What Country is Next in the Coming Pan-European Sovereign Debt Crisis?

It is beyond a hallucinogenic-induced pipe dream to even consider
that the Eurozone will come out of this attempt at replicating the US
"extend and pretend" policy intact and unscathed. The mere concept of
global equity rallies should have macro traders and fundamental
investors chomping at the bit. The US won't even get away with it, and
we have the world's reserve currency printing press in our basement
running with an ink-based, inter-cooled, twin-turbo supercharger
strapped on that will make those German engineers green with envy, not
to mention green with splattered printer ink as the presses go berserk!

In part 2 of my series on the Pan-European Sovereign Debt Crisis, we
will review Italy and Ireland in comparison to the whipping child of the
media - Greece (see "The
Coming Pan-European Sovereign Debt Crisis" for part one covering
Greece and Spain along with tear sheets for the Spanish banks at
risk for subscribers).

Click to enlarge... 

 

As seen above, Italy's gross debt as a % of GDP is worse than that of
Greeces. Spain's stuctural balance is nearly as bad as Greece's and
their GDP is heading backwards at a faster rate than Greece. Spain's
high unemployment trumps all in the comparison, with Ireland coming a
close second. Despite all of this, Greece has two to three times the CDS
spread. Greece is a dress rehearsal for sovereign debt failure in
several larger countries. Ireland is in very bad shape, and the UK is
heavily levered into Ireland through the banking system and bonds (to
the tune of $190 billion+) which exacerbates the issues that the UK
already has (we will get to this in a future post). Spain and Italy
combined are a sizeable chunk of the entire EU, and they are at risk. I
say this just to keep things in perspective. We still have at least 9 or
10 more nations to review, and it doesn't necessarily get any better
from here.  

As was prodigiously reported in the news, Greece is under fire by the
market and the EU to reduce a deficit of 12.7 percent of gross domestic
product last year to within the EU’s 3 percent limit in 2012. This is a
rather unlikely accomplishment for any country, and apparently even less
likely for Greece.

Feb. 10 (Bloomberg) -- Prime Minister George
Papandreou’s drive to get Greece’s ballooning
budget under control
will be challenged in the streets today as striking labor unions shut
down schools, hospitals and flights.

Air-traffic controllers and civil-aviation workers are effectively
closing down Greek air space as part of the 24-hour work stoppage by
ADEDY, the umbrella group representing about 600,000 civil servants.
Some 483 international and domestic flights have been cancelled, a
spokeswoman for Athens International Airport,
Greece’s biggest, said by phone.

Protests against Papandreou’s plans to freeze wages and reduce
benefits come after European Union leaders, set to meet at a summit in
Brussels tomorrow, signaled they may aid the country if progress in
cutting the deficit is made. Bonds have slumped in Greece and in the
euro area’s southern edge as investors examine budget shortfalls across
the 16-nation bloc.

“The concern is whether the strike will be a one-off or the first
of a long series of street demonstrations involving other parts of the
economy,” said economistGiada
Giani of Citigroup
Global Markets in London. “We need to see a prolonged period of strikes
before we know whether the government’s willingness will be affected.”

ADEDY opposes Papandreou’s plans and may
call out its workers again on Feb. 24, when the biggest private-sector
group GSEE holds its own 24-hour strike. Today’s walkout, with rallies
in Athens and other cities and towns, is organized labor’s first major
challenge since the Oct. 4 election of Papandreou, a socialist that
unions backed in the vote.

Union Threats

“Cutting public-sector salaries is an easy political choice,” Spyros
Papaspyros, chairman of the ADEDY civil servants union, said this
week. “Attacks that start on the public sector will lead to attacks on
all.”

The unions are contesting measures demanded by the EU and investors
to reduce a deficit of 12.7 percent of gross domestic product last year
to within the EU’s 3 percent limit in 2012.

It is nonsensical to assume strikers will institute just "one" strike,
knowing full well that a single strike will not drive the point home. It
is beyond wishful thinking. Even if that was the case, all the union
leaders need to do is read Bloomberg to sharpen their plans.

