There's A Very Nasty Storm Brewing in Euroland and Umbrellas Are Selling At Premiums With Insolvent Counterparties Attached - Prepare For It to Get Ugly!

Reggie Middleton's picture

I have been bearish on European banks since the UK mortgage banks
collapsed several years ago. To this day, despite mounds of fundamental
and macro evidence pointing to very bad things happening, there are
still cheerleaders stating that concerns are overblown. A good example
can be found in the post “Greek
Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on
, on March 14th:

“The worst of Greece’s
financial crisis is over and other European nations won’t follow in
its path”
, said former European Commission President Romano
. “For Greece, the problem is completely over,
said Prodi, who was also Italian prime minister, in an interview in
Shanghai today. “I don’t see any other case now in Europe. I
don’t think there is any reason to think the euro system will collapse
or will suffer greatly because of Greece

Okay, I shouldn’t have called him a liar,
but a tad bit optimistic, maybe? I actually agree with the last part of
his statement. The euro system will not suffer greatly because of
Greece, it will suffer greatly because of individual member countries’
problems collectively weighing on the union. As for Mr. Prodi’s
accuracy, let’s take a look at the Greek CDS over the time period in

Greece cds spreads

Yeah, that’s right! Listening to the former EC President would have
gotten you on the wrong side of the TRIPLING of CDS spreads. Not to fret
though, the ECB allocated 1 trillion dollars to alleviate this problem,
and now spreads have just more than doubled, but are still rising. And
for those of you who believed me over Prodi (I apologize again for the
“liar, liar pants on fire” bit, though)…

nbg - may 15 - June 8th

On that note, people have been asking me is it too late to join in on
the euro-bank brigade. My opinion is that the cat is out on these
popular names, and the option prices have finally caught up with the
fundamental and macro prospects of the actual entities. With that being
said, those fundamentals and macro prospects look awfully negative. In
the posts “With
the Euro Disintegrating, You Can Calculate Your Haircuts Here
“, “What is the Most Likely Scenario in the Greek Debt
Fiasco? Restructuring Via Extension of Maturity Dates”
and A
Comparison of Our Greek Bond Restructuring Analysis to that of
, I detailed prospective haircuts to be taken on Greek
debt, using a thorough forensic analysis methodology. To be absolutely
honest, the numbers contained withing the first two were quite
optimistic. In reality, in order for any restructuring to work, debt to
GDP should be reduced to below 100%. This wasn’t done i the previous
Greek analysis, but was hinted at in the Argentinian comparison…

Now, referencing the bond price
charts below as well as the spreadsheet data containing sovereign debt
restructuring in Argentina, we get…

Price of the bond that went under
restructuring and was exchanged for the Par bond in 2005


Price of the bond that went under
restructuring and was exchanged for the Discount bond


With this quick historical primer
still fresh in our heads, let’s revisit our Greek, Spanish, and Italian banking analyses (the
green sidebar to the right), many of which are trying to push the 400%
mark in terms of returns if one purchased OTM options at the time of the
research release. It may be worthwhile to review the Sovereign debt exposure of Insurers and Reinsurers
as well.

We may very well get a bear market
rally or two that may pop prices, but from a fundamental perspective, I
do not see how significantly more pain is not to come out of this debt
fiasco. The only question is who’s next. We feel we have answered that
question is sufficient detail through our Sovereign Contagion Model. Thus far, it has
been right on the money for 5 months straight!

I am now releasing the updated version of the Greek bank haircut
analysis, with the realistic goal of attaining sustainable debt to GDP
levels. This is a professional level subscription document, but be
assured, the number are ugly – quite ugly. Just as it was for
Argentina.  Now, just imagine 4 or 5 Argentinas, all multiples of the
size of Argentina attempting this style of restructuring and aggressive
hair cutting in the midst of aggressive QE going nowhere through another
sharp economic decline exacerbated by austerity measures. Long story
short, you ain’t seen nothing yet! No matter which way Greece looks at
it, and no matter how they restructure, they will have to hit the public
markets again by 2014, and that is with subsidies, ECB/EU/IMF bailouts,
haircuts, restructurings, the whole nine yards. It ain’t pretty!



