Of course, what would a weekend be without another installment in the Grecian soap opera: Greece Bailed Out.....Again: Bloomberg

  • European governments have offered up a $61 billion Greek rescue package, meanwhile (and of course), Greece has not asked for any sort of package, insisting it can pay its debts
  • Greece plans to offer €1.2 billion in 6 month and 1 year notes tomorrow (April 12th)
  • So, the EMU pledges aid that Greece does not want to accept right before a bond auction that would have otherwise failed, and Germany after months of demanding Greece be punished for its profligacy, has backed off and agreed to an emergency plan that offers aid at a significant DISCOUNT to the market rate. How does this pass the mainstream smell tests?
  • Here are some choice quotes from the story:
    • "The package “sends a clear message that nobody can play with our common currency and our common fate,” Greek Prime MinisterGeorge Papandreou told reporters in Larnaca, Cyprus." Actually, the package sends a clear message that moral hazard abounds over there in Euroland and their will be no market discipline for financial profligacy.
    • Germany “has lost the competition,” said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission. “All that fuss and talk about not putting taxpayer money at risk has been made obsolete.”

      ... the European loans would be tied to Euribor and priced above rates charged by the IMF, a nod to German opposition to subsidizing a country that lived beyond its means. The EU will offer a mix of fixed- rate and floating rate loans. Tis not much of a nod since it substantially undercuts the market rates. Yes, its more than the IMF rates, but the IMF rates were closer to zero, not withstanding the fact that the IMF would cause them to contort the spending.

    • Greece last week raised its estimate of the 2009 deficit from 12.7 percent of gross domestic product to 12.9 percent, the highest in the euro’s history and more than four times the EU’s 3 percent limit.
    • While rules dictated by Germany in the 1990s foresee fines for countries that go over the limit, no penalty has ever been imposed. Germany also led the charge to loosen the rules in 2005 after three years of excessive deficits. Basically, the rules are a joke and there is no wonder why not even a single country in the EU has respected them.

      While all euro-region governments vowed to contribute, some would need parliamentary approval. Ireland, itself reeling from the financial crisis, would require “national legislation,” Finance Minister Brian Lenihan said in an e-mailed statement.Ireland is quite the interesting case in and of itself. Subscribers who have not done so are strongly recommended to carefully review the Ireland public finance review thatI will be posting later on. It's a doozy! It will be very interesting to see how a country such as Ireland who actually needs a bailout, will be bailing out another country that needs a bailout. For a sneek preview, see Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook.

    image009.png

    Notice how Ireland is the nation with the second highest NPA to GDP ratio.

     

    eurodebt2.png

    Overall, in terms of total financing needed for 2010 (which includes 2010 bond maturities, short-term roll over debt and fiscal deficit), France and Germany top the list with € 377.5 billion and €341.6 billion, respectively while the total finance needed as percentage of GDP is expected to be highest for Belgium and Ireland at 26.3% and 22.4%, respectively.

    Now, to focus on the contagion effect of Ireland, specifically, let's borrow from our yet to be released foreign claims model in order to see who may be effected from the rush to pull capital out of extant positions to fill the leveraged NPA holes left by the banks...

     

    claims_against_uk.jpg

    Ireland has the largest claims against the UK as a percentage of the its respective GDP, the largest in the world. In the rush to raise cash to sell assets, expect some fire sales in the UK. For those who may be wondering how this may affect the UK, see our premium subscription report on the UK's public finances and prospects (recently updated to include the last round of government projections): UK Public Finances March 2010 UK Public Finances March 2010 2010-03-29 06:20:38615.90 Kb

     

     

     

    ireland_claims_against_piigs.jpg

    Ireland can also be expected to pull assets our of the ailing PIIGS group as well, since they are, bar none, the biggest lender to that group as a percentage of GDP. No wonder their banks are having problems.

