The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…
The same hypothetical leveraged positions expressed as a percentage gain or loss…
This was quite easy to see coming as those who downloaded the following subscription material can attest:
- Greek Banking Fundamental Tear Sheet
- A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf
- A Review of the Spanish Banks from a Sovereign Risk Perspective – professional
- Banks exposed to Central and Eastern Europe
- Spanish Banking Macro Discussion Note
This will get much, much worse before it starts to get better. Even those who chose not to pay for the research had plenty of free research to see the path of current events months in advance, they just didn't get the specific banks/securities referenced with fundamental value ranges. Reference:
The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.
What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
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.
Here are some more MSM news clips that drive the points home:
- European Stocks Erase 2010 Gain on Debt Contagion; Commodities, Euro Fall
- VIX Rises With VStoxx on Concern Debt Crisis to Spread to Portugal, Spain
- Greek Rescue Doubts Spur Rise in Sovereign Default Risk on Contagion Bets
- Is Spain the Next EU Country To Tumble Into a Debt Crisis?: Spain risks falling into the same trap as Greece unless it takes more forceful action, some investors tell the New York Times.
So, were the opportunities described actionable? Let's take a look...
300% gains on STD June '10 12.5 puts
100% to 150% on the NBG Aug 2.5s
150% to 300% or so on BBVA Oct. 15 puts.
And there's plenty more to go under several different opportunities (subscription only)...
- Actionable Intelligence Note For All Paying Subscribers on European Bank Research – This was certainly one very timely call!!!
- Italian Banking Macro-Fundamental Discussion Note
- and now introducing.....
The BoomBustBlog Sovereign Contagion Model
Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.
In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.
I. Summary of the methodology
- We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
- In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors - a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
- Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
- The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
- Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
- Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.
Latest Pan-European Sovereign Risk Non-bank Subscription Research
- Ireland public finances projections_040710
- Spain public finances projections_033010
- UK Public Finances March 2010
- Italy public finances projection
- Greece Public Finances Projections
The Pan-European Sovereign Debt Crisis, to date (free):
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.
9. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
21. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis
24. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
25. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
26. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog