Sovereign debt bubble thread

[Crazy_Ivan80]

I believe it's called stealing.

[Syt]

The death of the Hypo Alpe Adria bank in Austria will rest solely on the tax payer. €13 billion. Other banks were not interested taking on any of the bad debt. Some of the total sum might get deflected to the Bavarian bank that was also a shareholder of the Hypo Alpe Adria.

[Iormlund]

Ouch. €13b sounds like quite a chunk for a country as small as Austria. Is it an isolated incident or an indication of the state of banking over there?

[Syt]

Isolated. A result of bad management (there were criminal investigations, actually) as well as the financial crisis. The amount will be covered by a state owned bad bank and will stretch over a few years. Saw a headline today: roughly €1200-1300 per person living in Austria.

[Syt]

http://online.wsj.com/news/articles/SB10001424052702304104504579374842733926408

Austrian Banks Won't Participate in Hypo Alpe-Adria 'Bad Bank'

Privatization of Debt-Laden Bank No Longer Possible, Says Finance Minister

Austria's banks have refused to participate in a "Bad Bank" carved out of the wreckage of failed regional lender Hypo Alpe Adria AG, raising the risk that the government may declare the bank insolvent.

Austrian Finance Minister and Vice Chancellor Michael Spindelegger acknowledged Monday that he had failed to persuade the country's largest private-sector banks to fund a new institution that would wind down the bulk of operations at the bank, which was nationalized at the end of 2009 after a disastrous expansion into southeastern Europe during the boom.

That leaves the government effectively with two options: it can either assume the bad assets itself, and allow any further losses to hit the public accounts, or it can put the bank into an insolvency process. Hypo's estimated liabilities far exceed its assets, so insolvency would almost certainly impose losses on the bank's creditors—the first time since the financial crisis that an EU member state's government had failed to honor debts owed by a bank wholly under its control.

The government in December sold Hypo's domestic operations to a private investor, leaving only the bank's operations in the Balkans and Italy. As such, there is no direct risk to Austrian depositors any more—only to the bank's bondholders, its owner the government and Bayerische Landesbank, its former owner, which still has 2.3 billion euros of deposits tied up in the group as a result of the 2009 nationalization deal.

Talking to journalists after his meeting with representatives from the banks broke down, Mr. Spindelegger said the government will look at the establishment of a state-owned bad bank first, similar to the model used repeatedly in Germany since the crisis. Mr. Spindelegger's predecessor, Maria Fekter, had refused to countenance such a step, fearing that the extra debt load would cause credit ratings firms to cut Austria's sovereign rating.

"We have to look the facts in the face," Mr. Spindelegger said.

Neither he nor anyone else in Austrian officialdom was willing to venture an opinion on how much could still be lost on Hypo's remaining assets, which have shrunk to under €30 billion ($41 billion) from a peak of €50 billion as a result of successive write-downs and asset sales.

However, Helmut Ettl, joint head of the banking supervisor the Financial Market Authority, told journalists the only remaining models will all be expensive, but warned against experimenting with insolvency.

"A bankruptcy scenario is clearly a scenario where at the end of the day no one knows exactly how large the risks are," Mr. Ettl said.

The government and central bank have also shied away from the latter course for the last two years, saying it would have far-reaching consequences for the borrowing costs not only of the government itself, but for all government-controlled entities and for the whole Austrian economy.

However, the public has become increasingly impatient with the government's management of Hypo and the repeated capital injections needed to keep it going. The state has injected €3.6 billion into the bank since it bought it back from Germany's Bayerische Landesbank for a nominal sum in 2009.

A report prepared for the government by consultants Oliver Wyman suggested that insolvency would have the smallest direct impact on taxpayers in terms of losses, and that the effect on refinancing costs would only be temporary. One advantage for the Austrian taxpayer from insolvency could be that the remaining losses at the bank are imposed not only on Hypo's remaining private bondholders, but also on Bayerische Landesbank.

Mr. Spindelegger also said that privatization of the debt-laden bank was "de facto no longer possible." He was speaking to journalists after a meeting between government ministers, the head of the Austrian National Bank, Ewald Nowotny, and a banking task force created to advise on dealing with Hypo.

Hypo Alpe-Adria was nationalized in the wake of the financial crisis after overstretching itself in the Balkan region. The Austrian government had been hoping for major Austrian banks to participate in its wind-down to minimize the impact on the country's budget.

Mr. Spindelegger said the government would now consider an "institute" or traditional bad bank model.

[DontSayBanana]

I believe it's called stealing.

When a person does it, that's what it's called.  When a government does it, they put little pink dresses on the turd by calling it "malappropriation."

[Admiral Yi]

Or "taxation."

[Sheilbh]

Interesting IMF paper on debt and growth:
http://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf

[citizen k]

The European Debt Crisis Visualized

http://www.youtube.com/watch?v=C8xAXJx9WJ8

[MadImmortalMan]

Interesting IMF paper on debt and growth:
http://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf

Thanks for that. I read it all.

