I will release the haircut model to professional and institutional subscribers about 12 to 18 hours after I get the bailout rates and amounts, which are slated to be released today sometime.

Published in BoomBustBlog

There is an ancient Greek legend describing the education of the common man Damocles. You see, Damocles exclaimed that, as a great man of power and authority, Dionysius (the current ruler) was truly fortunate. Thus, Dionysius offered to switch places with him for a day, so Damocles could taste first hand that fortune which he savored so fervently. Later that night during a lavish banquet Damocles indeed

 
 Earlier installments of the Reggie Middleton's Pan-European Sovereign Debt Crisis

  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?

 

did savor being waited upon like a king. Only at the end of the meal did he look up and notice a hand sharpened sword hanging directly above his head by a single strand of horse-hair. Damocles immediately lost all taste for the amenities of royalty, pomp and circumstance and asked leave of the tyrant, saying he no longer wanted to be so "fortunate" [adapted from Wikipedia].[1][4]

Little did Damocles realize that what he experienced was of value, significant value. He simply failed to recognize the value as we has blinded by the fair maidens who served him hand and foot.  The moral to this BoomBustBlog telling of the Sword of Damocles is that: "When one sits on the Throne, the true value of the sword is not that it falls, but rather, that it hangs." Recent history has given weight to this moral as Greece has fed high on the hog for nearly a decade, while being totally oblivious to the value held within that single strand of horse hair, protecting it. Till this day, that strand, although dwindling, has yet to snap. 

On that note, we have this headline from Bloomberg: Greek Crisis Is Over, Rest of Region Safe, Prodi Says
"The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, said former European Commission President Romano Prodi.
“For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”" 

Reggie says "Liar, Liar, Pants on Fire". In all seriousness, while I don't truly believe Mr. Prodi is lying, he is also obviously ignoring the facts as they currently exist, whether purposefully or in error. Let's walk through a few excerpts from the most recent addition to the Pan-European Sovereign debt crisis. BoomBustBlog subscribers can download the full15 page analysis here, which contains more than enought evidence to throw serious doubt on the ability of Greece to come anywhere near their stated goals: pdf  Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb/. The report also makes clear why Germany is so hesitant to contribute funds to a Greek bailout.

 

The Austerity Package, in a Nutshell

 

The revenue measures include increasing tax rates, reducing tax evasion and some one-off measures while the expenditure measures consist of salary reduction, freezes in hiring and salary hikes as well as cutting other public sector expenditures. According to the Stabilityand Growth Program, January 2010, the government is aiming to reduce its fiscal deficit from 12.7% of GDP in 2009 to 8.7% in 2010. However, if the impact of the additional measures that were estimated at 2.5% of GDP is also added, the fiscal deficit is expected to come down to 6.2% of GDP in 2010, based on government's estimates. The government further envisages additional proceeds from the sale of stakes in some of the government-owned entities as well as proceeds from the payback of financial assistance provided to the Greek banks, which will be used to reduce the massive government debt of around 113% of GDP in 2009. However, there is strong evidence to support the assertion that the budgeted impact of these measures is grossly overstated, since a) The Greek government's base casescenario for the economy is overly optimistic when compared with analystexpectations, and  b) the dynamics of the announced measures shall lower the total projectedimpact.

There is an ancient Greek legend describing the education of the common man Damocles. You see, Damocles exclaimed that, as a great man of power and authority, Dionysius (the current ruler) was truly fortunate. Thus, Dionysius offered to switch places with him for a day, so Damocles could taste first hand that fortune which he savored so fervently. Later that night during a lavish banquet Damocles indeed

 
 Earlier installments of the Reggie Middleton's Pan-European Sovereign Debt Crisis

  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?

 

did savor being waited upon like a king. Only at the end of the meal did he look up and notice a hand sharpened sword hanging directly above his head by a single strand of horse-hair. Damocles immediately lost all taste for the amenities of royalty, pomp and circumstance and asked leave of the tyrant, saying he no longer wanted to be so "fortunate" [adapted from Wikipedia].[1][4]

Little did Damocles realize that what he experienced was of value, significant value. He simply failed to recognize the value as we has blinded by the fair maidens who served him hand and foot.  The moral to this BoomBustBlog telling of the Sword of Damocles is that: "When one sits on the Throne, the true value of the sword is not that it falls, but rather, that it hangs." Recent history has given weight to this moral as Greece has fed high on the hog for nearly a decade, while being totally oblivious to the value held within that single strand of horse hair, protecting it. Till this day, that strand, although dwindling, has yet to snap. 

On that note, we have this headline from Bloomberg: Greek Crisis Is Over, Rest of Region Safe, Prodi Says
"The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, said former European Commission President Romano Prodi.
“For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”" 

Reggie says "Liar, Liar, Pants on Fire". In all seriousness, while I don't truly believe Mr. Prodi is lying, he is also obviously ignoring the facts as they currently exist, whether purposefully or in error. Let's walk through a few excerpts from the most recent addition to the Pan-European Sovereign debt crisis. BoomBustBlog subscribers can download the full15 page analysis here, which contains more than enought evidence to throw serious doubt on the ability of Greece to come anywhere near their stated goals: pdf  Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb/. The report also makes clear why Germany is so hesitant to contribute funds to a Greek bailout.

