Today's top MSM headline - European Commission Recommends Euro Banking Union:

The euro zone should move toward a banking union and consider recapitalizing its banks using its permanent bailout fund, the European Stability Mechanism, the European Commission said on Wednesday, in remarks that briefly boosted stocksand the euro

The European Union's executive arm said in documents laying out recommendations for theeuro [EUR=X  1.2422 (-0.51%)]area that the crisis had slowed the financial integration process and "ambitious steps to accelerate and deepen financial integration may be needed."

"More specifically, a closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of [the Economic and Monetary Union]," the European Commission said in the documents.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM might be envisaged," it added.

Hmmmm... BoomBustBloggers crossed this intellectual Rubicon over 2 years ago. I was explicit in explaining that the bulk of the sovereign nations' debt woes stem from thier feeble and failed attempts to prop up their banking systems. I posted a refresher to this thesis a few weeks ago in So, Can Europe Nationalize All Of Its Troubled Banks? 

In a discussion that I had over at ZeroHedge there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

Literally years later, the sell side is now chiming in: Banks No Longer 'Float Above Their Countries': Deutsche

Banks' countries of origin have become important again. 

No shit, Sherlock!!!

image015.png

 Most of the developed EU nations don't stand frozen raindrop's chance in hell of bailing out banking systems that are literally multiples of the GDP of the domiciles themselves. 

image009.png

The problems is getting worse over time, not better, as risk, leverage and unrecognized NPAs continue to pack the banking system. 

I warned heavily last year about the connection between overleveraged, garbage laden banks and over-indebteded sovereigns...

 

Just as in the case of my call on the fall of Bear Stearns (again, I believe I was the only to make such a call so far in advance), this situation consists of something you NEVER hear in the media or investment circles. This is not merely a liquidity crisis of even a solvency crisis. For the first time in recent history, it is BOTH!!! As a matter of fact, it's not just both. There is a another problem that came into play, and it is the direct result of tomfoolery at the hands of the sovereings themselves. The games that they played to assist the banks in hiding thier problems has materially weakened the entire financial system by sowing rampant mistrust. Plain and simple, government endorsed lying has made the entire system afraid to do business with itself. Let's walk through this step by step.

The Liquidity Issue 

From The BoomBustBlog BNP Paribas "Run On The Bank" series...  "As The French Bank Runs...."... Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!


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The solvency issues

From the research note to subscribersFile Icon The Inevitability of Another Bank Crisis followed by the free blog posts on the same, see Is Another Banking Crisis Inevitable?

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

And last but not least...

The credibility crisis, whose sole responsibility lies dead center on the sovereigns themselves...

 BNP_Paribus_First_Thoughts_4_Page_01

You see, as you bend the rules to reporting, you resuce the banks for a day, but doom them for a decade (or in the case of Japan, 2.4 decades!!!). Now, the counterparties simply CANNOT trust each other!

BNP_Paribus_First_Thoughts_4_Page_07

... and why should the counterparties trust each other when all are privvy to the games that they are playing on each other! 

BNP_Paribus_First_Thoughts_4_Page_09

Before government officials start crying innocent, remember the tricks that you youreselves have played to bring use where we are now. In case your memory is failing, simply review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 

Now, I ask all... How in the world will grouping all of these increasingly unmanageable individual soveriegn problems cure the overall problem. By gathering all of the roaches into a big pile, you don't get less roaches - you just get a big pile of roaches! The bank failures will increase in both speed and intensity as time progresses and the drag will simply engulf the EU as a whole versus engulfing the states individually. At least individually, the better run states will recieve less pressure, and suffer through crossborder and financial contagion and counterparty risk rather than through this pooled method wherein direct pipes of contagion are being engineered to transmit the problems deep within each country. Does it sound like a good idea to you? I have my own ideas, of course....

How To Prevent Bailouts, Bank Runs & Other Fun Things To Do With Your Hard Earned Dollars

Subscribers, see 

I really want my subscribers to focus on this European bank, for it is primed to implode between its heavy derivative exposure  AND its sovereing exposure - Haircuts, Derivative Risks and Valuation
 
Later posts today will review my recent opinions on this bank in a little more datail as well as the related insurer at risk. Tomorrow we revisit what I believe to be a near slam dunk CRE short. I post graphs and profit potential as well. 
Published in BoomBustBlog

Bloomberg reports Google’s Android Infringed Oracle’s Java, Jury Says:

Google Inc. (GOOG), the largest Web-search provider, infringed copyrights for Oracle Corp. (ORCL)’s technology in developing Android software running on more than 300 million mobile devices, a federal jury said.

The 12-member panel in San Francisco, however, was unable to come to a unanimous verdict on whether Google had made “fair use” of Oracle’s intellectual property.

