Second Straight Hungarian Bond Auction Failure As Citi's Willem Buiter Calls For €2 Trillion European Rescue Facility, Ridicules Stress Tests

Tyler Durden's picture

A week ago we highlighted that Hungary, in addition to liquidity problems, is now back to experiencing solvency issues, after suffering a bond auction failure. Today, Hungary had its second failed auction in a row, after it was unable to raise enough money as had been initially planned. "The state debt management agency sold 40 billion forint ($174 million) of bills, 10 billion forint less than planned, at a yield of 5.41 percent compared with 5.35 percent on June 10." The domino effect in Europe (contrary to the lies by G-Pap) is now in full force and nothing can stop it. Country by country will now need to be bailed out (for a few months - recall that Greece is supposedly solvent, yet its CDS are now wider than ever) or be forced to default. Which brings us to our second point: in a note to clients (attached), Citi's Willem Buiter goes so far as to say that Europe's current €860 billion bail out facility is insufficient by more than half, and a new rescue package will promptly need to be created to the tune of €2 trillion or more. He also slams the ongoing stress tests for the vile, malicious joke (which just so happens is squarely on Europe's middle class) they are.

With banks joining sovereigns as claimants on the EU/IMF Facility (with the funds to the banks possibly routed via the sovereign– funds are fungible but appearances matter) the argument that the Facility is too small and will require at least €2 trillion is strengthened.

Buiter makes it clear why the EU/IMF is woefully underfunded:

Although we have no information with which to contest the IMF’s assertion about the quality of the loan book of the banks in late 2009 and early 2010, it is important for one’s view of the balance sheet strength of the EA banks to recognise that the IMF statements have nothing to say about the quality of the EA banks’ portfolio of securities, including specifically their portfolio of sovereign debt instruments. We now believe that, since October 2009, there ought to have been a general recognition that (1) there may well be no completely safe sovereign debt anywhere, and that (2) there are material differences between the creditworthiness of different G7 member states’ sovereigns and between different EA member states’ sovereigns. There was more than €2.8 trillion worth of sovereign debt of the 5 Euro Area Peripherals outstanding by the end of 2009 (see Buiter (2010)). Reports from the BIS (2010) and from national regulatory sources suggest that EA banks have significant exposure to the sovereign debt of the Peripherals and even greater exposure to their private sectors, which are unlikely to prosper if the sovereign were to be severely challenged in the markets for its debt.

Euro Area banks therefore need additional capital – a lot of it. This may not be apparent from their ratios of regulatory capital to risk-weighted assets but, in our view, both the numerator and the denominator of this ratio are deeply unreliable.
Many EA banks include in their definition of tier-one capital things other than tangible common equity – the only unconditional loss absorber, in our view. In addition, we think the risk weightings are deeply flawed (triple-A rated sovereign debt is assigned a zero risk weighting, for instance) and depend in part on non-verifiable model-based information provided by the banks themselves. Gross leverage ratios provide, in our view, a less distorted picture of the default risk of banks. It is true that, in principle, higher leverage can be achieved without increasing risk, simply by adding matching assets and liabilities to the balance sheet. In the real world, however, there is but one reason banks take on additional leverage: that is, to assume additional risk.

Also, as we reported previously citing Morgan Stanley, which confirmed that the Stress Tests will be a joke as they will not take in account sovereign solvency haircuts, which just so happens, is the primary concern in Europe, Buiter also agrees that European stress tests are nothing but a vile joke.

The exercise is apparently being repeated as we write this, with the results, including the results for individual banks, to be published by  the middle of July 2010. Although this represents a step forward, the stress tests are unlikely to include questions like: how would the solvency position of your bank be affected by a restructuring, with a 30 percent NPV haircut, of the sovereign debt of (1) Greece; (2) Greece and Spain; (3) Greece, Spain and Ireland; (4) Greece, Spain, Ireland and Portugal; and (4) Greece, Spain, Ireland, Portugal and Italy. In the absence of stress tests that include scenarios involving multiple sovereign defaults, we think it is difficult to view even the new exercise as a major confidence-boosting event. Added to this is the problem that the national implementation of these stress tests is left to the same national regulators and supervisors that failed in so  many countries, including Germany, France, Spain, the Netherlands, Belgium and Ireland, to anticipate and prevent the excesses that undermined so many of the institutions they were responsible for regulating and supervising. It does not matter very much whether these regulatory and supervisory failures were the result of incompetence or (cognitive) regulatory capture (see Buiter (2009)). The results of stress tests performed by those who failed to prevent the last crisis are likely to convince few market participants.

