This page has been archived and commenting is disabled.
Next Up In The Spotlight – Italy, Again
As Greece, and Portugal, and recently even Spain bask in the
spotlight of the bond vigilantes, I want to remind my subscribers to be
prepared for Italy’s turn to dance. Subscribers should reference 
Italy public finances projection 2010-03-22 10:47:41 588.19
Kb for the skinny on Italy’s “realistic” prospects, and
Italian Banking Macro-Fundamental
Discussion Note for a list prospective candidates to monetize
this view in the banking industry. As of the last time I checked, the
market hasn’t hammered them yet… Complacency???
In Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware! we scanned anecdotal evidence of Italy hiding the Italian
sausage…
As discussed in a recent ZeroHedge
article, a 1996 Italian currency swap, arranged by J.P. Morgan,
allowed Italy to receive large payments upfront that helped keep its
deficit in line, with the downside of greater payments later.
In addition, to curbing
their current deficits, countries are now using these swap agreements
to push off their loan liabilities (related to swap agreements) to a
later date through securitization, and Greece is one such example.
Under the 2001 deal
brokered by Goldman, Greece swapped dollar- and yen-denominated debt
for Euros at below-market exchange rates. The result was that the
country got paid €1 billion ($1.35 billion) upfront on the swap in
exchange for an obligation to buy the swaps back later. In 2005, this
obligation was in turn securitized as part of a 20-year debt issue,
further pushing off the day of reckoning.
Moreover, one of the key
reasons why such manipulations continued is the apparent ignorance of
the EU’s Eurostat, which knew enough about these deals to tighten the
rules governing their accounting-albeit only after they had served
their purpose – the Ponzi! When Italy’s then-Prime Minister Romano
Prodi miraculously achieved a four-percentage-point improvement in
Italy’s budget deficit in time to usher the country into the common
currency, Italy’s use of accounting gimmicks was widely discussed, and
then promptly ignored. As at that time, everyone was only too eager to
look the other way in the drive to get the single currency up and
running.
It wasn’t until 2008-a
decade after the deals became popular-that Eurostat was able to revise
its rules to push countries to include swaps in their debt and deficit
calculations. Still, till date too little is known about countries’
continued exposure to the deals that are already out there.
Overall, though there is
less evidence to support that there are more such swap deals that
happened during the late 90’s till early part of this decade, the data
below showing a sharp decline in interest payments as a percentage of
GDP particularly for Belgium (apart from Greece and Italy), hints that
there are considerably more of these deals to be discovred. The
questions is, will they be discovered before or after the respective
sovereign issues record debt to the suckers sovereign fxed income investors.
Notice the extremely
supercalifragilisticexpealidocious reductions Belgium, Greece and Italy
have made in their interest payments from 1993 to 2000 in this graphic
made pre-2000. If one didn’t know better, one would have thought
theses countries actually used magic to make such reductions. Hell,
Italy practicaly cut their debt service (projected, of course) in half.
It really makes one wonder. I’m just saying…
According to DERIVATIVES
AND PUBLIC DEBT MANAGEMENT by Gustavo Piga, “The
political stakes of the 1997 budget package were enormous. Therefore,
it was no surprise that many countries were accused of ‘creative
window-dressing’ in their budget through the use of accounting tricks
to reach the desired goal. One contentious item was interest
expenditure, which is the interest expense that governments sustain to
finance their deficit and roll over their debt. Interest expenditure
represents a high percentage of public spending and GDP in the European
Union. It is highly variable over time, especially when compared to
other components of the budget. Because of its relevance and because it
is subject only to minimal scrutiny during budget law discussions (and
many times even after its realization during the fiscal year),
interest expenditure is an ideal target for reaching fiscal
stabilization goals without incurring excessive political protest or
opposition”.
In Once
You Catch a Few EU Countries “Stretching the Truth”, Why Should
You Trust the Rest? I excerpted a few snippets from the
subscription only report ( Italy public finances projection 2010-03-22 10:47:41 588.19
Kb) that lays out how easily the optimistic mountain of hope
that was passed as financial projections can collapse.