The decision prevents Oracle from seeking damages for all but nine lines of computer code on Android, out of 15 million total lines, that the jury found were copied from Oracle, U.S. District Judge William Alsup said today. Oracle is seeking $1 billion in damages.

I'm far from an IP lawyer or anything of the sort, but it appears as if this registers as an epic #FAIL for team Oracle!

There has been zero finding of liability on copyright, the issue of fair use is still in play,” Alsup said after the verdict was read.

Google attorney Robert Van Nest asked Alsup to declare a mistrial, saying the issue of whether it’s liable for infringement is directly linked to the question of whether it was fair use. Alsup said he would consider Google’s request later. He ordered the patent phase of the case to begin.

The decision came in the copyright phase of an eight-week intellectual-property trial that began April 16 and next will shift to Oracle’s claims of patent infringement. A third phase, on damages, will follow the other two.

See also..

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

 

 

 

Published in BoomBustBlog

Vulture_Fights_Jackle_in_bubbleBelieve it or not, we actually have a mini-bubble within this bubble crash as vulture investors fight for the scraps disgorged by indebted sovereigns and over-leveraged banks. The time is not ripe just yet and I plan to allow the carrion feeders to price destruct amongst themselves as I await the coming interest rate storm which will truly bring about a once in a lifetime wealth creation opportunity.

Arguably, more millionaire money was made during the Great Depression than at any time in history. Well, if that's true then it looks as if history may be poised to repeat itself. The question is, who will be ready? I will discuss this live on RT's Capital Account show today at 4:30. 

Executive Summary

Asset sales by European sovereign nations, central and private banks have made global investors and speculators scour for cheap assets that have the potential to yield higher than average risk adjusted. However, the search process is not that easy, as sellers are adopting a ‘wait and see’ policy assisted by the European Central Bank’s facilitation of (extremely) cheap financing and liquidity measures. The market now witnesses by too many buyers chasing too few distressed assets. Hence the speculation about future returns has actually caused a mini-bubble in distressed asset prices. Professional subscribers should download the full version 

Asset sale by sovereigns is can be seen in the sale of stakes in government owned infrastructure assets and corporations. However, the approach adopted to dispose of these assets is to make partial sales in tranches in order to participate in any benefits of valuation recovery.

Professional and institutional subscribers should download the full version of this document (File Icon The BoomBustBlog Pan-European Distressed Asset Acquisition Initiative) which outlines investment opportunities in the following nation/banks: UK, Portugal, Italy, Cyprus, Greece, Ireland and Spain.  Our initiative runs the gamut from whole companies and equities, to real estate, infrastructure assets, rare earth and hard tangible assets to IP.

Dispositions by Europeans banks have consisted mostly of foreign assets outside of Europe. Most of these assets had the potential for high returns but are being offered at prices reflecting the perception that future investment performance would be robust. This is why there is so much interest in the private equity and asset management space in scanning for strong deals among those assets. However, the competition among these entities to buy quality assets at reasonable valuations has created a micro bubble of sorts, the type that make profitable vulture investing a very difficult proposition.

Sale of Sovereign Assets

Faced with mounting debt burdens, many European nations are under tremendous pressure to cut fiscal deficits

Related 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



by establishing and expanding austerity measures and reducing interest expenses. These nations include not only those faced with accelerating debt repayment obligations such as Greece, Italy, Spain, etc., but also some of the relatively better positioned countries – namely the United Kingdom and France.

In a bid to reduce accelerating debt burdens, many of these nations are selling their sovereign assets. We will probably see an even greater pool of sovereign asset sales as the futility of serially forced austerity drives the EU into a deep recession.

Even the Greek situation is just getting started, contrary to popular belief and the upcoming distress is not just CRE and RE assets that are available via fire sale, as clearly outlined two years ago in our subscriber (click here to subscribe) report 

File Icon Greece Public Finances Projections see pages 5 and 6 following... (click to enlarge)

 

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thumb_Greece_public_finances_projections1_Page_06

 

As a matter of fact, I warn those who do not subscribe to the BoomBust, this song is far, far from over... Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

Greece_Primary_balance

Greece is virtually guaranteed to re-default, with a structural imbalance that literally forbids the country from being able to service its debt, thereby chasing investors and bondholders with even remote access to a spreadsheet or calculator into the hills… Ne’er to return before the 720th fortnight!

It’s not just in the periphery either. The core states have some stress coming their way.


