Tuesday, 04 May 2010 20:53

The Pan-European Sovereign Debt Crisis

{jcomments on}The Asset Securitization Crisis of 2007, 2008 and 2009 led to the demise of several global banks and institutions. Central bank induced risky asset bubbles gave rise to, what was popularly considered and reported as through the popular media, a rapid recovery. The reality was that the insolvencies that marked the crisis were passed on, in part, to the sovereign nations that sponsored the Crisis, and as the chickens came home to roost the Asset Securitization Crisis has now blown into a full Sovereign debt crisis.

The Pan-European Sovereign Debt Crisis, to date (free):

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

    Latest Pan-European Sovereign Risk Subscription Research – The Good Stuff!!!

    Actionable Intelligence Note For All Paying Subscribers on European Bank Research

    File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf

    File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – professional

    File Icon Ireland public finances projections

    File Icon Spain public finances projections_033010

    File Icon UK Public Finances March 2010

    File Icon Italy public finances projection

    File Icon Greece Public Finances Projections

    File Icon Banks exposed to Central and Eastern Europe

    File Icon Greek Banking Fundamental Tear Sheet

    File Icon Italian Banking Macro-Fundamental Discussion Note
    File Icon Spanish Banking Macro Discussion Note


    Online Spreadsheets (professional and institutional subscribers only)

    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

  18. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

  19. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight

  20. Grecian News and its Relevance to My Analysis

  21. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis

  22. Euro-Gossip Debunked, Courtesy of Trichet and the IMF!

  23. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

  24. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

  25. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

  26. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

  27. Beware of the Potential Irish Ponzi Scheme!

  28. The Daisy Chain Effect That I Anticipated Appears To Have Commenced!

  29. How Greece Killed Its Own Banks!

  30. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

  31. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

  32. What We Know About the Pan European Bailout Thus Far

  33. As I Warned Yesterday, It Appears the Market Is Calling the Europeans Bluff – It’s Now Put Up Or Get Put Down

  34. How the US Has Perfected the Use of Economic Imperialism Through the European Union!

  35. The Greek Bank Tear Sheet is Now Available to the Public

  36. BoomBustBlog Irish Research Becomes Reality

  37. PIIGSlets in a Bank: Another European Banks-at-Risk Actionable Research Note

  38. Sovereign debt exposure of Insurers and Reinsurers

  39. As We Have Warned, the Fissures Are Widening in the Spanish Banking System

  40. “With the Euro Disintegrating, You Can Calculate Your Haircuts Here”

  41. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

  42. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!

  43. Introducing the Not So Stylish Portuguese Haircut Analysis

  44. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

  45. Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition

Follow the UK and Eurozone topic list for our latest analysis of Pan-European issues.

Published in BoomBustBlog

Anybody who has been following for the last fiscal quarter or so (or has seen my Spanish bank work in 2009) knows that I believe that the EMU as it stood in 2009 would probably be non-existent by the end of 2010. All of the pundits who proclaimed that the European debt crisis was over with the mere declaration that Greece may receive some additional debt either were abjectly lying or truly didn't understand the gravity of the situation. To be honest, there are a lot (and I mean a whole lot) of data points, angles and contingencies to grasp thus it is not necessarily easy. Then again, isn't that what these market professionals get paid for.

Very early in the year, I virtually guaranteed that the Greek banks would fall, or at least have to be rescued (a 2nd time) before they fell. I practically promised it. In the news today...

Lagarde to discuss Greece support with banks: French Finance Minister Christine Lagarde will meet with bank leaders on Wednesday to discuss how its banks could participate in the Greek rescue package. Lagarde told the French parliament the country's banks will reiterate their support for the rescue process on Wednesday but she said tomorrow's meeting could lead to them taking on a more active role, along the lines of what German banks have done. French banks have so far not been asked by the government to participate directly in the Greek rescue package, two sources in France's banking sector said earlier on Tuesday. They have only been asked to maintain their exposure to Greece and have agreed to do this, the sources said. "Nothing beyond this has been requested by the government," one of the sources told Reuters. France has overall the highest exposure to Greek debt, with about $75.2 billion worth of assets in total, according to Bank of International data as at end-2009. Germany's top banks and insurers offered support on Tuesday mainly by keeping open credit lines to banks and by agreeing not to sell Greek bonds for the duration of a wider IMF-led bailout. Germany's Finance Minister Wolfgang Schaeuble said that German financial firms had agreed to buy bonds issued by state controlled bank KfW as a way to help finance the bailout. Deutsche Bank Chief Executive Josef Ackermann said it was important to extinguish the fire in Greece and pledged to help the country. Ackermann is helping to coordinate efforts by the private sector to support the Greek rescue package.

I suggest one references my post, How Greece Killed Its Own Banks!.

Published in BoomBustBlog

The European crisis as portrayed in the news...

