Von Greyerz - Bank Failures, Disorder, Massive Panic & Gold

"The banking world is on the way to bankruptcy here. We’ve talked about the leverage in the banking system, but people don’t seem concerned about it. What we are going to see, one day, is when these dominos start falling, there will be panic.

Banks are supposed to come down to 20 times leverage. There is only one bank of the top twenty-five banks in the world today that is below 20 times leverage. Every other bank is above. 20 times leverage means that if they only lose 5% on their loan book, they have lost their capital.

I will bet you that virtually every bank in the world has a bad debt position which is worse than 5% of their assets. And if you look at an entity such as Deutsche Bank, do you know what their leverage is? 62 times. It means that if they have a bad debt position of 1.5%, the bank is bust. Deutsche Bank is bigger than German GDP. So, if something happens to Deutsche Bank, Germany goes under.

Credit Agricole, the largest French bank, has 63 times leverage. This is absolutely frightening. This situation is untenable. Some of these banks will not survive. Of course, central banks are aware of this, governments are aware of this, and they will print money. Will they print in time? Maybe for some banks, but some banks will not survive, I’m sure.

The two big Swiss banks combined total 7 times Swiss GDP. The banks have a leverage which is unsustainable, and in many cases are bigger than the countries themselves.

So, central banks, being aware of this, are going to keep accumulating more and more gold. And that trend will accelerate because central banks know that buying bank debt or government debt is a bad move. So, all of these dominos that will fall are going to accelerate the trend into gold.

The IMF came out with a report yesterday saying we are very near a eurozone breakup, a disorderly one. That would create panic in the market. There would be an even greater flight of deposits out of the banking system which would make the situation even worse.

The IMF is coming out with statement after statement that should frighten the world. Today they said that European Banks will have to sell roughly $3.8 trillion in assets. In reality, it could be well over $10 trillion in the next couple of years.

We are in a mess, Eric, and the IMF recognizes this. The central banks know this as well, but for right now they are trying to tell the markets, ‘We are not going to print any more money.’ They will print money. The know they will print money. 

The IMF, by making these statements, is saying central banks are going to have to print money, just to sustain the financial system. Improvements in the economy are unthinkable, things are going to get a lot worse.”

at http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/4/18_Von_Greyerz_-_Bank_Failures,_Disorder,_Massive_Panic_%26_Gold.html

The G-20 Is Failing

"The leaders of the G-20 countries have played a crucial role in rescuing the world from the brink of economic and financial disaster. They agreed to an impressive agenda in Washington in November 2008, and at their April 2009 London summit committed themselves to an integrated strategy to rescue the world economy from the brink of depression, to reform international financial regulation, and to transform the governance of the world's most important global financial institutions.
But now the G-20's accomplishments are in danger of unraveling, because these countries have failed to implement their agreements on reform of the International Monetary Fund (IMF). These reforms would enhance the role of the emerging market and developing countries, and help to cement the commitment of those countries to the global system. A failure now would produce multiple black eyes for the G-20 and represent a setback for the still-precarious world economy.
The challenge for the G-20 is to live up to its subsequent pledge in Seoul in November 2010 to implement a two-step reform of the IMF's governance. The first step would double IMF quota subscriptions, which are the core financial resources the IMF uses to lend to other members. Although this step would not significantly increase the overall financial resources of the IMF due to offsetting reductions elsewhere, it would modestly redistribute voting power away from the advanced countries and toward fast-growing emerging market and developing countries.
In addition, the Seoul agreement included the adoption of an amendment to the IMF charter that would redistribute seats on the IMF's executive board away from Europe. The G-20 leaders promised that this combined first step would be implemented by mid-October of this year, when the IMF's annual meeting will be held in Tokyo.
The second step agreed to in Seoul called for a revision of the formula used to adjust IMF quota shares by January 2013. This revision would be followed by a substantial increase in IMF quota subscriptions and overall financial resources by January 2014. This also promises to further increase the IMF voting power of emerging and developing countries, which was a key to winning their agreement to the overall reform package. Many of those same countries are now being called by the Europeans and by IMF Managing Director Christine Lagarde to temporarily lend to the IMF to protect Europe and the rest of the world from an escalation of the European sovereign debt crisis. One would think they would be more inclined to heed those calls if prospects for the reforms' implementation were better.
Unfortunately, and potentially tragically, the G-20 countries have dropped the ball on implementing the IMF governance reforms. Although October is still months away, it now looks like the Seoul commitments will not be met on the original timetable. None of the elements of the first step in the Seoul agreement can be implemented unless they all receive the necessary approvals. The crucial element is the amendment of the IMF charter: It requires acceptance by 60 percent of member countries (113 of 187) that also hold 85 percent of total IMF votes, which are weighted according to IMF quotas.
As of April 5, only 66 members with 46 percent of the votes had accepted the amendment. Crucially for the credibility of the G-20, only nine of the 19 core members of the G-20 have acted positively. The 10 missing G-20 countries have 36 percent of the votes in the IMF, 3 percent short of the remaining 40 percent needed to pass the amendment.
The United States, which has the largest IMF quota, is one of the major culprits behind the delay. Implementing the first step in the Seoul agreement requires formal approval by the United States because it holds 16.7 percent of the votes. But the Obama administration has declined to submit the necessary legislation to Congress, apparently fearing that doing so would ignite a fiscal battle that it does not want in an election year..."

