Euro-bank Crisis. Is it over?

Posted in America, Business, Current Affairs, Gold Reserves by Anuraag Sanghi on December 27, 2011

Will the rescue effort by the European Central Bank (ECB), the Longer-Term Refinancing Operation (LTRO) help?

Euro-zone countries, coming under a debt cloud, fall like nine pins. |  Cartoonist - Bruce Beattie; on 24th Nov. 2010; source & courtesy - cagle.com|  Click for larger source image.

Euro-zone countries, coming under a debt cloud, fall like nine pins. | Cartoonist - Bruce Beattie; on 24th Nov. 2010; source & courtesy - cagle.com| Click for larger source image.

Two years after

After The Great Recession hit the US economy with gale force, it was the turn of the Euro-Zone areas to face the brunt of this recessionary typhoon. Starting with Iceland and Ireland, it soon spread to Greece, Spain, Portugal, and ominously, Italy.

With European banks highly exposed to debt issued by distressed European Governments, it seemed that the European banks could go under. Needing about a trillion dollars, EU spent much time wrangling about the rescue plan – the who-and-how of the bailouts. Decisive Christmas actions by the European Central Bank (ECB), patterned on the lines of the US TARP and QE actions, the Longer-Term Refinancing Operation (LTRO)  …

created a buzz.

But questions remain

Will LTRO stabilize the European banking, even if it will not generate growth? Will it blow away the clouds hanging over the EU banking industry?

The first major development occurred on December 8. The European Central Bank (ECB) declared that it will offer unlimited liquidity to European banks for 36 months. To access that liquidity, the banks need to post appropriate collateral. The “appropriate collateral” by my reckoning includes the sovereign debt of Italy and Spain. This is important, because the large European banks — especially in France — are having very serious and possibly existential problems with their liquidity. Fears of potential default are making it unusually difficult for them to access overnight and other short-term lines of credit to finance their balance sheets. That constrains their abilities to provide credit to clients and meet their commitments.

Without the ECB’s new policy, euro-zone businesses face the prospect of grinding to a halt. Inventories are difficult to finance. Payrolls might not be met. Taxes might not be paid. Now, with unlimited liquidity available from the Central Bank, that credit crunch should be history. We saw the same relief from a very similar U.S. credit crisis in 2008 when the Federal Reserve Bank agreed to accept many kinds of collateral from its member banks for unlimited funding. The fact that the largest U.S. banks are still standing demonstrates that this policy can be effective.

Today, we had our first look at the results of that policy as this ECB financing operation was launched. It opened its window and loaned $641 million (errata: an alert 2ndlook reader points out that the correct figure is US$641 billions – and not millions) for three years at 1% annually to 523 European banks . The size of the refinancing was greater than expected. It is noteworthy that the program went smoothly. It demonstrated to the global financial community that the European banks not only have access to liquidity at very favorable interest rates — far better than the rates available on the private markets.

The second major development occurred on December 5. After months of being the “bad guys” to the rest of Europe on the issue of who should share the pain of the sovereign debt debacle, Angela Merkel, German Chancellor, agreed to align with the majority of the euro zone. Germany no longer insists that private sector investors bear the losses on their balance sheets as sovereign debt is written down. Instead, it appears that the governments will likely now shoulder the cost of buying bonds or doing what it takes to manage the problem.

Exactly how and when the sovereign debt issues will be resolved is still unclear. But at least a major impediment has been removed.

With these two major developments, I would expect the capital markets to breathe a sigh of relief. The liquidity and solvency issues surrounding the European financial system are finally seriously being addressed. Of course, the devil will be in the details. (via Is the euro-crisis over? – MarketWatch).

$641 billion to European banks from ECB – Santanomics

Posted in America, Business, Current Affairs, Gold Reserves, politics by Anuraag Sanghi on December 21, 2011

European Central Bank (ECB) keeping the festive spirit alive, announces a $641 billion effort to keep Euro-banks standing.

The State saves the banks, so that the banks can save us. This 'logic' now suffers from a problem of credibility. It is looking like the Big Guys look after their own. As for the Rest of Us ...  |  Cartoonist - Joel Petit; source & courtesy - about.com/d/politicalhumor  |  Click for larger image.

