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Here’s More Proof of the Sheer Lunacy of the European Bank Stress Tests: Passed Banks are Already Trying to Collect on Defaulted Claims of European Nations
- Bank Run
- Barclays
- Bond
- China
- Credit Suisse
- Creditors
- default
- Deutsche Bank
- ETC
- European Central Bank
- Fail
- goldman sachs
- Goldman Sachs
- Greece
- Gross Domestic Product
- Hungary
- Iceland
- International Monetary Fund
- Ireland
- Japan
- Kuwait
- Middle East
- NPAs
- Portugal
- Quantitative Easing
- Sovereign Debt
- Sovereign Default
- Sovereign Risk
- Sovereign Risk
- Sovereigns
- Transparency
- Unemployment
- United Kingdom
Much of the mainstream media has carried articles that were at least
somewhat skeptical of the European bank stress tests. I think being
“somewhat skeptical” is about 5 leagues below where they should be, but
its a start. After all, the EU actually passed a bank that is literally
insolvent. I don’t want to pound on the actual insolvency of this German
bank, since I already went into detail on this topic earlier,
but it is imperative that my readers understand the depth and extent of
the travesty (or lies) that are being promulgated in the name of
“transparency”. I ridiculed the basis of these stress tests last week (European Bank Investors, Don’t Look Now – You’ve Been Hoodwinked, BamBoozled…),
but now it is time to show you that these tests which assume the
biggest threat to the European banking system (sovereign default or
restructuring) will not occur and capriciously passes banks that not
only will be hampered in the future, but are actually quite insolvent
(by nearly any realistic means measurable) now, have actually proven that the risks of restructuring and/or haircuts are virtually guaranteed. This leaves the results of the stress tests a farce, at best and an insult to capitalism and common sense.
The tests assumed that there would not be a sovereign default. The
tests also refused to mark “hold to maturity” inventory to market,
despite the fact that said inventory may be permanently impaired. The
logic? Europe will not allow a default. But how about a restructuring?
And how will Europe handle more than one sovereign coming to the
restructuring trough? I’ve already demonstrated the damage that can be
done in A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.
Price of the bond that went under restructuring and was exchanged for the Par bond in 2005
Price of the bond that went under restructuring and was exchanged for the Discount bond
If one considers the leverage used by the banks to buy these bonds, there is no wondering how Greece Killed Its Banks
(see the contagion model below). Let’s delve further though, for their
is already ample evidence of distressed banks that passed the EU stress
tests that already have ample holdings of bonds that are already
defaulted. Yes! That’s right, the default has already occurred.
Revisiting the bank that I call (without a shadow of a doubt) insolvent, Deustche PostBank.
you will find that it had €57,033,065.20 in claims against the
Icelandic Kaupthing Bank. But isn’t that bank in bankruptcy? If the bank
is in bankruptcy, under the remote scenario that PostBank will get
ANYTHING back, it would most likely be pennies on the dollar. But I
thought default wasn’t in the cards, according to the European
authorities. Their credibility is shot, and has been since this crisis
began. See Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
to mark the track record of EU prognostications to market. Since the
crisis began, they have been wrong nearly ALL of the time, and each time
the error was skewed to the OPTIMISTIC side.
What many central bankers and government officials fail to realize is
that there is constant contingent of watchful eyes and analytical
prowess available thanks to the socially collaborative power of blogs
and the distribution prowess inherent in the Internet. Thanks to Wikileaks,
we know have a listing of $40 billion euros of claims against this
tiny bankrupt entity that proves the point that assuming no defaults
when so many nations are on the path to default is pure lunacy. The
leaked document is very hard to get due to traffic (the document is over
500 pages of bank secrets), but any free registered member of BoomBustBlog can download it here: 
kaupthing-claims.