Interesting findings that the overall debt level has a smaller effect on growth than the rate of increase. It does sort of sully the idea of spending as a stimulant. I guess if you think about it, governments can do their own version of quantitative easing by simply issuing less debt than they did the previous year.

[citizen k]

I have gone on record that the most dangerous organization is the now French led IMF with Christine Lagarde at the helm, which has presented a concept report that debt cuts for over-indebted states are uncompromising and are to be performed more effectively in the future by defaulting on retirement accounts held in life insurance, mutual funds and other types of pension schemes, or arbitrarily extending debt perpetually so you cannot redeem. Yes you read correctly, The new IMF paper is described in great detail exactly how to now allow the private sector, which has invested in government bonds,  to be expropriated to pay for the national debts of the socialist governments.
I have been warning that there is an idea that has been running around behind the curtain that the national debt of the USA could be settled by usurping all pension funds in the country. Here is a remarkable blueprint that throws all previous considerations concerning the purchase of government bonds over the cliff. The IMF working paper from December 2013 states boldly:
"The distinction between external debt and domestic debt can be quite important. Domestic debt issued in domestic currency typically offers a far wider range of partial default options than does foreign currency–denominated external debt. Financial repression has already been mentioned; governments can stuff debt into local pension funds and insurance companies, forcing them through regulation to accept far lower rates of return than they might otherwise demand."
id/Page 8 (IMF-Sovereign-Debt-Crisis)
Already in October 2013, the International Monetary Fund (IMF), suggested the Euro Crisis should be handled by raising taxes. The IMF lobbied for a property tax in Europe that should be imposed where there are no such taxes. The IMF has advocated for a general "debt tax" in the amount of 10 percent for each household in the Eurozone, which also has only modest savings.
People are blind. They think this is authorization to go get the rich. They are going after everyone for the "rich" are tiny players in the game. People do not want to hear that. They want to think the rich can pay the bills for everyone else. That is not practical and even Julius Caesar recognized that they may be a small group, but they are the engine of the economy that creates jobs. It would have been popular for him to wipe out all the rich who he was against. But in the end, he had to solve the debt crisis by simply retroactively attribute all interest to capital in order to solve the debt crisis that led to the first civil war.
There is no discussion whatsoever of reforming the system. They are merely planning to default on savers expropriating their savings, but continue to borrow forever. Nobody is even bothering to look at the structure that simply cannot work.
The money people have saved the IMF maintains should be used for debt service by sheer force. To reduce the enormous national debt, they maintain that government has the right to directly usurp the savings of citizens. Whether saving money, securities or real estate, about ten percent could be expropriated. This is the IMF view.
Because the government debt of the euro countries has increased a total of well over 90 percent of gross domestic product, they suggest that the people should sacrifice their savings for the benefit of the state. Socialism is no longer to help the poor against the rich, but to help the government against the people. The definition has changed.
In January 2014, the Bundesbank joined the IMF project focusing on a "wealth tax". In its monthly report they had announced: "In the exceptional situation of an imminent state bankruptcy a one-time capital levy could but cheaper cut than the then still relevant options" if higher taxes or drastic limitations of government spending did not meet or could not be implemented.
In the latest June 2014 working paper of the IMF, they have set forth yet another scheme – extending maturity. So you bought a 2 year note? Well, the IMF possible solution would be to simply extend the maturity. Your 2 year note now become 20 year bond. They do not default, you just can never redeem.
Possible remedy. The preliminary ideas in this paper would introduce greater flexibility  into the 2002 framework by providing the Fund with a broader range of potential policy responses in the context of sovereign debt distress, while addressing the concerns that  motivated the 2002 framework. Specifically, in circumstances where a member has lost  market access and debt is considered sustainable, but not with high probability, the Fund would be able to provide exceptional access on the basis of a debt operation that involves an extension of maturities (normally without any reduction of principal or interest). Such a "reprofiling" operation, coupled with the implementation of a credible adjustment program, would be designed to improve the prospect of securing sustainability and regaining market access, without having to meet the criterion of restoring debt sustainability with high probability.
(THE FUND'S LENDING FRAMEWORK AND SOVEREIGN June 2014)
Now the June 2014 report has a new, far-reaching proposal. This shows how lawyers think in technical definitions of words. There is no actual default if they extend the maturity. You could buy 30-day paper in the middle of a crisis and suddenly find under the IMF that 30 day note is converted to 30 year bond at the same rate.
The huge national debts could be reduced also according to the IMF by just expropriating all private pension funds. The vast amount of people are watching TV shows, sports, or something other than government and they know that. The press will not report the real risk for that is boring news. Hence, where his occupational pensions exist, you can suddenly wake up and find your future is now applied as a contribution to government – thank you for your patriotism. They have successfully convinced the evil is the rich so pay attention to them and you will miss the political hand in your back pocket.
What investor can really judge what is hidden in his fund when the government is denying democratic processes and control the press?
One thing is certain: For years, all pension funds bought government bonds because they were "conservative" and "safe". I have been warning that the threat would be the Sovereign Debt Crisis. The idea of a pension fund is really now seriously an outdated assumption that government bonds are extremely safe. And you want to even think that the stock markets are over priced and will crash? Where will money go? Government bonds again?
The IMF is an unelected dictatorship over people's lives and it is now calling the "New profile" of the strategy for public debt must be reassessed. The paper is nothing more than an orderly liquidation of government debt – at the expense of bondholders who can be forced pensioners without their knowledge. The focus is on countries that either have no access to the financial market, or "whose debt is considered sustainable, but not with a high probability."
The Eurozone is trying to federalize because they know what is coming. The IMF is telling them the path of options ahead but all are designed to sustain the power-base, not what is good for the people. The Euro-leaders have now given up and decided to make more debt while maintaining lip-service to savings. Thus, the Eurozone is likely to soon be directly affected by the IMF plans for when the market get wind of this on the horizon, it will be too late. For you see, pension funds do not THINK out of the box. Nobody will be the first to sell-out government bonds entirely. What if they are wrong and nothing happens? Then the manager loses their job. Even if they find themselves trapped by government either extending their maturities or expropriating all their assets, they will justify themselves as everybody else lost so they did nothing wrong.
Obviously, these ideas from the IMF would mean that if the debt is no longer manageable, then the power of government entitles them to just usurp everything to maintain the power-base. The plan of the IMF I believe will result in widespread civil unrest AFTER the fact. The mere fact that these proposals target investors in government bonds who must adjust to debt forgiveness or negative interest rates shows this is all about sustaining government power. Recently, the IMF has argued the ECB must purchase government bonds in the euro countries to sustain the Eurozone. They are like the terrorist leaders who brainwash kids to blow themselves up for the good of the cause while they would never do the same thing themselves.
It is noteworthy that the IMF imagines this haircut on private creditors as a kind of condition that bankrupt states must do to get any further loans from official creditors. Do as we direct of else. This is what the IMF is doing to Ukraine, no less what they did to Cyprus.
However, unlike private corporate debt where there are the real balances and tangible assets secured by real products and business, the IMF proposal amounts to a global nationalization of public finances, which are unsecured debt. This distinction is important. You get nothing from defaults in government debt but a portion of what remains in private debt. Because the states with the this infinite loop of perpetual borrowing with no intent on paying anything back, we are captured in a world of financing that has become completely corrupted.
The debt load of governments on a global basis is so oppressive, we are rapidly approaching not just the collapse in Democracy, but the collapse or the elimination of all market mechanisms in the public finance. If they cannot sustain the debt, default and FORCE the so many unsuspecting pensioners to surrender their future to allow politicians to live comfortably. They see no problem with people holding government debt should be punishable with massive losses, and are blame for extorting government even demanding interest.
The IMF proposal comes during the World Cup knowing that the press will not cover it much and the average person cares more about who wins what than the sneak attack upon their own lives. This far-reaching plan for the expropriation of savers, investors and retirees clearly shows the reality of socialism.