The State saves the banks, so that the banks can save us. This 'logic' now suffers from a problem of credibility. It is looking like the Big Guys look after their own. As for the Rest of Us ... | Cartoonist - Joel Petit; source & courtesy - about.com/d/politicalhumor | Click for larger image.

It is Christmas season

And it is every Christian’s right, to expect freebies and goodies from Santa Claus.

This year

Since appearances must be kept, the European Central Bank (ECB)  decided to become Santa Claus this year.

The ECB decided to match the US$700 billion bailout package (TARP).

The European Central Bank on Wednesday attempted to send a strong signal to financial markets by offering to loan $641 billion to 523 euro-area banks in a massive three-year funding operation.

The bank-funding move by the region’s central bank, known as a longer-term refinancing operation, or LTRO, is open to lenders across the euro zone. The figure came in well above a Reuters forecast for $408 billion. The loans run for three years.

The loans expand the central bank’s balance sheet by 20%, according to Louise Cooper, analyst at BCG Partners.

A breakdown of which financial institutions were among the bidders for the funding was not immediately available.

A representative from the European Central Bank‘s press office said that the central bank would not be releasing the names of the banks that applied for loans. Nor would it provide a breakdown of loans by euro-zone nation.

The LTRO operation was the first three-year funding operation undertaken by the central bank. The funds are borrowed at its average benchmark interest rate, which stands at 1%.

Ahead of the auction some media reports and analysts suggested that the drive to increase liquidity across the region was part of an effort to encourage banks to purchase government debt. (via ECB lends $641 billion to European banks – MarketWatch).

If the US can come out with a US$700 TARP to save their Big Corporations, Europe can do better. The LTRO is a full US$100 billion bigger than the TARP. Jai Ho!  |  Cartoonist - RJ Matson; source and courtesy - rjmatson.com  |  Click for source image.

If the US can come out with a US$700 TARP to save their Big Corporations, Europe can do better. The LTRO is a full US$100 billion bigger than the TARP. Jai Ho! | Cartoonist - RJ Matson; source and courtesy - rjmatson.com | Click for source image.

Bigger than expected, the LTRO has been received with mixed feelings by analysts.

The ECB said 523 banks requested €489 billion ($641 billion) in funding from the central bank in a bid to boost liquidity.

A Reuters consensus had predicted funding requests worth €310 billion.

“The good news is a lot more banks will be well funded throughout the next three years. They need to place the money short term and will be buying bonds in European sovereign countries, obviously,” said Christian Tegllund Blaabjerg, chief Economist at FIH Erhvervsbank.

“But on the flip side of the coin, it also signals a lot more banks than originally thought need capital and that is negative news,” he said. “It sort of implies the banking sector is far worse off than originally expected.” (via ECB funding boost short-lived in Europe – Europe Markets – MarketWatch).

Coming back to the Christmas season.

Some analysts decided to run old number through their computers. What they found is that there is some kind of ‘season’ in the market also – around Christmas.

The stock market, at long last, is about to enter the seasonally favorable period that honestly can use the name “Santa Claus Rally.” It begins at the close this coming Friday, the last trading day before Christmas, and lasts until the end of the year.

It’s not a very long period of favorable seasonality — just one week, after all — but the historical odds are quite impressive.

Consider the performance of the Dow Jones Industrial Average DJIA -0.49% during this period. Since 1896, when this benchmark was created, it has produced an average gain between Christmas and New Years of 1.07%. On an annualized basis, that works out to a gain of more than 80%.

The market’s performance during this period has been relatively consistent, turning in a gain 78% of the time. That compares to a gain rate of 54% for all other weeks of the year.

What accounts for this seasonal strength? A fascinating research study suggests that it has something to do with Christmas. Click here to read their study. (via Here comes good old Santa Claus – Mark Hulbert – MarketWatch).

In the meantime, let us also remember how gold prices in the first 2 weeks of December 2011 have been soft. And probably it is Arab gold that is being dumped into the markets.

Also remember that more noise works better than censorship.

Why are gold prices going down?

Posted in America, Business, Gold Reserves, politics by Anuraag Sanghi on December 18, 2011

The story behind the gut-wrenching US$300 drop in gold prices.

