Unicredito


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(email exchange)

Anyone hearing about issues at Unibank in Italy?

>   
>   On Thu, Oct 2, 2008 at 11:17 AM, Kevin wrote:
>   
>   If you mean Unicredito (UCG IM), yesterday there was talk they were to call an
>   EGM, with a rumor that the CEO Profumo was to resign and talk the bank was
>   suffering from liquidity issues. They subsequently announced some real estate
>   sales improving their tier 1 capital ratio. At the same time Italy suspended
>   short sales. Today I see they are looking to raise euro 2.3bn, through the
>   sales senior bonds, aimed at retail investors.
>   
>   Having been regarded as one of Europes strongest banks, market has been
>   concerned that Profumo has persistently claimed they have no balance sheet
>   problems, despite worsening financial environment.
>   
>   Senior cds is trading at 140bp (5yr), it was 80/90 on sept 25th.
>   
>   Kevin

Thanks, heard they are very big and having issues.

US market action seems to be spreading to the eurozone where it can do a lot more damage than it’s doing here.


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Proposal


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The short version of my current alternative proposal to the TARP remains:

  1. Normalize bank liquidity by allowing Fed member banks to borrow unsecured from the Fed in unlimited quantities.
  2. Have the Fed set term lending rates out to 3 months in addition to the Fed funds rate.
  3. Extend FDIC insurance to Fed deposits at member banks to keep any insolvency losses at the FDIC.
  4. Remove the cap on FDIC insurance to eliminate the need for money market funds.
  5. Declare a ‘payroll tax holiday’ and reduce social security and medicare payroll deduction rates to 0% until aggregate demand is sufficiently restored.

This would immediately end the current crisis.

Remaining issues include the increased demand for energy consumption as the economy recovers, and associated price pressures.

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2008-10-02 USER


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Monster Employment Index (Sep 8)

Survey n/a
Actual 160.00
Prior 159.00
Revised n/a

 
Counter trend move higher?

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Monster Employment Index MoM (Sep 8)

Survey n/a
Actual 0.6%
Prior 1.3%
Revised n/a

 
Slightly positive.

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Initial Jobless Claims (Sep 27)

Survey 475K
Actual 497K
Prior 493K
Revised 496K

 
Still high, but subtract maybe 50,000 for hurricanes and maybe the Boeing strike as well.

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Continuing Jobless Claims (Sep 20)

Survey 3550K
Actual 3591K
Prior 3542K
Revised 3543K

 
This was leveling off until the extended benefits package took effect, and has resumed its climb since.

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Jobless Claims ALLX (Sep 27)

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RPX Composite 28dy YoY (Jul)

Survey n/a
Actual -17.76%
Prior -17.15%
Revised n/a

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RPX Composite 28dy Index (Jul)

Survey n/a
Actual 224.28
Prior 230.00
Revised n/a

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Factory Orders YoY (Aug)

Survey n/a
Actual 4.2%
Prior 4.7%
Revised n/a

 
Still trending up year over year, but combined with other recent data doesn’t look good.

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Factory Orders MoM (Aug)

Survey -3.0%
Actual -4.0%
Prior 1.3%
Revised 0.7%

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Factory Orders TABLE (Aug)

 
Defense keeping this from being a lot worse.

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Factory Orders TABLE 2 (Aug)

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Factory Orders TABLE 3 (Aug)

 
Shipments down, unfilled orders up.


Karim writes:

  • Initial claims rise 1k to 497k, with 40-50k still accounted for by hurricanes (4wk avg 474k).
  • Continuing claims, not effected by hurricanes, rise another 48k to new cycle high of 3542k (4wk avg 3528k).
  • Continuing claims more highly correlated to duration of unemployment and wage demands.
  • Consensus NFP tomorrow is -105k; based on claims, Conf Board and ISM surveys, risks seem more in -150k area.


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Ambrose Evans-Pritchard: Europe’s banks more leveraged than U.S. banks


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Ambrose Evans-Pritchard: Europe’s banks more leveraged than U.S. banks

By Ambrose Evans-Pritchard

Oct. 2 (The Telegraph) It took a weekend to shatter the complacency of German finance minister Peer Steinbruck. Last Thursday he told us that the financial crisis was an “American problem,” the fruit of Anglo-Saxon greed and inept regulation that would cost the United States its “superpower status.” Pleas from US Treasury Secretary Hank Paulson for a joint US-European rescue plan to halt the downward spiral were rebuffed as unnecessary.

By Monday, Mr Steinbruck was having to orchestrate Germany’s biggest bank bailout, putting together a E35 billion loan package to save Hypo Real Estate. By then Europe was “staring into the abyss,” he admitted. Belgium faced worse. It had to nationalise Fortis (with Dutch help), a 300-year-old bastion of Flemish finance, followed a day later by a bailout for Dexia (with French help).

Within hours they were all trumped by Dublin. The Irish government issued a blanket guarantee of the deposits and debts of its six largest lenders in the most radical bank bailout since the Scandinavian rescues in the early 1990s. Then France upped the ante with a E300 billion pan-European lifeboat for the banks. The drama has exposed Europe’s dark secret for all to see. EU banks took on even more debt leverage than their US counterparts, despite the tirades against “le capitalisme sauvage” of the Anglo-Saxons.

