ECB Trapped: Steinhoff Liquidity Collapses As Lenders Pull Credit Lines

When yesterday we discussed the latest troubles facing embattled retailer Steinhoff, whose bonds are owned by none other than the ECB, we said that while the company"s bonds mature in 2025, its bankruptcy is at most months away. In retrospect, and in light of the latest news, that may have been optimistic, because it now appears that a bankruptcy may be imminent and is at most just weeks away. According to Bloomberg, Steinhoff - which is facing an accounting scandal that led to the recent departure of its CEO and destroyed most of the company"s value - said lenders are starting to cut off support.

The reason why Steinhoff is suddenly facing not only a solvency but liquidity crisis is that the company which owns Conforama in France, Mattress Firm in the U.S. and Poundland in the U.K. isn’t yet able to assess the magnitude of financial irregularities disclosed two weeks ago, it said in a presentation to lenders in London on Tuesday (presentation below). The South African company also said it didn’t know when it would be able to publish audited results for 2017 and 2016, nor whether additional years will need to be restated.

Furthermore, Steinhoff also revealed that it didn’t have “detailed visibility” of the cash flows of individual operating companies. The units rely on the company for working capital and “the forecast position for each operating company is evolving daily,” it said. PricewaterhouseCoopers has been hired to investigate the accounts, while AlixPartners LLP is working on an analysis of the cash flow.

In short, the company is flying blind with no budgeting and no corporate overnight.

The presentation also said that the company is still grappling with the task of getting to the bottom of the crisis, which has led to the resignations of CEO Markus Jooste and billionaire Chairman Christo Wiese. As Bloomberg adds, Steinhoff said earlier Tuesday that Chief Operating Officer Danie van der Merwe, 59, had been made interim CEO to helm the recovery attempt, while Conforama boss Alexandre Nodale will serve as his deputy in a new four-member management board.

Needless to say, the last thing secured creditors want, is not knowing the "revised" value of the collateral that secures their loans, especially in the case of a rollup which "suddenly" turned out to also be fraud. Hence: everyone is rushing to get out the back door. Predictably, Steinhoff"s shares - already decimated - resumed their plunge, and ended their recent dead cat bounce by slumping more than 205% in Frankfurt to the lowest since Dec. 8 before paring losses to trade 12 percent lower.

Finally, Steinhoff revealed that it had outstanding debt of 10.7 billion euros ($12.7 billion) as of Dec. 14, the slide below revealed. Almost 4.8 billion euros of that was in Steinhoff Europe AG, an operation based in Austria. About 690 million euros in notional facilities have been rolled over to date, according to the presentation.

As a reminder, the ECB is a creditor to Steinhoff Europe AG Austria.

Which brings us to the question he brought up yesterday: will, or rather when now that Steinhoff"s bankruptcy now appears imminent, will the ECB sell its Steinhoff bond holdings? As we showed yesterday, Mario Draghi appears to be getting ready to do just that. As BofA pointed out, Draghi seems to be taking a more defensive stance with regards to owning Fallen Angel bonds like Steinhoff"s.

Note that the CSPP Q&A has been updated as of 29th November 2017, and the paragraph on ECB selling now reads as follows:

Q1.5 Will the Eurosystem sell its holdings of bonds if they lose eligibility?

The Eurosystem may choose to, but is not required to sell its holdings in the event of a loss of eligibility, e.g. in case of a downgrade below the credit quality rating requirement.

Previously this phrasing was far more specific, with forced selling (or otherwise) not even presented as an option:

Q8 Will the Eurosystem sell its holdings of bonds if they lose eligibility? For example, if they are downgraded and lose investment grade status?

The Eurosystem is not required to sell its holdings in the event of a downgrade below the credit quality rating requirement for eligibility.

Of course, once the ECB breaks the seal and it become public knowledge that the world"s biggest hedge fund not only buys - as everyone had known - but also sells when it has to, all hell could break loose for those IG bonds on its books which are about to be downgraded to junk by one or more rating agencies, leading to the perilous scenario we described yesterday, in which "fallen angels" become very painful "falling knives."

Until then, we will just keep an eye on Mario Draghi for the answer how long he can continue to burn taxpayer money by holding insolvent bonds and pretending that nothing has changed...

* * *

Steinhoff"s full presentation to (evaporating) investors is below (link)

The ECB's Target2 Lies - Exposing The Real Capital Flight From Italy & Spain

Authored by Mike Shedlock via MishTalk.com,

The ECB claims that Target2 does not represent capital flight. Evidence says the ECB is wrong, especially for Italy and Spain.