Many ways to skin a cat

Under the guise of ‘modern’ economics, some fundamental truths have not been remembered, over the last 50 years. Importance of gold in the world monetary system is one of these ‘forgotten’ truths.

This has damped down gold prices – and printing presses have been busy printing money. Especially in the last 40 years – after the Nixon Chop.

24 hour coverage of financial markets has also created an impression that financial cycles play out in a matter of hours and days. So also, the the drop in gold prices of the last two weeks.

Many people have been puzzled over the last few months by gold’s (GC2G -0.19%) behavior. It has tumbled since the start of September from around $1,900 an ounce to below $1,600. This has happened even while a financial crisis has erupted in Europe which, says traditional analysis, should be bullish for gold.

But there are a couple of other factors at play.

First: Gold hasn’t fallen as far as it looks. The gold price is typically quoted in U.S. dollars. Yet in the past four months the dollar has rallied.

At the start of September, when gold touched $1,900 an ounce, the dollar was $1.45 to the euro. Since then the euro has slumped to $1.30.

Net result? Gold, which traded at around 1,300 euros per ounce back then, has declined to 1,200 euros per ounce now.

The second factor: Sentiment.

Four months ago, sentiment was massively bullish on gold. It had just skyrocketed, in the wake of the U.S. debt ceiling debacle. According to data published by the Commodities and Futures Trading Commission, speculators and traders had taken nearly record speculative bets that it would rise further.

This usually precedes a backlash, and so it has been.

Today? Sentiment is pretty bearish. The CFTC says the number of speculative bets on higher gold have collapsed by more than a third. (via Will the Europeans have to sell their gold? – Portfolio Insights by Brett Arends – MarketWatch).

A bump on the road

The first 15 days of December, 2011, has seen weakness in gold prices – falling from roughly US$1900 to US$1600. The biggest drop, after ‘gold dropped 25 percent in the fall of 2008 — from over $1,000 an ounce to about $750’. Broad parameters of the situation were similar then – as now.

In 2008, the US economy was tanking, and gold was at psychological barrier of US$1000. This time around gold is at US$2000 psychological mark. And it is feared that the Euro-zone may collapse.

“The worst case scenario (a euro zone break-up) was pretty much ridiculous a year ago but it is now becoming more and more possible, to say the least,” Juan Valencia, credit analyst at Societe Generale, said.

This time around

So, what are the specifics now.

First are the European banks. It is reported

banks face about 320 billion euros in senior and government guaranteed debt redemptions next year. By comparison, they had issued just 12 billion euros of debt in the past six months.

With no solution to the euro zone debt crisis in sight, interbank market players say they are reducing credit lines to an ever increasing number of banks.

“It is utter madness … When we see big names paying 300 basis points over overnight rates for dollars you know something is wrong,” said the head of money markets at a bank in London, who asked not to be named.

“Credit lines have already been reduced, we are seeing the big names paying through the nose for cash from corporates as wholesale is pretty much dead. The focus now is for the core banks to raise cash through the retail/corporate space. Central banks may be called upon.”

French banks’ borrowing from the ECB topped 100 billion euros in the maintenance period ending November 8, compared to 87 billion euros the month before. French banks are more exposed than any those of any other euro zone country to Italian, Spanish and Greek debt, with holdings in excess of 600 billion euros, according to Bank for International Settlements data.

Of the contributors to daily Libor rates, French banks BNP Paribas, Credit Agricole and Societe Generale say they pay the most for three-month dollars, around 0.6 percent. But dollar rates have recently been on the rise for other core country banks as well.

In such an environment liquidity is at a premium. Some investors are even taking money out of banks and paying to keep it in short-term German or Dutch government paper, which is trading with negative yields.

Where has all that yellow stuff gone? Buried under a mound of silence?  |  Cartoonist - Dave Simonds on 18-6-2011 in guim.co.uk  |  Click for larger image.

Where has all that yellow stuff gone? Buried under a mound of silence? | Cartoonist – Dave Simonds on 18-6-2011 in guim.co.uk | Click for larger image.

Where is gold coming from

Negative yield brings us to another grey area.

Gold lending at negative rates. Europe has an organized market where gold owners can lend gold to borrowers – at rates varying between 0.5% to 2%. There are ominous whisper-reports.

The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low-cost dollars for euro-area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks or by gold exchange-traded funds.

