Using Veritas to Construct the "Per…

29-04-2017 Hits:25069 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:26366 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:26034 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:27596 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:27372 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:29770 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:18748 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:28539 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:28573 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:28784 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:30542 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:30118 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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On March 26, EU endorsed the proposal of extending aid to Greece (in case it faces shortage of funds to meet the refinancing and new debt requirements) wherein each euro nation would provide loans to Greece at bend over market rates based on its stake in the European Central Bank. EU would provide more than half the loans and the IMF would provide the rest. The official estimates for the size of the planned assistance have not been disclosed since it would depend on Greece's actual need.  Erik Nielsen, Chief European Economist at GS, estimates Greece will need an 18-month package of as much as €25 billion, with the IMF providing about €10 billion of that. The French newspaper Le Figaro reports that German officials are estimating the total assistance of nearly €22 billion.

Taking advantage of the positive market response to the announcement of EU-IMF taking up the role of the lender of last resort, the government issued 7-year bond with no premium over the market rates. However, the euphoria was short-lived. The 7-year bonds which were issued at yield of 6.0% were trading at 6.27%, the next day. The sentiment was also weakened by the poor response to the surprise auction of 12-year bonds which attracted demand or order book of just €390 million against the offered amount of €1 billion. Judging by the fashion in which the market has accepted Greek debt as of late, even after announcement of EU/IMG support, it is quite feasible that the EU's offering of market rate loans is akin to shoveling money down a black hole in terms of market valuation.

Greece's order book has been shrinking and reflects the waning market demand for Greek bonds. The 7 year bond auction received orders of just €6 billion, 20% higher than the offered amount of €5 billion. This compared with orders of nearly €15 billion for the auction of €6 billion of 10 year bonds on March 4 and orders of nearly €25 billion for auction of €5 billion of five year bond on January 25.

 

According to the government estimates, it needs to raise nearly €53 billion in 2010 to meet its refinancing needs as well as fund its negative primary balance and interest expenditure. Out of this, the government has so far issued bonds of only €18.5 billion through:

  • €8 billion of five-year notes on Jan. 26 at yield of 5.93% (381 basis points more than benchmark German debt of similar maturity)
  • €5 billion of 10-year bonds on March 4 at yield of 6.44% (325 basis points more than German debt of similar maturity)
  • €5 billion of 7-year bonds on March 29 at yield of 6.0% (310 basis points more than German debt of similar maturity, immediately traded underwater)
  • €390 million of 12-year bonds on March 30 at yield of 5.9% (auction effectively failed)

The next round of short term refinancing requirement consists of about €12 billion in April and about €8.5 billion in May.

Market Reaction

While the initial reaction to the EU-IMF assistance announcement was positive in the Greek government debt market and sovereign CDS market, the optimism is receding. The yield on Greek 10-year bond dropped to 6.20% (spread of 305 basis points over German 10 year bond) on March 26 from 6.44% (spread of 337 basis points over German 10 year bond) on March 22. However over the last three days, the yield is again trending upwards and is trading at 6.52% on March 30 (spread of 343 basis points over German 10 year bond). The 5 year Greek sovereign CDS spread dropped to 295 basis points on March 26 from 341 basis points on March 22. However, the same has been lately drifting up again and reached 333 basis points on March 30.

greek_spreads.png

Increased interest burden - According to the data compiled by Bloomberg and Credit Agricole, Greece may pay about €13 billion more in interest on the debt it raises in 2010 than it would have if yields had stayed at their pre-crisis levels relative to Germany's. Interest on the three bonds it sold this year will amount to €7.7 billion over the life of the securities, compared with €3.8 billion if they had sold them at the average extra yield, or spread, over German debt that prevailed between 2000 and 2008, the data show. Greece will incur a further €18.9 billion of interest on this year's remaining issuance, compared with €9.4 billion before the crisis began.

We have (correctly) assumed such under our Greek public finances projections of last month and have already built the increased interest expense due to increased spreads against government expectations of decline in interest rates. Subscribers, see Greece Public Finances Projections .I also recommends the Greek Banking Fundamental Tear Sheet for a list of affected banks and pro subscribers should reference Banks exposed to Central and Eastern Europe.

 greek_interest_expense.png

Conclusions - The sustainability of Greece's public finances is seriously hindered by the piling government debt and widening fiscal deficits which were a result of poor fiscal policies. While Greece has announced drastic fiscal consolidation measures, serious concerns float around the implementation (after which, they will still have to content with internal deflation and increased social unrest). The Greek government's loss of credibility in the markets is reflected in the rising sovereign spreads and dwindling credit availability. Further, Greece competes for funds with other distressed sovereigns scrabbling to fund their fiscal deficits and refinancing requirements. Greece is walking the tight rope of arranging funds from the market to sustain its public finances and has one of the highest probabilities of failure.

Tied together with the common currency, the EU has been forced to provide assistance to Greece. Although the assistance would be invoked only when Greece fails to garner funds from the market, the implications of the assistance package will be the increased contagion effect of Greek's sovereign risk to other EU countries (some of which are already struggling with their domestic issues). The EU nations will be forced to accumulate debt on their books to finance Greece's requirements at a time when EU nations debt are already approaching historical proportions. Greece's rescue would send strong signals about how the sovereign risk of a member can be perceived as the risk of the EU, which has failed to maintain oversight and regulation of the members' public finance policies and has become jointly responsible for the poor governance in a member country. Greece is not the only EU country in trouble and the rescue can set a wrong precedent that can literally redefine the concept of moral hazard in Euroland! If this short term solution to the Greek crisis is applied to other troubled nations, sovereign debt accumulation in the region would be become a serious concern that would haunt the region for many years to come. Germany and, to a much lesser extent, France (as of very recently) have been, therefore, resisting the idea of putting the entire burden of Greece's rescue on EU and have proposed IMF collaboration.

EU-IMF assistance would entail a series of strong conditions for fiscal consolidation through reduced public expenditure, increased taxation etc. which will have deeper macro-economic impacts and undermine economic recovery for Greece.

For the complete Pan-European Sovereign Debt Crisis series, see:

1.     The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.

2.     What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect

3.     The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.

4.     The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

5.     The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

6.     The Beginning of the Endgame is Coming???

7.     I Think It's Confirmed, Greece Will Be the First Domino to Fall 

8.     Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

9.     Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

10.   "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! 

11.   Germany Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort of...

12.   The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino

13.   As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

14.   Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?

15.   Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

16.   Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

17.   Moody's Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

Premium Subscription research for the following sovereign states and their respective domiciled banks at risk are available for immediate download.

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