This mornings news flow is essentially a "Didn't Reggie tell us this in full detail up to two years ago" fest. Indebted Europe is falling apart for the new year just a day after the liquidity driven romp in equities. The Portugal T-Bill Yield Almost Doubles in Auction, from 3 months ago. The yield Portugal pays on its debt has increased 522% since this last year. This is after the Pan-European bailout fund was announced and implemented to put an end to such pressures. Alas.... The best laid plans. CNBC reports, as does Bloomberg:

Portugal sold six-month bills today, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year. The government debt agency, known as IGCP, auctioned 500 million euros ($665 million) of bills repayable in July. The yield jumped to 3.686 percent from 2.045 percent at a sale of similar maturity securities in September, with investors bidding for 2.6 times the amount offered. A year ago, the country paid just 0.592 percent to borrow for six months.

Yeah, this is sustainable. What is so interesting that mathematically, a default is definitely in the Portuguese cards, but the mains stream media does not drill down on this. Why? We, at BoomBustBlog have literally given away a complete mathematical analysis that shows the default happening - in real time, and for free. See The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History Tuesday, December 7th, 2010 and The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog Monday, December 6th, 2010. The line of default demarcation has been drawn in the sand t 2013, but does anyone truly believe that all of these deeply indebted states will float for that long. Could you imagine your interest rates rising over 500% and continue to climb during YOUR time of need?

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Our proprietary Sovereign Contagion model explicitly warned of Belgium issues as far back as June 4th, 2010. S&P is just now catching up, lowering its outlook on Belgium to negative.

S&P Lowers Outlook On Belgium To Negative Wall Street Journal

LONDON (Dow Jones)--Standard and Poor's Corp. lowered its ratings outlook on Belgium to negative from stable Tuesday, saying if the country fails to form a government within six months it could possibly face a one-notch downgrade. The ratings agency also affirmed the country's AA+ rating, the second-highest level, on a better-than-expected 2010 government budget outcome. However, the prolonged political uncertainty in the country poses a risk to its credit standing, "especially given the difficult market conditions many euro-zone governments are facing," it said.

The move is the first change S&P has made to Belgium's rating outlook since July 1992, when it first applied a stable outlook to the sovereign. The AA+ has been constant since first applied in Oct. 1988. The new outlook, along with the rating, puts Belgium on par with New Zealand in terms of S&P's ratings universe. "We view Belgium's political uncertainty as primarily evidenced by the prolonged delay in forming a federal government after the June 2010 general election, as well as the prolonged inability to form a key policy consensus across Belgium's linguistic divide," said Marko Mrsnik, credit analyst at S&P.

While on the topic... 'Belgium Has No Future' Spiegel Online

Six months after the general election, Belgium still has no new government. Flemish nationalist Bart De Wever, head of the country's largest party, wants to split Belgium into two states. In an interview that has caused a scandal in his country, he told SPIEGEL why the nation has "no future."

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From CNBC: Spanish Yields Climb at Auction, Pressure Continues

Spain was forced to pay a hefty premium at its final bond auction of the year on Thursday, in a key test of investor appetite for euro zone peripheral debt a day after Moody's said it may cut the country's rating.

The Spanish Treasury raised 2.4 billion euros ($3.20 billion), within the targeted range of 2-3 billion euros but disappointing some analyst who expected more debt to be sold.

Average yields on the two issues rose between 80 and 140 basis points from previous auctions of the same maturities.

That was a touch lower than what was expected according to trade in the secondary market ahead of the auction but analysts said the price paid by the Spanish government showed it remained at real risk of having to seek outside help next year.

"In the short term this should reduce pressure on the Spanish market, but I think when one looks at the bigger picture and considers the small amount sold, with low bid-covers, yet at a high yield, then it seems clear that peripheral markets remain under pressure and in need of support from policymakers," said Peter Chatwell, rate strategist at Credit Agricole in London.

Repeat "analysts said the price paid by the Spanish government showed it remained at real risk of having to seek outside help next year" - This was clearly illustrated and anticipated in Will Spain Default? The Answer Is Not Hard To Determine If You Take An Objective Look At The Numbers And Recent History! December 13th, 2010, to wit:

Spain is unique among the aforementioned group in that the amount of capital necessary to bail out this country is likely beyond the ken of the EU/IMF, and will likely assure a contagion effect. While it is true that Spain is not as indebted as the smaller periphery countries from a proportionate perspective, it is likely that it is not on a sustainable path and the efforts to make said path sustainable will may require restructuring/default, particularly if the smaller periphery states default.  Of course, Spain doesn’t necessarily see it his way, at least according to the mainstream media. From CNBC:

Spain Not Next in Line for EU Bailout: Finance Minister

Spain will not be next in line for a rescue package from Europe but a common economic policy is needed to support a single currency, Spanish Economy Minister Elena Salgado told BBC Radio on Friday.

This is a current snapshot of Spain as it stands now (excerpted from our subscription reportFile Icon Spain public finances projections_033010 and the online restructuring model - The Spain Sovereign Debt Haircut Analysis for Professional Subscribers):

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Having provided ample arithmetical evidence of the inevitability of a default of restructuring of the debt of

  1. Ireland (Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default…),
  2. Portugal (The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog),
  3. and Greece (),

it is now time to turn to Spain.  Spain is unique among the aforementioned group in that the amount of capital necessary to bail out this country is likely beyond the ken of the EU/IMF, and will likely assure a contagion effect. While it is true that Spain is not as indebted as the smaller periphery countries from a proportionate perspective, it is likely that it is not on a sustainable path and the efforts to make said path sustainable will may require restructuring/default, particularly if the smaller periphery states default.  Of course, Spain doesn't necessarily see it his way, at least according to the mainstream media. From CNBC:

Spain Not Next in Line for EU Bailout: Finance Minister

Spain will not be next in line for a rescue package from Europe but a common economic policy is needed to support a single currency, Spanish Economy Minister Elena Salgado told BBC Radio on Friday.

This is a current snapshot of Spain as it stands now (excerpted from our subscription reportFile Icon Spain public finances projections_033010 and the online restructuring model - The Spain Sovereign Debt Haircut Analysis for Professional Subscribers):

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There are more and more "professionals" in the mainstream media stating that they expect European defaults. What is interesting is that as there is at least a minority of pundits that are facing this inevitable event. European (and American) equity markets are still chuggling the global liquidity elixir awash in the markets and moving ever higher. From Bloomberg: Shrinking Euro Union Seen by Creditors Who Cried for Argentina

Nine months before Argentina stopped paying its obligations in 2001, Jonathan Binder sold all his holdings of the nation’s bonds, protecting clients from the biggest sovereign default. Now he’s betting Greece, Portugal and Spain will restructure debts and leave the euro.

Binder, the former Standard Asset Management banker who is chief investment officer at Consilium Investment Management in Fort Lauderdale, Florida, has been buying credit-default swaps the past year to protect against default by those three nations as well as Italy and Belgium. He’s also shorting, or betting against, subordinated bonds of banks in the European Union.

“You will probably see at least one restructuring before the end of the next year,” said Binder, whose Emerging Market Absolute Return Fund gained 17.6 percent this year, compared with an average return of 10 percent for those investing in developing nations, according to Barclay Hedge, a Fairfield, Iowa-based firm that tracks hedge funds.

He’s got plenty of company. Mohamed El-Erian, whose emerging-market fund at Pacific Investment Management Co. beat its peers in 2001 by avoiding Argentina, expects countries to exit the 16-nation euro zone. Gramercy, a $2.2 billion investment firm in Greenwich, Connecticut, is buying swaps in Europe to hedge holdings of emerging-market bonds, said Chief Investment Officer Robert Koenigsberger, who dumped Argentine notes more than a year before its default.

No disrespect intended to these fine gentlemen and distinguished investors, but the default of several of these states is simple math. You cannot take 8 from 10 10 from 8 and come up with a positive number. It really does boil down to being just that simple in the grand scheme of things. I actually released a complete road map of Portugal's default yesterday (see ), and today I will walk those who are not adept in the area through it with simple graphs and plain vanilla explanations.

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You don't need a "wikileaks.org" site to reveal much of the BS that is going on in the world today. A lot of revelation can be made simply by having motivated, knowledgeable experts scour through publicly available records. I'm about to make said point by showing that the proclamations of the ECB, IMF, the Portuguese government and all of those other governments that claim that Portugal will not default on their loans is simply total, unmitigated, uncut bullshit nonsense.

If you recall, I made a similar claim regarding the Irish government and posted proof of such, see Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… November 30th, 2010.

For those who wish to skip my market commentary and feel you may already understand how to interpret the output of the restructuring model, go straight to the haircut analysis by simply clicking this link and scroll to the bottom until you see the live spreadsheet. For the rest, let's start by looking at it from the German's perspective as reported in Bloomberg: Germany Snubs Pleas to Boost Aid, Sell Joint Bonds

Germany rejected calls to increase the European Union’s 750 billion-euro ($1 trillion) aid fund or introduce joint bond sales, signaling its refusal to bear extra costs to stamp out the debt crisis. With European finance ministers gathered in Brussels today for their monthly meeting, German Chancellor Angela Merkel rebuffed pleas from Belgium and central bankers to boost the emergency fund to save countries such as Portugal and Spain from falling prey to speculation. “Right now I see no need to expand the fund,” Merkel told reporters in Berlin. She said EU treaties bar joint bond sales, which might force up Germany’s borrowing costs, the lowest in the euro area. European political discord pushed down bonds in Spain and Italy today, reversing gains made last week after purchases by the European Central Bank briefly eased concern about the spreading crisis. The ECB bought the most bonds in a week since June, according to a statement today. The yield on Spain’s 10-year notes climbed 9 basis points to 5.08 percent as of 5 p.m. in London. Italy’s yield rose 7 basis points to 4.47 percent. The euro halted a three-session rally, dipping 1 percent to $1.3283.

