Financial, Real Estate, Stock Markets Trends and Current Affairs

 On July 23, 2011 I penned The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! which detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

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Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series).

 A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed n 2010. In a nutshell, the Swiss banking industry was built upon impenetrable bank privacy for high net worth clients. Once the US decided it needed to boost its tax revenues during hard times, it literally collapse the Swiss hegemony in secret banking and left that banking industry to compete in actual banking versus asset concealment. This left Swiss banks naked, for they don't appear to me to truly be able to compete aggressively and successfully in other areas. 

Add to this mix potential contagion issues for the Swiss banking industry due to the fact that Switzerland has a veritable cornucopia of exposure all over the soon (if not already) serial recession ridden world, and well...

The first chart is raw contagion exposure as a % of GDP. The 2^nd chart is the same exposure ran through our “reality” model. Food for thought.

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

Description: foreign claims of PIIGSforeign claims of PIIGSforeign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

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I.          Summary of the methodology

·         We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.

·         In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.

·         Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.

·         The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

·          Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings

·          Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

The bank run in other European nations:

Related Pan-European Sovereign Risk Non-bank Subscription Research Archives

·         Ireland public finances projections_040710

·         Spain public finances projections_033010

·         UK Public Finances March 2010

·         Italy public finances projection

·         Greece Public Finances Projections

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I believe I was one of the very few to declare Greece a foregone default in February 2010 (I Think It’s Confirmed, Greece Will Be the First Domino to Fall and then with with more specificity a month later As I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!). By the 2nd quarter of 2010 I was one of the very few to clearly and articulately detail exactly how Greece would default with specific structures in play- What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. Due to a few institutions who were skeptical, I attempted to make it a bit more real - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Well, Greece defaulted according to plan, despite all of the "people in the know" saying otherwise - Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! - from government officials tothe EC and IMF - Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Even after the default, I made clear that this wasn't over for Greece, for the default actually left Greece worse off fundamentally, not better. Go wonder... I know I did, reference the warning from 5 months ago:

This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. 

Well, fastforward to Der Speigel as of yesterday, as I highlight some choice excerpts:

Athens has not been having an easy time coming up with the €11.5 billion in cost cutting measures over the next two years it has promised Europe. Indeed, Greek Prime Minister Antonis Samaras is reportedly set to request an additional two years to make those cuts... 

... the financing gap his country faces could be even greater. During its recent fact-finding trip to Athens, the so-called troika -- made up of representatives from the European Central Bank, the European Commission and the International Monetary Fund -- found that Greece will have to come up with as much as €14 billion to meet the terms for international aid.

Methinks the Troika should renew their subscription to BoomBustBlog, for early in 2010 I noted their accuracy on the Greek situation...

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Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revised their forecasts to still end up wildly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

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The EU/EC has proven to be no better, and if anything is arguably worse!

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Revisions-R-US!

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and the EU on goverment balance??? Way, way, way off.

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If the IMF was wrong, what in the world does that make the EC/EU?

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the government of Greece has done with these fairy tale forecasts...

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Alas, I digress. Back to the der Spegiel article...

According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.

I'm sorry, but I simply cannot resist. This article was posted on BoomBustBlog in July of 2011 - Greek Asset Sales Fall Short, As We Virtually Guaranteed They Would In Spring 2010. In it I reviewed how the BoomBustBlog team detailed EXACTLY how bullshit the privatization plan was, in explicit detail - in the spring of 2010. THAT WAS MORE THAN TWO AND A HALF YEARS AGO, PEOPLE!!! If a blog can have this much foresight, with this much specificity, than what does one make of this so-called troika??? As excerpted:

This is a tragic Greek comedy. Professional/institutional subscribers should reference the Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb in its entirety. For those who chose not to subscribe, I am posting excerpts from pages 5 and 6 from said document, don't read this while eating or drinking for fear of spitting up your lunch!

