Brussels could take control of struggling European banks under secret plans

Politicians hope the proposals, which would be funded by a new tax on banks, will stem the rapid escalation in the debt crisis witnessed in recent weeks.

The plan is being formulated alongside Italian Prime Minister Mario Monti's desire for a guarantee on bank deposits.

The annual levy would be placed into a "deposit guarantee scheme", with the fund - backed by the EU, ECB or European Stability Mechanism - also having the power to take over struggling banks.

"Once you have got to a point intellectually where you are comfortable with a central European guarantee on all bank deposits, it takes only another small step to accept that this fund should have broader powers," the Sunday Times quoted one financier working on the plans as saying.

The proposals would essentially mean stronger European nations and financial institutions guaranteeing weaker countries and banks. TheSunday Times claimed top advisers to the European Commission believe removing the threat of bank collapses in this way would restore market confidence in Spain and Italy, according to the newspaper.

There are growing concerns that economic problems in Greece and Spain will spread further.

Greece will hold another election on June 17 after a May 6 vote left parliament divided evenly between groups of parties that support and oppose the austerity conditions attached to a €130bn bailout agreed with the European Union and International Monetary Fund in March.

Anti-bailout party Syriza is reportedly the favourite to win the fresh elections, raising questions whether the debt-stricken country - whose economy shrank 6.2pc in the first quarter of 2012 - can remain in the single currency.

In Spain, Bankia - the country's fourth-largest lender - has asked the government for a total bail-out of €23.5bn, while Catalonia, Spain's richest region, has also asked for financial help. Italy is also being watched closely for signs of contagion.

The Telegraph

Markets have lost $2-trillion since Greek stalemate began

You'd be tempted to think that Europe's leaders have all but thrown in the towel when it comes to Greece.

EU leaders met in Brussels this week and said they want Athens to stay in the euro zone. But they did nothing aimed at making that happen, and many observers believe it's now only a matter of time before Greece exits the 17-member monetary union. Indeed, officials are talking openly about it now.

Markets are now closely watching the polls in the run-up to the second Greek election in mid-June. Anti-austerity forces made surprising gains in the last election, so much so that attempts to forge a coalition government failed, and a new vote had to be called.

This comes amid a sinking economic outlook for the euro zone.

"It’s been three weeks since the Greek elections produced a stalemate between pro- and anti-bailout parties, unleashing a wave of doubts about Greece’s future in the euro, and about the common currency itself," noted deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"In that short span, the euro has dropped by more than 4 per cent to $1.251 (U.S.), 10-year Treasury yields have hit century-lows of 1.7 per cent, and global equity markets have dropped almost 5 per cent," he said in a report Friday.

The market capitalization of the MSCI World Index has lost about $2-trillion in value in that period, putting the benchmark just about back to early 2012 levels, Mr. Porter added in an interview, noting that while other factors have played into it, concern over Greece was the primary culprit.

"Putting the market cap loss of more than $2-trillion into some perspective, the value of Greece’s nominal GDP was $265-billion (and falling) over the past four quarters, or roughly three Facebooks," he said.

"True, this comparison mixes stocks (equity values) and flows (GDP), but it gives a sense of just how much havoc a grand total of 0.16 per cent of the world’s population can cause for financial markets."
The Globe and Mail

Marc Faber: 100% Chance of Global Recession

The stock market appears to be at a critical inflection point. That’s the takeaway from widely followed economist Marc Faber, author of the Boom, Gloom & Doom newsletter.

Faber’s bearish market calls have been followed closely since 1987 when he warned his clients to cash out before Black Monday.

And in a live interview on CNBC’s Fast Money Halftime Report, Faber again warned that economies of the world may be on the brink of a serious slowdown.

Faber indicated that while investors remain focused on Greece and Europe – other issues, bigger issues are looming. And they’re more threatening.

“As an observer of markets – whenever everyone focuses on one thing – like Greece and Europe – maybe they miss issues that are far more important – such as a meaningful slowdown in India and China.”