So who else has claims against this little bank that can payout very
little? Goldman Sachs, Deutsche Bank, Credit Suisse, Morgan Stanly,
Exista, Barclays, Commerzbank AG and a vast number of others totalling
over $40 billion euro. In case nobody realizes it, neither the bank nor
Iceland itself has the money handy to return to the creditors. As a
matter of fact, Deutsche Bank and Deutsche PostBank have double the
exposure due to their unusual relationship. Subscribers, see
- Deutsche Bank vs Postbank Review & Summary Analysis – Pro & Institutional
- Deutsche Bank vs Postbank Review & Summary Analysis – Retail
So, I assume some of the naysayers quip, “Well, Iceland is a one off
occurrence, and a very small country!” Right, in the case of Greece,
Portugal and Ireland, it’s different this time. They are all Ovebanked, Underfunded, and Overly Optimistic, this is the new face of sovereign Europe:
Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns
This is just a sampling of individual banks whose assets dwarf the
GDP of the nations in which they’re domiciled. To make matters even
worse, leverage is rampant in Europe, even after the debacle which we
are trying to get through has shown the risks of such an approach. A
sudden deleveraging can wreak havoc upon these economies.
If you don’t think another Iceland is about to happen momentarily,
take a glance over at Hungary. Although this country has adequate (for
now) reserves, the game of chicken it is playing with the IMF is bound
drive up rates and isolate it from global financial markets which will
further swallow a country that already has the 4th largest debt to GDP
ratio (80%+) in the EU. If the current Hungarian forint weakness
pursues, Hungarian banks will assuredly face additional stress. This
stress will be compounded since Hungarian households have borrowed
heavily in Swiss francs (CHF), potentially spreading financial and
economic contagion. The banks have a large inventory CHF-denominated
loans, hence a surge in NPLs and NPAs is imminent.
Of course, we have nothing to fear, since the EU stress tests
administrators have made it clear that there will be no defaults or
restructurings, you know, like the ones in Iceland. Let’s revisit how
easily and quickly financial and economic contagion can spread via The BoomBustBlog Sovereign Contagion Model:
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…
The BoomBustBlog Sovereign Contagion Model
Nearly every MSM analysts roundup
attempts to speculate on who may be next in the contagion. We believe
we can provide the road map, and to date we have been quite accurate.
Most analysis looks at gross claims between countries, which of course
can be very illuminating, but also tends to leave out many salient
points and important risks/exposures.
In order to derive more meaningful
conclusions about the risk emanating from the cross border exposures, it
is essential to closely scrutinize the geographical break down of the
total exposure as well as the level of risk surrounding each component.
We have therefore developed a Sovereign Contagion model which aims to
quantify the amount of risk weighted foreign claims and contingent
exposure for major developed countries including major European
countries, the US, Japan and Asia major.
I. Summary of the methodology
- We have followed a bottom-up approach wherein we have first
identified the countries/regions with high financial risk either owing
to rising sovereign risk (ballooning government debt and fiscal deficit)
or structural issues including remnants from the asset bubble
collapse, declining GDP, rising unemployment, current account deficits,
etc. For the purpose of our analysis, we have selected PIIGS, CEE,
Middle East (UAE and Kuwait), China and closely related countries
(Korea and Malaysia), the US and UK as the trigger points of the
financial risk dissemination across the analysed developed countries. - In order to quantify the financial risk emanating in the
selected regions (trigger points), we looked into the probability of
the risk event happening due to three factors – a) government default
b) private sector default c) social unrest. The probabilities for each
factor were arrived on the basis of a number of variables determining
the relative weakness of the country. The aggregate risk event
probability for each country (trigger point) is the average of the risk
event probability due to the three factors. - Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure.
The exposures of each developed country were expressed as % of its
respective GDP in order to build a relative scale for inter-country
comparison. - The risk event probability of the trigger point countries was
multiplied by the respective exposure of the developed countries to
arrive at the total risk weighted exposure of each developed country.
- Sovereign Contagion Model – Retail – contains introduction, methodology summary, and findings
- Sovereign Contagion Model – Pro & Institutional
– contains all of the above as well as a very detailed methodology map
that explains what went into the model across dozens of countries.
Additional reading of interest… Interest parties may click here to subscribe.
-
“With the Euro Disintegrating, You Can Calculate Your Haircuts Here”
-
The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!
- Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
You can find the full Pan-European Sovereign Debt Crisis series here.