Any subscribers who would have went heavily bearish into these banks when I first commented on the would have done quite well:

• •  Banks exposed to Central and Eastern Europe
•  Greek Banking Fundamental Tear Sheet

Okay, I digress - yet again... With such excessive bullshit, one does tend to get thrown off track. Back to the der Spiegel excerpts...

The news of the potentially greater financing needs comes at a sensitive time for the country. Many in Europe, particularly in Germany, are losing their patience and there has been increased talk of the country leaving the common currency zone. Over the weekend, German Finance Minister Wolfgang Schäuble reiterated his skepticism of additional aid to Greece. "We can't put together yet another program," he said on Saturday, adding that it was irresponsible to "throw money into a bottomless pit."

Well, my friend, if you had that BoomBustBlog subscription, you would have known before you spent that first euro that Greece was a bottomless pit. Let me reiterated what I pasted up top... This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. And guess what? Anyone who dips new money into Greece now will suffer the EXACT same fate!

As excerpted from Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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Greece's default will hit an already bank NPA laden Spain quite hard: The Spain Pain Will Not Wane: Continuing the Contagion Saga and ditto with Italy "As We Assured Clients Two Years Ago, Italy's Riding The Broken Promise Express To Restructuring". Once Italy gets hit, the true bank runs will start as socialist France (the so-called half of the EU anchor) loses control of its bankinsg system. Reference "As The French Bank Runs....": 

Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!: I detail how I see modern bank runs unfolding

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renege  

Etymology

From Latin renego, from nego (“deny”). Possibly influenced by renegotiate. See also renegade.

The question Du Jour is,,,,, Will reneging be the fiscal management policy of the new millennium? Can you blame those who even try? Are they wrong? Now that Greece has set the precedent of just not paying its bills, the floodgates are open. Don't be fooled if just a few drops of water come out at first!

My posts from last year...

The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media

My readers and subscribers know that I have been warning that Greece would guaranteedly default as far back as two years ago. As a matter of fact, I stated that the haircut needed would have to be around the 53% mark in order for Greece's economy to truly cash flow again, and that was two years ago when things were much, much better for the country. Now the issue has metastasized into something much worse. How much worse? Well, it's safe to say the situation is at least twice as bad. That being said, twice times 53% means 60, 70, even 75% NPV haircuts just won't cut the mustard. Since this is already a forgone conclusion, I will now release the research and economic models that have been available to BoomBustBlog professional subscribers two years ago (March 2010), take notice how prescient, how crystal balllish it all seems..

Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece!

In continuing with my rant on the absurdity of even pretending the Greek situation is salvageable or that Greece will somehow be bailed out without a near complete absolution of their debts, I  bring forth from the BoomBustBlog archives the Sovereign Contagion Model. For those who haven't read my most posts on this topic, please review The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media and Grecian Tragedy Formula, Bailout Number 3.

It is my contention that Greece's significant default is a forgone conclusion. It is also my contention that media attention should be much more focused on the damage to be done by a Greek default - considerably more so than whether Greece will ultimately default of not or what type of bailout it may or may not recieve. I have been of this mindset for several years which is why I had my analyst team create the Sovereign Contagion Model below.

foreign claims of PIIGS

Germany's Sophisticated Ignorance Doesn't Even Look Sophisticated Anymore

Surprise! Spain Makes The Same Ass-Backwards Mistake That The US and UK Made - Banning Shortselling

http://usawatchdog.com - The stock market rallied on news the European debt crisis is on its way to being fixed, but is it really? Not a chance, says today's guest. Reggie Middleton of BoomBustblog.com says, "Europe is insolvent," and nothing is fixed. Middleton contends, "Collapse in Europe is absolutely unavoidable. It's a foregone conclusion." Why should you listen to this entrepreneurial investor? He has made many stunning calls. He said Bear Stearns was insolvent when its stock was trading for well over $100 per share. He warned about Lehman Brothers and predicted the financial crisis of 2008 long before they happened. Now, he says, "Europe is coming to the end of the road very soon," and a "system crash is the only way to fix the problem." Greg Hunter of USAWatchdog.com goes "One-on-One" with Reggie Middleton.

