This is the skinny on those French and German banks that are at significant risk to PIIGS drowning, or potentially even getting significantly wet. The sell side banks have released reports on which bank is exposed to Greece, etc., but we decided to take it a few steps farther in order to create a truly actionable document that our subscribers can actually use to base concrete decisions upon. As is customary, I am releasing snippets of the proprietary research for free to the blogoshpere. This time around, I'll feature a European bank that we feel is thoroughly insolvent, yet trading at one of the highest premiums in all of Europe! As excepted from the reports referenced below:

Deutsche Postbank

The bank reported its exposure to sovereign debt of Greece, Italy, Ireland, Portugal and Spain at €1.3 billion, €4.7 billion, €350 million, €50 million and €1.2 billion.

Applying the loss rates under the base case, the total estimated losses on sovereign debt holdings is €1.7 billion (60.1% of tangible equity) on the total European sovereign debt exposure of nearly €24.9 billion (based on the reported sovereign debt exposure of December 2009). The existing Texas ratio of the bank is 139%, and if we include the losses on sovereign debt (unconventional, but illustrates solvency in a clearer fashion), the Texas ratio* will be 177%. The bank is trading at price to tangible book value of 1.83x. The stock is trading on a high multiple largely owing to speculation of full takeover by Deutsche bank. The float is 36% of shares outstanding as 39.5% is owned by Deutsche Post and 25% is owned by Deutsche Bank. See Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional and Deutsche Bank vs Postbank Review & Summary Analysis - Retail for a detailed overview and analysis of the unusual Deutsche Postbank situation.

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Last month I posted both a public and premium subscription analysis of Ireland's public finances, along with a focus on the banking system ( File Icon Irish Bank Strategy Note ). This month we can bear witness to...

Banks protesters storm Irish parliament

Wednesday, 12 May 2010

Gardai Clash with protestors marching against government cutbacks outside the Gates of Leinster House in Dublin tonight

Gardai Clash with protestors marching against government cutbacks outside the Gates of Leinster House in Dublin tonight

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I have decided to release the Greek Banking Fundamental Tear Sheet to the public (you must select the free registration option here to access it if you are not already a member of my blog). It was released as a summary of a more verbose document designed to inform subscribers which of the Greek banks we felt were worth putting short positions on as of 02/17/2010.

nbg - may 11 - 10

We have both summary and verbose tear sheets for banks based in Italy, Spain, Ireland, the UK, the US and those exposed to the CEE countries which we feel have significant room to run downwards. The Spanish banks have returned quite handsomely thus far.

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How many of those Greek, Portuguese, Irish and Spanish bondholders have factored the near guaranteed "additional" haircut (/scalping) they will receive having to stand behind the IMF in the event of a (probably guaranteed) default or restructuring? Do you think the investors of European banks (that includes central banks) that are holding/and currently still buying a boat load of these bonds have factored this into their valuations?

The IMF, like many other international institutions, asserts that it has a "preferred creditor status", and this has been a practiced convention in the past. Thus, IMF has de facto seniority rights over private creditors despite the fact that there is no legal or treaty-based foundation to support this claim and this seniority of rights for IMF will continue under the recent EU rescue plan announced as well as it has not been noted otherwise implicitly nor explicitly. This is the reason why Sarkozy said it is a said day when the EU has to accept a bailout from the IMF (aka, the US). The EU now, and truly, contains a significant parcel of debtor nations.

To add fuel to this global macro tabloidal fire, the Euro members’ loan will be pari passu with existing sovereign debt i.e. it will not be considered senior. Although there is no written, hard evidence to support this claim, it is our view that otherwise there will be no incentive for investors to hold the debt of troubled countries like Greece, which will ultimately defeat the whole purpose of the rescue package. Moreover, there are indications that support this idea. As per Dutch Finance Minister Jan Kees de Jager, “We are not talking about a special preference for the eurogroup loans, that’s not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html). Of course, if more investors did their homework and ran the numbers, that same disincentive can be said to exist with the IMF's super senior preference given the event of a default and recoverable collateral after the IMF has fed at the trough.

