Reader Asks "Where's the Money?"

Reader Robert at Americans for Limited Government asks an interesting question.

Robert writes ...

Hello Mish

We are led to believe that taxing Cypriot deposits in the amount of 5.8 billion euros will make the banks solvent. I have a question: Why the need for capital controls after "recapitalization"? How can deposits be used for taxation but not withdrawals?

Robert

I believe that's a rhetorical question. Robert knows the answer. Even with the EU kicking in 10 billion euros (a loan not a gift), the money is not there.

If the banks were sufficiently capitalized, there would not be a need for capital controls.

End of the Single Currency in All but Name

Jeremy Warner at the Financial Times has an interesting article on this very subject. Warner says If capital controls are introduced in Cyprus, it is the end of the single currency in all but name.

With the European Central Bank threatening to pull the plug on Monday by denying further liquidity support, and showing absolutely no sign of blinking, Cypriots have little choice in the matter. The present plan is only slightly more palatable than the last. The two most problematic banks are to be restructured, with uninsured creditors taking a 40 per cent hair cut. That gets the Cypriot authorities some of the way towards the €5.8bn they need, or is that €6.7bn? Reports suggest the beastly Troika has upped the ante. In any case, the balance, whatever it might be, is going to come from "taxing" uninsured deposits above €100,000 in other banks in the way originally proposed.

However, the perhaps more widely significant part of the proposal is the planned application of capital controls. This is of course entirely necessary to prevent a further run on the banks the moment they open their doors on Monday. Many Russian depositors are threatening to remove their spoils if they are subjected to any kind of a haircut. This would quickly render these organisations essentially insolvent regardless of the recapitalisations. Almost no amount of capital is sufficient for a bank which has lost the confidence of its depositors.

Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into a national currency, rather than part of wider monetary union. The capital controls will severely limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider eurozone. It would be a bit like telling Scots they can't spend their UK pounds in England. Monetary union is many things, but above all it is about free movement of money and a uniform value wherever it is spent. When these functions are disabled, then you cease to be part of a single currency.

This is precisely what happens in a fractional reserve lending system when faith is lost. And faith certainly has been lost. Why shouldn't it be lost? The entire global financial system would be recognized as insolvent if even 25% of the people tried to get their deposits.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Regrets Pour In; Cyprus Parliament Passes Bailout Plan; Will Her Highness Approve?

The Cypriot parliament passed bailout measures today, but they are not quite the measures that Her Highness, Angela Merkel approves. They are not measures Cypriot citizens will approve of either.

Let's take a look at the present state of blackmail, as passed by Cyprus and reported by the BBC.

MPs in Cyprus have voted to restructure the island's banks - one of several measures to ease the crisis, which has hit confidence in the eurozone. They have also approved a "national solidarity fund" and capital controls to prevent a bank run. MPs did not vote on a key measure - a levy on large bank deposits. They rejected similar moves on Tuesday.

The "solidarity fund" would allow the pooling of state assets for an emergency bond issue, reports the Reuters news agency. These include future gas revenues and some pension funds - an idea that German Chancellor Angela Merkel has strongly condemned.

Ms Merkel had warned Cyprus not to "exhaust the patience of its eurozone partners", reports say.

Businesses in Cyprus have been insisting on payment in cash, rejecting card and cheque transactions. "We have pressure from our suppliers who want only cash," Demos Strouthos, manager of a restaurant in central Nicosia, told AFP news agency.

Our correspondent says he has never seen this much pressure being applied to a member state by the rest of the eurozone community in recent years.

Regrets Pour In

The Financial Times reports Cyprus laments end of way of life

When he was finance minister a decade ago, Takis Klerides helped steer Cyprus into the EU and the single currency, a defining achievement for a once-impoverished island nation that is far closer to Beirut than Brussels.

But on Friday, with Cypriots contemplating the steep price of an EU bailout, Mr Klerides sounded like a man with regrets.

“We found out the hard way that it’s not a family,” he said of the EU, arguing that the bloc’s biggest members “dictate the terms and everyone else falls in line. It’s becoming a dictatorship.”

“The European project is crashing to earth,” Athanasios Orphanides, who until recently served as central bank governor, said in a separate interview in which he dubbed Cyprus’ treatment by European leaders “the bullying of a people”.

Nicos Michaelas, the general manager of an investment company, Demetra Investment, put it even more bluntly: “We expected our European friends to help and they put a gun to our heads.”

Hello Cyprus, Please Meet Reality

Merkel does not give a damn about you, all she cares about is her September reelection prospects and hardball with you helps those chances. But please, don't take it personal.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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German Economist Proposes "One Time" Cyprus-Like 15% Wealth Tax on Italians; Italy Proposes Easing Stability Pact; Is Italy the Next Cyprus?

