The EU and the IMF have promised a combined $1 trillion dollar bailout to assist Greece and potentially other debt laden companies in financing their opertations. The goal was to produce American-style shock and awe. The problem is they failed to attach American-style propaganda to it, hence reality is showing through the crachs. CNBC reports Moody's Cuts Portugal Rating, and as a result  ECB's Trichet Wants End of Rating Agencies Oligopoly.

Moody's slashed Portugal's credit rating by two notches to A1, citing a deterioration of the country's debt ratios and weak growth prospects.

Portugal's debt-to-GDP and debt-to-revenue ratios have risen rapidly in the past two years, Anthony Thomas, vice president and senior analyst in Moody's Sovereign Risk Group, said in a statement.

The euro [EUR=X  1.2573    -0.0012  (-0.1%)] fell after the announcement and the spread between Portuguese and German 10-year government bonds widened by 4 basis points to 290 points. "The bond markets response hasn't been dramatic," Martin van Vliet, euro-zone economist at ING Bank, told The downgrade came a little before a Greek auction to sell 6-month T-bills, the first since a bailout package agreed by the European Union and the International Monetary Fund in May.

Most likely because everyone knows Portugal is messed up...

Greece sold 1.625 billion euros ($2.03 billion) of 6-month instruments at a yield of 4.65 percent, up from 4.55 percent in a similar auction on April 13, according to Reuters.

So, after a $1 trillion dollar bailout announcement to drive down the costs of Greece's funding, they have to pay 10 basis points MORE than they did before the bailout! With friends like that, who needs enemies???

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On Wednesday, May 26th, 2010 I released "A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina" in which I explicitly outlined the restructuring of Greek debt using the Argentina experience as a template (I suggested that mixture of zero coupon bonds and explicit haircuts would be utilized to re-wrap debt). During that time, many analysts and government officials at the time (and even now) said that I was totally unrealistic in expecting a Greek default or explicit restructuring (reference Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!). Well, fast forward about 60 days, and voila, guess what the hell is going on???  Zero coupon bonds! Haircuts! Where have we heard this before??? Thanks and hat tip to BoomBustBlogger Shaunsnoll, "It’s no secret: Greece is restructuring debt" (via

...consider the cost of sending lawyers and consultants – you could call them spies – to hang around Brussels and Frankfurt to assess the risk of a Greek default.

Yet simply by looking “on internet”, you could find out that Greece has already started to restructure its state debts. Look at the site for the Hellenic Association of Pharmaceutical Companies (, and you will find a link to a joint press release by the Greek Ministry of Health and Social Welfare and the Ministry of Finance. On June 9, unnoticed by most in the financial world, they stated: “The [Greek state hospital system] debts of 2007, 2008, 2009 amounting to €5.36bn [£4.4bn, $6.7bn] will be settled with zero coupon bonds.” The hospital debts lingering from 2007 will be paid with two-year zeros, 2008 with three-year zeros, and 2009 with four-year zeros.

There is some, actually a lot, of detail missing from the one page release, which presumably will be filled in by the legislation that will be introduced, and probably passed, to implement the restructuring. The release does say: “It is certain that the banks co-operating with the suppliers will show interest in prepaying these bonds, transforming the corporate risk undertaken on behalf of their customers – hospital suppliers – in credit risk against the Greek state, in the form of a bond which can be financed through ECB.” And, according to the release: “In case suppliers settle these bonds by January 2, 2011 . . . the above ‘discounts’ corresponds to a total percentage of about 19 per cent.”

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Just after the HSBC Emerging Markets Index was released showing a marked slowdown in growth, HSBC Chief Economist Stephen King told CNBC news that Emerging Markets Hit a Bump in the Road. The is to be expected, with monetary tightening occurring in China (see and ), austerity measures being applied en masse in developed Europe (see The Pan-European Sovereign Debt Crisis) and the potential for a double dip in the US and UK. He also says that there is promise for the future, and I might even be inclined to agree with him, it's just that we need to get past the present first.

HSBC has a proprietary interest in the success of the emerging markets for they are highly geared into their growth and well being. With the developed nations of the west and Europe choking on debt overhang, the emerging markets are HSBC's key to growth, so it is very much the case that Mr. King is talking his book - which is not necessarily a bad thing, we just need to know all of the facts as they are laid before us.

I have just released our HSBC forensic analysis for the second quarter, and it is easily one of the most meaty reports that we have accomplished this year with 26 pages (Pro/Institutional versions) of fundamental, economic and macro analysis that truly picks apart both the inner workings and the future prospects of this bank. Below are some excerpts as applies to the topic of the emerging markets...

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Who says only Americans are trying to delever?

Even with exposure to foreign events and insolvent counterparties at the top of every financial institution’s worry list for the rest of 2010, the microeconomic picture for debtors in the UK remains mediocre.  Americans were not the only ransacked with debt during the past decade, as Brits watched their securitized debt levels rise to incredible rates.  The Bank of England makes a point to state that without record low interest rates, defaults would be another issue for banks to look out for (interpreted: the Democratic People’s Republic of Korea will win the World Cup before the central bankers at the BoE even consider raising interest rates).  Soon after, they state that it would be easier to raise rates in times of robust growth than the uncertainty of current conditions, which is absolutely novel.

Domestic Credit:

  • A majority of UK households have a large amount of equity in their home value
  • Unsecured mortgages made up 2/3 of write offs since 2007, and even as they have stagnated, credit card write offs have increased to record highs
  • The beginnings of a potential CRE resurgence in the UK have been limited to prime properties, with higher yield projects being shunned
  • Even as prices are rising, they are still a third below 2007 peaks (and still probably overpriced if it is anything like the US CRE market)
  • If tighter credit conditions prevent voluntary restructuring, CRE prices will fall further on corporate liquidations and forced foreclosures
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From Moody's Puts Spanish Debt on Review for Downgrade

Moody's said on Wednesday that it may cut Spain's Aaa local and foreign currency government bond ratings by as much as two levels after a three-month review.  Moody's [MCO  19.92    -0.09  (-0.45%)   ], the only major rating agency that still holds a top rating for Spain, said the possible downgrade reflects deteriorating short-term and long-term economic growth prospects, and the challenges Spain faces in achieving its fiscal targets.  The rating agency also cited concerns over the impact of rising funding costs over the medium term.  "If at the conclusion of the review, Spain's ratings are lowered, it would most likely be by one, or at most two, notches," Moody's said.  Fitch Ratings cut Spain's credit ratings to AA-plus, the second highest level, from AAA on May 28, saying its economic recovery would be more muted than a government forecast, pushing world equities and the euro [EUR=X  1.2294    0.0061  (+0.5%)   ] lower.

Just two days ago, I reviewed the debacle to be that was Spanish banking system and closely related Spain public finances in The Hypocrisy that is Known as the Spanish Banking System. I also issued warnings two months ago and as early as January, 2009. Those who held on to those that bearish BBVA and STD positions that we recommended are being paid rather handsomely.

As We Have Warned, the Fissures Are Widening in the Spanish Banking System Monday, May 24th, 2010

I have made our position on Spain clear through a complete forensic review of the state’s finances for subscribers: Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.

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CNBC runs as a headline the usual contradictory nonsense that we come to expect from certain heads of state. It would be funny if it didn't portend such dire consequences. The Spanish banks, just last week, were declared to be some of the healthiest in Europe (spoken with my fingers crossed behind my back, wry smile and spittle dripping from the side of my mouth). Of course, Banco Santadar and BBVA shares rocketed on the news that they are no longer insolvent and that the Spanish housing market pauses no threat.

CNBC Trader Talk Blog — Pisani: Spain Bank Aces Stress Test — CNBC ...

Europe mostly flat (Greece up 2.3 percent), euro behaving, U.S. futures were calm ahead of the quadruple witching expiration. Spanish bank Banco Santander is up 1 percent on several pieces of news:

1) a spokesman for Spain's Prime Minister remarked that the Spanish bank performed strongly during the recent stress tests, saying the bank had "one of the best" results. The Committee of European Banking Supervisors is expected to provide details of the results in the coming weeks.they have the best ranking so far in a European bank stress tests, according to a Spanish government source; not clear when the full results of those tests will be published.

2) the bank also confirmed they have made an offer for 318 British branches of Royal Bank of Scotland.

They already have a strong presence in the UK. Santander's vice-chairman caused a small stir yesterday when he said they were talking with M&T Bank, based in Buffalo, NY, about possibly merging its U.S. operations with them.

But all of a sudden the banks in Spain get pissed off when the ECB declares it no longer wants to play the Pan-European subprime lender role: Spanish Banks Rage at End of ECB Offer

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a 442 billion euros ($542 billion) funding program this week, accusing the central bank of “absurd” behavior in not renewing the scheme. On Thursday, the clock runs out on the ECB financing program – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”

Another top director said: “The ECB’s policy is that they don’t want to provide maturity of more than three months. But they have to adapt.” Banks across the euro zone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent. The 442 billion euro ECB facility, which charges interest at a rate of 1 percent, is not set to be renewed, something that banks in Spain and elsewhere in Europe say ignores current commercial realities. A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year. “The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”

BarCap estimates that at least 150 billion euros of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending. Spain’s banks have been among the hardest hit by the faltering confidence in the euro zone economies in recent months following problems with the country’s smaller savings banks, or cajas. The bigger commercial banks, led by Santander and BBVA, feel unfairly tarred.

Yeah, right. "Unfairly Tarred"!!! I've been warning about the Spanish Banks since January or 2009. Now that the chickens have come home to roost, they are screaming "unfairly tarred"??? How about (chicken roosting) feathered and tarred!

As We Have Warned, the Fissures Are Widening in the Spanish Banking System Monday, May 24th, 2010

I have made our position on Spain clear through a complete forensic review of the state’s finances for subscribers: Spain public finances projections_033010. An excerpt from this subscription document (subscribers, reference page 2) shows the euphoric, yet highly unrealistic optimism upon which Spain has built its fiscal austerity projections.

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From Europe Double-Dip May Bring Correction: Roubini

Economic woes in Europe could spread to the U.S. and lead to a further correction in stock prices, Nouriel Roubini, chairman of Roubini Global Economics, told CNBC on Monday.

Hey, but wasn't I saying that since January of this year??!! Remember back February when the media and the sell side analysts said the Greek problems were soon to be solved and this definitely was not a "European" problem but rather a localized one?

BoomBustBlog, February 7, 2010: The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a in localized one.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns


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.


Bloomberg has as a headline today: Stress Tests on European Banks Must Assess Sovereign Risks, EU Draft Shows. Duhhh! As if we should really ignore the biggest threat to the solvency of the the European banking system in a so-called "stress test". What is this, Geithner "lite"? Reference  How Greece Killed Its Banks! to see exactly how much damage those who wish to ignore sovereign risks are trying to hide...

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The EU Denies Planning Spain Credit Line with IMF, US, although rumors and leaks are propping in more places that a Swiss damn being plugged with a bunch of slender, fair fingers of those many blond maidens - after all, Greece did not want and was not looking for aid either. That trillion dollar bailout fund was the result of a bunch of politicians with too much money on their hands having absolutely nothing else to do with their time.

Cliff Wachtel gathers much of the evidence:

After 2 German newspapers reported that Spain was seeking aid, now add a Spanish newspaper, El Economista, as the third to report a coming aid package for Spain, after 2 German papers reported this last week. All reports have been denied by the Spanish Government, which is rapidly losing credibility as the reports build. See details here from Bloomberg.

Yesterday, the German newspaper Frankfurter Allgemeine, citing an unnamed source in Berlin, reported that Spain was discussing a bailout with EU officials following last week’s freeze in interbank lending as markets have lost confidence in the Spanish banking sector. Spain denied the report, did Greece had done the same thing earlier, so EU credibility isn’t what it once was. If the allegations prove true, look for A LOT more downside in risk markets. This was the second such report, the first was last week from from FT Deutschland

Remember that just last week Spain had a 3 year bond sale at an average yield of 3.32%, roughly double the yield needed to sell 3 year bonds as recently as April, an ominous sign given that Spain needs to sell about € 25 bln in bonds in July. It is unclear how long Spain can continue to withstand a doubling of its borrowing costs, which will counteract efforts to cut its deficit.

Cliff provides significantly more anecdotal evidence of an impending Spanish bailout in the link above. I harped on the increase in expenses yesterday:

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We've got a particularly heavy dose of BS in the mainstream news channel this morning. I believe it to be my duty to throw some facts amids this boiling cauldron of fiction, fantasy, propaganda, marketing and straight up lies. First up (yeah, you guessed it), those gosh darn Europeans...

June 9 (Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

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I have been bearish on European banks since the UK mortgage banks collapsed several years ago. To this day, despite mounds of fundamental and macro evidence pointing to very bad things happening, there are still cheerleaders stating that concerns are overblown. A good example can be found in the post "Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!", on March 14th:

“The worst of Greece’s financial crisis is over and other European nations won’t follow in its path", said former European Commission President Romano Prodi. “For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.””

Okay, I shouldn't have called him a liar, but a tad bit optimistic, maybe? I actually agree with the last part of his statement. The euro system will not suffer greatly because of Greece, it will suffer greatly because of individual member countries' problems collectively weighing on the union. As for Mr. Prodi's accuracy, let's take a look at the Greek CDS over the time period in question...

Greece cds spreads

Yeah, that's right! Listening to the former EC President would have gotten you on the wrong side of the TRIPLING of CDS spreads. Not to fret though, the ECB allocated 1 trillion dollars to alleviate this problem, and now spreads have just more than doubled, but are still rising. And for those of you who believed me over Prodi (I apologize again for the "liar, liar pants on fire" bit, though)...

nbg - may 15 - June 8th

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