    ireland_claims_against_cee.pngIreland also has the second highest claims (as percent of GDP) against the central and eastern European nations, who happen to be in a full blown depression. The withdrawal of assets, banking support and credit will exacerbate both Ireland's problems and that of these nations. See The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! to find that Ireland can exacerbate the problems of Austrian, Swedish and Belgian banks by pulling capital out of the CEE region, and yes, they are truly in a depression:

    • The Greek government has yet to request a European lifeline, confident that this year’s planned budget cut of 4 percentage points will stem speculation that it is heading for the euro region’s first-ever default. Fitch Ratings highlighted that risk by shaving Greece’s debt rating to BBB-, one level above junk, on April 9.

    • A combination of higher taxes, lower spending and salary cuts for public workers have prompted strikes and protests against Papandreou, a socialist elected in October on promises of raising wages.

    • greek_strikes.png
      • The EU showed no sign of demanding further Greek austerity measures. Rehn hailed the Greek government for implementing “a very bold and ambitious program.”This is interesting since our analysis shows that the plan as Greece has announced it, just won't be able to cut the butter. Either the guys at the EU didn't read the plan, their spreadsheets need to be recalibrated, or they aren't being totally upfront. Then again, maybe I can be totally wrong and all of the EU/IMF/Greek government super rosy estimates illustrated below will turn out to be different this time around????

      Greece needs to raise 11.6 billion euros by the end of May to cover maturing bonds, and another 20 billion euros by the end of the year to pay debt coupons and finance this year’s deficit. The debt agency plans to offer 1.2 billion euros of six- month and one-year notes tomorrow, in a test of investor confidence. So far, all of the recently issued bonds are totally undewater. Is this really a worthwhile investment?

      Greece is likely to need money by the end of April, said Erik Nielsen, London-based chief European economist at Goldman Sachs Group Inc. Noting that the budget cuts threaten to cripple the economy, he said in a research note that “this thing is unlikely to go to bed anytime soon." "Cripple" the economy is right. They will throw themselves into a deeper depression, and it is doubtful that the cuts go anywhere near far enough, thus they will either have to cut deeper or face the fact that they will still be running an inappropriate deficit anyway.

    • These are the email addresses of the reporters that worked on this story (James G. Neuger in Brussels atThis email address is being protected from spambots. You need JavaScript enabled to view it.Jonathan Stearns in Brussels atThis email address is being protected from spambots. You need JavaScript enabled to view it.). I challenge anyone (including them or their sources) to demonstrate how Greece will be able to pull out of this, even with the EU subsidy that was just announced. This are just too bad. Subscribers can reference Greece Public Finances Projections Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb. while those that don't subscribe can simply review the anecdotal evidence I have gathered, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

    Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

    image005.png

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

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

    image013.png

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

     

    image031.png

    Revisions-R-US!

    image044.png

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

    image040.png

    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 govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!...

    greek_debt_forecast.png

    Think about it! With a .5% revisions, the EC was still 3 full points to the optimistic side on GDP, that puts the possibility of Greek  government forecasts, which are much more optimistic than both the EU and the slightly more stringent but still mostly erroneous IMF numbers, being anywhere near realistic somewhere between zero and no way in hell (tartarus, hades, purgatory...).

    Now, if the Greek government's macroeconomic assumptions are overstated when compared with EU estimates, and the EU estimates are overstated when compared to the IMF estimates, and the IMF estimates are overstated when compared to reality.... Just who the hell can you trust these days??? Never fear, Reggie's here. Download our "unbiased, non-captured, empirically driven" forecast of the REAL Greek economy - (subscribers only, click here to subscribeGreece Public Finances Projections Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb. Related banking research can be downloaded here:

    It really is a shame when you have to pay for the truth, isn't it? If you think you've witnessed an example of social unrest in Greece, you ain't seen nuthin' yet. Wait until the reality of these faked numbers start hitting home...
    greek_strikes.png

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

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

     

     

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

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

    Grecian News and its Relevance to My Analysis

    A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis

     

     

     

    Published in BoomBustBlog

    After having just stating in an interview earlier this week that although many banks are probably guilty of what Lehman was caught doing with Repo 105's pursuing those actions based upon semantics may be fruitless (it may be called depo 106?), Reuters comes out with this interesting story: Major US banks masked risk levels: report

    (Reuters) - Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.

