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Spain: Close To the Edge And Soon To Be Eating Manure

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As reported in ZeroHedge, Spanish bond yields went over 7% and the Budget Minister in the Spanish Parliament this morning came out with the line 

“There’s no money in the public coffers.”

What a start to the day but it got even worse than that from the Minister

The Budget Minister went on in Parliament, this morning, to proclaim that “There is no money to pay for public services” which is quite a statement to make after the Prime Minister had told everyone that Spain was fine and that only the banks were having some issues. Of course this same Prime Minister said bailing out the Spanish banks was a “Great victory for Europe” so we already know that he is suffering from some serious psychological deficiencies and needs some help. Poor Mr. Rajoy; where is Sigmund Freud when you need him?

“The European Central Bank intervened in the secondary market to buy public debt to avoid the European monetary system collapsing. Spain would have collapsed without this intervention.”

                  -Budget Minister Montoro in Parliament this morning in Madrid.

Economists are not noted for their humour but this story is a classic.

Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.

 

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China To Be Major Gold Trade Center

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It should come as no surprise that China, the world’s largest gold producer and buyer should want to become a major gold trading center. The Wall Street Journal has reported such plans after being briefed by an insider.

China has proposed to broaden trading of precious metals in its local market in order to help China become a “major gold trading centre” (see News).

The Wall Street Journal was briefed about China’s plans by “a person involved with the matter.” The paper reports that “the move could increase liquidity and help Beijing gain stronger pricing power for key commodities like gold”.

China is the largest consumer and now the largest producer of gold in the world and has aspirations to become a major gold trading center on a par with London and New York. China is also the fifth largest holder of gold reserves in the world after the U.S., Germany, France, Italy (see table).

Clearly they have ambitions far beyond a major Gold trading center but as a worlds reserve currency, possibly even THE worlds reserve currency.

Chinese officials have spoken of China’s aspirations to have gold reserves as large as the U.S. in order to help position the yuan or renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term.

In the longer term, being a major gold trading center would make China a more powerful financial and economic player and indeed could allow them to influence commodity and other important market prices. Indeed, Reuters reported that becoming a major gold trading center “would boost the country’s clout in setting global prices”.

The journal reports that “Beijing’s tight grip on commodities trading and rigid capital controls are among the obstacles in the way.”

The move is also part of the broader financial reforms that Beijing has launched in recent weeks, loosening some of the restrictions on securities investment and allowing banks to price loans at cheaper rates than in the past, that seek to grant market forces a bigger role in both the economy and the capital market.

The moved proposed by market officials would expand trading of precious metals from designated exchanges to the country’s vast interbank market, according to the person involved. The Shanghai Gold Exchange has released draft rules for such interbank precious metals trading, which will include spot, forward and swap contracts for the commodities, said the person.

Current limitations.

At the moment, producers, consumers and investors can trade only spot and futures contracts in gold and silver on the Shanghai Gold Exchange and the Shanghai Futures Exchange, respectively.

Due to limited membership on the two exchanges, many investors, including banks, aren’t able to directly trade the precious metals on the exchanges.

The draft rules were jointly developed by the Shanghai Gold Exchange, which is the world’s biggest marketplace for spot gold trading, and the China Foreign Exchange Trading System, a central bank subsidiary that oversees onshore currency trading.

Plans are afoot to get around this and expand gold trading.

According to the draft rules, the authorities are aiming to launch the interbank trading on Aug. 31, starting with gold contracts, said the person.

That would make gold the first commodity to trade on the interbank market.

The authorities will introduce a “market maker” system for the planned precious metals trading—the first time the system will be used to trade a commodity on the interbank market—with transactions done on an over-the-counter basis as compared to the exchange-based pricing mechanism.

Market makers are firms that stand ready to buy and sell a product at a publicly quoted price to facilitate trade.

An over-the-counter market would allow investors, in this case banks, to trade in large quantities that far exceed the Shanghai Gold Exchange’s current trading volumes, analysts said.

According to the draft rules, banks are allowed to use the new precious metals contracts in the interbank market for proprietary trading only.

The Shanghai Gold Exchange is inviting banks, mostly members of the exchange, to submit applications to take part in the trading, said the person, who expects most major and midsize banks to participate.

The move to let banks become market makers also shows the authorities’ desire to give such better-established and more sophisticated institutions more power in setting prices for major commodities, a common practice in developed markets, said Jiang Shu, senior precious metals analyst at Industrial Bank Co.

Current restrictions and capital controls remain an obstacle to China becoming major gold trading center and to the renminbi becoming an accepted global reserve currency.

The move by China to expand precious metals trading to their glowingly important and vast interbank market is important and another step towards China becoming an economic power on the world stage and one that will rival European nations and the U.S.

Source: Goldcore

Baltimore to Sue Over Libor

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Probably the first of many case to be taken against the banks for the Libor scandal as Baltimore City looks set to be first up. The difficulty is going to be the burden of proof whereby Baltimore has to show that the allege fixing in London directly affected Baltimore. This could open the floodgates to similar lawsuits from other US cities.

Baltimore is lead plaintiff in a class action lawsuit that alleges that banks including Barclays, Bank of America, HSBC, JP Morgan and UBS conspired to fix a set of key interest rates – the London Interbank Offered Rate, or Libor – costing the city millions in the process. So far, the Libor scandal has played out mostly under the radar in the US. But now it is gaining traction in Washington, and Baltimore’s suit is putting a human face on a scandal legal experts predict could end up being the most costly of the credit crisis.

Firefighters, services for the elderly, school programmes – all these and more are being cut as a direct result of the actions of colluding bankers, Rawlings-Blake claims.

According to the court documents, Baltimore bought “tens of millions of dollars worth of interest-rate swaps” during the period when the alleged fixing took place. The suit, filed with top Washington law firm Hausfeld, alleges that between August 2007 and May 2010 the defendants conspired to suppress Libor below the levels at which it would have been set had they accurately reported their borrowing costs. Those manipulations had “severe adverse consequences” for Baltimore and others, according to the suit. Other cities are watching carefully and a raft of litigation is expected in the US.

The city had no choice but to fight, said Rawlings-Blake. “We are faced with closing fire companies, closing recreational centers … We have services that have been cut year after year; services that people depend on. Opportunities for young people, the cleanliness of the city: everything is affected by the budget,” she said.

Ultimately the US may take an Anti-trust case similar to that taken against the tobacco industry.

Stephen Bainbridge, a professor of law at UCLA, said the case was “one of the worst examples of abuse of trust that I can remember in 25 years of following corporate governance”. Given the scale of Libor’s influence, Bainbridge said, this could emerge as “the defining financial scandal of the meltdown”.

Bainbridge believes the justice department may build an anti-trust case against those involved that could ultimately lead to a settlement as large as that agreed in the US’s massive suit against the tobacco industry. Anti-trust laws allow three times the damages for those convicted of collusion.

But he believes a suit like Baltimore’s may prove harder to prove. The city’s lawyers will have to prove direct “loss causation” – in other words, that bankers allegedly fixing rates in London directly hit Baltimore’s bank balance.

“Proving that chain of events can be difficult,” said Bainbridge.

Source: Guardian

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