Monthly Archives: June 2012

The ESM will be the vortex which swallows Europe (if ratified)

Today it emerged that the ESM (European Stability Mechanism) could later be paying for the €100 billion bailout of Spain’s banking system. This ‘stability’ mechanism, however, has only been ratified by France, Holland and Slovenia – and may never materialise.

The video below is targeted at a German audience, but is still relevant to any European.

That ESM which everybody may think is a cuddly solution to the problem, is in fact a huge Orwellian nightmare. Nobody will be able to sue it or any of its officials, whilst they will have carte blanche to act above the law. Unelected overlord Eurosprouts will be able to impose their will over Europe and have the right to ask for any money from governments, whenever they like, within 7 days. Given such stringent conditions, it is difficult to see why any sovereign nation would want to participate and ratify the proposals. Please correct me if I am wrong (and I suspect I am) but it seems only 3 countries have ratified it so far, and I think it is likely that the pledges for the ESM will never really come to light.

Moreover, any bailout in Europe is also subject to the risks of contagious circular logic. The Eurozone’s members have to stump up the cash to pay into the ESM. But if anyone needs a proper bailout,  Italy stumps up 17.9%, Spain 11.9%, and France 20.4%, of the ESM’s funding. But I have some questions.

A) How is Spain going to be able to afford to fund a bailout to itself, when it inevitably needs one?
B) By paying up for Spain, surely Italy will be pushed over the edge and will need a bailout. How will Spain be able to afford to fund that, given that it has just been bailed out?
C) Then doesn’t this put ‘safer countries’ like France and Germany at risk? If this jiggery-pokery continues with the ESM, they may very well need a bailout themselves – although I don’t see the Euro lasting that long.

To conclude, sovereign bailouts are throwing money down the drain. The ESM is only going strengthen contagion fears because it spreads out the risk amongst already fragile public finances. Therefore if the ESM does get signed into national statute books, it will make Europe far from stable and will be the sinkhole that swallows it up.

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Posted by on June 11, 2012 in Trading Ideas


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The Spanish bailout that will only make the EU more fragile

No lasting joy forecast for Rajoy

The markets are likely to hurrah this morning as news of the Spanish bailout is celebrated. Spain’s banks have been given a €100 billion bailout from the EU and the headline could easily be interpreted as good news. The reality, however, is that this bailout is incomplete, unratified and unpopular.

Furthermore Spain’s bank bailout has been largely free of conditions – unlike the bailouts of Greece, Portugal and Ireland, they will not have to suffer enforced austerity. This strengthens the hand of parties like Syriza in Greece who want to get rid of austerity – let’s not forget they are Greek elections on Sunday. Therefore, this bailout makes the EU and the Euro project even more fragile as the risk of sovereign default and eurozone exits becomes more real.

Firstly the EU is yet to specify which bailout fund will pay for Spain’s banks. Will it be the EFSF (European Financial Stability Fund) or the ESM (European Stability Fund) which is not yet signed into law? If it is the EFSF – there are legal issues surrounding it. Money was paid into the fund by Eurozone members on the premise that it would only be used for sovereign bailouts, not bank recapitalisations. There is pressure from Holland and Finland, not to mention other states, who want to vote against the bailout before it is agreed.

Secondly, Spain technically has to backstop the loans to it’s banks. Many economists believe that the tipping point where a nation can no longer pay back its debts is when the debt/GDP ratio is over 90%. Now with this bailout equivalent to 10% of Spain’s GDP, Spain is pushed over that level and onto the path to insolvency. Moreover, this Spanish federal debt does not include that of its regions – which adds another 13% onto it’s debt/GDP ratio.

One last bugbear that the markets seem to be forgetting is that Spain’s bailout is without many conditions. Unlike the bailouts of it’s other European members, there is no harsh austerity requirements attached. As Greeks go to the polls once again on Sunday – I would not be surprised if they give a mandate to Syriza to rule because of their unjust treatment. With Syriza in charge, the austerity package would be in ripped apart, Greece would be truly insolvent and would not be repaying the EU’s bailout. Long term, this means exiting the Euro, short-term they are likely to be subsidised by Germany. But how long would the Germans be prepared to put up with that? Then what about when Spain needs a bigger bailout? Or Italy needs one? They are too big to fail and too big to bail. Although we are now veering into the realm of the hypothetical – I would imagine this could set the precedent for Spain and Italy to leave the Euro.