I have discussed this previously, but let’s recap Target2 before taking a look at new charts.

Project Syndicate writer, Hans-Werner Sinn, explains why the ECB’s asset purchases and Target2 imbalances constitute “Europe’s Secret Bailout”.

Under the ECB’s QE program, which started in March 2015, eurozone members’ central banks buy private market securities for €1.74 trillion ($1.84 trillion), with more than €1.4 trillion to be used to purchase their own countries’ government debt.

The QE program seems to be symmetrical because each central bank repurchases its own government debt in proportion to the size of the country. But it does not have a symmetrical effect, because government debt from southern European countries, where the debt binges and current-account deficits of the past occurred, are mostly repurchased abroad.

For example, the Banco de España repurchases Spanish government bonds from all over the world, thereby deleveraging the country vis-à-vis private creditors. To this end, it asks other eurozone members’ central banks, particularly the German Bundesbank and, in some cases, the Dutch central bank, to credit the payment orders to the German and Dutch bond sellers. Frequently, if the sellers of Spanish government bonds are outside the eurozone, it will ask the ECB to credit the payment orders.

In the latter case, this often results in triangular transactions, with the sellers transferring the money to Germany or the Netherlands to invest it in fixed-interest securities, companies, or company shares. Thus, the German Bundesbank and the Dutch central bank must credit not only the direct payment orders from Spain but also the indirect orders resulting from the Banca de España’s repurchases in third countries.

The payment order credits granted by the Bundesbank and the Dutch central bank are recorded as Target claims against the euro system.

For the GIPS countries [Greece, Italy, Portugal, and Spain], these transactions are a splendid deal. They can exchange interest-bearing government debt with fixed maturities held by private investors for the (currently) non-interest-bearing and never-payable Target book debt of their central banks – institutions that the Maastricht Treaty defines as limited liability companies because member states do not have to recapitalize them when they are over-indebted.

If a crash occurs and those countries leave the euro, their national central banks are likely to go bankrupt because much of their debt is denominated in euro, whereas their claims against the respective states and the banks will be converted to the new depreciating currency. The Target claims of the remaining euro system will then vanish into thin air, and the Bundesbank and the Dutch central bank will only be able to hope that other surviving central banks participate in their losses. At that time, German and Dutch asset sellers who now hold central bank money will notice that their stocks are claims against their central banks that are no longer covered.

Target2 Liabilities

A quick perusal of Target2 Balances for January shows capital flight has largely stabilized but the imbalance in Spain hit a new record.

ECB’s Story on Target2 Doesn’t Add Up

Financial Times Alphaville guest writer Marcello Minenna makes a case in pictures for what I have long stated.

It’s interesting to note that Minenna is the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator.

Minenna says the ECB’s Story on Target2 Doesn’t Add Up

Mienna compares France with its stable Target2 balance to Italy and Spain.

France Target2 Over Time

The red line with dots represents the imbalance. As of July France had a Target2 liability of 12.2 billion. France shows no correlation to ECB asset purchases.

Germany Target2 Surplus

Italy Target2 Liability

Spain Target2 Liability

Mienna goes over what various colored bars represents and concludes “For Italy and Spain, the QE programme has facilitated capital outflows by domestic investors. Elsewhere, it has not.”

This is what I concluded long ago. For discussion, please see Target2 and Secret Bailouts: Will Germany be Forced Into a Fiscal Union with Rest of Eurozone?

Bill Blain: "It Looks Like North Korea Is No Longer Playing To The Chinese Script"

Submitted by Bill Blain of Mint Partners

What we don"t know about Korea and China?

“The Chinese use two brush strokes for “crisis”. One brush stroke stands for danger, the other for opportunity.”

Everyone is guessing about North Korea! Who knows what happens next… Probably less than markets fear.. but that won’t stop us worrying about it…

The reaction of markets (on a US holiday) might mean the antics of the Hermit Kingdom are losing some of their capacity for immediate shock and destabilisation. Are markets becoming blasé about the repeated threats? Probably not - the pressure on asset prices and price volatility remains high as participants anticipate a wide range of outcomes.

What’s the right asset positioning? Risk on/off? What are the dangers in terms of the liquidity/return/safe-haven equation? Do nothing and hope it all plays out positively? (Hope is never a strategy.) How contained will it be? Take a defensive stance and miss upside if/when its resolved? Or buy the dips because the risks are massively overstated and its “opportunity”!

Either you know… or you are guessing.

Smarter political minds than I might be able to work out scenario probabilities on how this plays out.