    The paper said on Friday 18 banks, including Goldman Sachs Group , Morgan Stanley , J.P. Morgan Chase Bank of America and Citigroup , understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.

    The banks had increased their debt in the middle of successive quarters, it said.

    Citi, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley were not immediately available for comment when contacted by Reuters outside regular U.S. business hours.

    Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.

    Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.

    Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.

    The Wall Street Journal (see their interactive model) and ZeroHedge broke a similar storty with some meat behind it to justify the allegations. Ahhh!!! The return of real reporting, and not just from blogs!

    Published in BoomBustBlog

    From Banks, Brokers, & Bullsh1+ part 1:

    A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

    Let’s get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying “How the hell did he know that?”

    The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain’t so and I’m not going to lie to you. The truth of the matter is I sniffed these incongruencies out because  2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating “This time is different”, “There is a new math” (as if there was something wrong with the old math), etc. and so on and associated bullshit.

     

    So, the question remains, why is it that a lowly blogger and small time
    individual investor with a skeleton staff of analysts can uncover
    systemic risks, frauds and insolvencies at a level that it appears the
    SEC hasn’t even gleaned as of yet? Two words, “Regulatory Capture”. You
    see, and as I reluctantly admitted, it is not that I am so smart, it is
    that the regulator’s goals are not the same as mine. My efforts are
    designed to ferret out the truth for enlightenment, profit and gain.
    Regulators’ goals are to serve a myriad constituency that does not
    necessarily have the individual tax payer at the top of the heirachal
    pyramid. Before we go on, let me excerpt from a piece that I wrote on
    the topic at hand so we are all on the same page: How
    Regulatory Capture Turns Doo Doo Deadly

    First off, some definitions:

    • The Doo Doo, as in the Doo
      Doo 32
      :
      A  list of 32 banks that I created on May 22, 2008 which set the stage for my investment
      thesis of shorting the regional banks. At that time, I was one of the
      very few, if not one of the only, to warn that the regional banks would
      hit the fan.
    • Regulatory capture (adopted from Wikipedia): A
      term used to refer to situations in which a government regulatory
      agency created to act in the public interest instead acts in favor of
      the commercial or special interests that dominate in the industry or
      sector it is charged with regulating. Regulatory capture is an
      explicit manifestation of government failure in that it not only
      encourages, but actively promotes the activities of large firms that
      produce negative externalities. For public
      choice theorists
      , regulatory capture occurs because groups or
      individuals with a high-stakes interest in the outcome of policy or
      regulatory decisions can be expected to focus their resources and
      energies in attempting to gain the policy outcomes they prefer, while
      members of the public, each with only a tiny individual stake in the
      outcome, will ignore it altogether. Regulatory capture is when this
      imbalance of focused resources devoted to a particular policy outcome
      is successful at “capturing” influence with the staff or commission
      members of the regulatory agency, so that the preferred policy
      outcomes of the special interest are implemented. The risk of
      regulatory capture suggests that regulatory agencies should be
      protected from outside influence as much as possible, or else not
      created at all. A captured regulatory agency that serves the interests
      of its invested patrons with the power of the government behind it is
      often worse than no regulation whatsoever.

    About a year and a half ago, after sounding the alarm on the
    regionals, I placed strategic bearish positions in the sector which
    paid off extremely well. The only problem is, it really shouldn’t have.
    Why? Because the problems of these banks were visible a mile away. I
    started warning friends and family as far back as 2004, I announced it
    on my blog in 2007, and I even offered a free report in early 2008.

