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It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis
I’m fresh back from my trip to Amsterdam where I lectured ING
institutional clients and staff on the potential of a European banking
collapse. Below are a few clips from the first of two lectures.
Now that the mainstream media has been reporting what
BoomBustBloggers knew as fact as far back as two years ago. Today, the
FT printed an article titled “Greek debt hit by restructuring fears“, whose pertinent points are as follows:
The euro tumbled on Thursday and premiums
charged on Greek debt over Germany’s hit euro-era highs after the
countries’ respective finance ministers talked of Greece needing more
time and raised the prospect of debt restructuring.
In an interview with the Financial Times,
George Papaconstantinou said Greece needed more time to convince
international investors of its commitment to reform its finances.
Separately, Wolfgang Schauble, Germany’s finance minister, told Die Welt newspaper that, if a study already under way showed Greece’s debt levels were unsustainable, “further measures” would have to be taken.
When asked what those could be, he ruled
out any involuntary restructuring before 2013, but warned investors
could face losses after that point… Yields on Greek two-year bonds
jumped nearly a full percentage point to 17.884 per cent.
… “Greek bonds are getting crushed today
due to the comments from the German finance minister and the Greek
equivalent,” said Gary Jenkins, head of fixed income at Evolution
Securities. “The European Stability Mechanism allows a roadmap towards
restructuring, indeed it insists upon it if debt cannot be restored to a
sustainable path.”
Investors… flight left yields on
equivalent Greek debt 24bp higher at 13.162 per cent while Portuguese
10-year notes yielded 8.88 per cent, up 14bp. Mr Jenkins said investors
expected that any restructuring would start with Greece trying to extend
repayment deadlines on existing debt, or asking investors to “forgive”
interest on the loans. But he warned it could take more than that.
“Ultimately we believe that if the idea is to get the debt back to a
sustainable level then the target will be the Maastricht treaty limit of
debt-to-GDP of 60 per cent. In order to reach that level bonds will
have to take a haircut of some 62 per cent,” he said.
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Online Spreadsheets (professional and institutional subscribers only)
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Professional and institutional subscribers should feel free to look
at a variety of haircut scenarios via out proprietary sensitivity
analysis for the Greek head grooming. If you remember last year when
illustrated How Greece Killed Its Own Banks!,
you realize the main reason why the EU has been using the kids gloves
with the Greeks. To make a long story short, let’s employ the old adage
“A picture is worth a 1,000 words”…
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. Subscribers, please reference the following:
Leveraged European Entities from a Sovereign Risk Perspective – retail- Leveraged European Entities from a Sovereign Risk Perspective – professional
If you think those charts look painful, imagine if the Maastricht
treaty was actually respected. Our models haven’t pushed passed 80% debt
to GDP, but if you were to put the treaty’s debt ceiling in you would
see the very definition of contagion. The following chart represents the
first order consequences of a 62% haircut on Greek debt…
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Oh and Reggie....
Apple down -1.50%
Google down -8.25%
...keeping score on our 'wager' which one to short, and so far it's looking ugly for fundamental logical investing and rather pretty for irrational emotional instincts!
Reggie
This Eurozone bailout clown show is beyond a joke. Have you got any idea how much longer Greece, Portugal and Spain have got and more importantly how much has Germany and France got in the kitty before they're bled dry???
Are the Germans looking to the IMF to refinance all of these worthless Euro rescue fund debts? This is probably step one in a plan to dissessemble the components of the Euro rather than watch it inevitably implode under the weight of its dogs.
no fool.
Europe is in better shape then the states. How will Illinios and Calerfornia look with Portugal sized interest rates ?
what's your point there?
Bankrupt is bankrupt. Doesn't make much difference how much debt you drop over the ciff with or what your interest rates are. Once the politicians are all out of other peoples (taxpayers) money and can't repay creditors instalments all the dumb politcos hit the floor with the same 'thump'
....let's hope when these bankrupt politicians hit the floor they're booted out and the new guard remember there's the 'Iceland Option' on the table for not hooking up taxpayers for other peoples public sector errors
TBTF
What about the ECB? How much PIG crap has been taken on as collateral as well as all that ELA the Irish Central Bank has been engaged in.
It amazes me that the EURO house of cards has held out this long. The headlines keep getting worse. It's like the markets are numb.
I wish you would analyze the japanese economy in light of tepco admitting rolling blackouts for years. Can they maintain a surplus and continue to buy their usual amount of treasurys? If not, then I am sure it is not priced in to the market yet
You seem to have generated real alpha..
Thanks Reg, I can't find any fault with this analysis. By the way, Greek public debt = 144% of GDP 2010 (est). GDP 2010 (est) = € 322 B, hence public debt 2010 is around €460 B. That is around €43000 per head of the population.
http://www.theodora.com/wfbcurrent/greece/greece_economy.html
Looks like it is time to hid under one's desk. The governments cannot repeat the bailout routine of 2 years ago. The general population is tapped out. There is no more to take, even if the politicians want to bailout the banks one more time. This may be the event that makes the deflationists the winners in the inflation vs deflation debate.
http://www.TheAngryGrapes.Com
We need banks, but we don't need these banks. That's been the problem for three years now. Rock meet hard place. This will be fun to watch.
Does a 'restructuring' trigger a default event which triggers credit derivatives to be exercised/cashed in?
Thus a cascading of margin calls, cash raising and more defaults?
Just asking.
Yeah, the real problem is with the derivatives pools which have still not been fixed to avoid another collapse.
If GS front-ran the CDS crap back in 2007/2008 why wouldn't they front-run a sovereign default and CDS crisis again.
Exactly. Everybody is hedged, with other insolvent counter-parties. This is the biggest regulatory/auditing failure in the last century, except for social security, medicare, medicaid, HUD, yada, yada, yada...
Awesome, how these banks lie (?) to their country leaders, and to their public. The shit storm is now all too visible. Dominoes are like skittles at the bowling alley!
The killer bit that we don't know is that what is tested in the stress tests is a cooked up version of their total liabilities! Bunga-bunga these banksters to the depths of the ocean!
RM : Does JCT know about your analysis and this presentation in Holland? Will it elicit a response from them or those who conduct these stress tests???
Dear Reggie
Whats is the difference between an "European Banking Collapse" you so often write about and an "US Investor Colapse" that you never mention ?
I have written extensively on the US collapse. Didn't you hear the Property EU editor-in-chief say that I called the collapse of Bear Stearns and Lehman Brothers, both when said calls were quite unpopular. There are at least three asset markets and 42 companies to add to that list as well. I'm and equal opportunity realist, trust me.
Debt restructuring in Europe is actually Euro positive in the medium to long term.
The issue is the coming interest rate storm that RM highlights in his presentation and the incredible difference between what is considered 'Balance Sheet debt' and real total debt.