You just killed the troika

Bank of England warns of danger to markets from Greece and China
Financial policy committee’s quarterly report also identifies eurozone as source of potential instability in stress-test scenarios for banks

The crisis in Greece, a slowdown in China and the eurozone are the main international risks to the financial system, says the Bank of England, which is concerned that markets could suddenly seize up and a pose a threat tostability.

As the Bank’s financial policy committee – established to monitor risks in the system and chaired by bank governor Mark Carney - published its quarterly update on its assessment of the markets, it said that the annual stress tests on banks would focus on such international risks.

The scenarios will be published on Monday. Last year’s stress tests were more focused on risk from a slowdown in the UK economy and collapse in house prices.

In its statement following its meeting on 24 March, the FPC said: “International and geopolitical risks to financial stability in the United Kingdom persist. Despite recent encouraging signs, the risk of a low nominal growth in the euro area persists.

“There are also risks associated with a further slowdown in China and to some emerging economies as the stance of monetary policy begins to diverge globally. There also remain significant risks in relation to Greece and its financing needs, including in the near term.

“Any of these risks could trigger abrupt shifts in global risk appetite that in turn might lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or sharp adjustments in financial markets,” the Bank said.

Investors are assuming that they will be able to buy and sell assets easily, the Bank said, even though “liquidity in some markets may have become more fragile”.

“This could lead to heightened volatility and undermine financial stability. The committee judges that there is a need for a market participants to be alert to these risks, price liquidity appropriately and manage liquidity prudently,” the Bank said.

Using the US bond market as an example, the Bank said that market movements can be more sudden because trading volumes have fallen.

The Bank has been raising concerns about the potential liquidity risk in the financial system for some time but will now ask fund managers how they would handle a deluge of requests from investors to redeem their cash.

In the UK, the Bank said that risks from the housing market and indebtedness of households have not increasedbut it has been reviewing loans for commercial property, which also formed part of last year’s stress tests on banks. While it is not currently concerned, it might “consider appropriate actions if underwriting standards threaten to evolve in an unsustainable way”.

Carney also wrote to George Osborne to say that the FPC was also looking at identifying “domestically systemically important banks”which could be required to hold extra capital. These are likely to include major building societies.

The governor also said that the FPC was concerned about financial firms’ ability to withstand cyberattacks and would receive the results of tests later this year.

http://www.theguardian.com/business/2015/mar/26/bank-of-england-danger-markets-greece-china-stress-test

Swamped by an underwater home

After the housing collapse derails the American Dream, a cloud of uncertainty hangs over the Boateng family

On a cold Sunday afternoon 10 years ago, Comfort and Kofi Boateng stood with Comfort’s mother and their three children before a quarter-acre parcel in a brand-new subdivision in the center of Prince George’s County.

The place was called Fairwood. They stepped onto Lot 71, an empty stretch of gravel, and closed their eyes and bowed their heads. Comfort raised her hands to the sky.

“We sanctify the grounds with the blood of Jesus,” Kofi said.

The land had once been the site of Fairview, one of the Maryland’s largest slave plantations. Now it was Fairwood, an 1,800-home subdivision that would soon become the richest neighborhood in the richest African American county in the United States.

A decade ago, Comfort and Kofi were at the apex of an astonishing journey they had made from Ghana in 1997, when they had won a visa lottery to come to America. They did not know it at the time, but they were also at the midpoint in their odyssey from American Dream to American Nightmare.

Today, they struggle under nearly $1 million in debt that they will never be able to repay on the 3,292-square-foot, six-bedroom, red-brick Colonial they bought for $617,055 in 2005. The Boatengs have not made a mortgage payment in 2,322 days — more than six years — according to their most recent mortgage statement. Their plight illustrates how some of the people swallowed up by the easy credit era of the previous decade have yet to reemerge years later.

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Eurogroup Meeting Over - Talks Have Broken Down; Risk Slides After Greece Says "Won't Take Orders On Bailout" - Live Feed
Submitted by Tyler Durden on 02/16/2015 - 12:02
UPDATE: *EU FINANCE MINISTERS' TALKS WITH GREECE OVER FOR TODAY, GREECE SAYS WON'T TAKE ORDERS ON BAILOUT

Well that didn't last long. It seems - just as earlier in the week - the ability for either side in this Euro-system death match game of chicken to find any common ground to even start negotiations remains lost:

GREEK GOVT OFFICIAL SAYS THAT "THERE CANNOT BE A DEAL TODAY", EUROGROUP DISCUSSED "UNREASONABLE", "UNACCEPTABLE" DRAFT TEXT INSISTING ON EXTENDING BAILOUT

In fact, reports sya that the text presented was a reversal of last Thursday's agreement... The Germans are now calling for Tsipras to replace Varoufakis at the negotiating table. EURUSD is tumbling and S&P Futures are falling fast.

