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Monday, December 19, 2011

What's Ahead for the Eurozone?


Euro Pacific Logo

Investors are growing increasingly concerned as each successive proposal in Europe has fallen flat. While the deals have bought time, they have failed to make substantive improvements. Ominously, each failed attempt engenders ever more skepticism that Europe has the political will and economic savvy to fix the problem. This has left clear-eyed investors with one burning question: What is a real end game to all this posturing?

At this point, it looks like European leaders, led by Merkel and Sarkozy, will gravitate towards one of the following three remedies, or perhaps a combination of all three:
European leaders will approve a massive new financial package (on top of all the previously created facilities) to cover the debt and deficit financing needs of the PIIGS.
More moves will be made to enact greater fiscal and political integration within the European Union. These changes will allow the more solvent countries (read: Germany) to exert great fiscal control of the prodigal countries.
The European Central Bank (ECB) will follow the lead of the Federal Reserve and come to the rescue as a lender of last resort, effectively guaranteeing the debt of the troubled nations or creating credit lines in their behalf.

But each of these "solutions" has major roadblocks, and we don't see any meaningful changes until Germany and France have devised, launched, and ultimately lamented more doomed half measures. This process may well stretch into 2012-3.

A new financial bailout would likely require funds in the order of 1 trillion euros, a quantity of cash we believe is much higher than could be drawn from some mixture of the IMF's 290 billion euro forward commitment capacity, the E.U.'s 250 billion euro Financial Stability Facility (EFSF), and various other smaller sources. We don't know where that cash could come from. Although the extension of German political control may be enticing to the German ruling class, it will be significantly less popular among the rank and file, especially if it involves the commitment of more bailout funds to profligate neighbors. In addition, the legally complex and time-consuming measure of greater integration would likely take many months, if not years, and would probably face staunch opposition from key countries, such as the U.K. and Ireland. The third option, which would turn the ECB into a lender of last resort, runs afoul of E.U. treaties and would likely be politically untenable in Germany.

Our bottom line: We see an unavoidable resolution likely coming about via a voluntary default on sovereign debt by overly indebted counties and their possible exit from the Eurozone. Those countries that remain will likely have much better finances and will likely be more closely aligned with German economic policies. This could result in a more stable and powerful economic bloc of fiscally responsible central and northern European countries, most notably Germany, that would share monetary and fiscal ties. Lastly, in order for any restructuring to have long term viability, we must see significant structural changes in France, which up until now has somehow avoided the budgetary limelight (see article in this newsletter by Andrew Schiff).

Contrary to what many analysts project, we see the further deterioration of the European experiment as likely a positive development for the Euro in the medium- to long-term. Germany's determination to avoid devaluing its currency as a means of escaping its current predicament stands in sharp contrast to the behavior of the United States and other OECD nations. Furthermore, removing the fiscally reckless countries like the so-called Club Med from the Eurozone may help move the Euro higher, as the economic appeal of the new group may better draw assets into the region and investors develop greater confidence in its budgetary position.

While many non Eurozone countries, most notably the United States, are struggling in the wake of the financial crisis, Eurozone members face the unique dilemma of being unable to reduce their debt load through currency devaluation. Greece, Spain, and Italy struggled with debt even before the crisis, and are now doubly wounded by the high yields they have been forced to offer. In the not-so-distant past, Americans might have smugly wondered why countries with such obvious debt issues would so blatantly refuse to swallow the bitter pill of fiscal reform. But the last few months of ineffectual Supercommittees and political paralysis in Washington have shown unmistakably that politicians on this side of the Atlantic are no more capable of putting their country on sound budgetary footing than their Old World peers.

However, we take pains to note that the European crisis is essentially a political struggle rather than an intractable financial quagmire. Sooner or later the continental powers will get on the same page and fashion a solution that will provide clarity and a legitimate path forward. Unfortunately no such solutions are currently even imagined here in the United States.
Peter Schiff

Eurozone crisis: Foreign Office plans evacuation of expatriates

Eurozone crisis: Foreign Office plans evacuation of expatriates 

The Foreign and Commonwealth Office and the Treasury is putting measures in place to help evacuate thousands of expatriates living in Spain and Portugal in case they are stranded no access to their savings.

