From Cash to Trash

It turns out, according to the Committee of European Banking Supervisors (CEBS), the European banks aren’t half as stressed as everyone thought.

According to CEBS, the banks are only mildly tense, rather than stressed.

You’ve probably read, or at least skimmed over the details of the results already.

The upshot is that as today’s Australian Financial Review reports, “Just seven relatively minor unlisted banks of the 91 subjected to stress tests failed to pass.”

It also reports that, “regulators decided the banks needed to raise an additional €3.5 billion of capital.”

Phew! Everything must be fine then.

That’s a piddly amount. Especially so when you consider these so-called strong European banks have already raised €220 billion over the last 18 months.

As the AFR points out, “much of it from governments.”

Of course what the AFR really means is, “much of it from taxpayers.”

You can view the summary of each banks’ results under what CEBS calls the benchmark and adverse testing scenarios by clicking here.

And just in case you’re wondering what those scenarios are, here’s a link to the document that spells it out. Skip to page 3 if you’re just interested in knowing what the scenarios were. If not, enjoy the full 55 pages.

In a nutshell, the benchmark scenario is based on there being a mild economic recovery, whereas the adverse scenario is based on the much-feared double-dip recession.

But, the most interesting part of the report was perhaps footnote 19 on page 47:

“Since no sovereign defaults are considered in the exercise, there is no impact on holdings of sovereign bonds which are held to maturity in the banking book.”

Considering how close Greece came to defaulting, you’d have to be pretty confident that a sovereign default in the European Union isn’t going to happen.

And they’re probably right. As we pointed out on Friday, it’s much more likely that the Europeans will continue to take the cowards’ way out by bailing out economies and inflating their way out of one problem and into another.

Not only that, but under the adverse scenario Greek debt would receive a “haircut” of 42.2%, and Portugal 26.6%. In other words, the value of those country’s bonds would be revalued significantly less should the adverse scenario play out.

The full list is on page 52 of the link I’ve provided above.

But yet again the stress test doesn’t stress because the report notes, “these haircuts were not used in the stress test exercise and are presented only for the sake of comparison.”

Which has the effect of making the stress tests pointless.

Furthermore, we have to wonder what’s the point of testing the banks against an adverse scenario if everyone knows the European Central Bank (ECB) and European governments will just bail the banks out anyway?

And what’s the point of a stress test if you’re not going to stress it out?

You see, it just goes to show you how worthless money is, which I’ll come to in a moment.

But just one more quick note. Money Morning reader Jack has brought our attention to some interesting details of who’s holding US treasuries.

According to the latest report from the US Treasury, holders in the UK increased their holdings of US treasuries from just USD$90.8 billion in June 2009 to USD$350 billion as of May 2010.

That’s the single largest increase by holders in any particular country.

Out of interest, Australians sensibly only hold USD$14.1 billion worth.

Over the same time as the UK has more than tripled its holdings, the Chinese – who are still the biggest holders – have gradually reduced their exposure.

In other words, the Chinese are selling and the Brits are buying.

What could it all mean? We’re not sure. There are claims by one blogger that it’s simply the US government monetising its debt through offshore holdings.

Could that be right? We don’t know.

Or, could it have anything to do with the European banking stress tests? It’s possible we suppose. In anticipation of the stress testing have Europe’s banks dumped their dodgier sovereign debt holdings onto the central banks and then used the bailout money to invest in what’s deemed to be a safer asset – US treasuries.

That would make sense if it’s the case. And it could explain the massive increase over the past few months. We’ll see when the next quarterly report is released in August whether UK holdings of US treasuries have increased further.

But bringing the subject back to the points we raised last Thursday and Friday, it’s clear that the ECB will just print as much money as it needs to get the European banking system out of a hole.

After all, what’s another 3.5 billion compared to the 220 billion they’ve already put their taxpayers on the hook for?

It’s what makes the following two news stories that caught our eye over the weekend even more interesting. The best way to summarise them is that one article is about a store of value, while the other is about a store of rubbish…

A few months ago a treasure hunter in the UK county of Somerset unearthed 52,500 Roman coins. According to the report from the BBC, most of them are “made from debased silver or bronze.”

He found them on a farmer’s land while waving his metal detector around. We’re sure one or two locals have laughed at the man over the years as he’s unearthed treasures such as old bicycle frames and thirty year old empty baked bean cans.

But now he could be about to receive up to GBP1 million for the loot.

That’s not bad for 52,500 coins that are reckoned to be around 1,700 years old! That would give each coin a value of around GBP19 each.

Now take a look at this second report that we came across over the weekend. Here’s the headline as reported by News Ltd: “Old Romanian banknotes turned into bins.”

The report states, “The [Romanian] Central Bank processes roughly 4.5 million banknotes daily, of which 1.2 per cent are deteriorated and must be withdrawn from circulation.”

Ah, the coincidences. Roman versus Romanian. 52,500 coins, versus 1.2% of 4.5 million – which coincidentally is 54,000 bank notes.

If there was ever an illustration to show how valuable a hard and sound money system is compared to the worthlessness of a paper-based fiat currency system then this is it.

I mean, look at the comparison. 52,500 coins that are 1,700 years old are more valuable then paper bank notes that were probably produced no more than ten years ago.

You see, here’s the difference. The Roman coins are valuable in two ways. First of all there’s the intrinsic value. By that I mean, the actual value of the metal that the coins are made from.

And secondly there is the numismatic value, ie. The value that a collector places on the coins over the intrinsic value. Depending on how valuable these coins may be to a collector or a museum will obviously have an impact on the price.

The point is, after 1,700 years the collection of Roman coins still has real value.

Whereas the collection of paper Romanian bank notes are worthless. They contain nothing of any value. Not even as a collectable. The only worthwhile use for these notes is apparently to recycle them into things like rubbish bins!

Look, obviously if these coins were gold coins they would be even more valuable.

Although as we understand it, by the time of the fourth century the Romans were already well down the path of monetary inflation. Gradually reducing the precious metal content of coins and making them smaller while trying to retain the same face value.

Which is no different to how the modern money system works.

Except rather than changing the content of the paper notes, all the central bank has to do is just print more of them. The effect is the same, a devalued currency.

That’s why we’re in favour of a genuine money system that’s backed by gold or other precious metals. After 1,700 years, even the debased coins are still around and still have value, whereas in 1,700 years not a single paper note from today will be in existence.

The Europeans have supposedly put their banks through a rigorous test to assess their ability to withstand another financial shock.

The reality is that they’ve done no such thing. All they’ve done is provide concrete evidence of how they will save the bacon of them and their banking pals while simultaneously using the evils of inflation to destroy the wealth of its citizens.

Despite the high price it’s still clear that buying gold should be the top of everyone’s ‘To-Do’ list.

Cheers.
Kris Sayce
For Money Morning Australia

From Cash to Trash , 8.3 out of 10 based on 11 ratings

Tagged as: bank, capital, cash, money, scenario, trash