The ramifications:

IMF’s preferred creditor status coupled with the expensive Euro members’ loans which are part of the rescue package can create a public debt snowball effect that could push the troubled countries towards insolvency when the IMF debt becomes repayable in three years time. This could be seen particularly in case of Greece (subscribers, please reference Greece Public Finances Projections). Even if all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak to 149.1% of the GDP in 2013. Please keep in mind that these numbers are based on what we perceived (as does simple math) to be pie in the sky optimism. I urge all readers to reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

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Yesterday I commented on the folly of promising big money to throw at a myriad variety of highly indebted nation without a central authority to enforce the structural change needed to actually cure the problems that created the need for the monies in the first place. See  The EU Has Set Up An Oppurtunistic Entry Point for Shorts Instead of Expressly Offering a Solution to the Pan-European Sovereign Debt Crisis! and What We Know About the Pan European Bailout Thus Far. The primary flaw, by far, that I perceive in this most grand of grand bailout schemes is that it is just that - a bailout, not a solution. Methinks the market is about to call the EU on their bluff pretty much along the same lines that I espoused above. For those subscribers who follow my belief that the ECB and EU leaders are making one of the largest policy blunders of modern times, this may be an opportunity to set up a short position that makes the Lehman Brothers' debacle look like a day rally. All subscribers are welcome to download our latest File Icon Euro Bank Sovereign Debt Exposure Preview. A more verbose summary will be released for pro and institutional subscribers shortly. Reference the following articles in this early morning edition of Bloomberg:

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In continuing my rant of earlier this morning, let's take a look at what we know thus far about the Great Pan-European Bailout. Before we go on, I would like to make clear how dangerous this bailout game is for those in the confines of the EMU. Suppose.... Just suppose, as with the Greek Bailout(s) announced just weeks ago, the markets call the bailers' bluff? Exactly what ammunition will be left to move forward? The ECB/EU had better hope that this rally will hold up (and recent history shows that it will probably have an ever decreasing half-life), for if it doesn't the member countries are in a world of hurt.

Unlike many pundits, I am more than willing to offer solutions in lieu of just bitching about problems. So, what is the solution? Everyone needs to come clean in regards to the true state of their economic affairs, as well as the realistic prospects of earning their way out of their respective problems using realistic numbers. In this fashion, I would never be able to pen a piece called Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Once we have an honest, realistic starting point, then we move forward with very, very stringent contingencies on loan dollars and specific demands on selling off state assets using realistic valuations as estimates. As it stands now, the loans are given to counties that are knowingly attempting to mislead, and have a history of chicanery in their attempts to join the EMU. This can easily smell like a farce and the risk of failure is very high. Yes, the promise of massive liquidity will drive a big rally in risky assets, but if these risky asset prices diverge from their fundamentals, the snap back will be destructive. It is my opinion that offering money without a structural solution is a non-solution of throwing good money after bad. Remember, monetization is now on the table and in a big way. This means that the REAL value of the Euro is still looking downward...

A quick rundown of the bailout

EU policy makers have come out with a massive rescue plan worth EUR 750 billion to combat with the unprecedented crisis that threatens not only the stability but the very survival of the monetary union. The new EU stabilization mechanism which will be backed by funds of up to €750 billion, of which two thirds will be provided by euro-zone members (€500 billion) and one third by the IMF (€ 250 billion), is by far the strongest effort by EU and the ECB to avert a regional debt crisis.

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As many of us were expecting, the EU has come together for their 54th meeting to discuss their 9th solution to the problems that were contained in just Greece, which were over two months ago, just as Greece said they didn't want and were not looking for any aid - which was good since the Germans said they would never give any aid as France said any inclusion of the IMF would be the end of the Euro - as the IMF offers aid right before this big meeting that arranges a nearly trillion dollar package of more promises that pushed the STOXX index up over 7%. Wheww!!! Even with a 4 line run-on I could barely get all of the non-functional BS in. Let me excerpt this one line from a recent Bloomberg story that sums it all up:

“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” Anantha-Nageswaran also said.