    Well, here comes another warning. One of the Doo Doo 32 looks to be
    ready to collapse some time soon. Most investors and pundits won’t
    realize it because a) they don’t read BoomBustblog, and b) due to
    regulatory capture, the bank has been given the OK by its regulators to
    hide the fact that it is getting its insides gutted out by CDOs and
    losses on loans and loan derivative products. Alas, I am getting ahead
    of myself. Let’s take a quick glance at regulatory capture, graphically
    encapsulated, then move on to look at the recipients of the Doo Doo
    Award as they stand now…

    A picture is worth a thousand words…

    fasb_mark_to_market_chart.png

    So, how does this play into today’s big headlines in the alternative,
    grass roots media? Well, on the front page of the Huffington
    Post
    and ZeroHedge, we have a damning expose of Lehman
    Brothers
    (we told you this in the first quarter of 2008, though),
    detailing their use of REPO 105 financing to basically lie about their
    liquidity positions and solvency. The most damning and most interesting
    tidbit lies within a more obscure ZeroHedge article that details
    findings from the recently released Lehman papers, though:

    On September 11, JPMorgan executives met to discuss significant
    valuation problems with securities that Lehman had posted as collateral
    over the summer. JPMorgan concluded that the collateral was not worth
    nearly what Lehman had claimed it was worth, and decided to request an
    additional $5 billion in cash collateral from Lehman that day. The
    request was communicated in an executive?level phone call, and Lehman
    posted $5 billion in cash to JPMorgan by the afternoon of Friday,
    September 12. Around the same time, JPMorgan learned that a security
    known as Fenway,which
    Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed
    commercial paper credit?enhanced by Lehman (that is, it was Lehman,
    rather than a third party, that effectively guaranteed principal and
    interest payments)
    . JPMorgan concluded that Fenway was worth
    practically nothing as collateral.

    Hold up! Lehman was pledging as collateral allegedly “investment grade”,
    “credit enhanced” securities that were enhanced by Lehman, who was
    insolvent and in need of liquidity, itself. For anybody who is not
    following me, how much is life insurance on yourself worth if it is
    backed up by YOU paying out the proceeds after you die bankrupt? Lehman
    was allowed to get away with such nonsense because it was allowed to
    value its OWN securities. Think about this for a second. You are in big
    financial trouble, you have only a $10 bill to your name, but your
    favorite congressman (whom you have given $10 bills to in the past) has
    given you the okay to erase that number 10 on the $bills and put
    whatever number on it you feel is “reasonable”. So, when your creditors
    come a callin’ , looking for $20 in collateral, what number would you
    deem reasonable to put on that $10 bill.

    Ladies and gentlemen, in the short paragraph above, we have just
    encapsulated the majority of the mark to market argument. Let’s delve
    farther into the ZH article:

     

    By early August 2008, JPMorgan had learned that Lehman had pledged
    self-priced CDOs as collateral over the course of the summer. By August
    9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7
    billion of collateral, $5.8 billion of which were CDOs priced
    by Lehman
    , mostly at face value. JPMorgan expressed
    concern as to the quality of the assets that Lehman had pledged and,
    consequently, Lehman offered to review its valuations. Although JPMorgan
    remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that
    it had no other collateral to pledge.
    The
    fact that Lehman did not have other assets to pledge raised some
    concerns at JPMorgan about Lehman’s liquidity

     

    Hmmm!!! Three day old fish has a fresher scent, does it not? So where
    was the SEC, the NY Fed, or anybody the hell else who’s supposed to
    safeguard us against this malfeasance? Even bloggers picked up on this
    months before it collapsed. The answer, dear readers: REGULATORY
    CAPTURE!

