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"Latvian Banks Fight Off Deposit Run," The Boston Globe, 12/12/2011. http://www.boston.com/business/articles/2011/12/12/latvian_bank_fights_off_deposit_run/
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Capital mobility is an essential precondition to default as capital rushes out of a problem jurisdiction in the final phases of a sovereign spiral. Professors Reinhart and Rogoff, whose work we have referenced many times in the past, assessed the correlation between the liberalization of capital mobility and the incidence of banking crises across the globe. They concluded that "periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990's, but historically."2 We note that their data set, which begins in 1800, only covers through 2007 (this paper was published in April 2008). At that time, capital mobility was at its highest point ever and we all know how that turned out.
Carmen M. Reinhart and Kenneth S. Rogoff, "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises", pg. 7. http://www.nber.org/~wbuiter/cr1.pdf
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Hayman Capital Management, L.P. 2011
Manmohan Singh, IMF Working Paper: Velocity of Pledged Collateral: Analysis and Implications, November 2011. http://www.imf.org/external/pubs/ft/wp/2011/wp11256.pdf
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Hayman Capital Management, L.P. 2011
asset managers is, in part, a natural response to the European Banking Associations failure to conducted truly robust stress tests. Case in point: Dexia, a Franco-Belgian bank, passed a prior stress test with flying colors and approximately 90 days later failed miserably. In fact, 190 billion euros was needed for Dexia's bad bank alone. The most recent stress tests proved to be meaningless even sooner than last years tests. Below is an illustration provided in the IMF paper which shows the traditional flow of collateral (on the left) versus the structure currently employed by many large market participants. The reference to churn in the chart refers to a dealers ability to re-use (i.e. risk) excess collateral to generate positive yield for themselves.
The recent announcement of a coordinated G7 central bank action to increase the availability of currency swap lines at cheaper rates was an attempt to put into place facilities that will act as airbags for a marketplace that will likely disintegrate into a formless void of investor action once multiple sovereign defaults begin. We believe the timing of the swap facilities announcement was specifically designed to forestall the impending failure of a large Eurozone bank facing a funding crisis. The announcement provided temporary relief to the funding markets, and the mini-crisis was seemingly averted. However, this sort of relief simply allows Europes banks to continue to pick the flowers while allowing the weeds to grow, by preventing any failure and restructuring but forcing ongoing deleveraging across the system. The majority of "good" collateral is already posted at the ECB for repo funding, so facing a dearth of available collateral, what would you expect the ECB to do? Naturally, they announced an expansion of eligible or Tiffany collateral and provided some relief on the cost of the repo transactions. The constant lowering of collateral requirements has encouraged European banks to pledge lower and lower quality collateral to the ECB which, over time, has seen its balance sheet expand to provide more than half a trillion euros of loans; placing the ECB's tiny capital sliver of 5 billion euros at ever greater risk. As European leaders press forward with failed attempt after failed attempt to suppress borrowing costs, control spending, reduce deficits and prop up what the markets have already told us is a broken monetary system, the
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Hayman Capital Management, L.P. 2011
data tells us that the citizens of the most troubled and profligate nations are losing confidence in the Euro dream. Trust has been lost, confidence in the system is being lost, and the ultimate consequence of this break down - sovereign defaults are imminent. We continue to move ever closer to a great restructuring of sovereign debt.
Sincerely,
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Hayman Capital Management, L.P. 2011