The latest reports from Beijing would support Faber's assertion. The HSBC Flash Purchasing Managers Index, slipped to 48.7 in May from 49.3 in April. That marks the seventh straight month that the index has been below 50, a level which indicates economic activity is contracting.

Faber also cited weakness in the high-end as another key catalyst that’s very negative.

“There are more and more stocks that are breaking down – economic sensitive stocks and companies that cater to the high-end,” he said. "That suggests to me the economy is likely to weaken and the huge asset run is likely to come to an end with significant asset deflation.”

Earlier in the week Tiffany lowered forecasts citing slower sales. At that time, Fast Money trader Dan Nathan warned that results such as these were foreboding and suggested the high-end was starting to crack.

When taken in concert, Faber says all the economies of the world could take a hit from these negative developments.

CNBC

Lloyd's of London preparing for euro collapse

Richard Ward said the London market had put in place a contingency plan to switch euro underwriting to multi-currency settlement if Greece abandoned the euro.

In an interview with The Sunday Telegraph he also revealed that Lloyd's could have to take writedowns on its £58.9bn investment portfolio if the eurozone collapses.

Europe accounts for 18pc of Lloyd's £23.5bn of gross written premiums, mostly in France, Germany, Spain and Italy. The market also has a fledgling operation in Poland.

Lloyd's move comes as a major Franco-German provider of credit insurance for eurozone trade, Euler Hermes, said it was considering reducing cover for trade with Greece because of the risk the country might leave the eurozone.

When a company goes bust, it is often sparked by withdrawal of credit insurance for suppliers wanting to trade with it.

A spokesman for Euler Hermes, Bettina Sattler, told Bloomberg: "The outcome of the new elections in June remains highly uncertain. Consequently, the situation is further deteriorating. The risk of Greece exiting the eurozone has been revived.

"In light of the recent developments, Euler Hermes will most probably have to switch to a more prudent approach. [We have] maintained a high level of cover for [our] customers until today. But now we are confronted with a changing situation."

Lloyd's fears are likely to be shared by a number of European businesses, which are watching developments in Greece.

On Saturday, Juergen Fitschen, co-chief executive of Deutsche Bank, described Greece as a "failed state" run by corrupt politicians.

"I'm quite worried about Europe," Mr Ward said in one of the first admissions by a major UK business leader of the scale of the crisis that would be prompted by a eurozone collapse.

"With all the concerns around the eurozone at the moment, we've got to be careful doing business in Europe and there are a lot of question marks over writing business in the future in euros.

"I don't think that if Greece exited the euro it would lead to the collapse of the eurozone, but what we need to do is prepare for that eventuality."

Mr Ward says Lloyd's had been working hard on contingency planning and had the capability to switch settlement of European underwriting from euros to other currencies.

"We've got multi-currency functionality and we would switch to multi-currency settlement if the Greeks abandoned the euro and started using the drachma again," he said.

Lloyd's has de-risked its asset portfolio in recent years, with investments split equally into cash, corporate bonds and government bonds, mostly in the US, UK, Canada and Australia. "We have de-risked the asset portfolio as much as possible," he said.

The contingency planning comes as German politicians piled the pressure on Greece ahead of elections on June 17.

A conservative member of German chancellor Angela Merkel's cabinet said today Germany would not "pour money into a bottomless pit".

On Sunday, Swiss central bank chief Thomas Jordan admitted his country is drawing up an action plan in the event of the euro's collapse.

The Telegraph

Greece to Exit Euro, New Currency to Fall 60%: Citi

Greece will leave the euro zone next year and the country's new currency will "immediately fall by 60 percent," according to Citi chief economist Willem Buiter.



Greek officials have repeatedly stressed that the country will be running out of cash by the end of June, after which it would be unable to make debt payments and pay civil wages and pensions. An election is scheduled for June 17 after inconclusive results of the May 6 polls meant a government could not be formed.

The Troika of international lenders — the European Union, the European Central Bank , and the International Monetary Fund — are waiting to see what government will result from the elections next month before disbursing more aid.

