Greeks fearing collapse of eurozone bailout pulled record sums from bank

A man walks through Athens' main food market. Greece abounds in stories of people lugging suitcases of cash out of the country to banks in Cyprus, London and Switzerland. Photograph: Yiorgos Karahalis/Reuters

An unprecedented exodus of capital from Greece – peaking in a record number of withdrawals from banks in recent months – has exacerbated the liquidity crisis now wracking the recession-hit country.

The latest figures released by the Bank of Greece reveal that in September and October alone investors pulled €12.3bn (£10.3bn) from domestic banks, spurred by fears of political uncertainty and economic collapse.

Overall, outflows have reached a record 25% since September 2009 – when household and corporate deposits stood at a peak of €237.5bn, the data showed.

Theodore Pelagidis, an economics professor at the University of Piraeus, said: "This is part of the death spiral of the recession as a result of austerity measures. People realise that contagion has come to banks and they are very afraid of losing their deposits. On average around €4bn-€5bn in capital flees the banking system every month."

The extraordinary figures back up anecdotal evidence that it is not just the super-rich behind the flight of funds.

Over the past year, as the eurozone debt crisis has intensified in the nation where it largely began, there have been countless cases of ordinary depositors hauling suitcases stuffed with cash to the safer destinations of Cyprus, London and Switzerland.

The weekly Proto Thema publication reckons that some 500,000 Greeks have moved money abroad, with a record 1.2m bank transfers being made over the last 18 months.

An estimated €40bn, amounting to 17% of the country's gross domestic product, is believed to have been withdrawn from the banking system over the past year.

Foreign banks with branches in Athens were facilitating the cash flight, the newspaper claimed, by encouraging Greek depositors to set up bank accounts abroad. The Swiss banking groups UBS and Credit Suisse had made it much easier for investors to open accounts in Geneva and Zurich by simplifying procedures.

"In this way, they are putting the nail in the coffin of liquidity in the Greek financial system," Proto Thema declared.

George Provopoulos, the governor of the Bank of Greece, recently said the exodus of capital had "stabilised" following the appointment of an interim coalition government, headed by the technocratic economistLucas Papademos.

Tasked with overseeing the latest European Union and the International Monetary Fund-sponsored €130bn bailout for Greece – a rescue package that will include a voluntary write-down on the value of Greek bonds – the new administration appears to have had a calming effect on a populace whose panic levels have risen amid persistent speculation of a Greek default and exit from the euro zone.

Tellingly, most of the outflows occurred in October, when a proposal by Athens' socialist former prime minister, George Papandreou, to hold a referendum over the debt deal shocked Europe and world markets, sparking feverish talk of an inevitable Greek departure from the EU.

"It's not only about capital flight," said one banker, referring to the massive withdrawals. "People have had to tap into their savings as household incomes have declined and they have had to pay bills.

"Instead of moving ahead with privatisations and shutting down useless public utilities, the [previous] government chose to exit the crisis by imposing Taliban tax rates and horizontal wage cuts, which has resulted in liquidity being limited and the Greek economy not operating as it should."

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Gold Is not Safe?

Investors aren't as keen to get their hands on gold any more. Photo: Peter Morris

Is nowhere safe?

The thumping meted out to gold bulls overnight has certainly wiped some of the sheen from the precious metal's allure.
In the past four years, gold has been on a seemingly relentless march north, from levels close to $US600 until a few months ago when it appeared destined to smash through $US2000.

But gold traders have had second thoughts since September which has given the market a severe dose of the wobbles.
Overnight, gold dropped around $US92 an ounce, easily breaching the $US1600 barrier. And while it still is up 11 per cent for the year, the thinking among many traders is that it could go lower, possibly down to $US1400.
Exactly why this has happened is not easily explained. As fear grips money markets, and Europe continues to teeter on the brink of political self-destruction, gold ordinarily would be the natural haven of choice for investors too nervous for stocks and bonds.
But that enormous run up in recent years has lured investors into taking profits, for there are precious few assets in recent years that have been in the black. Many are looking to offset losses in other areas. There are plenty to choose from in that department. Bond markets and stocks have been hugely volatile for the best part of a year.
The other concern weighing on sentiment is the outlook for inflation. When the US Federal Reserve began printing money to kickstart the economy - and attempt to minimise debt by creating inflation - traders en masse jumped on board the gold bandwagon.