Once trust is lost it is very slow to recover. For now, much of Europe is acting as if it believes Cyprus is a "one time" thing? But isn't that what we heard about Greece? Who is next? Italy?

In an article on Handelsblatt the chief economist of Commerzbank says: Italy should bring a unique wealth tax.

It is a myth to talk of crisis-strapped states. Even the German Institute for Economic Research (DIW) and the chief economist of Commerzbank, Joerg Kraemer says the numbers suggest a different view.

Kramer relies on surveys of the European Central Bank. Net financial assets of the Italians are 173 percent of gross domestic product (GDP). This is significantly more than the net financial assets of the Germans, which corresponds to 124 percent of GDP, said Kramer for Handelsblatt Online.

"So it would make sense, in Italy for a one-time property tax levy," suggested the Bank economist. "A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product."

Reader Bernd suggests Kraemer means a net tax on all assets not just financial ones, but either way the idea is preposterous. Banks always want bailouts to fall on the backs of private citizens not on banks.

Italy's Companies Face Slow 'Death' as Credit Crunch Deepens

While pondering the above confiscation threat, Ambrose Evans-Pritchard the Telegraph reports Italy's Companies Face Slow 'Death' as Credit Crunch Deepens.

Confindustria, the business federation, said 29 percent of Italian firms cannot meet "operational expenses" and are starved of liquidity. A "third phase of the credit crunch" is underway that matches the shocks in 2008-2009 and again in 2011.

In a research report the group said the economy was caught in a "vicious circle" where banks are too frightened to lend, driving more companies over the edge. A thousand are going bankrupt every day.

Franco Bernabè, the head of Telecom Italia, echoed the warnings, lamenting that firms are literally "dying from lack of liquidity". He called on the Bank of Italy to take bolder action to head off disaster. "The Italian economy is being suffocated. The country must intervene rapidly to reinject funds into the economy", he said.

Late payments have become a chronic problem across the board in Italy, with 47,000 official complaints last year. The research group CGIA di Mestre said half of small companies cannot pay their staff on time.

Loans To Businesses and Households Plunge

Backing up what Ambrose Evans-Pritchard said with hard data, the Italian site Il Sole 24 Ore reports New Fall in Bank Lending to Households and Businesses.

Loans to businesses and non-financial families continue to face strong decrease. In February, according to the estimates in the monthly report of ABI were down 2.84% trend (-2.79% in January).

In 2012 there has been a strong leap in non-payments, up 8.8% compared to 2011. Compared to 2007, the last year before the crisis, the increase is 45 percent.

Total gross non-performing loans amounted to 6.4% in January 2013, up from 5.4% a year earlier (+17.5% YoY). With regard to small businesses, NPLs has more than doubled since 2008, rising from 3% to 7.4%. NPLs in family businesses rose from 7% to almost 12 percent. Gross NPLs totaled 126.1 billion in January.

In the construction sector companies the number of non-payments rose by 10,700 up 80% since 2007.

Italy Proposes Easing Stability Pact

In the "Germany is Not Going to Like This" category, Il Sole 24 Ore reports Italy Proposes Easing Stability Pact while lowering growth estimates and increasing deficits.

The government intends "loosen the constraints of the stability pact to allow the use of further resources."

Italy finance minister Vittorio Grilli says the proposal is to "increase our potential debt of 20 billion per year in 2013 and 2014, to create the cash on hand to pay for" expenses.

In this context, the government cuts economic growth forecasts: GDP in 2013 will drop by 1.3% from a previous estimate of -0.2%. GDP is expected to drop by 1.7% in 2014.

The 2013 deficit was revised up to 2.9% from 1.8%. The minister stressed that the increase of debt of 40 billion, to pay the debts of the government, is the "ceiling."

Reflections on "The Ceiling"

Note the euphemism "create cash on hand to pay for expenses" by going another 40 billion in debt. Also note the increase in debt of 40 billion euros is "the ceiling".

Care to bet? If so, care to bet that GDP estimates will not be lowered again?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Hollande Announces 20 "Confidence Shock" Measures to Support Home Building

Sticking with his economically insane campaign promise to construct 500,000 new homes in 2013, Hollande Announces 20 Measures to Support Home Building.

Advocating a "confidence shock" to revive the building "against the Emergency Economic, social and environmental" the head of state has shown its desire to remove "all obstacles to construction", while there was about 340,000 starts of new homes in 2012, below the target of 500,000.

Housing Starts Insanity

I commented on this once before but it's worth a repeat now that Hollande is hell-bent on forcing his will on the market.

Reader Tim Wallace helps put the insanity into perspective. Wallace writes ...