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Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

Interest rate volatility, at a bare minimum, is a given – with the potential for stagflation being the base case scenario…

 

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Interestingly, Chinese corporations are increasingly interested in European assets. There have already been a number of indicators to prove that while China is not as attracted to European sovereign bonds, there’s material interest in buying infrastructure assets; and interest in perceived attractively valued corporations has increased over the recent past. Seeing profitable investment opportunities, private equity firms and global leading funds have also joined in. This has created a kind of rush to search for attractively valued assets that could yield attractive returns in the years ahead. The current scenarios, as such, have been of  a kind wherein too many buyers are chasing too few assets up for sale, particularly in view of the fact that countries like Italy, the United Kingdom and to a lesser extent Spain, can bargain with time - unlike Greece, to wait for fair valuation of assets before their disposal. This has created a market of buyers and sellers wherein prices for distressed assets are not being determined by fundamental valuation, but are influenced by speculation and demand-supply gap. In essence, what we have amidst this bursting of the sovereign credit bubble is a mini-distressed asset bubble.

Professional and institutional subscibers should download the full version of this document (File Icon The BoomBustBlog Pan-European Distressed Asset Acquisition Initiative) which outlines investment opportunities in the following nation/banks: UK, Portigal, Italy, Cyprus, Greece, Ireland and Spain.  Our initiative runs the gamut from whole companies and eqiuities, to real estate, infrastructure assets, rare earth and hard tangible assets to IP.

Any who are interested in hearing more about this initiative can reach me via email or phone. All others are urged to follow me through my various social media assets:

  • Follow us on Blogger
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Published in BoomBustBlog

Last month I penned the piece Abu Dhabi & the UAE Can Leverage PetroDollar profits to capitalize on the plight of EU nations, wherein I announced that I was putting together an initiative to capitalize on the inevitable deleveraging of European (and soon Asian) banks and sovereign (as well as quasi-sovereign) nations. Those insititions and UHNW individuals who are interested in said initiative should click through and read the article and contact me afterward as there has already been significant indications of interest. I already have my analysts going through a plethora of opportunities, identifying hard assets first, and financial assets with deep, deep discounts in mind (100%+ cash on cash return within one year, unlevered).

As fate, and an adherence to viewing things analytically, would have it the opportunities may come to bear sooner than expected - to wit: European Banks Could Deleverage by $2.6 Trillion: IMF

A drastic contraction of European bank balance sheets during the next 18 months could jeopardise financial stability and economic growth, according to the IMF. The FT reports.

This is simply a reiteration of my warnings from as far back as 14 months ago, proffered in explicit detail, simple reference Is Another Banking Crisis Inevitable? (Attention subscribers: The subscription document is available as well The Inevitability of Another Bank Crisis)

Banks NPAs to total loans

Source: IMF, Boombust research and analytics

Euro banks remain weak as compared to their US counterparts

Later on today I will post the first of several documents to professional/institutional subscribers detailing what I have in mind in this potential asset grab.

Published in BoomBustBlog

In this followup to Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot I think we should get straight to the point - Anyone who doesn't believe that Portugal is clearly set up to for a bond route, and that it is seriously considering a default is either lying to themselves, believe human nature has changed, and/or really hasn't bothered to review the math. Here's proof of a Portuguese default presented with logic, numbers and pretty colorful graphs. The full spreadsheet behind all of the calculations, scenarios, bond holdings and calculations can be viewed online here (click this link) by professional level subscribers. Click here to subscribe or upgrade.

For one, we are on up to the 3rd Greek Bailout (Portugal has only received one hence it could be getting envious:-)). Portugal has had extreme austerity measures inflicted upon it. So extreme that it has materially and significantly depressed the economy. Portugal's GDP growth contracted even further by 1.3% q/q in Q4. Its HICP Moderated to 3.4% y/y in January. Very high unemployment (currently at 14% and rising), weakening wages, and a total dearth of credit to businesses and households (do you really think bond-busted banks are lending to and within Portugal like the good 'ole days) will lead to a downward spiraling self-fulfilling prophecy that is the antithesis of what appears to be driving all of those rosy estimates behind reports that Portugal won't default. I do mean rosy, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for examples. Let it be known that instead of growing the economy out of the doldrums, Portugal's austerity measures will push it down the drain.
It's gotten so bad that even the rating agencies are on board the truth train (Rating Agencies vs Reggie Middleton, Part 3). After Moody's downgraded Portugal, all three major agencies have it at junk, of course a year later than said information would have been useful. The massive liquidity injections by the ECB have prevent the market from imploding, but has also failed to rectify the problem, rather they simply feed the appetite of an addicted pig in the form of banks and sovereigns that rely on cheap/free money without the requisite market disciplines of risk wieghting and respect for the cost of capital.

