's comments, benchmark yields on 10-Year Spanish government bonds fell back below 7%, while yields on Italian 10-year bonds fell below 6%.

"Draghi ist ein Plünderer des Bürger-Spargroschens", says a headline from German newspaper Handelsblatt. The phrase, which loosely translates as "Draghi is plundering the nest eggs of citizens", is attributed to German politician Frank Schaeffler, a member of the FDP party which forms part of the governing coalition.

"Higher inflation is an inevitable consequence of this ECB policy," adds Klaus-Peter Willsch, a member of chancellor Angela Merkel's CDU party.

"The signs are already clear to see: in prime real estate prices, prices of agricultural and forest land, gold, coin collections, classic cars...the flight into real values has already begun."

In the US, the first estimate of second quarter gross domestic product is due out later today, expected to show a slowdown in economic growth.

"If the US GDP number falls short of expectations, it would once again fuel speculations on Fed easing, which would help gold," reckons Phillip Futures analyst Lynette Tan in Singapore.

Elsewhere in the US, hedge fund Paulson & Co. may have lost close to $50 million on its investment in gold mining firm NovaGold after its stock saw its biggest fall in three years, newswire Bloomberg reports.

Paulson & Co. offers investors accounts denominated in gold and holds a large number of shares in the SPDR Gold Trust (GLD), the world's biggest gold ETF.

GLD gold bullion holdings held steady yesterday at 1252.5 tonnes, though they remain at their lowest level since January.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011



end

and this from Goldcore after release of GDP numbers (see below)




Will US GDP Numbers Lead to QE3?


-- Posted Friday, 27 July 2012 | Share this article | Source: GoldSeek.com

Today's AM fix was USD 1,618.75, EUR 1,321.43, and GBP 1,031.51 per ounce.
Yesterday’s AM fix was USD 1,603.00, EUR 1,321.74and GBP 
1,034.26 per ounce.
Gold rose $11.10 or 0.69% in New York yesterday and closed at $1,615.60/oz. Silver climbed to a high of $27.815 and ended with a gain of 0.55%.
Gold edged up Friday, near the 3 week high, on the promise of the ECB President Mario Draghi’s words to do “whatever it takes” to prevent a collapse of the euro zone signalled more serious efforts to tackle the debt crisis. The weakened dollar increased gold’s safe haven appeal.
Today US 2nd qtr GDP figures are released and many feel these numbers will be the catalyst for the US Fed to decide next week on QE3.


Cross Currency Table – (Bloomberg)
US GDP is expected to grow at 1.5% for Q2 according to a Reuters poll, which is the slowest pace since 2Q 2011.   
Spot gold prices were headed for over a 2% gain this week, the biggest weekly rise since the last week of May.
US gold futures contract for August delivery edged up 0.1% to $1,616.90.   
Gold Prices/Rates/Fixes /Volumes – (Bloomberg)
The world’s top gold producers, Barrick Gold Corp and Newmont Mining Corp, both reported a sharp decline in their profits for the quarter.
For breaking news and commentary on financial markets and gold, follow us on Twitter.
GoldCore Limited
Ireland:

14 Fitzwilliam Square
Dublin 




And now for the major paper stories:


On Thursday night, it did not take Germany long to say no to the latest Draghi rant.
As Merkel is away on vacation it did not take the French newspaper Le Monde long to state that the "ECB is preparing to buy Spanish and Italian debt."  They used unnamed sources and also stated that the purchases will be in the secondary market trying to lower yields as both nations will have a tough time financing at higher levels of interest rates. The Bundesbank however stated that these purchases would be "problematic".

Le Monde states that there will be a phone call between Hollande and Merkel at 1 pm European time
and the response to this from German authorities:


  • STREITER SAYS `DOESN'T KNOW' ABOUT MERKEL-HOLLANDE CALL
Sigh - when one sees such relentless lies and confusion what else can one say but... "Europe."

As we have stated to you on many occasions, only pay attention to what Germany says.


(courtesy zero hedge)




As Europe Desperately Attempts To Talk Down Bond Yields Further, Bundesbank Finally Says "Nein"

Tyler Durden's picture





Following two days of desperate attempts by the ECB to talk down record peripheral bond yields without any actual action, it is only logical that while Merkel is on holiday, we get a third day of talking to buy some time purely thanks to rhetoric and jawboning, before the Chancellor comes back and spoils the party. Sure enough, here it comes via French Le Monde, whose host nation knows very well that after Spain and Italy, France is next:
  • ECB PREPARING TO BUY SPANISH, ITALIAN DEBT, LE MONDE SAYS
More from Reuters:
Euro zone governments and the European Central Bank are preparing to intervene on financial markets to help bring down Spanish and Italian borrowing costs, French afternoon daily Le Monde reported on Friday.

The newspaper, which cited unnamed sources, said the ECB was willing to take part in the action on condition that governments agreed to tap the bloc's bailout funds, the European Financial Stability Facility and the European Stability Mechanism.

Under the plan, the EFSF could be activated first to purchase Spanish and Italian debt on the primary market, followed by the ESM in September, after it becomes operational.

The ECB would at the same time buy Spanish and Italian government bonds itself on the secondary market.

The newspaper said the plan was days or possibly weeks away from being finalised and that officials were holding consultations on Friday about it.
Ah, the good old unnamed sources which always appear in times of need... and of Merkel summer vacations. But while the cat may be away, the Bundesbank has decided to take at least some matters into its own hands:
  • BUNDESBANK SAYS IT HASN’T CHANGED STANCE ON ECB BOND BUYING, REMAINS OPPOSED TO FURTHER BOND BUYING BY THE ECB
More from the WSJ:
"Germany's central bank remains opposed to further government bond purchases by the European Central Bank, but isn't against using the euro-zone's temporary rescue fund (European Financial Stability Facility) doing so to drive down soaring sovereign borrowing costs, a Bundesbank spokesman said Friday.

Germany's central bank regards further bond buys by the ECB as "problematic" and "not the most sensible" instrument for overcoming the debt crisis, in particular because they create false incentives for governments, the spokesman said."
And then, just to confirm that nobody in Europe has any clue what is going on and its politicians are once again simply making things up on the fly, we get this:
  • HOLLANDE-MERKEL TO SPEAK BY PHONE AT 1 PM ON HELP: LE MONDE
And the logical response:
  • STREITER SAYS `DOESN'T KNOW' ABOUT MERKEL-HOLLANDE CALL
Sigh - when one sees such relentless lies and confusion what else can one say but... "Europe."



end

Now Draghi is in a pickel as markets have soared because he stated that he will initiate some sort of European bond purchases.  The newspaper Le Monde indicated through "unnamed sources" that SMP will be re invigorated through purchases of Italian and Spanish bonds through SMP in the secondary market.
If he doesn't deliver, there will be major disappointments in the markets which may plunge as investors lose confidence in the ECB and its chief. In the meantime Spanish and Italian bond yield lower on potential news of a new SMP.

(courtesy zero hedge)


Draghi In A Box

Tyler Durden's picture





The jawboning party has come and gone, leading to a nearly 100 bps move tighter in Spanish spreads (from all time records of 7.6% just three days earlier), and now the hangover is here. Or, as Bloomberg puts it,Draghi is now in a box. "European Central Bank President Mario Draghi has boxed himself into a corner. Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today." If this seems like a Catch 22 in which the ECB loses regardless of the outcome, that's because it is. Luckily, no matter which path Draghi chooses, the time for talk is over, and now he has to act. Because with every day the ECB does nothing, the more credibility it loses.
From Bloomberg:
Draghi is damned if he does and damned if he doesn’t,” said Carsten Brzeski, senior economist at ING Group in Brussels. “He maneuvered himself into an extremely difficult situation. Expectations are very high.”