One thing is certain: no matter how many fabricated stress tests indicate that STD is actually good for you, the blow up of Europe's banks and countries can not be prevented but at best delayed. With even Citigroup seeing the writing on the wall, it is only a matter of time before the bond vigilantes push Europe beyond the edge and demand another trillion in rescue funding, to be followed by ten, hundred, and then, the death of the currency in which these rescue attempts are being conducted.

Full Buiter note below:


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SDRII's picture

Buiter - the same guy who used the FT pages to lament the barbarous relic and call for negative interest rates. Add him to the lose column

SWRichmond's picture

Euro Area banks therefore need additional capital; a lot of it.

Yes, they do, but you can't print capital.  Would that it were...

Sicilian Stallion's picture

And wouldn't EUR 2 trillion bankrupt the bailors???

btw/ Italy has a secret weapon called EUR/GLD.  With the highest amount of gold holdings per capita in the world, Italians get richer with each tick down.

Somewhere around EUR 5,000/GLD, Italy will be the richest country in the world.  I say that half-kidding and half-serious.

mephisto's picture

Unfortunately, if deflation is the policy in Europe only, not US, then EUR/USD will rally while Gold will only go up in USD as Bernanke destroys the USD.

You need Obama to cut the budget or Germany to leave the Eurozone, destroying EUR.

Chance... 1%.

mephisto's picture

Disagree. Buiter at least understands just how bad this situation is. He doesnt have a credible solution, but who does?

homersimpson's picture

Pimpin' just got cheaper in Eastern Europe.

Bam_Man's picture

Where exactly is the Unicorn that is going to sh*t these two trillion euros?

scofflaw's picture

The US taxpayer of course.  What else would you expect?

MrTrader's picture

Yawn. More of the world is going under chatter. Long EUR, long JPY. Short USD. Long ES of course. Short BP. Long GS. Short Gold. Long Copper. Long Oil. Thatßs qhat I call a portfolio. :=)

aaronb17's picture

So YOU'RE the bastard who's been on the winning side of all my trades!

Devore's picture

Just do the opposite MHFT says, and you'll be fine.

Ivanovich's picture

Yes, that's sure doing well today.

SDRII's picture

When Buiter was discussing portfolio risks at the banks he couldn't possibly be talking about the few billion STD just took on from CitiFinancial Auto's auto loan portfolio (Santander Consumer USA)?



London Dude Trader's picture

Denmark 0 - Japan 1. 

Erik Nielsen must be sweating....

Bonesetter Brown's picture

So if everything is so bad in Europe, why hasn't the ECB, BoE, or BoJ drawn on the Fed's FX swap line?

doublethink's picture


Country by country will now need to be bailed out.... You Betcha!


"Our national debt is our biggest national security threat," said Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, at a "Tribute to the Troops" breakfast on Thursday


Cyan Lite's picture

<sarcasm>So... iPhone 4 anyone? </sarcasm>

London Dude Trader's picture

The super-hyped iPhone 4 will kill AAPL.


It seems that people who pre-ordered the iPhone 4 in the US and received it one day early (yesterday) are unable to get any reception and make calls when holding the phone in their left hand: The same problem is now also being reported in the UK:


London Dude Trader's picture

Denmark 0 - Japan 2 

I hope Erik is watching the game in idyllic Chiswick 

Cow's picture

Quick!  All countries give ALL your money to bailout the failed EU and thus the failed EU banks, so that they might be able to lend the money back to you to grow the economy or else they will fail and "We" will lose a lot of money.



zero intelligence's picture

European governments can't write big checks for the next round of bank recaps. The simple solution is a debt/equity swap like John Hussman ( has been talking about for years. This is easy, doesn't cost the government a dime, and would result in huge capital bases for Europe's banks. Unfortunately, the eurocrats don't have the balls for it, so they will probably print the money instead.

Monday1929's picture

He doesn't believe a faked stress test by discredited criminals will boost confidence?

Where has he been?

And why would anyone care what Citi says? Didn't they die yet?

fearsomepirate's picture

The only reason the currency will die is because the people have been conditioned to believe that the single worst thing that could possibly happen to an economy is for the government to spend less money this year than it did last year.  They have been taught over years to believe that an economy can survive stocks hitting zero, defaults on corporate bonds, and individuals defaulting on private loans, but that if a government can't confiscate enough money to pay its loans, a plague of locusts will destroy the land, and no more joy will be seen in Zion, yea, unto a thousand generations.

So the people beg the state to please take away their freedom, anything, lest the apocalypse of, um, a state that is unable to squander even more of our money be visited upon us.  They embrace the central bank's announced plan to destroy their savings, happy to see their net worth go to zero to avert the catastrophe of an insufficiently rich political class.

If people ever wake up and realize that honest money is far more crucial to prosperity than a corrupt, obese and self-indulgent government, the game will be over.