Due to total reliance on funny munny from the ECB, required due to the lack of external financing avialable from the markets (unless Portugal defaults/restructures and starts from scratch, which is inevitable anyway) the Portuguese machine will still be in arrears accumulation mode - a mode which is essentially unsustainable.

Despite what I see as practically unassailable facts, the MSM is still steadfastly and unrealistically bullish, as per Bloomberg, Portugal Bond Rout Overstates Greek Likeness. Well, the Portugal Bond Yield is at 13% Despite Greek Deal - that's right, the 3rd Greek deal and one that include 74% haircut!!! Portugal will default/restructure and there's a very, very strong chance that right behind them will be Spain and then Greece again. That's right, Greece, again! 

Who was right about the Greek default, running against the consensus two years ago? See 2010 posts - Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and then A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina. In The Anatomy of a Portugal DefaultA GraphicalStep by Step Guide ... I walked through the financial tangle that is Portugal about two years ago, as excerpted.

This is the carnage that would occur in the OPTIMISTIC if the same restructuring were to be applied to Portugal today.

Yes, it will be nasty. That 35% decline in cash flows will be levered at least 10x, for that is how much of the investors in these bonds purchased them. A 35% drop is nasty enough, 35% x 10 starts to hurt the piggy bank! As a matter of fact, no matter which way you look at it, Portugal is destined to default/restructure. Its just a matter of time, and that time will probably not extend past 2013. Here are a plethora of scenarios to choose from...

This is Portugal's path as of today.

Even if we add in EU/IMF emergency funding, the inevitability of restructuring is not altered. As a matter of fact, the scenario gets worse because the debt is piled on.

Well, I took said model and updated it with recent historical GDP results as well as projections which incorporated the most recent developments. Do you think things look better or worse?

This is what Portugal's situation looks like today...

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The Portuguese bond yield has spiked since the Greek deal. Methinks Mr. Credit market (who is much wiser than Mr. Eqiuity market, probably due to the increased difficulty in manipulating Mr. Credit's demeanor) seems to agree with Reggie...

image011
These are the Portuguese bonds used in the calculations. Professional subscribers can access the full model and all of the stuff that went into it via the link at the bottom of this article - Introducing the Not So Stylish Portuguese Haircut Analysis.
Issuer Issue date Maturity Amt Out(M) Interest Due(M) Years to maturity Coupon rate
Portugal Treasury Bill 07/17/09 7/23/2010 4.50 0.00 -1.64 0.000%
Portugal Treasury Bill 09/18/09 9/17/2010 2.75 0.00 -1.49 0.000%
Portugal Treasury Bill 11/20/09 11/19/2010 3.10 0.00 -1.31 0.000%
Parpublica - Participacoes Publicas SGPS 12/16/05 12/16/2010 0.51 0.01 -1.24 2.690%
Portugal Treasury Bill 01/22/10 1/21/2011 2.05 0.00 -1.14 0.000%
Portugal Treasury Bill 02/19/10 2/18/2011 2.35 0.00 -1.06 0.000%
Portugal Treasury Bill 03/19/10 3/18/2011 2.03 0.00 -0.99 0.000%
Portugal Obrigacoes do Tesouro OT 11/16/05 4/15/2011 4.67 0.15 -0.91 3.200%
Portugal Obrigacoes do Tesouro OT 03/13/01 6/15/2011 4.96 0.26 -0.74 5.150%
CP - Comboios de Portugal EPE 02/26/02 2/26/2012 0.25 0.00 -0.04 0.990%
Portugal Obrigacoes do Tesouro OT 02/13/02 6/15/2012 7.64 0.38 0.26 5.000%
Portugal Government International Bond 08/28/09 8/28/2012 0.41 0.00 0.46 2.400%
Parpublica - Participacoes Publicas SGPS 07/08/09 7/8/2013 0.80 0.03 1.32 3.500%
Polo III-CP Finance Ltd 07/29/03 7/29/2013 0.10 0.00 1.38 4.500%
Ana-Aeroportos de Portugal SA 08/28/09 8/28/2013 0.10 0.00 1.46 4.050%
Portugal Obrigacoes do Tesouro OT 05/22/98 9/23/2013 7.16 0.39 1.53 5.450%
Portugal Obrigacoes do Tesouro OT 10/29/03 6/16/2014 6.00 0.26 2.26 4.375%
Polo Securities II Ltd 06/26/02 6/26/2014 0.31 0.00 2.29 2.880%
ANAM - Aeroportos da Madeira SA 07/29/04 7/29/2014 0.05 0.00 2.38 5.340%
Parpublica - Participacoes Publicas SGPS 10/15/04 10/15/2014 0.50 0.02 2.59 4.191%
Portugal Obrigacoes do Tesouro OT 06/03/09 10/15/2014 5.32 0.19 2.59 3.600%
Portugal Government International Bond 11/17/09 11/17/2014 0.08 0.00 2.68 3.064%
Parpublica - Participacoes Publicas SGPS 12/18/07 12/18/2014 1.02 0.03 2.77 3.250%
Refer-Rede Ferroviaria Nacional SA 03/16/05 3/16/2015 0.60 0.02 3.01 4.000%
Portugal Government International Bond 03/25/10 3/25/2015 1.02 0.04 3.03 3.500%
Polo III-CP Finance Ltd 07/29/03 7/29/2015 0.30 0.01 3.38 4.700%
Portugal Obrigacoes do Tesouro OT 07/13/05 10/15/2015 7.64 0.26 3.59 3.350%
Portugal Government International Bond 10/24/86 5/20/2016 0.18 0.02 4.19 9.000%
Portugal Government International Bond 05/20/86 5/20/2016 0.18 0.02 4.19 9.000%
Portugal Obrigacoes do Tesouro OT 07/17/06 10/15/2016 5.00 0.21 4.60 4.200%
Portugal Obrigacoes do Tesouro OT 05/03/07 10/16/2017 6.08 0.26 5.60 4.350%
Portugal Obrigacoes do Tesouro OT 03/04/08 6/15/2018 6.27 0.28 6.26 4.450%
Refer-Rede Ferroviaria Nacional SA 02/18/09 2/18/2019 0.50 0.03 6.94 5.875%
Portugal Obrigacoes do Tesouro OT 03/03/09 6/14/2019 6.86 0.33 7.26 4.750%
CP - Comboios de Portugal EPE 10/16/09 10/16/2019 0.50 0.02 7.60 4.170%
Portugal Government AID Bond 03/08/90 2/25/2020 0.01 0.00 7.96 1.520%
Portugal Obrigacoes do Tesouro OT 02/17/10 6/15/2020 5.26 0.25 8.26 4.800%
Parpublica - Participacoes Publicas SGPS 09/22/05 9/22/2020 0.50 0.02 8.54 3.567%
Parpublica - Participacoes Publicas SGPS 12/28/05 12/28/2020 0.15 0.00 8.80 2.423%
Portugal Obrigacoes do Tesouro OT 02/23/05 4/15/2021 7.08 0.27 9.10 3.850%
Refer-Rede Ferroviaria Nacional SA 12/13/06 12/13/2021 0.50 0.02 9.76 4.250%
Portugal Obrigacoes do Tesouro OT 06/10/08 10/25/2023 6.53 0.32 11.63 4.950%
Refer-Rede Ferroviaria Nacional SA 10/16/09 10/16/2024 0.50 0.02 12.60 4.675%
Refer-Rede Ferroviaria Nacional SA 11/16/06 11/16/2026 0.60 0.02 14.69 4.047%
Parpublica - Participacoes Publicas SGPS 11/16/06 11/16/2026 0.25 0.01 14.69 4.200%
CP - Comboios de Portugal EPE 03/05/10 2/5/2030 0.20 0.01 17.91 5.700%
Portugal Obrigacoes do Tesouro OT 03/22/06 4/15/2037 6.97 0.29 25.11 4.100%
Governo Portugues Consolidado 01/01/40 1/29/2049 0.00 0.00 36.91 3.987%
Governo Portugues Consolidado 02/01/42 2/28/2049 0.01 0.00 36.99 2.997%
Governo Portugues Consolidado 03/15/43 3/29/2049 0.00 0.00 37.07 2.764%
Governo Portugues Consolidado 12/01/41 12/29/2049 0.00 0.00 37.82 3.520%
Published in BoomBustBlog

Today's big headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to hear, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks? Is the "pass[ing] it on the the economy" the reason why there is now so much liquidity in European CRE? Here's a quick reminder of where I stand on this...

So, it's safe to say that all of those European REITs and real estate concerns with property mortgages coming up for renewal while underwater will definitively see most of that LTRO 2 money, right? Let's all take a deep breath and hold it as we wait for that one to happen. Ready? One... Two... Three...

What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21Slide21Slide21Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

 

Reggie Middleton Featured in Property EU, one of Europes leading real estate publicatios

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Published in BoomBustBlog

As global equity markets gap downward the trading day after I suggested Watch The Pandemic Bank Flu Spread, can kicking will get progressively harder from this point on. As I have said in my many interviews, the only way out of this is debt destruction, which will crush big European banks leveraged up on debt marked at par of close enough to it.

reggie_on_RT

 

Having made clear that default was the only way out, Iceland has once again proven me correct. And just to jog the memory, I made it clear that default was the only way out nearly two years ago...