“I don’t believe you will see government bond purchases yet,” said Jacques Cailloux, chief European economist at Nomura International Plc in London. “But there are other things they can do that will help, such as lowering the haircut on sovereign bonds they accept as collateral or buying private sector securities.”
And repeating what we said yesterday morning following day #2two of hollow promises (following Nowotny's bluster about the ESM getting a banking license which will not happen)...
It will be difficult to hold these gains without any actual action,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion. “There’s still pressure on the spreads of the peripheral countries and I fear this is only a temporary narrowing.”
Also, as reported earlier, the Bundesbank has finally stepped into the fray in Angela's absence:
The Bundesbank said restarting ECB bond purchases is not the best way to address the debt crisis.

“The Bundesbank has repeatedly expressed in the past that it views bond purchases critically because they blur the line between monetary and fiscal policy,” a spokesman said.
Finally, the ECB's bazooka will once again be a dud:
“We still don’t think policy makers have done enough to make the market sit up and take note,” said Richard Urwin, head of investments at BlackRock Inc.’s Fiduciary Mandate Investment Team in London. That has left bond yields in weaker countries “too high to be sustainable,” he said.

“The ECB appears to be running out of conventional ammunition,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “What is left, however, is the ‘bazooka’,” he said, referring to large-scale interventions in troubled bond markets.
But whether or not the ECB has run out of money, or Europe's politicians have run out of empty promises is, at the end of the day irrelevant: what matters is whether Europe has any actual money good assets. The answer is a resounding no.
And now, Justin Timberlake.



end



Many members of the ECB are surprised by the Draghi announcement. They are totally confused
The Eur/USA which at one point reached 1.239 started to plummet and hit it's nadir at 1.229 midday.
The Wall Street Journal reports that ECB members are not backing Draghi's proposal. This sets financial markets in disarray as the Euro plummeted, gold fell but stock markets still remained resilient.
However the big risk to the Europe markets is if the ESM license is not given and if the ECB is not allowed to buy Italian and Spanish bonds, the markets will plummet with a huge implosion.


(courtesy zero hedge)



Mutiny At The ECB?

Tyler Durden's picture





A lot of desk chatter about this move in risk-assets - and the entire reversion to red on the day in EURUSD - as a WSJ report now circulating suggests that ECB members are not backing reported proposals by President Draghi. Specifically, the statement referenced is the following: "Many ECB Members Surprised By Draghi's Comments Suggesting New Bond Buys, Source Tells WSJ". The bottom line here is that Draghi most likely pulled a Mario Monti (and his hanger on Mariano Rajoy), and spoke up before pre-clearing with Buba's Weidmann. Draghi thinks that, like Monti with Merkel at the June 29 summit, he can bluff the Bundesbank into submission, and Germany will agree to monetization, especially if markets have risen enough where nothing out of the ECB next week leads to a market plunge (as the WSJ explains below). The problem is that as we patiently explained, Monti got absolutely no concessions our of Merkel, as was seen in the bond yields of Spain after the June 29 summit, which hit record wides a few weeks later. Expect the same this time around too: i.e., Germany will hardly cave in to the European beggars.
From the WSJ:
Of course, the markets may have simply over-reacted to Mr. Draghi’s speech in London, or he may not have intended to give the impression he did. But either way, Italian and Spanish sovereign bond yields crept back up again before easing as the French newspaper Le Monde suggested the ECB is indeed preparing to buy Spanish and Italian debt in co-operation with euro-zone governments. Stocks and the euro moved up, down and then back up again. If this sounds chaotic, it is. But one thing is sure. If the ECB does nothing next week, themarkets will tumble.
Further, from Citi's European GC desk:
Mr.Draghi surprise outburst to defend EUR and possibly the government bond yields took  many off guard yesterday. The knee jerk risk on move suffice to say has helped to pull  peripheral bonds well below its highs with Spain now yielding ~6.6% in 10yr, off the highs  of ~7.5%. We doubt the rally will last as a long term trend for number of reasons despite  Mr. Draghi’s comment that “IF PREMIA ON GOVT BORROWING HURT MONETARY POLICY TRANSMISION,  THEY COME WITHIN OUR MANDATE”.

First, even if Mr. Draghi manages to wiggle out the SMP from the locked box, it won’t  change reality in the long run as we have seen last year when yields continued to increase  during sporadic bond purchases. Instead they only provide opportunity for the market to  sell their holdings and reduce the liquidity available for certain bonds, as well as  increase both the specialness of the bond and the fails rate. There are talks of  alternatives, i.e. reducing the haircut of the existing haircuts on collateral which would  boost amount of cash to the banks or widening collateral eligibility etc. But none of them  address the underlying problem of the Euro.  In some perspectives a large consistent SMP  buying would bring down the yields and give more time for Spain, albeit their unemployment  rate was rising again to 24.6% in the second quarter vs. 24.4% in the prior 3 months.  Labour reform anybody?  Spanish competitiveness? How to fix this staggering figure is more important.
Source: Citi FX




end



Behind the scenes, early Friday morning, Spain has discussed with Euro leaders on a full scale
300 billion full bailout.  Germany of course said they were very uncomfortable with this latest development.
The 300 billion euros needed would come on top of the 100 billion euros to help in the bailout of its banks.
The problem of course, is that much more is needed. This is where the 300 billion bailout first surfaces:

(courtesy zero hedge)



Spain Discussed €300 Billion Full Bailout, Germany "Uncomfortable"

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While the EUR was soaring, and Spanish bond yield were (very briefly) plunging in the past 48 hours, the reality behind the scenes was very different than what was blasted publicly in the headlines. Namely, Spain was on the verge of requesting a full blown sovereign bailout, one which would see it become the next country after Greece, Ireland and Portugal to fall under the Troika's control. From Reuters: "Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros ($366 billion) if its borrowing costs remain unsustainably high, a euro zone official said. Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6 percent, the source said. If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain's banking sector, stretching the euro zone's resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year." So why the sudden attempt to talk up European risk in the last two days? Simple - Germany did not agree to fund Spain's bailout. Which meant it was suddenly up to Europe's apparatchiks to jawbone markets into cooperation. "De Guindos was talking about 300 billion euros for a full program, but Germany was not comfortable with the idea of a bailout now," the official told Reuters."
What this means is that, as we suggested yesterday, Draghi really has nothing up his sleeve, and the promises of the last two days from Nowotny and less than Super Mario are very ad hoc and even more hollow, and that the vigilantes are about to come back with a vengeance as Spain has effectively admitted it is broke. So once the euphoria from the latest risk on episode fades, watch out.
From Reuters:
"Nothing will happen until the ESM is online. Once it is operational we will see what the borrowing costs for Spain are and maybe we will return to the question," the official said.

Spain has repeatedly said it would not need to follow Portugal, Ireland and Greece in seeking a full bailout. Asked about the source's comments, a government spokeswoman said on Friday: "We strongly deny any such plan. This possibility (of a 300-billion-euro rescue for Spain) has not been looked at and has not been discussed."

As Schaeuble and de Guindos were meeting on Tuesday, Spanish borrowing costs reached their highest level since the country adopted the euro, hitting 7.64 percent for 10-year bonds - a level at which Spain cannot sustainably borrow from the markets.

But on Thursday European Central Bank President Mario Draghi said the central bank was ready to act to bring down Spanish yields and the 10-year yield fell to 6.88 percent.

A second euro zone official said Spain could manage without a bailout, but had made bad communication mistakes which had unnerved investors. Asked if Madrid needed a bailout the second official said:

"In pure arithmetic terms no, if interest rates were commensurate with what I consider a sustainable situation."
Finally for those still confused what Germany's real goals are in the ongoing collapsing Nash Equilibrium, we have said it before, and we will say it again:
...to have Europe at the edge of chaos, keeping the EUR low, and its Debtor In Possession targets amenable to any terms
The rest is just central bank bluster even as city by city, region by region, country by country goes broke.
end

We then heard from Bridgewater's Ray Dalio who gave his warning that Spanish collateral is running out and that Spain may have to rely on its own  Emergency Liquidity Assistance program or ELA which is direct loans from the central bank of Spain.  This is occurring right now with Greece.