Hello Mish

I was astounded to see that France wants 500,000 units of housing starts. According to the World Bank in 2011 France had a population of 65.5 million people. This compares to the USA population of 311.6 million from the same source. Therefore France is approximately 21% the size of the USA. For the USA to have an equivalent number of housing starts to population (the people who would get the units) we would need to have 2,380,952 starts!

We know how that would end.

Indeed, we do know how this would end.

The US is currently running about 890,000 housing starts annually, on a seasonally adjusted basis. And Hollande wants an equivalent 2,380,952 starts "for the public good".

US housing is distressed. However, France is in the midst of a bubble now burst, and it is beyond stupid to keep building anywhere in the face of falling demand.

"Confidence Shock Coming Right Up"

Before the election, people assured me Hollande could not possibly be foolish enough to actually follow through on his campaign promises. To them I say, never underestimate what a socialist fool (or any other kind of politician) might attempt to do.

Should Hollande actually succeed at getting developers to build 500,000 new homes even though developer Nexity predicts 280,000-300,000, I can guarantee you there will be a "confidence shock" because home prices will crash through the floor.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Get While the Gettin' is Good

The understatement of the day comes from Fed chairman Ben Bernanke who essentially says: I'm Dispensable.

“I don’t think that I’m the only person in the world who can manage the exit,” Bernanke said when asked at a news conference in Washington if he’s discussed his plans with President Barack Obama.

What Bernanke said is best translated as "I'll get while the gettin' is good. Besides, I really don't have an exit plan in the first place, nor does anyone else."

• What better time to leave when the world has forgotten about your ignorance in blowing the biggest housing and debt bubble the world has ever seen? 
• What better time to leave than when equity and bond prices are back in enormous bubbles?  
• What better time to dump what comes next on Janet Yellen (the obvious next dove Fed chairperson appointee)?

Bernanke's big hope is that he can keep this house of cards from collapsing until January when his term expires, and Yellen takes over.

He claims he is tired and wants out of the public life. He ought to be tired after sponsoring the world's biggest housing bubble then bailing out every "too big to fail bank" in the wake.

For that, he gets the praise of Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, who says "His knowledge and experience is too valuable to let him go."

What a joke.

Hans Nichols, says "Bernanke, a student of the Great Depression, took steps unprecedented in the Fed’s 100-year history to steer the economy through its worst crisis since the 1930s."

If Bernanke was a student of the great depression, precisely what did he learn?

The "cause" of the great depression was not inept policies by the Fed in response to the downturn in 1929 as Bernanke proposes. Rather, the "cause" of the great depression was the debt bubble that preceded it, just as the cause of the global financial crisis was the housing and debt bubbles that preceded the crash.

Bernanke is no savior, nor did he have any clues as the following video proves.



Please play that video, again, and again until you get it.

People are entitled to their opinions, but I am entitled to the "facts". The fact of the matter is the housing bubble was obvious, yet time and time again Bernanke did not see it coming, nor did he understand the severity when the crash did come.

As a self-proclaimed "student of the great depression", Bernanke gets an "F". He did not learn a damn thing. History will not be kind to the man.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Note: Some ATT users (not a fault of ATT) received timeouts on my "Wine Country Conference" link (see below). If you were one of them, please try again. The problem has been fixed.

Wine Country Conference

I am hosting an economic conference on April 5 in Sonoma, California. Proceeds go to the Les Turner ALS Foundation (Lou Gehrig’s Disease).

Please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs for my association with the disease.

To learn about the economic conference with world-class speakers including John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike “Mish” Shedlock, Chris Martenson with guest moderator Lauren Lyster and other Special Guests, please visit Wine Country Conference April 5, 2013

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Denial is Everywhere (About Increasingly Important Things!)

Denial is Everywhere

Not only is denial everywhere, the denials are about increasingly important things. I offer three recent examples:

1. A former Japanese central bank official says "The Positive Impact of the Declining Yen Has Yet to be Seen"
2. Regarding Cyprus, all the eurozone nannycrats say "Not Me!" as Capital Controls Placed with Banks Closed Until Tuesday. Click on the link to see the Best that can happen now. 
3. The French newspaper Le Monde has a "Idea Headline" that states "No, France is Not Bankrupt".

In regards to France not being bankrupt, I beg to differ. In actuality, the entire global financial system is bankrupt.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Hope vs. Reality; Eurozone Downturn Intensifies, Led by Sharpest Drop in French Private Sector Output in Four Years

There are few sure bets economically speaking (especially if one has to put a timeframe on them), but some things come close. One easy call was for a continued implosion in France.

Sure enough the Markit Flash France PMI shows Sharpest fall in French private sector output for four years.