The Wall Street Journal recently ran the following: College Debt Hits Well-Off: Upper-Middle-Income Households See Biggest Jumps in Student Loan Burden. Having a college age child myself, I can certainly identify. From my perspective, there is absolutely no way in the world a cogent mind can deny that there is an education price bubble in the US. I most certainly find the "This couldn't be seen coming crowd" to be anathema - to wit, the MSM and even Wikipedia (whaaatttt????) have featured the problem:

• Higher education bubble - Wikipedia, the free encyclopedia
• Why the Education Bubble Will Be Worse Than the Housing Bubble (US News)...

• When Will the Education Bubble Explode? - Forbes

What makes this topic so interesting is that it brings to mind the work that we've been doing in the consumer discretionary/durables sector shorts - reference "BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated Euphoria!" for a strong supportive fundamental/macro argument and some sample short candidates. Long story, short - I believe the consumer and retail sector is due for a pretty significant correction. My team and I have gathered a material amount of evidence supporting said assumption, and the evidence keeps mounting. The Economonitor ran a most interesting piece that puts a different perspective on this, which I excerpt as follows (the emphasis is mine):

... We look at aggregate consumer credit (and not merely the revolving portion more commonly associated with retail activity) because we believe that term loan borrowing—where available (chiefly student loans and autos)—frees up cash for other consumption.  Another way of viewing this is that transportation and education are not truly elective purchases and not leveraging those purchases would otherwise reduce overall consumption.

What the numbers tell us today (as illustrated in the below graph) is that, as of January 2012, the growth rate in all forms of consumer credit on a 3 month average basis grew at a rate greater than at any time during the credit bubble.  Moreover, at $2.495 trillion, outstanding consumer credit stands a 97% of its peak of $2.576 trillion in August of 2008.  Deleveraging, my friends, this is not.

Yesterday the Consumer Financial Protection Board reported that student loans alone likely moved past the $1 trillion milepost at year end.  

Aren't the post recession eras supposed to be engines of growth? Is it different this time? Of course not, silly rabbits. Tricks are for kids. It's not different this time because we NEVER LEFT THE RECESSION OF 2008! The Fed's liquidity spigot combined with regulator's legalizing outright fraud simply hid the fact that we have been in a great recession ever since. I have discussed this in detail in the post "The Circle of Life -Purposely Disrupted By Multiple Central Banks Worldwide!!!"

Additional tidbits from that most excellent Economonitor article...

• • Are we once again entering a zone similar to the period immediately prior to the Great Recession in which consumer borrowing also grew rapidly, and more and more of the new borrowing was applied to debt service instead of new consumption? Watching retail sales trends over coming months should be instructive in this regard.
  • The crash in the housing market has left us with $873 billion in Home Equity Line of Credit balances (at Q4 2011) owed by consumers, most of which is no longer collateralized by home value. While borrowers may be making payments (many at vastly reduced rates of interest given the floating rate nature of those loans), I would put forward the argument that as a practical matterunsecured consumer debt in the U.S. is actually well over $3 trillion.
  • We are programmed by past cyclical phenomena to look at consumer credit expansion after a recession as being a positive – heralding the arrival of the “confidence fairy” who the more supply-focused in the macroeconomic establishment view as the critical element to a recovery.  There is no doubt that there is an element of this in the expansion illustrated below but, like so many things about the present secular crisis, that is surely not the driving force when a substantial portion of the increased indebtedness is applied to making ends meet, rather than triggered by optimism about the future.

So, what's next? Well,  my next post will illustrate my findings on a company closely tied to consumer credit. Then I will drill down farther into the consumer discretionary/durables sector for casual readers and paid subscribers (privileged content, of course) alike. New subscription research is available for download in the consumer discretionary sector - Preliminary analysis and short candidate (Consumer Discretionary).

