June 29, 2012
Tel Aviv, Israel
This week may very well go down as ‘connect the dots’ week. Things have been moving so quickly, so let’s step back briefly and review the big picture from the week’s events:
1) After weeks… months… even years of posturing and denial, Spain and Cyprus became the fourth and fifth countries to formally request aid from Europe’s bailout funds on Monday.
In doing so, these governments have officially confessed to their own insolvency and the insolvency of their respective banking systems.
Spain’s 10-year bond yield jumped to over 7% again in response, and many Spanish banks were downgraded to junk status by Moodys.
3) JP Morgan, considered to be among the few ‘good’ banks remaining in the US, conceded that the $2 billion loss they announced several weeks ago might actually be more like $9 billion.
4) The Federal Reserve reported yesterday that foreigners are reducing their holdings of US Treasuries.
5) Countries from Ukraine to Kazakhstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves.
6) Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in renminbi.
7) China has further announced plans to create a special zone in Shenzhen, one of its wealthiest cities, to allow full exchange and convertibility of the renminbi.
So… what we can see from this week’s events is:
– European governments are insolvent
– European banks are insolvent
– US governments are heading in that direction
– Even the best US banks are not as strong as believed
– Foreigners are abandoning the US dollar and seeking alternatives
– Gold is money
These events are all connected, and the trend is becoming so clear that even the most casual observers are starting to wake up.
When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling.
No amount of self-delusion can make this go away.
Rational thinking and measured action, on the other hand, can make the consequences go away… turning people from victims into spectators of the greatest bubble burst in modern times.
- It’s time to connect the dots (sovereignman.com)
- 17 Reasons To Be EXTREMELY Concerned About The Second Half Of 2012 (blacklistednews.com)
By Julien Toyer MADRID | Tue Jun 5, 2012 5:44am EDT
(Reuters) – Spain said on Tuesday that credit markets were closing to the euro zone’s fourth biggest economy as finance chiefs of the Group of Seven major economies were to hold emergency talks on the currency bloc’s worsening debt crisis.
Treasury Minister Cristobal Montoro sent out the dramatic distress signal in a radio interview about the impact of his country’s banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain.
“The risk premium says Spain doesn’t have the market door open,” Montoro said on Onda Cero radio. “The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.
The country, which enjoyed rapid growth after it joined the euro at its launch in 1999, is beset by bank debts triggered by the bursting of a real estate bubble, aggravated by overspending by its autonomous regions.
The risk premium investors demand to hold Spanish 10-year debt rather than the German equivalent hit a euro era high of 548 basis points on Friday, on concerns that Spain’s fragile banking system and heavily indebted regions will eventually force it to seek a Greek-style bailout.
Montoro said Spanish banks should be recapitalized through European mechanisms, departing from the previous government line that Spain could raise the money on its own and prompting the Madrid stock market to rise.
But his comments on Spain’s borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on expectations that a conference call of G7 finance ministers and central bankers may hasten bold action.
The European Central Bank holds its monthly rate-setting meeting on Wednesday and European Union leaders meet on June 28-29 to discuss their strategy for overcoming the two-year-old crisis which has already seen Greece, Ireland and Portugal forced to accept international bailouts.
Investors have fled peripheral euro zone sovereign debt for the relative safe haven of German Bunds and U.S. and British government bonds amid worries about Spain’s banking crisis and fears that a June 17 Greek election could lead to Athens leaving the euro, setting off a wave of contagion around the euro area.
Spain will test the market on Thursday by issuing between 1 billion euros ($1.24 billion) and 2 billion euros in medium- and long-term bonds at auction.
Emilio Botin, chairman of the nation’s biggest bank, Banco Santander told Reuters Spanish banks needed about 40 billion euros in additional capital, adding that “there is no financial crisis in Spain”. Montoro said the figures were “perfectly accessible”.
But his dramatization of the debt situation set a stark backdrop for the conference call of the United States, Canada, Japan, Germany, France, Italy and Britain, plus European Union officials, which two G7 sources said would start at 1100 GMT.
Montoro’s comments appeared aimed at pressuring the ECB and EU paymaster Germany to find ways of intervening. But the central bank has so far shunned calls to resume purchases of Spanish government bonds, and Berlin has said it is up to Madrid to decided whether to apply for assistance if it needs help.
Spain has been trying to persuade EU partners to allow direct aid from the euro zone’s rescue fund to recapitalize its banks without making it submit to the political humiliation of a full-fledged assistance programme, officials say.
The festering euro zone crisis has sparked mounting concern outside Europe, with the United States fretting that it could further harm its faltering economic recovery, and countries such as Japan and Canada fearing fallout for the global economy.
“We have reached a point where we need to have a common understanding about the problems we are facing,” Japanese Finance Minister Jun Azumi told reporters.
Ottawa and Washington both called for action after a G7 source said fears that capital flight from Spain could escalate into a full-fledged bank run had triggered the emergency talks.
“Markets remain skeptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen,” White House press secretary Jay Carney told reporters.