The two countries, which both have sizeable British populations, were among those made vulnerable by the "sustained deterioration" in funding.

Spain was warned by credit rating agency Fitch that it was facing a debt downgrade along with Italy, while Ireland, Belgium, Slovenia and Cyprus were also given the warning.

Meanwhile, around one million Britons live in Spain with around 50,000 in Portugal.

The Foreign Office said it was concerned they could be cut off from their accounts if the countries' banks called in loans.

A source told the Sunday Times (£) the Government was considering chartering planes, ships and coaches to bring expats back to the UK.

“The nuclear scenario would be having thousands of Brits stranded at the airports in Spain and Portugal with no way to get money from the cash dispenser and no way to get home. Who would be blamed for this? The Foreign Office," an official said.

“We are looking at how we can help evacuate them if the banks in Spain and Portugal collapse, getting people cash, things like that, sending planes. We did similar things in Lebanon in 2006. We are coordinating with the Treasury.”

Financial aid could also be sent to expats, many of whom are retired and living on small incomes.

A Treasury spokesman said: "Of course we plan for a range of contingencies. We are not going into the specifics of what we are planning for."

Last month, it was reported that the Foreign Office had asked embassies and consulates for contingency plans for rioting and social unrest in countries most affected by the eurozone crisis.

Diplomats were told to prepare for an evacuation of tens for/of thousands of British citizens as a banking collapse could mean they would be unable to withdraw cash.

An FCO spokesperson said: "Officials continue to contingency plan for a range of possible scenarios"

The Telegraph

Sale weatherman: Get ready for ‘worst winter in 200 years’


We're heading for the coldest winter since the early 1800s, according to a pensioner with an uncanny knack for predicting the weather.

Harry Kershaw, 85, correctly predicted the huge snowfalls and freezing temperatures that crippled the country last December and January.

Now the amateur forecaster, from Sale, says the coming weeks could see Britain gripped by a ‘mini Ice-Age’ last encountered 200 years ago.

Harry, who began his hobby as a merchant seaman, uses a system developed by the German army during the Second World War known as ‘similarity forecasting’.

He matches conditions with those of previous years and then predicts the future weather will follow a similar pattern – often with great accuracy.

In early 2007, his predictions of a miserable summer were at odds with official forecasts, but he was right. He also warned of wet weather in 2009 when the Met Office told the nation to prepare for a ‘barbecue summer’.

He has already predicted that this winter could be as cold as that of 1812-13 – when daytime temperatures reached no more than -9C and Napoleon was forced to retreat from Moscow during his attempt to seize the Russian capital.

Harry says the bitterly cold gusts that have blown into Greater Manchester from the Lancashire coast could signal that his winter forecast is accurate.

He said: "The higher the wind speed off Blackpool between the December 2 and 16, the colder the winter. The lower the wind speed, the milder the winter. This isn’t a meteorological rule, but I’ve observed it since 1962 and it seems to be very reliable. It looks as if we could be set for a white Christmas with cold easterly winds direct from Russia."

Harry says Europe could be in the middle of a ‘mini ice-age’ similar to the one in the four years from 1812 to 1815.

The number of spots on the sun, thought to affect the weather, has been the same in the last two years as in 1812 and 1813. And North Pole barometer readings in August suggested Europe will experience a repeat of last winter, Harry said.

He added: "It looks like we could be on the same weather cycle that occurred before Napoleon’s retreat."

Blackpool was battered by winds of up to 55mph this week.

The Met Office is warning that more winter storms could batter the region in the coming days as a chain of low pressure systems cross the Atlantic.

Met Office spokesman Dan Williams said: "We’re advising people to say up to date with the latest forecast and weather warnings because conditions are changing very quickly."

Manchester Evening News

Fake withdrawal?

Iran state TV shows 'CIA spy confession'

Iranian state TV broadcast this still photo saying it was Amir Mirzai Hekmati - 18 December 2011

Iranian state TV has broadcast what it says is the confession of an alleged CIA spy, a US man of Iranian descent.

