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“Tremendous Ripple Effects” – Retailers Demand Bailout After Hanjin Collapse Paralyzes Trade

“Tremendous Ripple Effects” – Retailers Demand Bailout After Hanjin Collapse Paralyzes Trade

When we first reported about the imminent paralysis of an unknown number of global supply chains and a potential shock in worldwide trade as a result of the historic bankruptcy of Hanjing Shipping, one of the world’s largest container shipping companies which handles 8% of Trans-Pacific trade volume for the US market, we concluded that “the global implications from the bankruptcy are unknown: if, as expected, the company’s ships remain “frozen” and inaccessible for weeks if not months, the impact on global supply chains will be devastating, potentially resulting in a cascading waterfall effect, whose impact on global economies could be severe as a result of the worldwide logistics chaos. The good news is that both economists and corporations around the globe, both those impacted and others, will now have yet another excuse on which to blame the “unexpected” slowdown in both profits and economic growth in the third quarter.

However, not even this extreme forecast captured what would happen just 48 hours later, when as the WSJ reported overnight, retailers have gone far beyond simply blaming the Hanjing bankruptcy for their upcoming woes: they are petitioning for a government bailout, or as the WSJ put it, they are “bracing for a blow as they stock up for the crucial holiday sales season, asked the government to step in and help resolve a growing crisis.”

Or, as America’s banks would call it, “get bailed out.” And, in taking a page right out of the 2008 bank bailout, the doom and gloom scenarios emerge:

While the situation is still developing, the prospect of harm is significant and apparent,” Sandra Kennedy, president of the Retail Industry Leaders Association, wrote in a letter to the Department of Commerce and the Federal Maritime Commission. Hanjin’s recent bankruptcy filing “presents an enormous challenge to U.S. shippers,” she said, and “could have a substantial impact on consumers and the economy at large.”

…click on the above link to read the rest of the article…

Heretical Thoughts And Doing The Unthinkable

Heretical Thoughts And Doing The Unthinkable

Heresy!

The Dow rose 222 points on Tuesday – or just over 1% – and everyone was exuberant…but things have not turned out well since. We agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.

Druckenmiller

Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly.

Speaking at an investment conference in New York last week, George Soros’ former partner warned that…

“…higher valuations, three more years of unproductive corporate behavior, limits to further easing, and excessive borrowing from the future suggest that the bull market is exhausting itself.” 

But we promised to return to the scene of our crime today. In these pages, we recently committed heterodoxy… even heresy! We don’t know what got into us and we are deeply sorry for our misdoings, the remembrance of which is grievous unto us…

… but in a moment of weakness (oh, ye gods of democracy, why have you forsaken us?) we dared to question whether voting makes any damned sense. We concluded that it didn’t.

We don’t know the candidates well enough to know who is really better. We don’t have any idea what challenges the next president will face, nor which candidate would be better equipped to deal with them. We don’t know if the candidates believe what they say they believe or whether they will do what they promise to do.

We only know our vote, statistically, won’t make a bit of difference. And that we don’t want the “lesser of two evils.” And that we don’t feel any obligation to play this game! Dear readers canceled their subscriptions… and heated up their irons.

…click on the above link to read the rest of the article…

Jim Grant Asks When The World Will Realize “That Central Bankers Have Lost Their Marbles”

Jim Grant Asks When The World Will Realize “That Central Bankers Have Lost Their Marbles”

April 15 comes and goes but the federal debt stays and grows. The secrets of its life force are the topics at hand— that and some guesswork about how the upsurge in financial leverage, private and public alike, may bear on the value of the dollar and on the course of monetary affairs. Skipping down to the bottom line, we judge that the government’s money is a short sale.

Diminishing returns is the essential problem of the debt: Past a certain level of encumbrance, a marginal dollar of borrowing loses its punch. There’s a moral dimension to the problem as well. There would be less debt if people were more angelic. Non-angels, the taxpayers underpay, the bureaucrats over-remit and everyone averts his gaze from the looming titanic cost of future medical entitlements. Topping it all is 21st-century monetary policy, which fosters the credit formation that leads to the debt dead end. The debt dead end may, in fact, be upon us now. A monetary dead end could follow.

