This Mornings News Flow Is Essentially A "Didn't Reggie Tell Us This In Full Detail Up To Two Years Ago" Parade As Indebted Europe Continues To Rip At The Seams!

This mornings news flow is essentially a “Didn’t Reggie tell us this
in full detail up to two years ago” fest. Indebted Europe is falling
apart for the new year just a day after the liquidity driven romp in
equities. The Portugal T-Bill Yield Almost Doubles in Auction, from 3 months ago. The yield Portugal pays on its debt has increased 522% since this last year.
This is after the Pan-European bailout fund was announced and
implemented to put an end to such pressures. Alas…. The best laid plans. CNBC reports, as does Bloomberg:

Portugal sold six-month bills today, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece
and Ireland to seek bailouts last year. The government debt agency,
known as IGCP, auctioned 500 million euros ($665 million) of bills
repayable in July. The yield jumped to 3.686 percent from 2.045 percent
at a sale of similar maturity securities in September, with investors
bidding for 2.6 times the amount offered. A year ago, the country paid
just 0.592 percent to borrow for six months.

Yeah, this is sustainable. What is so interesting that
mathematically, a default is definitely in the Portuguese cards, but the
mains stream media does not drill down on this. Why? We, at
BoomBustBlog have literally given away a complete mathematical analysis
that shows the default happening – in real time, and for free. See The
Anatomy of a Portugal Default: A Graphical Step by Step Guide to the
Beginning of the Largest String of Sovereign Defaults in Recent History Tuesday, December 7th, 2010 and The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog Monday, December 6th, 2010. The
line of default demarcation has been drawn in the sand t 2013, but does
anyone truly believe that all of these deeply indebted states will
float for that long. Could you imagine your interest rates rising over
500% and continue to climb during YOUR time of need?

The inevitable truth of the matter is
that several European states WILL default, and default they will. If
Germany, or any other economy that still has its druthers to it decides
to stand in front of said occurrence, it will likely be dragged down
as well. The Germans apparently realize this. See this excerpt from our
discussion on the topic regarding Ireland’s prospects for default:

… ?????from the post Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! wherein BoomBustBlogger Nick asked:

Reggie-

Do you have any reason as to why they are choosing 2013 as a deadline ? Seems like an arbitrary date.

Well, Nick, just follow the money  or the lack thereof…

So, what debt raising and servicing that
was unsustainable in 2010 was lent even more debt to become even more
unsustainable. The chickens come home to roost in 2013, post
IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding
bailout! What Angela in Germany was alluding to was what all in the
know, well… know, and that is that Ireland is already in default and
those defaults have been purposely pushed out until 2013. Angela simply
(and wisely from a local political perspective, although unwisely from a
global geopolitical standpoint) admitted/suggested was that the
defaults will be pre-packaged and managed ahead of time. The EU
politbureau insists that politics rule the day, and no prepackaged
structure be in place for the Irish defaults to be. This means the
potential foe even more carnage through the pipelines of uncertainty!

??Click through to Portugal’s Inevitable Default as clearly calculated in the BoomBustBlog live spreadsheets, currently available for free (Portugal only, you must subscribe for the analytical models of the countries that will really set things off).

Thus, the following additional
spreadsheet scenarios have been built for more severe maturity
extension and coupon reduction, or which will have the maturity
extension and coupon reduction combined with the haircut on the
principal amount. The following is professional level subscscription
content only, but I would like to share with all readers the facts,
as they play out mathematically, for Portugal. In all of the
scenarios below, Portugal will need both EU/IMF funding packages (yes,
in addition to the $1 trillion package fantasized for Greece), and
will still have funding deficits by 2014, save one scenario. That
scenario will punish bondholders severely, for they will have to stand
behind the IMF in terms of seniority and liquidation (see How the US Has Perfected the Use of Economic Imperialism Through the European Union!)
as well as take in excess of a 20% haircut in principal while
suffering the added risk/duration/illiquidity of a substantive and very
material increase in maturity. Of course, we can model this without
the IMF/EU package (which I am sure will be a political nightmare
after Greece), but we will be recasting the “The Great Global Macro Experiment, Revisited” in and attempt to forge a New Argentina (see A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina).

Here is  graphical representation of
exactly how deep one must dig Portugal out of the Doo Doo in order to
achieve a sustainable fiscal situation. The following chart is a
depiction of Portugal’s funding requirements from the market before
restructuring…

There is also Spain: As If On Cue After My Step By Step Illustration Of A Spanish Default, Spanish Yields Climb at Auction As Pressure Continues Thursday, December 16th, 2010. In addition, as we have warned ad nauseum, Ireland. As per Bloomberg today: Irish House Price Decline Quickens in Last Quarter, Daft Says.

From Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, see the reason why the Irish banks are done for…

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. Keep in mind that on an aggregate basis, these banks
are even more of a force to be reckoned with. I have identified Greek
banks with adjusted leverage of nearly 90x whose assets are nearly 30%
of the Greek GDP, and that is without factoring the inevitable run on
the bank that they are probably experiencing. Throw in the hidden NPAs
that I cannot discern from my desk in NY, and you have a bank that has
problems, levered into a country that has even more problems.

Notice how Ireland is the nation
with the second highest NPA to GDP ratio. This was definitely not hard
to see coming. In addition, Ireland has significant foreign claims –
both against it and against other countries, many of whom are embattled
in their own sovereign crisis. This portends the massive exporting and
importing of financial contagion. Reference my earlier post, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
wherein I demonstrate that Ireland’s banking woes can easily
reverberate throughout the rest of Europe, affecting nations that many
pundits never bothered to consider. Irish banks will be selling off
assets, issuing assets and bonds in an attempt to raise capital just as
the Irish government (contrary to their proclamations) will probably be
issuing debt to recapitalize certain banks. This comes at a time when
the Eurozone capital markets will be quite crowded.

The Irish banks are so saddled with NPAs as to be nearly dead on their feet. Reference our default and haircut analysis piece: Here’s Something That You Will Not Find Elsewhere – Proof That Ireland Will Have To Default… Tuesday, November 30th, 2010

The BoomBustBlog Ireland Haircut Model
has been posted, and it is a doozy. For those who anticipate  the Euro
being a slow train wreck, it may not be so slow after all. Professional
and institutional subscribers can access it here as a live, spreadsheet embedded into a BoomBustBlog  web page. Users can subscribe or upgrade to gain access.
The haircut model is SOOOO damn revealing that I can’t keep it all to
just site subscribers, thus I have pulled a few bits and pieces out for
the general public.

As any who have been following me know, I
believe that several European countries are bound to default, ie.
restructure their debt. Ireland is in that camp. What makes me so sure
about this? Well, its simple math. While I have calculated probable
restructuring and haircut scenarios, I am not at liberty to put it out
in the public domain just yet, but I can illustrate incontrovertible
evidence that shows that Ireland is on an unsustainable path – a path
made even more unsustainable by the recent bailout.

Let’s take a look at the cumulated funding requirement of Ireland over the next 15 years.

As you can see, the amount Ireland would
have to borrow to run the country (even after harsh and punitive
austerity measures) is literally more (and substantially more) than the
country’s projected GDP. These GDP projections are (in part) IMF
projections which I have already demonstrated to be grossly over
optimistic, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!).
As a matter of fact, the tab for Ireland is even greater AFTER the
IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding
bailout! This is what happens when you try to save a debt laden country
with more debt!

Click image below to enlarge a screen shot of the model.

Common sense dictates what Bloomberg has reported next, Swiss Central Bank Excludes Irish Bonds as Collateral.

We have also warned of specific European banks as far back as two years ago. Bloomberg reports Europe Banks Race Sovereigns to Bond Investors. BoombBustBlog Subscribers should review the subscription-only material in the Pan-European Sovereign Debt Crisis series (right hand margin).

Now, Bloomberg reports Professor Rogoff Says Greece May Yet Face Default on Its Debts, but we said it first: Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! and then the math behind it:

1. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

2. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!

3. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

What do you think happens when this hotbed of bad debt ignites in
Europe? Do you think rates are going to continue to scrape along the
bottom? Is that going to ignite the CRE and housing market? A spike in
rates will drive a spike of reality through both residential and
commercial property markets. Bloomberg reports U.S. Shopping Center Vacancies Rise as Unemployment Rate Climbs.

I have warned about CRE diverging from reality ever since I declared
GGP insolvent in 2007, two years before their bankruptcy. I’m not alone,
Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past Friday, December 31st, 201.

There are reasons for this divergence, reference The
Conundrum of Commercial Real Estate Stocks: In a CRE “Near
Depression”, Why Are REIT Shares Still So High and Which Ones to Short?,
but the reasons will not survive a European derived interest rate
storm. I will be speaking on this topic in person in NYC towards the end
of January and in Amsterdam in the beginning of April. Any and all are
invited to attend.

Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

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Comments

[Husk-Erzulie]

Reggie, how does China stepping in to purchase piig issues factor into your thinking?  Any comment on what you think their strategy is and if it makes any difference?

[Vampyroteuthis ...]

I like the article. It gives data in graphs instead of just an opinion on why Europe is hosed. Most bears have been waiting since last year for the Euro to collapse. It is amazing how they keep the facade of a functioning economy.