For those that do not follow me, I have been pretty spot on in regards to bubble identification... See Who Is Reggie Middleton for my track record. 

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As my readers now, I have been declaring recessions and depressions in Europe for some time now, to wit:

• It's Official & As I Foretold Years Ago, Greece Is Now In A True Depression As Reality Hits Greek Banks
• Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!
• As the Sell Side and MSM Sing The Praises of European Insurer "Street Cred" and 
• When (Not If) Germany Slows, The Whole House Of Cards Collapses!!!

Now there is corroboratig anecdotal evidence coming out of the woodwork: Gartner reports Western Europe desktop shipments down in Q2 2012

thumb_Sovereign_Contagion_Model_-_Pro__Institutional_demonstration_of_Greek_default

I present this article in the usual manner of challenging the ENTIRE sell side of Wall Street to offer analysis anywhere near as cogent, honest, straightforward, accurate, complete and credible. Or put more succinctly, the Goldman and Morgan Stanley clients can tell their advisers that Reggie Middleton advised them to kiss his A.

Axa, France's largest insurer, reported last week and both its share price and MSM media "cred" spiked. See 

• Axa's First-Half Operating Profit Rises 3% on Health Insurance:  Businessweek-Aug 3, 2012 Net income fell 36 percent to 2.59 billion euros after last year's results were boosted by 1.4 billion euros of gains from asset disposals, Axa said.
• Europeans shun risky investment for safe life insurance Reuters
• AXA H1 earnings fall, beat forecasts
• Europe's Big Insurers Post Solid Results

As paying subscribers recall, I released a full forensic review of Axa and the insurance industry in general as a drill down of my overall view of the FIRE sector for 2012 - reference Reggie Middleton Sets CNBC on F.I.R.E.!!! Those subscribers who haven't reviewed this material are recommended to do so now via the links at the bottom of this article.  Of particular interest is the deft skill at which Axa management has managed to handle both their portfolio and PC/life/health operations during this malaise. Subscribers (click here to subscribe) can reference Insurance Cos. Operational Stress and professional/institutional subscribers should reference pages 10-13 of AXA Report_122511 - Professional/Institutional edition to get an idea of what we saw coming late last year and how this may unfold. 

Of more interest is Axa's performance in its portfolio. We have uploaded a capital gains analysis for all subscribers -  AXA Q2 2012 Capital Gains analsysis. This analysis needs to be held in the light of our professional/institutional level forensic analysis (AXA Report_122511 - Professional/Institutional edition), particularly the stress test and accompanying pages (reference 2 through 10). Now, on to the other headlines gracing the MSM this morning...

• France's Rich Prepare to Flee the Country on 75% Tax Rule: Companies are planning to move high-paid executives outside of France as the country's president wants them to “pay extra tax to get the country back on its feet again.” The New York Times reports. It's just a matter of time before the governments induce recession by overtaxing. After all, those capital holes must be filled, right? But how do you fill the if there's now economic activity to generate the stuff to fill the holes?

• French Economy May Shrink for Second Straight Quarter

Do you remember the post France, As Most Susceptible To Contagion, Will See Its Banks Suffer or Watch The Pandemic Bank Flu Spread From Italy To France To ... from this time last year, or any number of the dozens of posts I made on the topic (here's a Google search to illustrate the point)? Well, like clockwork....

•  Italy's GDP Shrinks by 0.7% q/q in Q2
• ISTAT estimates showed the Italian economy continuing to contract in Q2 2012 with output declining 0.7% q/q (-2.5% y/y), down from -0.8% q/q (-1.3% y/y) in the previous quarter and -0.7% q/q (-0.4% y/y) in Q4 2011. PMI, tightly correlated (relatively) with GDP, also point toward further deterioration in the Italian economy as, on August 3, the final estimates released by Markit showed, the services PMI decreased marginally as the index reached 43.0 in July from 43.1 in June—contracting for the 14th consecutive months since May 2011. 

• Expect the Italian economy to contract another 3.5% by this time next year!