As to sin, Americans surrender, in full and on time, 83% of what they owe, according to the IRS—or they did between the years 2001 and 2006, the latest period for which America’s most popular federal agency has sifted data. In 2006, the IRS reckons, American filers, both individuals and corporations, paid $450 billion less than they owed. They underreported $376 billion, underpaid $46 billion and kept mum about (“nonfiled”) $28 billion. Recoveries, through late payments or enforcement actions, reduced that gross deficiency to a net “tax gap” of $385 billion.

This was in 2006, when federal tax receipts footed to $2.31 trillion. Ten  years later, the U.S. tax take is expected to reach $3.12 trillion.Proportionally, the 2006 gross tax gap would translate to $607.7 billion, and the net tax gap to $520 billion.

…click on the above link to read the rest of the article…

Puerto Rico Says Will Default Tomorrow, Begs Congress For Help “Or Else Crisis Will Get Worse”

Puerto Rico Says Will Default Tomorrow, Begs Congress For Help “Or Else Crisis Will Get Worse”

Update: PR Governor Padilla has spoken…
  • *PUERTO RICO GOVERNOR SAYS WON’T PAY DEBT TOMORROW
  • *PUERTO RICO GOVERNOR SAYS ISLAND WON’T PAY DEBT MONDAY
  • *PUERTO RICO GOVERNOR: GOVERNMENT SIGNED MORATORIUM BILL YESTERD
  • *PUERTO RICO NEEDS DEAL W/ CREDITORS AND/OR CONGRESS: GARCIA

And of course, demands a bailout…

  • *PUERTO RICO GOVERNOR CALLS ON U.S. CONGRESS, PAUL RYAN FOR HELP

And then threatens…

  • *CRISIS WILL GET WORSE IF U.S. CONGRESS DOESN’T HELP: GARCIA
  • *PUERTO RICO GOVERNOR CONCLUDES REMARKS TO COMMONWEALTH

As we detailed earlier, It’s D-Day in Puerto Rico.As Bloomberg reports, investors are finding little comfort in the Puerto Rico Government Development Bank’s efforts to strike a last-ditch agreement with creditors to soften the blow of a default this weekend. The bonds that mature today (May 1st) have crashed to just 20c (disastrously below the 36-cent recovery rate the commonwealth proposed in March).

It appears investors are not buying what Puerto Rico is selling and prefer to dump the bonds than hold out in hope of a ‘deal’…

A default on the $422 million due today is “virtually certain,” S&P Global Ratings said April 11.

No matter which route Puerto Rico takes, credit-rating companies see a default as inevitable. Moody’s Investors Service analysts said last week that any non-payment, even if it’s agreed to by creditors, constitutes a default in their eyes. S&P Global Ratings said a distressed-debt exchange or temporarily withholding interest is synonymous to default.
But as Bloomberg reports, Puerto Rico said its Government Development Bank, which is operating in a state of emergency to preserve its dwindling cash, reached an agreement with some credit unions to delay $33 million of bond payments as the commonwealth rushes toward a potential historic default.

…click on the above link to read the rest of the article…

Italy Seeks “Last Resort” Bailout Fund To “Ringfence” Troubled Banks, Meeting Monday

Italy Seeks “Last Resort” Bailout Fund To “Ringfence” Troubled Banks, Meeting Monday

Italy’s finance minister, Pier Carlo Padoan, wants to “ringfence” its troubled banks.

Padoan called a meeting of the executives of Italy’s troubled banks in Rome on Monday. The banks allegedly will come up with a “Last Resort” bailout fund.

Last resort or first resort, is there a difference at this point in time?

Please consider Italy Pushes for Bank Rescue Fund. I highlight the key buzzwords and phrases italics.

Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.

Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks.

Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession.

The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved.

Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions — mostly from Italy’s banks, insurers and asset managers — and then a larger debt component. The fund will then mop up shares in distressed lenders.

A second vehicle will seek to buy non-performing loans at market prices.

“It is a backstop fund,” said one person involved in the talks.

…click on the above link to read the rest of the article…

Austria Just Announced A 54% Haircut Of Senior Creditors In First “Bail In” Under New European Rules

Austria Just Announced A 54% Haircut Of Senior Creditors In First “Bail In” Under New European Rules

Just over a year ago, a black swan landed in the middle of Europe, when in what was then dubbed a “Spectacular Development” In Austria, the “bad bank” of failed Hypo Alpe Adria – the Heta Asset Resolution AG – itself went from good to bad, with its creditors forced into an involuntary “bail-in” following the “discovery” of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.

Austria had previously nationalized Heta’s predecessor Hypo Alpe-Adria-Bank International six years ago after it nearly collapsed under the bad loans it ran up when it grew rapidly in the former Yugoslavia. Having burnt through €5.5 euros of taxpayers’ money to prop up Hypo Alpe, Finance Minister Hans Joerg Schelling ended support in March 2015, triggering the FMA’s takeover.

This was the first official proposed “Bail-In” of creditors, one that took place before similar ad hoc balance sheet restructuring would take place in Greece and Portugal in the coming months. Or rather, it wasn’t a fully executed “Bail-In” for the reason that creditors fought it tooth and nail.

And then today, following a decision by the Austrian Banking Regulator, the Finanzmarktaufsicht or Financial Market Authority, Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG. 

The highlights from the announcement:

Today, the Austrian Financial Market Authority (FMA) in its function as the resolution authority pursuant to the Bank Recovery and Resolution Act (BaSAG – Bundesgesetz über die Sanierung und Abwicklung von Banken) has issued the key features for the further steps for the resolution of HETA ASSET RESOLUTION AG. The most significant measures are:

…click on the above link to read the rest of the article…

Governor Of Puerto Rico Set To Impose Capital Controls

Governor Of Puerto Rico Set To Impose Capital Controls 

Yesterday, in the latest plot twist surrounding the inevitable Puerto Rico default, we observed that after the commonwealth island’s Senate passed a surprising bill to impose a debt moratorium on any future debt repayment, its bonds – predictably – tumbled.

We also noted that the legislation addressed the Government Development Bank, or GDB, which is facing speculation that it’ll lapse into insolvency. The bank’s receivership process, liquidity and reserve requirements and payment obligations would be suspended indefinitely, according to an analyst’s read of the bill, which also seeks to split the entity into a “good bank” and “bad bank.”

Hedge funds holding debt in the GDB sued on Monday to stop the bank from returning deposits to local government agencies as it faces a growing cash shortage. The funds, which include affiliates of Brigade Capital Management, Claren Road Asset Management and Solus Alternative Asset Management, accused the bank of seeking to “prop up” local agencies at the expense of other creditors. The GDB has a $422 million debt-service payment due May 1.

The Government Development Bank serves the dual purpose of providing financial support to local governments and acting as a financial adviser to the commonwealth. The funds, which say they hold a “substantial amount” of almost $3.75 billion in the bank’s outstanding debt, blamed the entity’s deteriorating condition on a “hopeless conflict” between loyalties to Puerto Rico and to creditors.

Fast forward to today, when Puerto Rico Governor Alejandro García Padilla signed a measure into law Wednesday that would enable him to declare a moratorium on the commonwealth’s debt payments, mere hours after it cleared the Legislature amid concerns of securing enough support in the lower chamber and a full-court press by creditor lobbyists demanding changes to the bill.

…click on the above link to read the rest of the article…

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The Triumph of Politics

 All of life’s odds aren’t 3:2, but that’s how you’re supposed to bet, or so they say. They are not saying that so much anymore, or saying that history rhymes, or that nothing’s new under the sun. More and more theys seem to be figuring out that past economic and market experiences can’t be extrapolated forward – a terrifying prospect for the social and political order.

 Consider today’s realities:

Global economies have grown to their current scale thanks to a glorious secular expansion of worldwide credit – credit unreserved with bank assets and deposits; credit extended to brand new capitalists; credit that can never be extinguished without significant debt deflation or hyper monetary inflation

Economies no longer form sufficient capital to sustain their scales or to justify broad asset values in real terms

Markets cannot price assets fairly in real terms without risking significant declines in collateral values supporting them and their underlying economies

Politicians that used to anguish (rhetorically) over the right mix of potential fiscal policies, ostensibly to get things back on track (as if somehow finding the right path would have actually been legislated into existence), have come to realize the limits of their power to have a meaningful impact

Monetary authorities have become the only game in town,assassinating all economic logic so they may juggle public expectations in the hope – so far successfully executed – that neither man nor nature will be the wiser.

The good news for policy makers is that man remains collectively unaware and vacuous; the bad news is that nature abhors a vacuum. The massive scale of economies relative to necessary production (not to mention already embedded systemic leverage) suggests this time is truly different.