http://www.zerohedge.com/news/2014-07-03/expropriation-back-christine-lagarde-most-dangerous-woman-world

[Admiral Yi]

Strident.

[Valmy]

How are the rich the source of all jobs?  I mean I am not for pulverizing them to pay for evol socialism but...um they do not consume that much and do not spend all their capital hiring people.  They make lots of investments, but if capital generation created lots and lots of jobs we would not have employment problems in the first world because we have crap loads of capital being generated.  If that is all we need why not just have 100s of lotteries a year and just create tons and tons of new rich people.  Surely then we would reach full employment right?

Though I guess when he talks about how the First Roman Civil War (um...Marius and Sulla?  Or...) was brought on by a sovereign debt crisis that sparing the rich (because proscribing tons of rich people and handing their stuff to supporters was sparing them?) was the solution to I guess I shouldn't expect a good clear explanation on that.

[Iormlund]

It looks like Spain finally bounced off the deep end in 2013. A couple days ago we heard year-to-year employment grew for the first time since the crisis started. What is even more surprising, as of late there were as many open-ended contracts signed as short-term ones.

The situation in my sector (car manufacturing) is markedly improving, though I don't know whether this pattern of investment will hold. Nobody does. We're having a lot of problems with this kind of thing because most companies are VERY reluctant to re-hire, which hurts a lot with delivery dates. There's a shortage of engineers and techs, since the younger generation has no experience and are thus useless.

[The Minsky Moment]

Strident.

Who to believe, Christine Lagarde or "Tyler Durden"

Personally, I am not inclined to take financial advice from someone whose assumed nom de guerre is the insane alter ego of a fictitious anarchist.