Ray Dalio Issues Stark Warning: Spanish Collateral Is Running Out

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Confirming what we described in detail in March, Bridgewater's Ray Dalio notes in his Daily Observations that "Spanish banks' collateral is running out in a way that could force them into an ELA." The manager of the largest hedge fund in the world - so not some self-perpetuating political mouthpiece - estimates that the Spanish banking system has only a few hundred billion euros left in eligible collateral and that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. Critically, if this occurs, then Spanish banks will need to turn to its own Emergency Liquidity Assistance (ELA) program. An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly. This increasing Balkanization of European central banks and funding capabilities only entrenches the impossible task of fiscal union as 'more' sovereign control transfer will be required in return for any core backstopping. Furthermore, those who are hoping for LTRO3: no collateral, no deal! Which the IMF just confirmed is a flashing red warning:
  • IMF: COLLATERAL AT ECB VULNERABLE TO DOWNGRADES, MARGIN CALLS

Just EUR300bn left in Spanish Collateral: Then What?

An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.

Spanish Banks' Collateral Is Running Out in a Way That Could Force Them Into an ELA

We estimate that the Spanish banking system only has a few hundred billion euros left in eligible collateral. That means that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. (We think this reality is the reason why we are seeing a number of legal changes in Spain that look like an attempt to scrounge up a bit more capital). if Spanish banks run out of ECB collateral, then the Spanish central bank would likely need to turn on its own ELA. The potential magnitude of such an operation would dwarf the nationalized money printing to date.

Spanish balance sheets can probably support about €800 billion of borrowing from the ECB. Between the ECB and privately secured funding, mostly foreign interbank, Spanish banks are already borrowing about €500 billion, and if private secured funding was pulled, this borrowing and related collateral could be shifted to the ECB. So we think about the remaining capacity to borrow as the total collateral borrowing capacity (€800 billion) less what is pledged to both the ECB and private lenders (€500 billion), or about €300 billion. However, this almost certainly overstates Spanish banks' collateral cushion because there are strong banks such as BBVA and Santander that probably have ample capacity and weaker banks that are likely much closer to being tapped out.

The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.
The Balkanization of European Central Banking Continues
We think that one of the bigger risks facing the Eurosystem is the continuing division in its central banking system. When the euro came into existence, the individual national central banks within Europe became mostly implementers of a common ECB monetary policy. But as the European debt crisis has dragged on, the national central banks have gradually begun to conduct policies that are creating a differentiated monetary policy between core and peripheral countries (as we'll describe below). The more the national central banks create easier policy within weaker parts of the eurozone, the more they stimulate money creation in the weaker parts of Europe that will logically flow to the stronger parts -- which will only put more pressure on the currency union.
The ECB's rejection of Greek government bonds as Eurosystem-eligible collateral is the most recent example of the growing balkanization, as it will require Greek banks to again turn to their national central bank's ELA for funding, an avenue that basically allows them not to adhere to the ECB's borrowing standards. The real looming risk, however, is in Spain. Spanish bank funding needs continue to grow, system-wide ECB-eligible collateral is running low (and anecdotal signs of banks seeking to create new collateral suggest to us that some banks are probably already almost out), and there is a real chance that the Spanish banks could soon need to turn to an ELA of their own.
An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly.
Recall that, like the Fed, the ECB has a hub and spoke structure, with policy directed by Frankfurt and implemented by the national central banks (NCB's). But unlike the Fed, which has been around for a very long time and is the national central bank of a single, indivisible sovereign, the ECB is still in its infancy and represents a collective of 17 countries with very different risk tolerances, incentives, and historical perspectives. And importantly, these countries are not bound very tightly in a fiscal union. The ECB charter reflects this, providing a reasonable amount of autonomy and authority to individual NCB's, which was not utilized until the debt crisis. This autonomy has recently translated into the increasing use of emergency liquidity facilities (ELAs) and lending against non-standard collateral by the NCB's. And unlike standard ECB repo lending operations, these loans are solely backstopped by the applicable NCB and, if necessary, the domestic government in that country.
This creates a two-tier monetary policy - exactly what Draghi just tried to tell us he is avoiding.
The ECB has taken some steps:
Emergency Liquidity Assistance (ELA's) 
NCB's received, under the original construct of the European Central Bank, certain autonomous rights, including the ability to determine their own policies with regard to the provision of domestic liquidity. However, few central banks ever actually operated outside the Eurosystem for more than very limited purposes. This changed with the onset of the sovereign debt crisis. Several NCB's have opened ELA's, which theoretically give them the ability to unilaterally set collateral standards, terms, and haircuts for lending to the domestic banking system. The risks arising from these ELA loans are borne by the NCB's (since these transactions are "outside" the Eurosystem) and backstopped by the domestic government. The ECB has the ability to shut down these facilities with a two-thirds vote of the governing council (and we believe that the ECB is involved in the set-up and maintenance of ELA's), but technically the NCB's do not require the ECB's approval to open an ELA. Our current estimate of ELA's is €180 billion.
Non-standard collateral
In concert with the recent LTRO's, the ECB announced an expansion in eligible collateral for repo operations. The NCB's had to submit for ECB approval the non-standard collateral they would accept. However, even with the ECB's approval, the risk of loans backed by non-standard collateral is borne by the individual NCB's, not the ECB. After the second LTRO, ECB President Draghi said that €53 billion of non-standard collateral had been accepted by the ECB. We don't know if this number has changed since that time. There is potential for this number to go much higher. It should also be noted that once again we saw differentiation across the NCB's. Only seven NCB's submitted plans to allow their banks an expanded pool of eligible collateral. Most core NCB's rejected the opportunity to ease collateral standards (the exceptions being France and Austria).

end



And now  on the subject of Draghi, I give you Bruce Krasting who has been remarkably accurate on many aspects concerning the Euro financial mess. If you recall, he stated that he was now out of his Eur/USA short at 1.21 and that he was not going back into shorting until late August.  He changed his mind and he is now back into shorting the Eur/USA cross.  Here is why he decided to do this trade:

(courtesy Bruce Krasting/zero hedge)


Draghi – We Will Continue to Fight Until Everyone is Dead

Bruce Krasting's picture





A week ago I cut a EURUSD short position that was well into the money. (Link)I was concerned that “something” might happen that could make a mess. I listed a number of concerns that might have caused a flip-flop, but Mario Draghi talking, was not on my list. Of course, that is precisely what happened. I’ve read what Mario said a number of times, I think there is no substance to his words.
"The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough"
I’m reminded of an article I wrote more than two years ago titled, Sarkozy Will Get “Stuffed” (link). The occasion was a stupid remark made by then French President Nicholas Sarkozy regarding some new measures that would, once and for all, end the run on the bond markets of Europe:
“We will confront speculators mercilessly. They will know once and for all what lies in store for them.”
This didn’t work out so well for poor old Sarko. The speculators ended up crushing him, and he lost his job. Draghi will suffer the same result.
Mario must be saying to himself,
“If only I can just get the Spanish Ten-year back to 6%, all will be well again”.
I think he’s nuts. Spain’s problem is its competitiveness. The domestic economy will never recover without a currency devaluation (and debt restructuring). If Mario has his way, Spain will suffer from a decade of recessions with unemployment over 20%. How could he possibly call that outcome a success?
On Friday we got some clarification of what exactly Draghi has up his sleeve when he promised, “It will be enough”. From Bloomberg:
DRAGHI'S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO
Bond buys? Rate cuts? New LTRO? That’s Draghi’s bazooka? These things have been tried in the past and have failed. These steps might buy the EU a few weeks (or hours?) of market relief, but they have no chance of turning the EU around.
There is still a market-based system that exists in the world of central bank manipulation. In the end, market forces always prevail. The outcome for the Euro will be no different. Draghi thinks he has the power to thwart the markets. He does not have that power. Draghi is either bluffing or lying, that or he is a blind as a bat.
.
.
FX Note:
An interesting outcome of the Draghi comments is that the Euro ended the week north of 1.2300 (up 1.5%). Whatever chance the EU may have, it is dependant on a weaker Euro exchange rate. In my book, Mario’s words have set the EU back, not forward.
A week ago I swore (Link) I would be out of FX until we got into late August. The silliness of the last few trading days changed my mind. I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got the Euro above 1.2400, and ended up with a fill a bit over 1.2300.
My thinking is that someone in Germany is going to say:
“Sorry Mario, you can’t have our cake and eat it too.”
As if on cue, this article appeared in Germany’s Handelsblatt today:
.

end

Early this morning (Saturday) Schauble in the German Press emphatically states "nein" to Draghi
and denies rumours of ECB bond buying.  Monday will be a scorcher!!!