…click on the above link to read the rest of the article…

The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

Last week, during the peak of the commodity short squeeze, we pointed out how this default cycle is shaping up to be vastly different from previous one: recovery rates for both secured and unsecured debts are at record low levels. More importantly, we noted how this notable variance is impacting lender behavior, explaining that banks – aware that the next leg lower in commodities is imminent – are not only forcing the squeeze in the most trashed stocks (by pulling borrow) but are doing everything in their power to “assist” energy companies to sell equity, and use the proceeds to take out as much of the banks’ balance sheet exposure as possible, so that when the default tsunami finally arrives, banks will be as far away as possible from the carnage. All of this was predicated on prior lender conversations with the Dallas Fed and the OCC, discussions which the Dallas Fed vocally deniedaccusing us of lying, yet which the WSJ confirmed, confirming the Dallas Fed was openly lying.

This was the punchline:

[Record low] recovery rate explain what we discussed earliernamely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson’s Michael Lipsky put it: “we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.

…click on the above link to read the rest of the article…

Which Countries Have The Highest Default Risk: A Global CDS Heatmap

Which Countries Have The Highest Default Risk: A Global CDS Heatmap

Sweden beats USA and Germany as the least likely to default on its bonds but at the other end of the global sovereign risk spectrum lie two socialist utopias – Venezuela (CDS just shy of 6000bps) and Greece (CDS around 1800bps) are the nations most likely to default.

Of course, our readers will be well aware of this: back in December, when its CDS was trading at “only” 2300 bps (or whatever points upfront equivalent it was back then) we said Venezuela CDS are going much, much wider. Little did we know that in just about 14 months they would more than double, and as of last check, Venezuela CDS are just shy of 6000bps suggesting a default is virtually guaranteed.

So aside from these two socialist utopias, who else is on the default chopping block? The CDS heatmap below lays out all the countries which according to the market, are most likely to tell their creditors the money is gone… it’s all gone.

Below, in order of declining default risk, are the ten most likely to follow Venezuela and Greece into the great default unknown:

  1. Ukraine
  2. Pakistan
  3. Egypt
  4. Brazil
  5. South Africa
  6. Russia
  7. Portugal
  8. Kazakhstan
  9. Turkey
  10. Vietnam

Sovereign Credit Default Swaps (CDS) are financial contracts that measure the risk of default on sovereign debt: the higher the spread, the greater the risk of default.

Source: BofA

10,000 Greek Farmers Stage Massive Revolt In Athens, Destroy Police Cars

10,000 Greek Farmers Stage Massive Revolt In Athens, Destroy Police Cars

On Friday, some 800 angry Greek farmers marched on the Agriculture Ministry in Athens and beat police with Shepherd’s crooks.

No, really:

The farmers are understandably upset with Alexis Tsipras and the government for a proposal to triple the social security burden and double income taxes in an effort to appease the powers that be in Brussels who claim Greece has not made enough progress towards fiscal consolidation since the country’s third bailout was agreed last August.

Tsipras and Syriza swept to power a little over a year ago with promises to roll back austerity, but prolonged negotiations with creditors and the resulting economic malaise that gripped the country last summer broke the PM’s revolutionary spirit and now, he’s been reduced to something of a technocrat rather than a socialist firebrand.

Putting Greece on a sustainable path is a virtual impossibility at this juncture. There are myriad structural problems that cut to the heart of the currency bloc’s woes and on top of that, Athens’ debt burden is simply astounding. In other words, Tsipras and Brussels can raise taxes and cut pension benefits all they want but this problem is never going to be solved. It’s too late.

Adding insult to injury, data out Friday shows the country slipped back into recession in Q4.

All of this helps to explain why, after the tomato-tossing, stick-waving melee at the Agriculture Ministry, the farmers – joined by some 10,000 of their compatriots as well as union members, massed in Syntagma Square on Friday where tractors could be seen meandering through the crowd.

While that clip depicts a mostly peaceful scene, things weren’t so calm earlier in the day when still more farmers clashed with authorities and beat a police car half to death:

…click on the above link to read the rest of the article…

Puerto Rico “Generously” Offers To Repay 54 Cents On The Dollar To Creditors Owed $70 Billion

Puerto Rico “Generously” Offers To Repay 54 Cents On The Dollar To Creditors Owed $70 Billion

Height Securities’ Daniel Hanson is “deeply skeptical” about the viability of Puerto Rico’s proposal for restructuring the island’s $70 billion in debt.