"The elections (on June 17th) will not produce a viable government that can follow the troika plan, leading to a stalemate between the Greek government and official creditors, and to the suspension of EFSF-IMF funding,” Buiter wrote in Citi's latest Global Economic Outlook.

However, analysts caution that a default wouldn’t automatically lead to an expulsion of Greece from the euro zone.

As UBS writes in a recent report: "There is plenty of precedent for defaulting inside a monetary union, so [a Greek] exit should not be assumed to be automatic."

Limited Cash Reserves

But Citi explains a Greek exit from the euro zone is closely linked with its limited cash reserves, which may be depleted well before the year end: “A Greek EMU exit could be triggered by the government’s need to print money to cover its spending.”

Citi adds that Greece's new currency will immediately fall 60 percent versus the euro and “remain depreciated by 50 to 60 percent for the next five years.”

Based on this scenario, the bank believed that Greece’s real gross domestic product will shrink by about 10 percent in 2013. However, it could rebound by 4 percent to 5 percent in 2015-2016, as gains in cost competitiveness revive exports, especially tourism, Citi wrote.

Addressing Spain’s banking sector troubles, Citi expects “some kind of troika program for Spain to be agreed this year or in early 2013." Its main goal will be to fund a recapitalization of the banks, though there is a chance it could be used for the funding of the fiscal deficit as well, according to Citi.

On Thursday, Spain’s Prime Minister Mariano Rajoy reiterated the country had no “interest and no need” for a recapitalization of its banking sector through the European rescue fund.

Hours later the Spanish economy minister Luis de Guindos confirmed that Bankia, the country’s fourth-biggest lender, will be fully nationalized, with a 9 billion euros ($11 billion) capital injection through Spain's state-backed bailout fund.

CNBC

Israel revives military option after Obama rejects its nuclear demands of Iran

Israel has withdrawn its pledge to US President Barack Obama not to strike Iran’s nuclear sites before the November presidential election after he rejected its minimal demands for nuclear negotiations with Iran. This is reported exclusively by DEBKAfile’s Washington sources.

In public, Israeli ministers still talk as though they believe in results from the Six-Power talks with Iran, which Thursday May 24 limped into their second day in Baghdad with the parties still miles apart. But the presidential veto has essentially cast Israel outside the loop of influence on the outcome of diplomacy.
When Israeli Defense Minister Ehud Barak met US Defense Secretary Leon Panetta at the Pentagon on May 17 he was told that Obama had rejected Israel’s toned-down demands for Iran to at least to halt high-grade uranium enrichment, export its stocks of material enriched higher than 3.5 percent grade and shut down production at the Fordo nuclear plant near Qom. For six months, the Obama administration tried to sweeten the bitter pill of this rejection by bumping up security aid. The latest appropriation covered another $70 million for manufacturing more Iron Dome short-range missile interceptors.
After talking to Panetta, Barak turned to Secretary of State Hillary Clinton and National Security Adviser Tom Donilon in the hope of winning their support for softening Obama’s ruling. Clinton replied she was not involved in the negotiations with Iran and Donilon, that a personal decision by the president was not open to change.
A week of consultations followed the defense minister’s return home, during which it was decided to tear up Israel’s pledge to refrain from attacking Iran during the US presidential campaign. Wednesday, May 23, the day the Baghdad talks began, Barak signaled Washington to this effect.
It was conveyed in a little-noticed early morning radio interview with the defense minister. To make sure his words reached the proper address without misunderstandings, the defense minister’s office issued a verbatim English translation from the Hebrew:
"There is no need to tell us what to do, and we have no reason to panic. Israel is very, very strong, but we do know that the Iranians are accomplished chess players and will try to achieve nuclear capabilities. Our position has not changed. The world must stop Iran from becoming nuclear. All options remain on the table."

As the Baghdad talks went around in circles, Israel’s military option was put back firmly on the table and on the US-Iranian chessboard.




DEBKA File

SpaceX Launch of the 1st Dragon Spacecraft

Again the dragon......