There is also a third source of gold that is being lent in the market.  Gold that does not belong to any European Governments or to any ETF.

But obtained from deposed Middle East rulers of Egypt, Tunisia, and Libya.

Cash is king

Regardless of the source of gold, the cash situation at European banks remains a trigger for this gold sell-off.

The need for cash has overwhelmed gold’s traditional status as a safe haven in past few months, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst.

“With access to liquidity being constrained, market participants have increasing problems to refinance,” Credit Suisse said in a research note. “As a result they have to sell their assets – including precious metals – to raise the much needed cash. This is the main reason why gold prices fall on days of increasing funding stress.”

This has obviously raised concerns in the Asian markets – the main buyers of gold. This extra supply of gold from European banks has led to a sell-off – led by Asian markets.

In recent weeks the gold price has fallen significantly from around $1900 to $1535 (intraday). Gold is now trading near Q3 target of $1650. The size of the move was far more significant compared to other recent unwinds, like those in May or August. One of the key factors for  long-term bullish view on gold is Asian demand – the majority of end-user demand for gold is from Asia. From an Asian valuation perspective, gold is also relatively cheap.

One way to proxy Asian demand for gold is to look at how gold performs during Asian trade. Over the past few years, gold has generally appreciated during Asian hours, reflecting strong demand for the metal. However, recent weeks have shown weakness in Asian hours. On previous occasions when gold traded poorly, such as in May and August, it remained relatively robust during Asian hours, with any sell-off tending to come in London and New York hours, suggesting that Asian investors were supporting an unwind of Western investors’ long gold positions.

This contrasts with the recent fall, noticeable across multiple time zones. In the very short term, we believe a reversal would need to be led by appreciation in Asia. Although a few data points do not constitute a trend, on Tuesday and Thursday gold rose by 2%, its largest moves higher during Asian hours since October 2008 and perhaps a signal that it could be turning back up.

Gold often trades like a risky asset. This has been evident in recent weeks where we have seen a strong positive correlation between gold and the S&P500, which we use as a proxy for risky assets. The rationale is that heavy losses in risky assets forces investors to unwind other positions to free up cash. As a liquid asset and also with heavily extended net long speculative positioning heading into this episode, gold has suffered.

The price-drop also generated sell-orders based on stop-loss triggers at US$1700. For the time being the stampede has abated. Asian markets were at the forefront of some investment demand.

Gold rebounded in thin trading during the Asian session Friday, paring some of this week’s losses with traders expecting gains to hold in the near-term with some dip buying likely amid a modest bounce in stock markets.  The yellow metal rose more than 1% in the session to a high of $1,589.90 a troy ounce after falling for four consecutive days this week.

A Hong Kong-based trader said there is some investment demand, which is driving up prices. Some speculators have also returned to the market after prices fell sharply this week.  Despite the slight improvement in sentiment, however, investors continued to be wary of the European sovereign debt crisis.

There is hardly any dissonance between various reports – which supports a belief that this may have a momentary technical correction before gold breaks the US$2000 per ounce barrier. In a year, where most asset classes have performed badly and market volatility took away whatever little was left on the table, fund managers may have locked in their profits on gold for the year. Remember, this is also the time of the year, when bonuses get calculated. The long-term fundamentals of the gold remain beyond argument.

Even in the short-term, this maybe a buying-opportunity one may regret having missed.

And forgive us for our ignorant protests

Posted in British Raj, India, Media, politics, Satire by Anuraag Sanghi on December 12, 2011
Markandey Katju is a reall bull in real china-shop - breaking down valuable stuff based on his imagined nightmares. | Artist: Sudhir Tailang, The Asian Age, November 2 2011; courtesy - http://searchingforlaugh.blogspot.com | Click for source image.

Markandey Katju is a reall bull in real china-shop - breaking down valuable stuff based on his imagined nightmares. | Artist: Sudhir Tailang, The Asian Age, November 2 2011; courtesy - http://searchingforlaugh.blogspot.com | Click for source image.

Dim wits like us

All those who disagree or doubt with Markandey Katju and his wisdom are backward people with dim understanding of Katju-saheb’s vision.

For instance, Katju-saheb wisely informs us that modern societies are the only ‘scientific’ societies. All traditional or ancient societies were either superstitious, backward – or lucky.