at http://www.piie.com/publications/opeds/oped.cfm?ResearchID=2089&utm_source=feedburner&utm_medium=%24%7Bfeed%7D&utm_campaign=Feed%3A+%24%7Bupdate%7D+%28%24%7BPIIE+Update%7D%29

Greek PM says third bailout may be needed

"The Greek prime minister Lucas Papademos has conceded that the crisis-plagued country could require a third bailout only weeks after it secured a second package of rescue funds following months of hand-wringing in Brussels.
Athens may have received the biggest bailout in history but another lifeline could not be ruled out, the technocratic leader said in an interview. So far, the EU and International Monetary Fund have committed a total €240bn (£200bn) to the near-bankrupt nation.
"Some form of financial assistance might be necessary but we have to work intensely to avoid such an event," Papademos told the Italian business daily Il Sole 24 Ore..."

at http://www.guardian.co.uk/business/2012/mar/30/greek-pm-papademos-third-bailout

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European Central Bank urges more resources for IMF

"Eurozone finance ministers raised the combined lending capacity of their two bailout funds to €700bn from €500bn on Friday after many G20 countries made a stronger eurozone firewall a pre-condition for committing more money to the IMF.

"These resources (for the IMF) would be for the general resources of the IMF, not for any specific fund or for any specific account for Europe," Mr Constancio told a news conference after a meeting of European Union finance ministers and central bank governors in Copenhagen.

"It is a recognition that, in general, for the world economy, the IMF needs to have more resources if we think ... what in a future emergency situation could be the needs of the IMF to fulfill its role anywhere in the world," he said.

Finance ministers from the world's 20 biggest developing and developed economies, the G20, meet in April in Washington to discuss an increase of resources for the IMF.

"That is very important to understand - this linkage with the European situation has in my view been overplayed and exaggerated by some," Mr Constancio said..."

at  http://www.telegraph.co.uk/finance/financialcrisis/9178020/European-Central-Bank-urges-more-resources-for-IMF.html

BRICS Threaten To Withhold IMF Funding Unless They Get More Voting Power

"The BRICS - Brazil, Russia, India, China and South Africa - have agreed to provide credit to each other in local currencies. Officials say the deal will facilitate economic growth in times of crisis.
­The currency swap deal is aimed at promoting trade and investment in local currencies as well as to cut transaction costs. It’s also seen as a step to replace the dollar as a reserve currency in trade between BRICS.

“The idea is in line with many interests and economic exigencies in the world economy,” Yaroslav Lissovolik, the chief economist at Deutsche Bank told RT. “The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies. Clearly the world needs more reserve currencies.”
The deal would also increase the BRICS influence on the international arena and will make their cooperation less sensitive to sanctions from the West, experts say.
"The BRICS countries are in the first rank to do the job that international financial system now needs. What the BRICS said was a very welcomed wake up call," John Kirton, the Co-Director of the BRICS Reasearch Group told RT.
Russia and China have been trading in the rouble and yuan for several years, now Russia plans to expand local currency settlement with India.