I have harped on this topic in my previous Pan-European
Soverign
Debt Crisis post, but let me drive it home again. Greece is merely a
test drive by traders and those who are truly concerned about the debt
overhang from the global bailout. Yes, it has the highest debt to GDP
ratio, but it is closely followed by much larger nations with much
worse, and much more immediate debt and NPA issues.

As initially illustrated in my last post on this topic, when pondering
the sovereign debt
status of Italy, Spain and Ireland, keep in mind how much of their GDP
is
bogged down by NPAs in their banking systems - and this is what is
reported, knowing full well that the reporting is at best, lagged in
terms of non-performing assets... 

 

So who will be the first (second, third) to fail in a government bond
offering?

Governments all over the world are selling record
levels of debt to investors, and quite often buying most of it too
through their respective quantitative easing programs. Without that
guaranteed government bid, it is likely that either not all the bonds
will be sold or they will have to be sold at a substantially higher
yield. This comment is aimed at the US, UK and Japan, the world's
economic powerhouses, which I will get to in detail in later
installments of this series. Reference the following and keep in mind
that we have just begun to see what will be a worldwide record issuance
of sovereign debt, or at least an attempt at such:

• BBC:
  The UK Treasury has failed to sell all its government bonds in an
  auction for the first time since 2002 (these are the guys with9% of
  their GDP tied up in non-performing bank assets, ex. RBS, Loyds, etc.)
  
• FT.com / Markets - German
  bond sale’s fate signals trouble ahead: A German sovereign bond
  auction failed on Wednesday as investors
  shunned one of the most liquid and safe assets in the world in a
  warning
  for governments seeking to raise record amounts of debt to stimulate
  slowing economies. The fate of the first eurozone bond
  auction of
  2009 signals trouble ahead as governments around the world hope to
  issue
  an estimated $3,000bn in debt this year, three times more than in
  2008.The 10-year bonds failed to attract enough bids to reach
  the €6bn the
  German government wanted. Bids of €5.24bn, a cover of only 87 per
  cent,
  amounted to the second worst auction on record in terms of demand.Such

  developments were rare before the credit crisis. Before the seven
  German bond auctions that failed last year, the last German bond
  auction
  to fail was in July 2000 after the dotcom crash.Analysts said
  the vast amount of supply is deterring investors and a growing number
  of
  countries, including those with deep and mature bond markets, such as
  Germany, the UK and Italy, are struggling to attract buyers.The
  Netherlands has seen bond auctions fail, the UK and Italy have been
  forced to offer investors higher yields to meet their auction targets,

  while Spain and Belgium have cancelled offerings because of a lack of
  demand.

Now, let's put this into perspective.

1. The amount of debt offered in the past will pail in quantity and
   scope with the amount of debt that needs to be offered now, amid
   historically record high deficits and dwindling revenues, high
   unemployment and global uncertainty.

Let's examine exactly how much debt we are talking about and when...

The weaker Eurozone countries will start flooding the market with
sovereign debt rollovers starting THIS MONTH. It remains to be seen
whether Germany will backstop Greece, but if they do how can they avoid
backstopping Spain, Portugal and Italy. The Spanish and Italian
backstops will be particularly tricky since there are bank NPAs hidden
in their whose extent has been purposely kept a big mystery. Reference
the NPA as a percetn of GDP chart above. If Germany doesn't backstop
these countries then it's left up to the IMF and their goes the
credibility of the Euro. If Germany does backstop the countries, then
their goes those Bund rates! An interesting conundrum, indeed.

The near term debt issuance is simply the tip of the iceberg here.
According to Merrill Lynch, we have trillions of nigh unwanted sovereign
debt to deal with (Click to enlarge, by way of Zero Hedge):

 

Tyler Durden of ZeroHedge put it quite succinctly, "It is sheer
lunacy if the ECB and Germany believe that the guarantee program will
not wreak havoc on their plans to quietly fund this massive hole." With
these facts in mind, it should be obvious to all that Greece is a
comparative non-issue being harped upon by the media and traders. It is
so much so, that I will give away the cursory research on the Greek
banks that I have found in my next post, as I outline some of the banks
and related sovereigns for my paying subscribers that will really show
some problems in this upcoming debt crisis.

Further thoughts on...