The man, named as Amir Mirzai Hekmati, was shown allegedly confessing to a mission to infiltrate Iran's intelligence services.

The report said Mr Hekmati joined the US army in 2001 and received special training before being sent to Iran.

When the man's capture was first announced on Saturday, US officials rejected the claim as propaganda.

Washington has made no comment on the alleged confession.

The TV report said Mr Hekmati came to the attention of Iranian agents at Bagram air base in Afghanistan, before he went to Iran.

He was shown speaking Farsi and English, describing his alleged mission to infiltrate Iran's intelligence ministry.

Iran's government has repeatedly accused the United States of carrying out covert intelligence operations in order to undermine it.

In May, Tehran claimed it had detained a network of 30 CIA operatives, saying they had been involved in espionage and sabotage.

Last week, Iran indicted 15 people on charges of spying for America and Israel but gave few other details.

Washington has acknowledged that Iran was in possession of a sophisticated US reconnaissance drone which came down on Iranian territory.


Hundreds’ of North Korean Nuke Scientists in Iran


Hundreds of nuclear scientists from North Korea, whose leader Kim Jong-il died Saturday, are working in 10 different locations in Iran, The SouthKorean-based Korea Times reported this week.

North Korea has been known to beworking closely with Iran, Pakistanand Syria on nuclear development, but the disclosure of the number of scientists in the Islamic Republic spells out the close ties between the two powers, part of what Foreign Minister Avigdor Lieberman has called the ”axis of evil.”

The Korea Times quoted an unnamed source that the scientists and missile engineers are working at the Natanz and Qom sites, among others. Iran is operating auranium enrichment plant at Natanz. Despite Iranian President Mahmoud Ahmadinejad’s denials, Israel and Western powers assume the objective of the enrichment plant is to use the uranium to build a nuclear weapon, while engineers tryto build a missile capable of delivering it.

North Korea has an enrichment plant in its own country and has conducted nuclear tests. Both it and Iran are under United Nations sanctions for not cooperating with International Atomic Energy Agency (IAEA) inspectors.

“The source with access to intelligence on the years-long weapons collaboration between Pyongyang and Tehran said the North Koreans are visiting Iran via third countries and many of them are being rotated every three to six months.” the newspaper reported.

“The North Korean experts are from the country's so-called Room 99, which is directly supervised by the North's ruling Workers' Party Munitions Industry Department,” it added. ”The room, which can be translated as office or bureau, is widely believed to be engaged in exports of weapons and military technology.”

Arutz Sheva

Mass burial for Philippines floods victims

A mass burial has been organised in the Philippines for scores of people killed by flash floods on the southern island of Mindanao.

Health officials in the city of Iligan say unclaimed bodies are being buried after being marked for possible future identification.

Coastal communities were devastated early on Saturday in flash floods triggered by a tropical storm.

More than 650 people were killed and another 800 people are still missing.

Damaged roads are hampering efforts to reach survivors in remote villages.

Officials in Iligan said they were preparing to bury unclaimed bodies in a mass grave as early as Monday because of their advanced state of decomposition.

The ports of Iligan and nearby Cagayan de Oro bore the brunt of the flooding.

Health officer Liddy Villarin said the body bags would be marked for possible exhumation.

"We will put markings on the cadaver bags which will give the physical features of each body before they put them in the mass grave," she said.Corpses unclaimed

Disaster management chief Benito Ramos said funeral parlours had been overwhelmed by the catastrophe.

Speaking from a boat off Cagayan de Oro, he told AFP news agency: "I'm out here retrieving bodies that are starting to rise to the surface."

The Philippine Red Cross said its staff had confirmed 652 people dead and another 808 were listed as missing.

Officials in Cagayan de Oro said corpses were piling up unclaimed at mortuaries and overworked staff had run out of coffins.

One establishment turned away the bodies of two drowned children, local media reported.

About 35,000 people are sheltering in evacuation centres, the National Disaster Risk Reduction and Management Council said.

The government says survivors are in desperate need of fresh water, shelter and medicine.

China and the US are among international donors offering assistance.

The flash floods struck in the early hours of Saturday as a passing tropical storm coincided with high tides.

