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Contagion 'Madness'?

Leo Kolivakis's picture





 

Published in Pension Pulse. Chart above from Bill Marsh, NYT (Source: Bank for International Settlements).

Emma
Ross of Bloomberg reports, Greek
Quarantine Tested as Spain Denounces Contagion ‘Madness’
:

Investors
are already testing the euro region’s efforts to contain the Greek
crisis.

Greek bond yields yesterday rose above
their level before the government agreed on a European Union-led
bailout on May 2 as escalating protests cast doubt on its ability to
drive through austerity measures. Spanish and Portuguese bonds also
renewed last week’s slide as investors question their ability to cut
budget deficits that are among the highest in the euro area.

 

“If the execution of the announced measures in
Greece faltered it would certainly make it more difficult to bring the
sovereign debt markets of Spain and Portugal into calmer waters,” said
Kommer van Trigt, who helps oversee 140 billion euros ($183 billion) at
Robeco Group in Rotterdam. “We want to see more evidence that measures
are really being implemented.”

 

European governments are hoping that Greece’s
110 billion- euro bailout will stop a crisis that Nobel Prize-winning
economist Joseph Stiglitz says threatens the currency’s survival.
Investors are speculating that Spain and Portugal may also eventually
need assistance, prompting Spanish Prime Minister Jose Luis Rodriguez
Zapatero to dismiss such talk as “complete madness.”

 

That didn’t stop a selloff in Spanish bonds
yesterday. The extra yield that investors demand to buy its debt over
German bunds rose 21 basis points to a 14-month high of 117.8 points.
Spain’s benchmark IBEX Index, the euro region’s worst performer after
Greece, fell 5.4 percent to the lowest since July. Portugal’s spread
rose 40 basis points to 247 yesterday.

 

The euro weakened 1.4 percent to $1.3011, the
lowest in more than a year.

 

Flights

 

Greek unions plan
their third general strike of the year today after workers yesterday
occupied the Acropolis and shut down schools and hospitals at the start
of a 48-hour walk-out. Aegean Airlines SA, a Greek carrier, has
canceled all flights.

 

Workers are protesting
against the 30 billion euros of austerity measures agreed to by Prime
Minister George Papandreou in return for the bailout from the euro
region and the International Monetary Fund. Protesters will meet at
Pedio tou Areos Park in central Athens and will march through
Constitution Square, where the Parliament is situated.

“We will continue with action as long as these
measures, which go against workers and are anti-social, continue to be
demanded,” Stathis Anestis, a spokesman for the GSEE union, said in a
telephone interview, predicting “massive participation.”

 

The yield on Greece’s 10-year bond climbed 90 basis
points to 9.84 percent yesterday compared with 9.343 percent on April
30.

 

Greek Opposition

 

More than 51 percent of Greeks said they won’t
accept new austerity measures before the rescue deal, according to a
poll of 1,000 people by ALCO for Proto Thema newspaper. That compared
with 33 percent who would accept them. No margin of error was given for
the poll, which was conducted from April 27 to April 29.

 

Unions have had some success influencing policy in
the past. In 2001 they forced then-Prime Minister Costas Simitis to
dilute proposals such as raising the retirement age. In 1985, unions
successfully opposed a government proposal to cut spending and boost tax
revenue, prompting Simitis, who was economy minister at the time, to
resign two years later.

 

Some economists say the terms are too harsh
for the country to bear. Greece expects its economy to shrink 4 percent
this year and 2.6 percent in 2011.

 

“The economic pain that such belt tightening will bring suggests that
it would be unwise to rule out a default further down the line,” Ben
May, an economist at Capital Economics in London, said in a note.

 

Wrangling

 

The danger for the euro region is that failure to
fix the Greece crisis after three months of wrangling by EU leaders
will prompt investors to shift attention to the deficits of Portugal and
Spain and dump their bonds too. Spain’s budget deficit was the
third-highest in the euro region last year, at 11.2 percent of GDP.
Portugal’s shortfall was the fourth at 9.4 percent of output.

 

The IMF yesterday published a statement denying
speculation that Spain had asked for a bailout.

 

“These rumors can increase the interest-rate differential compared
with German bonds and damage our national interests,” Zapatero told a
news conference in Brussels yesterday. “This is simply intolerable and I
can tell you that we will certainly combat it.”

Ireland had the highest deficit at 14.3 percent and Greece’s was
13.6 percent.

 

While the Greek rescue “may
work for a little while, in the long run the fundamental institutional
problems are there, speculators are aware of these problems,” said
Stiglitz, a Columbia University professor, in an interview with BBC
Radio 4 yesterday. “The future of the euro may be limited.”