In a sign of increasing concern about the euro area’s debt crisis, Australia’s central bank cut interest rates by 25 basis points to 3.50 percent, the lowest level in two years. It cited further weakening in Europe and a deterioration in market sentiment.
PRESSURE ON BERLIN
Pressure is building in particular on Germany, the biggest contributor to euro zone rescue funds, to back away from its prescription of fiscal austerity for the region’s weaker economies and to work harder on fostering short-term growth.
Berlin argues that it is already doing its share by encouraging above-inflation domestic wage settlements, accepting the prospect of higher-than-usual German inflation and most recently agreeing that Spain should have more time to achieve its fiscal targets.
Furthermore, Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would discuss with EU authorities the idea of putting systemically important cross-border banks under European supervision.
A German government strategy paper seen by Reuters sets out a timetable for closer fiscal union in the euro zone, but Berlin does not expect final decisions on strengthening economic policy coordination until March 2013, with only a roadmap being agreed at this month’s summit.
A G7 source familiar with plans for the call said the group would urge more progress at this month’s EU summit, though this alone would probably disappoint global markets.
Central banking sources said the ECB could contribute by cutting its main interest rate, lowering its deposit rate to try to shake loose some 700 billion euros parked overnight in its vaults by anxious banks, or by providing a third big liquidity injection to banks.
Some analysts believe the bank is more likely to await the outcome of the Greek election and the EU summit before taking decisive action.
A G7 source said there was only a very small chance the G7 would go as far as to pledge coordinated action to curb excessive currency volatility. Japan, for one, fears a strong yen, which has been a safe haven for investors during the euro zone crisis, could help tip its economy into recession.
The G7 could also call for concerted action at the upcoming summit of the wider Group of 20 major economies in Mexico on June 18-19, the source said. The G20, which includes China, played a prominent role during the 2008-2009 financial crisis.
A G20 official in Asia said the grouping, which also includes Brazil and India, could look to put pressure on Germany to switch to stimulus mode, as part of a wider call for strong, developed economies to step up spending.
“Germany and Canada could be seen as those having fiscal capabilities among the advanced economies,” the official said.
- Merkel rejects debt sharing as Obama urges Europe action (ekathimerini.com)
- Spain wants euro zone fiscal authority (news.yahoo.com)
- Spain tries to calm investors amid market pressure (seattlepi.com)
Thursday, May 10, 2012 – by Staff Report
Argentine Vice President Amado Boudou on Tuesday urged US companies to invest in YPF, the nationalized oil company that Argentina recently expropriated from Spain’s Repsol … “We are very optimistic in terms of what is coming for the Argentine economy in general and the hydrocarbons sector specifically” Boudou said at a Conference on the Americas at the US State Department in Washington. Far from scaring off foreign investment because of the expropriation, the government of President Cristina Fernandez has set the framework for “excellent opportunities for those who want to invest in joint ventures and possibilities of joint work in the energy sector,” he said. The Cristina Fernandez administration is gambling that the discovery in May 2011 of a giant oilfield in Argentina’s Patagonia would be too tempting for foreign oil giants to ignore. YPF needs the know-how and the capital to fully exploit the oil fields in the south-western Nequen province, known as Vaca Muerta (Dead Cow), which according to official estimates holds 150 million barrels of oil. YPF is “open to capital and the possibility of working together with public or private companies in Argentina or abroad,” Boudou said. – Merco Press
Dominant Social Theme: Don’t cry for Argentina. It’s all under control …
Free-Market Analysis: Are Argentina’s top officials having second thoughts about their expropriation of Spain’s Argentine oil-producer? It would seem that way from the above news report via Merco Press.
If the move was as wildly destructive as people think it may have been, then this posture would tend to confirm the idea that one of the world’s more powerful and influential states is simply spinning out of control.
The results may be truly catastrophic, not just for Latin America but for the larger, struggling world.
This boom may well be ending – or certainly growing long-in-the-tooth after a decade or more.
Although the Argentine expropriation of Repsol made major shock waves, the Argentine government under President Cristina Fernandez has portrayed it as a judicious and necessary gambit.
Many other observers regardless of political affiliation have branded the move as a shallow populist one that will bring disaster to Argentina and environs.
As the predictions of damage mount, there is more speculation that Fernandez’s action may bring down not only her own government but other regional governments as well.
These predictions involve inevitably a peso devaluation that will set off a dollar-withdrawal frenzy in big regional banks. Real estate prices – radically inflated after a decade of monetary expansion – may well plunge. The results could affect large swaths of South America.
Countries that could be affected include Uruguay, Brazil, Chile and Peru among others – all countries that have pursued moderate market-based policies and have benefitted from the South American industrial and monetary boom.
Meanwhile, Repsol doesn’t seem apt to surrender. Here’s more from the article.
YPF is “open to capital and the possibility of working together with public or private companies in Argentina or abroad,” Boudou said.
