Shorting the Euro

If one considers the euro area debt crisis properly, it should be clear that it is not – at least not yet – a currency crisis. It is a sovereign debt crisis combined with a bank solvency crisis that has the potential to become a currency crisis.

There are two ways in which it can transmogrify into a currency crisis. Firstly, it could become one if the euro area were to fall apart, by which we don't mean a mere splitting off of say Greece and/or Portugal. Such a splitting off of weak peripheral economies would strengthen rather than weaken the currency area. However, if for instance France or Germany were to decide to leave the euro (both 'unthinkable' only a few months ago, but no longer) and return to their national currencies, then the very existence of the euro would become doubtful. Secondly, it could become a currency crisis if the ECB gives in to all the pressure heaped on it and decides to embark on a massive money printing spree to 'save' the overextended fiscal offenders.

Speculators have recently put on a massive record net short position in euro futures:

 


 

Commitments of traders in euro futures: speculators have put on a record net short position – click for higher resolution.

 


 

However, this position is not really sensible at the moment. Here is why: euro area money supply growth has been the lowest in the whole world over the past year, with the true money supply growing at a mere 1.3% year-on-year. This compares with over 15% true money supply growth in the US and 5% in Japan. Why should the euro fall when fewer euros get printed than other currencies? Note that this is not to say that it cannot fall. In the short to medium term currency exchange rates are often driven by other considerations than relative money supply growth. However, the euro even enjoys a slight interest rate advantage over dollar, yen and the pound – one that admittedly is set to shrink in coming months.

There is another reason however why this bet may turn out to be tactically wrong. The ECB and Germany remain firmly committed to their 'no money printing to bail out the PIIGS' stance. In fact, as John Hussman points out this week, there is very little ambiguity in the ECB's statutes. For instance:

 

“The Treaty is very specific in restricting the ECB from assisting individual governments. Article 123 of the Treaty on the Functioning of the European Union prohibits the ECB from providing any type of credit facility to central governments (and specifically "any financing of the public sector's obligations vis-a-vis third parties"). That Article also effectively means that the ECB is prohibited from providing funds to "leverage" the European Financial Stability Facility (EFSF).”

 

There is a lot of pressure on the ECB to alter its stance and we can of course  imagine that ways could be found to circumvent these legal obstacles. The EFSF itself has after all been established on the flimsiest legal pretext imaginable  – the EU based it on a paragraph of the Lisbon treaty that is normally reserved for giving mutual assistance to countries hit by a natural catastrophe, such as an earthquake. This was done to skirt the 'no transfer union'  clause.

Note however that apart from the legal situation and apart from the genuine convictions of the personae dramatis, both Germany and the ECB would stand to lose quite a bit of face by now if they were to relent and give up their determination to find a solution that does not depend on monetary largesse.

Assuming that they will continue to stand firm, what else must someone short the euro keep in mind here?

One important factor is the situation of the euro area banking system. Given that the banks need to increase their core tier one capital ratios sharply, they have begun to sell assets and shrink their balance sheets. National regulators are also contributing to this drive to reduce assets held by commercial banks. As an example, here is a recent directive from the central bank of Austria:


“Following intensive consultations, the Austrian Financial Market Authority (FMA) and the Oesterreichische Nationalbank (OeNB) have devised a set of measures to make the business models used by Austrian banks operating in Central, Eastern and Southeastern Europe (CESEE) more sustainable. These measures will be published as prudential guidelines before the end of 2011.

The package of sustainability-boosting measures is meant to strengthen banking groups’ capital adequacy and to improve CESEE subsidiary banks’ refinancing options as follows:

First, to bolster banking groups’ capital bases, the Basel III rules will be implemented fully as soon as they take effect on January 1, 2013 (the participation capital subscribed under the bank support package will be included in the capital base). Second, as from January 1, 2016, banks will be obligated to hold an additional common equity tier 1 ratio of up to 3%, depending on the risk inherent in the respective business model.   