Hanson, in a note out late last week, said Governor Alejandro Padilla was “significantly unlikely” to present a “credible” plan and that the commonwealth’s offer to creditors may be “laughably low.”

As a reminder, Puerto Rico defaulted on some of its non-GO debt last month, presaging more missed payments this year as creditors come calling in May and July.

So far, the island has been able to avoid a messy default on its GO debt by utilizing a revenue “clawback” mechanism that effectively allows the commonwealth to divert money earmarked for non-GO debt, a move decried by the monolines.

In December, the market thought there might be a light at the end of the tunnel when creditors and the island’s power utility managed to get the bond insurers to go along with a $8 billion restructuring for PREPA, but that fell apart a week ago when lawmakers failed to vote on a new tax. Ultimately, the deadline to pass the bill was extended to February 16, but the fraugh negotiations underscore how precarious the situation has become.

On Monday, we got our first look at Puerto Rico’s opening salvo in what’s likely to be protracted battle to tackle the entire debt burden.

“Puerto Rico on Monday announced a major exchange offer to creditors that could reduce its debt by about $23 billion, the opening salvo in efforts to resolve the island’s crippling $70 billion debt crisis,” Reuters reports, adding that “the new plan would reduce a $49.2 billion chunk of Puerto Rico’s debt by about 46 percent, to $26.5 billion, by offering creditors payout reductions under a new, so-called “base bond” with better legal protections.”

…click on the above link to read the rest of the article…

Dallas Fed “Responds” To Zero Hedge FOIA Request

Dallas Fed “Responds” To Zero Hedge FOIA Request

Two weeks ago, Zero Hedge reported an exclusive story corroborated by at least two independent sources, in which we informed our readers that members of the Dallas Federal Reserve had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances.

The Dallas Fed took the opportunity to respond (on Twitter), when in a tersely worded statement it said the following:


No truth to this @zerohedge story. The Dallas Fed does not issue such guidance to banks. https://twitter.com/zerohedge/status/688441021986959361 

Italian Banks Sink As “Bad Bank” Plan Underwhelms

Italian Banks Sink As “Bad Bank” Plan Underwhelms

“Italian banks’ share prices have been volatile YTD, given the market’s renewed fears over asset quality and potential developments on a possible bad bank creation,” Citi wrote, in a note analyzing which Italian banks are most exposed. “Total gross NPLs in Italy have increased by c160% since 2009 and now represents c18% of loans (vs c8% in 2009).”

Essentially, Italy was slow to tackle its NPL problem relative to other countries and the chickens have now come home to roost.

The idea was to create a “bad bank” for the “assets” (because that’s worked so well in other countries), but the plan was stalled by the European Commission due to concerns about whether Italy was set to run afoul of restrictions around when countries can provide state aid to the financial sector.

In short, creditors at Italy’s banks would need to take a hit before PM Matteo Renzi’s government would be allowed to extend state aid. That is unless Italy could devise some kind of end-around, which is precisely what Renzi was attempting to do last week.

As a reminder, this would have been easier had it been negotiated last year before new rules on bank resolutions came into effect in 2016. That’s why Portugal pushed through the Novo Banco bail-in and the Banif rescue in December.

In any event, Italy has indeed managed to strike a deal with Brussels to help alleviate banks’ NPL burden.

Essentially, Italian banks will securitize their souring loans, sell them to investors, and the government will guarantee the senior tranches of the new paper.

…click on the above link to read the rest of the article…

Why A Former Fed Official Fears A Global Meltdown

Why A Former Fed Official Fears A Global Meltdown

Authored by Gerald O’Driscoll, former vice president at The Dallas Fed, posteed op-ed at The Wall Street Journal,

Are we headed for another global financial crisis? The market convulsions of the past week reflected a continuation of a market selloff that began on the first trading day of 2016. Investors have reasons to be fearful—but not terrified.

This year is likely to be one of financial crises in industries and countries around the world. Whether those turn into a global financial crisis is an open question, and the answer will likely turn on the health of the U.S. financial industry and broader economy. No crisis is global if American financial markets hold up. The best I can foresee, at this moment, is that a true global financial crisis is not likely.

Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.

Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead “extend and pretend”—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process?

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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