“With China it took us three years to (evolve) from initial conversations to trading in local currencies,” Vladimir Dmitriev, the chairman of Russia’ s VEB told reporters. “I think we will meet similar terms with India”.
Meanwhile the swap requires a lot of technical work by each country such as the synchronization of national banking legislation, according to Mr. Dmitriev.
The BRICS countries are also going to announce plans on a joint development bank which is considered a possible rival to the World Bank and the IMF. If established, it would function as a lending agency and would provide finance for joint BRICS projects..."

at http://www.businessinsider.com/brics-demands-more-imf-voting-power-2012-3

On Spain’s coming under the watchful eye of the Troika in 2012

"This is a thematic post, I am also putting outside the paywall because there is a lot of chatter today about Spain needing to tap EU bailout funds this year. The messaging in the analyst community follows the thematic prediction I made in October 2010 about periphery countries missing targets and this creating a renewed crisis in the euro zone. Just to quote briefly to fix on how this will proceed, I wrote On the Troika’s Coming Occupation of the Periphery:

Translation: continue fiscal austerity until you reduce your deficits significantly. If the depression this creates causes you to miss your fiscal targets, redouble your efforts under the watchful eye of the Troika.
Portugal is out making additional cuts and increasing taxes (link in Spanish). Nevertheless, Olli Rehn has already indicated that Portugal runs the risk of not making its 2011 fiscal targets (link in Portuguese). Even Spain, not under an IMF program, will miss fiscal targets.
So, it is only a matter of time before what is happening in Greece happens at a minimum in Portugal and probably in Ireland as well.

While Ireland and Portugal are already in IMF programs, the worry now is that Spain will follow. Let me break down the different threads briefly. Here are the principal stories I am hearing..."

at http://www.creditwritedowns.com/2012/03/spain-bailout-2012.html

US grip on World Bank challenged

"The Nigerian finance minister, Ngozi Okonjo-Iweala, and former Colombian finance minister, Jose Antonio Ocampo, are reportedly being put forward to replace Robert Zoellick who is retiring.

Ever since the World Bank was established at the Bretton Woods conference after the Second World War, an American has always led it. The understanding also upholds the traditional that a European always heads the International Monetary Fund, created in the wake of the same conference.

Leaders of developing economies have called for a break in the tradition but have so far failed to get enough support from other countries.

Sources told Reuters that Mr Okonjo-Iweala and Mr Ocampo have gathered support from key countries such as South Africa and Brazil.

Mr Okonjo-Iweala was managing director of the World Bank until last year when he left to become Nigeria's finance minister. Mr Ocampo was the former under-secretary for economic and social affairs at the United Nations (UN)..."

at  http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9158530/US-grip-on-World-Bank-challenged.html

BRICS bank next step to dollar independence

"The ‘club’ of emerging economies known as the BRICS are strengthening their union. The countries are mulling over setting up a single development bank to promote joint investment initiatives, as well as their domestic currencies.
Brazil, Russia, India, China and South Africa are set to discuss the idea at the coming BRICS meeting in New Delhi on March 29, Financial Times says.
This is mainly to get a louder say in international arena for the“great reserves,” Ivan Tchakarov, chief economist for Russia and CIS countries at Renaissance Capital, told Business RT. “All of these economies, in particular China, Russia and Brazil and less so India are the countries that are not only growing at a significantly faster pace than the developed economies, but they also have a lot of reserves,” he said.
China currently possesses the biggest foreign exchange reserves in the world, standing at $3.2 trillion. This compares with Russia’s $505.4bln and $355.1bln in Brazil, which ranks them the 4th and the 6th on the list.
The setting up of such an international financial institution will pave the way for a bigger voting for the BRICS countries in international bodies such as the IMF and the World Bank, Tchakarov added.
In terms of priority, infrastructure projects would most benefit all the BRIC members, as it remains well below the world standards in all of the states, Tchakarov said.
The move comes after media reports were saying Brazil, Russia, India, China and South Africa were seeking distance themselves from the US dollar. Mutual credits in so-called “intro BRICS currencies” through such a bank for development could really help them“elevate their international status.”

