I have been warning of this potential in Spain for nearly two years (January of 2009, reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank after a trip to the Costa del Sol by way of Málaga). I will spend the Thanksgiving holidays working on the Irish and Spanish haircut updates and fine tuning the contagion model for subscribers and I will attempt to publish the analysis in a very rich format (with dynamic models, graphics, video, etc. on BoomBustBlog, Barnes and Noble Nook/Kindle via ebook format, and through YouTube) On that note, Bloomberg reports: German Chancellor Angela Merkel said the prospect of serial European bailouts was “exceptionally serious,” sending the euro to a three-month low as officials estimated saving Ireland will cost 85 billion euros ($114 billion).
Irish bonds dropped and the premium that investors demand to hold Spanish debt over German counterparts jumped to a euro- era record as the relief rallies triggered by Ireland’s Nov. 21 aid request evaporated. Traders are now betting the turmoil that started in Greece a year ago will spread to Portugal and Spain.
“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis,” Charles Diebeland David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, said in a note today. “With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole.”
Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to save its banking system. The European Commission estimates Ireland may need 85 billion euros, according to two officials who were on a Nov. 21 conference call of finance ministers. Of the total, 35 billion euros would go to banks and 50 billion euros to help finance the government.
The euro dropped 1.8 percent to $1.338 as of 4:55 p.m. in London. The yield on Ireland’s 10-year bond rose 35 basis points to 8.65 percent. The spread on Spanish 10-year bonds over bunds rose 28 basis points to 236 basis points.
Merkel today chose to highlight the risks facing the euro even as bailout talks destabilize Ireland’s government. Speaking in Berlin, she said while she didn’t want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe. The German leader is stressing the threat to the euro posed by indebted member countries and is pushing German plans to make investors help pay for any future crisis in the currency area.
“I won’t let up on this because otherwise that primacy of politics over finance can’t be enforced,” Merkel said. “It remains our task to keep calling for tough measures and tough conditions, but also to express clear support for the euro.”
Merkel’s stance has drawn opposition from European Central Bank President Jean-Claude Trichet and leaders in Spain and Greece, who say it risks derailing euro-area nations’ deficit- cutting efforts.
In other words, Merkel is being too damn honest and forthright in her public pronouncements. So be it. This is an excerpt of what we used to prep and warn paying subscribers regarding Spain since the beginning of the year (excerpted from Spain public finances projections_033010):
In January of 2009 (reference Reggie Middleton on the New Global Macro – the Forensic Analysis of a Spanish Bank ), and after a trip to the Costa del Sol by way of Málaga I became highly suspicious of the spillover effects of bubble credit and excessive reliance on construction that the European nations had and absorbed from the private sector banks. At first this was focused on Spain, but then my team of analysts and I widened our scope to all of Europe, and found that there was a contagion waiting to manifest. This was a full year and a half before most even admitted there was a pandemic problem (and to this day, there are still some naysayers). Here's a quick time line and link fest of all of the misunderstandings, misinformation, disinformation and outright lies that have led us up to this point...
Around February 7, 2010, many sell side analysts and geo-political pundits stated that there was no European sovereign debt "crisis", not to mention a "pan-European" crisis. I responded with The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, , not a localized not a, not localized one. Of course, this was absolute blasphemy within the circles of those smart guys who knew what they were talking about. I then went on with What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect and followed up with:
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.
More and more "experts" on the matter explained how the situation is overblown- Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
Summary: This is an extensive post designed for those who want to truly comprehend what I perceive to be both the root causes and the practical solution to the Irish sovereign debt problems and the threat of Pan-European, or possibly global, financial and economic contagion. It contains a lot of applied concepts that veer outside of the realm of finance and economics and into human nature and psychology - alas, that is what I consider reality. For those that wish to skip to the pure financial aspects of why I believe Ireland is destined to default (and how they are hiding debt with the complicity of other parties), scroll down to "Real World Examples of the Social Science Concepts Above". To get the full gist of what is going on, continue reading below. I will continue this post within 24 to 48 hours with our calculation of Irish sovereign debt haircuts and some likely contagion effects.
Ireland did not rule out the possibility of turning to the European Union for help, while an Irish newspaper reported that the Prime Minister may approach Brussels as early as Tuesday.
The Irish Independent said Finance Minister Brian Lenihan may ask his European counterparts in Brussels on Tuesday if it would be possible to funnel funds into Irish banks which he has already promised to pump up to 50 billion euros ($68.38 billion) into.
"There is no question about Irish sovereign debt - the question remains about the funding of the banks. The banks are having trouble getting money," the newspaper quoted the source as saying.
"We have to find out - could you go to the fund and get money for the banking sector? Lenihan at ECOFIN presents an opportunity to discuss it. It would be the banks that would have to pay it back - not the state."
The total amount of outstanding European Central Bank loans owed by Irish banks rose to 130 billion euros as of Oct 29 from 119 billion on September 24, data published on the Irish central bank's website showed on Friday.
As if BoomBustBlog subscribers didn't see this coming a mile and a year away - Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! I will be reviewing and adding to my extensive work on the Pan European Sovereign Debt Crisis this week since that situation is about to explode. I will also reveal the likely haircuts to be taken on Irish debt as well with the publication of our Irish haircut model. Remember how nasty those Portuguese haircuts looked - Introducing the Not So Stylish Portuguese Haircut Analysis???
You think those are ugly? You ain’t seen nothing yet!
In the meantime I suggest that paying Subscribers review our Irish analysis and related contagion material:
As predicted in May, DB honors its obligation to flush good shareholder capital down the toilet. Deutsche Bank Plans to Raise at Least $12.4 Billion, Bids to Buy Postbank
Sept. 13 (Bloomberg) -- Deutsche Bank AG, Germany’s largest bank, plans to raise at least 9.8 billion euros ($12.5 billion) in its biggest-ever share sale to take over Deutsche Postbank AG and meet stricter capital rules.
Deutsche Bank expects to offer between 24 euros and 25 euros a share in cash to Postbank stockholders to increase its 29.95 percent stake in the lender, the Frankfurt-based bank said yesterday. The company intends to book a charge of about 2.4 billion euros in the third quarter as it marks down the value of its existing Postbank holding.
Chief Executive Officer Josef Ackermann is planning the biggest rights offer in Europe this year as he seeks to reduce Deutsche Bank’s dependence on investment banking by gaining control of Postbank, a consumer lender based in Bonn. The capital increase will also help Deutsche Bank meet new rules from global regulators that more than doubled banks’ capital ratios.
Update: This just in, Anglo Irish Will Be Split Into Two Banks With Portion Wound Down or Sold.Talk about timely articles. The reason the bank was split is actually explained in a few lines down in this post - an attempt to prevent a run on the bank while in run-off mode. Now, do we get to see what's under the hood? Cause if we do, expect more splits from a UK bank near you!
We can only warn about Ireland so many times (It's been done nearly monthly since January), with the latest iteration coming just a week ago in the form of "I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!" Ireland has captured headlines TWICE since then. It appear that the mainstream media is catching on, but are they missing the forest because of all of that bark in the way? First, this story from Bloomberg: Ireland Default Swaps Surge to Record on Bank Funding Concerns:
Sept. 8 (Bloomberg) -- The cost of insuring against losses on Irish sovereign debt surged to a record on concern the government will struggle to support the nation’s banks.
Investors are losing confidence in the ability of governments to absorb mounting costs from bank bailouts. Ireland’s cabinet is today discussing the future of nationalized Anglo Irish Bank Corp., which last week said it needs about 25 billion euros ($32 billion) in state funding.
“The problems of Irish banks are seen as the problems of Ireland,” said Zoso Davies, a credit strategist at Barclays Capital in London. “The market is focused on debt coming due at Irish banks and the impact this could have on the Irish government.”
I know many of you don't like to hear I told you so, but if you don't subscribe to the blog you can always take the advice that I proffered last week: "I Suggest Those That Dislike Hearing “I Told You So” Divest from Western and Southern European Debt, It’ll Get Worse Before It Get’s Better!". Anyone who truly believes that the current pan-European fiasco is not going to end badly will most assuredly get their feelings hurt. In the following Bloomberg article that ran this morning I took the liberty of adding extended analysis, data, and my rather strong opinion. I query, imagine if a media organization with the reach of Bloomberg took advantage of the unbiased Deep Dive analytical ability of an entity such as BoomBustBlog on a regular basis. There would probably not be a recognized need for sell side research. Just a thought to ponder as you read though Greek Debt Deals Hidden From EU Probed as 400% Yield Gap Shows Bond Doubts
Sept. 8 (Bloomberg) -- Four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt.
“We have not seen the real documents,” Walter Radermacher, head of the European Union’s statistics agency Eurostat, said in a Sept. 2 interview in his Luxembourg office. Eurostat first requested the contracts in February.
