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The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History
There are more and more “professionals” in the mainstream media
stating that they expect European defaults. What is interesting is that
as there is at least a minority of pundits that are facing this
inevitable event. European (and American) equity markets are still
chuggling the global liquidity elixir awash in the markets and moving
ever higher. From Bloomberg: Shrinking Euro Union Seen by Creditors Who Cried for Argentina
Nine months before Argentina stopped paying its obligations in 2001, Jonathan Binder
sold all his holdings of the nation’s bonds, protecting clients from
the biggest sovereign default. Now he’s betting Greece, Portugal and
Spain will restructure debts and leave the euro.
Binder, the former Standard Asset
Management banker who is chief investment officer at Consilium
Investment Management in Fort Lauderdale, Florida, has been buying
credit-default swaps the past year to protect against default by those
three nations as well as Italy and Belgium. He’s also shorting, or
betting against, subordinated bonds of banks in the European Union.
“You will probably see at least one
restructuring before the end of the next year,” said Binder, whose
Emerging Market Absolute Return Fund gained 17.6 percent this year,
compared with an average return of 10 percent for those investing in
developing nations, according to Barclay Hedge, a Fairfield, Iowa-based
firm that tracks hedge funds.
He’s got plenty of company. Mohamed El-Erian, whose emerging-market fund at Pacific Investment Management Co. beat its peers in 2001
by avoiding Argentina, expects countries to exit the 16-nation euro
zone. Gramercy, a $2.2 billion investment firm in Greenwich,
Connecticut, is buying swaps in Europe to hedge holdings of
emerging-market bonds, said Chief Investment Officer Robert Koenigsberger, who dumped Argentine notes more than a year before its default.
No disrespect intended to these fine gentlemen and distinguished
investors, but the default of several of these states is simple math.
You cannot take 8 from 10 10 from 8 and come up with a positive number. It really
does boil down to being just that simple in the grand scheme of things. I
actually released a complete road map of Portugal’s default yesterday
(see The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog), and today I will walk those who are not adept in the area through it with simple graphs and plain vanilla explanations.This is done as a preview for our subscription only
Ireland, Spain and Greece default scenarios. These scenarios, while
still denied by most, are actually just the tip of the iceberg, for they
will do much more damage together than they could ever do separately.
As a group, they will make the Argentina event look like a bull rally.
That is where the contagion models come into play (see Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!). Any institutions or professional investors who are interested in accessing our research should subscribe here. To my knowledge, I believe BoomBustBlog is the only source on the publicly available web for such information.
This is what the Argentinian referenced in the article above did to investors…
Price of the bond that went under restructuring and was exchanged for the Discount bond
That’s right! Ouch! Imagine this times 10! That is what we are
looking forward to. Let’s jump straight into Portugal’s situation, and
remember that many of these countries have deliberately mislead and
misrepresented their fiscal situations for years (see Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest? and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!).
This is the carnage that would occur if the same restructuring were to be applied to Portugal today.
Yes, it will be nasty. That 35% decline in cash flows will be levered
at least 10x, for that is how much of the investors in these bonds
purchased them. A 35% drop is nasty enough, 35% x 10 starts to hurt the
piggy bank! As a matter of fact, no matter which way you look at it,
Portugal is destined to default/restructure. Its just a matter of time,
and that time will probably not extend past 2013. Here are a plethora of
scenarios to choose from…
This is Portugal’s path as of today.
Even if we add in EU/IMF emergency funding, the inevitability of
restructuring is not altered. As a matter of fact, the scenario gets
worse because the debt is piled on.
Let it be known that there are larger sovereign states that are worse
off. There are other states that are not in as bad a shape but are
poised to do much more damage, and then there are a plethora of states
that will get dragged down through contagion. Yet, the natural manner of
pricing risk in the equity markets does not transmit these facts
because of the unprecedented amount of liquidity stemming from central
bankers around the world doing the Bernanke/Japanse QE thing.
Anyone interested in seeing the entire scenario analysis for Portugal should look here, you will find it nowhere else: The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog
Anyone wishing to see even more advanced analysis for the larger and strategically more important nations should subscribe here. Those who are just interested in reading more can go through my entire Pan-European Sovereign Debt Crisis series. I have been writing much about the Irish situation as of late as well.
Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default…
Tuesday, November 30th, 2010
Let’s take a look at the cumulated funding requirement of Ireland over the next 15 years.
Monday, November 29th, 2010
Friday, November 26th, 2010
Tuesday, November 23rd, 2010
Monday, November 22nd, 2010
If the World Knew What BoomBustBlogger’s Know, Would Ireland Default Today?
Wednesday, November 17th, 2010
As We Have Clearly Anticipated Since Early 2010, Ireland is About to Go
Monday, November 15th, 2010
Thursday, October 7th, 2010
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Credit Default Swap Assholes take down another country just so the IMF (funded by US Taxpayers) can rush-in to the rescue!!!!! You can "hack" your watch by these motherfuckers!
Rant Complete
Reggie your work is terrific as usual, and yes I can see no way out for Greece, Ireland and Portugal at a minimum. I do think the Euro can survive a Greek or Portugese default, but an Irish or Spanish default, with the CDS's and leveraged positions re: banks, would blow the Euro sky high. ETA: 2012
What are the trade ideas if we agree with you? Are there any good ideas available to your average, non-institutional, trader? Other than EUO?
Fascinating analysis by the way, as usual.
Good Reggie, But I still don't get the 8 from 10 analogy?
10 - 8 = +2 = Still a positive number, Yes?
Okay, you got me. I meant take ten from eight :-)
Good Effort
The problem are Banco Comercial de Crédito, Espirítu Santo Bank and Caixa Geral.
Great.
8 from 10 leaves 2 unless I missed something.
You cannot take 8 from 10 and come up with a positive number. Hmmm
"You cannot take 8 from 10 and come up with a positive number".
-Fed Speak!
Oh c'mon Reggie, everyone knows that Germany and Uncle Ben can fix this minor problem. Why I can hear the stirring EU anthem now...
/s
LOL -- as usual excellent analysis, but it might be lost on a world gone mad with finanical hubris. They're partying like it's 1999.
Sovereigns' default? Unpossible!
I'm quite sure that the IMF/WorldBank/BIS is fully prepared to lend as many new notes as they need to "print" in order to paper over the mess. Just need to let the pain set in a little longer first, though, to increase the desparation. Then they apply the a chokehold while stating take our terms or die.
There is nothing new in this playbook. It's just moving up the food chain, that's all.
As always, great work!