Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!

Reggie Middleton's picture

Minutes ago I posted So, What's Next Step Towards The Eurocalypse? wherein I illustrated the folly in believing this CAC-powered Greek bond deal will be the near term sovereign default issues. Following up on those thoughts of serial defaults, I remind my readers and subscribers what was revealed in the post The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... 

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. First of all, there's trash and then there's real trash. The ECB has lowered there standards to accept some very low quality assets as collateral. The lower the quality of the asset, the more volatile that asset can be said to be in times of uncertainty. This is both common sense and taught in the first year of B School. Is it that no one at the ECB has common sense or went to school? Nah!!!! I doubt that's the case. In the post Greece's Problem Is Shared By Much Of The EU & Can't Be Solved Through Parlor Tricks, via ZeroHedge, it was noted:

This 'Deposits Related to Margin Calls' line item on the ECB's balance sheet will likely now become the most-watched 'indicator' of stress as we note the dramatic acceleration from an average well under EUR200 million to well over EUR17 billion since the LTRO began. The rapid deterioration in collateral asset quality is extremely worrisome (GGBs? European financial sub debt? Papandreou's Kebab Shop unsecured 2nd lien notes?) as it forces the banks who took the collateralized loans to come up with more 'precious' cash or assets (unwind existing profitable trades such as sovereign carry, delever further by selling assets, or subordinate more of the capital structure via pledging more assets - to cover these collateral shortfalls) or pay-down the loan in part. This could very quickly become a self-fulfilling vicious circle - especially given the leverage in both the ECB and the already-insolvent banks that took LTRO loans that now back the main Italian, Spanish, and Portuguese sovereign bond markets.

Of course, it gets worse... What can't be pawned off to the ECB in exchange for harsh margin calls merely days later has been pushed into insurers. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see File Icon Exposure of European insurers to PIIGS) sovereign debt holdings.


As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).


Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.


That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. On that note, here's some info on a very large, very well respected and very diversified European insurer. Before reviewing this, make sure you have read So, What's Next Step Towards The Eurocalypse? and understand the concepts behind Contagion Should Be The MSM Word Du Jour, in particular the potential and paths for contagion, nominally... What happens when you take the raw public debt exposure and you massage it for reality? Well, BoomBustBlog subscribers already know. Here's a sneak peak of just one such scenario...

(Click to enarge)


You see, Greece getting away with bondholder murder can easily kick off an interest rate shit storm. If so, it really won't look pretty - not nearly as pretty as Lehman, at least! Ask this big EZ insurer that would immediately get $11B chopped off of equity nearly instantaneously...


Subscribers are well served to review this report released in December. This opportunity is driven from the possibility of a Euro sector sovereign meltdown. Thus far, every step leads in that direction. I'm not saying its guaranteed, but everything has been happening according to plan thus far, D day looks to be that much closer...

The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).

Reggie Middleton Explains the Travails of the F.I.R.E. Sector on CNBC

Related links:


Next up I release the latest (and very interesting) Apple research to subscribers, and the effects of this sovereign stuff on British banks and US CRE.

As is usual, you can reach me via BoomBustBlog or by the following means...

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winter2012's picture

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halthouse1's picture

Eminent domain: Being a bondholder ain't what it used to be!


What happens when the rules of the game for bond buyers change midstream?


Does that make it more difficult to find buyers for that debt in the future? 


In other words if a rule change could happen to GM senior bond owners, Greece sovereign bond owners and almost to the owners of CDS on Greece debt, what happens to markets?


Article at The Political Commentator here:

jomama's picture

greece defaulting under the guise of a bailout/safety net, while EU nations pretend there is no sting: priceless

for everything else, there's mastercard.

onlooker's picture



Appreciate the information/insight as grim and unsettling as it is. Reality is not always pretty nor best kept under the basket.  thanks man

Rogier's picture

So basically Reggie says Generali's losses on PIGS debt are (partly) offset by UNFAIR gains on German debt. Priceless...