Well, 6 months ago in Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!, I illustrated how many all of the countries in the EU played hide the sausage games in order to qualify for what apparently was an unrealistic debt criteria., but since we are picking on Greece right now, let's refresh our collective memories (just remember, everybody else did the Grease, ummm... I mean Greece as well) :
Back in September of 2007 when I was preparing to launch a hedge fund, I came up with this interesting name for a blog. It was BoomBustBlog. What made it interesting is that I can literally blog ad infinitum on the synthetically crafted booms and busts of the global economy, for the method of shepherding the economy in this day and age is actually predicated on the existence and/or creation of Booms and Busts. Of course, from my common sense perspective, one would think that the job of a central banker would be to ameliorate the effects of, and in time eliminate booms and busts... Apparently, that doesn't appear to be the flavor du jour. As a matter of fact, it appears as if central bankers are doing the exact opposite. Of course, attempting to cure a bust with a boom, or worse yet attempting to prevent a boom from busting with another boom is a recipe for disaster, and worse yet the probability of success is close to nil, yet central bankers try anyway. This leads to overt and explicit policy errors, which leads to outsized profit opportunities to those who pay attention. Enter "The Great Global Macro Experiment, Revisited", from which I will excerpt below. Please keep in mind that this article was written in October of 2008, and turned out to be quite prescient, I will annotate in bold parentheticals the portions of particularly prescient relevance. The original macro experiment piece was posted on my blog in September of 2007... For those that are interested, I plan on discussing this topic live on Bloomberg TV today: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.
So, S&P finally gets around to Cutting Ireland's Rating on the Cost of Bank Support, as reported by CNBC:
Ireland's financial headache worsened on Wednesday after Standard & Poor's cut its credit rating in a move criticized by the country's debt management agency.
The premium investors demand to hold Ireland's 10-year bonds over German bunds has been steadily widening in the past few weeks and remained elevated at 327 basis points on Wednesday.
The spread finished at 330 bps on Tuesday, its highest level since the Greek financial crisis broke in May.
Brenda Kelly, an analyst at CMC Markets, said she expected Irish borrowing costs to climb on the back of S&P's move.
"I think we are going to have to an awful lot more in interest payments," she said.
Although Ireland has raised virtually all of the 20 billion euros of long-term debt targeted for 2010, S&P's move may make it more difficult for the country's banks to extend the maturity of their funding later this year and eventually wean themselves off a state guarantee on their debt.
S&P cut Ireland's long-term rating by one notch to 'AA-', the fourth highest investment grade, and assigned the country a negative outlook late on Tuesday saying the cost to the government of supporting the financial sector had increased significantly.
Rating agencies have been steadily hacking away at Ireland's credit rating and S&P's is now on a par with Fitch and one notch below Moody's, which cut its rating to Aa2 last month.
S&P said it expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimate of 80 billion euros including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.
Ireland's budget deficit ballooned to 14 percent of gross domestic product, the highest in Europe, last year due to the cost of propping up nationalized lender Anglo Irish ANGIB.UL and it could climb higher if Dublin injects an additional 10.05 billion euros into the bank...
I'm not going to say I told you so, but I did throw some pretty strong hints...
On April 29th, I was quite blatant in stating "Beware of the Potential Irish Ponzi Scheme!", urging my susbscribers to review the Irish Bank Strategy Note and the Ireland public finances projections that I made available earlier that month. You see, unlike many of the pundits in Europe who state that Ireland has moved beyond the worst of its problems and is an example of how austerity should work, I believe that Ireland is in very, very big trouble and I outlined the reasoning behind such in my very first posts on the Pan-European Sovereign Debt Crisis.
The Guardian, UK proclaims:
Greece's economy deeper in recession than forecast
• Second-quarter GDP in Greece estimated to have fallen by 3.5% year-on-year [Reggie's note: I'd like to bring to your attention that this is a pace that is over 11.5x WORSE than the projections that Greece used to get the austerity package-based bailout!!! It is also much more in line with what we anticipated]
• Record jump in Greek unemployment prompts that crisis could intensify social unrest
Investment dropped and public spending slumped in the three months to June as Greek politicians battled to regain the confidence of financial markets and meet the conditions of a multibillion-euro bailout from the European Union and International Monetary Fund.
On the weekend of March 14th, 2010, ex EU Commissioner Prodi proclaimed the worst of the Greek crisis was over. Many EU, ECB and Greek officials claimed Greeks issues were overblown. I said, "Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!".