at http://rt.com/business/news/brics-set-bank-development-004/

Portugal will be the next Greece, predicts Mohamed El-Erian

"Portugal will follow Greece to be the next eurozone country to falter, according the boss of the world's largest private sector bond fund.
Like Greece, it will need extra cash from Brussels to stop the country going bust, Pimco chief executive Mohamed El-Erian told the German magazine Der Spiegel.
Asked whether he expected Portugal to have become the next Greece by the end of this year, he said: "Yes, unfortunately that will be the case."
Portugal's economy is forecast to contract 3.3% this year as the government implements austerity measures under a €78bn (£65bn) bailout from the European Union and International Monetary Fund.
El-Erian, who is also co-chief investment officer of Pimco, said he expected Portugal's first bailout package to be insufficient, prompting it to ask the EU and IMF for more money.
"Then there will be a big debate about how to split the burden between the EU, creditors, the IMF and the European Central Bank. And then financial markets will become nervous because they are worried about private sector participation," he said..."

at http://www.guardian.co.uk/business/2012/mar/18/portugal-next-greece-mohamed-el-erian

IMF and ECB Bailouts "Created" Huge Bondholder Losses; More Haircuts Coming Up

"Please consider the question How much did the IMF, ECB and EU bailouts harm Greek bondholders?

The Greek CDS auction results are in, and the implied recovery rate on the Greek bond swap is 21.5 percent – so a 78.5 percent loss. What isn't widely appreciated is that most of this loss was created by the bailouts. That is of course true in the sense that the Greek bailouts have delayed the process of adjustment in Greece, so it continued on an unsustainable path for longer meaning its eventual defaults are larger.

And no one thinks the new situation is really sustainable – new Greek bonds are pricing in of order a 75 per cent further write-down. But that's not what I'm referring to here. I mean something much simpler: because Greece was bailed out with loans from the IMF, ECB and EU that have been treated as senior to the bonds of the private sector (i.e. any losses were to be experienced first by the private sector – all loans to the IMF, ECB and EU were to be repaid with a higher priority than loans to the private sector), that meant that the losses to those Greek private sector bondholders that ended up taking losses were much greater.

The bailouts mean that those bondholders that eventually take losses take a 75 per cent loss rather than a 33 per cent loss – they are badly harmed by the bailout process. Anyone with bonds in another eurozone state in receipt of bailouts had better beware. Portugal, anyone?

More Haircuts Coming Up

The market is already predicting another 75% collapse in Greek bonds. Ultimately any fools that threw money at Greece (without CDS protection) will lose every cent, except of course the idiots who insisted on the bailouts in the first place: the ECB and IMF.

Portugal is now in the batter's box and Spain is on deck. Both will fail, just as Greece did. The only thing that remains to be seen is how much money the ECB throws at those problems before both blow up in the ECB's face..."

at http://globaleconomicanalysis.blogspot.com/2012/03/imf-and-ecb-bailouts-screwed-greek.html

BRICS prepares world banking revolution

"RICS member-states are preparing a world banking revolution. They are planning to nominate an alternative candidate for the post of the Chairman of the World Bank for the first time in history. BRICS also demands redistribution of quotas in the International Monetary Fund in the near future and intends to study India’s initiative on creating a South-South Bank.
Representatives of Brazil, Russia, India, China and South Africa proposed a reform of the world financial system at their meeting in Mexico City which took place during the conference of G20 finance ministers and heads of central banks.
BRICS financiers are annoyed with the private rule that the head of the World Bank is always a representative of the US. They believe that candidates should be assessed based on their merits and not citizenship. BRICS member-states are convinced that it is essential to create competition for the US candidate, either from a BRICS country or from Europe. It has been decided to prepare a declaration on a coordinated position on this subject in the next two weeks. Candidates for the post of the head of the World Bank should be determined by the 23rd of March.
On the 29th of March BRICS leaders are expected to launch the mechanism of coordinating opinions on India’s proposal to create a South-South Bank. It is to become a support institution for countries with developing markets. BRICS member-states will be playing the main role in it, according to the quotas of votes..."

at  http://www.voltairenet.org/BRICS-prepares-world-banking