Italy:

Budgets
deficit to rise significantly and state debt will probably reach 117%
of the GDP. As per Moody's, Italian banking sector is relatively less
exposed to further shocks than some other peer banking systems. With
this being said, Italy is still "overbanked"and has banks of material
size still sporting 100% Texas ratios as Italy has more than 2.2% of its
GDP consumed by its bank's non-performing assets. Paying subscribers
should download the 11 page tear sheet featuring 7 Italian banks worth
noting, including one with a 100% ratio (meaning the bank has more
non-performing assets than it has equity = insolvency!) Italian bank
here:  Italian Banking Macro-Fundamental
Discussion Not

2010-02-09 17:00:40
792.07 Kb.

Ireland:

• It has been reported (I haven't
  verified this personally) that Ireland now has the highest level of
  household debt relative to disposable income in the developed world at
  190%.
• IMF

  via the Irish Times

  : IRELAND WILL pay a higher price to stabilise
  its banks than any other developed country, the International Monetary
  Fund (IMF) has warned. The Washington-based organisation estimated the
  cost of stabilising Irish banks will be the equivalent of about €24
  billion, the highest government bailout as a proportion of economic
  output. The IMF said yesterday that "financial stabilisation costs"
  would account for 13.9 per cent of Ireland's estimated €171 billion in
  annual gross domestic product (GDP), the value of all the goods and
  services produced in the State this year. The cost of bailing out the
  banks in the UK and the US fell slightly behind that of Ireland as a
  share of the value of their economies, totalling 13.4 per cent and 12.1
  per cent of GDP respectively, in a list of 19 developed economies. "The
  United States, United Kingdom and Ireland face some of the largest
  potential costs of financial stabilisation (12 to 13 per cent of GDP)
  given the scale of mortgage defaults," the IMF said in its biannual
  Global Financial Stability report. The IMF estimates that Irish

  government debt will increase by more than any other developed country
  over the three years from 2008 to 2010, rising by 41 percentage points.
  The expected amount of debt in issue guaranteed by the Government would
  total $641 billion (€495bn), amounting to 2,700 per cent of the average
  debt issued by the State between 2003 and 2007, it said.

• Ireland is currently running an estimated

  1.135 billion Euro government deficit

  .

Spain: Subscribers can download a tear
sheet on all
Spanish banks
investigated here:  Spanish
Banking Macro Discussion Note 2010-02-09 02:48:06 519.40 Kb

).

Embedded structural rigidities will prolong the
downturn causing the oft sought after "V shaped recovery" to become an
unlikely occurrence. The very high private sector debt levels most
likely exacerbated the effects of global downturn. A round of
consolidation and restructuring seems inevitable as both the NPAs in its
banks are increasing on a fundamental basis and the banks are forced to
come clean with the true losses on their commercial and residential
real estate in the form of increasing NPAs (see The
Spanish
Inquisition is About to
Begin...) as well as the share of NPLs which are also increasing.
PWC expected the bad loans ratio to increase to 8% by the end of 2009.
It is apparent that the sector will need refinancing. however, Spain's
loan-to-deposit ratio of 130% is higher than the Eurozone average of
115%, which shows Spain's high reliance of wholesale funding and
securitization channels, both of which have dried up.

Any institutions interested in my research can feel free to reach out to me here. Anyone can subscribe to the research here.

Comments

[putbuyer]

Reggie,

I'd like to see a default breakout that drones can understand. Can you do a version that lay people get. i.e. next 3 months potential defaults vs outstanding. Some on my friends can't understand complex analysis.

Thanks.

[Anonymous]

There will be NO EU bailout for Greece. Maybe IMF but the debt contagion will keep rolling across the world. In the end politicians cannot stop the world debt unwind. The day of reckoning can only be slightly stalled. Once the flee of capital begins from a nation it cannot be stopped. Panics are like that and the capital fleeing Greece is now in full swing!

[jbc77]

What on earth could possibly be the end game here? This is just one hell of a substantial cluster fuck. The market levitation show is in the 3rd act and I'm not sure there is going to be an encore performance. Leo, where are you.......?

[Anonymous]

> The real crisis in Europe is the moslim problem that is
> growning. Today's headlines: 56% of all new births in
> European cities are foreign muslim children. in 1992, this
> was 7%!