Greece Gets $146 Billion Rescue in EU, IMF Package (Update1) May 3 (Bloomberg) -- Euro-region ministers agreed to a 110 billion-euro ($146 billion)
rescue package for Greece to prevent a default and stop the worst crisis ...- 2010-05-03

Euro Declines on Concern Greece Bailout May Fail to Get Support Europe’s common currency slumped versus most of its 16 major counterparts as German
Chancellor Angela Merkel began making a public case for her citizens to ... - 2010-05-03

European Stock-Index Futures Decline as Greece Gets Bailout ... rose. TNT NV, Europe’s second-biggest express-delivery company, may be
active after reporting first-quarter earnings. Xstrata ... - 2010-05-03

Merkel Makes Public Case for Germany to Aid Greece (Update1) May 3 (Bloomberg) -- Chancellor Angela Merkel began making a public case for Germany
to aid Greece, saying she’s confident of gaining parliamentary approval ... - 2010-05-03 Hmmm. We shouldn't celebrate a bailout until the bailout is actually ratified, should we?

Iceland Is Better Off Than Greece Thanks to Krona (Update2) May 3 (Bloomberg)

Iceland, which before Greece had been the western nation hardest hit by the global credit crisis, avoided a meltdown as bad as the Greeks’ in part because it had its own currency, Finance Minister Steingrimur Sigfusson said.

“Oh my God, I wouldn’t want to be in the position they’re in,” Sigfusson said in an interview. “The position Greece is in is quite different from the position Iceland is or was in; Greece has the euro and we can debate whether or not that’s good for them for the time being.”

Iceland’s financial crisis started at the end of 2008, when its three biggest banks failed, resulting in a sell-off of the krona that culminated in a depreciation as deep as 80 percent against the euro offshore. The central bank imposed capital controls to stem volatility at an exchange rate about 45 percent weaker than before the crisis. The krona slump instantly ended 22 quarters of trade deficits, helping a recovery that saw the economy grow 3.3 percent in the fourth quarter from the third.

“It won’t be easy for Greece to get out of the trouble it’s in,” Sigfusson said.

Published in BoomBustBlog
Thursday, 29 April 2010 04:59

Beware of the Potential Irish Ponzi Scheme!

I have updated the latest Ireland research (released yesterday) and urge all to review the additions, as well as our overview of Ireland's fiscal difficulties:

We fear Ireland is on the verge of considering a massive Ponzi Scheme, if which avoided, will possibly result in a fiscal deficit approaching 20%, dwarfing the beleaguered Greece by several leagues.

Non-subscribers should reference Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?, for the underlying premise of this in depth article described the upcoming situations with prescience.

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

image015.png

Published in BoomBustBlog

The Pan-European Sovereign Debt Dominoes start to fall "precisely" as anticipated...

From the Wall Street Journal:

Standard & Poor’s downgraded Spain’s long-term credit-rating to double-A with a negative outlook just one day after roiling global markets with downgrades for both Greece and Portugal.

“We now believe that the Spanish economy’s shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” S&P credit analyst Marko Mrsnik said.

The move sent the euro to a fresh one-year low against the dollar of $1.3129; the 16-nation currency had briefly bounced higher as fears about Greek debt contagion eased. Spain’s IBEX index extended earlier losses, oil prices fell and U.S. stocks briefly turned negative.

This follows a downgrade of Portgual and Greece (to one of junk). The Actionable Intelligence Note of last week was quite timely. Up until a few days ago the options on many of these banks were quite cheap, on relative basis (even the Greek banks, at least on a relative basis though IV was high). Notice the explosion in both implied volatility and intrinsic value leading to a 100% to 200% gain...

Banco Santandar since research

Published in BoomBustBlog
Tuesday, 27 April 2010 13:25

How Greece Killed Its Own Banks!

Yes, you read that correctly! Greece killed its own banks. You see, many knew as far back as January (if not last year) that Greece would have a singificant problem floating its debt. As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market. So, what happens when these relatively small banks gobble up all of this debt that is summarily downgraded 15 ways from Idaho.

Reference (Bloomberg) Stocks Plunge as Dollar, Treasuries Gain After Greece, Portugal Rate Cuts and (the Wall Street Journal) S&P Downgrades Greece to Junk Status:

S&P cut Greece's ratings to junk status, saying the country's policy options are narrowing as it tries to cut its large budget deficit. The news, combined with an S&P downgrade of Portugal, pushed down the euro to $1.3269, hit U.S. stocks and sent Treasury prices higher”.

  • Stocks Plunge, Asia Bond Risk Climbs on Greece, Portugal Default Concerns
  • Greece's Junk Contagion Pressures EU to Broaden Bailout After Market Rout
  • Trichet Travels to Berlin on Diplomatic Mission as Merkel Nears Greek Vote
  • Greece Bondholders May Lose $265 Billion in Default as S&P Sees 70% Loss
        April 28 (Bloomberg) -- Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s.

    The ratings firm cut Greece three steps yesterday to BB+, or below investment grade, and said bondholders may recover only 30 percent and 50 percent for their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, data compiled by Bloomberg show.

    The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes to as high as 19 percent from 4.6 percent a month ago as concern deepened the nation may delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product.

    “It’s now not just market sentiment, but a top rating agency sees Greek paper as junk,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam.

    Before yesterday, Greece’s bonds had lost about 17 percent this year, according to Bloomberg/EFFAS indexes. The 4.3 percent security due March 2012 fell 6.54, or 65.4 euros per 1,000-euro face amount, to 78.32.

    ...

    S&P indicated the cuts, which may force investors who are prevented from owning anything but investment-grade rated bonds to sell, may not be over, assigning Greece a “negative” outlook.

    “The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory,” S&P credit analyst Marko Mrsnik said in a statement.

    Credit-Default Swaps

    Traders of derivatives are betting on a greater chance that Greece fails to meet its debt payments.

    Credit-default swaps on Greek government bonds climbed 111 basis points to 821 basis points yesterday, according to CMA DataVision. Only contracts tied to Venezuela and Argentina debt trade at higher levels, according to Bloomberg data. Venezuela is at about 846 basis points and Argentina is at about 844, Bloomberg data show.

    Just minutes before lowering Greece’s ratings, S&P cut Portugal to A- from A+. Yields on Portugal’s two-year note yields jumped 112 basis points to 5.31 percent, while credit- default swaps on the nation’s debt rose 54 basis points to 365.     The downgrades may force banks to boost the amount of capital they are required to hold against bets on sovereign debt, said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut.

    While bank capital rules give a risk weighting of zero percent for government debt rated AA- or higher, it jumps to 50 percent for debt graded BBB+ to BBB- on the S&P scale and 100 percent for BB+ to B-.

    “These downgrades are going to cause people to increase their risk weightings,” Yelvington said.

Well, the answer is.... Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...

image001

Published in BoomBustBlog

Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin...). Starting in January of this year, I went in depth into the European contagion thing when practically all of the banks, pundits, analysts and rating agencies said this was contained to Greece.

In February, I posted "The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one." To wit:

Banks are the epicenter of the economic crises that face the developed and emerging nations over the last few years. Many appear to have allowed the media to carry the conversation away from the banks and into sovereign debt issues, social unrest etc., but the main issue still resides in the banks. Why, you ask? Well, because every single major country conducts its finances through the banks and when those finances become stressed, the banks will be the first to show it and usually show it in an aggrieved manner since most banks are still highly leveraged.

Published in BoomBustBlog

It would pay to review all of the relevant European bank research. The market seems to have realized the perilous linkages throughout the EU and is taking many (if not all) of the researched banks down. This research came out early enough for all subscribers to have been able to take advantage of it. Of particular note should be:

Published in BoomBustBlog

As was literally guaranteed by the BoomBustBlog analysis, Greece is well on its way to default, or at least the acceptance of significant aid in an (probably futile) attempt to avoid default. For a refresher, see Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!. Subscribers should reference the Greece Public Finances Projections. Of particular note is how accurate we have been in forecasting the nonsensical optimism embedded in the Greek Government's economic numbers, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!. Now, let's peruse the news of the morning...

In Bloomberg: Greece, Ireland Lead Euro-Area Budget Deficit Widening to Double EU Limit

April 22 (Bloomberg) -- The euro area’s budget deficit widened to more than double the European Union’s 3 percent limit in 2009, led by Greece and Ireland. I explicitly warned that these two countries were at the top of the risk chain throughout the year, culminated with a forensic report on Ireland. See Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! Subscribers should reference Ireland public finances projections. Ireland is in a particularly precarious position, potentially more so that Greece!

ireland_claims_against_piigs.jpg

The total budget gap for the 16-nation euro region widened to 6.3 percent of gross domestic product last year, the biggest since the introduction of the euro in 1999, from 2 percent in 2008, the EU’s Luxembourg-based statistics office said today. At 14.3 percent of GDP, Ireland had the largest shortfall, while Greece’s deficit was 13.6 percent. I'm not going to say I told you so!

Published in BoomBustBlog

Here is another smattering of news from the weekend past, as well as our take on it and a decent dose of realistic analysis to cast a light on the real issues at hand...

Beijing Reports a Trade Deficit: BusinessWeek

  • China reported its first trade deficit in over 70 months as the prices of raw materials imports climbed
  • Analysts are stating that a stronger Yuan is needed to deter increasing domestic inflation
  • China has the impossible task of balancing an ever increasing asset price bubble with US demands for a revalued Yuan in order to fuel President Obama's manufacturing jobs utopia
  • Subscribers should reference File Icon China Macro Discussion 2-4-10 (Global Macro, Trades & Strategy)

And speaking of Beijing,,, China's Economic Growth Accelerates to 11.9%, May Prompt End of Yuan Peg - The Overheating has arrived???