As rivers burst their banks, many were trapped in their homes while in other areas entire villages are reported to have been swept away.

Authorities are facing criticism for not giving enough warning of the storm's severity.


Erdogan's illness impacts events around Syria and Iran

Extreme concern was quietly voiced Sunday, Dec. 18, by American and European official circles over the state of Turkish Prime Minister Tayyip Erdogan's health – and especially its impact on present and impending events in Syria and other parts of the Middle East, including Iran, DEBKAfile's Western intelligence sources report. Those sources say Erdogan is suffering from Rectosigmoid cancer, but were not sure if it had reached the advanced Stage TIII (spread out of the colon to regional lymph nodes).

They also said they did not know what treatment he had received at the Istanbul hospital where he was first admitted and latterly at the Hacettepe Hospital in Ankara.

Sunday, Turkish Health Minister Recep Akdag, talking to local journalists, told them not to pay attention to the "gossip" that the hospital had prepared a special room for the prime minister to conduct affairs of state, but did not deny it. No denials were issued either of Turkish news reports about Erdogan undergoing "abdominal surgery " on Nov. 26. They also reported that, since he was released, an air force ambulance helicopter had been standing outside his home.

According to reports flying around Ankara Sunday, which were neither confirmed nor denied, the Turkish prime minister is back in hospital.

DEBKAfile's sources would only admit they are worried because the lengthy medical treatment he needs has already had an effect on the state of Middle East decision-making, especially in relation to the urgent Syrian crisis.

Thursday night, Dec. 15, Erdogan and President Abdullah Gul led a top military command council meeting in Ankara to review preparations for war on two possible fronts - Syria and Iran, if Tehran decides to come to Bashar Assad's aid.

On Friday, the Turkish prime minister met US Defense Secretary Leon Panetta who flew in from Baghdad.

When Turkish journalists asked after his health, Erdogan replied: "I'm fine and I will be better."

Our sources point out that whatever decisions were made at the Turkish military council conference and the consultations between Turkish and American security chiefs, Erdogan's ill health was clearly uppermost in every mind in Ankara – and not only there.

In Washington, there is considerable anxiety. US President Barack Obama regards Erdogan as a personal friend and his senior ally in the execution of administration Middle East policies, especially with regard to Iran and Syria. The two leaders were recently described by insiders as having developed "intimate relations of trust." According to some sources, they had at least 14 phone conversations in recent months.

The question asked in Washington is this: Is the Turkish leader in fit condition to continue to help the Obama administration carry forward their agreed plans in the region?

They were not encouraged by the comment heard from Deputy Prime Minister Bulent Arinc while Erdogan was away from Ankara.

He chastised the ruling Justice and Development Party –AKP for "divisions… in Edrogan's absence…" over a bill for regulating the nomination of party candidates.

Turkish pundits saw those "divisions" as symptoms of a power struggle already afoot over the Erdogan legacy.

And so the next day, Arinc admitted "he had made a very big mistake" in bringing the argument out in the open.
There were no comments in Israel on the Turkish prime minister's medical condition.

Credit agencies pile pressure on EU leaders

European leaders are under renewed pressure to boost the firepower of the EU's multibillion-euro bailout package after Belgium's credit rating was cut.

Moody's downgraded Belgium by two notches to Aa3, its fourth highest rating. It warned that indebted eurozone countries such as Belgium will find it increasingly hard to fund their debts or achieve economic growth in the face of Europe's austerity drive.

"The fragility of the sovereign debt markets is increasingly entrenched and unlikely to be reversed in the near future," warned Moody's.

Rival ratings agency Fitch earlier said it would consider cutting Belgium's credit rating, along with those of Spain, Italy, Slovenia, Cyprus and Ireland. France's AAA credit rating remained intact for another day, although Fitch did revise its outlook down to "negative".

The latest credit rating changes came on the day that the EU released details of the "fiscal compact" deal designed to rescue the euro and prevent countries from going bust. This was published amid concerns over rising bad debt levels in European banks and the growing dependence of major lenders on funds provided by the European Central Bank.