To promote the subsidiaries’ refinancing structure, credit growth will in the future be conditional on the growth of sustainable local refinancing (comprising mainly local deposits, but also local issuance activity and supranational funding, e.g. by the EBRD or the EIB). In the future, subsidiaries that are particularly exposed must ensure that the ratio of new loans to local refinancing (i.e. the loan-to-deposit ratio including local refinancing) does not exceed 110%”


All of this means that bank lending both in the euro area and the neighboring CEE nations will be reduced henceforth. In addition, there is ongoing deposit flight. In all the 'PIIGS' the true money supply is currently deflating, in some cases at quite astonishing speed as depositors, fearful of the state of the banking system and fearing the possibility that their nation may leave the euro and slap on capital controls, are withdrawing their money. Thus we now see the 'reverse multiplier effect' in action in the PIIGS. Readers should consider our description of the money multiplier effect in part two of our article series on fractional reserve banking (see: 'The Problem of Fractional Reserve Banking, part 2'). It makes a very big difference to the money supply whether money is held in the form of money substitutes, i.e., deposit money inside the banking system, or in the form of currency outside of it.

Lastly, as euro area banks sell off assets denominated in foreign currencies, they repatriate capital, which puts a certain degree of upward pressure on the euro as well. Similarly, their drive to cut down the size of the assets they hold means that they are reluctant to extend new credit. Should the paying back of outstanding credit exceed the extension of new loans, the euro money supply is bound to decrease.

All in all this means that the speculators currently shorting the euro are in effect not betting on what is happening, but on what might happen. The fact that such a large majority of speculators has already sold the euro means that the scope for additional selling is fairly small. If you consider the chart above, it is clear that once the net speculative short position reaches such extreme levels, the market is close to a trend reversal, at least in terms of time. This does not preclude a marked price decline in the time that is left until the reversal happens, but one should be aware that time is growing short.

As an aside to the above, retiring Deutsche Bank CEO Josef Ackermann confirmed once again that Germany's banking establishment actually backs Jens Weidmann's hard line:


“He [Ackermann, ed.] also said on Monday he was against the European Central Bank acting as the lender of last resort to fiscally ailing governments, which would allow it to buy an unlimited amount of sovereign debt, adding he now opposed mutually-backed euro bonds.”


Spanish Legerdemain

There is an old trick governments like to employ when it comes to economic data they don't like. Instead of altering policies, simply change the data! The grand-daddy of this trick is probably US CPI, the calculation of which has been mangled over time to ensure that there will never again be 'inflation'. The main reason for this statistical legerdemain is to keep so-called COLA expenditures from rising too much, i.e. government payments to pensioners and the like that are inflation-indexed. Spain currently doesn't like the fact that its 10 year bond yield indicates the growing danger of default, so it has asked data providers to change the benchmark bond. As the FT reports:


Spain has asked data providers to switch bonds used for pricing its benchmark debt, in an unexpected move that has pushed quoted yields sharply below last week’s euro-era highs.

Just a day after borrowing costs soared in a lacklustre auction, the yield on 10-year Spanish debt, which moves inversely to prices, dropped by about 35 basis points on Friday, mystifying traders.

However, it has emerged that Thomson Reuters and Bloomberg, the main providers of government bond price data, were asked by the Spanish Treasury to change the main quoted benchmark price, from the new 10-year bond launched on Thursday back to an older one.

After the difficult sale of new debt, in which Spain paid the highest yield since 1997 in an issue of 10 year bonds, the Treasury sent a request marked “urgent” on Friday morning, asking the data providers to restore the older bond as the benchmark.

This decision reversed a request made before the auction. The yield on the old bond was trading on average about 35 basis points lower.

“The Spanish have clearly seen yields are higher on the new benchmark and decided to go back to the older one. It is a farce and shouldn’t be allowed,” said one trader.

Another said: “It is a bit of a pantomime. But most traders look at a range of bond yields, so the change would not necessarily have affected us too much. It is a bit odd, though, to request a change.”


We're not really sure what the government hopes to gain by employing this trickery. Bond traders are usually not quite as easily duped as their counterparts in the stock market. In fact, when governments begin to employ such shoddy methods, they only stand to lose what's left of the trust of investors even faster. Alas, as we have often said, the eurocracy is generally masterful at scoring own goals.