This is Italy’s
presumption of economic growth used in their fiscal projections:
You see, the Italian
economic situation wasn’t that great to begin with
since they were one of the hardest hit in the recession of 2009.
If their overstatement of
the ability to pull out of this falls flat
(which it most likely would) then you will see a spike in devt service
and interest, of course accompanied with the tried and true “Nobody
could have seen this coming” statement from the BIS. No, not the Bank
for International Settlements, but the Bureau of Internal BS
(excuse my Italian).
And in Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to
Collapse! I show how even though Italy’s projections make the EU and
IMF numbers look overtly conservative, the reality of the situation is
that even those numbers are, and have been for years, pie in the sky!
This is Italy’s
presumption of economic growth used in their fiscal projections:
This is a sample of what was received in the Italian subscription
content. As I type this, I see those who were truly believers in the Spanish Banking Macro Discussion Note
and the
Spain public finances projections and used puts to
monetize those views are now pushing the 500% profit mark! Kudos to
those who took the correct positions.
Below is the market for these options at the approximate time I
released the Spanish research. I truly believe the market is coming
nowhere near appropriately pricing the risk of European contagion in the
capital markets. I will be exploring this issue in depth in the
discussion and comment forums of BoomBustBlog over the next week or two.
Follow my ongoing analysis
of the Sovereign Debt Crisis, now over 30 articles strong and
available to the public.
- advertisements -
Reggie - whats up with BoomBust Blog? your servers melted??
Europe is troubling, but since governments are not concerned about money as much as they are about power, they will work something out, and a new normal will be established.
Gary North thinks the pattern in the U.S. will be mass inflation (40 percent or so max), then depression. He suggests buying gold for the aftermath when it will be valuable in the reconstruction processes.
For what it is worth, i think we are in a debt deflation spriral that will lead to inflation, only after the USD becomes the only safe haven left and it becomes clear they can no longer roll their debt.
The US has been printing money like crazy but it has only gone into shoring up the bank balance sheets, it is all held on deposit now so while it exists, it is not inflationery per se. IT will also likely be needed just to stop the banks becoming (more) insolvent in the near-term, not as a deposit base for lending. When the global debt wash-out reachs the UST is when the printing presses will come out for real. My guess - 2012. Deflation reigns until the M3 says otherwise.
Wait until the oil hits the florida keys.......that is when things are going to get very interesting.
Reggie, do yo remember the article from the UK Telegraph back on Feb 11, 2009, where it was reported that European banks may need at least 16.3 Trillion pounds in bailout because of the toxic debt European banks have on their books. Well what happened is that the as Zerohedge pointed out last week, the article has been changed in the document but not in the header pointing to the document (It's hard to get rid of a cache). If you look at the link, it shows the headline that was put out back then with the document. But if you go to the link it will make no mention of the amount of the bailout in the headline or in the document.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4590512/European-banks-may-need-16.3-trillion-bail-out-EC-dcoument-warns.html
This is because everyone in europe has been playing with their books some more than others, including eastern europe that has many of it's countries that received loans from the EU banks. Trichet can't buy bonds even if he wanted too, because there is just to much debt on everyones books, we still don't even know if the 140 billion would be enough fro Greece. That amount shot up within a week from the 45 billion they where supposed to get, so whats to say they don't really need 300 billion, and remember Greece is a country of 11 million people. And then you look at Spain with 45 million people and there was rumors of them wanting 389 Billion that the Prime Minister came out and denied (I knew it was true when essentially the functional head of their state made an appearance to stop a rumor, if they are doing so well this rumor would have fallen flat on it's face). Then last week the leaked data from Spain which showed unemployment at 20%. As far as we and anybody knows, Spain may really need 795 Billion dollars. But as with anything if you just stood up and actually said as a country to others that if you don't give us 795 Billion dollars or euros or even 389 Billion in dollars or euros; you know that your market would literally crash by the end of the day.
Its hard for the EU to hide their banking troubles and insolvency as well as the US (for now), it's because of the difference in cultures of the member states and each one have a different agenda. Many looked at the EU as a way to get more funding or protection from themselves at the expense of the richer members. This is going to happen to the US also, just imagine that the 50 states are countries in and of themselves. All 50 states need financial help from the federal govt., but the Fed is afraid to bail even one of them out. Because if say Obama allows the Fed to bail out California, to the tune of 29 Billion dollars or more then the rest of the states with their senators and congressmen and women will demand that their states get bailed out too and it won't be pretty. He may be looking at the possibility of close to 1.1 Trillion dollars or more for all the states after their representatives are done making the pitch. And guess what, the inflation/hyperinflation that they have somewhat been keeping controlled would shoot up like a rocket. Because most of the printed money is being shifted back and forth between banks and the US treasury via bonds and other monetary vehicles, but almost none are being loaned out to the street. But once that money gets to the state, then it will be out on the street and we will see the cooking of the economy inflation style.
The first black swan is the European meltdown which is happening, the second will be the internal meltdown in the US from the states needing money. Take your pick everybody:
1.) Keep printing until we get hyperinflation.
2.) Severe austerity to the point of govt. being overthrown.
3.) Or everyone in the countries involved and more with debt saying and agreeing to null and void all debt on each other an inside each others countries to essentially start over for the better.
Leo,
I've been following ZH for a long time, but just recently started commenting. Initially I thought you were a tool. I no longer think that and appreciate your honest persepective on this site. My question for you is, knowing that the game is rigged and there are in fact structural problems throughout the world economy at what point would you not only stop buying the dips but sell? This is an honest question.
Reggie - Thanks good stuff...but I'm wondering, do you know the opposite, who will thrive in next year or so? It seems like almost all countries have sovereign debt issues or are dependent on commodities and trading partners that are about to become insolvent, does any country avoid brutal deflation (currency inflation to default)?
Italy´s last year budget deficit was 5,5%. Half of America´s. Aren´t you overreacting a bit? Only a bit.
Few days ago, I posted a comment said that US stock market will be 'nucleared' if Greek situation didn't go well as planned. Guess what, today it actually happend, but nobody listen to me then because I'm new guy to this site. Now I have new guess that soon Gold and emerging markets will be 'nucleared' too. Thanks peole this site for providing me with wisdon.
I doubt no one listened to you, and I'm sure many agreed with your assessment. Right now gold is up in an apparent flight to safety and has decoupled from silver which moves more with industry demand. Why do you think gold will be nucleared?
Lets be honest here the MATH shows the west is insolvent, Europe has blown up and its a bit like early 2008 Now things got nasty during 2008 and very nasty in early 2009 the the printing press was cranked up, Its been a real earner for me going long, I am a poor trader so gold and silver longs are my play as they should be fine whatever happens, My forecast is a replay of 2008/09 events starting now so shorts and treasuries and gold should be the place to be as trading goes, Since the new world order will stop at nothing Europe will not fall apart, I hope it does being in the UK, The ECB will dust off its printing press and crank out a few trn Euros and instal a federal mandate to tax and spend directly from countries, Onece this happens the PIIGS would be a great long trade, This is the holy grail. The markets may not play ball but being long now is a risk too high for me in the markets today.
37FH, I too am a poor trader but real long physical gold and US$ (cash / FRNs in hand).
Your forecast is very interesting re future of Europe.
Kind of would be nice to pick up some investments down there in Club Med once they have been bled dry...
I am welcoming all input. Both Leo and Reggie are adding to the debate. My gratitude to you both for your wrangling... and thoughtful opinions.
Nice work as usual Reggie... you are posting a very healthy win/loss record BTW... thanks for the update!...
Only in that the Investment Banks are in the way
Yeah, whatever, the real PIGS are on Wall Street. Everybody is short euro and European stocks. Even Chinese solars are getting killed because of fears that Europe will cut subsidies "when it implodes". Total nonsense, fear mongering so the big hedgies can make a killing. I've seen this song & dance before and THIS TIME IS NOT DIFFERENT.
Leo, the reality is that multinational financial firms created the Eurobubble in the first place. Complaining that they're now going to pop that bubble kind of misses the point, eh? Maybe next time around countries will try and finance their governments the old fashioned way, rather than buy into "complex instruments" to keep a political illusion up.