All Semites (arabs & jews) should be deported from Europe ?

[Anonymous]

India expected to grow at 8% in 2010. If they maintain this rate for 10 years (and most of their growth is in the internal facing economy), they will be in the G-8.

[Anonymous]

You guys don't seem to get it. This is just about government debt, not nations' total debt.

Greece for instance may have a large public debt relative to its GDP, but it is mostly self-financed and the Greek people and corporations still have piles of dough (their housing market hasn't even shown a blip yet). Greece has a a modest positive international asset position. And they're big tax evaders - if the Greek government would improve its tax collection, it could solve this public debt problem in a matter of years.

Nearly all EU nations (except UK) have big public and private coffers and large international asset holdings.
So, don't focus only on their public debts or their external debts - those are offset by large domestic and international asset holdings.

The US, in contrast, is deeply indebted to the world, and it is indebted on all levels - government, public, corporations. Worst of all, it doesn't have the productive capacity to ever work its way out of this mess unless it massively devaluates its currency; the result of 30+ years of 'monumental abuse of the privilege of issuing the world's trade and reserve currency', as De Gaulle once put it.

[Anonymous]

The real crisis in Europe is the moslim problem that is growning.

Today's headlines: 56% of all new births in European cities are foreign muslim children. in 1992, this was 7%!

They predict that in 10 years this will be 70%!

I'm multicultural, well off, ... but if there is a crisis comming in the future, that one will be it.

[Anonymous]

Actually when the total economy moves from $70 Trillion to $40 Trillion....what is actually happening is expected....

What happens to a person when they need $70 but are given $40 ? What changes do they have to make ?

Assets should be allowed to reprice....

And the government is currently staeling from those that have savings because there is an artificially low rate....since there is no rate ...this the same as taxing savers 100% of their interest...

The government is literally stealing from those who did the right things....and is reallocating it to htose who did not....

How can this be fair ?

FACISM....USA STYLE

[Dirtt]

That is the way is was in 1764 when they mocked the folks throwing tea overboard.  12 years later we know the history.  Imagine if they had the internet in 1764?

Fast forward to today. 2007-2009 is 1764.  Don't expect it to take 12 years this time.

[jmc8888]

Why does it seem that most non-US auctions are failing?  My guess is the fed isn't buying theirs.  If most others are failing, it really points to why ours aren't.  Could the Fed not just be 90 percent of our mortgage market but also the majority of our auctions? It's been talked about many times on here before of course, but in light of repeated auction failings in Euroland, and ours continue to not fail, it really seems to me that the odds the fed ARE the vast majority of the bids, or as said before the buyer a few days later, just went up.

[i.knoknot]

plausible theory if you follow ZH/KD/...

add to it that *they* (internationals) aren't buying their own debt either... rather, they are looking at the dollar as being slightly less evil than their own debt... in addition to the FED 'helping out a bit...'

it feels like everyone's on a sinking ship and running back and forth between the bow and stern, knowing it's insane, but not knowing what else to do.

(maybe there's a shiny yellow lifeboat? but does it float in high seas...  :^)

[Thoreau]

Germany may be the real crisis country if their populace turns virulent; which I believe will eventually take place.

[Publius Terenti...]

Might the markets exhibit a Northern European bias in favour of Ireland?

Its citizens are fairer haired and fairer skinned than their Mediterranean cousins - and also they speak the "right" language and write it intelligibly.

[THE DORK OF CORK]

I would have to respectfully disagree with that statement old boy !

irishslang.net/

[Anonymous]

Re. CAPTCHA - (malicious)bot as in robot, ie. a piece of software can not post on the site as it can not algorythmicly solve the captcha and say fill it full of spam.

Does that clear it up?

[Anonymous]

And most of the under educated like me cant do minus.I like captcha. Its too easy today.