(courtesy zero hedge)


Schauble Just Says Nein Again: German FinMin Denies Rumors Of ECB Bond Buying

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When day after day, for three days in a row last week, the ECB spread rumors that it would commence buying Spanish debt in what was in retrospect nothing but a massive bluff (just as we suggested yesterday), what passes for a market postulated that since there was no official German denial, and with Merkel on vacation that would mean a statement from her finance minister sidekick Wolfgang Schauble, that Germany was ok with the reactivation of Spanish bond buying and as a result ramped risk by over 4% in 3 days. All of that is about to wiped out as Schauble has finally spoken. Quote Spiegel: "For days, it is rumored that the ECB will buy Spanish government bonds in a big way. Now Finance Minister Wolfgang Schaeuble has rejected such reports - there was "no truth". And scene. Luckily all the momo chasers who bought stocks last week on hopes their prayer-based strategy will finally play out, will be able to sell ahead of all those other momo chasers who bought stocks last week on hope their prayer-based strategy will finally play out. Or maybe not.
From Spiegel:
For days, it is speculated that the European Central Bank (ECB) is planning, together with the bailout fund EFSF Spanish government bond buy - so come back to Spain to cheaper capital. The "Sueddeutsche Zeitung" According to the euro countries willing to support this approach . Federal Finance Minister Wolfgang Schäuble (CDU) has now dismissed the reports in an interview with the newspaper "Welt am Sonntag".

"No, at this speculation is not true," Schäuble said the newspaper. The Finance Minister said it was already a sufficiently large aid package for Spain have been laced.

The 100-billion-euro package to recapitalize Spanish banks also close an emergency aid of 30 billion €. "The short-term financial requirements of Spain is not so great", said Schäuble, "the painfully high interest rates - but the world will not, if you have to pay for some bond auctions a few percent more."
Why will Germany, which Schauble says himself is in a very difficult position, and has already been very helpful to Spain, not provide more funding? Simple - unlike all other broke globalist neo-socialists, he believes that the market is actually right in punishing profligate spenders, and having bonds trade above 7% is not the end of the world. Of course, he is absolutely right.
The interest for Spanish government bonds in recent days had passed, the legislation as critical threshold of seven percent. Schäuble said, however, convinced that the Spanish reform efforts, which he praised likely to be soon rewarded. The finance ministers will meet on Monday with his U.S. counterpart, Timothy Geithner . Observers expect that will also be in this conversation on the holiday island of Sylt in the center of the European financial crisis.
And in case one rejection is not enough, here is another, courtesy of Handelsblatt:
Federal Finance Minister Wolfgang Schaeuble has rejected speculation about impending purchases of government bonds by Spanish EFSF and ECB. Spain itself, meanwhile, calls for more solidarity from Germany.

When asked whether there would soon be a motion to allow the euro rescue could buy Spanish government bonds, Schaeuble said the "Welt am Sonntag", "No, at this speculation is not true."

Schäuble does not believe that the high risk premiums on corporate bonds Spain overwhelm. "The short-term financial requirements of Spain is not so big," he said. "The high interest rates are painful, and they create a lot of anxiety -. But the world does not go under if you have to pay for some bond auctions a few percent more," You have "tied aid package big enough" for Spain. The country receives for the recapitalization of its banks up to 100 billion €. "And we have them provided 30 billion euros in rescue EFSF as a possible emergency," said the Minister
So what is Spain's strategy: nothing but more heart-string tugging and some World War II revisionist history:
The Spanish Minister for Europe, Inigo Mendez de Vigo has claimed in an interview from the federal government more commitment and solidarity in crisis management. After the Second World War, Germany had been helped in a very much more difficult situation, the minister said the "Bild" newspaper. Many countries have abandoned in favor of the Federal Republic of money. "That should not forget Germany".
In other words, help a brother out. Only problem is that when the Marshall Plan was instituted, there was a whole continent of incremental debt capacity still untapped, courtesy of debt repudiation. This time around, there is no such thing, and certainly not in the US where debt/GDP is now 103%. So unless somehow Africa is to be involved in the second Marshall Plan of Europe, we urge Spain to rethink its strategy.
Just as we urge all those who continue to buy stocks on hope and prayer to perhaps reevaluate if they are in the right business.




Now let us head over to Greece:

The three Greek leaders are meeting trying to clinch agreement on a 11.5 billion euro package of budget cuts trying to satisfy the troika. These budget cuts are necessary for more euros to be advanced.  The Greek economy is contracting at a rate of 7% this year and tax revenue is faltering.  Many in Greece just do not pay their tax as tax evasion is a major sport. As such the budget talks stumble as it seems it would be impossible to deliver the cuts.

( courtesy Bloomberg News)



Greek Budget Talks Stumble as EU Urges Samaras to Deliver

By Maria Petrakis and Marcus Bensasson on July 26, 2012


Greek political leaders struggled to clinch agreement on an 11.5 billion-euro ($14 billion) package of budget cuts, as international creditors began a review of Greece’s progress that may determine its future in the euro.
Prime Minister Antonis Samaras and his coalition partners, Evangelos Venizelos of Pasok and Fotis Kouvelis of Democratic Left, are to meet again on July 30 to determine the savings required to receive the funds pledged under Greece’s two rescue packages totaling 240 billion euros. European Commission President Jose Barroso urged Samaras to make good on promises.
“The key word here is deliver,” Barroso said after meeting the premier, the first visit to Greece by a senior European Union official in more than a year. “Deliver, deliver, deliver. The delays must end. Words are not enough.”
Greece, which held consecutive elections in May and June as public opposition to spending cuts grew, risks running out of money without the disbursement of 4.2 billion euros due last month as the first instalment of a 31 billion-euro transfer. Citigroup Inc. (C) (C) said there’s now a 90 percent chance Greece will leave the euro in the next 12 months to 18 months.
The coalition government leaders met after Finance Minister Yannis Stournaras held his first talks of the review with the “troika” of officials representing the euro area, the European Central Bank and the International Monetary Fund.

‘Extremely Difficult’

“We are not done,” Kouvelis told reporters after the meeting. “The economic situation is extremely difficult but society on the other hand can’t stand being bled any more.”
Since forming his coalition government, Samaras has promised more asset sales to pay down debt and help finance an additional two years to the program agreed with creditors to restore economic health. He and his partners are trying to avoid the across-the-board pay and pension cuts that have driven the country into the worst recession since World War II.
Greece’s two elections in six weeks derailed planned reforms, halted state-asset sales and fanned concerns over whether the country can remain in the 17-nation euro bloc.
“All want to contribute to achieving fiscal targets,” government spokesman Simos Kedikoglou told reporters in Athens. “Everyone is seeking in this negotiation alternative choices so that this happens with a sense of social justice and without further recession.”

‘Worse Hardship’

Failure to satisfy the troika on budget cuts and other reforms promised under the two packages may threaten Greece’s place in the euro.
Barroso said he was encouraged by Samaras’s pledges to step up state-asset sales and to keep to promises made under a 130 billion-euro second rescue package earlier this year. Sticking to commitments would ensure the country’s place in the euro, he said.
“Staying in the euro is the best chance to avoid worse hardship and difficulties for the Greek people, mainly for those in vulnerable positions.” he said. “Greece is part of the European family and the euro area and we intend to keep it that way.”
Citigroup updated its forecast for a Greek exit from the currency area from a previous estimate of 50 percent to 75 percent, and said it would most likely happen in the next two to three quarters. The bank assumes a Greek exit would occur on Jan. 1, 2013, while saying that isn’t a forecast of a precise date.
Robert Mundell, a Nobel Prize-winning economist, said the Citigroup report doesn’t help the situation.