It appears that "politciians" will never be able to solve this economic problem of the state, for they are too constrained by politics (I'm giving them the benefit of the doubt in assuming they truly recognize the problem). For those that don't get it, I will try to express it simply.... You cannot cure issues of over-indebtedness and insolvency by lopping humongous amounts of debt onto the problem. All that does is exacerbated the issue, with the immediately calming, but eventually scalding realization that all you have done was kicked the can down the road (and adding lead to said can which makes it both heavier and more toxic). The ailing countries at hand need significant structural change and equity in some form or fashion. Adding more debt simply makes them more indebted.

ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.

QE, right on schedule. The ECB will load up on this stuff which will eventually devalue, and then what???? The will look just like the Federal Reserve, minus the reserve currency... Don' t get me wrong, I'm all for significant action to be taken, but it must be in a logical definable form. Just spending money replicates the actions that got us here in the first place. Back to the original questions, "How will it be pad for when nearly all of the contributing states are facing some form or fashion of austerity of their own?" and "Where is equity to counterbalance all of this debt?".

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”

Yeah, okay! More like spend and borrow, the indebted edition... The US "Shock and Awe" was an EQUITY package, not a loan package!

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Thursday, 06 May 2010 11:25

Next Up In The Spotlight - Italy, Again

As Greece, and Portugal, and recently even Spain bask in the spotlight of the bond vigilantes, I want to remind my subscribers to be prepared for Italy's turn to dance. Subscribers should reference Italy public finances projection Italy public finances projection 2010-03-22 10:47:41 588.19 Kb for the skinny on Italy's "realistic" prospects, and
File Icon Italian Banking Macro-Fundamental Discussion Note for a list prospective candidates to monetize this view in the banking industry. As of the last time I checked, the market hasn't hammered them yet... Complacency???

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Spain is due to hit the capital markets tomorrow. This is far from an opportune time: Spain's Borrowing Costs to Rise at Debt Sale as Zapatero Confronts `Abyss'

May 5 (Bloomberg) -- Spain’s borrowing costs may climb tomorrow at the country’s first debt sale since its credit rating was cut last week on concern the fiscal crisis pummeling Greek bonds will spread to fellow euro-region countries.

The Treasury may sell as much as 3 billion euros ($3.89 billion) of five-year notes to yield 3.34 percent, according to the median estimate of seven analysts and investors in a Bloomberg News survey. The yield was 2.84 percent when Spain auctioned 4.5 billion euros of the same securities on March 4...

Standard & Poor’s lowered its ranking for Spanish debt one step to AA on April 28, saying more downgrades are possible if the government’s “budgetary position underperforms to a greater extent than we currently anticipate.” Spain, which has the euro-region’s third-largest deficit, has pledged to reduce it to within the EU limit of 3 percent of gross domestic product in 2013, from 11.2 percent last year.


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Bloomberg has as a headline: Greek Quarantine Tested as Spain Vows to Combat Euro Contagion `Madness':

Investors are already testing the euro region’s efforts to contain the Greek crisis.

Greek bond yields rose yesterday above their level before the government agreed on a European Union-led bailout on May 2 as escalating protests cast doubt on its ability to drive through austerity measures. Spanish and Portuguese bonds also renewed last week’s slide as investors question their ability to cut budget deficits that are among the highest in the euro area.

The equity destroying capability of this occurrence should not be underestimated. Referencing " How Greece Killed Its Own Banks!", you can see that at just 10x leverage (about 1/3rd what most European banks are currently sporting), any holder of Greek bonds are underwater (if not insolvent) on those particular purchases at offer - and that is using last weeks numbers, which look much better than the reality today!

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