More cracks in the ice

Greece and Italian presidents step down while new governments are organized, the Eurozone looks to separate itself from other European countries, Germany positions itself as financial leader, today bank shutdowns are happening in Latvia and Lithuania. Are we seeing more cracks in an already thinning veneer of ice which separates the global economy from the inevitable: collapse? Meanwhile, as the MF Global scam reveals itself, JP Morgan is slapped with the biggest fine ever.

Hedge fund broker Ann Barnhardt, after shutting down her own firm BCM, says:

“I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not,” And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy."

"...I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses."

The derivatives market is valued at 1.2 quadrillion dollars. Putting that number in perspective, betelgeuse, the red giant star that is unimaginably larger than our sun, is 4 quadrillion miles away and appears in the night sky barely as a speck of starlight. The GDP of the US is 14 trillion dollars, its entire money supply is 15 trillion dollars,, while entire world GDP is 50 trillion. Does that sound over-inflated? Do pigs with dollar signs have wings?

In other news...

Last week Lithuania’s fifth largest bank, Snoras, was nationalised as Lithuanian authorities shut down the bank after it observed irregularities in the bank’s operations. This morning the Latvian authorities suspended the Latvijas Krajbanka (Latvian Savings Bank). Krajbanka is Latvia’s ninth largest bank.

We think the systemic risk from these events should be relatively limited if handled properly by the authorities. That said, the collapse of especially Snoras is not good news for the Lithuanian economy as it creates uncertainty about the economic outlook. In our view it is especially important that the nationalisation of Snoras is handled in such a way as to put minimal pressure on Lithuanian public finances that are in a precarious state as it is. A full nationalisation of Snoras in the sense of taking over all liabilities would be unwarranted.

Yesterday Lithuanian Prime Minister Kubilis said that the problems at Snoras might involve “shady financial transactions” (according to the news agency Reuters) and the case was more “complicated” than initially thought. Lithuanian central bank governor Vasiliauskas at a news conference said that “we thought it was a flu, but now it seems to be a small cancer”. These comments obviously give some reason for concern.
So far the market reaction in the local markets has been limited. Not surprisingly the share price of some of the small locally-owned banks in Lithuania has been under pressure. This morning there is also a bit of pressure on the Latvian lat and local rates and yields are up a bit.

Furthermore, last week when the news of Snoras’ collapse broke we saw an initial minor negative reaction in the Swedish krona, but since then there has not been any visible spillover to the Scandinavian FX and fixed income markets, where the euro debt crisis continues to dominate.http://www.fxstreet.com/fundamental/analysis-reports/flash-comment/2011/11/22/

According to Snoras, the bank is Lithuania’s fourth-largest by capital size and ranks fifth in terms of assets. The exact causes behind Snoras’s financial difficulties have not been made clear. The idea of a bank-run causes shivers in Latvia. In November 2008, it nationalized Parex, the Baltic state’s largest locally-owned bank, after depositors jittery about the country’s deepening economic crisis began withdrawing their cash. A month later, Latvia was forced to turn the EU and International Monetary Fund for a 7.5-billion-euro emergency loan package, which has been paid out in tranches amid one of the most draconian austerity drives in Europe. Latvia’s economy shrank by 18 percent in 2009, the deepest recession in the 27-nation EU, but has been recovering for a year. -Lativa Limits Bank Withdrawals On Lithuania Spillover Fears