Like India.

One of Mr.Katju’s pearls of wisdom starts with ‘for industrialization, science is necessary’. And India does not have either any science nor industry! But my deficient understanding could not fathom, Shri Katju-saheb, how traditional India became the largest producer of gunpowder ingredients (till 1900), without science or industry?

Must have been luck.

Is there a God Of Luck?

Of course, Indians were plain lucky to build the best ships that British Navy could buy? Katju-saheb reminds us that we must be grateful to God(s) with whose kindness to Indians made cupro-nickel alloys at Mohenjodaro and Lothal – plus cupre-nickel coins later in the Takshashila region. Plus refined Zinc.

Thousands of years before the Western science and industry could. Gods have been kind to us Indians.

In modern times, instead of God, we must be grateful to the British (and the West) for civilizing, enlightening and improving the lot of us backward Indians.

There is an age-old advice, that applies in this case, “If people think you are a fool, don’t open your mouth and prove it.’ We backward Indians instead of learning science, that Mr.Katju-saheb suggests, waste time in protests.

The automotive engineering world is plain silly talking of India’s ‘frugal engineering’.

Why can we not appreciate ‘royal’ children?

Katju-saheb’s ideas of what I must read or write are right for me – and us backward Indians.

It is more important for us backward Indians to know more about Rajiv Nehru-Gandhi children than about Bachchan’s children. Katju-saheb has decided that it is ‘modern’ and ‘scientific’.

Katju-Saheb’s contempt for the those who are not State-schooled or educated is very topical – breath taking. Shri Katju-saheb seems to think that he (or some nominee of the State) has a right to force the media into joining the State in educating Indians – which backward people like Indians is brainwashing.

The State does not want have anyone outside the reach of its ideological regimentation.

In my small little mind

Though I must admit, a difficult question comes into my mind. If India is not a facing the problem of an aging population, that the West and Japan has no solution for, it is because of unschooled and unlettered Indians. India is not a demographic disaster zone, due to the healthy contempt that these unschooled and unlettered Indians have, for such anti-family population control policies of the Indian State.

I wonder what the august Shri Katju-saheb has to say to this thought from my backward mind.

Katju is in the vanguard of this ‘progress’.

But then I am not surprised

Mr.Katju is from the sort that wants ‘respect in world community’. So, Mr.Katju wants to impose all such ideas and policies and ideas on Indians that will get him ‘respect in world community’. Since, when has it become a part of State agenda that India’s policies will be dictated by the objective of ‘respect in world community’.

But can Mr.Katju be wrong about ‘pluralism, tolerance, individual freedom, and free flow of information’.

On pluralism and democracy, maybe Shri-Katju-saheb should talk to Catholics in USA, the world’s oldest Republican democracy – suggested another small Indian mind. Why has there been only one Catholic President in US history – who was assassinated before completing his term? We will not talk of impossible ideas like a woman President of the US.

But surely Muslim women banned from wearing hijab, in France can talk to Shri Katju-saheb about tolerance and democracy. On individual freedom, Katju-Saheb can check out in the citadel of individual freedom and democracy, Europe. All the Roma Gypsies in Europe will surely give a ringing endorsement of individual freedom and democracy in Europe. On ‘free flow of information’ who better to talk than Julian Assange.

I must admit

People like me, who know very little about ‘progress’, ‘development’ are the problem in this country of India – unlike Shri.Katju-saheb.

Backward people like me, cannot appreciate that Shri Katju-saheb has a noble idea of ‘spreading scientific ideas amongst the vast masses and raising their cultural level’ – and therefore wants to control media.

Can any one doubt Mr.Katju?

Is he not a ‘strong votary of liberty and have been misunderstood.’ He is against astrology. After all, who can deny that complex mathematical calculations of 27 nakshatras, 9 planets, sun and moon, multiple constellations are all superstition? How can we equate statistics with science?

I am now convinced

Mr.Katju is not the problem. Anyway, media cannot be the problem. Both Shri Katju-saheb and media are right.

We the backward people of this under-developed country are the problem. Lead us, O Great Shri Katju, the kicking and screaming backward masses to ‘progress’ and ‘development’.

And deliver us from our actors and actresses.

%d bloggers like this: