How Greece Killed Its Own Banks!

Yes, you read that correctly! Greece killed its own banks. You see,
many knew as far back as January (if not last year) that Greece would
have a significant problem floating its debt. As a safeguard, they had
their banks purchase a large amount of their debt offerings which gave
the perception of much stronger demand than what I believe was actually
in the market. So, what happens when these relatively small banks gobble
up all of this debt that is summarily downgraded 15 ways from Idaho.

Reference (Bloomberg) Stocks
Plunge as Dollar, Treasuries Gain After Greece, Portugal Rate Cuts
and (the Wall Street Journal) S&P
Downgrades Greece to Junk Status:

“S&P cut Greece’s ratings to junk
status, saying the country’s policy options are narrowing as it tries
to cut its large budget deficit. The news, combined with an S&P
downgrade of Portugal, pushed down the euro to $1.3269, hit U.S. stocks
and sent Treasury prices higher”.

• •Stocks
  Plunge, Asia Bond Risk Climbs on Greece, Portugal Default Concerns
• •Greece’s
  Junk Contagion Pressures EU to Broaden Bailout After Market Rout
• •Trichet
  Travels to Berlin on Diplomatic Mission as Merkel Nears Greek Vote
• •Greece
  Bondholders May Lose $265 Billion in Default as S&P Sees 70%
  Loss
  April 28 (Bloomberg) — Holders of Greek bonds may lose as much as
  200 billion euros ($265 billion) should the government default,
  according to Standard & Poor’s.

  The ratings firm cut Greece three steps yesterday to BB+, or below
  investment grade, and said bondholders may recover only 30 percent and
  50 percent for their investments if the nation fails to make debt
  payments. Europe’s most-indebted country relative to the size of its
  economy has about 296 billion euros of bonds outstanding, data compiled
  by Bloomberg show.

  The downgrade to junk status led investors to dump Greece’s bonds,
  driving yields on two-year notes to as high as 19 percent from 4.6
  percent a month ago as concern deepened the nation may delay or reduce
  debt payments. Prime Minister George
  Papandreou is grappling with a budget deficit of almost 14 percent
  of gross domestic product.

  “It’s now not just market sentiment, but a top rating agency sees
  Greek paper as junk,” said Padhraic
  Garvey, head of investment-grade strategy at ING Groep NV in
  Amsterdam.

  Before yesterday, Greece’s bonds had lost about 17 percent this year,
  according to Bloomberg/EFFAS indexes.
  The 4.3 percent security due March 2012 fell 6.54, or 65.4 euros per
  1,000-euro face amount, to 78.32.

  …

  S&P indicated the cuts, which may force investors who are
  prevented from owning anything but investment-grade rated bonds to sell,
  may not be over, assigning Greece a “negative” outlook.

  “The downgrade results from our updated assessment of the political,
  economic, and budgetary challenges that the Greek government faces in
  its efforts to put the public debt burden onto a sustained downward
  trajectory,” S&P credit analyst Marko
  Mrsnik said in a statement.

  Credit-Default Swaps

  Traders of derivatives are betting on a greater chance that Greece
  fails to meet its debt payments.

  Credit-default swaps on Greek government bonds climbed 111 basis
  points to 821 basis points yesterday, according to CMA DataVision. Only
  contracts tied to Venezuela and Argentina debt trade at higher levels,
  according to Bloomberg data. Venezuela is at about 846 basis points and
  Argentina is at about 844, Bloomberg data show.

  Just minutes before lowering Greece’s ratings, S&P cut Portugal
  to A- from A+. Yields on Portugal’s two-year note yields jumped 112
  basis points to 5.31 percent, while credit- default swaps on the
  nation’s debt rose 54 basis points to 365.     The downgrades may force
  banks to boost the amount of capital they are required to hold against
  bets on sovereign debt, said Brian
  Yelvington, head of fixed-income strategy at broker-dealer Knight
  Libertas LLC in Greenwich, Connecticut.

  While bank capital rules give a risk weighting of zero percent for
  government debt rated AA- or higher, it jumps to 50 percent for debt
  graded BBB+ to BBB- on the S&P scale and 100 percent for BB+ to B-.

  “These downgrades are going to cause people to increase their risk
  weightings,” Yelvington said.