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From CNBC: UK 'Vindicated' for Refusing Euro: Chancellor Osborne

Britain's decision of not joining the euro was vindicated by the crisis in the euro zone, as the countries in the single monetary union have lost control of their monetary policy, UK Chancellor of the Exchequer George Osborne told CNBC.

The UK did not join the euro because that would have meant giving up decision over interest rates and removing exchange rate flexibility, Osborne said in an interview late Tuesday.

"And, you know, I feel that our view has been vindicated by recent events, and I'm very pleased the UK's not part of the euro," he said.

Whaaaattt????!!!! That's not the way I remembered it. As I recall, a man with a proprietary investment style very similar to my own (see "The Great Global Macro Experiment, Revisited") George Soros warned the UK officials not to join the Euro and they ignored his advice.

[caption id="" align="alignnone" width="680" caption="From a Global Macro perspective, it is actually quite profitable taking the opposing side of Central Bank trades. They are inevitably always wrong! If one were to look at the track record of my public calls via BoomBustBlog over the last 4 years, this assertion is proven true without a shadow of a doubt."][/caption]

He then levered up against the pound as the UK tried to manipulate its currency to fit within the EMU's mandated band. The man reportedly made $1 billion off of that trade (which was a lot of money for a trade back in the '90s) and was labeled a villain. Methinks they should erect a shrine in homage of Soros in Trafalgar Square instead. It appears quite obvious that Soros was right and the UK government was wrong. Here's how Wikipedia puts it:

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The BoomBustBlog Ireland Haircut Model has been posted, and it is a doozy. For those who anticipate  the Euro being a slow train wreck, it may not be so slow after all. Professional and institutional subscribers can access it here as a live, spreadsheet embedded into a BoomBustBlog  web page. Users can subscribe or upgrade to gain access. The haircut model is SOOOO damn revealing that I can't keep it all to just site subscribers, thus I have pulled a few bits and pieces out for the general public.

As any who have been following me know, I believe that several European countries are bound to default, ie. restructure their debt. Ireland is in that camp. What makes me so sure about this? Well, its simple math. While I have calculated probable restructuring and haircut scenarios, I am not at liberty to put it out in the public domain just yet, but I can illustrate incontrovertible evidence that shows that Ireland is on an unsustainable path - a path made even more unsustainable by the recent bailout.

Let's take a look at the cumulated funding requirement of Ireland over the next 15 years.

As you can see, the amount Ireland would have to borrow to run the country (even after harsh and punitive austerity measures) is literally more (and substantially more) than the country's projected GDP. These GDP projections are (in part) IMF projections which I have already demonstrated to be grossly over optimistic, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!). As a matter of fact, the tab for Ireland is even greater AFTER the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! This is what happens when you try to save a debt laden country with more debt!

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As reported by Bloomberg: Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds

European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts.

An oxymoronic comment in and of itself since the market turmoil stems from excessive indebtedness of sovereign states and this event marks the dumping of $85 billion of debt on said indebted state.

European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.

If bond traders were a tad bit more fundamentally analytical in their perspective, they would realize that the Germans were simply being forthright and honest about an inevitable truth. With the current debt load, Ireland will most likely restructure its debt by 2013 anyway. The German proposal is actually a marked positive in that the restructurings (read, "haircuts") would be uniform, universally agreed upon ahead of time, standardized across the board and known by all market participants - basically a sovereign prepack bankruptcy deal. The so-called "bond traders" as referred to by the MSM, are apparently reported to prefer the anarchy of piecemeal, default as you go, restructurings with no standardized form or fashion. Argentina, here we come!

Is it that some believe that if they stick their heads in the European sand and ignore the problem it will go away in due time?

The first test of the twin decisions came as markets resumed trading after speculation intensified last week that Portugal and perhaps even Spain will require support.

If Ireland continues to have the problems that I believe they will have, not only will Spain and Portugal face their market comeuppance, but other European countries outlined in my Pan-European Sovereign Debt Crisis series as well.

I have been 100% correct year to date, much more so than the more widely publicized pundits, investment bank analysts and the IMF/EU themselves:

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Summary: The BoomBustBlog contagion model easily predicted the actions of the UK and Sweden in aiding Ireland 9 months ago. The model also has some dire predictions for the near future.

Ireland, like several other EMU states, is in a very difficult position. It has built up significant amount of debt on top of a crippled banking system of which it has decided to exchange taxpayer capital for private losses. Like many other EMU nations, it is overbanked, hence is literally dwarfed by both its banking system and the bad assets contained therein (see Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up??? November 22nd, 2010).

The ECB, EU, IMF and individual states UK and Sweden (in a bilateral agreement) have agreed to bailout Ireland and its mired banking system. It is interesting to note that there are actually individual countries that have volunteered (out of the goodness of their collective hearts) to assist Ireland outside the collective (UK and Sweden offer over €9bn in bailout loans). The secret of said generosity is in the charts.

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