    Again, from ZH:

     

    The SEC was not aware of any significant issues with Lehman’s liquidity
    pool until September 12, 2008, when officials learned that a large
    portion of Lehman’s liquidity pool had been allocated to its clearing
    banks to induce them to continue providing essential clearing services.
    In a September 12, 2008 e?mail, one SEC analyst
    wrote: Key point: Lehman’s
    liquidity pool is almost totally locked up with clearing banks to cover
    intraday credit ($15bnjpm, $10bn with others like citi and bofa).
    withThis is a really big
    problem.

     

    BoomBustBlog featured several warnings starting January of 2008!

    One would think that after all of this, the problem would have been
    rectified. To the contrary, it has been made worse. Congress has
    pressured FASB to institutionalize and make acceptable the lies that
    Lehman told its investors, counterparties and regulators. That’s right,
    not only will no one get in trouble for this blatant lying, the practice
    is now actually endorsed by the government – that is until somebody
    blows up again. At that point there will be a bunch of finger pointing
    and allegations and claims such as “But who could have seen this
    coming”.

    Do you not believe me, dear reader. Reference

    About the Politically Malleable FASB, Paid for Politicians,
    and Mark to Myth Accounting Rules
    : the nonsense is unfolding and
    collapsing right now, even as I type this sentence.

    The next place to look??? Who knows? Maybe someone should take an An
    Independent Look into JP Morgan
    .. or maybe even an unbiased
    gander at Wells Fargo (see

    The Wells Fargo 4th Quarter Review is Available, and Its a
    Doozy!)
    . After all, If
    a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
    It?

    More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:

     

    Published in BoomBustBlog

    The IMF has recently released a white paper labeled "Strategies for Fiscal Consolidation in the Post-Crisis World". Here's a synopsis:

    Introduction:

    • The fiscal state of the developed world is facing the question of solvency for the first time since WWII, and this time demographic trends are incredibly unfavorable. See Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for explicit evidence.
    • Current fiscal models for the developed world see fiscal tightening starting in 2011 [in 8 months governments are going to start tightening liabilities? Possible, but I wouldn't hold my breath for this one]
    • The only G-7 economy with debt projected at <85% of GDP is Canada [True, but is that because it is temporally behind the curve? See Easter Weekend News Update:
      • Canadian Dollar Too Strong? Bloomberg.com:

      • Minority opposition in Canadian Parliament is growing over strengthening Loonie
      • Leaders fear fallout in exports from CAD nearly at parity with USD
      • CAD strength is directly tied to Chinese commodity demand (is the CAD bubblicious, too?)
    • Debts in emerging markets are beginning to look safer as they pare down stimulus packages plus old debt.

    Potential Exit Strategies:

    • Inflating (debasing) one's own currency to pay off debt is too dangerous on a social level to be seriously considered, especially for emerging markets
    • Over the past three decades, the most successful method of managing debt and securing social safety has been to expand the primary balance surplus

    Reference What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect

    Click to enlarge...

    italy_-_ireland.png

    • Currently, the biggest step toward renewing primary surpluses in the developed world would be to phase out entitlement/pension funding or drastically modify payout schemes

    [But who really knows where all of the bodies are buried? Reference Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

    The French

    In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France's deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the pdfLaurent_Paul_and Christophe_Schalck_study for a background on the deal. I don't necessarily concur with their conclusions, but it does provide some info france_telecomm_transaction.png

    For the record and according to the doc referenced above, according to the State balance sheet for 2006, total pension liabilities of civil servants have been estimated at 941 billion €, i.e. 53% of annual GDP in France. An attempt to reform all special schemes in 1995 collapsed because of severe strikes on the railways. Sounds awfully Hellenic in nature, doesn't it??? I, for one, believe that Greece is getting a bad rap, and not becaue it is being falsely accused but because it is just a lot sloppier at covering up its shenanigans than its European neighbors.

    Now, back to France. A transaction similar to the France Telecomm deal took place in 2006 with La Poste which still employs 200,000 civil servants, but is now facing the same evolution as France Telecom in 1997. But an important difference with France Telecom is the obvious insufficiency of the lump sum paid by the postal company (2 billion €) compared to the amount of pension liabilities transferred (70 billion € at the end of 2006).

