The inevitable truth of the matter is that several European states WILL default, and default they will. If Germany, or any other economy that still has its druthers to it decides to stand in front of said occurrence, it will likely be dragged down as well. The Germans apparently realize this. See this excerpt from our discussion on the topic regarding Ireland’s prospects for default:
… from the post Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! wherein BoomBustBlogger Nick asked:
Do you have any reason as to why they are choosing 2013 as a deadline ? Seems like an arbitrary date.
Well, Nick, just follow the money or the lack thereof…
So, what debt raising and servicing that was unsustainable in 2010 was lent even more debt to become even more unsustainable. The chickens come home to roost in 2013, post IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! What Angela in Germany was alluding to was what all in the know, well… know, and that is that Ireland is already in default and those defaults have been purposely pushed out until 2013. Angela simply (and wisely from a local political perspective, although unwisely from a global geopolitical standpoint) admitted/suggested was that the defaults will be pre-packaged and managed ahead of time. The EU politbureau insists that politics rule the day, and no prepackaged structure be in place for the Irish defaults to be. This means the potential foe even more carnage through the pipelines of uncertainty!
Click through to Portugal’s Inevitable Default as clearly calculated in the BoomBustBlog live spreadsheets, currently available for free (Portugal only, you must subscribe for the analytical models of the countries that will really set things off).
Thus, the following additional spreadsheet scenarios have been built for more severe maturity extension and coupon reduction, or which will have the maturity extension and coupon reduction combined with the haircut on the principal amount. The following is professional level subscscription content only, but I would like to share with all readers the facts, as they play out mathematically, for Portugal. In all of the scenarios below, Portugal will need both EU/IMF funding packages (yes, in addition to the $1 trillion package fantasized for Greece), and will still have funding deficits by 2014, save one scenario. That scenario will punish bondholders severely, for they will have to stand behind the IMF in terms of seniority and liquidation (see How the US Has Perfected the Use of Economic Imperialism Through the European Union!) as well as take in excess of a 20% haircut in principal while suffering the added risk/duration/illiquidity of a substantive and very material increase in maturity. Of course, we can model this without the IMF/EU package (which I am sure will be a political nightmare after Greece), but we will be recasting the “The Great Global Macro Experiment, Revisited” in and attempt to forge a New Argentina (see A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina).
Here is graphical representation of exactly how deep one must dig Portugal out of the Doo Doo in order to achieve a sustainable fiscal situation. The following chart is a depiction of Portugal’s funding requirements from the market before restructuring…
There is also Spain: As If On Cue After My Step By Step Illustration Of A Spanish Default, Spanish Yields Climb at Auction As Pressure Continues Thursday, December 16th, 2010. In addition, as we have warned ad nauseum, Ireland. As per Bloomberg today: Irish House Price Decline Quickens in Last Quarter, Daft Says.
From Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, see the reason why the Irish banks are done for...
This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they’re domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.
Notice how Ireland is the nation with the second highest NPA to GDP ratio. This was definitely not hard to see coming. In addition, Ireland has significant foreign claims – both against it and against other countries, many of whom are embattled in their own sovereign crisis. This portends the massive exporting and importing of financial contagion. Reference my earlier post, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? wherein I demonstrate that Ireland’s banking woes can easily reverberate throughout the rest of Europe, affecting nations that many pundits never bothered to consider. Irish banks will be selling off assets, issuing assets and bonds in an attempt to raise capital just as the Irish government (contrary to their proclamations) will probably be issuing debt to recapitalize certain banks. This comes at a time when the Eurozone capital markets will be quite crowded.
The Irish banks are so saddled with NPAs as to be nearly dead on their feet. Reference our default and haircut analysis piece: Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… Tuesday, November 30th, 2010
The BoomBustBlog Ireland Haircut Model has been posted, and it is a doozy. For those who anticipate the Euro being a slow train wreck, it may not be so slow after all. Professional and institutional subscribers can access it here as a live, spreadsheet embedded into a BoomBustBlog web page. Users can subscribe or upgrade to gain access. The haircut model is SOOOO damn revealing that I can’t keep it all to just site subscribers, thus I have pulled a few bits and pieces out for the general public.
As any who have been following me know, I believe that several European countries are bound to default, ie. restructure their debt. Ireland is in that camp. What makes me so sure about this? Well, its simple math. While I have calculated probable restructuring and haircut scenarios, I am not at liberty to put it out in the public domain just yet, but I can illustrate incontrovertible evidence that shows that Ireland is on an unsustainable path – a path made even more unsustainable by the recent bailout.
Let’s take a look at the cumulated funding requirement of Ireland over the next 15 years.
As you can see, the amount Ireland would have to borrow to run the country (even after harsh and punitive austerity measures) is literally more (and substantially more) than the country’s projected GDP. These GDP projections are (in part) IMF projections which I have already demonstrated to be grossly over optimistic, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!). As a matter of fact, the tab for Ireland is even greater AFTER the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! This is what happens when you try to save a debt laden country with more debt!
Click image below to enlarge a screen shot of the model.
Common sense dictates what Bloomberg has reported next, Swiss Central Bank Excludes Irish Bonds as Collateral.
We have also warned of specific European banks as far back as two years ago. Bloomberg reports Europe Banks Race Sovereigns to Bond Investors. BoombBustBlog Subscribers should review the subscription-only material in the Pan-European Sovereign Debt Crisis series (right hand margin).
Now, Bloomberg reports Professor Rogoff Says Greece May Yet Face Default on Its Debts, but we said it first: Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! and then the math behind it:
What do you think happens when this hotbed of bad debt ignites in Europe? Do you think rates are going to continue to scrape along the bottom? Is that going to ignite the CRE and housing market? A spike in rates will drive a spike of reality through both residential and commercial property markets. Bloomberg reports U.S. Shopping Center Vacancies Rise as Unemployment Rate Climbs.
I have warned about CRE diverging from reality ever since I declared GGP insolvent in 2007, two years before their bankruptcy. I'm not alone, Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past Friday, December 31st, 201.
There are reasons for this divergence, reference The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?, but the reasons will not survive a European derived interest rate storm. I will be speaking on this topic in person in NYC towards the end of January and in Amsterdam in the beginning of April. Any and all are invited to attend.
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