Debts in Euros

“In Greece, getting out of the euro doesn’t change the fact that the debts are in euros,” Mundell said in Athens today. A euro exit and devaluation of a new currency could lead to a doubling of Greece’s existing debt, he said. If Greece defaults, it would make more sense to do it within the euro area, Mundell said.
Venizelos, the head of Greece’s Pasok party and a former finance minister who negotiated the second bailout earlier this year, said the continuous speculation of a Greek exit is undermining the country’s attempts to reform its economy as well as hurting other nations.
“Sacrificing Greece will prove suicide for the euro area,” Venizelos said. He said it was imperative that the current bailout plan be extended to the end of 2016.
Greece has to reduce its budget deficit to 7.3 percent of output this year from 9.1 percent in 2011. With the economy shrinking about 7 percent, more than forecast, Stournaras has said the goal is to reach the nominal target of 14.8 billion euros for this year’s deficit, not the ratio.

Second Restructuring

The ECB holds the lion’s share of Greece’s residual debt after private bondholders forgave 100 billion euros in the biggest debt restructuring in history in March.
Euro-zone governments are weighing options including asking the ECB to accept losses from Greek bonds and coaxing private creditors who didn’t take part in the March writedown to do so now, German newspaper Die Welt reported today, without saying where it got the information.
“I cannot understand why anybody should be talking about restructuring or any other such measures,” Thomas Wieser, head of the group that prepares meetings of euro-area finance ministers, said in an interview on Bloomberg Television.
“I would regard any question of what should be changed with the program as being completely premature” until the troika’s assessment is complete, Wieser said. “There is very strong political will to do whatever it takes to bring the program back within the parameters.”
To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
 How are the Greek banks handling their subprime mess over there?


Simple:  they just extend the mortgage to 45 years or so and then call on children to co sign as eventually they would inherit the properties.  Foreclosures cost too much money for the Greek banks so they try and keep the properties with the original owners despite the fact that they are in default. It also avoids a big fall in real estate prices.

(courtesy Reuters)


Greek Banks Follow Euripides To Help Borrowers: Mortgages


Greek banks faced with mounting mortgage delinquencies are following the advice of 5th-century BC playwright Euripides: Time heals.
Banks restructure loans rather than foreclose, extend terms to as long as 45 years, grant payment holidays of up to a year when borrowers are only required to make interest payments, or add guarantors to loans, often children who will eventually inherit the property.
Lenders see foreclosures as the worst way to collect, and so far Greece has avoided the price declines that result from vacant, bank-owned properties that destroy values of whole communities and flood the market, said Andreas Athanassopoulos, general manager of mortgage and retail banking for the National Bank of Greece, the country’s biggest lender with about 30 percent of all home loans. While Euripides was known as a tragedian, modern Greek bankers believe borrowers given a chance to remain in their homes will end up making good on their debts.
“There is a lot of stickiness in the market as people tend to buy their home, live there a lifetime and pass it on to their children,” Athanassopoulos said in an interview at his office in Athens. “The best way to get money from delinquent mortgage holders is to give them time, that’s the only doctrine, to help them pay their loans while minimizing the bank’s losses.”
At the moment, banks have little choice. In 2010, after Greece became the first European nation to receive an international bailout, with an initial 110 billion euros ($135 billion), the government suspended foreclosures on primary residences with outstanding mortgage debt of 200,000 euros or less until June 2011. The measure was subsequently extended twice until the end of 2012 and is likely to be extended again in 2013, according to the National Bank of Greece.

Pay Cuts

Non-performing mortgages in Greece, in recession for its fifth year with a record unemployment rate of about 23 percent, reached 17.2 percent of the total outstanding in the first quarter, according to the Greek central bank. That’s up from 15 percent in the previous three months. Also contributing to the rising delinquencies are government pay cuts of public employees' salaries by as much as 45 percent.
In the U.S., where there were 4.7 million foreclosures between January, 2006 and June, 2012, according to data seller RealtyTrac Inc., prices have fallen 34 percent. In Spain, where Tinsa, the country’s largest home appraiser estimates prices are down by a third, there have been about 330,000 foreclosures, according to PAH, a group that supports people who have lost their homes to lenders.

Support People

“We have learned a lot from what happened in the U.S. -- foreclosures pull down the value of properties in surrounding areas, and prices so far in Greece have not collapsed,” Athanassopoulos said. “The idea here is to support people repaying and to minimize losses.”
In Athens, prices have only fallen about 20 percent from the peak in the second quarter of 2008, central bank data show. In Thessaloniki, Greece’s second largest city, they’re 18.8 percent lower than the high point that year, according to Bank of Greece data. In other cities, they’re down 11.6 percent.
What’s good for Greek mortgage holders and home prices may not be as beneficial for holders of about 3.5 billion euros of loans packaged inside mortgage bonds, said Dipesh Mehta, a London-based analyst at Barclays Plc. The government and banks may be “kicking the can down road” until the suspension of foreclosures is finally lifted, when an “avalanche” of repossessions could flood the housing market, he said.

Bond Yields

Investors demand 22 percentage points above interbank rates to buy five-year senior bonds backed by Greek mortgages, according to JPMorgan Chase & Co. data. Spreads have widened from 10 percentage points a year ago, as investor concern grew that the country would need to leave the euro and return to the drachma. That compares with a 1.2 percentage points spread for U.K. prime residential mortgage-backed securities.
“Investors will be holding extremely long bonds especially as they will not be called,” Mehta said in a telephone interview. “They’ll be concerned over the tail risk especially for holders of junior notes about what will happen if repossessions do start to come through.”
In addition to those suffering hardships such as lost jobs or reduced pay, banks must also deal with delinquent borrowers who could pay yet prefer not to sacrifice their lifestyles, as well as those who have transferred cash out of Greece and filed for personal bankruptcy. Negotiating with those two groups, which represent about 20 percent of those seeking relief, is complicated by the legal prohibition on foreclosures.

‘No Muscle’

“The problem with laws encouraging foreclosure forbearance is that they can encourage people who can pay not to, leaving the banks with no muscle to force people who take advantage of the law to pay,” said Ivan Zubo, an analyst at BNP Paribas SA in London.
Foreclosure “is not a strategic option for us,” said Athanassopoulos. “We want the law changed to give us more discretion and flexibility. I would never foreclose on a person who has lost his job but we need more discretion with people who are taking advantage.”
The Greek mortgage market had annual growth of 82 percent in the early 2000s when first-time buyers took advantage of easier financing and interest-rate reductions as the country joined the single European currency.
Home loans expanded to 80.5 billion euros by the end of 2010, and home prices in Athens increased more than 170 percent from 1997 through the end of 2008, according to data from the country’s central bank.

Household Debt

Even now, Greece’s household mortgage debt as a percentage of gross domestic product is among the lowest in developed countries, at 36 percent, and less than half the level in the U.S., Ireland and U.K, according to Deutsche Bank AG analysts Conor O’Toole and Rachit Prasad. “It ranks second lowest only to Italy among the selection of European peripheral states and far lower than the U.K. and the U.S.” they wrote in a May report.
The biggest delinquent debtor in the country is the Greek government, which has 6.8 billion euros in arrears to companies. That’s also a drag on the economy, which contracted more than 6 percent last year. Mortgage lending has ground to a halt as the banks deal with rising delinquencies and potential buyers wait to see whether the country will be able to negotiate an agreement with its international creditors that will allow it to get further bailout funds and stay in the 17-member European currency.

Rescue Packages

Greece’s so-called troika of creditors -- the European Central Bank, the European Commission and the International Monetary Fund -- are in Athens this week to review the country’s progress on implementing budget cuts.
Also dependent on further agreement with the troika is an additional 23 billion euro payment from a recapitalization fund for Greek banks that is part of a broader delayed second tranche of emergency funding for Greece. So far, 25 billion euros of recapitalization funds have been paid.
Core tier 1 capital at the National Bank of Greece is at 8 percent after receiving 7.4 billion euros in the first round of recapitalization. Like all other Greek lenders that must rise to 9 percent by the end of September and 10 percent by July 2013.
“If the state is given the thumbs up for its progress, the disbursement from the troika will come and the state will pay its arrears and there will be liquidity,” while the bank “recapitalization will also boost liquidity,” said Petros Christodoulou, National Bank of Greece’s deputy chief executive officer. “Unless you have liquidity nothing can function. Liquidity is like blood, nothing can function without blood. I hope that from September onwards this will happen.”