Recession fear trumps inflation
In more recent months, however, the concerns in Europe have overshadowed the fear of inflation. Now, the worry is that a recession in Europe will dampen global growth, taking the heat out of inflation.
While the European Central Bank has shunned the Fed strategy of printing cash to fund bond purchases of distressed nations like Italy, it is under plenty of pressure to do so as a way of extricating Europe from its immediate problems.
For as long as it retains its resolve to avoid the inflation cure, the euro will continue to struggle, the US dollar will shift higher and gold will weaken. But if it does succumb to the pressure and embark on that questionable strategy, the focus again will switch to gold.

Read more:


Here is a poll on what the Sheeple are picking as the safest place to park your cash. 

Poll: With markets so volatile, where do you think is the safest place to park your money?

Poll form

Bank deposits

29%

Stocks

4%

Bonds

4%

Gold or other precious metals

11%

Housing

12%

Farmland, other agricultural investments

10%

Cash

19%

Other

2%

All of the above

9%

Total votes: 2499- poll closes in 2 days

Shadow Banking Driving Gold Price to Xmas Present Levels

In the November monthly report, I mentioned how the MF Global collapse was a really big deal because it further shattered the one major commodity that holds financial markets together – trust. When investors lose trust in a 'system' meant to safeguard their wealth, uncertainty, illiquidity and volatility ensue.

I was only half right. This is a really, really big deal. And not just because MF Global stole client money. The investigations into its downfall have revealed a system of finance so rotten and corrupt that you won't even believe it possible. Making things much, much worse, is that this system is legal.

So sit back and prepare to be shocked. The whole idea around the SMSI service is to encourage you to think differently about your wealth. Well, if you don't do so after today, I'm not sure you ever will.

What is going on in financial markets is truly momentous. By the end of this issue, you'll understand why gold and silver are getting hammered right now – and why this will prove to be one of the great buying opportunities of this historic bull market in precious metals.

You'll also see why, despite showing an apparent reluctance to do so in today's FOMC (Federal Open Market Committee) announcement, the US Federal Reserve will have to resort to another round of money printing, most likely sometime in January.

There is a lot going on in global financial markets at the moment – Europe and China are the obvious areas of focus. But the macroeconomic climate in these regions is a just a sideshow. To understand what is really going on you need to look under the hood.

And it starts with MF Global. For a brief background story, please read the November monthly. I incorrectly thought MF Global was a simple story of theft. That is, use of client money (that should have resided in segregated counts) to fund the company's speculative investments.

It turns out it is much more than that. It could well transpire that much of the $1.2 billion in missing client funds was legalised theft.

How could that happen? Let me introduce you to the arcane world of shadow banking. I'll try and keep it as simple as possible.

First, let's start with normal banking. When you deposit funds in a bank account, the bank takes that money and lends it to someone else, usually only setting aside a small portion as a reserve. These reserves are enough to satisfy a small number of people wanting their cash back at any particular time. But, if everyone loses confidence in the bank and wants their cash back at the same time, the bank will collapse. It simply doesn't have enough liquid assets (cash) to satisfy the demand from customers.

That's how the traditional banking system works.

The shadow banking system works in much the same way except it is much larger, unregulated and far more risky.

When you're dealing in amounts in the hundreds of millions, you don't usually deposit your funds in a traditional bank. The traditional banking system in the US only insures amounts up to around US$250,000. It's deposit insurance for the little guy.

So big depositors (and big borrowers) play in the shadow banking system. The interest rate is usually a little better and insurance takes the form of 'collateral', which is the simple ownership of a security, like a US treasury bond, while funds are on deposit. Instead of a guarantee that your deposit is safe, you get a treasury bond.

Shadow banking is for the financial behemoths, like sovereign wealth funds, hedge funds, large corporations, investment banks and their brokerages, governments etc. It's very complex and only a small percentage of financial market participants would know what it's about.

But I think it's very important you get the gist of how the system works (and is currently imploding) so you can understand what the market is doing and where it is going.

As a broker dealer, MF Global was part of the shadow banking system. It took money in from clients. But instead of just acting as a transactor of trades and custodian of client funds, it used those monies for itself. But the thing is, it might not have been illegal.

You might find this hard to believe, but US and UK securities law allows client funds (that are being held as security against the client's position) to be used by the holder of those funds to place new bets.

Say you have $1,000 worth of futures with MF Global, but have only put up $700 of your own money. MF Global has lent you $300. Under US rules, MF Global is allowed to use the $700 worth of securities that you think you own and post that as collateral for its own trading activity.

