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The crisis has dealt a blow to Europe's rosy image

The Swiss-based Bank of Central Banks said a hunt for yield was luring investors en masse into highrisk instruments, a phenomenon reminiscent of exuberance prior to the global financial crisis. This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong well that fear has been eased by the recent decision of the FED head honcho Mr. Bernanke. This looks like to me like 2007 all over again, but even worse, said William White, the BISs former chief economist, famous for flagging the wild behavior in the debt markets before the global storm hit in 2008. All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle, said Mr White, now chairman of the OECDs Economic Development and Review Committee. The BIS said in its quarterly review that the issuance of subordinated debt -- which leaves lenders exposed to bigger losses if things go wrong -- has jumped more than threefold over the last year to $52bn in Europe, and jumped tenfold to $22bn in the US. The share of leveraged loans used by the weakest borrowers in the syndicated loan market has jumped to an all-time high of 45pc, ten percentage points higher than the pre-crisis peak in 2007-2008.

Share of high risk leveraged loans now greater than it was in 2007
The BIS said investors are snapping up covenant-lite loans that offer little protection to creditors, as well as a form of hybrid capital for banks known as CoCos (contingent convertible capital instruments) that switch debt into equity if bank capital ratios fall too low. While CoCos help shield taxpayers from losses in a banking crisis by leaving private creditors with more of the risk, the recent appetite for such an instrument is also a warning sign. The BIS said interbank credit to emerging markets has reached the highest level on record while the value of bonds issued in off-shore centers by private companies from China, Brazil and other developing nations exceeds total issuance by firms from rich economies for the first time, underscoring the sheer size of the debt build-up in Asia, Latin Africa, and the Mid-East. Claudio Borio, the BIS research chief, said the ructions in emerging markets since the Fed turned hawkish in May is a warning to investors that they must tread with care. Global financial markets have

2 reacted very strongly. If there were any doubts about the strength of international policy spillovers, they have now been put to rest, he said.

How Bernankes very recent signal has pushed up long term rates
There's money on the line. Markets will be listening for signals that the Federal Reserve Bank plans to wind down its $85bn in monthly asset purchases known as quantitative easing. For nearly five years the stimulus program has helped markets find confidence in a discouraging landscape. Bernanke has signaled that it won't last forever. But it was supposed to last until the economy and specifically the unemployment rate improved. Or until rising interest rates grew too worrisome. However, Mr. Borio said nobody knows how far global borrowing costs will rise as the Fed tightens or how disorderly the process might be. The challenge is to be prepared. This means being prudent, limiting leverage, and avoiding the temptation of believing that the market will remain liquid under stress, the illusion of liquidity, he also said. The BIS enjoys great authority and it was the only major global body that clearly foresaw the global banking crisis, calling early for a change of policy at a time when others were being swept along by the euphoria of the era. Mr. White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines. The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks. Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. I dont know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel, he said. The BIS quietly scolded Bank of England Governor Mark Carney and his eurozone counterpart Mario Draghi, saying the attempt to use forward guidance to hold down long-term rates by rhetoric alone had essentially failed. There are limits as to how far good communications can steer markets. Those limits have become all too apparent, said Mr Borio.

Across Europe's southern rim, people recoil at the idea of returning to national currencies
Europe's common currency has left the continent's southern countries depressed, indebted and struggling to compete internationally. But even in the tumult of Italy's national election campaign this month, the question of euro membership isn't being seriously debated. In Italy, as in Spain, Portugal and other crisis-hit countries, popular support for the euro remains strong. Across Europe's southern rim, people recoil at the idea of returning to national currencies, fearing such a step would revive inflation, remove checks on corruption and derail national ambitions to be part of Europe's inner circle. Such fears outweigh the bleak growth outlook that has prompted many U.S. and U.K. economists to predict a split of the currency. Only 20% of Italians say leaving the euro would help the economy, compared with 74% who believe it would be bad or disastrous, according to a recent