Everywhere you look, everyone is
talking about "contagion" and the beginning of a wave of sovereign debt
defaults. I tend to agree with Spain's Prime Minister that what is going
on right now is "complete madness". Spain's banks are among the best in
the world and they got trashed on Tuesday.

At
times like these, I like to take a step back and listen to reason. In a
sea of cacophony, very few have the insight of William Engdahl. Watch
both interviews below and listen carefully to his thoughts on Eurozone
warfare and the secular decline of the US economy. Both these interviews
are a must watch. No wonder European leaders are ramping up their
push for a new bond-rating agency
.

 


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Wed, 08/17/2011 - 08:32 | Link to Comment pama
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Tue, 07/26/2011 - 07:20 | Link to Comment pama
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So now we have to ask the question you pose, why have regulators failed, and can we staff them with better men?
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Wed, 05/05/2010 - 16:37 | Link to Comment jwalker46
jwalker46's picture

Does the owner of this website read these comments?  If so, take a hint: "Leo" is damaging your reputation.

Wed, 05/05/2010 - 17:02 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

They read every single comment, including your dumb ones. Later loser.

Wed, 05/05/2010 - 17:27 | Link to Comment akak
akak's picture

Hey, every forum needs its court jester!

And those pointy bell-tipped shoes and that harlequin suit seem to fit you extremely well.

Wed, 05/05/2010 - 13:35 | Link to Comment ewmayer
ewmayer's picture

I'm continually surprised that someone so loath to back up his major assertions "Spanish banking system is fundamentally sound") as Leo gets a dedicated posting slot on ZeroHedge. Now a lot of the time I suspect he's just trolling, but trolls should be relegated to the reader-comments sections of serious articles, not writing the articles themselves.

Anyway, here is a recent Fortune article that actually lays out some facts on Spain:

Even the bears aren't bearish enough on Spain's coming sovereign debt problem

More importantly, Spaniards have a substantial amount of outstanding debt that has to be rolled over this year. Estimates suggest the figure could be as high as 225 billion euros, of which foreigners hold almost 45%. Considering that the total proposed Greek bailout is 146 billion euros over three years, any potential bailout -- and to be clear, we are not there yet -- would be of an exponentially larger scale than Greece.

As recently as a few years ago, Spain's leadership in growth and stability were a beacon with the European Union. The reality though, was that Spain's economic growth was predicated on the construction and housing industries. Spain was the poster child for the global housing and real estate boom, bubble, and subsequent bust. In fact, home building and construction spending represented 20% of GDP and 12% of employment at the peak. With an economy that has limited exports, the evaporation of the construction sector as a major engine of growth and employment suggests the Spanish government's estimates of 3% GDP growth in 2011 and beyond are overly optimistic.

Not surprisingly, as went the global construction market, so accelerated Spain's unemployment. Currently Spain's unemployment is sitting at just north of 20%. Both the Sudan and the West Bank are currently more employed than Spain. There is good news, though: according to Minister Salgado only 290,000 jobs were destroyed in the first quarter of 2010. Good news, of course, is always relative.

Another debt issue as it relates to Spain's fiscal health is private indebtedness, currently at 178% of GDP, according to the recent S&P report that downgraded Spain's long-term sovereign debt. A substantial portion of this debt relates to mortgages and home financing. While defaults have been increasing -- doubling for the last three years in fact -- we believe they are set to accelerate one again due to unemployment and the timing of benefits.

Spain has a very generous unemployment system that pays the unemployed 65% of the average national earnings for up to two years for those who have worked for the prior six years. The risk, of course, is that as these benefits begin to run out, the ability of the unemployed to pay their mortgages diminishes substantially, which could lead to broad issues for the Spanish banking system.

 

Wed, 05/05/2010 - 13:54 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

I've read enough nonsense. If you're such a bear on Spain, put your money where your mouth is and short it. I'll be glad to take the opposite side of the trade.

Wed, 05/05/2010 - 13:31 | Link to Comment RagnarDanneskjold
RagnarDanneskjold's picture

Spanish government points to their government balance sheet and says everything is fine...but Spain's problem is the banking system, not the sovereign debt. Six months ago people were worried that Spain's banks could cause losses in the euro system that would then lead to sovereign debt problems.

I love the conspiracy theorists that rely on the U.S. being simultaneously stupid and genius. Amazingly, the "genius" Anglos always manage their well-coordinated strikes just as some foreign entity has engaged in behavior so stupid that it makes the Americans look smart. 