• BNP Paribas on Preliminary Q2 GDP Estimates: "Unsurprisingly given the poor production data, Italy's economy as a whole also continued to shrink in Q2; today's preliminary GDP release for Q2 was in line with our expectations at -2.5% y/y, though the quarterly drop surprised slightly to the upside at 0.7% q/q against our expectation for a 0.8% q/q fall. We believe Italy faces another two quarters of negative GDP growth this year. With the forward-looking PMIs still pointing downward, there is little sign as yet of light at the end of the tunnel."
• Of course, BNP should be looking inward as well, as all readers and subscribers have witnessed through the article This Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Paribas?"
• Services PMI: "July PMI data pointed to recession in Italy’s service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred" around the height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery. Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June’s recent low. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts.”Analysis Markit Economic Phil Smith Aug 03, 2012
  
• Manufacturing PMI: "July saw the recession in the Italian manufacturing sector extend to a year. Moreover, the downturn was shown to have deepened as the PMI sank to its lowest level in three months, primarily reflecting a sharper reduction in staffing levels. A solid and accelerated decrease in stocks of purchases also dragged the headline index lower, and suggested that firms had grown more concerned about cash flow and were not anticipating a rise in production requirements in the near term. Average input costs meanwhile fell at the fastest rate for three years during July, an offshoot of weaker demand for raw materials and semimanufactured goods both at home and abroad. Data showed, however, that Italian manufacturers did not take full advantage of the opportunity to boost their competiveness, and instead dropped selling prices only slightly over the month.” Markit Economic Phil Smith Aug 01, 2012
  
• Rabobank: “After falling GDP of 0.2% q/q in 11Q3 and 0.7% in 11Q4, Italy’s economic contraction accelerated further, to 0.8%, in 12Q1. The deepening recession stands in contrast to the aggregate eurozone, which managed to avoid a widely expected second quarterly drop in output....Analysis Rabobank Tim Legierse Jun 05, 2012
  
• OECD: “Since late 2011, Italy has introduced significant structural reforms while making progress in fiscal consolidation. The economy has re-entered recession, under pressure from weak European economies and the short-term consequences of fiscal tightening. Activity seems likely to continue to decline over the next year but will turn up in late 2013." The OECD expects the economy to contract by 1.5% y/y in 2012 before witnesing no growth (0% y/y) in 2013.Analysis OECD May 22, 2012
  
• European Commission: "After inrporating the large GDP decline in the fourth quarter of 2011, economic activity entered 2012 with a negative growth impulse of 0.5 pp. It is set to continue to contract in the first half of 2012, as spending and investment plans of consumers and firms are held back by poor labor market prospects and still-high uncertainty in financial markets. Real GDP is expected to have declined by a further 0.7% q-o-q in the first quarter of 2012 and to fall by 0.4% in the second quarter. Under the assumption of no further worsening in financial market conditions and yields on 10-year Italian sovereign bonds slightly below 6%, output is expected to stabilise in the third quarter of 2012 and to start expanding only mildly as of the last quarter of 2012. As a result, real GDP is set to fall by 1.4% in 2012 and increase by 0.4% in 2013."Analysis European Commission May 11, 2012
  
• IMF:  “Italy’s growth is expected to continue at a modest pace. Staff projects Italy’s output to grow by 1% in 2011 and 1.3% in 2012, in line with most other forecasters. By end-2012, the Italian economy would have recouped only half of the output loss suffered during the crisis. Growth is expected to continue to be driven by exports and the resumption of investment from low crisis levels. However, it will likely be held back by subdued domestic demand and further fiscal consolidation. Such a modest pace of activty will not allow a significant recovery in employment. Persistent labor market weakness, sluggish income growth, a decrease in government transfers, and a rising cost of credit will curb household spending. A persistent competitiveness gap hindering export growth, and slow progress in structural reforms, will also limit growth.”Analysis International Monetary Fund (IMF) Apr 17, 2012 & Analysis IMF Jul 13, 2011

I'd like to take this time to comment on the sheer lunacy of taking the IMF's or the EC's word for ANYTHING EU sovereign debt-related. In 2010, I clearly outlined the joke that is the IMF/EC economic forecast in Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!, to wit we can see in big pretty charts how accurate the IMF and EC have been in regards to Italy since the crisis began:

This is Italy's presumption of economic growth used in their fiscal projections:

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For those that don't subscribe, there is still a lot of nitty gritty that I made publicly available on Italy here:Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest? 