Ambrose Evans-Pritchard, who only a few months ago opined that Spain would be able to rescue itself by means of its thriving export industry (an opinion we took issue with at the time), has apparently changed his mind and is now predicting Spain's imminent downfall. It can of course not be denied that Spain's economy is an unholy mess following the collapse of the housing bubble. The Bank of Spain has just taken over yet another failed bank, Banco de Valencia (cost: € 1 billion). Failed banks in Spain are a symptom of the cockroach syndrome: where there is one …

 

Eurocrats Notice Something Is Amiss

On November 16, we posted a missive entitled 'Crisis Eats Its Way Into The Core'. It apparently took the average eurocrat a further five days to notice the same thing. Reuters notes: 'ECB's Stark: suro debt crisis has spread to core'.


“These are very challenging times… The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon," Stark said in a speech to Ireland's Institute of International and European Affairs in Dublin.”

 

In other words, it is actually a good time to sail off into retirement.

The next eurocrat to take note of this recent phenomenon was no other than the living contrary indicator Olli Rehn, which almost provides a good reason to buy French and Austrian government bonds, merely by dint of the fact that he's mentioning it. According to Reuters: 'Debt crisis hitting core of euro zone-EU's Rehn'.


“Europe's sovereign debt crisis is hurting the core of the 17-country euro zone, the EU's economic and monetary affairs commissioner said on Monday, warning there should be "no illusions" about its potential long-term impact.

Echoing other senior EU officials who have said that the lack of investor confidence and rising sovereign bond yields are now systemic across the euro zone, Olli Rehn said Europe's economies could risk becoming irrelevant if they failed to act.

"This crisis is hitting the core of the euro zone, we should have no illusions about this," Rehn told a seminar in Brussels. "Without a dynamic and growing economy, Europe would risk becoming irrelevant on the global scene," he said.


As difficult as this may be to swallow for a powerful bureaucrat like Rehn – who cares about Europe's 'relevance' on the 'global scene'? The US is for instance  'relevant' on the global scene militarily and has nearly bankrupted itself to attain this exalted status. International relevance in short is usually rather expensive, so one is probably better off without it. It seems to us that there are far more pressing problems to worry about. Moreover, Rehn is probably mostly concerned about his own 'relevance'. Imagine showing up at a G-20 meeting as the emissary of an 'irrelevant' region. The horror!

 

Belgium Still Without A Government

Belgium's new prime minister-designate has just offered his resignation before even starting a single day on the job.


“Belgium's squabbling political parties failed to hammer out a coalition deal in weekend talks after more than 500 days without a government in the eurozone country, media reports said on Monday.

[..]

Negotiations on forming a new government have been dragging on for weeks but again ran into deadlock over budgetary differences between right and left-wing parties after they resumed on Sunday, local media reported.  Caretaker premier Yves Leterme and the European Commission have repeatedly called for a deal on a future budget that would bring the public deficit below three percent of gross domestic product by 2012 – rather than the 4.6% now forecast.

The six parties from across the political spectrum are split over how to slice 11.3 billion euros ($15.3 billion) off the deficit next year and some 20 billion in all by 2015.

 

(emphasis added)

Not having a government hasn't been particularly problematic for Belgium up until now. In fact, the lack of a government is a great boon, in  the sense that no new legislation and regulations get added to the existing pile. It would probably be best if all of Europe had only completely paralyzed 'caretaker' governments. Unable to do anything, they would be very effectively prevented from doing additional harm.

The only problem for Belgium is that it is one of the countries representing the 'soft underbelly' of the so-called euro area 'core'. Its public debt is quite high and its bond yields and CDS on its debt have moved up sharply. The fact that the political parties can not agree on a budget probably means that investors are now even more likely to dump Belgian debt. On the other hand, investors must also consider the above mentioned advantages of there not being a government.

 

 

Vestiges of Sanity

 

Occasionally the deafening chorus of 'print or die' that comes from literally every corner these days (see as an example this recent Bloomberg editorial imploring the ECB to 'Take wisdom from Keynes instead of Weimar') is interrupted by a sane voice.

One example worth considering is Raoul Ruparel's critique of the so-called 'Soros Plan' (which involves, what else, money printing and the installation of a transfer union via issuance of eurobonds). In Reply to Soros' plea that the 'ECB must step in to save the euro-zone', Ruparel points out the great many problems this would create. Below are a few pertinent excerpts:


“Without a clear mechanism for winding down the ECB bond purchases, it becomes impossible to imagine a situation where the ECB could end its bond buying programme without causing huge market distortions.

