Monday's Top 10 with NZ Mint: Europe's new plan to bail out banks with taxpayer money; Iceland blocks sale of land to Chinese billionaire; The madness of using vendor finance to deleverage; Dilbert

Here's my Top 10 links from around the Internet at 11.30 am in association with NZ Mint.

I welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

The theme today is bank bailouts in their many forms: money printing to buy toxic bonds, cheap guarantees and mark-to-make-believe rules for valuing dodgy loans. Europe's governments are getting ready for one monster bailout. I wonder if European voters know what's about to hit them.

1. Socialising the losses and privatising the profits - John Ward writes at The Slog that the French and Southern Europeans are keen for a new bailout deal that allows the bankers to either dump their toxic sovereign debt on the European Central Bank or not have to take haircuts on it.

It's the same old tactic of extension and pretension.

And when that doesn't work, politicians agree with the bankers that they cannot let the banks collapse and so instead transfer the debt onto taxpayers' balance sheets.

This sort of thing is eventually being recognised by people on the ground.

That's why there is so much opposition publicly now to anything that looks like a bank guarantee.

Let's hope our own Open Bank Resolution system keeps any bank debts well away from public balance sheets.

HT Chris via email

Here's Ward on the latest machinations emanating out of Europe.

Scared by market attacks on northern Europe, and still lacking any bazooka money, the EU’s key players are secretly putting together a plan to ensure the electors pick up the debt-crisis tab. The plan – which first emanated from Paris – is being scoped out and sold to the major member States by Wolfgang Schauble. It will be discussed at the ESM summit this week.

Basically, the nugget that has gone largely undiscovered is this: although a number of sources know and have reported about tighter lending discipline being forced upon all the banks operating in the euro area, Brussels is secretly dangling a quid pro quo in front of investment bankers – who should be scoring loans properly as part of their commercial duty anyway.

Staggeringly, the deal is this: agree to these new banking rules in full, and we’ll let you off taking any haircut when it comes to ClubMed debt.

I understand the ClubMeds are all for it. Imagine that. The northern Europeans are less keen, because they see this for what it is: looney lender forgiveness as well as sovereign debt forgiveness.

2. And here's the official version - Here's the Reuters version of this story above, just to show it's not just the nutters worried about this. Basically, it's similar to what happened in America in early 2009 when the banks were allowed to not have to reset the value of their assets using market values. They were able to 'mark-to-make-believe'.

And they all wonder why confidence in the US and European banking systems is at all-time lows.

Here's Reuters.

Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday. Discussions are taking place against a backdrop of flagging market confidence in the region's debt and as part of wider negotiations over introducing stricter fiscal rules to the EU treaty.

Euro zone powerhouse Germany is insisting on tighter budgets and private sector involvement (PSI) in bailouts as a precondition for deeper economic integration among euro zone countries. Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from July 2013 - could be withdrawn, with the majority of euro zone states now opposed to them. The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

"France, Italy, Spain and all the peripherals" are in favor of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands." Austria is also opposed, another source said.

3. And yet more taxpayer money to help Euro banks - Here's the Bloomberg version which shows European governments are thinking of reducing fees for guarantees

The European Commission will publish rules on state aid for lenders that may dilute the effect of turmoil in the euro area on the fees that banks have to pay for guarantees on their loans and bonds, said the people who couldn’t be identified because the discussions aren’t public. Under the plans, the formula for setting the fees would reduce the impact of soaring debt- insurance costs for the country giving the backstops, one of the people said.

“Renewed tensions” in financial markets are forcing European Union regulators to extend into 2012 special state aid rules for banks that have allowed governments to inject billions of euros into the industry, said EU Competition Commissioner Joaquin Almunia this month. He said he was planning to “clarify and update the rules on pricing and other conditions.”

4. Now that's an independent country - Iceland has been lauded for its decision to default on its debts rather than try to bail out bank shareholders and bondholders. In reality it didn't have a choice because the debts were way too large.

But voters and the new Icelandic government have been much more aggressive at pushing back against the interests of bank shareholders and bondholders.

If only our government was as aggressive pushing back on the sale of farm land. I'm still amazed the Crafar Farms sale never made it onto the election agenda this time. The OIO's slowness has a lot to answer for.

Bloomberg reports Iceland has blocked a plan by Chinese billionaire property developer (and poet) Huang Nubo to buy 300 square kilometres of land in Iceland's (really, really) frozen north. The last sentence is the cracker. Why would anyone donate US$1 million for an Icelandic-Chinese poet-exchange programme?

Icelandic law “imposes strict conditions on corporations wishing to acquire ownership or the right to utilize Icelandic properties and it’s clear that the company in question doesn’t fulfill any of the requirements,” the ministry said.

Huang planned to invest about US$200 million to build a resort with a hotel, golf course and racecourse, according to an Oct. 26 article in China Dialogue. In a September interview with Bloomberg News, Huang said he was in talks to buy the land for US$8.8 million from a group of farmers and was awaiting approval from the government. Huang is estimated by Forbes magazine to have a fortune of US$1.02 billion.

Huang said his connection with Iceland started 30 years ago when he was studying at Peking University. His roommate and good friend back then was from Iceland and later married a politician. Huang donated US$1 million last year to set up an Icelandic- Chinese poet-exchange program.