In the UK, there are no limits. The broker can take the whole amount and use it as collateral for its own trades. It's trading on someone else's money – and taking the profits for yourself. It's no surprise then that MF Global was operating out of London, where there were no limits on the use of client funds (as were Lehman Brothers and AIG before their bankruptcies).

The process I have just described is called hypothecation and re-hypothecation. You may have heard of it recently. It refers to the fact that when someone puts up collateral for a loan in the shadow banking system, the creditor 'hypothetically' owns that collateral. And it can then re-lend, or 're-hypothecate' the collateral onto someone else, for its own benefit

Fractional Reserve Banking on Steroids

This principle of hypothecation and re-hypothecation extends across the whole shadow banking system. Depositors' funds are taken, re-lent, and the next party in the chain does the same thing. This goes on and on until the chain of actual ownership of anything resembling a real asset is so long and tenuous a puff of wind would break it.

It's all about using other people's money to make a profit. It's like fractional reserve banking (where your local bank lends your money to someone else) on steroids. And because the system is so opaque and unregulated, no one knows where the risks are pooling.

This re-hypothecation of client money means the shadow banking system is far more leveraged that what official figures suggest. By how much no one knows. The IMF guessed that by the end of 2007 it could have been as high as 4 times. Even if it's only twice as large now, it's still massive. Officially, there's around US$15 trillion in the shadow banking system.

In the case of MF Global, it made a bad bet with re-hypothecated client money. That's why clients won't get their money back. It wasn't stolen in the way you normally think of a theft.

Essentially, the asset you thought you had was 'sold' and put into something else. When that 'something else' didn't pay off, your asset disappeared up, or down, the chain of other people using other people's money.

This is why the issue is so huge. It is systematic theft and when everyone realises this, confidence in the system will disintegrate.

It's already happening. The problems in the European banking system have obvious macroeconomic foundations. But the deleveraging of the shadow banking system is making these problems much worse. That's because the shadow banks are (or more accurately were) major funders of the European banks. When they pull their funding, the Euro banks will have to go to the ECB for cash... and/or sell assets.

A subscriber sent an email in today asking why the ECB's recent offer of unlimited cash to the euro banks wasn't having a negative effect on the euro and a positive effect on gold. I think it's partly to do with the fact this liquidity injection by the ECB isn't new liquidity. It's merely replacing the disappearing liquidity from the shadow banks. But the gold story is more complex and murkier than that.

What has gold got to do with it?

Indeed, just what has gold got to do with it? A lot. Much more than you would think actually. To introduce gold to our story, let's start with this recent article from the Financial Times:

It appears that the faulty plumbing connections in the euro-area banking system are now creating something I have never seen before: a crisis of confidence in a monetary system that leads to a frantic selloff in gold.

The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low-cost dollars for euro-area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There's not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks or by gold exchange-traded funds.

Read that last sentence carefully. Banks don't own any gold. So they can't be selling it. But they could be selling someone else's gold. Or, using our new found lingo, they could be re-hypothecating gold held by various ETFs (exchange traded funds), which just so happen to have large banks as their trustees and/or custodians.

Gold has corrected sharply in the past week and I would put that down to two things:

1. Selling in the paper/futures markets as leveraged players dump their positions. The MF Global situation should also be waking players up to the fact the futures markets are rigged and they are closing down their positions, exacerbating the selling.

2. New supply of physical gold coming from the banks, via the ETFs, as per the article above.

Relative to the amount of 'money' in the world, the gold market is tiny. So the rise in the gold price over the past decade might seem impressive. But in absolute dollar terms, it's minimal compared to the credit created by central banks and the traditional and shadow banking systems that they oversee.

Now you could argue that gold is falling because these fragile credit markets are themselves deflating (at least the shadow banking system is), which on the surface makes sense. But when you consider that the gold market is itself a type of fractional reserve system, whereby the ounce you think you own is actually owned by a number of other parties, then you can see how gold moves with the credit system itself.

The irony of this is profound. You own gold because it is meant to protect you from all the failings of the fractional reserve banking and shadow banking system we are all caught up in. You own gold because it is no one else's liability. It is outside the 'system'.

While it might not be apparent now, the MF Global collapse will be the trigger that breaks gold away from the fractional reserve banking system. It will send a very strong signal to those who own gold in any form other than physical (i.e. you hold it yourself or store it outside the banking system) that their insurance policy is worthless. When this realisation dawns and big money demands delivery of physical metal to vaults outside of the banking system, the gold fireworks will begin in earnest.