Online Spreadsheets (professional and institutional subscribers only)

Bloomberg reports: Iceland May Hold Krona Auctions Within Weeks

The island, whose banks defaulted on $85 billion in 2008, is moving into the final stages of its resurrection plan as the last vestiges of crisis management are gradually removed. Iceland’s decision, taken together with the International Monetary Fund, to impose capital controls three years ago was key to surviving the bleakest moments of the crisis and helped prevent an all-out run on the island’s assets, Gudmundsson said.

“Without the capital controls it would have been much more difficult to ensure stability in the exchange rate, calling for much higher interest rates and an inability to shelter the domestic economy as well as we did,” he said. “With the turbulence in the international markets lately, the capital controls have sheltered Iceland considerably, since there’s no way of doing a run on the financing of the Icelandic state or the financing of the Icelandic banks.”

It is clear that capital controls are coming to the EU, and I'm sure there already in place in some form or fashion. It is quite ironic how the so-called "in the know" pundits alleged that Iceland would be osctrazied from the captial markets for defaulting when they are the ones actually returning to the markets as the TPTB in the EU are being shunned. Just default already and get it over with, or you just may find yourself working for an Icelandic boss momentarily... You can try to save all of your banks and end up saving no banks at all, or you can go the logical route - the route that Iceland democratically allowed their populace to choose, which also so happened to be the right way. Hmmm... Democaracy! Capitalism! We just don't seem to be seeing those concepts in the Euro area much these days...

Outperforming Euro Area

Iceland’s economy will grow faster than the euro-area average this year and next, the IMF estimated in September. The cost of insuring against an Icelandic default, using credit default swaps, is lower than the average for the euro area.

Iceland’s economy will grow 2.5 percent this year and next, versus 1.6 percent in the euro area this year and 1.1 percent in 2012, the IMF said Sept. 20. Next year, Iceland’s current account surplus will widen to 3.2 percent of the economy and unemployment will be 6 percent, versus 9.9 percent joblessness in the euro area, the fund said.

The stabilization of the island’s economy has allowed the central bank to press ahead with capital liberalizations that the government estimates won't be fully dropped until 2013. The approach allows foreign investors eager to offload their krona holdings to transfer them to foreign or local investors willing to commit long-term to the island, according to the central bank.

'Nuff said. Now, on to my other premonitions, predilections and predictions for which my subscribers pay me so dearly for... CNBC reports Moody's Warns On French Rating Outlook

A rise in interest rates on French government debt and weaker growth prospects could be negative for the outlook on France's credit rating, Moody's warned in a report on Monday, adding to pressure on European debt markets.

Worries that France has the weakest economic fundamentals among the euro's six AAA-rated countries have drawn the euro zone's second largest economy into the firing line in the debt crisis this month.

The rating agency said the deteriorating market climate was a threat to the country's credit outlook, though not at this stage to its actual rating.

"Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated Nov.21.

"As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France's creditworthiness and the stable outlook (though not at this stage the level) of the government's Aaa debt rating," the Moody's note read.

The yield differential between French and German 10-year government bonds rose above 200 basis points last week, a new euro-era high.

Moody's said that at that spread level, France pays nearly twice as much as Germany for long-term funding, adding that a 100 basis point increase in yields roughly equates to an additional three billion euros in yearly funding costs.

In early Monday trade, the French 10-year spread was up about 20 basis points at 167 bps following publication of Moody's report but remained well short of the 202 bps hit last week.

The CAC 40 index, which was down 1.7 percent in opening trade, was down 2.2 percent after an hour of trade.

"With the government's forecast for real GDP growth of a mere one percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult," Moody's said.

On Oct 17, Moody's said it could place France on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget.

"The French social model cannot be financed if the French economy's potential is not preserved.

... The stress on banks' balance sheets can lead to further increases of liabilities on the government's balance sheet when further state support to banks is needed, it added.

The events are unfolding like clockwork. Just go back a few months - or a year - or two years - in the BoomBustBlog archives for the Eurozone topic...

Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter

When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

So, does BNP have a funding problem, or is it at risk of the same?

BoomBustBlog subscribers know full well the answer to this question. I'm also going to be unusually generous this morning being that our prime French bank run candidate has approached my "crisis" scenario valuation band. So, as to answer the question as to BNP, let's reference File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers, and otherwise known as BNP Paribas, First Thoughts...

The WSJ article excerpted above quotes BNP management as saying: "The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks."

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:

BNP_Paribus_First_Thoughts_4_Page_01 

The following two pages of this report go on to reveal the games being played to potentially come up with a figure such as the 135 billion quoted above. Boys and girls, I fear those may be Lehman bucks! 

For those not familiar with the banking book vs trading book markdown game, I urge you to review this keynote presentation given in Amsterdam which predicted this very scenario, and reference the blog post and research of the same:

CNBC and Bloomberg report S&P to Update Bank Credit Ratings Within 3 Weeks. You know that means (or at least should mean)... Next stop of the bank flu express... Germany!

I may post an update on German banks in a week, but I want subscribers to remember that if when things really kick off, this is going to be an explosion that no one said they expected but will blow everybody's ears out - posted behind the paywall well over a month ago and still priced inexpensively relative to those other banks: Blowup Bank - Haircuts, Derivative Risks and Valuation

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CNBC reports: France and Germany Clash Over ECB Crisis Role

France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets. 

Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.

BoomBustBlog readers and subscribers saw this coming a mile away. The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue. Reference the series:

The Italian problems were brought to the Attention of BoomBustBlog subscribers over a year and a half ago (subscribers reference  Italy public finances projection from March of 2010) and each of the major Italian banks undergoing major distress righ now were identified and outlined over a year and a half ago as well, when their share prices were multiples of what they are now. Subscribers should reference Italian Banking Macro-Fundamental Discussion Note.Long term puts and shorts on these banks (you could've simply closed your eyes and picked two or three) would have made any fund manager's year. Those who don't subscribe can still see the aftermath, after the fact, as referenced by Bloomberg... UniCredit Trades as Junk With $51B Due

Bonds of UniCredit SpA (UCG), the Italian bank that posted a surprise 10.6 billion-euro ($14.3 billion) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year.

Fixed-income investors are pricing the Milan-based lender’s bonds at levels that imply a rating of B1, four levels below investment grade and eight steps lower than its A2 ranking, according to Moody’s Analytics. The 13.4 billion euros of UniCredit debt securities that are contained in Bank of America Merrill Lynch’s Euro Corporates Banking index have lost 2.8 billion euros since the start of June.

UniCredit, Italy’s biggest bank, has the highest amount of bonds maturing in 2012 by a major European lender, according to data compiled by Bloomberg. Concern that Italy will struggle to cut Europe’s second-highest debt load and tame the sovereign crisis drove the country’s debt yields to euro-era records, infecting UniCredit’s 40 billion euros of Italian bonds.

Yeah, right! "Surprise" , "loss". Interesting terms considering the warning was given a year and a half ago. Those damn non-BoomBustBlog subscribers... So, where goes Italy, so follows France...After Warning Of Italy Woes Nearly Two Years Ago, No One Should Be Surprised As It Implodes Bringing The EU With It - or  Focus on Greece? No! How About Italy? No! It's About Baguettes, Mes Amis! See also, When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

The Catch 22 is that Germany's woes are not that far detached from France's, yet it appears that they do not see this. I reiterate, then query again - Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! This is a Pan-European sovereign debt crisis, not a southern or western European sovereign debt crisis. The countries fates are inextricably linked.

And for those who believe what Fed Member Bullshitterard said, at least according to CNBC: European Debt Crisis Unlikely to Impact US: Fed's Bullard, I refer you to my extended, self-answered query, "Is The Entire Global Banking Industry Carrying Naked, Unhedged "Risk Free" Sovereign Debt Yielding 100-200%? Quick Answer: Probably! " I place this stamp on Bullard's comments...

grade_a_bullshit_alert_trans

If you really want to know the truth, simply read my post from yesterday, Squids, Morgans & Counterparty Risk: Blowing Up The World One Tentacle At A Time

Bond market turmoil is spreading across Europe. Italian 10-year bond yields have risen above 7 percent, unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria — which along with Germany form the core of the euro zone — have also climbed.

Asian shares and the euro fell further on Thursday as doubts deepened about Europe's ability to stop its sovereign debt crisis from spinning out of control.

MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2 percent, while Japan's Nikkei stock average opened down 0.5 percent.

The euro  hovered near five-week lows against the dollar, trading not far off Wednesday's trough around $1.3430, a low not seen since Oct. 10.

"The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe," French government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris.

French Finance Minister Francois Baroin repeated Paris's view that the euro zone's EFSF bailout fund should have a banking license, something Berlin opposes. Such a move would allow the fund to borrow from the ECB, giving it extra firepower to fight the spreading crisis.

"The position of France ... is that the way to prevent contagion is for the EFSF to have a banking license," Baroin said on the sidelines of an awards ceremony.

But German Chancellor Angela Merkel made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action.

"The way we see the treaties, the ECB doesn't have the possibility of solving these problems," she said after talks with visiting Irish Prime Minister Enda Kenny.

The only way to recover markets' confidence was to implement agreed economic reforms and build a closer European political union by changing the EU treaty, Merkel said.

ECB policymakers continue to reject international calls to intervene decisively as Europe's lender of last resort, stressing that it is up to governments to resolve the debt crisis through austerity measures and reforms.

However, many analysts believe such a move now represents the only way to stem the contagion, despite the potential risk of inflation from printing money.

Short Respite

Traders said the ECB bought Spanish and Italian bonds on Wednesday, but the respite was short and there was no sign of a change in its policy of limited, stop-go purchases to calm markets temporarily while maintaining pressure on governments.

Fitch Ratings warned it might lower its "stable" rating outlook for U.S. banks because of contagion from problems in troubled European markets. 

But didn't Fitch here what Fed Member Bullshitterard said??? What's the problem? Are those Fitch guys reading BoomBustBlog now??? Tired of the HPA non-sense (as in [residential] housing perpetual price appreciation). Yep! Those guys from Fitch justified their AAA ratings on Bullshit based upon the concept of prices in housing increasing at XX% per year, FOREVAAAAH!!!! You thought I forget about that, guys???

grade_a_bullshit_alert_trans

Back to CNBC's article...

The size and mood of the rally, the first big protest in almost a month, will signal just how bitterly a restive public will fight further tax rises and spending cuts that international lenders demand in return for a massive bailout.

Greece's main conservative leader Antonis Samaras has refused to bow to EU demands for a written commitment to the bailout program and called for elections in three months to restore social peace.

New data showed that Greece's austerity-fuelled recession had widened the budget deficit in October, the government failing to boost revenues despite unpopular new taxes.

ECB President Mario Draghi has said the 17-nation currency bloc will be in a mild recession by the end of the year, making it tougher for governments to put their finances in order, and Europe's debt crisis is also increasing strains in the money market, the plumbing of the international financial system.

Euro zone banks are finding it harder to obtain dollar funding. While the stresses are nowhere the levels of the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.

Published in BoomBustBlog

With all due respect to that Nassim Taleb dude who popularized the term "Black Swasn", Black Swan events are both overrated and the term is sloppily bandied about by those who may not be putting the requisite thought into just how utilitarian the knowledge of Black Swans actually are. Since you can't accurately predict, nor back test against, nor adequately hedge against such events, exactly what good is a Black Swan discussion. Well, I can answer that question. Black Swan events do maximum damage when the economic cycle is at its weakest. In Reggie Middleton's Economic Circle of Life (think the Lion King) it is the right portion of the circle in which Black Swan events do the most damage.

Actually, it is not the Black Swan events themselves that do the damage but said event do serve as the catalyst that either bust a bubble that was waiting to pop anyway, or break a structure that was hobbling along on one leg as it was  - where we happen to be now in many places of the developed world - sans rampant propaganda, misinformation and disinformation from less than disinterested sources.

I have always been of the contention that the 2008 market crash was cut short by the global machinations of a cadre of central bankers intent on somehow rewriting the rules of economics, investment physics and global finance. They became the buyers of last resort, then consequently the buyers of only resort while at the same time flooding the world with liquidity and guarantees. These central bankers and the countries they allegedly strive to serve took on the debt and nigh worthless assets of the private sector who threw prudence through the window during the "Peak" phase of the circle of economic life, and engaged in rampant speculation. Click to enlarge to print quality...

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I read this headline from the Financial Times and said to myself, "Okay Reg, Don't say 'I told you so'". Thus, you won't hear it from me, at least not this time. As reported today in the Financial Times: Goldman reveals fresh crisis losses and Goldman’s republished results present a new picture

Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.

Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs??? and I did it without being privvy to Goldman's financial innards. It was more or less common damn sense. Goldman and its employees do not walk on water, they do not shit gold, and they cannot perform miracles. If one takes an objective approach to their equity analysis, and simple plug the numbers into a spreadsheet (objectively) you would have come up with the exact same conclusions that I gave my subscribers all of these years. Let's reminisce, shall we?

So, what is GS if you strip it of its government protected, name branded hedge fund status. Well, my subscribers already know. Let’ take a peak into one of their subscription documents (Goldman Sachs Stress Test<br /> 	Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb - 131 pages). I believe many with short term memory actually forgot what got this bank into trouble in the first place, and exactly how it created the perception that it got out of trouble. The (Off) Balance Sheet!!!

image001.png

Contrary to popular belief, it does not appear that Goldman is a superior risk manager as compared to the rest of the Street. They may
the same mistakes and had to accept the same bailouts. They are apparently well connected though, because they have one of the riskiest
balance sheet compositions around yet managed to get themselves insured and protected by the FDIC like a real bank. This bank’s portfolio looked quite scary at the height of the bubble.

And back to the FT article...

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