predicting the future, page-18

The biggest threat to NKP will be funding.(IMO)
There are dire warnings in the main stream media now.

From the Commonwealth and westpac banks. Stevens has gievn a warning that time is running out.
There are now concerns that, with Japan's bonds rising, that they could be next to be in trouble.
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This is from today's Daily reckoning.

Back to the coming global banking crises... and how one got started in 2007.

Banks don't really fund themselves with deposits. That's why investment companies that don't take deposits exist. Instead, funding comes from debt markets. Just like when the bank lends money to you it demands collateral (the house), financial institutions demand collateral from each other. They do this in all sorts of odd ways with odd names. Repos, swaps, and so on.

The point is banks need collateral to access these sources of funding. Even the so-called lenders of last resort - central banks - require banks to post collateral with them before they lend money.

The problem with widespread use of one particular type of collateral is that it goes from being accepted one minute to unacceptable the next. The whole repo or swap market can freeze up in an instant if the commonly used collateral is called into question. And so it was in 2008.

Companies like Bear Stearns and Lehman Brothers used their vast amounts of AAA-rated Collateralised Debt Obligations (CDOs) as collateral in funding agreements, usually repos. (A CDO is basically a bundle of mortgages.) The repos required assets posted as collateral to be rated AAA, so when those ratings were finally reduced, Bear and Lehman were suddenly unable to fund themselves. That's why they failed. It was their inability to provide acceptable collateral to their lenders.

Fast forward to today and you see exactly the same story - it's just sovereign bonds instead of CDOs and European banks instead of American ones. The banks find themselves short of acceptable collateral to post with normal lenders. The European Central Bank, Europe's lender of last resort, has relaxed its standards to allow even Greek sovereign debt to be posted as collateral in exchange for emergency lending. Without these changes, Europe's banks may have failed already.

But The Economist says a collateral c*ck up may be developing anyway:
With funding ever harder to come by, banks are resorting to the financial industry's equivalent of a pawn broker: parking assets on repo markets or at the central bank to get cash. "We have no alternative to deposits and the ECB," says a senior executive at one European bank. Yet what happens if banks run out of collateral to borrow against?

The boss of UniCredit, an Italian bank, has reportedly asked the ECB to accept a broader range of collateral. And an increasing number of banks are said to conduct what is known as "liquidity swaps": banks borrow an asset that the ECB accepts as collateral from an insurer or a hedge fund in return for an ineligible asset - plus, of course, a hefty fee.
This should have you very very very worried. More worried even than Germany's failed bond auction. Because it means things are freezing up in the same way they did in 2008. And things are already desperate.

This type of collateral crisis can start rapid contagion in seemingly unrelated parts of the financial system. Once dodgy assets are no longer any good as collateral for funding, they become even less useful to hold. So banks sell them to raise cash. This puts assets, which used to be thought of as 'safe', under immense selling pressure. Bankers might have learned the wrong lesson in 2008. They learned that governments will bail them out. But this time around, it's sovereign debt that is the big issue. Governments will need the bailing out, as well as banks. The lifeboat launched in 2008 is itself sinking.

Plan for the worst, and hope for the best.