- advertisements -
so reggie,
we both know what is presented as earnings and the stress tests are a sham. but you are forgetting: go with the flow and then dump. they all knew dot coma to be a sham, knew the hosuing bubble had to crash. that is their behavior. Just more of the same
Well, there will be some sort of fugitive restructuring when the Feds buy $6.4 trillion in securities sometime around December.
What we're waiting for in America is for college-educated unemployment to go up to 60%. That's the only thing that's going to make people more active politically--and then God only knows what; they may invent a new Hitler.
But the level is only 10%, and that is why the band plays on. Everything else--ZH or any other chatter--is, quite simply, nothing.
"But I thought default wasn’t in the cards, according to the European authorities. Their credibility is shot, and has been since this crisis began"
Yet gold is down some 14% in Euros since June & (gasp) 16% in AUD. Either nobody cares about credi-bility or you must be long gold Reggie.
Reggie, great investigative work again (thanks for sharing your insight). Wish I could afford your site subscription fees - any discounts for the UWCUBS (unemployed who can't collect unemployment benefits) ?
"Since the crisis began, they have been wrong nearly ALL of the time, and each time the error was skewed to the OPTIMISTIC side." - Reggie, I think this is the new normal for GAAP (generally accepted accounting principles)."
It will be interesting to see where the Europeans move their wealth (e.g. gold sovereigns, US stocks, emerging markets, etc.).
Go Reggie!
Why are reports and data like yours not on television or main stream media?
Because the advertisers won't allow it!
Imagine someone telling the truth before and after GM, Ally bank, Fidelity, or a Congressional Campaign ad.
Oh no, keep it happy and bubbly and positive buddy or no more BMW ad revenue for you!
Keep up the good work.
"This stress will be compounded since Hungarian households have borrowed heavily in Swiss francs (CHF), potentially spreading financial and economic contagion. The banks have a large inventory CHF-denominated loans, hence a surge in NPLs and NPAs is imminent."
And people wonder why the SNB was swapping CHF for Euros.
Reggie, your thoughtful, detailed posts are a pleasure. Akak: you have that right, and RockyRaccoon: thanks for the laugh. I am going to use 'Amagergeddonbank'!
Reggie,
Super work, many thanks for your all your efforts and for posting on ZH.
DavidC
Reggie,
Methinks the ECB and EU are serious when they say there will be no sovereign default. Claims may well be paid in nominal specie at a value haircut, but paid they will be.
That result will have its own consequences, which in the eyes of the powers that be, may be preferable to outright repudiation or restructuring.
Amagerbanken (Denmark), is worth watching. It has an almost Icelandic cast of overleveraged former billionaires that the bank will not forclose on or even give a margin call. If it does, the forced liquidations of large, leveraged, holdings in small companies f.ex. "Molslinien A/S", the rich-on-borrowed-money crowds favorite stock, will take a hammering, triggering further trouble.
Amagerbanken was recapitalised with DKK 700 million in februrary 2010 and it duly lost DKK 745 million on "currency trading", up till now, while paying bonuses all-round to "retain the expertise". Now they are trying a stock-emission. Probably Nordea will buy it because Nordea is already in the hole here having also lent large sums to the same crowd as Amagerbanken.
IOW: Amagerbanken is not "too big to fail", its "too leveraged to fall", it is an "inflection point". I hope it dies soon, there is too much Happiiie News on TeeVee lately. I will light a nice cigar for the occasion.
Maybe it should be called "Armageddonbank"!
I thought the same thing instantly upon reading that comment too!
Meanwhile the US banking system is insolvent and this guy is worried about not receiving his $1 senior discount: http://www.nypost.com/p/pagesix/sorry_barney_no_discount_BSco6dW9b1VTgrL7GcCFrN
Great stuff but maybe tone down the shameless self-promotion.... just a little bit eh bud?
Some banks are more equal than others...
There is a lot of gold changing hands in the EU.
What is a "one-off" occurence, anyway?