This is the central banking Special Olympics and you'll find out the gold medal isn't what you thought it was...

Wed, 05/05/2010 - 12:59 | Link to Comment Windemup
Windemup's picture

Get the tin foil hats ladies and gentlemen, that's an ominous looking pentagram!

Wed, 05/05/2010 - 12:21 | Link to Comment kaiserhoff
kaiserhoff's picture

Leo,

Been watching the "ritual" protests in Athens and the related blood in the streets.  I must say I'm looking forward to the same sort of peaceful protests in DC.  Vat gifs mit your peeps?  Someone didn't get the script.

Wed, 05/05/2010 - 11:26 | Link to Comment ElvisDog
ElvisDog's picture

This guy is nuts. The "unlimited potential" of Europe? I would take the mid- to long-term prospects of the U.S. over Europe any day of the week. Whatever structural or demographic problems the U.S. has, Europe has the same but more so.

Wed, 05/05/2010 - 11:22 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

You are all forgetting Bubble Ben and the US government's master plan: reflate risk assets at all cost, and inflate your way out of debt. What is going on in Europe right now is part of the larger scheme. Think about it this way, the alternative - a protracted depression with deflation - would kill the US financial/ political elites and their control over the global economy.

Wed, 05/05/2010 - 19:22 | Link to Comment SWRichmond
SWRichmond's picture

You are all forgetting Bubble Ben and the US government's master plan: reflate risk assets at all cost, and inflate your way out of debt. What is going on in Europe right now is part of the larger scheme. Think about it this way, the alternative - a protracted depression with deflation - would kill the US financial/ political elites and their control over the global economy.

I agree completely with everything written here.  When I said there is no "money" to pay the debt, I meant real money produced in a wealth-producing transaction, not the faux printed crap that Ben is producing.  I agree completely that the preferred path is to inflate away the debt, and I agree completely that a self-reinforcing debt deflation would destroy the financial elites and their control of the system.  I believe that, in trying to do inflate, they will completely destroy faith in the currency, and then to stay in control they will use any means necessary, any means at all.  THAT's when it gets interesting.

Wed, 05/05/2010 - 12:07 | Link to Comment the grateful un...
the grateful unemployed's picture

stop me if I'm wrong, government Sachs remains the primary financial agent, calls the ratings agency for a downgrade, so the bonds they end up with in the bailout are priced at a fair rate of return. This little game is about transferring risk, US taxpayers deserve something for bailing out Greece, and if EURO land doesn't like it they can pony up a larger share of the bailout, although we seem to be getting maximum leverage out of this for our 45B??

Forget the panic, the demonstrations are street theatre, 51% disagree, hell we had a President for six years who could barely muster 25% approval, and the country kept going.

The market rally Monday was right on cue, this selloff has me wondering if I missed something, and obviously the currency arbitragers are having their way. The dollar continues firm and t bond auctions by the Fed don't even need the indirect bid, is that it in a few words?

Wed, 05/05/2010 - 11:11 | Link to Comment Escapeclaws
Escapeclaws's picture

Engdahl gives himself away when he makes a distinction between Medeyev and Putin in the final moments of the interview, as if Medeyev is more than a place holder for Putin. Also, he approves of Russia's use of natural gas politics which can be used against Germany and the rest of Europe and has already been used against the Ukraine. While I myself questioned in a previous post the motives behind the current anti-Europe propaganda which feeds the innate jealosy of Americans, who relatively speaking get zero for the taxes they pay, his arguments suggesting an American plot against Europe seem simplistic and not particularly insightful. I think it's more of a case of gloating and opportunism than an outright plot.

Wed, 05/05/2010 - 11:03 | Link to Comment PD Quig
PD Quig's picture

I'm surprised Engdahl agreed to be interviewed at such length without his tin foil hat. The several million year history of primate experience demonstrates beyond all doubt that no two individuals can keep a secret, yet this guy postulates conspiracies that he would have us believe have run for decades with thousands of conspirators. That frankly is just f*cking stupid. There is a much simpler explanation that meets the Occam's Razor test.

A group of powerful folks in 1910 snookered Congress into creating the Fed and human nature and financial gravity did the rest. The quest for power, greed and the intellectual laziness of the citizenry (exacerbated by leftard propaganda mills known as public schools) has led us to this end. And it IS an end, my pretties, because at long last the credit-based economy epoch is ending. If I worked in D.C. or on Wall Street, I'd be working on legislation to remove all the lampposts and ban rope sales.

 

Wed, 05/05/2010 - 10:57 | Link to Comment the grateful un...
the grateful unemployed's picture

So the US is trashing the EURO to give the dollar some lift? Is that what they want? That's two questions, and the answer to both of them is probably no, but its the wrong question. The knee jerk reaction to why the ratings agencies downgraded sovergein debt among the PIIGS, is what? I didn't hear the phone ring? Who ordered this pizza?

Oh I get it they want a better return on the bonds Greece has to float, and Goldman is the lead dog. So lets force rates higher with a downgrade, so we can bleed these poor bastards dry, which is what the IMF always does, and Goldman always does?

While we sell Treasuries at negative rate of return at auction to fund our endless deficits, including yours.

 

And they think the century of America is over, baby we are just getting started.

 

Wed, 05/05/2010 - 10:50 | Link to Comment Otherspeoplesmoney
Otherspeoplesmoney's picture

"Spain's banks are among the best in the world and they got trashed on Tuesday."  Not true.  Please read the following posted by John Mauldin in August of 2009.  Spain and it's banks are a basket case.  

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2009/08/31/spain-the-hole-in-europe-s-balance-sheet.aspx

Wed, 05/05/2010 - 10:56 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

With all due respect to Mauldin, I've been to Spain and know a lot about their banks through hedge fund managers there and contacts here in Montreal. Spain has problems, but this hysteria is way overblown.

Wed, 05/05/2010 - 11:09 | Link to Comment Otherspeoplesmoney
Otherspeoplesmoney's picture

So you are saying the following data is either insignificant or incorrect? So I guess I should step up and buy their bonds?  But I'm all full of the Greek bonds you pumped some time ago.

Spain has as many unsold houses as the U.S. which is six times larger than Spain. Spain is roughly 10% of the EU GDP yet accounted for 30% of the new homes built in the EU since 2000. In 2000 developer loans valued 33B (euros), in 2008 they valued 318B. If construction loans are included the value increases to 470B euros, almost 50% of Spain’s GDP.   The reason this has not come to the forefront is the effort by Spanish banks to buy back real estate rather than letting the housing market collapse.  The result, Spanish banks are the largest owners of real estate in the country. 

Wed, 05/05/2010 - 11:13 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

So go ahead, be my guest and short Banco Santander. You're going to get your ass handed to you.

Wed, 05/05/2010 - 11:26 | Link to Comment Otherspeoplesmoney
Otherspeoplesmoney's picture

Nice rose coloured glasses pal. I'm afraid you just don't get it. Stick to the pension work and issues which will give you plenty of time to revise. 

You did buy the Greek bonds didn't you?  You didn't just pump them and not follow through did you....for shame.

Wed, 05/05/2010 - 12:09 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Greek bonds paying north of 8% are a steal if this bailout goes through. The problem is if it doesn't go through, they default on their debt. As for Spain, I think they're in much better shape than what the MSM portray. I stand in solidarity with my Spanish, Portuguese, Italian, and Irish brothers and sisters.

Wed, 05/05/2010 - 13:04 | Link to Comment RockyRacoon
RockyRacoon's picture

I stand in solidarity with my Spanish, Portuguese, Italian, and Irish brothers and sisters.

Your familial attachment has very little to do with economics, Leo.  Stick to the facts.  I think that the sibling reference demonstrates that your analysis is tainted.  Sorry to have to report same.

Wed, 05/05/2010 - 10:54 | Link to Comment whydtinogo
whydtinogo's picture

Id agree with your comment - Kolivakis has a habit of posting opinion and conjecture as fact. The Cajas are in a very bad way on virtually any measure - the larger banks are in better shape than their country cousins but that doesnt make them "among the best in teh world"

Wed, 05/05/2010 - 10:24 | Link to Comment pc_babe
pc_babe's picture

What a bunch of anti US crap!

That chick couldn't help his hard-on if she tried.

Wed, 05/05/2010 - 10:31 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

I do not hold Engdahl's views on the secular decline of the US, and I do believe the US recovery going on right now is real and sustainable. It will surprise many skeptics who are long-term bears on the US. The world is more complex than we think. Chimerica is a reality and it will not go away anytime soon.

Wed, 05/05/2010 - 13:26 | Link to Comment akak
akak's picture

"I do believe the US recovery going on right now is real and sustainable."

Thank you, "Leo" (or should I say, Mr. Geithner, or Mr. Bernanke?) for definitively driving the last nail into the coffin of your financial and economic credibility here.

Wed, 05/05/2010 - 10:07 | Link to Comment whydtinogo
whydtinogo's picture

Greece will restructure its debt within one year - Portugal will follow Greece within this year - within 2 years the Euro will notice the absence of the aforementioned countries as well as Spain. Italy will be out in 3

Wed, 05/05/2010 - 09:52 | Link to Comment crzyhun
crzyhun's picture

And the frogs, olive oil, chicken, you name it comes home to roost.