I buy into the current impasse as a China story: To what extent can/might China exercise guidance and control? It rather suited them to watch Trump fulminating and leave him embarrassed. That may no longer be true. It rather looks like the North Koreans are not playing to the script – clearly catching China as surprised and angry as the rest of us at a hydrogen blast 10 times more powerful than Hiroshima. The potential for China to lose patience with N Korea adds a new factor.

Initially it looked like China would be the likely winner, playing the blessed peacemaker role in its own backyard. We were trying to figure what potential upside for China of scoring geo-political points if Korea goads Trump into doing something “hasty” might be? And, what would be the figurative and literal fallout if the Americans lose patience.. (pretty much a worst case scenario)? 

The current what-ifs could change in an instant… I read a number of analysts making contrarian calls about the opportunity to buy cheap Korean stocks and go long the Won. Perhaps it changes the China equation – especially if there is a flood of refugees from the North as some analysts suggest?  Putting China under pressure immediately ahead of the Peoples National Congress in October (picking the next leaders) is an “interesting” shot across the bow.

The other big known unknown this week will be the ECB meeting - and in this case I confidently expect market disappointment.  Draghi will wait before giving any definitive guidance on the direction and scope for further asset purchase schemes. In other words it will be more uncertainty about when the ECB starts to tighten (for that is what a taper effectively is.) We won’t know till later this year.

The big question is the Euro – at what stage does the ECB start to signal its “concern” about the strength when inflation remains weak and the fledgling recovery is still taking hold. Or does the market decide for them? No sign of weakness from a market still convinced Europe is a big recovery story. That could change. 

I continue to harbour suspicions on just how papier-mâché the European façade is. Last week I was reading through the lists of eligible ECB bonds - it’s a pretty complete list of every bond deal ever launched. We know what, but not how much, they buy of that list.

Based on a hint from the excellent Marcus Ashworth of Bloomberg, one issue that got me thinking is the stack of European Sovereign and Agency bonds the ECB holds: there is a letter from Draghi on line confirming the ECB holds no EIB bonds.

So what do they hold in that Euro 180 bln SSA portfolio?

There is a long list of eligible European agencies and banks with government support, ranging from French railways to Landesbanks, to Italian savings banks to Portuguese agencies.. Not saying - not for one moment - that these are tat issuers… but they are sovereign obligations with sovereign ratings for a reason..…

Weird Things Are Happening With Gold

Authored by James Rickards

Last week featured two unusual stories on gold - one strange and the other truly weird. These stories explain why gold is not just money but is the most politicized form of money.

They show that while politicians publicly disparage gold, they quietly pay close attention to it.

The first strange gold story involves Germany…

The Deutsche Bundesbank, the central bank of Germany, announced that it had completed the repatriation of gold to Frankfurt from foreign vaults.

The German story is the completion of a process that began in 2013. That’s when the Deutsche Bundesbank first requested a return of some of the German gold from vaults in Paris, in London and at the Federal Reserve Bank of New York.

Those gold transfers have now been completed.

This is a topic I first raised in the introduction to Currency Wars in 2011. I suggested that in extremis, the U.S. might freeze or confiscate foreign gold stored on U.S. soil using powers under the International Emergency Economic Powers Act, the Trading With the Enemy Act or the USA Patriot Act.

This then became a political issue in Europe with agitation for repatriation in the Netherlands, Germany and Austria. Europeans wanted to get gold out of the U.S. and safely back to their own national vaults. The German transfer was completed ahead of schedule; the original completion date was 2020.

But the German central bank does not actually want the gold back because there is no well-developed gold-leasing market in Frankfurt and no experience leasing gold under German law.

German gold in New York or London was available for leasing under New York or U.K. law as part of global price-manipulation schemes. Moving gold to Frankfurt reduces the floating supply available for leasing, making it more difficult to keep the manipulation going.

Why did Germany do it?

The driving force both in 2013 (date of announcement) and 2017 (date of completion) is that both years are election years in Germany. Angela Merkel’s position as chancellor of Germany is up for a vote on Sept. 24, 2017. She may need a coalition to stay in power, and there’s a small nationalist party in Germany that agitates for gold repatriation.

Merkel stage-managed this gold repatriation with the Deutsche Bundesbank both in 2013 and this week to appease that small nationalist party and keep them in the coalition. That’s why the repatriation was completed three years early. She needs the votes now.

The truly weird gold story comes from the United States…

Secretary of the Treasury Steve Mnuchin and Senate Majority Leader Mitch McConnell just paid a visit to Fort Knox to see the U.S. gold supply. Mnuchin is only the third Treasury secretary in history ever to visit Fort Knox and this was the first official visit from Washington, D.C., since 1974.