Even if that doesn’t materialise soon, it is impossible to see how this bailout solves the Eurozone crisis. I am shorting the FTSE now in out of hours trading at 5560 with a stop loss at 5660. Once the bailout mania disappears, I think we will see the markets realise the dismal fate of the Eurozone once again and they will fall.

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Posted by on June 11, 2012 in Trading Ideas


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The truth about bank accounting: the Royal ‘Berg of Scotland

Shareholder group PIRC discovers £40 billion of unrealised losses in UK banks – yet bonuses keep flowing on the back of fake profits

Last summer I attended an open day by RBS for A-Level students. It was an “insight day” to look at what it was like to work at their investment banking division. They paid the travel expenses and my naive self thought that investment banking was something I later wanted to work in – so I went to London for the day.

After arriving, I got chatting with a chap who had come down from Bradford. “They paid me train fare – 250 quid, put me int ‘otel overnight, and paid me for’ taxi.” That’s a lot of money, I thought, for just one person, for just a single day. At that point I pondered – if RBS were willing to spend that much on today, surely they must value it, think it is important, and make it really useful. But how wrong I was.

For the first half hour we had a “communications guru” who spent the best part of an hour telling us that smiling makes you come across as a nicer person. You don’t need to be Benedict Cumberbatch to work that out.

Then we had another woman who was awfully nice, and smiled a lot, but didn’t really tell us anything useful. She told us about RBS’ Moneysense program that would teach us how to make a budget at university. Surely if you did not know how to budget at university, you should not be later working with other people’s money in an investment bank. But no, not at RBS!

This was followed by tasks of minimal educational value – putting velcro-backed company logos onto a board with Retail Bank, Investment Bank, Hedge Fund and Building Society on it. A trip to the trading floor for literally 30 seconds (for informational security reasons) – before we were told about their wonderful “insight week” (more of the same), internships and other opportunities. At which point many of us just rolled our eyes.

The reason I mention this day is because it illustrates a culture in which money is thrown around left, right and centre for spurious purposes – regardless of the fact it is owned by the UK taxpayer. This approach may have been acceptable before the crisis – but they should not be so reckless with money now, given that without the UK government they would no longer exist.

In the context of the recent report by PIRC, a shareholder group who revealed that RBS have undeclared losses of £18 billion, it would seem RBS have been equally liberal with their accounting.

The problem with bank accounting is that – from an outsider’s perspective – it’s very easy to fudge the numbers. You can report your losses during one quarter, or announce them later. You can mark-to-market (record your assets at their real market prices) or not. What this means is the top brass at a bank can record large profits and consequently pay themselves huge bonuses, despite the reality of creating a big loss.

A little while later, losses have to be reported, the bank’s capital buffer is wiped out, and guess who will have to pay again? You guessed it – the taxpayer!

Many would argue that RBS should have been allowed to fail in the 2007/8 crisis – but it was propped up. Billions of pounds have been dispersed in bonuses whilst they have milked moral hazard mentality (tails we win, heads you lose) – leaving the bank to be little more than a decrepit shell.

In my humble opinion – RBS is taking took much risk and is willing to let the taxpayer take the hit when defaults on their loan books ultimately occur. In the meantime, they are paying out most of their (short term) “profits” out in bonuses. Therefore, I would recommend a short-selling of it with a stop-loss at 250p a share.

Granted, the shares have fallen 50% over the past year – they are not at their cheapest and a bit of volatility could make us hit the stop loss. However, with the saga of Europe rumbling on – I would argue they are already technically insolvent.

One last thing, if you’re not convinced that it is a basket-case already… just read what The Slog said about it.

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Posted by on June 6, 2012 in Trading Ideas


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