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First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does?
As soon to be ex-president Mubarak demonstrates that he has essentially lost control of his country, as is exemplified by the multi-million man march in the
streets of Egypt, it brings to mind one of the major contributors to
financial contagion, and that is government instability.The uprising in
Egypt, brought over from Tunisia (whose president lost power) has now
spread to Yemen: Yemeni president pledges not to seek another term:
Yemen’s U.S.-backed president, in
power for more than three decades, pledged Wednesday not to seek
another term in office in an apparent attempt to defuse protests
inspired by Tunisia’s revolt and the turmoil in Egypt.
As I have stated in my posts over the last few days, financial
contagion can spread rapidly and from relatively unexpected origins. The
debt situation in the EU is a powder keg simply waiting for an ignition
spark as the ECB and stronger EU parties attempt to spray water on the
pile of gunpowder from an aerosol can.
- Tracing The Path Of Egypt’s Disruption Sending Contagion To The Stronger Countries Of Europe January 31st, 2011
- Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! January 28th, 2011
- Japanese Downgrade Illustrates Potential Paths To Contagion January 27th, 2011
If the middle east continues on the path that it currently is, it can
inject contagion directly into the EU powder keg. I have highlighted
for subscribers the paths using our contagion model that takes into
account social unrest.
Now, lets reference the subscription “BoomBustBlog Sovereign Contagion Model“,
wherein we spent many analyst man/months to create a realistic model
to capture the potential for social unrest, financial and economic
contagion as they could skip across sovereign borders, continents, asset
classes and hemispheres. What we set out to do was to adjust the
pathways of apparent pure financial contagion with several, real world
factors.
So what could happen if the Middle East unrest pierces the EU border from a contagion perspective?
We have a very strong idea of what country will get hit first, and we
came to this conclusion by connecting the dots. That, of course,
doesn’t mean that that country will be alone in suffering the contagion
effect. There are those countries with excessive internal sovereign
exposure. The Greek banks have 226% of Tier 1 capital exposed towards
their own sovereign debt. In How Greece Killed Its Own Banks! I illustrated the folly of such a high concentration by graphing the result of a haircut on said portfolio…
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)…
The same hypothetical leveraged positions expressed as a percentage gain or loss…
When I first started writing this
post this morning, the only other bond markets getting hit were
Portugal’s. After the aforementioned downgraded, I would assume we can
expect significantly more activity. As you can, those holding these
bonds on a leveraged basis (basically any bank that holds the bonds)
has gotten literally toasted. We have discovered several entities that
are flushed with sovereign debt and I am turning significantly more
bearish against them.
I also outlined various haircut scenarios for Greece, reference Rumor
Has It That The Germans Are Starting To Consider Real World Solutions
To The Greek Debt Dilemma – Restructuring, Exactly As We Anticipated!.
Well, we have updated our haircut analysis to take into consideration
cross border contamination, and it doesn’t look very pretty if things
start flowing. The graph below is an excerpt from the most recent contagion research document. Keep in mind this is a
depiction of a Greek default, and does not incorporate the contagion
that will invariably lead to the domino effect of other sovereigns
feeling the pressure and/or defaulting.
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Excellent Reggie.
Over the past few days, there's been some discussion regarding what would happen if there was a substntial spike in the price of rice. It has not run up like wheat and corn and may be the next target of specs.
With 280M+ Muslims in Indonesia [and their Islamic extremists] needing to eat, a spike in price food riot could make 80M+ Egyptians clamoring for political freedom look like a tea party.
The problems this could create in the Straits of Malacca choke point could be significant. With the flow of oil at risk in Suez and possibly the Straits of Hormouz this would then threaten all 3 points.
What is your feeling on trouble in Asia?
My friend, you obviously have not been following your Fed Chairman. There is no inflation. On a more serious note, I am trying to pull together the pieces as I type this. I have identified a weak point in Europe with close ties to the issues in the Middle East, that can't afford any more issues. At this point, that is where I think the highest probability for ignition lies. I have yet to drill down on Asia. The research has been completed, but I have yet to fully digest and assimilate it.
Thanks for the reply Reggie.
Keep us informed.
You are a valued contributor.
"First Tunisia, Then Egypt, Now Yemen"
...
next will be (probably after others) Saudi Arabia. And when that happens, the powder keg that will be reached will be the US rather than EU.
Reggie- can you please keep this excellent info to paying members only! We have to many trolls seeking to extend the pretend period.
PS- With an "unsinkable Fed" your doomsday scenairo will never play out. The antichrist will make sure of that!
Not unsinkable. You are falling for the "potent director" myth. A quick check of interest rates during QE's 1 & 2 will show that the Fed accomplished nothing. Their status depends nt he sufferance of an increasingly angry public.
Gone in 6 years.