The U.S. government likes to ignore gold and not draw attention to it. Official visits to Fort Knox give gold some monetary credence that central banks would prefer it does not have.

Why an impromptu visit by Mnuchin and McConnell? Why now?

The answer may lie in the fact that the Treasury is running out of cash and could be broke by Sept. 29 if Congress does not increase the debt ceiling by then.

But the Treasury could get $355 billion in cash from thin air without increasing the debt simply by revaluing U.S. gold to a market price. (U.S. gold is currently officially valued at $42.22 per ounce on the Treasury’s books versus a market price of $1,285 per ounce.)

Once the Treasury revalues the gold, the Treasury can issue new “gold certificates” to the Fed and demand newly printed money in the Treasury’s account under the Gold Reserve Act of 1934. Since this money comes from gold revaluation, it does not increase the national debt and no debt ceiling legislation is required.

This would be a way around the debt ceiling if Congress cannot increase it in a timely way. This weird gold trick was actually done by the Eisenhower administration in 1953.

Maybe Mnuchin and McConnell just wanted to make sure the gold was there before they revalue it and issue new certificates.

Whatever the reason, this much official attention to gold is just one more psychological lift to the price along with Fed ease, scarce supply and continued voracious buying by Russia and China.

The ECB's Balance Sheet Is Now The Size Of Japan's GDP

Yesterday was a landmark day for the ECB. First, the central bank disclosed that its CSPP, or corporate bond, holdings rose above €100Bn for the first time. As DB"s Jim Reids notes this morning, to put things in perspective, a similar market cap company would be the 18th largest in the Stoxx 600 and 42nd largest in the S&P 500. It"s also roughly equivalent to the annual national output of Kuwait - the 59th largest economy in the world as of 2016."

Assuming that the previously disclosed percentage of bonds purchased in the primary market, or directly from the company, has not changed since our report a month ago, this means that the price indiscriminate ECB has directly injected approximately $15 billion in various European corporate entities in exchange for bonds, bypassing any middlemen in the process.

As for the ECB"s other notable "achievement" according to the latest update, the ECB"s balance sheet now stands at €4.23 trillion, making it the largest central bank holding in the World. As Deutsche Bank notes, this is the same as the GDP of Japan (€4.3 trillion) - the 3rd biggest economy in the world and a decent distance ahead of Germany (€3.02tn) - the fourth largest.

The news takes place one month after another memorable event for central-planning took place, when both the ECB and BOJ balance sheet surpasses the size of the Federal Reserve"s.

Jim Reid"s conclusion conveys our sentiment too: "It"s staggering to think of it in those terms."

Friend Insists Death Of Republican Operative Behind WSJ Collusion "Bombshell" Wasn't A Suicide

Yesterday we reported how the death of Peter Smith, a longtime Republican operative and financier, had been ruled a suicide. Smith was the primary source for a bizarre WSJ story that tried to link National Security Adviser Mike Flynn with a group of individuals organized by Smith who bargained with a Russian hacker group for copies of what were purportedly Hillary Clinton’s missing 30,000 emails.

Smith died on May 14 – 10 days after he was interviewed by WSJ for the piece. Though a reporter initially described his death as stemming from natural causes, the Chicago Tribune reported Friday that it had been, in fact, a suicide, citing local police records that describe the manner of death – asphyxiation due to helium poisoning – and an alleged suicide note that cited his recent ill health and the coming expiry of a life insurance policy as Smith’s reasons for taking his own life.

But before that narrative could catch hold, a longtime associate of Smith who may have been the last person to speak with him has come forward, telling the Daily Caller that he doesn’t believe the police’s suicide ruling…and neither should you.

Charles Ortel, a Wall Street investment banker and market analyst, told the DC that there were no indications the Chicago businessman and anti-Clinton political investigator was about to take his life when the two spoke on the phone the day before his death.

“He may have been a fantastic actor but I certainly didn’t leave that phone call saying, ‘oh shit, the guy’s at the end of his rope,’” Charles Ortel, a Wall Street investment banker and market analyst, told The Daily Caller News Foundation’s (TheDCNF) Investigative Group.

“This does not seem like a settled story. It made perfect sense to me he might have died of natural causes, but little chance he would have killed himself,” Smith said.

Ortel and Smith had a common interest in the Clintons. Ortel has dug deeply into the financial operations of the Clinton Foundation. He first came to public attention in 2007 by exposing questionable accounting practices at General Electric, according to the DC.

And Smith reportedly had a hand in exposing then Gov. Bill Clinton’s “Troopergate” scandal, where the future president used state troopers to guard him while he was having sex with various women who were not his wife.

Ortel said in his last phone call to him, Smith seemed to be upbeat and very interested in future projects.

Initially, Ortel assumed Smith died of natural causes, but after reading the police report, which included a description of a jerry-rigged suffocation device that’s widely used by terminally ill patients who opt to take their own lives, he’s not so sure.

 “There are lots of older guys like him who still ‘have it ‘and they’re still smart.  They like projects. They like the intellectual stimulation. He was very interested and pleased with his work,”  Ortel said.

Ortel also said the description of the suicide note – with its all-caps type – was out of character for Smith, and that, out of all the emails they’d sent to each other, he couldn’t remember a single example of Smith typing in all caps.

Ortel also was suspicious about the note Smith allegedly left behind, written in all caps, stating “NO FOUL PLAY WHATSOEVER.”

He also noted that many life insurance policies typically exclude payments to beneficiaries in the case of suicide.

He wrote that he was taking his own life because of a “RECENT BAD TURN IN HEALTH SINCE JANUARY, 2017” and that his timing was related “TO LIFE INSURANCE OF $5 MILLION EXPIRING.”

Assuming, for a moment, Smith’s death was the result of foul play: what’s the explanation? Could it have been a politically motivated attack? In the original WSJ story, Smith said he’d received a cache of documents purporting to be the missing 30,000 emails that Clinton withheld from the FBI and State Department, but withheld them because he had doubts about their veracity. Maybe Smith was in possession of the legitimate emails, but lied about turning them over to Wikileaks. What if the Democrats were somehow warned about what Smith had in his possession, or at least what he believed he might have had. Is another "Seth Rich" scenario emerging?
 

The European Union Has A Currency Problem

Authored by Milton Ezrati via NationalInterest.org,

Donald Trump, for all his rhetorical clumsiness and intellectual limitations, still sometimes makes a valid point. He does when he says that Germany is “very bad on trade.” However much Berlin claims innocence and good intentions, the fact remains that the euro heavily stacks the deck in favor of German exporters and against others, in Europe and further afield. It is surely no coincidence that the country’s trade has gone from about balance when the euro was created to a huge surplus amounting at last measure to over 8 percent of the economy—while at the same time every other major EU economy has fallen into deficit. Nor could an honest observer deny that the bias distorts economic structures in Europe and beyond, perhaps most especially in Germany, a point Berlin also seems to have missed.

The euro was supposed to help all who joined it. When it was introduced at the very end of the last century, the EU provided the world with white papers and policy briefings itemizing the common currency’s universal benefits. Politically, Europe, as a single entity with a single currency, could, they argued, at last stand as a peer to other powerful economies, such as the United States, Japan and China. The euro would also share the benefits of seigniorage more equally throughout the union. Because business holds currency, issuing nations get the benefit of acquiring real goods and services in return for the paper that the sellers hold. But since business prefers to hold the currencies of larger, stronger economies, it is these countries that tend to get the greatest benefit. The euro, its creators argued, would give seigniorage advantages to the union as a whole and not just its strongest members.

All, the EU argued further, would benefit from the increase in trade that would develop as people worried less over currency fluctuations. With little risk of a currency loss, interest rates would fall, giving especially smaller, weaker members the advantage of cheaper credit and encouraging more investment and economic development than would otherwise occur. Greater trade would also deepen economic integration, allow residents of the union to choose from a greater diversity of goods and services, and offer the more unified European economy greater resilience in the face of economic cycles, whether they had their origins internally or from abroad.

It was a pretty picture, but it did not quite work as planned. Instead of giving all greater general advantages, the common currency, it is now clear, locked in distorting and inequitable currency mispricings. These began with the enthusiasm in the run up to the currency union. High hopes for countries such as Greece, Spain, Portugal, and to a lesser extent Italy, had bid up the prices of their individual national currencies. In time, reality would have adjusted such overpricing back to levels better suited to each economy’s fundamental strengths and weaknesses. But the euro froze them in place, making permanent what otherwise would have been a temporary pressure. At the same time, Germany, which at the time was still suffering from the economic difficulties of its reunification, joined the common currency with a weak deutsche mark, locking in a rate, International Monetary Fund (IMF) data suggests, some 6 percent below levels consistent with German economic fundamentals.