Greek Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, often in a good-cop-bad-cop manner, have been cruising through the media, lobbing a mix of admirable rhetoric, verbal hand grenades, and down-to-earth explanations. And they have become white-hot media darlings.

So Varoufakis was in Germany to meet with his counterpart, Wolfgang Schäuble, and they didn’t “even agree to disagree,” he said. He urged Germany to help end the “gross indignity” of the Greek debt crisis. The Troika’s austerity program had wasted “too much time, hopes, lives,” he said.

But it’s all about other people’s money.

They’d come to power with a pledge to wipe out half of Greece’s insurmountable pile of debt. Debt restructuring, debt exchange, more haircuts for bondholders, exit from the Eurozone… these are the kind of terms that Syriza party officials have bandied about before and after the election victory.

To show that this isn’t just talk, that the Greeks mean business, the government hired Lazard’s government advisory arm, headed by Matthieu Pigasse, master of sovereign-debt restructurings. And they made sure the media picked it up.

Syriza is also running a highly effective charm offensive. Not just words and smiles – but actions, or at least symbolic actions. It wants to show that it’s different from the prior succession of corrupt, self-serving governments.

And the Spiegel picked it up so that German taxpayers would get the drift: The entire fleet of official cars that prior cabinet members had used would be sold. Among them a custom-made bullet-proof BMW with satellite communications system, acquired for €750,000 by the government of George Papandreou, prime minister from 2009 to 2011 during the heady bailout days. It was last used by Evangelos Venizelos, finance minister during the bailout days and deputy prime minister and foreign minister until the election in January.

Tsipras, who is still driving his Audi A-4 that he drove as leader of the opposition, exhorted his ministers to avoid blowing a lot of money and if possible stick to economy class for official travel. So Varoufakis, who’s ostensibly getting around Athens by taxi or motorcycle, made sure the media depicted him during his whirlwind tour around Europe in economy class.

Georgios Katrougalos, deputy minister of administrative reform and in charge of selling these cars, told the Greek media that “ministers don’t need state luxury cars.” He’ll use his personal car, he said, a classic MG Roadster. Who can’t love these guys that have so much style?

And his personal security? “Why would I need police protection?” he said. “When I notice that someone wants to throw yogurt at me, I’ll resign immediately” – because that would mean, he said, that the people no longer wanted him as minister.

This is the sort of attitude we wish all politicians had. But it’s just part of the government’s charm offensive, where the goal is other people’s money.

So Thursday evening, thousands of Greeks amassed in front of the Greek parliament, not to protest against the government as they’d done in prior years – pictures of violence and fires still resonate through distant memories of the bailout years – but to support Syriza.

But it’s not working.

During the debt crisis years of 2010 to 2012, every time a Greek politician said something untoward about the euro, the Eurozone, or defaulting on the debt – all mild compared to what Syriza’s politicians are propagating these days – European stocks swooned.

I came to call it the extortion racket. Chancellor Merkel, like all successful politicians, governs with one eye on stocks. During the three summer months of 2011, the German DAX, which is the only stock index that really counts in this racket, crashed 30%.

German nerves were rattled. Then, in November that year, Prime Minister Papandreou dared to mention in an exasperated one-sentence comment that he wanted a “referendum” at home; Greeks themselves should decide if they wanted to keep the euro and subject themselves to the umpteenth austerity and bailout plan being concocted at the time. The EU deposed him and installed a caretaker government. Something needed to be done to calm the waters.

Taking down European stocks and bonds, and thereby hurting the wealth of powerful entities and investors has been the sharpest weapon available to the prior Greek governments. And it worked – to some extent.

It resulted in a remarkable socialization of losses. Not that the Greeks benefited. But banks, hedge funds, and other entities were able to unload their toxic Greek bonds onto the ECB, the IMF, and the European bailout mechanism. Together they currently hold 76% of the Greek debt. The remaining private sector bondholders had to take a big haircut. It also ensured that Greek politicians would get to keep their euro-denominated pensions, rather than pensions converted to dwindling drachmas.

If Greece defaults on its debt, it would mostly be taxpayers in other countries, particularly German taxpayers – but also US taxpayers via the IMF – that would eat the losses on deals banks and hedge funds had made a killing on.