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 rout 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 imagine, 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. Subscribers, please
reference the following:

• Leveraged European Entities from a
  Sovereign Risk Perspective – retail
  
• Leveraged European Entities from a
  Sovereign Risk Perspective – professional
  

To date, my work both free and particularly the subscription work,
has shown signifcant returns. I am quite confident that the thesis
behind the Pan-European Sovereign Debt
Crisis research is still quite valid and has a very long run ahead of
it.  Let’s look at one of the main Greek bank shorts that we went
bearish on in January:

The Pan-European Sovereign Debt Crisis, to date: The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! The Beginning of the Endgame is Coming??? I Think It’s Confirmed, Greece Will Be the First Domino to Fall Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware! Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? “Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of… The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest? Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!! How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight Grecian News and its Relevance to My Analysis A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis Euro-Gossip Debunked, Courtesy of Trichet and the IMF! Greek Soap Opera Update: Back to the Bailout That Was Never Needed? Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic! LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

Latest Pan-European Sovereign Risk Subscription Research – The Good Stuff!!! Actionable Intelligence Note For All Paying Subscribers on European Bank Research – This was certainly one very timely call!!! A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf A Review of the Spanish Banks from a Sovereign Risk Perspective – professional Ireland public finances projections Spain public finances projections_033010 UK Public Finances March 2010 Italy public finances projection Greece Public Finances Projections Banks exposed to Central and Eastern Europe Greek Banking Fundamental Tear Sheet Italian Banking Macro-Fundamental Discussion Note Spanish Banking Macro Discussion Note

Comments

[M.B. Drapier]

As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market.

But how much of that debt did the banks hold on to, instead of immediately pawning it off on the ECB? Even now the ECB will accept GGBs on the Class I haircut schedule, with only a 5% additional haircut in prospect for the future. A cynic might suggest that maybe the biggest threat to the solvency of the Greek commercial banks is the prospect of direct ECB support for Greek government debt, as that would take away the banks' indispensable (and lucrative) position as money-launderers for the current indirect bailout.

EDIT: corrected stupid haircut mistake

[seventree]

The faster the official Greek economy implodes, the more people will distance themselves from it and rely on an already robust shadow economy of barter and back room deals. A self-reinforcing spiral.

How enthusiastic was the general populace about joining the EU/EMU in the first place?

[bigkahuna]

This is the first step in a fiscal policy lockdown for Europe. All of the euro zone is about to be subject to a federal reserve/treasury system like we have in the US. Kiss your sovereignty good-bye.

[Carl Spackler]

Either that or a Euro collapse.  Pick your poison.

Regardless, the Euro socialist fantasy is at the beginning of its end.  It's wake-up time.

No more free lunches.  Time to pay the piper, one way or the other.

Great work, Reggie! 

[Anonymouse]

Thank goodness we would never create artificial demand for US treasuries!

[seventree]

Well at least we don't wreck our banks doing it. Everybody else maybe...

[Fish Gone Bad]

A little one sided Rochambeau with Mr Bove is certainly in the cards.

[THE DORK OF CORK]

Increase the capitalisation of Greek banks and others up to 20% ,50% and walla you can keep this going for another decade or so.

The only revenue they can obtain now is from government debt!

[ZackAttack]

http://www.guardian.co.uk/business/2010/apr/28/greek-debt-crisis-imf-chief-imf-chief-to-woo-germany

But with 57% of Germans against helping to support Greece, and with Angela Merkel facing a regional election in the country's most populous state, North Rhine Westphalia, on 9 May, it is far from clear just when and to what extent the German government will show its willingness to endorse funds towards a multibillion rescue package. She is due to make a statement at 15.45pm UK time after the meeting. Headlines across the German press today, particularly in the tabloid Bild, have summed up Germans' reticence to support Greece.

"You Greeks are getting nothing from us!" read one banner headline. Another read: "We fear for our money".

One article entitled "Why should we pay for Greeks' luxury pensions?" summed up the mood of Europe's largest economy...

 That's probably a pretty good summary of how the everyone on the planet feels about bailouts.

[ZackAttack]

Just give us billions and billions, fast. The details aren't important right now. The world will end - END, DAMMIT - if we don't get it right this instant.

Where have I heard all this before?

[doggis]

As always - reggie is the best! I seriously want to kick dick bove in his (excuse the expression) 'nuts'. he is an idiot. i want reggie to fill the air time instead of Bove.

[Carl Spackler]

Dick Bove is just another Mainstream Media addict. 

He produces soundbytes, as opposed to well thought and well-corroborated independent analyses of situations.

[Leo Kolivakis]

Listen to this: