Saturday, 8 January 2011

Weekend Update January 08, 2011

Sovereign Debt Default.

Baltic Dry Index. 1544 -77

LIR Gold Target by 2019: $30,000. Revised due to QE.

At the end of a bad week for European sovereign debt, a warning from Citigroup about America and Japan. Stay long physical precious metals.

“With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

Dr. Bernanke. November 2005.

JANUARY 7, 2011, 10:47 A.M. ET

Euro Crisis Roars Back to the Forefront

LONDON—The euro zone's debt stresses are back in force at the end of the first trading week of 2011, touched off by new political paralysis in Belgium, signs of slowing economic recovery and a proposed European Union rule that private investors take a hit in cases of bank failures.

The euro slipped to its lowest levels since September against the dollar Friday, with chart patterns pointing to a potentially large decline. The cost of insuring Western European government bonds against default hit a record high as fiscally-weaker government bond markets slumped.

December had brought a period of calm in this long-running drama, as investors pared back bets towards the end of the year. Now, government bond markets are in turmoil once again, the euro currency is falling, and nerves are building over the timing of the next big bailout for an under-pressure euro zone member.

Analysts at Danske Bank pointed to a "change in sentiment", with a "renewed focus" on the fragile sections of the euro-area government bond markets—chiefly Portugal and Spain, but also Belgium.

----A key trigger for new nervousness has come from the European Commission, which late Thursday proposed a region-wide framework for confronting bank and investment-firm failures that could see bondholders sharing the burden.

In a 100-plus page consultation paper that aims to abolish the excuse that a bank is too big to fail, the commission asked whether bank bondholders should share in paying for future bailouts. It is also seeking to give greater authority to national regulators over bank leadership and business strategies when a country's economic stability is at risk.

One trader at a Portuguese bank described these potential new rules as "the final killer" for Portugal, since it may lead to considerably higher funding costs for banks, especially weak ones. "Everyone is expecting the International Monetary Fund to enter the country now," he said.

Debt default fears will spread to US and Japan, warns Citigroup's Willem Buiter

Fears about the finances of eurozone nations will spread around the world to engulf the US and Japan, former Bank of England policy maker Willem Buiter has warned.

By Emma Rowley 8:00AM GMT 08 Jan 2011

Worries about the risk of a sovereign state defaulting on its debt, which thrust the eurozone into crisis, will soon encompass the two major economies as well, according to Citigroup economists led by Mr Buiter, who sat on the Bank's Monetary Policy Committee.

The team has published a note forecasting much more strife to come in the wake of Greece and Ireland's recent bail-outs and eurozone governments' borrowing costs hitting record highs.

"Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving," the team wrote. "There is no absolutely safe sovereigns."

There are likely to be several sovereign debt restructurings in the next few years, the analysts said, with Portugal likely to need to access the emergency funding facilities soon.

Against this backdrop, the US and Japan - dubbed the "fiscal sustainability deniers" - cannot keep ignoring the question of how safe their public finances are, the team said.

The fears about default will encompass the two economies "before long", they argued - particularly if a default is defined not just as a failure to meet the debt contract, but also as inflicting severe losses on debt holders through deliberately-engineered inflation or weakening the currency.

"Both Japan and US public finances are unsustainable, in our view, and in the absence of credible and substantial fiscal tightening both would eventually face painful discipline through the markets," the economists wrote.

----While the break-up of the eurozone was seen as very unlikely, the analysts believe there is a risk that a lagging member state could leave the monetary union "in a fit of populist and nationalist rage" if they do not get enough external support, despite the high costs of exiting the euro.

There is also a risk that if a weaker member seems to get too much financial help, a major player could depart "on a wave of domestic populist outrage" about having to fund bail-outs.

The economists called for a much bigger liquidity support facility and for a restructuring of the debt of the EU's failing banks and insolvent nations.

We close with the result in from Massachusetts. The banks lost, and Massachusetts retains its rule of law and its honour. The suspicion is that the banks could have provided more of a paper trail to the court than they did, but in doing so it would show multiple pledging of the same mortgages to different RMBS. 2011 is going to be a very difficult year for the banks that securitised US mortgages.

On July 1, 2005, Bernanke stated with great confidence that the U.S. was not experiencing a housing bubble, saying: “I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.”

JANUARY 8, 2011

Two Banks Lose in Foreclosure Cases

The highest court in Massachusetts ruled against Wells Fargo & Co. and U.S. Bancorp in two foreclosure cases that cast doubt over whether some home loans were properly handled when packaged into securitizations.

Justices in the state's Supreme Judicial Court upheld a lower court's decision to void foreclosure sales of two homes in Springfield, because owners of the loans couldn't prove that the mortgages had been assigned to them. Both loans were assembled into mortgage-backed securities sold to investors.

Bank stocks fell on worries that Friday's ruling could make it harder for financial firms to foreclose on mortgages that wound up in securities. The defeat also might provide ammunition to mortgage-bond investors who have accused and even sued servicers for what the investors claim is systematically shoddy loan documentation.

The ruling against the fourth- and fifth-largest U.S. banks in assets came amid a delay in the crafting of new standards for mortgage lending as top U.S. regulators clash over protections for homeowners facing foreclosure.

----The Massachusetts case is a closely watched example of what some mortgage experts describe as "show-me-the-paper" cases over widely used procedures for transferring loans after they are made. Individual loans often are sold to an investor, with the new owner's name left blank in loan documents to minimize paperwork hassles as the loan subsequently changes hands before being combined with other loans into mortgage-backed securities.

Justice Robert J. Cordy concluded in a concurring opinion that the two banks showed "utter carelessness" when they "documented the titles to their assets." If the ruling is followed by lower courts in Massachusetts or emboldens borrowers and investors elsewhere, it could delay or even derail some foreclosures. That would make it harder for banks to recoup loan losses by selling homes that are seized through foreclosure proceedings.

"It's deeply disturbing to investors that it even got to this point, but it potentially strengthens any bondholder claim that the servicers are mishandling foreclosures," said Talcott Franklin, a lawyer representing bond investors.

Susan Wachter, a real-estate finance professor at the University of Pennsylvania, called the ruling a "landmark decision" with nationwide implications because Massachusetts loans wound up in many securities.

2011 if off to a dangerous start. Portugal’s a goner at current interest rates, with Spain likely to follow in the first half of the year. Now Belgium might jump ahead of Spain. But will the year end with America and Japan the “next Spain”? Citi’s Chief Economist worries that they might.

"It is inherently extraordinarily difficult to know whether an asset's price is in line with its fundamental value. It's not obvious to me in any case that there's any large misalignments currently in the U.S. financial system."

Dr. Bernanke. November 16, 2009

More on Monday.


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