French president Nicolas Sarkozy and German chancellor Angela Merkel said the fiscal compact could go ahead with the backing of just nine of the eurozone's 17 members. It will allow Brussels to enforce greater budgetary control and provide a solid firewall against shocks from the financial system.

But Fitch said the wrangling over fundamental aspects of the compact and the failure to clearly identify who will pay if the plan fails was undermining its standing with the markets.

As if to emphasise this point, the new prime minister of Italy, Mario Monti, openly disagreed with Berlin over the speed and severity of proposed cuts to public spending. He warned that further demands from the EU for cuts would undermine his efforts to bring stability and threaten a north-south eurozone split.

Monti said that Europe's response to the debt crisis "should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigour in some countries".

He added: "To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the eurozone brings us … the risk of conflicts between the virtuous north and an allegedly vicious south."

Monti is under pressure from Italian unions, which have warned that the country risked a "social explosion" if the technocrat prime minister pressed ahead with huge spending cuts and tax rises.

Public sector workers are expected to join a nationwide strike on Monday after MPs in Rome backed a €30bn (£25bn) austerity programme that includes an increase in VAT to 23% and a rise in the pension age, eventually up to 70. The cuts package was approved by 495 votes to 88. Had it been defeated, Monti and his government of technocrats would have been forced to resign exactly a month after the economist was sworn in with the task of keeping Italy from being the next victim of Europe's debt crisis.

On the bond markets, Italy's borrowing costs declined along with those of Spain after the European Central Bank intervened to buy Italian and Spanish debt from some of the continent's worst-hit banks. Deutsche Bank and BNP Paribas were downgraded on Thursday after repeated concerns that their loans to southern European countries could become worthless.

The eight-page compact being touted by Sarkozy and Merkel as the answer to the eurozone's debt and deficit crisis confers new powers on the European Court of Justice for policing balanced budget legislation limiting national debt levels in all eurozone countries, and commits the signatories to quasi-automatic penalties against countries that break the 3% maximum limit on budget deficits, with the European Commission as the referee.

The first draft of the "fiscal and stability compact" – agreed at a watershed EU summit last week in which Britain deployed its veto – was circulated to the 27 governments of the EU ahead of what promises to be acrimonious negotiations starting next week.

A simple majority of eurozone countries – nine of 17 – would see the "fiscal union" come into force within a month of the nine ratifications, a move clearly designed to stymie, for example, a no vote in a potential Irish referendum or a rejection by other eurozone parliaments.

Senior EU officials confirmed that all 27 EU governments, including veto-wielding British, would be involved in the negotiations, though the UK was being accorded mere "observer status" in the talks, according to the officials. British sources contested that second-rank status.

David Cameron's unprecedented veto last week thwarted German plans to anchor the new pact in a revised EU Lisbon treaty, forcing the other 26 to take the "second-best" route of forging a new international treaty between governments which may not contradict the Lisbon treaty.

The two main innovations going beyond the existing stability pact governing the euro are the automatic sanctions for those breaking deficit limits, and a "debt brake" that pledges participating countries to enact balanced budgets and ties their hands on public spending and borrowing. Two EU institutions – the court of justice and the European Commission – would be empowered to rule on conformity with these stipulations and the commission would effectively be charged with imposing fines.

The Guardian

Markets are on alert as EU bosses face big decisions

Jean Claude Juncker, the head of the Eurogroup, said all 27 European Union finance ministers, including George Osborne, would talk together tomorrow afternoon to approve or reject extending the funds to the IMF as agreed in Brussels by December 19. The loans would be used by the IMF to support struggling eurozone countries.

The finance ministers are also tasked with devising a voting system to govern the European Stability Mechanism (ESM) after the Brussels decision to replace unanimity sparked a revolt. The ministers are under pressure to have a deal ready for approval by EU leaders when they convene on Tuesday.

There are fears that a failure to reach an agreement on either the IMF loans or the ESM would rattle markets which already have to digest the mass credit rating downgrade warnings on eurozone sovereigns that were announced on Friday night.

Fitch placed six countries, including Spain and Italy, on “negative watch”, while Moody’s downgraded Belgium. Standard & Poor’s has said 15 eurozone states face a downgrade, including France and Germany.

Mariano Rajoy is due to make his first speech to the Spanish parliament, setting out his long-awaited austerity plans. The new prime minister has hardly made any public announcements on Spain’s economic future since he was swept to power last month.

Mr Rajoy will be sworn in as prime minister on Wednesday when he will also name his cabinet, including his finance minister. The cabinet will meet for the first time on Friday. Although the yield’s on Spain’s 10-year debt dropped at the end of last week, the country faces an even tougher time on the bond market after Fitch’s warning.

Separately, Jurgen Stark said he decided to quit as senior economist at the European Central Bank (ECB) because he disagreed with its bond-buying policy.
The Telegraph

Germany may pay full ESM contribution in 2012 - paper


(Reuters) - Germany's Finance Minister Wolfgang Schaeuble said the country may pay its full contribution to the euro zone's permanent rescue fund in 2012, a regional German paper wrote.

"It is clear that the sooner and the more paid-in capital the ESM (European Stability Mechanism) has, the more it gains trust on the financial markets," he was quoted as saying by the Rheinische Post Duesseldorf, in an interview to appear in Monday's print edition. "My priority is to create trust."

The Finance Ministry was unavailable to comment.

European leaders agreed in Brussels last week to accelerate the launch of the ESM by a year to mid-2012, as part of measures aimed at putting an end to a devastating debt crisis.

The ESM, which will replace the temporary EFSF bailout fund, will have an effective lending capacity of 500 billion euros and total subscribed capital of 700 billion euros, of which 80 billion euros will be paid-in capital from euro zone countries.

EU leaders agreed earlier this year that the paid-in capital will be channelled into the fund over five years in five equal installments.

Germany's total contribution to the paid-in capital is set for 21.5 billion euros, paid in instalments of 4.3 billion euros. Earlier this year, it was reticent to pay up its contribution at a faster pace, due to concerns about sticking to its debt brake and consolidating its own budget.

Schaeuble was cited earlier this week by a newspaper as saying Germany would fund its contribution to the ESM with a supplementary budget.

A government source told Reuters earlier this week that Germany's first instalment could be much higher than previously planned "because people want the ESM to be able to act soon."

The statement of rating agency Fitch on Friday that a comprehensive solution to the euro zone crisis was beyond the region's reach has heightened pressure on leaders to get to grips with the turmoil.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said on Wednesday he would like all paid-in capital for the ESM to be contributed during its first year of operation, to ensure it had the firepower to deter speculation.

Schaeuble was also cited as saying the new fiscal compact for all European Union member states except Britain - which last week vetoed it - should be implemented by March 2012, and the new treaty for a stability union should be linked to the ESM treaty.

"It would make sense for the new pact to be linked with the new ESM treaty," he said. "That would mean that solidarity is inseparable from solidity."

"Markets want to see actions," he said.

Britain´s only option...a great escape!!!

Trustee to Seize and Liquidate Even the Stored Customer Gold and Silver Bullion From MF Global


The bottom line is that apparently some warehouses and bullion dealers are not a safe place to store your gold and silver, even if you hold a specific warehouse receipt. In an oligarchy, private ownership is merely a concept, subject to interpretation and confiscation.

Although the details and the individual perpetrators are yet to be disclosed, what is now painfully clear is that the CFTC and CME regulated futures system is defaulting on its obligations. This did not even happen in the big failures like Lehman and Bear Sterns in which the customer accounts were kept whole and transferred before the liquidation process.

Obviously holding unallocated gold and silver in a fractional reserve scheme is subject to much more counterparty risk than many might have previously admitted. If a major bullion bank were to declare bankruptcy or a major exchange a default, how would it affect you? Do you think your property claims would be protected based on what you have seen this year?

You always have counter-party risk if you hold gold and silver through another party, even if they are a Primary Dealer of the Federal Reserve. As Ben said, the Fed offers no seal of approval.

If a Bankruptcy Trustee can pool your bullion into the rest of the paper assets and then liquidate it at prices that are being front run by the Street, you will have to accept whatever paper settlement that they give you.

The customer money and bullion assets are not lost, or rehypothecated or anything else. This is a pseudo-legal fig leaf, a convenient rationalization.