Olympia's picture

Global Debt Crisis

The greatest private fraud of human history.

Who are the great fraudsters who are becoming the murderers of the human kind?

How does the economy "illness" threaten Democracy and the freedom of people?

World War III - The First Private War in History

Authored by Panagiotis TRAIANOU.

disabledvet's picture

"Trading perspective" indeed. You've been annihilated YTD there Reggie! Having said that "the banks have said they don't have a problem with GREEK exposure." Obviously they have HUGE exposures to Europe as a whole. "That is the banking system" as they say. My view is that you've simply taken your analysis (which is quite good btw) too far in the "here's what's going to happen" department. All i would have said is "you want to avoid the long end of the yield curve as pricing pressures (which the Fed has publicly called for btw) begin to be felt" and leave it at that. Any sudden move in the long end of the "managed curve" SHOULD it happen SHOULD have an immediate impact on the dollar (causing it to strengthen. Should it weaken instead...LOOK OUT BELOW!) But still "these are hypotheticals." We all now know pricing pressures exist throughout the entirety of the US economy...including labor as CNBC has reported now....yet incomes are STILL coming nowhere near close to "affording it." Again..the massive size of the Federal Government and the total shredding of the most basic Constitutional protections for the American people are the problem. The former will be fixed by "inflating away the size to match the problem of it." The latter however...And yes, Mr President..."the world is watching." They (the world) really would i think like to put their capital to work here in the USA--but our "freedom index" on that front is clearly "less than zero." Hence..."exploding trade deficit." And as Zero Hedge and any other economist worthy of the name "exploding trade deficit figures=lower GDP." Period. Hence..."bad for banking" and "small banks/big Government" dilemma. the question is "how long can they keep that interest rate beast in the cage." so far...a lot longer than i thought capable:

Zero Govt's picture

Awesome Reggie

..think most of us would assume the ECB easy-money/cash-for-crap/bailouts would shore up the Euro bwankers for the headlined 3 years and "All is Well"

Just reading a Financial Times article this minute explaining 6 of the pension funds that were holding out against Greek Govt Bond haircuts were in fact Greek, 2 of them Finance Ministry and Civil Servant Union Pensions who'd already seen 20% and 25% haircuts last year. 

Evangelos Venizelos, Greeces finance minister, said his own ministry’s union was among those holding out and blasted the dissenters, calling them "rebels", saying they were letting Greece down at a pivotal moment.

When a Ministrys own staff are set against each other so much for wider European unity??? . . ."All is Well"

disabledvet's picture

"wait 'till the election." until those tanks roll in i'm bullish on equities. (Robo's still right on his gold call however.)

surf0766's picture

Those countries are all suffering from over socialism. Lack of other peoples money.

falak pema's picture

Italy has more money in Swiss land than there is snow; so if you want to eat your pasta deep frozen there will be no problem whatever happens to Fiat-fiat, Fiat or Chrysler. 

Spain looks the weakest big domino, not Italy. But its the banks not the sovereigns in Spain, while its the Sovereigns in Italy as well as the banks. Italy has huge assets stashed away; that's the tragedy and the comedy of fiat ponzi meltdown.

disabledvet's picture

conversion of the Italian debt "into the German money" was the mistake. (the basis of my thesis in 1993) that would be TRILLIONS. The euro actually was collapsing upon its introduction. "Only 9/11 and the American response" has allowed it to continue this long. Hmmm. "Go figure." Needless to say....

eddiebe's picture

Translation: Fiat is doomed.

WestVillageIdiot's picture

Like Lazarus, it will die, and then be brought back to life.  There is too much money to be made off of making money to think these devils won't continue to do the same thing over and over.  What did Einstein say about doing that? 

French Frog's picture

I tell thee, it's all bullish ... everything is these days

Manthong's picture

"the more volatile that asset can be said to be in times of uncertainty"

Anybody see any uncertainty or volatility out in the market?