 

The Austerity Package, in a Nutshell

 

The revenue measures include increasing tax rates, reducing tax evasion and some one-off measures while the expenditure measures consist of salary reduction, freezes in hiring and salary hikes as well as cutting other public sector expenditures. According to the Stabilityand Growth Program, January 2010, the government is aiming to reduce its fiscal deficit from 12.7% of GDP in 2009 to 8.7% in 2010. However, if the impact of the additional measures that were estimated at 2.5% of GDP is also added, the fiscal deficit is expected to come down to 6.2% of GDP in 2010, based on government's estimates. The government further envisages additional proceeds from the sale of stakes in some of the government-owned entities as well as proceeds from the payback of financial assistance provided to the Greek banks, which will be used to reduce the massive government debt of around 113% of GDP in 2009. However, there is strong evidence to support the assertion that the budgeted impact of these measures is grossly overstated, since a) The Greek government's base casescenario for the economy is overly optimistic when compared with analystexpectations, and  b) the dynamics of the announced measures shall lower the total projectedimpact.

Well, not if they are able to pull off their stated austerity measures. Let's see how well they are doing thus far...

Papandreou Says First Deficit Is Greece's Credibility Gap Jan. ...

Jan. 28 (Bloomberg) -- Greece's first "deficit" is its credibility gap, Prime Minister George Papandreou said today at a panel event at the World Economic Forum in Davos, Switzerland.

Greek Markets Rattled as EU Says Deficit Forecasts ‘Unreliable ...

Jan. 12 (Bloomberg) -- Greek stocks and bonds tumbled after the European Commission said "severe irregularities" in the nation's statistical data leave the accuracy of the European Union's largest budget deficit in doubt.

 So, in order to gain credibility, Greece has to apply austerity measures and close its large budget. Can Greece accomplish this mission? After all, they are trying to close a fiscal deficit at an unprecedented pace... Let's gauge both their progress and the populace's reactions...

Greek Customs WorkersStrike Dents ExportsCuts Fuel Supplies‎ 

 Feb. 19 (Bloomberg) -- Greek motorists lined up at gas stations as fuel stocks dwindled while a strike by customs workers over government austerity measures stretched into a fourth day, hurting imports and exports.

The Federation of Greek Customs Workers called a three-day strike on Feb. 16 and decided yesterday to extend the action by six days to protest government austerity measures aimed at trimming Europe’s biggest budget deficit.

Greece is once again “hostage to strikes by powerful labor union groups,” theNational Federation of Greek Commerce said in an e-mailed statement. The strike is “catastrophic” for the country’s trade and industry as well as shipping, food and transport companies and the Greek consumer, said the Athens- based organization, which represents Greek commerce groups.

Exports have fallen 18 percent since the beginning of the customs strike as the shipping of goods via maritime, rail and air links is paralyzed, Christina Sakellaridi, president of the Panhellenic Union of Exporters, told private Skai radio today.

The total value of goods exported by her organization’s members reached 11.4 billion euros ($15.4 billion) in 2009, according to Central Bank of Greece data.

Customs workers in parts of Thessaloniki, Greece’s second- largest city, and on Crete, the biggest Greek island, returned to work today, the state-run Athens News Agency reported. That contradicted a statement by the customs workers’ union on its Web site that continued participation in the industrial action was “universal.”

 

Cab Drivers Join In

Greece’s taxi drivers also staged a 24-hour strike today, the second in as many weeks, to protest measures including an increase in fuel tax and the obligation to give customers receipts, part of the Greek government’s efforts to clamp down on tax evasion.

Private and public sector unions strike for 24 hours on Feb. 24 over measures introduced by Prime Minister George Papandreou’s government to reduce a budget gap of 12.7 percent of gross domestic product by 4 percentage points this year. The government has frozen wages for public workers and trimmed bonuses, while raising taxes on consumer goods such as tobacco and gasoline.

I suggest subscribers take another look at those exposed Greek banks: 

File Icon

 Greek Banking Fundamental Tear Sheet 

 I'm going to end the Euro-Sovereign debt crisis in two more installments, and they will be hard hitting ones. In the meantime, make sure you are caught up because I will be creating a road map that will track where the dominoes fall - If (actually, when) they start falling... 

  1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let's Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
  2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
  4. 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.
  5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

     

 

Well, not if they are able to pull off their stated austerity measures. Let's see how well they are doing thus far...

Papandreou Says First Deficit Is Greece's Credibility Gap Jan. ...

Jan. 28 (Bloomberg) -- Greece's first "deficit" is its credibility gap, Prime Minister George Papandreou said today at a panel event at the World Economic Forum in Davos, Switzerland.

Greek Markets Rattled as EU Says Deficit Forecasts ‘Unreliable ...

Jan. 12 (Bloomberg) -- Greek stocks and bonds tumbled after the European Commission said "severe irregularities" in the nation's statistical data leave the accuracy of the European Union's largest budget deficit in doubt.