    • Almost 1/5 of public spending stabilization could come without affecting public investment, and simply cutting wage and transfer payments
    • The IMF recommends setting up government institutions to enforce budget restrictions (the ridiculousness of one government entity stopping a handful of spendthrift entities is mind boggling)

    Global Adjustments:

    • Emerging markets that have opted to inflate away debt have seen interest rates skyrocket for years, while other who opted to adjust the primary balance deficit have seen interest rates fall
    • The average G-20 nation will need to adjust its balance sheet 8.8% by the end of the decade to reach public debt targets [RIIIGHT!!!! Like the Maastricht Treaty which, after 18 years has been respected by exactly 0.000000% of its members, all of whom are well below the 3% debt to GDP threshold by about an average of negative 300%!!!!]
    • Over the past 30 years, Greece has made a "large fiscal adjustment" once (1995), where they had more success generating new revenue, andbarely managed to cut expenditures. Greece's inability to make any sort of cuts to preserve fiscal responsibility is going to embarrass the cheerleaders looking to save Europe without lifting a finger. Spanish and Italian efforts have yielded similar results

    Long Term Growth:

    • Over the previous 15 years, a clear inverse relationship has developed between debt ratios and real GDP growth
    • Evidence on whether adjustments should be upfront (shock therapy 1990's) or gradual is inconclusive according to IMF staff
    • One of the easier methods of reducing public expenditures is to tighten and reform pension policy (the days of mandatory retirements, backloaded payouts based on final five years average salary, etc, are numbered)
    • Countries with higher domestic debt ownership are more likely to honor debt and have higher debt tolerances among citizenry (i.e. Japanese JGB hoarding vs. USA tea parties)

    Conclusion:

    The IMF has an incredible data set to work with yet somehow continues to see a picture far rosier than what meets the eye. The impacts of measures to manage sovereign debt loads seemed to be futile in the medium-long term. The situation we currently see is similar to the 1950's in data only. The demographic makeup of the world today (particularly in Europe) is one that is aging, dependent on entitlement programs, and underfunded pensions that are seeing falling/no incoming revenue. This is a clear contradiction to the call for managing or reducing entitlement and wage expenditures at the government level (globally), and is a sign that fears over a global sovereign default among advanced economies is a legitimate threat over the next decade.

    Related Subscriber Content:

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

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

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

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

    Grecian News and its Relevance to My Analysis

    Published in BoomBustBlog

    Greece has been in the news a lot over the last 24 hours. Let's recap:

    Bloomberg: Greece May Find Lukewarm U.S. Reception for Its Bonds

    April 7 (Bloomberg) -- Greece may discover it’s no cheaper to sell bonds in the U.S. than in Europe as the government seeks to persuade investors it can plug the region’s biggest budget deficit.

    Investors may demand a yield of as much as 7.25 percent to buy Greek 10-year dollar bonds, 410 basis points more than benchmark German bunds and 330 basis points more than Treasuries, according to Paris-based Axa Investment Managers, which oversees about $669 billion. TCW Group Inc., which manages $115 billion in assets from Los Angeles, says Greece may have to offer a premium of as much as 400 basis points over Treasuries.

    Petros Christodoulou, director general of Greece’s Public Debt Management Agency, said March 31 the country planned a “roadshow” in the U.S. and maybe Asia to drum up investor demand for a sale of dollar-denominated bonds. The country may offer as much as $10 billion of the securities, the Wall Street Journal reported the same day. Greece is struggling to tackle a budget deficit that is equivalent to 12.7 percent of gross domestic product, more than four times the European Union’s 3 percent limit.

    Anybody present at these road shows should print out a copy of the post Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! and"Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!. Be sure to have the salespersons answer the hard questions posed in those pieces. Subscribers can feel free to whip out the subscription material and ask for explanations and clarifications - File Icon Greece Public Finances Projections. I am anxious to hear what would be said in response. At this point, I see a Greek effective default as a foregone conclusion.

    More on this topic: Euro, Greek Bonds Drop on Rescue Concern; Most U.S. Stocks Gain

    From CNBC: Greek Banks Hit by Money Moved Offshore: Report

    Greek banks are being hit by a wave of redemptions as rich citizens and companies look to move their money to big global banks or offshore as the country's debt crisis rages, the Telegraph newspaper reported on its website.

    The report appeared to contradict recent data from the European Central Bank and comments to Reuters by analysts and Greek banking sources, who said there was no clear evidence of a major, extended deposit outflow from Greek banks.

    The UK newspaper said late on Monday that big depositors have been clamoring to move their cash to international financial firms such as HSBC or France's Societe Generale, which operate large branches in the country.

    They are among those to have received several billion euros of new money, it said without specifying sources.

    ... More than 3 billion euros ($4.05 billion) of deposits held by Greek households and companies left the country in February, while in January about 5 billion euros of deposits were moved out, the Telegraph quoted figures from Bank of Greece as showing.

    Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis, the newspaper said.

    Subscribers should reference:

    From the Greek banking site, bankingnews.gr: [coarsely translated] Greek long bond investors - <a href="http://www.bankingnews.gr/ΟΛΑ-ΤΑ-ΝΕΑ/item/2159-Πουλάνε-ελληνικά-ομόλογα-και-οι-long-επενδυτ

    Published in BoomBustBlog
    Monday, 05 April 2010 00:00

    Easter Weekend News Update

    Canadian Dollar Too Strong? Bloomberg.com:

    • Minority opposition in Canadian Parliament is growing over strengthening Loonie
    • Leaders fear fallout in exports from CAD nearly at parity with USD
    • CAD strength is directly tied to Chinese commodity demand (is the CAD bubblicious, too?)

    Relevant BoomBustBlog content (we gave you an explicit warning of this in early January): China's Most Expensive Export: Price Inflation

    Ukraine is dangerously close to the brink http://www.bloomberg.com/apps/news?pid=20601095&sid=aNw4Q7ntlMqc

    • Ukraine is about to use up the remainder of a $16.4 billion IMF loan
    • Premier Mykola Arazov has applied for another loan to "reform the economy" (what the hell did they do with the first $16.4 billion?)
    • Ukraine has needed assistance to make good with about 20 lenders

    We have went through this in exquisite detail, both in the public sections of the blog and particularly in the subscriber-only content. See The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! Professional and institutional subscribers should carefully reference "Banks Exposed to CEE & SEE" while all paying subscribers should review the "Greek Banking Industry Tear Sheet".

    Published in BoomBustBlog

    Implied volatility for the big banks is down across the board, just about where it was before the system went into convulsions. This implies the coast is clear, as do the share prices of many banks.

    Hard core forensic and fundamental analysis implies otherwise. So does the Fed's actions, which still incorporates ZIRP policy, as well as the waffling at FASB. We will either have smooth sailing from this point on out or there is a nasty surprise waiting (on and off balance sheet) for bank investors in the near future. I invite readers to weigh in with their opinions.

    image001.png

    As you can see, we are just about where we were in 2007 in terms of average volatility.

    Published in BoomBustBlog

    On March 26, EU endorsed the proposal of extending aid to Greece (in case it faces shortage of funds to meet the refinancing and new debt requirements) wherein each euro nation would provide loans to Greece at bend over market rates based on its stake in the European Central Bank. EU would provide more than half the loans and the IMF would provide the rest. The official estimates for the size of the planned assistance have not been disclosed since it would depend on Greece's actual need. Erik Nielsen, Chief European Economist at GS, estimates Greece will need an 18-month package of as much as €25 billion, with the IMF providing about €10 billion of that. The French newspaper Le Figaro reports that German officials are estimating the total assistance of nearly €22 billion.