Now the financial markets don’t care anymore. Despite Syriza’s financial firebrand rhetoric before and since the election, European stocks had the best January since 2011. The all-important DAX is a hair away from an all-time high.

The only market that has been hit by the pre- and post-election firebrand rhetoric has been in Greece.

Since June last year, Greek stocks have plunged 40%; half of that since early December. Greek bank stocks have been demolished. Now the ECB has cut off one of its funding mechanism, and they’re facing bank runs. The 10-year yield of Greek government debt spiked to 11% a few days ago and now sits at just under 10%, in an otherwise near-zero environment. Financial mayhem is breaking out in Greece, while investors elsewhere are raking in the QE-fattened bucks.

Every time Syriza’s politicians fire a verbal dart, they’re not sinking German assets and banks; they’re sinking Greek assets and banks.

And that’s why neither the ECB, nor the IMF, and least of all the German government show any appetite for officially telling taxpayers in Europe and around the world the obvious, that they were shanghaied into bailing out banks and hedge funds during the last few waves, and that now was the time to begin eating the losses.

Alas, debt that can never be repaid won’t be repaid. That’s the other side of the equation. Whatever “solutions” will be found – Greece’s more or less orderly exit from the Eurozone or some form of politically palatable restructuring of its debt – banks and hedge funds, and their investors, made off with the money long ago. And taxpayers outside Greece are left holding the bag, one way or the other.

The ECB is starting up its own QE, but won’t buy anymore Greek bonds. Its deposit rate is already negative. Other central banks around the world are falling all over each other lowering their benchmark interest rates.

By Russell Napier of ERIC

The PBOC – How to fail in business without really flying

"Terrain seems a bit unstable...and there seems to be no sign of intelegent life anywhere"

- Buzz Lightyear (Toy Story)



"That wasn't flying...that was falling with style"

- Woody (Toy Story)

Another day, another central bank failure. In a world of currencies backed only by confidence, every failure is masqueraded as success. Like the ballet dancer who transforms the stumble into a pirouette, central bankers, knocked to the ground by market forces, smile and pretend that this was all part of the routine. Financial market participants, having bet everything on the promised omnipotence of central bankers, do indeed seem happy to see genius in every stumble. However a fall is a fall regardless of the style of the descent. So when will investors see that the earth is rapidly approaching and that style is just style?

The key for investors today is to see behind the masquerade and the mask, the façade of those putting up a front behind a public face, and be able to tell the difference between the soaring flight of reflation and the perilous fall of deflation. The more attitude you hear from policy makers, the more you can be sure it’s style compensating for the lack of real substance and that this is falling and not flying. And as the attitude becomes more high-handed, the lower the altitude gets. The attitude quotient is rising rapidly.

Two weeks ago we noted the ‘flying’ undertaken by the Swiss National Bank as the market forced them to abandon their exchange-rate target. Deposit rates in Swiss Banks are now at such a low level that investors are better off converting deposits into bank notes and placing them under the bed. The Danish Central Bank has also instituted negative interest rates with the consequence that deposits in Denmark might also fly into paper. As the central bank managed to create over DKK106bn (US$16.3bn) in bank reserves, trying to stop a revaluation of their exchange rate last month, there will be no shortage of banknotes to go round should a ‘bank run’ from deposits to banknotes begin.

Taking interest rates so negative that they threaten a run on bank deposits should not be seen as success --- it is failure. Creating bank reserves at that pace should not be seen as success --- it is failure. The next failure may well be some government-inspired restriction on capital inflows. Well, you could call such restrictions, and risking the liquidity of banks, monetary success if you like, but then you probably also think it’s a success to throw the ball one yard from the touchline.

Last week the Monetary Authority of Singapore was apparently "flying", definitely not falling, when it cut interest rates and tried to devalue the SGD to defeat deflation. The Central Bank of Russia reduced interest rates while defending its exchange rate and, guess what, the currency fell. Most people, of course, would recognize that as simply falling, but as it was Russia you do have to ask did it just fall, or was it pushed ?

You may even have missed the news, that the Costa Rican central bank has just announced that they will be floating the Colon. Those of a squeamish disposition should certainly not try googling "floating colon" but, just take their word for it, the Colon will float. Elsewhere there were examples of more conventional falling, disguised as controlled flying, in the form of cuts in interest rates from Australia, Canada, Egypt, India, Pakistan, Peru and Turkey. The Turkish President has the perfect style for this sport and declared that interest rates had to fall as they were the cause and not the cure for inflation. As our hero himself remarked, ‘Buzz Lightyear to star command, I have an AWOL space ranger.’