Those who are interested on a more realistic, unbiased and non-political view on Italy from that period should reference the BoomBustBlog subscriber documents:  Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as the Italian Banking Macro-Fundamental Discussion Note. And back to the Hopium induced optimistic bullshit (the same Hopium induced optimistic bullshit we have witnessed in the US, btw BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated Euphoria!)  

• Growth Revised Downward: Reuters (April 19th) “The assessment, a technical document which will be submitted to senior EU officials, comes after Italy said on Wednesday its deficit would be 0.5% of GDP next year, up from a previous forecast of 0.1%, which will be reached instead in 2014. The government forecast an economic contraction this year of 1.2%, almost in line with the Commission's forecast of a 1.3% drop in output."News Reuters Francesco Guarascio Apr 19, 2012
  
• UniCredit: “After the ugly 1Q, we can expect the pace of contraction in consumer spending and investment to ease in the remainder of the year, helped by receding financial tensions. Therefore, we are confident to leave broadly unchanged the q/q GDP path beyond 1Q, envisaging a stabilization in output already starting in the spring. As a result, we lower our full-year GDP estimate for 2012 to -1.0% from -0.3%.”Analysis Unicredit Bank Marco Valli Mar 09, 2012

As a matter of fact, there is only one MSM headline that I came across today, that seemed to hold any water, and that was from CNBC... Is the Market Rally Just a Set-Up for a Bigger 'Collapse'. Remember... Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece! What happens when you take the raw public debt exposure and you massage it for reality? Well, BoomBustBlog subscribers already know. Here's a sneak peak of just one such scenario...

(Click to enarge)

 thumb_Sovereign_Contagion_Model_-_Pro__Institutional_demonstration_of_Greek_default

•  Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
•  Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

BoomBustBlog subscribers, reference please reference the following insurance related documents:

AXA Report_122511 - Professional/Institutional edition

AXA Report_122511 -Retail edition

AXA Preliminary Observations

Insurance Cos. Operational Stress

Insurance cos. EU exposure 11-2011

The MSM has this as a leading headline today... Recession Stalks Germany as Breakeven Rates Drop: Euro Credit

In Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream, I stated:

This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredly bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong w.ords, strong words are necessary for a dire situation. Let's consider this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positions that the majority simply didn't have the foresight, temerity (or balls) to implement and hold on to.

The constant and consistent belief that Germany is a bullet-proofed save all is foolish at best. Germany lives in the same economic malaise roach motel as the rest of the EU, they simply rented the penthouse suite! Pushing them to build up more debt to push additional debt on over-indebted nations who clearly can't pay back their current debt is quite foolish. Recession and depression looms everywhere. As clearly articulated in the orginal "Sophisticated Ignorance" article...

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the sovereign states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big. 

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As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ultimately witnessing the private banks fail anyway.

I warned of this in the beginning of the year via my many proclamations on the FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly. We also warned in Deustche Bank as follows:

As derived and excerpted from  Euro Bank Sovereign Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):

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What is the result of throwing pound after pound of leveraged fiat currency meat into the hungry maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...

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The afore-linked document has Deutsche Bank's exposure to the PIIGS group oulined and detailed. There is another angle that we covered early last year as well. Reference Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional or Deutsche Bank vs Postbank Review & Summary Analysis - Retail.