Right from the start, then, the currency union divided the Eurozone into two classes of economies. Greece, Spain Portugal, Italy, and others became the consumers. Because the euro had locked in their overpriced currencies, populations in these countries had the sense that they had more global purchasing power than their economic fundamentals could support and consumed accordingly. At the same time, the currency overpricing put producers in these countries at a competitive disadvantage. Germany, having locked in a cheap currency position, faced the opposite mix. It became the producer for all Europe even as its own consumers, feeling a little poorer than they otherwise might have, remained cautious. Because Germans in this situation had every incentive to sustain production, while others did not, they made more productive investments, improving their economic fundamentals and so widening the gap between economic reality and the euro’s expression of it. Updated IMF data suggests that by 2016 Germany’s relative pricing edge had doubled to 12 percent.

These pricing biases have gone on to foster still more harm. The German economy has become increasingly export oriented, less responsive to its own consumers, more vulnerable to what happens abroad, and consequently more fragile. The distortions have also spilled outside Europe. By exacerbating the fiscal-financial problems of so many Eurozone members, they contributed to a general decline of the euro against the dollar, the yen, the yuan and other currencies. Accordingly, German industry’s pricing advantage has extended to the global marketplace, certainly compared to where matters would have stood if Germany had an independent currency that avoided the taint of Europe’s troubled economies. Japanese producers complain incessantly about how the strong yen has priced their products off global markets. American producers, which have seen the euro fall some 30 percent against the dollar during the past ten years, are hardly any better off. German industry makes no such complaints.

Berlin and the German media have pushed away any blame. They hotly deny that the country engineered matters in this way. This may be so. No one at the euro’s birth anticipated such a result, not even the Germans. But whether the advantage was planned or not, Berlin, it is clear, has certainly taken advantage of it and has taken steps to perpetuate it. Germany has, for instance, put some 671 billion euros ($752 billion) at risk, one quarter of its gross domestic product (GDP), to support Greece and other troubled nations on Europe’s periphery. It has also helped lasso the IMF into such lending. Berlin claims that all this money at risk reflects its commitment to the European experiment in union. That may indeed be so, but it is an awful lot of altruism. A more cynically inclined observer might suggest such extreme actions have an alternative motivation, that the Germans are desperate to prevent the unraveling of a structure that serves German industry well.

Whatever the truth of German motivations, Trump, it should be clear now, has a point. Germany is leveraging an unfair and distorting competitive advantage. More important everyone, except of course German industrialists, has an interest in unwinding this currency pricing bias. It is not apparent how Europe could do this. A harmonization of tax and spending policies might reduce some of the hardship imposed by these pricing biases but not remove the basic problem. A good first step might at least admit that such distortions exist and that an adjustment would provide relief. For non-German consumers, it might encourage restraint by demonstrating that the global purchasing power of their incomes is less than they had supposed. For German households, it would have the opposite effect. Finding a way to correct the imbalance would provide a lift to non-German production and in so doing lift the pressure of the fiscal-financial crisis under which Europe has labored now for almost ten years. In the process, it would save the German taxpayer from having to put so much money at risk to prop up a distorting system. If an adjustment would hurt German industry, it would also slow or perhaps reverse the underlying ill effects it is having on the structure of that important economy.

Who Knew? German Central Bank Has Been Selling Gold For More Than A Decade

Authored by Louis Cammarosano via Smaulgld.com,

Deutsche Bundesbank gold reserves shrink 45 tons over the past ten years.

• German Central Bank holdings fall From 3,420.6 tons at the end of Q2 2007 to 3375.6 tons, a drop of 1,446,783 ounces.


• German gold reserves have decreased 1.3% over ten years.

Bring the Gold Home & Sell Some

Deutsche Bundesbank, the central bank of Germany, has gained a high profile for its insistence on repatriating a good portion of its gold from vaults at the New York Fed, the Bank of England of London and the Bank of France in Paris. We have been covering the German gold repatriation story since they made their request in 2013 here, here, here and here.

The German repatriation requests aimed to rebalance the Deutsche Bundesbank’s gold holdings from nearly 70% held abroad to 50% held within Germany’s borders. The German Central Bank announced earlier this year that it has nearly completed its plan to repatriate its gold.

Jens Weidman, President of the Deutsche Bundesbank once famously said:

“Indeed, the fact that central banks can create money out of thin air, so to speak, is something that many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish.”

In this video from the Deutsche Bundesbank, German nationals, Deutsche Bundesbank representatives and Herr Weidman explain the importance of gold to Germany.

Given the Deutsche Bundesbank’s statements and the accelerated German gold repatriation schedule, we are surprised to see that the Deutsche Bundesbank has been a steady seller of its gold over the past ten years.

German Gold Reserves 2007 – 2017

The Duetsche Bundesbank gold reserves fell 45 tons from June 30 2007 to May 31, 2017.

The Central Bank of Germany holds the second largest gold reserves of any central bank.

