Need More Money
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01/18/12

The market is optimistic more money will soon be available to pump into the eurozone monetary system.  The International Monetary Fund announced they would seek to raise $600 billion dollars in additional capital.  Five hundred billion dollars would be for struggling eurozone countries with a $100 billion dollars as a “protection buffer.”

The IMF currently has about $380 billion dollars in lending capacity.  The European Union has committed to provide $200 billion dollars of the additional capital, but has not identified which countries will donate.  The Guardian reports that Britain expects to be asked for up to $18 billion dollars.  This amount represents 4.5% of the $400 billion to be raised from outside the eurozone; this is Britain’s traditional contribution rate to the IMF.  The IMF could get up to half this amount administratively from the British Treasury, but more would require approval from the House of Commons.

British politicians want the eurozone to increase efforts internally before increasing the IMF funding.  A spokesman for the David Cameron said “The eurozone still has to find the bazooka.”  British Chancellor George Osborne said “this is not a substitute for the eurozone providing money for dealing with its own currency.”  Osborne, and others in the British government, does not believe the eurozone is being aggressive enough in support of the euro.

The Financial Times reports that Greece is close to making a deal with bondholders on exchanging ‘old’ Greek bonds for ‘new’ Greek bonds.  The new bonds would be longer term at low interest rates, and for a smaller face value.  The talks broke off last Friday after some eurozone officials called for a bigger write-down than the 50% agreed to last fall.

The Greek government has $250 billion dollars worth of sovereign debt they would like to roll-over into 20-year bonds at low interest rates.  This would remove refinancing pressure on the government.  The deal worked out last fall would reduce the face value of the bonds by 50% but there was a possibility of EFSF guarantee on part of the new bond.

Greece is considering offering bondholders warrants tied to future economic growth.  If the Greek economy responded to the lower debt load and began growing, bondholder’s warrants would increase in value.

Greece has $14.5 billion dollars in debt and interest due in March.  Angela Merkel said last week no more money would be advanced to Greece until they came to an agreement with existing bondholders.  The Greek Prime Minister, Lucas Papademos, warned bondholders not to hold out or the government might pass legislation to make participation mandatory.

This would trigger credit default swaps (CDS) on the debt.  Those debt holders who own CDS on the debt would be big winners if the government did this and may be actively working to scuttle the talks.

The market is rallying, but I am getting suspicious.  Where is the $200 billion dollars in additional funding for the IMF going to come from in the eurozone?  Nine country’s credit ratings were downgraded on Friday by S&P.  Germany, Netherlands, Finland and Luxembourg are the only eurozone countries left with AAA credit ratings.  The obvious answer is the European Central Bank.  The market is assuming the ECB is being painted into a corner that will result in massive quantitative easing.

Every move so far has indicated they will not do this.  We don’t know how much of the $637 billion dollars in three-year loans offered in December were “new money.”  Some most certainly was, but how much?  No one knows…except the bankers.

Everyone Needs Money, Nobody has Any

I am not naturally suspicious of bankers. They are businessmen, as am I.  My next door neighbor years ago, owned a couple of banks.  He was and still is a good friend.  Big banks are a different breed.  Something must happen when your bank has over $50 billion in assets.  Call it a “God Complex.”

I have been reading articles about a term I only became aware of after the MF Global bankruptcy.  Hypothecation.  Many people (and all of congress) probably get a glassy look when they hear this word.  But wait, hypothecation may be behind the missing money at MF Global.  Hypothecation may be the next “black swan” we should be concerned about.  Tomorrow I am going to attempt to explain how big banks use hypothecation to get around banking laws, and could be pushing the world financial system closer to the edge.

Hypothecation is gasoline next to an open campfire in today’s intertwined financial world.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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