The authors [Soros and Peter Bofinger, ed.] approvingly cite the example of the unlimited liquidity provision given to banks. However, this could equally be used as an illustration of the risks mentioned above. Although the ECB’s unlimited liquidity provision for the banking sector may have avoided a bank run, it simultaneously created a set of so-called ‘zombie banks’. Precisely because of the absence of an exit strategy, these banks have now become reliant on ECB liquidity to survive, while stripping them of the incentive to reform the bad practices and mismanagement which got them into this situation in the first place.”

[…]

It’s true that the yields may not currently accurately represent the economic fundamentals of each nation, however they are a result of the markets trying to price in the domestic and European political risk as well as the structural flaws in the eurozone exposed by the current crisis. Using the ECB to try to ‘correct’ these issues not only damages the price determination mechanism in markets but takes the ECB far beyond its mandate.

Moreover, the German fears over hyperinflation cannot be seen as an anomaly – it is a political reality that goes to the heart of the German post-world war settlement. The day the ECB is turned into a politicised lender of last resort, may also be the day when the Germans start to seriously question whether they wish to be a part of the single currency.

The struggling eurozone countries need to press ahead with economic and institutional reform. But in the longer term it has now got to the point where the eurozone will have to reassess its structure and membership if it is to survive. Having the ECB act as a full lender of last resort will detract from these requirements and may throw up more problems in the longer term; making it ultimately self-defeating.”


This is precisely the crux of the problem. Yes, it would probably be possible to stop the run on euro area sovereign bonds in the short term by printing money. Alas, this would be the first step (or rather the second, in this case) on a slippery slope and it would eventually become impossible to reverse course or extricate the central bank from this policy.

We already see this playing out in the US and the UK, where the central banks have embarked on 'QE' with the result that they can now no longer 'disembark'. Instead, fresh iterations of QE are constantly proposed and implemented. They are in fact now in precisely the same situation faced by the revolutionary assembly of France in the late 18th century: as soon as the effect of the inflationary push provided by the printing press fades, the economy is back at square one and economic contraction resumes. This then tempts policymakers to add yet another dose of monetary heroin. After all, if it didn't work the first time, that must mean it wasn't enough, right? In addition, as we noted yesterday, 'dovish' board members can always point to the fact that final goods prices have not yet risen all that much. This apparent 'absence of inflation' then is held to indicate that there can be no harm in going for additional monetary pumping. At the heart of these deliberations is the conceit that policymakers will always have things under control – alas, a great abundance of historical examples argues otherwise.

 

Euro Area Credit Market Charts

Below is our customary collection of CDS prices, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded. Prices are as of Monday's close. Thing look as tense and unhappy as ever. Notably, our euro-bank CDS index is at a new all time high.

 


 

5 year CDS on Portugal, Italy, Greece and Spain – all just slightly off recent highs and bouncing slightly again yesterday – click for higher resolution.

 


 

5 year CDS on France, Belgium, Ireland and Japan.  CDS on France are back at their recent high – click for higher resolution.

 


 

 

5 year CDS on Bulgaria, Croatia, Hungary and Austria –  new highs for Croatia and Austria – click for higher resolution.

 


 

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click for higher resolution.

 


 

5 year CDS on Romania, Poland,  Lithuania and Estonia – click for higher resolution.

 


 

5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey. Fresh uprisings in Egypt are probably the driver of the strong rise in CDS on Bahrain – click for higher resolution.

 


 

5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns. The recent rise in CDS on the US is probably occasioned by the predictable failure of the 'super-committee' to come up with budget cuts – click for higher resolution.

 


 

Three month, one year and five year euro basis swaps – the rout continues – click for higher resolution.

 


 

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – that's a new all time high for this index – click for higher resolution.

 



 

10 year government bond yields of Italy, Greece, Portugal and Spain – Spanish yields continue to trek higher – click for better resolution.


 



 

10 year government bond yield of Austria, the 9 year government bond yield of Ireland, UK Gilts and the Greek 2 year note – click for higher resolution.