3 survey by Milan-based opinion-research group Ispo. Strong majorities in Spain, Portugal, Greece and Ireland also reject an exit from the euro, recent polls show. Europeans' determination to stay in the common currency will play an important role in how the euro crisis unfolds this year. As Europe's financial-market panic subsides, the euro's survival relies on countries enduring a painful, lingering economic retrenchment. Italy's center-left party, which is leading in polls, promise to maintain the austerity measures required to defend the country's place in Europe. Even conservative ex-premier Silvio Berlusconi has toned down his anti-euro rhetoric. Popular will to stay in the euro doesn't guarantee that no country will leave. Political paralysis or bank runs could, in theory, force a country to print its own currency to avoid financial collapse. Nor does popular support make the euro a success. Europe's plight has resurrected old warnings that a single currency spanning disparate national economies can lead to crises, as well as make it harder for countries to escape trouble. Experience suggests recovery from a financial crisis can be easier if a country devalues its currency, making its goods cheaper abroad. The only option for struggling euro-zone countries, by contrast, is to push down wages and prices relative to the euro's core economies. The process will likely add years of hurt to regions of Europe already five years into a downturn. Many southern Europeans are disappointed with the European Union's institutions and leaders, and bitter about the effects of austerity medicine. But the euro has escaped the backlash. "Europeans who now use the euro have no desire to abandon it and return to their former currency," according to a survey by the Pew Research Center. In Spain and Portugal, 70% or more of people want to stick with the euro, recent polls found. Even in Greece, where the economy and employment have shrunk by more than 20%, just one in five people wants the drachma back. Even supporters of radical anti-austerity party Syriza mostly oppose leaving the euro. Antipathy to the euro has risen strongly in European countries that didn't join it. The currency crisis has strengthened the conviction of Britons, Swedes and Danes that they were right to keep their own currencies, the EU's regular Eurobarometer surveys show. The recent history of countries in the eurozone periphery helps explain their resilient support for the European project. Spain, Portugal and Greece all escaped dictatorship in the 1970s. Joining Europe's economy and institutions helped cement democracy and raise living standards. European ties helped them overcome decades of backwardness and isolation. Ireland's democracy is older, but European largess is strongly associated there, too, with economic transformation. The crisis has dealt a blow to Europe's rosy image in such countries as Portugal, but "the cultural association of Europe with modernization is still there," said Antonio Costa Pinto, a political scientist at the University of Lisbon. Spain, with its regional divisions and bitter legacy of the Franco dictatorship, "has constructed its democratic, contemporary identity on the idea of Europe," leaving the country with "no Plan B," said Antonio Moreno, a Spanish historian at Madrid's Complutense University. In all of the crisis-hit countries, distrust of domestic politicians and government bureaucracies is a potent reason why few want to leave the euro. Most people believe their national leaders, acting without the yoke of the euro, would make an even bigger mess of national

4 economies. Regular corruption scandals, such as the slush-fund allegations currently shaking Spain's ruling party, have reinforced popular suspicion. In general, "Returning to the drachma, lira or peseta would mean giving economic power to the most discredited group of all," said Jacob Funk Kirkegaard, a scholar at the Peterson Institute for International Economics in Washington. Nowhere is this more heartfelt than in Italy. The euro is more than a currency, it is the strongest symbol of belonging to Europe, a relationship that many Italians hope can teach them better governance. Italy has had 58 governments in 65 years, frustrating efforts to fix the country's stifling bureaucracy, chronic tax evasion and recently stagnant business sector. Even Italian politicians refer to Europe as a beneficial vincolo esterno, a shackle on lawmakers. Italians' trust in the EU has slipped to 40% in the recent Ispo survey, down from 57% in 2010. But over the same period, the survey found, trust in Italian political parties fell to 4% from 13%, largely because of chronic scandals.

The Banking union should help speed up the repair of BANKS

The president of the ECB told a conference in Berlin that a single resolution mechanism was needed to restore the eurozones banking sector, boost business lending and prepare for future banking crises. Banking union should help speed up the repair of banks that is if, as I hope, we end up with a strong resolution mechanism. He added: We need a mechanism that allows non-viable banks to be wound down without financial stability risks, as we see in the US. The 17 eurozone finance ministers discussed a proposal to give the European Commission authority to wind up failed banks. Wolfgang Schuble, the German finance minister, led the opposition to the plan, pushing instead to continue to make national governments responsible for failing institutions. Mr Schuble told reporters in Vilnius, Lithuania, where the EuroGroup met: The path that the commission has proposed toward a resolution mechanism is a rocky one. There can be no doubt about it: we need to be on a legally certain foundation. He added: Only if there are sound fiscal and macroeconomic policies in all countries can firms prosper and compete effectively. And only if all countries can maintain a sustainable position can there be closer euro area integration. EMU was not set up for some members to be permanent creditors and others to be permanent debtors. Germany must pay for effectively lending money to the EZ to buy their products. However, Germany cannot be seen to pay so there will be maneuvering and subterfuge to make Germany paying seem painless to their voters. Bunds/German State Debt are the only way to achieve this whilst not making the average of contemporary German/Turkish voters aware of the consequences before it's too late.

Slow decline is the German future within EMU.

Le Figaro on the Euro many years ago "Versailles without a War" the writing was on the wall. Banking Union means the solvent guarantee balance sheets of all banks which amount to 9000 bn. Cypriot, Greek, Spanish, Italian , French.....and once introduced with their majority in the ECB there is no turning around or back the Ship of Fools. The Euro and EU will bring all of Europe down, the ripples will be enough to sink Scandinavia and Briton economic ships. Date: September 20.2013

Mircea Halaciuga, Esq. 040724581078 http://risc-managment.webs.com/