Where did this odd and cryptic phrase suddenly come from, and has anyone else noticed how such weird (usually British) words and phrases have been popping up overnight in the American lexicon over the last few years? Like the word "vet" for "review or check" that appeared out of nowhere a few years ago, or the word "redact" for "edit" more recently. And what I find really strange about this phenomenon is that literally overnight, almost EVERYONE in the media is instantly using these words and phrases!
It's a conspiracy, I tell ya!
Come on now, Akak, you are dwelling on the minutiae. Relax, take it easy. Make some more popcorn and watch the show. Pass the salt.
What is existence itself but a vast assemblage of minutiae?
In all seriousness, though, I am bothered by what I see as the accelerating degeneration of the English language. Language is the tool of communication, and when one allows one's tools to dull or even break, what good can come of it? Case in point: rap.
(I was joking about it being a conspiracy, however! Bigfoot told me it is all just a coincidence.)
Degradation of the English language? WTF!?!?
i h8 dat!
txt me sumtin, k?
Have you noticed people talking and communicating in small bits and not being able to get past two or three sentences, or one large main idea?
Their not able or too lazy to digest anymore, and tend to respond to information with a question on they're iPhone or there Blackberry/Droid/Smart Phone (*sarcasm alert* the incorrect "there/eirs/y're's" were intentional).
btw, ur my bff!
As I recall the French went down that road of preventing language corruption. It resulted in some pretty funny words. I am English and Literature educated through college level and I have some pet peeves that would drive you up the wall.
Example: Noun verb disagreement in sentences such as "None of the crew were sober."
None is a contraction of "not one", therefore, correct verb usage would be "was".
Wide spread mispronunciation of "ebullient". The word has 4 syllables with emphasis on the 2nd syllable. It so often comes out "e-bu-lent" with emphasis on 1st syllable.
And let's not even get started on "imply" vs "infer". I point my bony old finger at Kudlow for screwing that usage at every opportunity.
Just a taste of what drives me nuts....
And my list of linguistic pet peeves would be a lengthy one as well!
Aside from the mysterious and recent "redact" (which IS a word in Polish, however) and "vet" as a verb, how about "most every" or "most any", which grammatically are nonsensical constructions (what is meant is "ALMOST every" or "ALMOST any"), or the now almost ubiquitous but still incorrect "He could care less" --- again meaningless --- in place of the correct "He could NOT care less".
Then there is recent trend toward saying "-ale" as "-ell", and "-eel" as "-il" (as in pronouncing the word "hail" the same as "Hell", or the word "feel" the same as "fill"), not to mention using the word "issue" (which means a topic or subject of discussion) in place of the word "problem".
And I, as well, could go on and on ......
Bah, verbogeny is one of many pleasurettes afforded a creatific thinkerizer.
Add this to your list: Using "very" with words that need no modification. Such as "very excellent", "very unique", or "very exclusive". If something is unique, it is one of a kind. It cannot be very one of a kind. Excellent has no degrees of condition. And exclusive is... well, exclusive.
Pretty well-edumacated for a future hat, or perhaps thinking cap.
Most excellent post!
Having an issue with your post, I could care less!
Not to mention gobsmacked.
gobsmacked - utterly astounded
lol, had to look that one up.
my favorite is flabbergasted. i use it every chance i get.
Ahh. Ok. Back in the box now.
Banks are a disaster. They should never have even accepted taking the stress tests, utterly fraudulent. Time and time again displaying incompetence, short-termism. America sets the bar and they attempt to copy. Literally, waiting to suck on China's teat. It's just gobsmacking that anyone mandates this level of behaviour from in the very core of uman society.
I totally agree - but on the other hand it seems to have worked so far.
This is solid analysis available to all. Nice work Reggie. But Iceland has been living in BK for what 18 months? How much longer can it go on? Months, years, decades? Besides the prepared and skeptical, does anyone really care? Even most of the sheeple probably want the illusion to continue.
How much longer can the shuffle the deck chairs, but before answering - they own all of the media, control the printing presses, and have complicit subjects and banks.
Reggie, I like your posts because they have raw data backing them. In your opinion, who will be the next to go way of Iceland?
Now that the 'Tour' is over I can get back to watching the world disintegrate.
If I'm so paranoid, why are things always worse than I thought?