The customer assets were stolen, and given to at least one major financial institution by MF Global to satisfy an 11th hour margin call in the week of their bankruptcy, even as MF Global was paying bonuses to its London employees.

And in an absolutely classic Wall Street move, they are still charging the customers storage fees on the bullion which they have misappropriated from them. lol.

And now that powerful financial institution does not want to give the customer money and metal back. And they are apparently so powerful that the Trustee and the Court are reluctant to try and force its return to the customers, which is customary in this type of preferential distribution of assets prior to a bankruptcy, much less assets that were stolen. And keep in mind that in those last days the firm sent checks instead of wire transfers to customers so they could bounce them, and in a few cases even reversed completed wire transfers!

And so in the great Wall Street tradition they are trying to force the customers and the public to take the loss. The regulators and the exchange are aghast, and are trying to imagine how to resolve and spin this to preserve investor confidence and prevent a run on the system.

'Let them eat warehouse receipts.'

For many this would have been unthinkable only a few months ago. They had been cautioned and warned repeatedly, but chose to trust the financial system. And now they are suffering loss and anxiety, frozen assets, and the misappropriation of their wealth.

How more plainly can it be said? The US financial system as it now stands cannot be trusted to observe even the most basic property rights as it continues to unravel from a long standing culture of fraud.

Get your money as far away from Wall Street as is possible. And if you want to own gold and silver, take delivery and store it in a secure private facility outside the fractional reserve system.

Zero Hedge

Eurozone to pursue crisis action, Fitch doubts outcome

BRUSSELS (Reuters) - The euro zone will tackle its debt crisis this week by offering more cash to the IMF and long-term liquidity to banks, while moving toward tighter fiscal rules, after ratings agency Fitch cast doubt on its capacity to respond decisively.

"We all know that Europe has not been able to convince markets that its governance set-up and its measures against the crisis were enough," Italian Deputy Economy Minister Vittorio Grilli said in a newspaper interview published Sunday.

"More integration and more effective instruments are needed. We are not yet there," he told Il Sole 24 Ore.

Euro zone leaders agreed on December 9 to write into national constitutions a rule that budgets have to be balanced or in surplus in structural terms. If they are not, automatic corrective measures would follow.

Such rules would sharply limit government borrowing, bring down debt and, euro zone politicians hope, help restore market trust in the sustainability of public finances.

But constitutional changes will take a year or more and markets want reassurance now that money invested in euro zone debt is safe, especially after banks were asked to accept a 50 percent loss on their Greek bonds in October as part of a second bailout of the country which sparked the debt crisis.

European leaders have belatedly insisted that the Greek case was unique and did not set a precedent.

To address market concerns that they do not have enough money to prevent the crisis from engulfing Italy and Spain, euro zone leaders brought forward by one year to July 2012 the launch of their 500 billion euro permanent bailout fund.

ECB President Mario Draghi told Monday's Financial Times that euro zone politicians needed to move fast to make the European Financial Stability Fund (EFSF) operational, as any delay would end up raising the cost.

Euro zone leaders also agreed to offer 150 billion euros in bilateral loans to the IMF to raise its crisis-fighting capacity. Up to 50 billion euros ($65.1 billion) more might come from non-euro zone European countries and possibly more from outside Europe.

Euro zone finance ministers will discuss at a Monday teleconference the draft text of the new euro zone fiscal compact so that it can be finalized by the end of January, EU officials said.

They will also consider the size of individual bilateral loans to the International Monetary Fund, in talks from 1430


There are still doubts about this scheme. Germany's Bundesbank said last week it would only contribute if non-euro zone and non-European countries did too and the level of outside commitment is not clear.

Another topic for the ministers to discuss Monday will be the voting method in the euro zone's permanent bailout fund, the European Stability Mechanism (ESM).

Leaders decided on December 9 to abolish unanimity in ESM voting to prevent small countries blocking major decisions.

Finland objects to the change, because to accept it the Finnish government would have to have a two thirds majority in parliament, which it does not have.

German Finance Minister Wolfgang Schaeuble tried to show his backing for the permanent bailout mechanism in an interview published Monday, by saying his country may pay its full contribution to the mechanism next year.

"It is clear that the sooner and the more paid-in capital the ESM has, the more it gains trust on the financial markets," regional paper Rheinische Post Duesseldorf quoted him as saying. "My priority is to create trust."

Leaders will decide in March if the combined lending capacity of the temporary fund, the 440 billion euro EFSF, and the ESM, should be capped at 500 billion euros, or raised by the amount already spent by the EFSF.

"It is clear that in the short term, to fight the crisis of the single currency, the bailout instruments, such as the EFSF and ESM funds, must be reinforced," Italy's Grilli said.

Italy's austerity budget, vital for Rome's attempts to get its accounts in order and do its part to try to save the euro from collapse, enters its final stretch this week with unions still on the warpath.


Market response to the December 9 summit has been cool, mainly because of the reluctance of the European Central Bank to step up euro zone bond purchases and declare its readiness to do so.

"While acknowledging the extraordinary measures the ECB has adopted to provide liquidity to the European banking sector, its continued reluctance to countenance a similar degree of support to its sovereign shareholders undermines the efforts by euro area member states to put in place a credible financial 'firewall'," Fitch ratings agency said Friday.

Draghi declined to give a clear answer when asked in the Financial Times interview whether the ECB would keep buying government bonds once the EFSF entered the picture, and also warned governments not to expect the ECB to become a lender of last resort. [ID:nL6E7NI0RO]

Other uncertainties also weighed.

"A week after the Brussels summit the basis of the agreement reached there has begun to unravel even more quickly than is normally the case," Emirates NBD bank said in a research note.

"Virtually all aspects of the deal appear to be being pulled and picked apart, from the degree of fiscal integration, the amount of firepower available for the bailout funds, and even to the support pledged to the IMF," the bank said.

"As a result the emphasis is likely to fall even more heavily on the ECB to keep the Eurozone system functioning."

The ECB, which is forbidden by EU law from directly financing government deficits, welcomed the December 9 agreement on more fiscal discipline in the euro zone, but doused expectations it would ramp up sovereign debt buying in return.

As a result, Fitch concluded that a 'comprehensive solution' to the crisis was technically and politically beyond reach.


Euro zone policymakers said the ECB's role in the crisis was impossible to communicate clearly because of legal and political constraints. But they said the bank would not, in the end, allow the crisis to threaten the survival of the currency bloc.

A declaration from the ECB that it would buy unlimited amounts of euro zone bonds for as long as necessary would immediately calm markets, but would probably break EU law and would relax pressure on politicians to reform their economies.

"The ECB simply can't and won't say that, and it's very unreasonable to even expect it," one euro zone official said.

Instead, the bank was likely to keep quietly buying enough Spanish and Italian bonds to keep both countries on the market but with financing costs sufficiently high to keep pressure on their lawmakers to quickly accept tough reforms.

"This is the most expensive approach, also not likely to work in the longer run, but still it is the only one possible," the euro zone official said.

ECB executive board member Lorenzo Bini Smaghi signaled the same in an interview published in Il Sole 24 Ore Sunday, saying ECB bond interventions were very effective in specific situations when the market risked going into "tailspin."

At the same time they created "perverse incentives" that reduced the pressure on single governments to adopt financial discipline, he said.

Instead of unlimited bond buying, the ECB will offer banks this week an opportunity to borrow money for three years for the first time, extending the current one-year ceiling for refinancing.

France hopes banks will use the money to buy euro zone bonds and ease the upward pressure on yields, but Italy's Unicredit bank said last week this "wouldn't be logical" for banks that are under pressure to reduce risk and rebuild capital.

Fitch warned that six euro zone economies including Italy and Spain could be hit with credit downgrades in the near future. This is the second time in two weeks that the euro zone has been threatened with multiple ratings markdowns after a similar statement from Standard & Poor's. [ID:nL6E7NG46A]

Fitch said it might also cut AAA-rated France within two years. A poll showed French voters overwhelmingly fear serious damage to the economy if France loses its top rating, despite attempts by President Nicolas Sarkozy to reassure them such a blow would be surmountable.