Key points:

• Flash France Composite Output Index posts 42.1 (43.1 in February), 4-year low
• Flash France Services Activity Index drops to 41.9 (43.7 in February), 49-month low
• Flash France Manufacturing PMI unchanged at 43.9
• Flash France Manufacturing Output Index rises to 42.8 (41.8 in February), 3-month high

Summary:

Private sector firms in France reported a further steep decline in output during March. Moreover, the rate of contraction accelerated to the sharpest in four years. This was signalled by the Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, falling from 43.1 in February, to 42.1. 

Dragging the composite figure down was a faster decline in service sector business activity during March. The latest fall was the steepest since February 2009. Manufacturing output was also down markedly, but the pace of decline eased slightly to the slowest in three months. Incoming new business also decreased at a sharper rate in March. Mirroring the trend seen for activity, the latest reduction in new work was the fastest in four years.

Employment in the French private sector fell further during March. The pace of job shedding remained solid, despite moderating to the slowest in three months. Job losses were broad-based across services and manufacturing, and at similar rates.

France Economic Activity vs. GDP



Care to guess where French GDP is headed?

France Drags Eurozone Lower

The Markit Flash Eurozone PMI shows Eurozone downturn intensifies for second month running in March.

Key Points:

• Flash Eurozone PMI Composite Output Index at 46.5 (47.9 in February). Four-month low.
• Flash Eurozone Services PMI Activity Index at 46.5 (47.9 in February). Five-month low.
• Flash Eurozone Manufacturing PMI at 46.6 47.9 in February). Three-month low.
• Flash Eurozone Manufacturing PMI Output Index at 46.5 (47.8 in February). Three-month low.

Summary:

The Markit Eurozone PMI ® Composite Output Index fell from 47.9 in February to 46.5 in March, according to the flash estimate. The decline signalled an acceleration in the rate of contraction of business activity for the second consecutive month to the steepest experienced for four months. With the exception of a marginal increase in January of last year, business activity has fallen continually since September 2011.

Manufacturing output fell in March at the fastest rate since December, while business activity in the service sector suffered the steepest decline since October. Companies also reported that new business levels fell at the strongest rate for three months, dropping at the fastest rates since December and September in manufacturing and services respectively.

Employment fell for the fifteenth successive month, reflecting the need to reduce capacity in line with the ongoing deterioration in inflows of new orders and a further marked decline in backlogs of uncompleted orders.

Comments:

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

“Instead of the eurozone economy stabilising in the second quarter, as many – including the ECB – have been hoping to see, the downturn could therefore intensify in coming months. ... France saw the steepest downturn in business activity since March 2009, rounding off the worst quarter for four years, while Germany looks set to have enjoyed reasonable if unspectacular growth. However, even Germany showed worrying signs of growth fading in March, driven by a return to contraction of its manufacturing sector.”

Hope vs. Reality

Markit economist Chris Williamson wrote "Instead of the eurozone economy stabilising in the second quarter, as many – including the ECB – have been hoping to see ..."

We now know the rest of the story, but the story was easy to predict in advance.

Illusions of Stabilization

It was not only the ECB who was "hoping", but also Markit economist Chris Williamson. Flashback, February 7, 2013: Illusions of Stabilization

In Germany Rebounds but ... I noted a recovery "of sorts" in Germany, a contraction in France at the steepest rate in four years, and a record decrease in services employment in Italy.

Thus, it should be no surprise to see the Markit Eurozone Composite PMI® shows national divergence hits record high.

Yet, in aggregate, the eurozone contraction decelerated with the eurozone composite PMI rising from 47.2 to 48.6.

So, what's it all mean?

Chris Williamson, Chief Economist at Markit offered this interpretation: "The eurozone is showing clear signs of healing, with the downturn easing sharply in January and the region moving closer to stabilisation in the first quarter. ...."

No Signs of Healing

I disagree with Williamson. Those divergences show the eurozone is getting sicker, not healing.

If there was any healing, and certainly if there was any rebalancing, manufacturing and export growth would be picking up in Spain, in Italy, and in France at the expense of Germany.

A quick check of the Markit Eurozone Manufacturing PMI will show that is not what's happening.

Illusion of Eurozone Stabilization

There is no real stabilization and there is no healing. Rather, the policies of Hollande are so disastrous that some output has shifted to Germany and elsewhere, (coupled perhaps with some inventory replenishment and a temporary stimulus-fueled increase in demand in Asia).

Properly rebalancing will require a shift in production from Germany to the rest of Europe as well as a shift towards more consumption in Germany from the rest of Europe. That cannot and will not happen with the destructive polices of Hollande, and the lack of reforms in Spain and Italy.

Moreover, and as I have noted on many occasions, the entire Euro construct is flawed. Until those flaws are fixed, there is only the illusion of stabilization, and that based on more unbalanced growth.

The only thing that has stabilized (for now) is interest rates, and even that won't last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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