Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
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Thursday, 29 April 2010 08:59
Beware of the Potential Irish Ponzi Scheme!
I have updated the latest Ireland research (released yesterday) and urge all to review the additions, as well as our overview of Ireland's fiscal difficulties:
We fear Ireland is on the verge of considering a massive Ponzi Scheme, if which avoided, will possibly result in a fiscal deficit approaching 20%, dwarfing the beleaguered Greece by several leagues.
Non-subscribers should reference Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?, for the underlying premise of this in depth article described the upcoming situations with prescience.
Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns
Published in
BoomBustBlog
Wednesday, 28 April 2010 17:10
The Daisy Chain Effect That I Anticipated Appears To Have Commenced!
The Pan-European Sovereign Debt Dominoes start to fall "precisely" as anticipated...
From the Wall Street Journal:
Standard & Poor’s downgraded Spain’s long-term credit-rating to double-A with a negative outlook just one day after roiling global markets with downgrades for both Greece and Portugal.
“We now believe that the Spanish economy’s shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” S&P credit analyst Marko Mrsnik said.
The move sent the euro to a fresh one-year low against the dollar of $1.3129; the 16-nation currency had briefly bounced higher as fears about Greek debt contagion eased. Spain’s IBEX index extended earlier losses, oil prices fell and U.S. stocks briefly turned negative.
This follows a downgrade of Portgual and Greece (to one of junk). The Actionable Intelligence Note of last week was quite timely. Up until a few days ago the options on many of these banks were quite cheap, on relative basis (even the Greek banks, at least on a relative basis though IV was high). Notice the explosion in both implied volatility and intrinsic value leading to a 100% to 200% gain...
Published in
BoomBustBlog
Tuesday, 27 April 2010 17:25
How Greece Killed Its Own Banks!
Yes, you read that correctly! Greece killed its own banks. You see, many knew as far back as January (if not last year) that Greece would have a singificant problem floating its debt. As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market. So, what happens when these relatively small banks gobble up all of this debt that is summarily downgraded 15 ways from Idaho.
Reference (Bloomberg) Stocks Plunge as Dollar, Treasuries Gain After Greece, Portugal Rate Cuts and (the Wall Street Journal) S&P Downgrades Greece to Junk Status:
“S&P cut Greece's ratings to junk status, saying the country's policy options are narrowing as it tries to cut its large budget deficit. The news, combined with an S&P downgrade of Portugal, pushed down the euro to $1.3269, hit U.S. stocks and sent Treasury prices higher”.
- •Stocks Plunge, Asia Bond Risk Climbs on Greece, Portugal Default Concerns
- •Greece's Junk Contagion Pressures EU to Broaden Bailout After Market Rout
- •Trichet Travels to Berlin on Diplomatic Mission as Merkel Nears Greek Vote
- •Greece Bondholders May Lose $265 Billion in Default as S&P Sees 70% Loss
- April 28 (Bloomberg) -- Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s.
The ratings firm cut Greece three steps yesterday to BB+, or below investment grade, and said bondholders may recover only 30 percent and 50 percent for their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, data compiled by Bloomberg show.
The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes to as high as 19 percent from 4.6 percent a month ago as concern deepened the nation may delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product.
“It’s now not just market sentiment, but a top rating agency sees Greek paper as junk,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam.
Before yesterday, Greece’s bonds had lost about 17 percent this year, according to Bloomberg/EFFAS indexes. The 4.3 percent security due March 2012 fell 6.54, or 65.4 euros per 1,000-euro face amount, to 78.32.
...
S&P indicated the cuts, which may force investors who are prevented from owning anything but investment-grade rated bonds to sell, may not be over, assigning Greece a “negative” outlook.
“The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory,” S&P credit analyst Marko Mrsnik said in a statement.
Credit-Default Swaps
Traders of derivatives are betting on a greater chance that Greece fails to meet its debt payments.
Credit-default swaps on Greek government bonds climbed 111 basis points to 821 basis points yesterday, according to CMA DataVision. Only contracts tied to Venezuela and Argentina debt trade at higher levels, according to Bloomberg data. Venezuela is at about 846 basis points and Argentina is at about 844, Bloomberg data show.
Just minutes before lowering Greece’s ratings, S&P cut Portugal to A- from A+. Yields on Portugal’s two-year note yields jumped 112 basis points to 5.31 percent, while credit- default swaps on the nation’s debt rose 54 basis points to 365. The downgrades may force banks to boost the amount of capital they are required to hold against bets on sovereign debt, said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut.
While bank capital rules give a risk weighting of zero percent for government debt rated AA- or higher, it jumps to 50 percent for debt graded BBB+ to BBB- on the S&P scale and 100 percent for BB+ to B-.
“These downgrades are going to cause people to increase their risk weightings,” Yelvington said.
Well, the answer is.... Insolvency! 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)...
Published in
BoomBustBlog
Saturday, 24 April 2010 08:32
LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog Wanrs Of Failure!
Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin...). Starting in January of this year, I went in depth into the European contagion thing when practically all of the banks, pundits, analysts and rating agencies said this was contained to Greece.
In February, I posted "The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one." To wit:
Banks are the epicenter of the economic crises that face the developed and emerging nations over the last few years. Many appear to have allowed the media to carry the conversation away from the banks and into sovereign debt issues, social unrest etc., but the main issue still resides in the banks. Why, you ask? Well, because every single major country conducts its finances through the banks and when those finances become stressed, the banks will be the first to show it and usually show it in an aggrieved manner since most banks are still highly leveraged.
Published in
BoomBustBlog
Thursday, 22 April 2010 17:00
Actionable Intelligence Note For All Paying Subscibers on European Bank Research
It would pay to review all of the relevant European bank research. The market seems to have realized the perilous linkages throughout the EU and is taking many (if not all) of the researched banks down. This research came out early enough for all subscribers to have been able to take advantage of it. Of particular note should be:
Published in
BoomBustBlog
Thursday, 22 April 2010 11:44
As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
As was literally guaranteed by the BoomBustBlog analysis, Greece is well on its way to default, or at least the acceptance of significant aid in an (probably futile) attempt to avoid default. For a refresher, see “Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!. Subscribers should reference the Greece Public Finances Projections. Of particular note is how accurate we have been in forecasting the nonsensical optimism embedded in the Greek Government's economic numbers, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!. Now, let's peruse the news of the morning...
In Bloomberg: Greece, Ireland Lead Euro-Area Budget Deficit Widening to Double EU Limit
April 22 (Bloomberg) -- The euro area’s budget deficit widened to more than double the European Union’s 3 percent limit in 2009, led by Greece and Ireland. I explicitly warned that these two countries were at the top of the risk chain throughout the year, culminated with a forensic report on Ireland. See Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! Subscribers should reference Ireland public finances projections. Ireland is in a particularly precarious position, potentially more so that Greece!
The total budget gap for the 16-nation euro region widened to 6.3 percent of gross domestic product last year, the biggest since the introduction of the euro in 1999, from 2 percent in 2008, the EU’s Luxembourg-based statistics office said today. At 14.3 percent of GDP, Ireland had the largest shortfall, while Greece’s deficit was 13.6 percent. I'm not going to say I told you so!
Published in
BoomBustBlog
Thursday, 15 April 2010 11:16
Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News
Here is another smattering of news from the weekend past, as well as our take on it and a decent dose of realistic analysis to cast a light on the real issues at hand...
Beijing Reports a Trade Deficit: BusinessWeek
- China reported its first trade deficit in over 70 months as the prices of raw materials imports climbed
- Analysts are stating that a stronger Yuan is needed to deter increasing domestic inflation
- China has the impossible task of balancing an ever increasing asset price bubble with US demands for a revalued Yuan in order to fuel President Obama's manufacturing jobs utopia
- Subscribers should reference
China Macro Discussion 2-4-10 (Global Macro, Trades & Strategy)
And speaking of Beijing,,, China's Economic Growth Accelerates to 11.9%, May Prompt End of Yuan Peg - The Overheating has arrived???
Published in
BoomBustBlog
Monday, 12 April 2010 19:04
Euro-Gossip Debunked, Courtesy of Trichet and the IMF!
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.
Published in
BoomBustBlog
Monday, 12 April 2010 18:45
Commercial Delinquencies Rise Again, Data Goes Ignored
Commercial Delinquencies Rise Again, Data Goes Ignored: Mortgage Bankers Association
- Commercial Real Estate delinquency rates for loans held >30 days rose to 5.69% (as REITs continue to hit record highs)
- CMBS debt has continued to have the highest delinquency rate of all debt by sector
- For a reminder of the early warnings on regional bank exposure, see the Doo Doo 32
- For my 2010 commercial real estate outlook (which thus far has been right on the money) see
CRE 2010 Overview 2009-12-16 07:52:362.85 Mb
Published in
BoomBustBlog
Monday, 12 April 2010 14:38
Greek Soap Opera Update: Back to the Bailout That Was Never Needed?
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?
- "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.
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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.
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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.
Notice how Ireland is the nation with the second highest NPA to GDP ratio.
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...
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):
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 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:
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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.
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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.
- 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.
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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 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.
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.
Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...
The EU/EC has proven to be no better, and if anything is arguably worse!
Revisions-R-US!
and the EU on goverment balance??? Way, way, way off.
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!...
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 subscribe)
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...
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