    Published in BoomBustBlog

    From Capital.gr: Moody's Downgrades Five Greek Banks

    Moody’s Investors Service said Wednesday it downgraded the deposit and debt ratings of five of the nine Moody’s-rated Greek banks due to a weakening in the banks’ stand-alone financial strength and anticipated additional pressures stemming from the country’s challenging economic prospects in the foreseeable future. [Moody's is late to the party, but their logic is solid, see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! followed by our forecast of the weaker vs. stronger Greek banks (premium content subscribers only) - File Icon Greek Banking Fundamental Tear Sheet]

    The affected banks are: National Bank of Greece (to A2 from A1), EFG Eurobank Ergasias SA (to A3/Prime-2 from A2/Prime-1), Alpha Bank AE (to A3/Prime-2 from A2/Prime-1), and Piraeus Bank (to Baa1/Prime-2 from A2/Prime-1). Moody’s has also downgraded the deposit and debt ratings of Emporiki Bank of Greece SA (to A3/Prime-2 from A2/Prime-1), but as a result of a reassessment of the credit enhancement associated with systemic support for this institution. The outlook on all five banks’ ratings remains negative. This action concludes the review of these banks initiated on 3 March 2010. [It looks as if Moody's peaked at the blog's subscription content :-)]

    Published in BoomBustBlog

    Ireland has finally admitted the horrendous condition of its banking system. I actually give the government kudos for this, and await the moment when the US, China and the UK come forth with such frankness. That being said, things are a mess, I have forewarned of this mess for some time now.First, the lastest from Bloomberg: Ireland's Banks Will Need $43 Billion in Capital After `Appalling' Lending

     

    March 31 (Bloomberg) -- Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds.

    “Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

    Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

    ‘Truly Shocking’

    The asset agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy. Lenihan said the information from NAMA on the banks was “truly shocking.”

    ...

    Capital Target

    Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent.

    AIB’s equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank of Ireland’s at 5.3 percent. Those ratios exclude a government investment of 3.5 billion euros in each bank, made at the start of 2009.

    ...

    Credit-default swaps insuring Allied Irish Bank’s debt against default fell 6.5 basis points to 195.5, according to CMA DataVision prices at 8:45 a.m. Contracts protecting Bank of Ireland’s debt fell 7 basis points to 191 and swaps linked to Anglo Irish Bank’s bonds were down 3.5 basis points at 347.5.

    Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improving perceptions of credit quality.

    State Aid

    If Allied Irish can’t raise enough funds privately, the state will step in with aid, Lenihan said. It is “probable” the government will then end up with a majority stake, he said.

    ...

    Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

    The premium investors charge to hold Irish 10-year debt over the German equivalent was at 139 basis points today compared with 284 basis points in March 2009, a 16-year high.

    Ireland’s debt agency said it doesn’t envisage additional borrowing this year related to the bank recapitalization. It is sticking to its 2010 bond issuance forecast of about 20 billion euros, head of funding Oliver Whelan said in an interview.

    “The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based fixed-income strategist at Societe Generale SA. [What is the logic behind this statement? Has the real estate market started increasing in value? Are the banks credits now increasing in quality? Will the stringent austerity plans of the government create an inflationary environment in lieu of a deflationary one for the bank's customer's assets???] “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.” [This is a circular argument. If the government raises taxes significantly in a weak economic environment, it will put pressure on the bank's lending consituents and the economy in general, presaging a possible furthering of bank losses!]

     

    and...

    Juckes Says Outlook `Frightening'
    March 31 (Bloomberg) -- Kit Juckes, chief economist at ECU Group Plc, talks with Bloomberg's Linzie Janis about the outlook for Ireland's banks after the government set out plans to revive the country's financial system.

    Now, notice how prescient my post of several months ago was, The Coming Pan-European Sovereign Debt Crisis:

    Published in BoomBustBlog