5. A definition of banking madness - Bloomberg reports on how European banks are selling assets to raise cash, but are so desperate to get these deals going that they are providing finance to the buyers... HT Alex via Yammer.

European banks, vowing to sell distressed assets as regulators tighten capital requirements, are lending money to buyers to get deals done.

Royal Bank of Scotland Group Plc (RBS) may provide as much as 600 million pounds ($939 million) in debt to help Blackstone Group LP acquire part of a 1.4 billion-pound portfolio of commercial mortgages from the bank after the private-equity firm struggled to get outside funding, three people with knowledge of the transaction said. The deal, scheduled to close within weeks, follows Credit Suisse Group AG (CSGN)’s agreement to finance the sale of $2.8 billion of property loans to Apollo Global Management LLC in December, two people with knowledge of the matter said.

“The use of vendor financing to de-lever defeats its own purpose,” said David Thesmar, a professor of finance at HEC Paris, a business school. “The assets may become safer because the buyer injects equity, but the actual gain in core Tier 1 capital ratio for the bank isn’t as great as if it was purely and simply sold. It shows banks’ deleveraging is going to be tougher than planned.”

6. How frozen the European banking system is - Ambrose Evans Pritchard details in his Telegraph blog just how broken the European wholesale bank funding system now is.

The dam is breaking in Europe. Interbank lending has seized up. Much of the financial system is paralysed, setting off a credit crunch just as Euroland slides back into slump.

The Euribor/OIS spread or`fear gauge’ is flashing red warning signals. Dollar funding costs in Europe have spiked to Lehman-crisis levels, leaving lenders struggling frantically to cover their $2 trillion (£1.3 trillion) funding gap.

America’s money markets are no longer willing to lend to over-leveraged Euroland banks, or only on drastically short maturities below seven days. Exposure to French banks has been slashed by 69pc since May. Italy faces a “sudden stop” in funding, forced to pay 6.5pc on Friday for six-month money, despite the technocrat take-over in Rome.

But more importantly, Ambrose then goes on to suggest the US Federal Reserve prints to buy Southern European government bonds.

Just wait til the Tea Party gets hold of this. American money printed to bail out Greek and Italian taxpayers...brace yourself.

Yikes.

Here's Ambrose quoting some serious people suggesting this:

Nobel economist Myron Scholes first floated the idea over lunch at a Riksbank forum in August. "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about," he said.

This is not as eccentric as it sounds. The Fed’s Ben Bernanke touched on the theme in a speech in November 2002 – “Deflation: making sure it doesn't happen here” – now viewed as his policy `road map' in extremis.

"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.

Berkeley’s Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash,” he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world’s paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent.

One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not

7. The contagion fear sales pitch - Simon Johnson warns at the New York Times against the arguments of banks who say they are too big to fail and must be bailed out to protect the economy.

No responsible official wants the entire financial system to crash; this would be incredibly disruptive to all Americans and potentially lead to a worldwide depression. Knowing this, many people who want bailouts on generous terms use “contagion fear” as part of their sales pitch.

How are we to know if a particular event, like deciding not to bail out a big bank, will lead to contagion that spreads to other financial markets? Contagion is the key issue.

In Europe, the failure of just one large bank can do macroeconomic damage; governments there have let individual banks build balance sheets that are bigger than the country’s gross domestic product. In the United States, we too should fear megabanks; the big six bank-holding companies have become much bigger in recent years and now have combined assets worth more than 65 percent of G.D.P.

8. China's grumpy workers - CNN's Jaime FlorCruz reports on a wave of industrial unrest spreading across China. Even the government is worrying now.

Thousands of workers at the Yucheng Footwear Factory in Dongguan, a manufacturing hub in southern Guangdong province, clashed with police last week to demand better pay. Factory managers laid off 18 employees and cut overtime after a drop in overseas orders --prompting employees to demonstrate at the local government building.

"This is probably the most intense spike in worker activism since the wave of strikes that hit Chinese manufacturers in summer 2010," said Geoffrey Crothall of China Labor Bulletin, a Hong Kong-based group that monitors labor issues in China.

In June, workers at the Toyota and Honda Motor plants in southern China went on strike, halting production and forcing pay hikes. Experts attribute the spike in protests to employers maximizing their shrinking profits at the expense of workers.

"There are a broad range of complaints but they are basically related to being squeezed by their employers who are themselves making less profit," said Crothall.

"Also many businesses in the Pearl River Delta are planning to relocate inland and this is creating uncertainty and anxiety among the workforce."

The specter of large-scale labor unrest worries Chinese officials whose fear of "luan" (chaos) is close to visceral.

"Labor unrest is a glaring reminder to them that their attempts to reduce social injustice and income disparity are not working," opined Crothall.

"They are trying manage social and economic disputes in the usual administrative top-down manner without giving workers a voice in resolving their own grievances. That is why workers have no choice but to take to streets to make their voices heard."

9. Totally great multinational and simultaneous version of Stand By Me at Playing For Change.

10. Totally NSFW after 2 minutes 30 - George Carlin has his say on advertising and consumerism. Topical in the wake of the pepper sprayings and gun fights in the Black Friday riots.

"This country was created by a bunch of slave-owners who said all men were created equal."