These two links both refer to looming financial stresses within the system. Both are “shadow” in that they are simply not in the forefront of people when they look for problems that can blow-up in their faces. Part of the problem of course is that they are not immediate, they are potential problems down the road, that, might [one hopes] never actually eventuate. Well, they will, at some point, that unfortunately is the dangerous truth.

China and their banking system

The Grexit, short for Greece finally giving up on the single currency, has been trending for the last few weeks. And coming up next: the Spexit.

In Greece, people have just about put up with it — until now. So have the Irish, the Portuguese, and the Italians. The Spanish won’t. Here’s why.

One: Spain is too big too rescue.

Two: Spain has tired of austerity already. Remember, the protests against cuts began in Madrid a year ago with the “indignados” movement, which started sit-ins across major cities in 2011. The protests spread from there to Greece, and other euro-zone countries. The austerity had hardly even begun, yet already it has provoked strong opposition.

Three: Spain has a real economy. The Greeks understandably feel nervous about life outside the euro zone. They don’t really make anything. Spain is a successful economy with a perfectly respectable industrial base – its export to GDP ratio is 26%, similar to the U.K., France or Italy. Only last week the Japanese car-maker Nissan announced a major new investment there.

Four: Spain is politically secure. For many countries, euro membership is more about politics than economics. The Greeks stay in because it locks them into Europe (rather than being part of the Turkish sphere of influence). Latvia wanted in because it made it part of the EU rather than being dominated by Russia. For the Irish, it is about separating themselves from Britain. The Germans stick with the euro because the EU still represents a break with its troubled past.

Five: Spain has bigger horizons. The Spanish economy looks partly to Europe. But it looks just as much to the booming Spanish-speaking economies of Latin America (and indeed the huge Hispanic market in the U.S.). Rather like the U.K., Spanish business has always looked to the global rather than the European market. Why tie yourself to a failing project when there are much bigger opportunities out there?

Six: The debate has already started. There is already a serious discussion underway in Spain about the future of the currency. Plenty of mainstream economists and pundits are arguing that the real problem is the euro, and Spain will only recover once it gets the peseta back. The taboo has been broken. That isn’t true in Greece, where even the far-left Syriza party still clings to the idea that it should stay in the euro.

Spanish govt 2yr yields are blowing out at the moment in response to the bankruptcy/bailout of one of their larger banks. With Greece now saved, the problems have emigrated. The truth is that Europe is essentially bankrupt, as is America, as is China. The money printing can delay the issues at any given specific point, but, it just moves somewhere else. This will result in some large scale defaults somewhere, sometime.

From the Financial Times a series of bubbles.

In what’s believed to be a first by a public pension plan, the Northern Mariana Islands Retirement Fund filed for Chapter 11 bankruptcy protection on Tuesday.

The public defined-benefit plan is in a hole. At the moment, it’s only 38.8% funded, thanks to low investment returns and a benefit structure that’s been increased without raises in funding, according to the bankruptcy filing in the U.S. District Court for the Northern Mariana Islands, a U.S. commonwealth consisting of three major islands in the Western Pacific.

Currently, the fund holds $268.4 million in assets, yet faces a staggering $911 million in liabilities. Last year alone, it paid $76 million in retirement benefits, health and life insurance claims and lump-sum death payments.

Once again the imbroglio in Greece was credited for spooking US markets on Friday. Will Greece default? Will they accept austerity measures? Will they leave the Euro? Stay? What would the impact be on US markets? Let’s look at some data to see if anything becomes clearer.

Well the US banking system exposure to Europe is substantial: some $800 billion, with a total bailout reaching $1.1 Trillion. Even to tiny Greece the exposure is $48 billion, not a drop in the ocean. It looks like once again, the bankers have placed the entire financial system at risk, and why the market is so jumpy every time Greece teeters on the brink – they look at Greece as the Lehman moment for the sovereigns.

Equities, as we have seen in a previous movie would not survive the run to cash, which would in the first instance likely be 90 Day Treasury paper, sparking a spike in the dollar that might be sustained, the US commercial banks would again become targets of short-sellers, and you have to wonder, currently, retail wise, who would be holding bank stocks anyway – I certainly am not, although, tell a lie, I do hold one financial stock AEA.

So the blogoland twitchy-ness with regard to equities is not unfounded. So twitchy however, that many have simply gone to cash and watched the market trade higher for about the last 10 weeks. That is a lot of lost profits. Their fear of course, and it’s not an unreasonable one, is that if Greece defaults, leaves the Euro, the fall in markets will be so brutal as to wipe out those 11 weeks of gains virtually over-night.

It has to be said, that could happen, the ‘flash crash’ demonstrated just how fast markets can fall when the algo boys get the bit between their teeth. Against that you have the Central Bankers, who are determined that Greece will not fail in a shock manner, although you could be excused for thinking otherwise, so ineffectual have the politicians been to date.

I guess it remains, watch this space, and have a contingency plan for the worst should it happen.

Too much debt, not enough production. Thus the solution to the problem is also obvious: less debt and/or greater production. As production cannot just be turned on, that rather points at less debt, or default.

AMR is not the only U.S. company to declare Chapter 11 recently. Eastman Kodak did as well. But Kodak’s reasons are different. It wants to buy time, financially, to auction off patents, which may or may not be valuable. Kodak may cut few if any workers in the process. AMR, on the other hand, wants to salvage its wreck while leaving behind the parts most damaged.

Which is why I still hold the EKDKQ shares. If Kodak can shed some liabilities, viz. pension obligations, monetize the patents, it could yet emerge as a valuable company: they still generate circa $7 billion in revenues, there is something there.

I eventually got my average cost down to just over a dollar. At the moment I am sitting on an ugly position, but the worst has already happened, only good stuff can happen from here-on-in.

Kodak (NYSE:EK) has approached Citigroup (NYSE: C) for money to tide it through Chapter 11 (Bloomberg)

So what happens if it gets the DIP finance?

Kodak releasing bad news:

Eastman Kodak Co. is preparing for a Chapter 11 bankruptcy-protection filing in the coming weeks should efforts to sell a trove of digital patents fall through, people familiar with the matter said.

Eastman Kodak is preparing for a Chapter 11 bankruptcy-protection filing in the coming weeks should efforts to sell a trove of digital patents fall through. Dana Mattioli has details on The News Hub. Photo: AP

The struggling photography icon, which employs about 19,000 people, is in discussions with potential lenders for around $1 billion in so-called debtor-in possession financing that would keep it afloat during bankruptcy proceedings, the people said. A filing could occur as soon as this month or early February, one of the people said.
A Kodak spokesman said the company “does not comment on market rumor or speculation.”
Should Kodak seek Chapter 11 protection from creditors, the company would then try to sell its portfolio of 1,100 patents through a court-supervised bankruptcy auction, the people said. Kodak would continue to pay its bills and operate normally while under bankruptcy protection, the people said.

Looking very ugly…on all fronts.

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