Well,  look what we find in the MSM headlines this morning... European Banking Regulator Imperiled by Zombie Banks in Germany

Germany’s regulator balked last year when the European Banking Authority conducted stress tests on financial firms, objecting to the agency’s definition of capital and allowing one state-owned lender to withhold some results.

The refusal to go along with the European Union regulator reflects an aversion by governments to ceding control to a central authority that may doom talks about creating a banking union and thwart plans to shift the burden of bailing out Spanish and Irish lenders to other euro-area nations. 

“Germany didn’t let the EBA dictate any terms to its troubled banks, why would it now hand over controls to a new regulator?” said Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm specializing in sovereign-credit risk. “The prospects of a new central authority are shaky at best.”

EU leaders agreed in June to use common funds to inject cash directly into banks once a new regulator is established. Until then, Spain will be on the hook for as much as 100 billion euros ($123 billion) it may need to borrow to recapitalize its banks. That means increasing the public debt level, already strained by budget deficits, a second recession in four years and regional governments strapped for cash.

Well, you can't say I didn't tell you s, re: Spain...

• CNBC Asks, "So Why Are Spanish Bond Yields are so Hgh, I Ask Why No One Considers Spanish Banks To Be Insolvent?

• You Have Not Known Pain Until You've Tried To Save Spain Jun 19, 2012 – The MSM reports Spanish Short-Term Debt Costs Reach Alarm Levels:Spain paid a euro era record price to sell short-term debt on Tuesday, 
  

• Beware The Day When The Bulging Bunds Go Bust ... Jun 29, 2012 – Bloomberg EU Eases Spain Debt Rules as Merkel Retreats and Euro Rises After EU Leaders Renounce Spain Loan Seniority Euro-area leaders.

• The Economic Bloodstain From Spain's Pain Will ... May 31, 2012 – Those that regularly follow me know that although I'm quite the mediocre short term trader, I have uncommon strengths that lie in the realm of ...
• European Insurer Needs Insurance As $6B Of Its ... -Jun 11, 2012 – So, Spain finally gets a bailout, as I pretty much guaranteed in The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain .
• The Spain Pain Will Not Wane: Continuing the ... Apr 16, 2012 – Just over two years ago I warned that Spain posed a significant threat to the EU area economies. This was a very unpopular stance, and since ..

Spain has crossed the rubicon, and entered into bad decision nirvana as it too decided to ban short selling, which has worked so well for all of those other smart countries which have done so. For instance, when the US did it in 2008, they helped their bank's shares float to the tune of -48%! Hey, with friends like that, who needs enemies. When will they learn that tempering/tampering with financial markets is not ever as good as it sounds. Keep in mind that short sales put a natural floor under weak securities by creating natural sellers at the end or a trade (whether the trade is successful or not). If the stock is truly overvalued (hear's to you European banks), then the shares are going to drop anyway as the holders of those shares sell to get out of them. Without shorts, there will be no buying on the way down as speculators and astute investors cover profitable short sales and the only bids you will get are at rock bottom where fundamental guys feel there "deals that can't be refused" (except for the occasional BTFD fools along the way). That is usually a bid that's much higher than would have been achieved through the short sale. Of course, nobody explained this to the Spanish.

An additional issue is that the banning of short selling broadcasts a message that Spain should want to mute, and that is the message of FUD (Fear, Uncertainty and Doubt)! Why else would one make the normally legal and necessary action of selling bad stocks illegal? Fear of the facts! Of course, as word gets out it just makes situations that much worse...

From CNBC:

Spain's stock market regulator banned short-selling on all Spanish securities on Monday for three months and said it may extend the ban beyond October 23. 

The ban, which will not apply to market makers, will apply to any operation on stocks or indexes, including cash operations, derivatives traded on platforms as well as OTC derivatives, the regulator said in a statement.

European shares extended their losses following the move by Spain, which raised fears that the region's sovereign debt and banking crisis may be worse than expected.

Subscriber's related reading (click here to subscribe):

 The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers

 Spanish Banking Macro Discussion Note

 Spain public finances projections_033010