And The Next Stop On The European Bank Flu Express Is

Reggie Middleton's picture

As global equity markets gap downward the trading day after I suggested Watch The Pandemic Bank Flu Spread,
can kicking will get progressively harder from this point on. As I have
said in my many interviews, the only way out of this is debt
destruction, which will crush big European banks leveraged up on debt
marked at par of close enough to it.

made clear that default was the only way out, Iceland has once again
proven me correct. And just to jog the memory, I made it clear that
default was the only way out nearly two years ago...

Online Spreadsheets (professional and institutional subscribers only)

Bloomberg reports: Iceland May Hold Krona Auctions Within Weeks

island, whose banks defaulted on $85 billion in 2008, is moving into
the final stages of its resurrection plan as the last vestiges of crisis
management are gradually removed. Iceland’s decision, taken together
with the International Monetary Fund, to impose capital controls three
years ago was key to surviving the bleakest moments of the crisis and
helped prevent an all-out run on the island’s assets, Gudmundsson said.

the capital controls it would have been much more difficult to ensure
stability in the exchange rate, calling for much higher interest rates
and an inability to shelter the domestic economy as well as we did,” he
said. “With the turbulence in the international markets lately, the
capital controls have sheltered Iceland considerably, since there’s no
way of doing a run on the financing of the Icelandic state or the
financing of the Icelandic banks.”

is clear that capital controls are coming to the EU, and I'm sure there
already in place in some form or fashion. It is quite ironic how the
so-called "in the know" pundits alleged that Iceland would be osctrazied
from the captial markets for defaulting when they are the ones actually
returning to the markets as the TPTB in the EU are being shunned. Just
default already and get it over with, or you just may find yourself
working for an Icelandic boss momentarily... You can try to save all of
your banks and end up saving no banks at all, or you can go the logical
route - the route that Iceland democratically allowed their populace to
choose, which also so happened to be the right way. Hmmm... Democaracy!
Capitalism! We just don't seem to be seeing those concepts in the Euro
area much these days...

Outperforming Euro Area

economy will grow faster than the euro-area average this year and next,
the IMF estimated in September. The cost of insuring against an
Icelandic default, using credit default swaps, is lower than the average
for the euro area.

economy will grow 2.5 percent this year and next, versus 1.6 percent in
the euro area this year and 1.1 percent in 2012, the IMF said Sept. 20.
Next year, Iceland’s current account surplus will widen to 3.2 percent
of the economy and unemployment will be 6 percent, versus 9.9 percent
joblessness in the euro area, the fund said.

stabilization of the island’s economy has allowed the central bank to
press ahead with capital liberalizations that the government estimates
won't be fully dropped until 2013. The approach allows foreign investors
eager to offload their krona holdings to transfer them to foreign or
local investors willing to commit long-term to the island, according to
the central bank.

said. Now, on to my other premonitions, predilections and predictions
for which my subscribers pay me so dearly for... CNBC reports Moody's Warns On French Rating Outlook

rise in interest rates on French government debt and weaker growth
prospects could be negative for the outlook on France's credit rating,
Moody's warned in a report on Monday, adding to pressure on European
debt markets.

that France has the weakest economic fundamentals among the euro's six
AAA-rated countries have drawn the euro zone's second largest economy
into the firing line in the debt crisis this month.

rating agency said the deteriorating market climate was a threat to the
country's credit outlook, though not at this stage to its actual

borrowing costs persisting for an extended period would amplify the
fiscal challenges the French government faces amid a deteriorating
growth outlook, with negative credit implications," Senior Credit
Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated

we noted in recent publications, the deterioration in debt metrics and
the potential for further liabilities to emerge are exerting pressure on
France's creditworthiness and the stable outlook (though not at this
stage the level) of the government's Aaa debt rating," the Moody's note

yield differential between French and German 10-year government bonds
rose above 200 basis points last week, a new euro-era high.

said that at that spread level, France pays nearly twice as much as
Germany for long-term funding, adding that a 100 basis point increase in
yields roughly equates to an additional three billion euros in yearly
funding costs.

early Monday trade, the French 10-year spread was up about 20 basis
points at 167 bps following publication of Moody's report but remained
well short of the 202 bps hit last week.

The CAC 40 index, which was down 1.7 percent in opening trade, was down 2.2 percent after an hour of trade.

the government's forecast for real GDP growth of a mere one percent in
2012, a higher interest burden will make achieving targeted fiscal
deficit reduction more difficult," Moody's said.

Oct 17, Moody's said it could place France on negative outlook in the
next three months if the costs for helping to bail out banks and other
euro zone members overstretched its budget.

"The French social model cannot be financed if the French economy's potential is not preserved.

The stress on banks' balance sheets can lead to further increases of
liabilities on the government's balance sheet when further state support
to banks is needed, it added.

The events are unfolding like clockwork. Just go back a few months - or a year - or two years - in the BoomBustBlog archives for the Eurozone topic...

Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!!

BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter

When French bankers gorge on roasting PIIGS - OR - Can You Fool Everybody All Of The Time?

So, does BNP have a funding problem, or is it at risk of the same?

subscribers know full well the answer to this question. I'm also going
to be unusually generous this morning being that our prime French bank
run candidate has approached my "crisis" scenario valuation band. So, as
to answer the question as to BNP, let's reference File Icon Bank Run Liquidity Candidate Forensic Opinion - A full forensic note for professional and institutional subscribers, and otherwise known as BNP Paribas, First Thoughts...

The WSJ article excerpted above quotes BNP management as saying: "The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks."

OK, I'll bite. Excactly how did BNP get to this €135 billion figure? Was it by using Lehman math? Methinks so, as clearly delineated in my resarch report on the very first page:


following two pages of this report go on to reveal the games being
played to potentially come up with a figure such as the 135 billion
quoted above. Boys and girls, I fear those may be Lehman bucks! 

those not familiar with the banking book vs trading book markdown game,
I urge you to review this keynote presentation given in Amsterdam which
predicted this very scenario, and reference the blog post and research
of the same:

CNBC and Bloomberg report S&P to Update Bank Credit Ratings Within 3 Weeks. You know that means (or at least should mean)... Next stop of the bank flu express... Germany!

I may post an update on German banks in a week, but I want subscribers to remember that if when things really kick off, this is going to be an explosion that no one said they expected but will blow everybody's ears out - posted behind the paywall well over a month ago and still priced inexpensively relative to those other banks: Blowup Bank - Haircuts, Derivative Risks and Valuation