ZeroHedge ran an interesting article yesterday, IMF Prepares For Global Cataclysm, Expands Backup Rescue Facility By Half A Trillion For "Contribution To Global Financial Stability", stating that the IMF will surcharge larger developed countries to raise an enormous amount of money for what apparently is preparation for a massive increase in default risk throughout the world. One of the countries in line for a significant charge is Ireland. This is interesting, for it plays directly into the Pan-European Sovereign Debt Crisis theory that we have been working for all of 2010. It is our belief that the very real threat of defaults will reverberate throughout a material portion of Europe. Even countries that are supposed to be on the right track, are in reality, skating the brink of insolvency. A forensic look of Ireland brings this thesis into focus.

We have performed a cursory overview of the risks inherent in Ireland though previous "preview" posts: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook. For the most part, Ireland has considerable embedded risk through both foreign claims on troubled countries (ex. PIIGS) and significant bank NPAs as a percent of its GDP.

ireland_claims_against_piigs.jpg

Below is an excerpt from our recent forensic Ireland analysis. Subsccribers, please download the most recent report here:File Icon Ireland public finances projections_040710:

Published in BoomBustBlog

I was having a conversation with a very respectable young man from the press, and he asked me the following question, "Last week, I remember you saying that you thought Greece would default and that could put Europe into recession or worse. Does the fact that Greece was able to raise debt in the past few days change your view on that?".

I thought I would post my answer to the blog, for I want my views on this to be crystal clear.

Answer:  Absolutely not! Greece has three primary problems.

a. One, it has cash flow issues. The recent bailout "promise" potentially alleviates the cash flow issues, and at the same time exacerbates them. Although the 5% rate promise that was offered is less than the market is charging, it is still more than what will put Greece on sustainable footing. In addition, since this (4th) bailout "promise" was announced (and still has to be voted on), Greek banks, stocks and bonds have tanked further, as well as Greece being but on rating watch negative by the ratings agencies (one of the very few times we agree on something). I warned months ago about the very banks that have collapsed (price wise), stating that they were virtually guaranteed to see hard times. See the Greek banking attachment included (banks exposed to central and eastern Europe and the Greek Banking Fundamental tear sheet). I warned this time last year about the Spanish banks. We shall see if that warning bears fruit as well.

Published in BoomBustBlog

Italy on the right track, IMF says: Wall Street Journal

  • Italy's economy continues to be based off of external demand, and that is important to maintain fiscal discipline (We may never hear Italy and fiscal discipline in the same sentence again)
  • IMF predicts that Italian unemployment rates will continue to rise, and that native banks will continue to see credit risk rise as loans are appearing to be less profitable.

italian_real_gdp.png

Published in BoomBustBlog

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

    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

    The IMF has recently released the results of their staff consultations with Greece. Some may find it interesting, particularly where it intersects with relevant BoomBustBlog research. Let's not mince words here. Greece is going to effectively default on its debt, one way or another, and it is probably going to do it relatively soon. Shall we walk through the IMF findings from LAST YEAR and how they are actually optimistic compared to the facts that my team and I have dug up?

    IMF Consultation: Greece (2009)
    Context:

    · After joining the EU, the income gap between Greece and the Eurozone fell on lower interest rates and the resulting “demand boom”
    · Through the boom, fiscal deficits stayed at >95% of GDP, fiscal condition continues to aggravate 10 year spreads & contributes to credit downgrades (arguably a lagging indicator)
    · Private Greek debt is below the Eurozone average, as is the case for non-financial corporations (governments and financial services therefore must be the source of Greek leveraging)
    · Even as output has dropped, Greek wages have remained comparably high, and saw a 12% nominal increases in from 2008 - 2009
    · Quality of assets on Grecian balance sheets continues to erode with end of credit based consumption in Southeastern Europe (SEE)
    · Household and corporate credit growth has slowed, probably due to rising interest rates causing the opportunity cost of taking on new debt to be unmanageable (directly causing revenue shortfall at the government level)

    Projections:
    · IMF forecasted uncertain, and potentially negative growth from 2009 through 2010 on stagnant trade and policy based mistakes
    · The EU had a much rosier forecast, citing a rise in tourism, lower dependency on trade, and government based infrastructure projects (that are paid in money taken from bond offerings and paid to construction workers at far greater than average Eurozone wages)

    I have sourced the accuracy of both the IMF and the EU's forecasting in "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!. If your well being relies on this stuff, you would be well served to subscribe to our research services. Let's take a visual perusal of what I am talking about in regards to Grecian GDP, the IMF and the EU.

    image005.png

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

    image031.png

    Here are our considerably more realistic forecasts (premiums content: Greece Public Finances Projections).

    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

    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