 So, in order to gain credibility, Greece has to apply austerity measures and close its large budget. Can Greece accomplish this mission? After all, they are trying to close a fiscal deficit at an unprecedented pace... Let's gauge both their progress and the populace's reactions...

Greek Customs WorkersStrike Dents ExportsCuts Fuel Supplies‎ 

 Feb. 19 (Bloomberg) -- Greek motorists lined up at gas stations as fuel stocks dwindled while a strike by customs workers over government austerity measures stretched into a fourth day, hurting imports and exports.

The Federation of Greek Customs Workers called a three-day strike on Feb. 16 and decided yesterday to extend the action by six days to protest government austerity measures aimed at trimming Europe’s biggest budget deficit.

Greece is once again “hostage to strikes by powerful labor union groups,” theNational Federation of Greek Commerce said in an e-mailed statement. The strike is “catastrophic” for the country’s trade and industry as well as shipping, food and transport companies and the Greek consumer, said the Athens- based organization, which represents Greek commerce groups.

Exports have fallen 18 percent since the beginning of the customs strike as the shipping of goods via maritime, rail and air links is paralyzed, Christina Sakellaridi, president of the Panhellenic Union of Exporters, told private Skai radio today.

The total value of goods exported by her organization’s members reached 11.4 billion euros ($15.4 billion) in 2009, according to Central Bank of Greece data.

Customs workers in parts of Thessaloniki, Greece’s second- largest city, and on Crete, the biggest Greek island, returned to work today, the state-run Athens News Agency reported. That contradicted a statement by the customs workers’ union on its Web site that continued participation in the industrial action was “universal.”

 

Cab Drivers Join In

Greece’s taxi drivers also staged a 24-hour strike today, the second in as many weeks, to protest measures including an increase in fuel tax and the obligation to give customers receipts, part of the Greek government’s efforts to clamp down on tax evasion.

Private and public sector unions strike for 24 hours on Feb. 24 over measures introduced by Prime Minister George Papandreou’s government to reduce a budget gap of 12.7 percent of gross domestic product by 4 percentage points this year. The government has frozen wages for public workers and trimmed bonuses, while raising taxes on consumer goods such as tobacco and gasoline.

I suggest subscribers take another look at those exposed Greek banks: 

File Icon

 Greek Banking Fundamental Tear Sheet 

 I'm going to end the Euro-Sovereign debt crisis in two more installments, and they will be hard hitting ones. In the meantime, make sure you are caught up because I will be creating a road map that will track where the dominoes fall - If (actually, when) they start falling... 

  1. Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let's Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
  2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
  4. 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.
  5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

     

 

UPDATED -It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The mere concept of global equity rallies should have macro traders and fundamental investors chomping at the bit. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based, inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered printer ink as the presses go berserk!

In part 2 of my series on the Pan-European Sovereign Debt Crisis, we will review Italy and Ireland in comparison to the whipping child of the media - Greece (see "The Coming Pan-European Sovereign Debt Crisis" for part one covering Greece and Spain along with tear sheets for the Spanish banks at risk for subscribers).

UPDATED -It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The mere concept of global equity rallies should have macro traders and fundamental investors chomping at the bit. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based, inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered printer ink as the presses go berserk!

In part 2 of my series on the Pan-European Sovereign Debt Crisis, we will review Italy and Ireland in comparison to the whipping child of the media - Greece (see "The Coming Pan-European Sovereign Debt Crisis" for part one covering Greece and Spain along with tear sheets for the Spanish banks at risk for subscribers).

First, a quick news scan:

My regular readers should remember my warnings on the currency trade risks (Japan's Hirano can testify), and interest rate derivative concentrations (let's see what happens to the counterparty daisy chain if Dubai defaults): "The Next Step in the Bank Implosion Cycle???". As excerpted:

Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

First, a quick news scan:

My regular readers should remember my warnings on the currency trade risks (Japan's Hirano can testify), and interest rate derivative concentrations (let's see what happens to the counterparty daisy chain if Dubai defaults): "The Next Step in the Bank Implosion Cycle???". As excerpted:

Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.png

As a quick follow-up to "Reggie Middleton on the Recent Ackman Short - Realty Income "O"", I took a look at the likelihood of O tripping their covenants in an attempt to keep the dividend intact.

Regarding Realty Income’s debt covenants - there is a bank owned credit facility of $355 million but as of July 21, 2009, the Company had no outstanding balance under it. Since, per the cash flow analysis linked above, it was observed that the Company will not face serious liquidity pressures in the next year unless the rental income declines severely (we assumed 5% consecutive decline for the next two fiscal halfs), the Company may not need to utilize the credit facility.

However, the Company is required to fulfill the debt covenants of the senior unsecured notes of $ 1,350 million. The table below summarizes the requirements under the debt covenants and the Company’s actual position as of June 20, 2009

Note Covenants

Actual

 

 

Debt to total adjusted assets should be less than 60%

38.7%

Secured debt to total adjusted assets should be less than 40%

0.0%

Debt service coverage ratio should be greater than 1.5x

3.5x

Total unencumbered assets to total unsecured debt should be more than 150%

258.0%

 Now, contrast this to the situation in the company below...

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