Displaying items by tag: UK and Eurozone

The European crisis as portrayed in the news...

Greece Gets $146 Billion Rescue in EU, IMF Package (Update1) May 3 (Bloomberg) -- Euro-region ministers agreed to a 110 billion-euro ($146 billion)
rescue package for Greece to prevent a default and stop the worst crisis ...- 2010-05-03

Euro Declines on Concern Greece Bailout May Fail to Get Support Europe’s common currency slumped versus most of its 16 major counterparts as German
Chancellor Angela Merkel began making a public case for her citizens to ... - 2010-05-03

European Stock-Index Futures Decline as Greece Gets Bailout ... rose. TNT NV, Europe’s second-biggest express-delivery company, may be
active after reporting first-quarter earnings. Xstrata ... - 2010-05-03

Merkel Makes Public Case for Germany to Aid Greece (Update1) May 3 (Bloomberg) -- Chancellor Angela Merkel began making a public case for Germany
to aid Greece, saying she’s confident of gaining parliamentary approval ... - 2010-05-03 Hmmm. We shouldn't celebrate a bailout until the bailout is actually ratified, should we?

Iceland Is Better Off Than Greece Thanks to Krona (Update2) May 3 (Bloomberg)

Iceland, which before Greece had been the western nation hardest hit by the global credit crisis, avoided a meltdown as bad as the Greeks’ in part because it had its own currency, Finance Minister Steingrimur Sigfusson said.

“Oh my God, I wouldn’t want to be in the position they’re in,” Sigfusson said in an interview. “The position Greece is in is quite different from the position Iceland is or was in; Greece has the euro and we can debate whether or not that’s good for them for the time being.”

Iceland’s financial crisis started at the end of 2008, when its three biggest banks failed, resulting in a sell-off of the krona that culminated in a depreciation as deep as 80 percent against the euro offshore. The central bank imposed capital controls to stem volatility at an exchange rate about 45 percent weaker than before the crisis. The krona slump instantly ended 22 quarters of trade deficits, helping a recovery that saw the economy grow 3.3 percent in the fourth quarter from the third.

“It won’t be easy for Greece to get out of the trouble it’s in,” Sigfusson said.

Published in BoomBustBlog
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

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Published in BoomBustBlog

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...

Banco Santandar since research

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)...

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Published in BoomBustBlog

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

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

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!

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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

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 File Icon 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???

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.

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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
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