Here's my Top 10 links from around the Internet at 11 am in association with NZ Mint.
I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
I'll pop the extras into the comment stream. See all previous Top 10s here.
Apologies for no Top 10 yesterday. Just swamped. Have a great weekend. I've caught up with some extra Dilberts today.
1. What happens when governments stop bailing out banks? - Their credit ratings get cut.
That's what happened on Thursday night for 10 German landesbanks, which are smallish state-owned savings banks in the hinterlands in Germany.
BusinessWeek reports Moody's downgraded the ratings because "there is now a lower likelihood they would get government support."
This is part of the reason why there has been some pressure on the ratings of our banks in New Zealand.
The government's Open Bank Resolution policy, which has yet to be finalised, is designed so bond holders and shareholders are forced to take haircuts if there was ever a problem.
Here's the fallout in Germany to a similarish policy there.
US money market funds are less likely to fund them...
And so it goes on...
Here's Bloomberg:
“Government support for German public-sector banks has become less certain,” the ratings company said in an e-mailed statement yesterday. “Restrictions on the provision of support, due to strict conditions set by the European Commission,” was the other main reason for the downgrades, Moody’s said.
Moody’s removed some of the “extraordinary support” factored into the ratings because a new bank resolution regime allows the German government to impose losses on creditors outside of liquidation. Some Landesbanken, including Landesbank Baden-Wuerttemberg, Bayerische Landesbank, HSH Nordbank AG and WestLB AG, needed bailouts from their owners -- federal states and regional savings banks -- following losses during the financial crisis.
“The downgrade could potentially have an impact on the banks’ funding, especially from U.S. money-market funds,” said Otto Dichtl, a London-based credit analyst for financial companies at Knight Capital Europe Ltd. “More expensive funding may also hinder new business.”
2. A euro sceptic arises - Landon Thomas from the New York Times profiles former EU economist Bernard Connolly and his (now extremely prescient) views on the Eurozone from March this year.
“The current policy of lending plus austerity will lead to social unrest,” Mr. Connolly told investors and policy makers at a conference held this spring in Los Angeles by the Milken Institute, arguing the case that Greece, Italy, Portugal and Spain could not simply cut their way to recovery.
“And one should not forget that of the four countries we are talking about, all have had civil wars, fascist dictatorships and revolutions. That is history,” he concluded, his voice rising above the chortles and gasps coming from the audience and the Europeans on his panel. “And that is the future if this malignant lunacy of monetary union is pursued and crushes these countries into the ground.”
Mr. Connolly has been warning for years that Europe was heading for disaster. As an E.U. economist in the early 1990s, he helped design the common currency’s framework, but then he was dismissed after he expressed turncoat views. In 1998, just months before the euro’s introduction, he predicted that at least one of Europe’s weakest countries would face a rising budget deficit, a shrinking economy and a “downward spiral from which there is no escape unaided. When that happens, the country concerned will be faced with a risk of sovereign default.”
3. What's wrong with France - Now the bond markets are ganging up on France. Here's Cyrus Sanati at Fortune explaining why an apparently tough budget announced last week is not appeasing the bond vigilantes.
He thinks the French are doing far too little and far too late
What has happened to the French economy? The 35-hour government mandated work week surely hasn't helped matters much, but it goes deeper. France has the highest level of government spending in the eurozone at around 54% of GDP. That high level of spending goes to support the generous French welfare state, which is funded through borrowing and high taxes. Those taxes are passed through businesses, making French goods very expensive and ultimately uncompetitive on the world market. Today, around half of the gross labor costs in France go to prop up the French welfare state, while it is just 28% in neighboring Germany, according to MEDEF, France's largest union of employers.
The market was looking for France to finally announce plans to reduce its spending and force through meaningful cuts in its social safety net. Instead, it got a plan where France would try to tax its way out of its problems. Meaningful cuts in government spending, followed by liberalization of the nation's labor laws, will go a long way to solving France's fiscal dilemma. That would require a showdown with the country's powerful unions, something that not even conservative President Nicolas Sarkozy seems to have the stomach for at this point.
4. The real problem - Unfunded entitlement liabilities (such as future pensions and health care costs) is the real problem for America, writes Boston University Economics Professore Laurence Kotlikoff at Bloomberg.
In fixating on economically meaningless measures of official debt, my professional brethren are diverting attention from our biggest policy problem: the ever-growing, enormous and unaffordable bill being foisted on our children.
There is a label-free way to measure this bill. It’s called the infinite-horizon, present-value fiscal gap. It tells us how much money (beyond the taxes projected to be collected over time) would be needed today to meet all our future spending commitments -- including such items as Social Security and Medicare -- without further damaging our children’s economic futures. Like space-time in physics, the fiscal gap is a fundamental concept, not a linguistic illusion.
Based on Congressional Budget Office projections, this year’s U.S. fiscal gap is $211 trillion, or about 14 times gross domestic product. By comparison, Greece’s is 12 times GDP. Germany’s is three times GDP. What’s more, our budget shortfall is growing rapidly. Last year’s value was $205 trillion. So the true measure of our nation’s insolvency grew in one year by $6 trillion, while the supercommittee is charged with saving a trivial $1.2 trillion over 10 years.
My bottom line? If the supercommittee “succeeds,” it will, in fact, fail by doing too little too late. It will win a word game and lose the big game: ensuring the economic well-being of our children.
'5. Entire system destroyed by MF Global' - Zerohedge reprints a letter here from a US broker to his clients saying she is shutting down because she has lost confidence in the US futures and options market because of the collapse in MF Global, which has undermined confidence in how sacrosanct client funds are from broker trading funds.
The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.
The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.
And then she goes on to say this:
I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.
And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.
6. 'What gives you the right to dictate to the Italian people.' - Anti-Euro European MP Nigel Farage has some fun excoriating the Euro elite.
7. America's shift - Gordon Chang writes at WorldAffairs Journal that Barack Obama's less-than-kind comments about China earlier this week signal a new belligerence on America's part towards China.
Chang likes it.
It worries me a bit.
Here's Chang:
a newly confident Beijing has turned both assertive and belligerent, especially since the first months of 2009. Since then, China has harassed American vessels in international waters, carried out unprecedented cyber espionage campaigns, engaged in increasingly predatory trade policies, worked to close off its economy, and opposed vital US initiatives with growing boldness. Senior Chinese military officers have even openly talked about waging a “hand-to-hand fight” with America.
It took the Obama administration a long time to reverse course, but the change in direction, once executed, was both swift and comprehensive. Sunday’s announcement was preceded on Thursday by Secretary of State Hillary Clinton calling Taiwan an “important security and economic partner.” With a few well-chosen words, she publicly challenged Beijing, which seeks to absorb the self-governing island, and supported the democracy of 23 million that was a pariah in Washington for most of the Bush years.
Clinton’s rhetorical shift followed the Pentagon’s announcement last Wednesday of the creation of a new office to implement the Air-Sea Battle concept. Most analysts see this move, which seeks to combine Navy and Air Force assets, as directed mainly against Chinese expansionism.
At this moment, these initiatives might not be fully thought out, but that may be because none of them looked possible a few short months ago. Now, American policymakers appear alive to the possibility that China’s Communist Party is not benign. The first few weeks of November 2011 will probably be remembered as the time when the Obama administration publicly moved away from China-centric policies that were not serving the best interests of the international community.
'7. 'It will be hellish and it's on its way.' - Addison Wiggin at Forbes cites various bears saying a financial crisis is imminent.
"There is definitely going to be another financial crisis around the corner," says hedge fund legend Mark Mobius, "because we haven't solved any of the things that caused the previous crisis."
We're raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out. We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management.
Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world's major banks are tangled up.
8. And it's started in China - Bloomberg reports house prices fell in 33 of 70 Chinese cities in October.
Wenzhou led the decline with a slump of 4.6 percent from September, more than 10 times the average drop, according to data released by the statistics bureau today. A credit squeeze on smaller businesses in the eastern city prompted a visit and pledge of financial aid from Premier Wen Jiabao last month.
China Vanke Co. and Poly Real Estate Group Co. fell more than 2.8 percent, leading a decline in stocks of developers after the report showed new home prices retreated in Shanghai, Shenzhen and Guangzhou. Wen said this month that the government won’t relax property curbs, after raising down-payment and mortgage requirements this year to avert a possible bubble.
9. Don Quixote's phantom airport - El Pais (in English) reports on a public-private partnership airport in central Spain that cost 1.1 billion euros to build and is now bankrupt, having never hosted an unsubsidised commercial flight. And people wonder why Spain and Europe is near bankruptcy...
The airport was built next to a city with 72,000 people in the middle of nowhere. A fast train was built to go through it. The promo video for the airport is below. HT Andrew via email.
The last flight out of Ciudad Real departed on October 29, to all intents and purposes leaving the privately built airport empty. That was the day low-cost carrier Vueling - the last company operating from there and no longer being subsidized by the regional government - pulled out.
After operating for less than two years, the aptly named Don Quijote airport is now filing for bankruptcy with more than 300 million euros in debts. The project was financed by two savings banks taken over by the Bank of Spain earlier this year due to mismanagement: Caja Sur and Caja Castilla-La Mancha.
The airport has a single 4.2-kilometer runway, which, along with air facilities in Málaga and Madrid, is the only one in Spain where the new Airbus 380, the world's largest passenger plane, can land. It also has a capacity to handle 10 million passengers a year, even though last year it received just 55,000 passengers.
10. Totally Clarke and Dawe on Barack Obama's role as US President.
(Corrected and Updated link for #number 5 to correct link here. (HT Peter via email)
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