Last week the Argentine president signed a bill expropriating 51% of YPF stock from Repsol, its majority shareholder, sealing a measure that has roiled the country’s trade ties with Europe.
Cristina Fernandez has argued that the move was justified because Argentina faces sharp rises in its bill for imported oil, and Repsol has failed to make agreed investments needed to expand domestic production.
In Madrid, a Repsol spokesman Tuesday said the company has warned its competitors that they will face legal action if they invest in YPF.
“The idea is to protect the assets that were confiscated in Argentina until the situation is resolved in a satisfactory way for the parties that are involved,” the spokesman said.
Conclusion: A cascading crisis in South America may still seem likely …
- Argentina: Vaca Muerta – Argentina’s oil and gas seizure poses new dilemma (mb50.wordpress.com)
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
- Leftist economist masterminds Argentina’s YPF grab (mb50.wordpress.com)
- This Is Why President Cristina Kirchner Is Not Good For Argentina (businessinsider.com)
- Argentine Congress easily approves YPF takeover (fuelfix.com)
- BOOM: Argentine Parliament Votes To Nationalize YPF (YPF) (businessinsider.com)
- Leftist economist behind Argentina’s YPF takeover (sacbee.com)
- Argentina Backs Nationalization of YPF Oil Firm (theepochtimes.com)
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
LA PAZ, Bolivia (AP) — President Evo Morales announced Tuesday that his government is completing the nationalization of Bolivia’s electricity sector by seizing control of its main power grid from a Spanish-owned company.
Morales took advantage of the symbolism of May Day, the international day of the worker, to order troops to occupy installations of the company, a subsidiary of Red Electrica Corporacion SA.
The president’s placing of another of what he deems basic services under state control comes as neighboring Argentina moves to take control of the country’s oil company, YPF, from the Spanish energy company Repsol SA, which had held a majority interest.
Spain‘s ambassador to Bolivia, Ramon Santos, told reporters the electric grid takeover “is sending a negative message that generates distrust.”
Red Electrica is the sole operator of the transmission grid in Spain, and the Spanish government holds a 20 percent stake in the company.
Morales did not say how much the company would be compensated, but the nationalization decree says the state would negotiate an indemnization fee.
Morales said only $81 million had been invested in Bolivia’s power grid since it was privatized in 1997.
The government, meanwhile, “invested $220 million in generation and others profited. For that reason, brothers and sisters, we have decided to nationalize electricity transmission,” he said.
Bolivian soldiers peacefully took over the company’s offices in the central city of Cochabamba, hanging Bolivia’s flag across its entry.
Red Electrica had no immediate comment. A security guard reached at its headquarters in Spain said a statement was expected later.
The company owned 74 percent of Bolivia’s electrical transmission network, or 1,720 miles (2,772 kilometers) of high voltage lines.
Two years ago, on May Day, Morales’ government took control of most of Bolivia’s electrical generation, nationalizing its main hydroelectric plants.
Morales, Bolivia’s first indigenous president, has moved to put energy, water and telecommunications under state control.
But analyst Joao de Castro Neves of the Eurasia Group said the president has been far more pragmatic and less radical than the leftist leaders of Venezuela or Argentina.
“He knows his limits,” Castro Neves said. “The Bolivian state doesn’t have the capacity to take over all these sectors (including mining) and maintain the high levels of investment they need.”
He noted that Morales still hasn’t come to terms for taking over several small mines whose nationalization he announced last May Day.
Bolivia’s government also has not been able to negotiate compensation for the power plants taken from GDF Suez of France and Rurelec PLC of Britain.
Morales continues to deal with multinational companies such as Brazil’s oil company, Petrobras, and Repsol, whose president, Antonio Brufau, he met with on Tuesday after announcing the power grid takeover.
The two men inaugurated a $528 million natural gas plant in eastern Bolivia that represents the single biggest foreign investment in the country under Morales. It is designed to triple the amount of gas sent to Argentina and the local market to 9 million cubic meters a day, said Carlos Villegas, president of Bolivia’s state energy company, YPFB.
In the case of electricity, the government is following a policy of returning to the public domain a sector privatized during the 1990s.
“Just to make it clear to national and international public opinion, we are nationalizing a company that previously was ours,” Morales said.
The 20 percent of the industry the government does not own is in the hands of small companies serving cities in the eastern lowlands that are not connected to the national grid.
In his first year in office in 2006, Morales announced he was “nationalizing” the oil and gas sector. He began extracting concessions from multinational energy companies, renegotiating contracts to give Bolivians greater control of and a bigger share of profits from the natural gas industry, the country’s biggest ahead of mining.
In 2008, he used May Day to announce the completion of the nationalization of Bolivia’s leading telecommunications company, Entel, from Telecom Italia SpA
The nationalizations have not saved Morales from widespread criticism by Bolivians upset over rising consumer prices, lower domestic oil production and discontent over government plans to build a highway through a lowlands nature preserve inhabited by Indians.
Morales’ approval rating is down to about 40 percent from 69 percent when he began his second term in January 2010.
Read more: BI