Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

Anybody who has been following for the last fiscal quarter or so (or
has seen my Spanish bank work in 2009) knows that I believe that the EMU
as it stood in 2009 would probably be non-existent by the end of 2010.
All of the pundits who proclaimed that the European debt crisis was over
with the mere declaration that Greece may receive some additional debt
either were abjectly lying or truly didn’t understand the gravity of the
situation. To be honest, there are a lot (and I mean a whole lot) of
data points, angles and contingencies to grasp thus it is not
necessarily easy. Then again, isn’t that what these market professionals
get paid for.

Very early in the year, I virtually guaranteed that the Greek banks
would fall, or at least have to be rescued (a 2nd time) before they
fell. I practically promised it. In the news today…

Lagarde to discuss Greece support
with banks: French Finance Minister Christine Lagarde will
meet with bank leaders on Wednesday to discuss how its banks could
participate in the Greek rescue package. Lagarde told the French
parliament the country’s banks will reiterate their support for the
rescue process on Wednesday but she said tomorrow’s meeting could lead
to them taking on a more active role, along the lines of what German
banks have done. French banks have so far not been asked by the
government to participate directly in the Greek rescue package, two
sources in France’s banking sector said earlier on Tuesday.
They have only been asked to maintain their exposure to Greece and have
agreed to do this, the sources said. “Nothing beyond this has
been requested by the government,” one of the sources told Reuters.
France has overall the highest exposure to Greek debt, with about
$75.2 billion worth of assets in total, according to Bank of
International data as at end-2009. Germany’s top banks and
insurers offered support on Tuesday mainly by keeping open credit lines
to banks and by agreeing not to sell Greek bonds for the duration of a
wider IMF-led bailout. Germany’s Finance Minister Wolfgang
Schaeuble said that German financial firms had agreed to buy bonds
issued by state controlled bank KfW as a way to help finance the
bailout. Deutsche Bank Chief Executive Josef Ackermann said it
was important to extinguish the fire in Greece and pledged to help the
country. Ackermann is helping to coordinate efforts by the
private sector to support the Greek rescue package.

I suggest one references my post, How
Greece Killed Its Own Banks!.

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…

This was quite easy to see coming as those who downloaded the
following subscription material can attest:

• Greek
  Banking Fundamental Tear Sheet
• 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
• Banks
  exposed to Central and Eastern Europe
• Spanish Banking Macro Discussion Note

This will get much, much worse before it starts to get better. Even
those who chose not to pay for the research had plenty of free research
to see the path of current events months in advance, they just didn’t
get the specific banks/securities referenced with fundamental value
ranges. Reference:

1. The
   Coming Pan-European Sovereign Debt Crisis – introduces the
   crisis and identified it as a pan-European problem, not a localized
   one.

2. What
   Country is Next in the Coming Pan-European Sovereign Debt Crisis?
   – illustrates the potential for the domino effect

3. 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.

4. The
   Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to
   Western European Countries

5. Financial
   Contagion vs. Economic Contagion: Does the Market Underestimate the
   Effects of the Latter?

6. “Greek
   Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants
   on Fire!

Here are some more MSM news clips that drive the points home:

• European
  Stocks Erase 2010 Gain on Debt Contagion; Commodities, Euro Fall
  
• VIX
  Rises With VStoxx on Concern Debt Crisis to Spread to Portugal, Spain
  
• Greek
  Rescue Doubts Spur Rise in Sovereign Default Risk on Contagion Bets
• Is Spain the Next EU
  Country To Tumble Into a Debt Crisis?: Spain risks falling into
  the same trap as Greece unless it takes more forceful action, some
  investors tell the New York Times.

• Report Spain Wants $364
  Billion Aid is ‘Madness’: PM
• Will Investors Avoid
  Spain’s Debt
• ECB May Have to Expand
  Role

Oh yeah, Spain. This is where our hard core stuff
truly comes into play – Spain
public finances projections_033010 – real answers to real
questions, without the bias and BS.

So, were the opportunities described
actionable? Let’s take a look…

300% gains on STD June ‘10 12.5 puts

100% to 150% on the NBG Aug 2.5s

150% to 300% or so on BBVA Oct. 15
puts.

And there’s plenty more to go under
several different opportunities...

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.

Latest Pan-European Sovereign Risk Subscription Research

• Ireland
  public finances projections_040710
• Spain
  public finances projections_033010
• UK
  Public Finances March 2010
• Italy
  public finances projection
• Greece
  Public Finances Projections
• Actionable
  Intelligence Note For All Paying Subscribers on European Bank
  Research – This was certainly one very timely call!!!
• Italian

  Banking Macro-Fundamental Discussion Note

• and
  now introducing…..

The Pan-European Sovereign Debt Crisis,
to date (free):

1.      The
Coming Pan-European Sovereign Debt Crisis – introduces the crisis
and identified it as a pan-European problem, not a localized one.

2.      What
Country is Next in the Coming Pan-European Sovereign Debt Crisis?
– illustrates the potential for the domino effect

3.      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.