This is why the European banks are scared shitless to lend to each
other. There’s a very nasty storm brewing up ahead, and umbrellas are
selling at premiums, with insolvent counterparties attached. Reference
today’s articles from ZeroHedge on the topic:

Deposit Facility Usage Hits Fresh Record At €362 Billion As Liquidity
In Europe Worse Than Ever

Europe’s banks are not buying the
propaganda about liquidity moderation on the continent. In fact quite
the contrary: yesterday’s total usage of the ECB’s overnight deposit
hit a fresh all time record of €361.7 billion. This is an
€11 billion increase from the night before and €55 billion from a week
earlier. This means that all the excess liquidity in Europe is getting
tied into the safety of the central bank, and the market continues to
experience a liquidity glut. It also explains why both 3 and 6 month
Euribors crept higher today, to 0.713% and 0.999%, just wider compared
to yesterday’s fixings. Ignore all the populist rhetoric: the liquidity
in Europe is getting worse with each passing day, as the banks’ own
actions confirm.

Oh yeah, this is all despite the fact that the Eurozone Nations Set Up $1
Trillion Bailout Fund
. European banks are hitting the ECB for
parking their cash (as opposed to to lending to fellow banks that are killing themselves or are nearly guaranteed suspect counterparties) at a
greater rate that at ANY time during the crisis including the collapse
of Bear Stearns and the bankruptcy of Lehman Brothers.

Professional subscribers should reference the live, online spreadsheet: Greek Debt Restructuring Analysis with Sustainable
Debt/GDP Ratio Limits – Professional

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naiverealist's picture

What's the skinny on Iceland?  Have they been nuked out of existence because they told the bankers "NO, F********* WAY).  Or have they just dropped off the radar because the world didn't collapse when they went down.


Any insights

Hephasteus's picture

They are just chilling. We're all going to default together.

Cognitive Dissonance's picture


So the smart kids are finally waiting for us dummies to catch up. It's about time.

akak's picture

Excellent question!

But far from the first time, I note once again that our terminally ADD-afflicted corporate media is chronically unable to engage in any follow-up to the major stories of just the prior few months.

I need more asshats's picture

"I have been bearish on European banks since the UK mortgage banks collapsed several years ago."

Oh of course you have reggie. You are the most accurate financial clairvoyant in this world. Why you have to peddle subscriptions to a web site is beyond me. You should be making trillions with your spot on predictions.

jbc77's picture

The guys research is beyond good. I'm not sure where you can get a product more polished and refined than Reggie's. Have you ever considered that he's parlayed the blog into a viable business? What have you got against promting a business, making money? Something against capitalism or what.....................?

ZerOhead's picture

Slightly OT but have you ever posted anything even remotely intelligent?

I need more asshats's picture

I'm rubber and you are glue. Crazy kitty. Nice little pussy.

akak's picture

You mean you haven't sufficiently embarrassed yourself YET?

ZerOhead's picture

Speak for yourself... I'll take the compliment!

Hephasteus's picture

Ugly. What's the expression when a guy is beyond ugly. He's a "Monster"!!!

breezer1's picture

when should i start looking at olive groves reggie?

Whats that smell's picture

I miss Al Greenspan's jibberish.. A true master!

Rusty Shorts's picture


Portugal Ireland Greece Spain Hungary ITaly


 - comment on EC.

akak's picture


Portugal Ireland Greece Spain Hungary ITaly



Hungary, Estonia, Latvia, Poland

ZerOhead's picture

France Ukraine China Korea Malaysia Ethiopia!... someone is getting funny here!

akak's picture

Yemen Oman Uruguay Andorra Namibia Djibouti Israel Algeria Rwanda Egypt Bulgaria Ukraine Turkey Tunisia France Uzbehkistan Croatia Kyrghizstan Eritrea Denmark

John McCloy's picture

You got that right.

Best laugh of the day 

ZerOhead's picture

India Namibia Denmark Equador England Djibouti!

(Nice work by the way!)

MayIMommaDogFace2theBananaPatch's picture

This acronym was predicted by the prophets.  It has been unspeakable until now. 

We have been anticipating its arrival for sometime now.

Thank you, Rusty.  Your role in this matter is unspeakably huge.

ZerOhead's picture

+1000... Niiice!

(Note to self... must visit PIGSHItaly some day!)

Cognitive Dissonance's picture

(Note to self... must visit PIGSHItaly some day!)

Double NICE.

Kudos to both of you for your very active imaginations. Your sex lives must be very healthy.

ZerOhead's picture

The Palm sisters are not complaining!

DoChenRollingBearing's picture

Oh!  I always thought it was Rosie Palm and her 5 little daughters...

Cognitive Dissonance's picture

Wow, I just had a thought. Yes, I know, that's always dangerous. But here goes.

Is there such a thing as a left handed or right handed cat, present company excluded?

MayIMommaDogFace2theBananaPatch's picture

Oh the tangled threads we weave.

Both of the felines that dominate my world are of the right-handed variety.  How do I know this?

Simple.  Just ask them.

i.knoknot's picture

kitler... i just should NOT be laughing this hard...


Cognitive Dissonance's picture

God, you ask a simple question and all the maniac cats come out of their various (mouse) holes with paws raised. :>)

epobirs's picture

No, because cats don't have hands. Imagine the trouble if they did. Oh, it might start off innocently enough, with them learning to operate the can opener and overindulging. But who knows what terrible feline ambitions would ensue next?

Hephasteus's picture

Wow I never throught of that. Humans spend more time learning how to control our hands than we spend learning to walk and talk. I guess if a cat spends alot of time playing they could end up favoring one hand over the other for jabbing and taunting moves.

Robslob's picture

Unfortunately the U.S. already played those cards and the stink is here...


Doubt Britain or the E.U. is going to get away with any "stress test" BS primarily due to the fact almost EVERYBODY already knows they have lied about their balance sheets in the first place...

Rogerwilco's picture

Gotta love the central bankers and their sycophants in government and the Press. We're told today that Bernanke "calmed" the markets with "reassurances" that nothing bad is coming to the good ol' USA. Just like the numerous reassurances he offered in 2007 and 2008? I suppose if you are the CEO of BAC or WFC, those pats on the head mean something, for everyone else, not so much.

Amsterdammer's picture

Stress tests for the European banks are in the making

and are almost completed, announced Trichet last

Saturday ( see Reuters ) and will be made public,

and made not by Timay's team but by the

Committee regrouping the 27 national regulators.

Obviously 'haircuts' are under way, look out for

the German and French banks to take the biggest

blows imho







ToNYC's picture

"Stress Test" is a semiotic, cognitive dissonance moniker: full of sound and fury, signifying nothing; a tale told by an idiot. The assumptions involved in such  "stress tests" define out all the real problems and count pure trash as solid gold.

What a fool wants to see, a fool believes.

Cognitive Dissonance's picture

"....a semiotic, cognitive dissonance moniker: full of sound and fury, signifying nothing; a tale told by an idiot."

You rang?

BTW, only my wife can call me an idiot. :>)

MayIMommaDogFace2theBananaPatch's picture

You rang?


Even funnier if somehow you could have conveyed (projected) the unison voices of Lenny and Squiggy saying "Heellloooo."  Kind of tricky though...

Still -- a 95th percentile joke IMHO.

Ripped Chunk's picture

I bet the test results are similar to the ones we saw for the US banks.

What the hell is that smell??????