Leo, if you look at the numbers many of the Euro nations are broke, and their interest expenses are going up every auction. Their trading partners are broke, so there will be no exporting their way out, and many of their banks are loaded up on their debt which is getting devalued by the day. I don't see how "MATH" is fear-mongering.
You know, that is what many people said when I declared Bear Stearns, GGP and Lehman would go bust. It wasn't fearmongering, it was balance sheet reading.
Reggie, your efforts are always appreciated. Great Work. Facts come through in the end.
Leo has a hard time with facts. He is a big fan of crossing his fingers and criticizing the same industry that he has milked his entire career. He believes the market is rigged yet still plays it....sounds logical? Leo, stop embarrissing yourself on a daily basis.
Should sound illogical?
Dont know if this still exists but my belief is that professional wrestling was (is)rigged, a staged show with scripted events.
Another belief is professional wrestlers were perfectly aware of this situation. Did they stop wrestling? Nope, they kept on.
A rigged market does not mean that you cant draw benefit from it. If you do, here's a big incentive to keep playing it.
Keeping in mind that the game is rigged also helps avoiding the big trap of starting to believe lies.
A cheating winner has better never forget he is cheating or he is on the path to forget how he wins.
The market is rigged, which is why I have continued buying these dips. Central banks will do everything to prop it up, so expect Trichet to do an about face soon, and buy bonds. As for embarrasing myself, I put my balls on the table and if I am wrong, I don't hide, which is more than I can for cowards like you who can't even publish their real name on the internet but love criticizing me. What a tough guy you are!
You're a punter pal! "balls on the table"? You are a joke. I imagine the best thing we all can do is to stop responding to you. A group effort to do so may help remove your nonsense from the site.
I will not be part of that group. Not because I agree with Leo (I often don't, this case included) but because he is making a case for what he believes. If they day ever comes when a member can be voted off the island, even on 100-1 sentiment, that's the day I am out of here. This site is famous for bloody-minded malcontents, and even they need to be discontented once in a while.
Also, gratuitous insults and mindless name-calling is the lowest kind of schoolyard behaviour. We don't need that kind of crap (even tho the crappers have a right to crap it).
I like to mess with Leo, but no way should he be removed...that's ridiculous, his writings are no where near level of what one would have to do to be removed.
+ 960 (or would that be + 347?)
I disagree with lots of what Leo says, but he lays it on the line, explains what he thinks.
Besides, he knows a lot about Greece, his knowledge there may be very valuable.
Blah, blah, blah, and where are you putting your money, pal?
Leo, if Trichet buys bonds he will have to buy close to a trillion of bonds for several different countries - and all that will do is slow the ascent of interest rates. It still doesn't cure the core issue of insolvency. It is just like the banks in 2008 (BTW, that story still hasn't played out, trust me on that) - liquidity does not equate to solvency!
Reggie, I agree with you, but collateral damage is too high here. I am not sure how they're going to engineer this, but so far Trichet is content staying on the sidelines, letting the euro weaken, but eventually he will have to move or face an onslaught.
The reality is that we allowed private banks to get away with murder for years, hiding their junk off balance sheets. Is it time for politicians to think the unthinkable, ie. nationalize the banks?
I do not believe the liquidity flood of 2008 can be repeated this time without cremating his currency. The bond vigilantes are onto this game now.
Reggie,
I respectfully disagree with your conclusion. We all know the MATH but I would caution you permabears not to jump on the "world is ending" bandwagon. Total and utter nonsense.
This is where I disagreed with the pundits in 2008. Now, just like then, I never beleived the world was coming to an end. That drama is simply fodder for the CNBC crowd. Banks, like countries, have defaulted, financially collapsed and risen from default 1,000's of times over tens of thousands of years. You're right, it is not the end of the world, nor is it even close to it. But, it is the end of cheap and near free credit and the ability to abuse such through the capital markets. The new normal will simply end up being normal, which will be an abnormal negative shift for those countries that spend beyond their means.
Greece is one of those countries.
See comment below.