4.      The
Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
European Countries

5.      The
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious!

6.      The
Beginning of the Endgame is Coming???

7.      I
Think It’s Confirmed, Greece Will Be the First Domino to Fall

8.      Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware!

9.      Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter?

10.   “Greek
Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on
Fire!

11.   Germany
Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort
of…

12.   The Greece and the Greek Banks Get the Word “First”
Etched on the Side of Their Domino

13.   As
I Warned Earlier, Latvian Government Collapses Exacerbating Financial
Crisis

14.   Once
You Catch a Few EU Countries “Stretching the Truth”, Why Should You
Trust the Rest?

15.   Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
Collapse!

16.   Ovebanked,
Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

17.   Moody’s
Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

18.   The
EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

19.   How
BoomBustBlog Research Intersects with That of the IMF: Greece in the
Spotlight

20.   Grecian
News and its Relevance to My Analysis

21.   A
Summary and Related Thoughts on the IMF’s “Strategies for Fiscal
Consolidation in the Post-Crisis

22.   Euro-Gossip
Debunked, Courtesy of Trichet and the IMF!

23.   Greek
Soap Opera Update: Back to the Bailout That Was Never Needed?

24.   Many
Institutions Believe Ireland To Be A Model of Austerity Implementation
But the Facts Beg to Differ!

25.   As I Explicitly
Forwarned, Greece Is Well On Its Way To Default, and Previously
Published Numbers Were Waaaayyy Too Optimistic!

26.   LTTP
(Late to the Party), Euro Style: Goldman Recommends Betting On
Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After
BoomBustBlog

27.
Beware
of the Potential Irish Ponzi Scheme!

28. How
Greece Killed Its Own Banks!

Comments

[Tic tock]

Sure it's expensive to produce. That's what you do and you make money on it, anyway. It's nice that you share it.. really it is.. good, deep, technical stuff.. but as lusvka notes, 'where's the point?' -that you've been right for three months straight? Cudos. But I thought, from the title, that you had a an idea of what was going to happen next..? Like, for example, sterling, interest rates, uk gdp, uglier than tyler after a good night?

[Matto]

Reggie, thank you for the depth of your analysis. Im in the money thanks to you.

I appreciate your style of writing as it highlights the ability to find the truth in the markets with a LOT of hard work, something other analysts make excuses for. It gives me a kick in the arse(ass) as to what is possible when you dont satisfice for "close enough" research.

Dont worry about the knockers, thankfully zerohedge is a place where they can speak their minds but that doesnt mean you should listen to them.

[thebone]

agreed. these posts are absurd. you might as well have a Reggie youtube informercial at the top starring the guy from ShamWow

[lusavka]

Very tired of endless self-promotion from Reggie Middleton. If he has a point - state it concisely, as opposed to providing a jungle of links to various previous postings. His postings are so focused on how correct he was, and how great his models are... Maybe he has a point - but very hard to understand his reasoning - it's lost among self-promotion. One more posting like that and I will stop even try to read this junk. Just a noise on zerohedge, which otherwise is a great blog... 

[Reggie Middleton]

It's unfortunate that you categorize this as endless self promotion when I look at it and see hundreds of pages or free (and I believe, quality) research that you didn't pay for. The realit of the matter is this stuff is not generated for free. To the contrary, it is quite expensive to produce. If you would rather have the Yahoo Finance style of analyis without links to the commercial material, then be my guest and "stop even try to read this junk" right now, which would save both of us some time.

I looked back at a previous post to say that when I write about when things didn't go as planned (http://www.zerohedge.com/article/reggie-middletons-year-end-note-subscribers-and-readers), guys like you never jump in to say "Hey Reg! You're too hard on yourself, stop the sado-masochistic punishment stuff". Yet, when I actually did go back through the comments, most of you guys were actually rather supportive and understanding, so maybe it's just you and a relatively small cadre.

So, I say again to you, this is my style. You know I will make long posts, link heavy, with a lot of heavy content, and I am not shy about the fact that not only did I not produce this for free but I offer higher end analysis on a commercial basis. I keep a record of the research results, both good and bad. Things go my way, I'll say it. If they go against me, I'll say that to and will let you know the reason why. If you don't like it, the next time you see Reggie Middleton as the author, don't click the title. Deal?

I'll make a promise as well. When the time comes that I feel I don't have useful content and analysis to contribute, I will not post (whether it be free or commercial content). Just keep in mind that nothing of quality is free. ZH is free because there are a lot of smart people sacrificing for a goal or  milestone. That goal will have to result in monetization in some form or fashion eventually or the posters will either burn out or move on. It's simple economics. If you have a problem with that, there is always the pure banner ad/Google ad sense route, ex. Yahoo! Finance.

[FEDbuster]

I don't mind you patting yourself on the back, you deserve to.  You have done some great work on the Euro mess, but I think what most readers like is a quick summary of the past calls and an in depth look at the future.  Thanks for all your work though, it is appreciated.