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With Greek Debt Yielding 20%+ and Trading at Half Par Value, European Banks Are Trapped!
As nearly every proclamation and warning that I have given in 2010
has come to pass in 2011, the coming mass restructuring of the European
banking system is nigh upon us. Let me make this perfectly clear.
Despite what you may have heard, those banks and institutions holding
and hoarding EU periphery debt are getting slaughtered. Let’s walk
through the simply math. I borrow €100 million with €10
million equity and purchase €110 million in bonds from Greece at par.
These bonds are now roughly half of what I paid for them. That is a €55
million loss on a €10 million equity investment. A 550% loss! This is
not rocket science, yet there are many who are dismissing this concept
as sensationalist. Try dismissing it as basic math, first!
Exactly one year ago tomorrow, I went through this scenario in the article “How Greece Killed Its Own Banks!“, which my regular readers should be quite familiar with.
…. 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)…
Well, one year later and things have gotten much worse. Ireland and
Portugal have joined the bailout brigade as well as Greece’s bonds
tumbling even further – post bailout!
Greece’s shorter term bonds are on a backwards tear, with the 2 year
breaching the 20% mark while the 10 years pushing 15. This is not only
unsustainable, but a sign that the market not only expects a
restructuring but is forcibly extracting compensation for said
restructuring ahead of time.
Bloomberg: Greece to Sell Bills With Two-Year Bond Yields Exceeding 20%: Euro …
So, anyone who doesn’t think that a country that is in recession
paying 20% on its debt AFTER it was just bailed out with global interest
rates at cyclical low combined with the ECB raising rates is simply
delusional. The next question any realist would ask is not if Greece is
going to default or restructure, but what happens when they actually do?
Well, if you remember my rants concerning the EU’s “Delay & Pray”
strategy of classifying these sovereign junk bonds as hold to maturity
assets marked at par, you realize that there are hundreds of millions of
euros of losses sitting on bank balance sheets RIGHT NOW, levered much
more than 10x to 15x times. These assets are also currently going down
in value, not static or rising. This means that not only are their
gaping holes in the balance sheets of European banks all over that
everybody seems to be ignoring, those wholes are being ripped wider and
wider as time goes by.
Well, if Greece does default or restructure (and the market is
telling us that Reggie is right in that this is a foregone conclusion),
then…
The chart above illustrates what would happen if Greece were to
restructure to the point where it would come into compliance with the
Maastricht Treaty. Of course, if Greece were to do such, it would not
happen in a vacuum. You see, if Greece were to restructure than all of
those banks who were playing “Hide the Sausage” would be forced to come
clean and mark all of that bad debt to market. Germany would lose a full
23% of its tier one capital, and Germany is the number one economy and
banking system in the EU, formerly thought of as untouchable!. Hey, hold
on… It gets better.
Not only do other periphery countries hold Greek debt that, if
properly marked or defaulted on, would tear a hole through their
domiciled banks tier 1 capital… They countries would most likely face
extreme rate pressures in addition to internal socio-political pressure
to default on their obligations as well as their tax paying populace
undergo extreme austerity measures, mostly to save banks and
bondholders. This is a pretty tough sell, even for the best political
minds.
So, what happens if Portugal and Ireland decide to default/restructure as well???
Basically, a domino effect all throughout the European banking
system. OF course if Portugal, Ireland and Greece fall, Spain is the
country that would be in the cross hairs and I would not ignore any of
the other countries either. Every country that falls adds weight to the
remaining countries backs. And to think, some of those central bank
types thought Lehman Brothers was a fiasco. Hmmm, they ain’t seen
nothing yet! Just so you are aware that I don’t bite my tongue to
assuage the audience, this is the same message presented in more detail
at the ING RE Valuation conference in Amsterdam.
Throughout the week, I will post additional clips from the
conference. Professional and institutional subscribers should feel free
to contact me via email if
they want to discuss analysis that I haven’t released on the blog
pertaining to this topic. Next, I will discuss the potential fate of EU
countries not mentioned (in detail) in this missive, for no one is truly
immune to a banking collapse.
See the UK and Eurozone on BoomBustBlog for more EU opinion and analysis.
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Hmmm ... I've seen this movie before.
The banks will roll over the 'bad' debts for new (equally bad) debts, the terms will be fiddled with (and CDS holders bought or fought off), the poor ol' can will get kicked again and again until the blame can be shifted to someone that nobody likes very much.
Then ... the loans will all be written off and forgiven, the banks will be 'reconstituted' with new capital (and old executives) given bigger buildings somewhere else ...
or the whole shebank is going to collapse taking big US and Chinese banks with it!
Watch for that blue swan. Coming to a town near you ...
Don't worry about it. Leo says its OK.
Leo's buying the dip in Greek debt as we speak
...if Greece were to restructure than all of those banks who were playing “Hide the Sausage” would be forced to come clean..
Hide the Sausage!!! Reggie, classic line, love it (and your above analysis:)
Insiders in Europe, who are aware of the approaching abyss, may be behind much of the recent buying of PMs.
Here's hoping the Morgue & Goldman Sucks have their dirty little fingers in the soon to break dike in euroland,while hoping the ECB would come riding to their rescue. Someone needs to die!
Société Générale and BNP you arrogant s-bags, your time is gonna come!
wasn't Jean Claude Trichet ('twat' for short) a BNP Banker ...and founder of the EU project ...and now, surprise surprise, Chief chump of the ECB ...small world Europes elite!
DOOM!
You do us all a great service, Reggie.
Thanks.
can't we do the same to GS/JPM? Or are we already?...hmmmm.
so tell us which banks
are going to take it up the keister.
or do we have to pay for that information
i'll 2nd that motion ...Reggie cough up, which Euro banks are most exposed?
no problem, the imf, ecu, fed will guarantee all soverign bonds at face value.
i would love to see swiss exposure to the piigs
if there is little swiss exposure buy long calls on the chf
http://www.cnbc.com/id/37025018/Banking_Systems_Most_Exposed_to_PIIGS_Nations?slide=9
It's CNBC though, so who knows how accurate it really is...
I think the ECB has taken lots of this trash in as `collateral`already. Idoubt they get to margin call the banks who swapped it for liquidity. Perhaps not much Greek debt has been gotten off the ballance sheets of the banks this way - but I think plenty of Portuguese and Spanish paper has been. The ECB has been the buyer of last resort for much of this stuff since Ireland went tits up. I suspect the European tax payer is already on the hook for a lot of it - he just doesn`t know it yet. Not saying holes will not be torn in bank ballance sheets, just that a large portion of the bill may have already been allocated to the taxpayer.
Fifty-fifty...? As Enrico Mattei proposed to the Seven Sisters...They didn't like it then...He disappeared into thin air one day!
Well if China put one trillion USD into PIIGS and One trillion into US PDs it will own the world.
Then it can convene the IMF and define the NEW Bretton Woods cum Yalta of the coming age. Simple as that. But right now upto january 2013...it'll be :
"Double double, toil and trouble...Fire burn, and cauldron bubble " to let the western world simmer in its own dirty juice...Herr Merkel and Chinese Emperor will then define the new age with the next dumb US president up to his neck in debt. As will be the rest of EU (apart from Germany) AND Japan also in deep shit. So that looks like China's plan A...
China, where are you?
Why dont you go save the day?
If Greece has a really bad earthquake it would save them like Japan. Let's hope for death and destruction to save the bondholders
greece does not have its own currency and its own government run central bank...Japan will be fine even tho they took a terrible hit and have lots of internal debt....Greece will not be
Do these Portuguese, Spanish and German banks have no concept of hedging or cutting their losses? They could've sold that crap paper any time in the past two years. Instead, they chose to hang onto it. Now, tell me why anyone should feel the least bit of sympathy or care for the consequences of their poor investing decisions?
Sell it to who?
There is no such thing as hedging. Even if you do get a hedge that works, the counterparty will go broke and you are naked again. Hedging is the great myth used to hide the facts.
Sold it? Who to? Do you have any idea how much debt they are holding and what would happen if they tried to sell it? The value would go to zero overnight.
They couldn't even think of getting out. The best they could hope for was a bailout that would postpone the inevitable for another year or 2.
This disaster was locked in 10 years ago, by people who were only looking ahead a year or 2.
So, there are no position size limits at these banks? They were simply free to put on positions that were so large they'd bankrupt them if they tried to sell?
Why should this display of ineptitude garner the sympathy, or so much as a dime, from the public?
Since it was sovereign it was considered risk free and no reserves or swaps were required to be held.
Since spending money or holding excess reserves cuts the return, these are all essentially unhedged, unreserved positions. I am getting a little worried.
I dont see the endgame. Tell us poor schmucks who cant afford a subscription the end game.
European banks are not trapped....they ar FUCKED!
ECB bailouts have done nothing to allay fears of default and since all of EU banks are risk exposed to each other...they are FUCKED!
One default will initiate the domino cascade....who will be the first? This would be the repeat of 2007 and 2008 except in Europe first.
Its a TRAP!
"It's a Rat* Trap Billy, and you've been conned!" (song by Boomtown Rats in 1980's recession)
*Rat = Politicians