Maybe the Mayans were right, along with St Malachy.

Live in debt and you die. What was the last productive thing that Europe did??

Voice of reason will fall to emotion everytime. Sit back watch the great Eurozone unglue. BTW this was in the cards a ways back, patching together these countries was a mad attempt at union.

Wed, 05/05/2010 - 09:44 | Link to Comment SWRichmond
SWRichmond's picture

Euro at 1.28

USDX at 84.20

Is there a Treasury auction this week?  Never mind, there's one every week.

I'm gonna get a great opp soon to double down on my silver miners.

Leo, Engdahl's points may be correct, but that doesn't change the fact that there is no money to pay off the debt, either in the U.S. or in Europe.

Wed, 05/05/2010 - 09:53 | Link to Comment trav7777
trav7777's picture

This remains the bottom line...there isn't any money.

We continue to have massive auction after massive auction without a hitch.

Maybe destroying the Euro is our opening move in sovereign wars.  But, at any rate, gotta LOVE the ratings agencies finally being OUT AHEAD of this, eh?

They didn't cut Ambac or LEH to junk until after the stock zeroed.  But they're cutting Portugal and every peripheral country in Europe in advance, just to start the ball rolling.

This is an assisted avalanche.

Wed, 05/05/2010 - 10:05 | Link to Comment Baron Robber
Baron Robber's picture

SW and Trav, 2 of my favorite commentors. Leo is just one of the financial pundits (especially in his mind) that does not get it at all. Let me posit this on Moody's being out front for a change. Buffet seems to be fighting tooth and nail to stop any derivatives reform after calling them financial weapons of mass destruction - but I'm thinking he's pushing Moody's to downgrade Spain because Berkshire is shorting PIGS debt through CDS and making a bundle.

Wed, 05/05/2010 - 10:28 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

I've been calling these markets bang on and as far as getting it, trust me, I get it. Wake up and realize the US and UK financial elites are trying to destroy the Euro and Eurozone as part of a master plan to control oil and than inflate their way out of debt. Engdahl is bang on, and the US controlled rating agencies (as if they had any shred of credibility) are just political patsies aiding and abating the banksters on Wall Street. Baron Robber, before you write out of your ass, think a little.

Wed, 05/05/2010 - 09:37 | Link to Comment JimboJammer
JimboJammer's picture

The  Dominoes   are  falling ,   Gold  and  Silver  are  Quality  Wealth..

Is  Greece  getting  a  bailout  in  Gold  ..  ?   Hell  No.....

Wed, 05/05/2010 - 09:23 | Link to Comment snowball777
snowball777's picture

Who knew giving handouts to the homeless perched in front of your lender would make it harder to get a decent rate on a loan?

Wed, 05/05/2010 - 08:12 | Link to Comment dcb
dcb's picture

It has nothing to do with the market at all. the global carry trades means that as people get out of euros the market will fall. regardless of anything. it is why you need some form for capitial controls. money flows in too easy and out too easy. it promotes instability. bad for society.

One of the reasons the golbal financial system was designed to destruct.

Wed, 05/05/2010 - 08:08 | Link to Comment ZackAttack
ZackAttack's picture

I'm not sure traditional metrics of credit quality apply to a nation's banks when there are stressors such as 20% UE.

 

So, the EU is going to form the Lake Woebegone Bond Rating Agency, where all debt is above average. What makes anyone on the planet think it would have a shred more credibility than the EU itself, which is bobbing around absolute zero? Why don't they just bribe the rating agencies like everyone else?

 

Wed, 05/05/2010 - 09:40 | Link to Comment SWRichmond
SWRichmond's picture

where all debt is above average.

Hey man, trophies for everyone, winner or not.

Wed, 05/05/2010 - 08:05 | Link to Comment wang
wang's picture

some lightweights chime in on all of this hysteria

A bail-out for Greece is just the beginning

By Martin Wolf

http://www.ft.com/cms/s/0/de21becc-57af-11df-855b-00144feab49a.html?cati...

A dark scenario

Charles Wyplosz

http://www.voxeu.org/index.php?q=node/4987

 

Wed, 05/05/2010 - 06:49 | Link to Comment doggings
doggings's picture

I must say, living in Spain I would tend to side with this opinion of the Spanish banks

http://ftalphaville.ft.com/blog/2009/08/21/68016/are-spanish-banks-hidin...

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