 


 

10 year government bond yield of Italy – presumably building a triangle here – click for higher resolution.


 



 

10 year government bond yield of Portugal – the recent positive 'troika' review has given Portugal a little breathing room, but this still looks like a bullish consolidation – click for higher resolution.

 


 

10 year government bond yield of Spain – another new high – click for better resolution.

 


 

10 year government bond yield of Spain, long term. Stair-stepping higher – click for better resolution.


 


 

Italy's 10-2 spread inverts, now at a negative 10 basis points. This is a very bad sign – click for higher resolution.

 


 

5 year CDS on the debt of Australia's 'Big Four' banks – once again, risk premiums increase – click for higher resolution.


 


 

Addendum:


Our contention that the severe damage recently inflicted on the sovereign CDS market by the eurocracy is creating unintended, but perfectly predictable blow-back has been confirmed by the CEO of Germany's Commerzbank, Martin Blessing. 

As the FT reports:

 

The growing perception of the ineffectiveness of sovereign CDS is likely to make investors in banks increasingly wary of institutions’ exposure to a range of sovereign borrowers.

In response to regulatory and investor concerns about eurozone debt banks have over the past year begun to disclose more details of their holdings of government bonds, but have often done so in a way that tries to highlight net exposure after taking into account any default protection bought through CDS.

Mr Blessing said doubts over CDS were among several reasons for investors’ loss of confidence in eurozone bonds that he warned would “intensify the liquidity bottlenecks” in bond markets. “There are simply not enough investors at the moment that are prepared to invest in most eurozone government bonds,” he said.

Josef Ackermann, Mr Blessing’s counterpart at Deutsche Bank, this month also acknowledged in an interview that sovereign CDS had lost value as a consequence of the agreement with private Greek creditors. “I don’t think you’ll see a [disorderly] default in any country. You’ll always have a voluntary burden-sharing,” Mr Ackermann said.

Bankers including Mr Ackermann as well as politicians have sought to insist that the deal to bind Athens’ private sector creditors into a voluntary debt writedown and bond exchange should not set a precedent. Wolfgang Schäuble, Germany’s finance minister, said on Friday: “For as long as there are no collective action clauses in bond contracts – so for the time being – Greece will remain a unique case.”


In short, the eurocracy has shot itself into the foot by trying to outmaneuver 'evil CDS speculators'. Many of the very banks that are now tottering due to the debt crisis have tried to hedge their exposure via CDS, hedges that have now become highly questionable. Consequently there is now even more selling pressure on peripheral euro area bonds. Well done, Barnier & co!

 

 

Charts by: Bloomberg, Sentimentrader.com


 


 

 

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13 Responses to “Betting Against the Euro, Spanish Legerdemain and Vestiges of Sanity”

  • rodney:

    Yes, speculators shorting the euro are betting on what might happen instead of what is happening. I believe you are presenting a solid case when arguing that this might be a tactically wrong position. However, I am inclined to go along with the currency futures market assessment.

    Think about it; as you said, the only circumstances in which the euro could crash are if Germany were to exit the single currency or if the ECB responds with large scale money printing. But, in the minds of interventionist bureaucrats, what other options are there? We know the real option is restructuring, but as you said, that’s unthinkable for them.

    The latest plan B involving the IMF qualifies as money printing, so the market may be on to something with their short positioning.

    • This is certainly true – but it is a question of time frames as well. In the short term the speculative shorts could be faced with a phase of paradoxical euro strength as euro area banks accelerate repatriation for instance. We have seen quite often that the currency of the region that was at the center of a debt crisis has strengthened for this, or related reasons – see the Yen 1992-1995, or the US dollar in 2008.

  • Floyd:

    Pater said: “In short, the Eurocracy has shot itself into the foot by trying to outmaneuver ‘evil CDS speculators’.”
    ****
    This explains why the Eurocracy engaged in this pretense allowing for the weakening the credibility of souvereign CDS.
    The unintended consequences were written on the wall. One only had to bother read.
    What a folly.
    Only career politician and bureaucrats can miss (or wish away – for a day) such a simple step of reasoning.

    • The EU’s chief financial markets commissar Michel Barnier is an especially misguided figure. An etatiste like few others in the eurocracy, and that is really saying something. He is trying to shoot messengers left and right.

  • jimmyjames:

    There are two ways in which it can transmogrify into a currency crisis. Firstly, it could become one if the euro area were to fall apart, by which we don’t mean a mere splitting off of say Greece and/or Portugal. Such a splitting off of weak peripheral economies would strengthen rather than weaken the currency area

    ***********
    I had thought the same thing about the EUR strengthening-if the sick pigs left-

    France and Germany have about 6000 tons of gold reserves together-

    Italy has 2,452 tons-
    Portugal has 421.6 tons-
    Spain 281.6 tons-
    Greece 111.7 tons-
    Ireland 6 tons-
    About 3300 tons total-

    I wonder how much the PIIGS could devalue the EUR currency if France and Germany left-
    The gold reserves should have an underpinning effect at some point I would guess-

    • Jimmy, that is $150 billion at current prices. It wouldn’t cover the losses in Greece. You can’t leverage gold successfully any more than you can leverage paper. Eventually insolvency developes and it implodes. Increase the price of gold 10x and they might be able to swallow the debt of Italy.

      • jimmyjames:

        mann–

        I agree with what you say about the shortfall between debt and the current gold price value-but for example-if you look at the CHF “prior to the recent Swiss manipulation-the CHF always caught the safehaven money and that was I believe-because of the Swiss gold holdings-
        Switzerland has less GDP and tax base than any good size western city-their banks were on the verge of insolvency and actually were insolvent if marked to market and 3/4 of the Swiss GDP was derived from the banking industry-so Switzerland other than its gold reserves had little to offer as a safehaven and this is the point I was trying to make about the PIIGS gold reserves and how that should underpin the Euro currency without France or Germany-
        I believe the CHF was considered by currency traders and scared money to be a gold backed currency without any government decree-

        • anto:

          Amazing work as always Pater. One thing I am wondering, speaking of the CHF, is if the ECB decides to print and buy (either on its own or thru the IMF), will the SNB be forced to abandon their peg to the Euro? With figures being thrown around of 3-4 trillion euros needing to be printed to stabilize and target Euro-area bonds, I don’t see how the SNB could keep up without completely destroying the CHF.

          • Anto,
            the SNB is already between a rock and a hard place imo. The board of the SNB talks about the ‘danger of deflation’ even while it inflates the CHF money supply into the blue yonder. I expect that there will be ‘stagflation’ in Switzerland sooner or later, as these huge amounts of money are bound to leak out. You are of course correct that maintaining the peg could become very difficult if the ECB hits the print button as well. All of this reminds one fatally of the competitive devaluations of the 1930’s, which incidentally also coincided with numerous banking crises and sovereign defaults.
            Note here that contrary to what one might expect from Switzerland, the board of the Swiss National Bank is infested with Neo-Keynesian dunderheads.

      • As an aside to this, I would not rule out that the gold price eventually – say over the next decade or so – goes to levels that are currently as unimaginable as $850 gold must have been in 1969.

    • In the past, all these countries were serial devaluers of their currencies. Italy was famous for its regular Lira devaluations, usually just before the tourist season began. They are simply not used to dealing with a ‘hard currency’. So it is pretty certain that they would devalue if it comes to a breakup. Relative to the size of the economy, Portugal’s gold reserves are actually the most significant. The Portuguese central bank was so foolish to sell some calls on its gold a while back and had to deliver 40 tons (if memory serves) that were eventually called. However, they all would also get back a few tons from the ECB’s hoard – presumably. It may not happen due to the TARGET-2 imbalances, which keep growing. I don’t think there is any plan as to how these will be dealt with in the event of a break-up. Germany would end up with huge claims, especially on Greece and Portugal, as the BuBa is the main liquidity provider in the TARGET-2 system.

  • Andrew Judd:

    Looks like the IMF has a plan to ensure the can gets kicked down the road a while longer. As people are pointing out it is odd that the pope is a german and the ECB head is an italian and one of the countries most desparate for a bailout has their ex finance minister as head of the IMF.

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  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Why You Should Expect the Unexpected
      End of the Road The confluence of factors that influence market prices are vast and variable.  One moment patterns and relationships are so pronounced you can set a cornerstone by them.  The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight.  When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.   The...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

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