In another irony, it will be the deleveraging of the fractional gold market that leads to its price explosion. That's because there is not enough gold (at current prices) to satisfy the demand for REAL gold. Not paper gold or re-hypothecated gold.

So do not be spooked out of your gold position at this point. If you are underweight, or want to get more exposure, this is a great time to do so. I have long advised against owning ETFs and I reiterate that advice strongly now. If you own an ETF, sell it and buy physical. There is a high likelihood that at some point the gold position you thought you had will not be yours at all. It will have been lent out to someone else who went bankrupt...and your gold will have disappeared down the chain of related counterparty failures.

As for the rest of the 'system', the Fed will have no option but to print more money. Early in the new year is my best guess. As the ramifications of the MF Global failure continue to reverberate, more money will flee the shadow banking system. At the very least, participants will make sure their funds are not re-hypothecated by signing agreements to that effect. This will continue to have a deflationary effect. Hence the Fed stepping in. The battle between inflation and deflation continues.

The Fall of Europe, The End of the NWO, The Rise of PM's

Europe Using US as Model to Fix Debt Crisis

European policymakers are taking a page out of their American counterparts' playbook to address their burgeoning sovereign debt crisis, banking analyst Dick Bove said.

The European Central Bank already has begun its own version of quantitative easing, the program used by the Federal Reserve  to recapitalize banks during the financial crisis that exploded in 2008, said Bove, vice president of equity research at Rochdale Securities.

At the same time, Bove said the ECB is well on its way to a "partial nationalization" of European banks, in which it will take equity stakes in the institutions as it seeks to stabilize the financial system.

The end result could be a boon for banks in the US and elsewhere that will benefit from the pain their European competitors will have to endure, Bove believes.

"The suffering in Europe may impact the rest of the world. However, there will be significant opportunities for non-Euro banks if this train of events occurs," Bove said in a research note. "The Euro zone banks will now become quasi utilities. Thus, the non-Euro zone banks will begin to fund the private sector companies that the Euro zone banks cannot handle."

Comparisons between the current state of European banking, which is bracing against the losses the system will take from likely national debt defaults, and the situation in 2008 when U.S. banks took massive writedowns from subprime mortgage losses, are easy to make.

Both suffered as much or more from illiquidity as insolvency, and solutions to both situations focus heavily on government backstop measures to ensure that capital remains flowing.

A move starting Dec. 21 that will allow European banks to borrow at low rates and in turn buy up sovereign debt looks, to Bove, "suspiciously likequantitative easing  ."

In the U.S. Fed's QE measures, it slashed interest rates to near zero and bought up mortgage securities and government debt to recapitalize the banks and get money flowing through the system.

The European version also includes low rates and incentives for banks to buy sovereign debt.

A notable difference: The ECB will not buy the debt itself, allowing it to avoid navigating the political minefield in which the Fed found itself.

"The reason that the ECB is not opening the flood gates to buy sovereign bonds in unlimited amounts is due to what happened in the United States," Bove said. "In this country, once the Federal Reserve made it known it would use quantitative easing to buy Treasury debt, the Congress abandoned any attempt to deal with U.S. deficit. The ECB has learned this lesson and is not letting European governments slide back into their old habits. It wants some discipline."

In exchange for the loans, European banks will have to sell equity and comply with stringent capital requirements.

"European banks must sell equity and buy sovereign debt. They will be forced by these parameters to abandon private sector offerings and private sector clients," Bove said. "The clients that will be the first to go will be those outside each bank’s country."

Similarly, Bove sees two possible solutions coming to address the complications brought about because the widely disparate European nations must abide by the rules of the same currency.

He predicts a possible "pseudo-euro" of lower quality issued to heavily indebted countries, which then can default on their obligations and devalue their currencies in order to cheapen their debt.

In the second case, he sees "partial nationalization" as governments purchase stakes in the European banks, in much the same way the US government took positions in Wall Street's largest financial players.

"This program may actually start today with a Commerzbank sale of stock to the German government," Bove said. "The problem with this approach is that the private sector is starved for funds and this causes a significant recession of greater than normal longevity."

For Bove, all of the scenarios point towards opportunities for US banks, which have gotten clobbered this year over concerns that the European crisis will spread across the Atlantic and infect the American financial system. He said the situation will be much like the 1990s when US banks took clients from failing Japanese institutions.

"This is not a phenomenon that will begin; it began months ago," he said. "The fear of contagion is a myth. The ability to gain market share is reality."

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