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for “regulatory capital relief rather than risk mitigation.” In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

It turns out that European regulators have allowed even greater use of “off-books” chicanery than the Americans. Mr Paulson may have saved Europe.

As suspected. This has always been the case. Remember the French banks, pre-euro, periodically announcing massive losses, and the French government writing the check, back when they had their own currency so all it did was add a bit to inflation?

Most eyes are still on Washington, but the core danger is shifting across the Atlantic. Germany and Italy have been contracting since the spring, with France close behind. They are sliding into a deeper downturn than the US.

The interest spreads on Italian 10-year bonds have jumped to 92 points above German Bunds, a post-EMU high. These spreads are the most closely watched stress barometer for Europe’s monetary union. Traders are starting to “price in” an appreciable risk that EMU will break apart.

The European Commission’s top economists warned the politicians in the 1990s that the euro might not survive a crisis, at least in its current form. There is no EU treasury or debt union to back it up. The one-size-fits-all regime of interest rates caters badly to the different needs of Club Med and the German bloc.

The euro fathers did not dispute this. But they saw EMU as an instrument to force the pace of political union. They welcomed the idea of a “beneficial crisis”. As ex-Commission chief Romano Prodi remarked, it would allow Brussels to break taboos and accelerate the move to a full-fledged EU economic government.

As events now unfold with vertiginous speed, we may find that it destroys the European Union instead. Spain is on the cusp of depression. (I use the word to mean a systemic rupture.) Unemployment has risen from 8.3 to 11.3 per cent in a year as the property market implodes. Yet the cost of borrowing (Euribor) is going up. You can imagine how the Spanish felt when German-led hawks pushed the European Central Bank into raising interest rates in July.

This may go down as the greatest monetary error of the post-war era. The ECB responded to the external shock of an oil and food spike with anti-inflation overkill, compounding the onset of an accelerating debt deflation that poses a greater danger. Has it committed the classic mistake of central banks, fighting the last war (1970s) instead of the last war but one (1930s)?

After years of acquiescence, the markets have started to ask whether the euro zone has the machinery to launch a Paulson-style rescue in a fast-moving crisis. Who has the authority to take charge? The ECB is not allowed to bail out countries under EU treaty law. The Stability Pact bans the sort of fiscal blitz that has kept America afloat. Yes, treaties can be ignored. But as we are learning, a banking system can implode in less time than it would take for EU ministers to congregate from the far corners of Euroland.

Looks like he has been reading my papers!

France’s Christine Lagarde called yesterday for an EU emergency fund. “What happens if a smaller EU country faces the threat of a bank going bankrupt? Perhaps the country doesn’t have the means to save the institution. The question of a European safety net arises,” she said.

The storyline is evolving much as euroskeptics predicted, yet the final chapter could end either way as the recriminations fly. Germany has already shot down the French idea. The nationalists are digging in their heels in Berlin and Madrid. We are fast approaching the moment when events decide whether Europe will bind together to save monetary union, or fracture into angry camps. Will the Teutons bail out Club Med? If not, check those serial numbers on your euro notes for the country of issue. It may start to matter.


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Eurozone on the Brink


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Hi Joseph,

Agreed, and this attitude continues this morning, with comments like ‘Europe needs this slowdown to bring down inflation’ as their opinion leaders argue against a rate cut (not that a rate cut would actually help demand as they think it would, but that’s another story).

It seems they are actually welcoming this weakness, probably out of fear unemployment was getting far too low to ‘discipline’ the unions, as wage demands were anecdotally featured in the Eurozone news.

France’s proposal for a 300 billion euro wide fund to calm bank depositors was immediately shot down by Germany (not that it would have or could have been sufficient to stop a run on the banking system, but that too is another story).

It is also becoming more clear that effectively major euro lending institutions have found themselves massively ‘long’ euros and ‘short’ dollars. The Fed’s swap lines have grown to over $600 billion, mainly with the ECB. This means the ECB is borrowing USD from the Fed to lend to its banks. This represents the same kind of external debt that has brought down currencies since time began. Running up external debt to sustain your currency is highly unlikely to succeed.

Ultimately, their only exit is to sell euros and buy the USD needed to cover their net USD needs. The resulting fall in the currency can spiral into a serious run on the banking system. Unlike Americans who run to high quality securities in their local currency when they get scared, Europeans and their institutions tend to flee the currency itself.

While the national governments will attempt to contain any such run, they don’t have the capability, as they are all limited fiscally by both law and market forces, with the latter the far stronger force. Only the ECB can write the check of the size needed, no matter how large, but they are currently prohibited by treaty from making such a fiscal transfer.

I have serious doubts the Eurozone can get through this week without entering into a system wide banking crisis that will end with the payments system being closed down until it reopens with bank deposit insurance at the ‘federal level’- in this case from the ECB itself.

The Eurozone would have been ‘saved’ if the US has responded with a fiscal response in the range of 5% of GDP, and continued to increase imports and keep the world export industries alive.

But that didn’t happen, and, by design, that channel was cut off when Paulson, supported by Bernanke and Bush, managed to convince foreign central banks to stop accumulating USD reserves.

This both killed the goose laying the golden eggs for the US (imports are a real benefit and exports a real cost), as US exports have boomed and real terms of trade fell, and also triggered the looming collapse of the Eurozone as exports fell off and domestic demand remained weak.

Good morning!


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