[m.g. turner]

It's very difficult to know the truth in Italy but if the authorities begin to deny the existence of a funding crisis you can bet there's a funding crisis. On a Friday night in September 1992 the Italian government denied that a devaluation of the Lira was imminent and by Sunday evening the Lira was devalued by about 7%. I can't remember who said it, but in Italy when the politicians are talking, they're lying and if they're not talking, they're stealing.

che sarà, sarà

[Anonymous]

The attack on the weaker eurozone countries is serious and will be followed by attacks on the US Treasuries. The attacks on the municipal bonds of the weaker States (CA, FL, OH, MI, NJ, NY, NC) representing over 100 mm people (35% of the USA population) is next. China has announced there will no new purchases of any US debt without a formal Federal guarantee. The growing conflict between the well paid State/local employees and the unemployed/under employed private sector will lead to civil unrest this year in my opinion. Last year it was banks/billions of bailouts now its sovereign debt/trillions of bailouts.

[bugs_]

The kinder are waiting to see what their sibling
the Greeks _actually_ get first.  Once they know
then it will be Tumult, Volksaufruhr, Krawall!
The rush to Mutter's kitchen!  ME! ME! ME!!!

[Anonymous]

So what can be reasonably concluded on a list of declining likelihood.
a) International banks et al and all central banks intentionally bankrupted world countries to assume world assets, natural resources and the means of production in collusion with global corporations.
b) International and central banks were swept away in the hubris thinking the parade would go on forever, which would suggest c) and d).
c) The Banks are incompetent and do not know how to qualify candidates for loans based on the ability to pay. I don't think so.
d) They are stupid. Not likely but willing to accept the Moniker if it helps them accomplish a).

PS. I really hate CAPTCHA and don't understand the point of it.

[fedusw (not verified)]

Agree....experts: Crisis will get much worse

Looking at Portugal, Dubai to have further troubles. who knows.

[Anonymous]

Let's keep this simple....

Wht happens to an economy if the following were the case....

Country starts out with a $70 Trillion economy....This would include all net equity and borrowing capacity....

All goods and services have the possible price of $70 Trillion....

Then economic change ....The total equity and borrowong capacity is lowered to $40 Trillion....

All goods and services have the possible price of $40 Trillion....

All prices move to 4/7's of what they were before....

......................

In the above case....the government decides to print $12 Trillion while the total economy is at $40 Trillion....which because of dilution...wealth is transferred amongst the haves and have nots....BUT the real economy does not change and stays at $40 Trillion....

........................

The point is that the economy will not return to $70 Trillion until equity and borrowing capacity is actually replaced....

Thus the query is how todo this ? Or rather what role should the government play ?

.........................

The role the government should play is to restructure taxaxtion such that both equity and borrowing capacity can be quickly and sustainably replaced....

.........................

This is very simple....

Model the following two scenarios....

1) The current tax structure....currently progressive with VAT to be added....Small business will be taxed at a rate of over 60% when all governemnt programs are summed....

2) Ban all income taxes and corporate taxes....Replace with a simple 15% consumption tax....which would sum to approximately $21,000 x 15% based on an average family unit take of $48,000....X 81 million families....

Now estimate the total economy of both 1) and 2) 10 years later....

The size of the 1) economy would easily be 10X smaller than the 2) economy....

.........................

What are any of the troubled economies waiting for ?

[Anonymous]

Don't want to get all Georgist on you but a land value tax would be a better approach than an increased consumption tax. I do support your suggestion of scrapping income and company taxation.

[PD Quig]

They're waiting for it to become politically feasible. All the competing interests that have tax carve-outs are never going to allow the transition to a pure consumption tax. It will only become politically tenable when we have crashed and burned and lay in smoldering wreckage on the ground. For example, people will suddenly be a lot less interested in their mortgage interest tax deduction when they are neither paying a mortgage nor living in a house.

[Dirtt]

"They're waiting for it to become politically feasible."

At least here in the USA that day will only come one day too late.  And we'll be screwed.

Bastille Day...La Guillotine shall claim her bloody prize.

[Anonymous]

I think any of them could go at any time. (FUCKING BIG PIGS)
France, Ukraine, China, Korea, Indonesia, Netherlands, Germany, Britain, Italy, Georgia, Portugal, Ireland, Greece, Spain. All those mother fuckers are bankrupt. So are the banks.

[Anonymous]

Do not forget primarily the USA followed by Africa and all G20 except the BRICs.

The system is BUST world wide, BUY and hod GOLD!

[Anonymous]

Add latin american countries like Argentina to that list

[Anonymous]

hahahaha $%^&ing good
But,china ?????