Greek Exit

Citigroup Inc. this week updated its forecast for a Greek exit from the euro, saying there is now a 90 percent chance, probably in the next two or three quarters. Previously it said there was a 50 percent to 75 percent likelihood, and said it would most likely happen in the next two to three quarters.
Greece, which has struggled to meet targets for narrowing its budget deficit, has more ground to make up after holding elections in May and June that highlighted voter anger over the bailout terms. An inconclusive May 6 vote led to a June 17 rerun in which the New Democracy party of Prime Minister Antonis Samaras, finished first with almost 30 percent of the vote.
Samaras formed a government with the Socialist Pasok party, which came in third, and the sixth-place Democratic Left with pledges to keep Greece in the euro while fighting for looser aid conditions from the region and the IMF.

Austerity Measures

The Greek public remains divided about the austerity measures, with polls showing a majority favor a renegotiation of bailout terms. Alexis Tsipras, head of Greece’s biggest opposition party Syriza, on July 23 called on the government to refuse talks with the troika.
“There are opportunists sitting on the sidelines saying, ‘Let’s leave Europe, let’s not pay a penny, let’s blackmail them,’ but any technocrat knows that is certain death,” said National Bank of Greece’s Christodoulou. “I for one believe in the opportunity of staying in the game, and that is the opportunity we give to homeowners. Taking away the home of a particular family tears apart the social fabric of an already stressed society,”
To contact the reporters on this story: Sharon Smyth in Athens at ssmyth2@bloomberg.net; Rob Urban in Athens at robprag@bloomberg.net.

end

Here is your opening Spanish 10 yr bond yield at 8 am est Friday morning: (still down with the hope that the ECB will re institute SMP by buying Italian and Spanish bonds:)

SPANISH GOVERNMENT GENERIC BONDS - 10 YR NOTE

Add to Portfolio

GSPG10YR:IND

6.720000.20800 3.00%
As of 07:49:00 ET on 07/27/2012.

end





 Your opening Italian 10 yr bond yield:  (also lower yields with the hope of ECB re instituting SMP)

Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio

GBTPGR10:IND

5.899000.15700 2.59%
As of 07:50:00 ET on 07/27/2012.



end



Italian regulators extend the shorting ban until Sept 14.2012 due to persistent weak conditions
within Italy:

(courtesy zero hedge)






Italian Regulator Extends "One Week Only" Shorting Ban Through September 14 Due To "Persistent Conditions"

Tyler Durden's picture





Europe is so fixed, and so jawboned to death, that the Italian regulator who launched this year's BanWagon episode of financial stock short selling bans with what was supposed to be just a one-week ban of shorting, has just extended the ban for nearly two more months, through September 14. The reason: "persistent conditions" - in other words Europe appears to be only  fixed and stuff on a transitory basis. But yes, absolutelynobody could see this coming.
From Consob
Consob: extended until 14 September, the ban on short selling bank stocks
Consob, in view of the persistent conditions of uncertainty in financial markets, has today decided to extend until 18:00 pm Friday, September 14 pv the prohibition of short selling securities in the banking and insurance, introduced on 23 July with Resolution no. 18283 and expiring at 18:00 today.
The prohibition applies both to short-selling securities backed by loans ("covered") and "bare", already prohibited by resolution (No. 17993) 11 November 2011. Intermediaries are required to take all necessary measures and precautions to strict compliance with the measure.
It 'a duty to notify Consob without delay for those operators wishing to use the exemption for the activity of market making .
On site www.consob.it are available the full text of the measure (Resolution no. 18298 of July 27, 2012), the list of affected securities, the exemption for communications relating to the business of market making as well as FAQ (Frequently Asked Questions).
Rome, July 27, 2012

end



Your closing Italian 10 yr bond yield:


Italy Govt Bonds 10 Year Gross Yield

 Add to Portfolio

GBTPGR10:IND

5.956000.10000 1.65%
As of 07/27/2012.


end

Your closing 10 yr Spanish bond yield:



SPANISH GOVERNMENT GENERIC BONDS - 10 YR NOTE

Add to Portfolio

GSPG10YR:IND

6.744000.18400 2.66%
As of 07/27/2012.

end




Biderman, late Thursday night, was rather stunned with the market's exuberant reaction to the Mario Draghi put, where the central banker told the world to believe him in that the ECB will cost share sovereign debt over 17 nations. Draghi stated that the ECB will start to buy bonds of stressed out Spain.

It seems that all miss the key important point.  Europe is not earning enough tax  euros and governments are spending far more in euros than they receive in taxes. And now to boot, the recession means less taxable revenue and governments continue to spend like there is no tomorrow. The debt keeps piling on previous dismal bad debts. Printing money to pay your bills will just not work...the road to hell is paved with good intentions

(a must see video/Charles Biderman)


Biderman Batters 'Believe-Me'-Draghi

Tyler Durden's picture





Somewhat stunned by the market's exuberant reaction to Mario Draghi's 'Believe Me' speech this morning, Charles Biderman, CEO of TrimTabs, sees the slow-motion train-wreck that is the European crisis speeding up and rapidly running out of track. Stepping back to look again at the European big picture; Biderman sees a bunch of economies whose citizens are making less money than before (and even before the current recessions European economies were not generating enough taxable income to pay current government expenses).
Now, a worsening recession means there will be less taxable income for governments to fund ever growing entitlements. Add that to a huge pile of dismal bad debts, and Charles sees theEuropean crisis as "not a solvable problem the way the world works today." Neither Draghi nor any of the bankers even bothers to talk about the real problem of not enough regional income and too much government spending.
Draghi’s only solution is some form of money printing. "Printing money to pay bills maybe will work over the short term. But long term, it cannot"; if money printing works in the real world why not print and give every one a billion Dollars, Euros or Yen? While governments will do anything to maintain the status quo (and avoid the tough times ahead), Charles succinctly reminds that, "the road to hell is paved with good intentions."



end


David Chapman comments on the Kirby analysis with respect to the Libor scandal.
JPMorgan in 2008 added 8 trillion in derivatives and Goldman Sachs added  a large 12 trillion. Who supplied the credit lines for this addition?  Only the ESF could have possibly engaged as the counterparty to JPMorgan and Goldman and this is why interest rates on long term bonds are in the range of 2.6% instead of 6 or 7%.  The manipulation of libor played a major roll in the Fed's goal of keeping long term rates low and also keep a lid on the price of gold.

(a great piece/courtesy David Chapman)





Rob Kirby www.kirbyanalytics.comdoesn’t mince words. Rob likes to dig behind the story and drill down into the numbers to unearth the shenanigans that the big banks have been up to in the markets. When the LIBOR scandal broke Rob went to work trying to see if he could figure out what the big banks were up to.

Rob spent a number of years working as a broker trading the very instruments that are at the heart of the LIBOR scandal. On a daily basis he came into contact with the banks that set the LIBOR rates.  The daily LIBOR setting is a very important rate. It is probably the most important rate setting in the world, even more important than the Federal Reserve’s discount rate. The daily LIBOR setting has an impact on upwards of $1 quadrillion of derivatives and loans. It impacts almost everything from mortgages to car loans and student loans.

Yet hardly anyone knows of its existence. Why? Because the daily LIBOR setting is solely with a small cadre of banks that are members of the British Bankers Association. Each morning they submit the rates that they believe they can borrow funds in the interbank market for a host of currencies and terms. For the currencies it is primarily US$ as the most traded currency in the world.








Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data.








The chart above shows three interest rate related spreads and instruments plus the US$ Index. The TED Spread is the difference between the interest rates on interbank loans and short term US government debt. Typically the Ted Spread is followed for the 3 month Eurodollar and the 3 month US Treasury Bill. The word TED is an acronym for T-Bill and ED the symbol for the Eurodollar futures contract.

The two interest rate instruments are the 3 month Eurodollar and 3 month Treasury Bills. The fourth chart is the US$ Index. All cover the key financial crisis period from 2006 to 2009 and highlights what was going on from June 2007 through December 2008 when the financial crisis first broke and it hit its nadir with the collapse of Lehman Brothers in September 2008. What followed was one of the most devastating financial collapses ever when the S&P 500 lost 56% of its value from its October 2007 highs and the world’s financial system came close to a complete meltdown.

As Kirby notes when the financial crisis first broke in 2007 LIBOR and 3 month Eurodollars rose and US Treasury Bills fell with the result that the TED Spread widened. The rush into Treasury Bills as the crisis deepened was described as a flight to safety. Normally, when there is a flight to safety the US$ rises as there is usually inflow from foreign buyers rushing to the safety of US Treasury Bills.

Kirby examined the data from the Office of the Comptroller of the Currency (OCC) and specifically looked at the holdings of derivatives of the bank holding companies with an interest rate maturity less than one year. In the 3rd quarter of 2007 there was a large $7 trillion jump in derivatives under one year held by JP Morgan and a smaller $4 trillion jump in derivatives under one year held by Citibank. When the 4th quarter OCC numbers were released the large jump of $7 trillion held by JP Morgan had disappeared although Citibank’s holdings only fell by $1 trillion.

All of the derivatives matured during the quarter suggesting that they all had original maturities of 3 months or less. But it was during this period that the Eurodollar yields rose and Treasury Bill yields fell. And the US$ fell. This appears to raise the question as to what actually caused the Treasury Bills yields to fall. If JP Morgan and Citibank collectively added $11 trillion in derivatives under one year, the hedge for these new positions is Treasury Bills. They buy the Treasury Bills in the market. 

But during this period in the second half of 2007 the US$ Index fell instead of going up. This was not suggestive of a flight to safety. The fall in the US$ Index appeared to be at odds with the fall in Treasury Bill rates even as the interbank Eurodollar rate rose.

The same thing it appears happened in 2008 when the financial crisis broke. Even as JP Morgan and the bank holding companies were under severe stress due to the collapse of Lehman Brothers once again JP Morgan managed to add some $8 trillion new derivatives under one year maturity in the 1st quarter 2008 and Goldman Sachs added a large $12 trillion of derivatives with a maturity under one year. Again this creates the potential for a large position in US Treasury Bills in order to hedge the positions.

The one difference this time was the US$ Index rose during this period instead of falling as it did in 2007. As well the derivatives with maturities under one year have largely remained on the books of the bank holding companies. If anything they appear to have increased since 2009.

The major question that Kirby raises with all of these sudden changes in the derivative positions of the major bank holding companies is who has the credit lines necessary to allow JP Morgan and others to increase their holdings of derivatives so dramatically in such a short period of time. Kirby continues to believe that it is the Exchange Stabilization Fund (ESF) an arm of the US Treasury that operates with little or no accountability. The ESF was set up as an emergency reserve fund primarily for foreign exchange intervention. However, today the ESF not only continues to act in secret the ESF can operate in any market it so choses to act.

Kirby believes that the actions of the ESF have contributed to pushing interest rates to zero or almost zero across the yield curve. The US has $15.7 trillion in debt and a rise in interest rates would not be in the interest of the US. Nor would a collapse of the US$ be in the interest of the US and finally huge bank holding companies becoming insolvent would not be in the interest of the US. Through the ESF Kirby believes that the US will do what it takes in the name of national security to preserve the status quo. But if the US benefits who pays? Savers, pensioners, pension funds and holders of capital stock. As was noted at the outset – Rob Kirby does not mince words.

But now a huge scandal has erupted that has at its heart manipulation of LIBOR that has an impact on trillions of dollars of loans and derivatives. Barclays could not be the only manipulator as there are upwards of 20 banks involved in the setting of LIBOR. Criminal investigations are underway. Lawsuits are underway that could threaten the viability of the large banks at the heart of the LIBOR scandal. The fact that the scandal was revealed suggests that someone or some powerful company may have blown the whistle because it was to their disadvantage.

A rise in interest rates would not be in the interest of the US Treasury or for the banks at the heart of the LIBOR scandal because of their huge holdings in derivatives. Yet the mere breaking of the scandal could start an unravelling that plays out over time. And as the scandal unravels the markets would be at risk and it may eventually overshadow the Euro crisis.

copyright 2012 All Rights Reserved David Chapman

General Disclosures






end

And now let us head over to the USA where our first announcement of the day at 8:30 am was news that the second quarter GDP came in at 1.5% slightly above expectations of 1.4%





(zero hedge)


Q2 GDP Beats Expectations As Historical GDP Data Revised

Tyler Durden's picture





US Q2 GDP printed at an annualized rate of 1.5%, just slightly above expectations of 1.4%, and a 25% drop from the Q1 rate of 2.0%, with personal consumption plunging as a key contributor from 1.72% to just 1.05%, and government once again being less and less a detractor from "economic growth." Inventories "added" 0.32% to GDP, a number which in Q3 GDP will subtract from economic "growth." Now whether this headline number is bad enough for the Fed to decide on more QE, is up to Hilsenrath to decide. But in a Bizarro world in which only horrible data boosts the market, today's modest beat will likely not make the market happy, nor sellers of newsletters in which the only strategy is hope and prayer. And just as important, today the BEA revised historical GDP data retroactively. Of note 2010 GDP was revised from 3.0% to 2.4%, while Q3 2011 GDP was revised from 3.0% to 4.1%, indicating that the slowdown we are experiencing is in fact far worse than previously expected. It also shows that HFT trigger buying or selling on GDP data is completely meaningless as today's data will be revised violently higher or lower in a year, making it completely irrelevant.
Q2 GDP breakdown:
Historical revisions:

end

Hilsenrath, the mouthpiece of the Fed has now spoken and in his words, the GDP is worse than expected.
Thus expect some QE III on Aug 2.2012 when the Fed delivers its FOMC report.

(Art Cashin at UBS has also affirmed that Hilsenrath is the mouthpiece of the Fed. He also states that his counterparty at the ECB is Greg Ip and we will be in future commentaries reporting what he states)

Now we hear from Hilsenrath on the GDP numbers...

(courtesy, zero hedge/Hilsenrath/WSJ/)




Hilsenrath Has Spoken: GDP Is Worse Than Expected After All, "Won't Constrain Fed"

Tyler Durden's picture





Just after the GDP number was released, we joked that the only opinion on the sub-standard Q2 US economic growth that matters is that of Fed uberchairman Jon Hilsenrath:
Turns out we were not joking: the Fed mouthpiece has just released his take on the GDP. His bottom line: Inflation Data Won’t Constrain Fed. In other words, the Fed ignores the modest beat to expectations, and has given the green light after all.
From Jon:
GDP Highlights: Inflation Data Won’t Constrain Fed

A few quick thoughts on GDP report out this morning:
  • Key price indexes are uniformly running below the Federal Reserve’s 2% objective. The personal consumption expenditures price index was up 1.6% from a year ago, thanks in part to falling gasoline prices. This is the price index that the Fed watches most closely, more so than the consumer price index produced by the Labor Department, which is running a touch higher. Excluding food and energy, the PCE price index was up 1.8% from a year ago. The Fed watches this ex-food-and-energy index to get a read on underlying inflation trends. For the quarter at an annual rate, the PCE price index ran at 0.7% and excluding food and energy it ran at 1.8%. An alternate measure, the “market-based” price index, is also running below 2%. This is ammunition for Fed officials who want to act right away to spur growth. Not only is growth subpar, and the job market stuck in the mud, inflation is also running below the Fed’s long-run goals.
  • National defense spending contracted three quarters in a row. The winding down of two wars, it seems, is having a short-term negative impact on growth, though it is certainly in everyone’s interest in the long run that the nation not be at war. Of course budget cuts are also part of this story.
  • Business investment ran at an 8.5% annual rate in Q2. Not bad, despite all of the uncertainty business leaders express about the world. That includes 7.2% in the all important equipment and software category.
  • With very little fanfare, housing investment has been growing for a full year and went at a double digit pace in the first half of 2012.
  • Final sales of domestic product — a measure of how the economy is doing when you take out inventory swings – up at a 1.2% rate in Q2 and averaging a 1.7% rate since 2011.That’s really substandard for a recovery.
And there you have it: the central planners' parrot has squawked.


end


We now have more Americans on Foodstamps.  The total has now risen to 46.5
The total on disability:  8.7 million Americans.