Currently, with the People’s Bank of China halting its gold purchases since October 2016, only the Central Banks of Russia, Kazakhstan and recently Turkey are steady buyers of gold.

Two Italian Zombie Banks Toppled Friday Night

Authored by Wolf Richter via WolfStreet.com, 

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.

Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

And the ECB provides a little history of its failed efforts to put these banks on the right track:

ECB Banking Supervision has closely monitored the two banks since capital shortfalls were identified by the comprehensive assessment in 2014. Since then, the two banks have struggled to overcome high levels of non-performing loans and underlying challenges to their business models, which resulted in further deterioration of their financial position.

In 2016, the Atlante fund [Italy’s government-sponsored “bad bank” set up in Luxembourg to take toxic assets off Italian banks books] invested approximately €3.5 billion in Veneto Banca and Banca Popolare di Vicenza. However, the financial position of the two banks deteriorated further in 2017.

The ECB had therefore asked the banks to provide a capital plan to ensure compliance with capital requirements. Both banks presented business plans which were deemed not to be credible by the ECB.

So nothing worked. Private sector money stayed away in droves. JP Morgan, which had been recruited to save the Italian banks, threw in the towel. These banks had been zombies for too long. Everybody knew it. But the government kept denying it.

Just weeks ago, Italy’s Minister of Economy Pier Carlo Padoan insisted that the two banks would not be wound down. Last year, to dispel the mountain of evidence to the contrary, he insisted that that there would be no need of any future bail outs; and that, furthermore, Italy did not even have a banking problem.

In early June, the two banks were instructed by the European Commission to raise an additional €1.25 billion in private capital. No one bit. Italy’s government then tried to persuade the European Commission and the ECB to water down the requirement to €600-800 million, and it urged Italian banks to chip in to the bank rescue fund.

All that failed. So this weekend, the Italian government gets to sit down together for a friendly chat to enact the necessary measures to protect depositors and senior bondholders in those two banks. Stockholders will be crushed. Junior bondholders will likely get slammed hard. And the Italian taxpayer might face some additional pain – all of it caused by many years of terrible and reckless bank management. The saga of the long-festering banking crisis has thus moved on to the next chapter.

A new era has begun in Europe. And it started in Spain. Many Banco Popular investors were wiped out. Taxpayers are off the hook. Read…  “Bail-In” Era for Europe’s Banking Crisis Begins

In Historic "Self Bail-In" A German Bank Just Canceled Interest Payments On Two Bonds

One year ago, when Deutsche Bank was sliding on concerns about its bad loan book, Germany"s Bremer Landesbank which at the time had €29 billion in assets, saw its bonds plunge overnight when concerns emerged about an imminent failure by the German lender.

Back then the worry was that the bank"s extensive portfolio of nonperforming shipping loans would require either a bailout by a bank, with the name of majority owner NordLB cited, or a state rescue. It was a report by Germany"s Handelsblatt that unleashed the selling, and fear of another European bank failure, after it said that a bailout may not come: "shipping loans have brought Bremer LB into distress and the bank can not survive without government help, but a direct capital injection from Lower Saxony now looks unlikey." Eventually, the crisis passed after NordLB took full control of Bremer LB last September, with concerns about its viability swept under the rug.

Fast forward to today, when moments ago in a historic development, the German bank again made headlines again after it said it would "strip", or cancel the interest payment, on its most subordinated debt, impacting two Euro AT1 notes, the first such move by a German bank which effectively amounted to a partial "self-bail in."

In a statement, the bank said "The Management Board of Bremer Landesbank decided to cancel, at the next Interest Payment Date, all payment of interest on the AT1 Notes forming part of the own funds"

With respect to the notes issued by Bremer Landesbank Kreditanstalt Oldenburg -Girozentrale- ("BLB") as "EUR 50,200,000 Perpetual Non-cumulative Fixed to Reset Rate Additional Tier 1 Notes of 2015" (ISIN: DE000BRL00A4, WKN: BRL 00A) and as "EUR 100,000,000 Perpetual Non-cumulative Fixed to Reset Rate Additional Tier 1 Notes of 2015" (ISIN: DE000BRL00B2, WKN: BRL 00B) (together the "AT1 Notes") forming part of BLB"s own funds the Management Board (Vorstand) of BLB decided today, by exercising its sole discretion pursuant to § 3 (8) (a) of the relevant terms and conditions of the AT1 Notes, to cancel all payment of interest on the AT1 Notes for the current Interest Period at the next Interest Payment Date on 29 June 2017.

Specifically, the bonds affected are the bank"s perpetual €50.2MM 8.5% and €100m 9.5% AT1 notes which will no longer pay a cash coupon starting June 29 payment.

In kneejerk response, the bank’s 9.5% junior bond fell 10% to trade at just over 80 cents on the euro on Tuesday. The 8.5% bond tumbed to 78 cents on the euro.

To be sure, one of the purposes behind such Additional Tier 1 (AT1) bonds under Europe"s EBRD resolution mechanism is to take losses at times of distress, such as what happened today in Germany. The only problem is that nobody saw it was coming. After all, Europe is said to be "doing better" than the US these days.

Investor concerns about such self-imposed "bail-ins" have been especially acute in recent weeks, following the collapse and bail-in of Spain"s sixth largest, at the time, bank Banco Popular which suffered a major bank run on concerns about its viability, prompting the government and ECB to put it into resolution and to be acquired by Santander for €1.

In some ways today"s move is more troubling as in the Banco Popular "bail in" losses were not imposed through a coupon cancellation prior to the bond write-down, suggesting that the facade of some of Europe"s more "stable" bank hide far more substantial balance sheet impairments than the market anticipates. With European stocks closed for the day, there has been no follow through yet to Bremer LB peers or other continental assets.

"Audit The ECB"? - German Officials Call For Greater Oversight Of Central Bank

With the omnipotence of the world"s central banks suddenly all too evidently exposed as nothing more than "Oz"-like smoke-and-mirrors, it is not just US politicians that are losing faith and calling for more oversight of the most-powerful unelected officials in the world. Handelsblatt reports today that Germany"s federal auditor says The ECB lacks accountability in banking sector oversight and government will work to close that oversight gap.

Handelsblatt reports, citing a parliamentary report it obtained, that the European Court of Auditors is unable to perform an "extensive review" of the bank supervisory functions at ECB. Furthermore, the German Federal Court of Auditors says in a report submitted to the German parliament’s budget committee
Germany should explore all options for closing the oversight gap.

In its report, the federal auditor says bank oversight is an important public function that does not fall under the rubric of central bank independence, noting that national banking regulators like Germany’s used to be fully audited before the ECB took over the responsibility in 2015.

“The federal government should explore all options for closing this oversight gap,” the report said.

The ECB has argued that the European Court of Auditors only has the authority to review the central bank’s efficiency in terms of personnel and budgeting, not its decisions as Europe’s top banking supervisor. The European Court of Auditors has complained in the past that the ECB has used this argument to justify its refusal to turn over some documents for review.

That, according to the German agency, has left a gap in oversight that didn’t exist before 2015, since national regulators in the euro zone tended to be separate from their country’s central banks.

In a statement, the ECB said that it works closely with the European Court of Auditors and has made “a considerable number of documents and explanations available.”

While we fully understand the concerns at the lack of transparency and oversight of Europe"s most powerful entity, it is comewhat ironic that it is the Germans complaining when they just used the "well, it"s not us messing with the currency, the ECB is independent" argument to eschew Trump"s currency war tweets.

We are sure Dragh is not too worried for now, but if this escalates, this is what we would expect him to look like...

Euro Surges, Bunds Tumble On Report Draghi Considering Rate Hikes Prior To QE End

Update: Reuters chimes in with its own headline, saying the discussion was brief, without broad support.

•  SOME ECB RATE SETTERS RAISED POSSIBILITY OF RATE HIKES BEFORE END QE, DISCUSSION WAS BRIEF, WITHOUT BROAD SUPPORT - SOURCES

* * *

The EURUSD spiked, European stocks faded gains, and German Bund futures tumbled to session lows following B loomberg report that the ECB has discussed whether the central bank can hike rates before the end of QE.

As Bloomberg further adds, ECB policy makers considered the question of whether interest rates could rise before their bond-buying program comes to an end, and notes that the central bank"s Governing Council on March 9 "exchanged views on ways of communicating and sequencing an exit from unconventional stimulus."

That said, Bloomberg"s sources notes that the council didn’t discuss any specific scenario or timeline and hasn’t made any formal decisions on a strategy. An ECB spokesman declines to comment on the rumor. Bloomberg further adds that the ECB Governing Council currently “expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.”

While the report may be merely the latest trial balloon to gauge the market"s response, for the now the market is not taking chances, and has aggressively sold off the German bunds, while paring gains on the Stoxx 600 to only 0.2% on the day: Bund futures tumbled to session low of 159.10 on the news, sending the Bund yield to 0.48%, while Schatz futures likewise drop sharply and the Euribor strip steepens in expectation of future ECB rate hikes.

As to the mechanics of just how the ECB hikes rates while continuing to buy bonds, we eagerly look forward to the details.