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ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!!
Here is a sequence of events that I warned thoroughly about, and is
unfolding like clockwork. Witness the massive destruction of capital,
despite the fact that it could have been so easily seen at least a year
in advance. Let’s walk through just the past couple of months. In
January, I posted “The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults“. To wit…
About a month ago, I pulled the covers
off of the speculation over whether Portugal would default or not. Most
of the “experts” declared that a default was not in the cards. I
strongly recommended that the so -called “experts” pull out a calculator
and run the math. Not only will there be defaults, but the haircuts
will look particularly nasty. See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by
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 (December 6th & 7th, 2010).
Today, in the mainstream news we find the ECB Throws Portugal a Temporary Lifeline. From CNBC:
The European Central Bank threw
Portugal a temporary lifeline on Monday by buying up its bonds, traders
said, as market and peer pressure mounted for Lisbon to seek an
international bailout soon. A senior euro zone source told Reuters on
Sunday that Germany, France and other euro zone countries were pushing
Portugal to seek an EU-IMF assistance programme, following Greece and
Ireland, in a bid to prevent contagion spreading to much larger Spain,
the fourth biggest economy in the euro area.
The interest rate premium on Portuguese sovereign debt fell on Monday after rising sharply late last week
as traders said the ECB intervened to buy government bonds on the
secondary market. “They’re buying five-years and 10-years in Portugal,
whatever people are offering really,” one trader said.
So, the ECB is stuffed with these bonds, eh? So, what do you think
happens? Well, as the aforementioned post clearly articulated in the
title, The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults…
From Reuters yesterday:
Portuguese yields under pressure, Bunds rally
LONDON, Feb 17 (Reuters) – Five-year
Portuguese yields hit a new euro-era high on Thursday as peripheral debt
underperformed on concerns that Portugal will be forced to ask for financial aid, and on some disappointment over a Spanish bond auction.
German Bunds rallied on a jump in
U.S. jobless data and concerns over geo-political tensions in the Middle
East, helped by the two-year Schatz future breaking above a resistance
level.
The five-year Portuguese bond yield
PT5YT=TWEB rose to a 7.126 percent high after the Jornal de Negocios
reported, without citing sources, that Germany is pressuring Portugal to request an international bailout before the European rescue package is revised in March.
Portugal seen taking bailout by April -euro zone source
* Consensus growing that Portugal will need bailout
* End of March seen as crisis point for Lisbon
“Portugal is drowning. It’s not going
to be able to hold on beyond the end of March,” the euro zone source
said. “That’s already understood to be the case in financial markets,
but now it’s also understood among (EU) finance ministers.”
Reuters Update 1: Portugal govt urges Europe to respond to crisis
* Report of Germany putting pressure on Lisbon
* Bond spreads widen
“Any delay of an effective European
response to confront this situation (debt market turbulence) damages all
the countries and the euro itself,” Silva Pereira told reporters after a
cabinet meeting. “That is why our message is that Portugal is doing its
work. Europe also needs to do its part.”
Earlier on Thursday, the Jornal de
Negocios daily reported without citing sources that Germany has been
pressuring Portugal to request an international bailout immediately,
before any changes to the European rescue package are decided at a
summit in March. [ID:nLDE71G0HG]
Asked about the report, the minister said “the government has no comment in relation to this.”
Portuguese bonds have been under
pressure in the past few weeks on growing concerns over its public
finances and that it may be forced to follow euro zone peers Greece
and Ireland in requesting an international bailout. The concerns have
also risen on worries Europe may not reach a deal in March on fixing the
debt crisis.
Hey, that didn’t take too long did it? Five weeks before the ECB aid
effect evaporates, as well as the capital behind the aid? Let’s walk
through the EXTREMELY valuable research that I posted on on Portugal to
see what happens in the case of a default – starting with the
explanations given in 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 (December 6th & 7th, 2010):
Price of the bond that went under restructuring and was exchanged for the Discount bond during the Argentinian bond crisis…
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. Ireland is a prime example. If one were to look at the cumulated
funding requirement of Ireland over the next 15 years as clearly
illustrated in Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! Monday, November 29th, 2010
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.
Keep in mind that the German’s game plan is to kick this down the road till 2013, at which point it will be unsustainable but the mechanisms will be in place to force bondholders to take haircuts in front of the tax payers…
Sounds like a plan, doesn’t it? Except for the high probability that
you will probably have a rate storm well before 2013. If rate volatility
and/or levels spike for the more developed nations before then, all
hell breaks loose. In the US, we’re damn near zero now. Hey, what
happens to residential and commercial real estate valuations when rates
spike higher? See The
Coming Interest Rate Volatility, Sovereign Contagion, Geo-political
Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global
Real Estate Through This Mess.
Revisiting the Topic of Haircuts
Now, let’s return to the post “The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults“.
All readers should open this link in a new window, scroll down to the
spreadsheet at the bottom of the post, and reference the first column
with the cell labeled “Decline in present value of cash flow for
creditors” under the label “Haircut in the principal amount”. Now,
scroll over the to the column labeled “Restructuring by Maturity
Extension & Coupon Reduction w/Haircut”, which is the second to last
column in blue highlight and carefully read the figure for the “Decline
in present value of cash flow for creditors”. Booyah! And
that’s the unlevered losses. 5x leverage wipes you out several times
over. It is rumored that the ECB is levered over 90x, just for the sake
of discussion. I strongly suggest anyone interested in this
space study this spreadsheet very closely. This level of analysis is
probably not available anywhere else on the free Web.
Next up, I will revisit what the coming rate storm means to real
estate that is already falling in most developed nations, even at near
zero interest rates.
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TCT : BB can question QE to infinity...?
Oh bummer I didn't get to answer the guy I partially agreed with who called my analysis bullocks. Maybe we shall meet again to discuss it. My answer is that the sovereign to private debt ratio doesnt matter if the overarching sovereign, the ECB, is going to guarantee it, or if the individual sovereign such as Ireland is going to guarantee that private debt.
Whether private banks create money by monetization of central banks create it is a distinction without a difference. It is the total debt level that is important, not how it is spliced and diced. Dilution of the money is something the Germans are very sensitive about. If the dilution favors the PIIGS then it is a subsidy to the PIIGS since they get to spend the newly created money first.
Sorry about that , I like to say that outburst was uncharacteristic of me but it wasn't.
But getting back to the more substantial point of the division between private and public debt , now I have a problem with the concept of public debt but that is another issue.
I keep banging on about the 3% deficit rule in Europe as I believe it is so important - this prevented goverments from gaining the ability to compete with private corporations as most of the new money supply has been private in nature - this has given certain private utilties a advantage over goverment corporations with devastating results in the capital investment sphere - particulary in the energy sector - these private entities essentially favour low capital intensive projects over high capital intensive projects with strategic goals and therefore tend to engage in lets say the creation of a gas fired power plant over a nuclear plant - this transfers the risk to the consumer via the possibility of variable gas prices.
Anyway - there was a ecosystem of state or semi state organisations in Europe before the era of deregulation and they preformed quite well in their stated goals which went above short term profit taking.
So if you imagine the base money of Europe as being constrained and on its back rested a growing ogre of private debt which from my perspective created nothing but mass concrete with little function - you realise Europe is truly fucked unless the central bank creates base sov money - diluting the money and re localising the European continent.
The core countries savings are a illusion - money or currency saved is only a medium , if the investments have a negative yield they are not much of a investment.
PS BB thinks theres a difference - in the IMF$ system the dollar is a form of synthetic gold - if people continue to accept the 14 trillion dollar fiscal debt and growing which in reality is the worlds money supply he wins , we in Europe lose.
Is not debt destruction a deflationary event? Short of complete and total economic collapse, why wouldn't the Euro gain in value relative to the US Dollar?
Is Bernanke counting on an economic depression in the European Union to bring his much beloved inflation to America?
New Jersey and Michigan.Then California, Arizona.
Who's up after Portugal ?.. I forget the acronyms. So far the ECB plan has worked No? Euro at 135.. Bonds spreads somewhat contained..they are brilliant indeed!. Some minor skirmishes here and there. sarcasm
Greece should learn from the Egyptians.. now that's how you overthrow your Dictatorial Govt. Either go all the way or go home.
German conquest is based on economic virtue not on guns this time. As for UK...tighten your belts if interest rates go up and the asset speculation deflation flattens the City. The pound is very fragile to this : pension fund indexation on assets, real estate/mortgage sensitivity to interest rate is very high.
TCT. I hope your maths are better than your USA, USA hoopla...
Something tells me that Angela Merkel is more solid than Washington thinks. And by 2013, the Europeans will have in dire case a two tier money. You can bet on that. Can you bet on the USD sticking it out to 2013...?
So, the Germans will finally suceed in conquering Europe when the Euro goes away and the new German Mark is the last man standing. Looks like the UK was very smart to keep the Pound: http://en.wikipedia.org/wiki/United_Kingdom_and_the_euro
Good calls reggie. It is your time to shine. One thing you are forgeting is that the last highly liquid dominant fully floating currency left standing wins. We will do ok here if the euro collapses because it means we can qe to infinity without major inflation to us, and the world has no choice but to use our dollars, a free lunch for us. All we have to do is be the last man standing. Bye bye euro. Hello deficit to infinity without tears! Suck it up eurobitchez!
Trust me, Bernanke is betting the house on it - Literally!
Its always been a dollar vs Gold play - with the euro as the gold vector , if the ECB does not increase its balance sheet massively , the periphery of Europe will re wild and the dollar will be king again.
This is a very important point and worthy of an entire thread - which country's currency will be the last standing? why? and what are the numbers to back up the reasoning? etc.
How is it that the FDIC closes banks on Bank Closure Fridays? Do these banks all just magically default on a specific date, or are they allowed to continue to operate for days, months or even years until such time that all the proper arrangements for default can be made?
Portugal will default in the same manner.
It is easier and less disruptive to bring the new team in over the weekend and make the transition when the bank is already closed. If all depositors are protected anyway it doesnt really matter when they close the bank.
Reggie. Your opinion is misleading. I live here in P…..
Do you really think the situation is that chaotic. You’re talking about a country that can use its gold reserves to pass this crisis without increasing its taxes but choose not to do it. For the sake or truth, compare it with any state in the US, much larger but much more close to serius default or the UK…
P.S.: In case you have not studied Economic History, Portugal was also the only country after WWII that fully repaid the Marshall Plan aid….*
That is a joke. Portugal doesnt have near enough gold to pay off the debt and fund their current deficits.
Yeah I will compare it to any state. Total debt to state gdp is lower for.any state you care to pick, compared to portugal.
My friends, it appears that there are a lot of bondholders and traders that seem to agree with my opinion. The math appears to show that Portugal will have debt service issues.
This situation at inception in Portugal, Spain, Ireland is different to Greece. Greece was a public sector scam from day 1. They don't have rule of state, tax payments, etc.
In the three other countries the debt crisis is pure speculative greed by private sector FIRE economy. Now today, without economic growth, the public sector bail out, triggered by this massive transfer of dead assets, does not have a sufficient savings/growth base to absorb it without pain in the local economy. Whence ECB step in...
Reggie bang on yet again. I live in the middle of london, and there heaps of empty office space, meanwhile house prices have only fallen a little; still a stupid levels.
The way people are spending here, you wouldn't think there was a recession/depression.
Foreign investors buying London estate, probably. Second; people are in denile (not de Thames) abart what's coming up as the Gov't cuts and redundancies haven't kicked in yet.
Reggie, tell me why these private sector speculative losses generated in real estate and held by private banks should not be written down, hair cutted, by the banks before tax payers take the load further down through the ECB. From what I can see the private sector has ransomed the local govt. sector to bail them out and now the ECB is stepping in to spread the pain around EU and especially Germany. Angela Merkel is right. The buck stops in 2013.
The only question is what plan B exists to Portugal today for private sector melt down in real estate?
Reggie , the ECBs balance sheet is even today very light in Goverment bonds - it could easily increase its purchases many times.
Low goverment debt relative to private debt is the problem in the euro system from its inception - creating massive malinvestment from the private sector as it filled a financial power vacuum filled with cheap concrete and dead ideas.
The state utilities of Europe need to reverse their decapilisation / privatisation schemes and they need base money to acheive that.
You are right, and that is the plan. Germany knows they have no choice but to let the southern countries live a subsidized lifestyle. However the germans are very upset and try to delude themselves into thinking that there is some other solution. There is. Let the euro project fail, or just as bad let some sovereigns go bankrupt. It looks like the plan is to subsidize piigs by bond monetization until 2013 and then let sovereigns go bankrupt, barring a miracle.
To be quite frank I call your interpretation complete bollocks , you see - you are looking at fiscal flows as if they matter much in the euro zone.
Since the ECB declared that bank bonds were equilivent to sov debt the 3% rule is a nonsense.
Most of the new money created in the euro zone has been private in nature - with sov debt remaining static relative to a mushrooming private debt.
German banks are not decaptilised as they have fuck all capital to start with - their balance sheets are in some sort of deep freeze.
Yet the periphery pay a tribute to these fuckers anyway .
The fiscal problem is a illusion - it is a manifestation of the declining money supply initiated by the non default on private debt speculation - period
The end of "The Great Keynsian Experiment" is nigh.
The only question remaining is "Where first?"
Euroland, Japan or the U.S.?
Sure looks like Euroland according to Reggie and I am inclined to agree.
I'm going to choose the dark horse and go for Japan, not because of its 200% dept to gdp but because it demographics are so damned ugly.
Their aging population is ahead of ours, and so how are they going to pay their money back, when they're all running round in walkers?
If they have to sort their debts out, they better do it now.
Defaults are bad for any population, but an ageing/old one? The big question will be How?
Maybe, but it sure looks like the "unraveling" has already begun in Euroland, giving them a good head start on Japan.
No doubt, the Japanese collapse could happen suddenly and it will be a doozy.
I respect your opinions, but you sure do know how to make one butt ugly chart
REPLY FOR REGGIE; tell the truth and shame the devil, Reggie. You do good work, my friend. your walking tour of Manhattan pointing out the buildings that were sold for %60 and less of their most recent financing value, was very convincing; I got a couple of people to look at it and start thinkin' different; one of one signed up with you; if I find another one I'll get him to sign up too. Keep givin the lying devils hell, Reggie.