(courtesy zero hedge/BLS)



46.5 Million Americans, Record 22.3 Million US Households, On Foodstamps; 8,753,935 On Disability

Tyler Durden's picture





America's transition into a welfare state continues, as May saw a new all time high number of American households, 22.3 million to be exact, enter technical poverty and collect foodstamps. At the individual level, 46.5 million Americans lived off foodstamps, a 222,157 increase in the month, or nearly three times the number of people who found jobs in June according to the BLS. Next month this too will be a record, as it is currently just 17,367 before the previous all time high set in December of 2011. The good news, and we use the term loosely, is that the average benefit per household rose from all time lows of $275.82 to $276.76. Surely, the bottom is in and just like housing, there is on blue skies ahead.
And before we go, here is the total number of Americans on disbility: 8,753,935.
Combined foodstamp and disability recipients: 55,250,723


end

The consumer is 70% of USA GDP and as such a very important number.
Again last month, the Michigan consumer sentiment index decreased from 73.2 to 72.3 last month.

Michigan Consumer Sentiment Index Decreased to 72.3 in July

Jul 27, 2012 9:55 AM ET

The Thomson Reuters/University of Michigan final index of U.S. consumer sentiment for July fell to 72.3 from 73.2 at the end of last month.
Economists projected the gauge to hold at the preliminary July reading of 72, according to the median estimate in a Bloomberg News survey. Projections of the 63 economists surveyed ranged from 69 to 75. The index averaged 64.2 during the last recession and 89 in the five years before the 18-month economic slump that ended in June 2009.A report from the Commerce Department today showed the economy expanded at a 1.5 percent annual rate in the second quarter after growing a revised 2 percent from January through March. The pace of consumer spending was the weakest in a year.
-END-







A few months ago, Wolf Richter broke the story on the plight of Cyprus with their bad and fraudulent
mortgage practices together with their hopeless banking mess. Cyprus banks have invested heavily in Greek bonds which will default.  It seems that Cyprus is in need of 15 billion euros with an economy of 18 billion euros.  A lot of money was made in Cyprus and that many has left for Switzerland leaving debts behind.
Cyprus is asking Germany, Holland, Finland for their kind support.

Special thanks to Wolf Richter of www.testosteronepit.com for this terrific commentary on the plight of Cyprus.



The Ballooning Cyprus Fiasco

testosteronepit's picture





Wolf Richter   www.testosteronepit.com
The government of Cyprus is desperate. It is deliberately slowing down paying its contractors. “We are talking about final payments and settling of bills for work that was carried out and passed through the inspections, and for which an order was issued for payment,” said Nicos Kelepeshis, head of the Federation of Associations of Building Contractors. 120 days, and more. The government also told inspectors to delay inspections in order to slow down payments.
In June, Cyprus had held its nose and requested aid from the Troika, those despised austerity thugs made up of the European Union, the European Central Bank, and International Monetary Fund that have, in Cypriot eyes, wreaked havoc in neighboring Greece. And this week, once again, these despised Troika inspectors are swarming over Cyprus to find out how much money the banks would need to deal with their putrefying balance sheets, and how much the government would need to stay afloat.
If a deal is reached—sticking point are the conditions, namely structural reforms, budget cuts, privatizations, and tax increases—the first bailout money might arrive in October. But Cyprus is bankrupt now! So, the government is raiding the “semi-state“ sector. Last week, it pilfered €101 million from the Cyprus Telecommunications Agency, €50 million from the Ports Authority, and €24 million from the Human Resource Development Authority. Now it’s going after the pension fund of the Electricity Authority to get a couple hundred million. This place is seriously out of money.
At first, it was just a funding crisis. After markets closed the door, Cyprus went begging to Russia and got €2.5 billion. That money has now evaporated.
Then it was the banks. In June, the Bank of Cyprus needed €500 million and Popular Bank €1.8 billion—in total €2.3 billion. A black hole in their regulatory capital had developed when they were forced to write down the defaulted Greek government bonds on their balance sheets [“We owed it to our children and grandchildren to rid them of the burden of this debt,” sneered Greek Finance Minister Evangelos Venizelos at the time as private sector investors got whacked with a 74% loss. Read....“A harder Default To Come”].
But the banks were joking about the €2.3 billion. They’ve also been eviscerated by Greek corporate debt—40% of the loans on their balance sheets. They’re turning to trash as Greece slithers deeper into its fifth year of recession. Then there are the loans left over from the real estate bubble and title-deed scandal that the banks themselves colluded in. An estimated 130,000properties are without title deeds—in a country with only 838,000 souls. Those who think they own these properties don’t legally own them. A nightmare gumming up the future of the country [I warned about it in October.... Another Eurozone Country Bites the Dust].
And so in June, as bailout talks with the Troika took off, the €2.3 billion were declared a joke. “Eurozone sources” mumbledsomething about €10 billion, including a government bailout, which hadn’t needed one before.
Cyprus has been trying to triangulate its bailout negotiations by adding China and Russia. They’re ogling the vast natural gas reserves found off the coast. Awash in natural gas, Russia is the major supplier to the EU through a system of pipelines, and it wants to keep control over its export market. China wants to grab resources around the world. And on July 6, Russian Finance Minister Anton Siluanov confirmed, “Yes, we have a request from Cyprus. They’re looking for €5 billion.”
So since Monday, the despised Troika inspectors have been plying their trade. And it didn’t take long for it to seep out that the banks alone would now need a bailout of €9 billion—a stunning amount for the banks in such a tiny country. Plus, the government would need €4 billion. For total package of €13 billion.
But the €9 billion for the banks is likely to grow even further—because bad debt isn’t bad debt in Cyprus. Under Cypriot rules, loans on the banks’ books that are over 90 days past due aren’t considered bad debt, and no losses have to be recognized, if the loans are secured. Hence, a mortgage that is in default doesn’t have to be written down because the bank might eventually obtain the property, which takes many years, and then sell it to recuperate its money. But property values have collapsed. And worse: the title-deed fiasco resulted in banks securing two or more mortgages with the same property—and only one of them has any value at all. But they’re all “secured”; hence, none have been written down.
The Troika inspectors are circling. They want those loans written down. Government and banks resist. The outcome of this clash will be a big factor in determining the bailout amount for the banks. And the government bailout of €4 billion will certainly rise. The first time is only the beginning—Greece, if it were to stay in the Eurozone, would require a third bailout. Standard and Poor’s tacked on some extra billions and came up with €15 billion. 83% of GDP. €18,000 ($22,000) per resident. Another bottomless pit. Is that why Russia and China haven’t jumped into the fray?
In the run-up to this crisis, people have gotten rich and taken their money to Switzerland. What’s left is debt. But instead of letting it blow up and disappear, wiping out creditors and equity holders in the process, it’s being replaced with new money, but from taxpayers elsewhere: 29% from Germany, 22% from France, even from teetering Italy and Spain....
But Spain is on the brink. The word is out: default. Or bailout. Read.... The Extortion Racket Shifts to Spain.
And here is a great perspective by George Dorgan, a portfolio manager in Switzerland who used to live in Italy. Read.... Italian Euro Exit: why it might come in 2-3 years and why it will help the Eurozone and Italy.


end


Well that about does it for the week.
I can assure you that next week will be a roller coaster affair so
put on your seat-belts.

I wish you all a grand weekend and I will see you late Monday night

Harvey

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