So, will failure ever be seen as failure? Well, it will if the PBOC also fails. For we must remember that the most dangerous thing in finance is the thing that never ever moves --- until it moves. A generation of investors has grown up to believe that China can have whatever monetary policy it wants and simultaneously maintain a stable exchange rate. That generation now believes it will see a monetary reflation in China and a stable exchange rate and thus economic gravity defied. There is more evidence every day that China cannot achieve both goals.

Such a dual target might be possible if China ran a large external surplus and had effective capital controls. However, with China reporting a US$91.2bn deficit on its capital account in 4Q 2014 it is fairly clear that China’s capital control regime is not working. In 4Q 2014 the capital account deficit was larger than the current account surplus. Indeed, the total reported value of Chinese holdings of US Treasuries has been declining for over a year, despite regular steady rises in the price of Treasuries, suggesting that China’s current account surplus is at least offset by its capital account deficit. This is a huge change as China’s external surplus, a seeming economic certainty for two decades, has ceased to be.

Easing monetary policy and maintaining a stable exchange rate without an external surplus would be flying indeed. Other symptoms of the nature of this failure are also visible, with the offshore and onshore exchange rate to the USD declining and the price of Dim Sum bonds falling 4% from their November 2014 levels. This combination of a falling exchange rate and rising interest rates are compatible with the lack of an external surplus but entirely incompatible with consensus expectations for monetary reflation combined with a stable exchange rate. Since the PBOC cut interest rates in November 2014 and then yesterday reduced the banks reserve ratio the 12 month deposit rate has risen from 300bp to 465bp! Is this falling or flying? Sources familiar with the PBOC’s plans report to Bloomberg News that a further widening of the trading bands for the Yuan is being considered. Monetary policy is tightening, not easing and the PBOC will respond by jettisoning its exchange rate target. How much style they can muster for the fall only time will tell but this will be falling and not flying.

The PBOC are preparing to fall because of their failure to generate sufficient reflation while simultaneously maintaining the exchange rate with the USD. Something has to give and the result won’t be the exhilarating flight of reflation but instead an initial global deflationary shock that will see exports pour out of China at ever lower USD prices as the Yuan declines. Few will then believe in the omnipotence of central bankers: style over substance may still not have gone out of fashion, but style will just be style and falling, well, that will very much be seen as just falling. Ignoring the rapidly approaching ground and seeing falling as flying brings tranquility of mind but is that what they pay you for?

‘The test of the machine is the satisfaction it gives you. There isn't any other test. If the machine produces tranquility it's right. If it disturbs you it's wrong until either the machine or your mind is changed.”

Robert M. Pirsig, Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values

European nationalists have successfully convinced us, against all logic, that the European crisis is a conflict among nations, and not among economic sectors. Today’s Financial Times has an article discussing the travails of Greece’s new Finance Minister, Yanis Varoufakis as he takes on Germany:

In a small but telling sign of the frosty relations between Berlin and the new Greek government, the German finance ministry last week criticised Mr Varoufakis for failing to follow through with a customary courtesy call following his appointment. Mr Schäuble, meanwhile, has warned Greece not to attempt to “blackmail” Berlin with demands for debt relief.


This is absurd. The European debt crisis is not a conflict among nations. All economic systems— and certainly an entity as large and diverse as Europe— generate volatility whose balance sheet impacts are mediated through different political and economic institutions, among which usually are domestic monetary policy and the currency regime. With the creation of the euro as the common currency among a group of European countries, monetary policy and the currency regime could no longer play their traditional roles in absorbing economic volatility.

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Amid 'turmoiling' stock markets on Friday, CNBC's Simon Hobbs summed up the status quo's thinking on the new Greek leadership when he noted, somewhat angrily and shocked, "The Greeks are not even trying to reassure the markets," seeming to have entirely forgotten (and who can blame him in this new normal the world has been force-fed for 6 years) that political leaders are elected for the good of the people (by the people) not for the markets. Yesterday saw the clearest example yet of Europe's anger that the Greeks may choose their own path as opposed to following the EU's non-sovereign leadership's demands when the most uncomfortable moment ever caught on tape - the moment when Eurogroup chief Jeroen Dijsselbloem (he of the "template" foot in mouth disease) stood up at the end of the EU-Greece press conference, awkwardly shook hands with Greece's new finance minister, and whispered..."you have just killed the Troika," to which Varoufakis responded... "wow!"

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Private Mega TV reported short before 9 pm on Friday.

Eurogroup chief whispered to Greek FinMin’s ear “You just killed the Troika” and that Varoufakis replied with a simple “WOW!”
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