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How Long Does It Take For Losing Money To Result In Lost Money? The Effects Of Rampant Bond Selling on Devalued Sovereign Debt
I am working on an interesting project closely connected to the issue
that European (and now American) banks are facing. The firs of several
reports should be available to paid subscribers in about a week. In the
meantime, let's make a few observations that may or may not have been
lost on market participants.
From the BNP Paribas earnings press release:
Rather
than implementing the agreement reached on 21 July, EU authorities
formulated a new Greek assistance package on 27 October. As a result of
this plan, whose implementation is still shrouded by uncertainty, BNP
Paribas set aside a provision for 60% of the full amount of all Greek
sovereign debt it holds, which equates to further provision of 2,094
million euros for the banking book and of 47 million euros for the
insurance portfolio. Furthermore, the effect of the additional
impairment of Greek bonds on associated companies was negative to the
tune of 116 million euros.
The
Group's revenues, which totalled 10,032 million euros, were down 7.6%
compared to the third quarter 2010. They grew in Retail Banking (+2.2%
at constant scope and exchange rates with 100% of the domestic networks'
private banking businesses, excluding PEL/CEL effects), and Investment
Solutions (+2.5%) but fell 39.8% at Corporate and Investment Banking due
to very challenging market conditions and losses on sales of sovereign
bond debt (-362 million euros). Corporate Centre revenues were
affected by two exceptional items related to the valuing of long-term
assets and liabilities at market price (+786 million euros in own debt
revaluation and -299 million euros in additional impairment on the
equity investment in AXA).
This seems to be glossed
over, but the equity impairments and revaluation of liabilities are a
big deal, particularly in entities that are bond rich (well, now poor).
... With the additional provision set aside for Greek government bonds, the cost of risk was 3,010 million euros.
Excluding
this effect, it continued its downward trend (-28.9%) in all the
business units, coming in at 869 million euros, or 50 basis points of
outstanding customer loans compared to 72 basis points in the third
quarter 2010.
This is nonsense. They are speaking as if the
devaluation is a one time event, when in reality it is the beginning of a
long string of events. You lose credibility when you play your audience
for fools...
The
Group reported 541 million euros in net profits (attributable to equity
holders) (-71.6% compared to the third quarter 2010). Excluding the
Greek debt provision, net profits were 1,952 million euros, up 2.4%
compared to the same period a year earlier.
For
the first nine months of the year, the Group's revenues totalled 32,698
million euros, a limited decline compared to the first nine months of
2010 (-2.6%). Thanks to CIB's flexible costs, and despite the effect of
the bank levies, operating expenses edged down 1.0% (-1.7% excluding the
bank levies). Gross operating income was down 4.8% at 13,260 million
euros and net income (attributable to equity holders) down 16.0% at
5,285 million euros. Excluding the impact of the provision set aside in
connection with the Greek assistance programme, the cost of risk was
down 28.5% during the period and net income (attributable to equity
holders) totalled 7,034 million euros, up +11.8% compared to the first
nine months of 2010.
Click to expand...
But
including losses on Spanish, Italian, Irish and Portuguese capital
losses realized upon disposition, and the ongoing losses on Greek debt,
what then????
You see, the truly under appreciate
problem here is that the private banks rampant selling is driving down
the prices of already highly distressed and rapidly devaluing bonds.
Reference Bloomberg's European Banks Selling Sovereign Bond Holdings Threatens to Worsen Crisis.
In the news now, exactly as I anticipated European Stocks Drop as Italian Bond Yields Jump as well as:
No surprises here:Wednesday, 03 August 2011 - France, As Most Susceptble To Contagion, Will See Its Banks Suffer
These
events are quite relevant for I warned several times over that the true
risks are in Italy's funding fragility, its size, and its direct ties
into France who, if caught the contagion, would invalidate any
Pan-European rescue scheme. That is why "The French Banks Are The First To Accept a Voluntary Greek Restructuring".
Well, here we are! Another point that is oft overlooked is that while
all of the these private holders are dumping European bonds en mass, who
is buying them. Well, I addressed this last year and early this year as
well..
Over A Year After Being Dismissed As Sensationalist For Questioning the
ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
Keep in mind that Italy has already accepted IMF supervision over its
finances, which means that it has in essence already given up its
sovereign financial independence. We all know what the next step is,
don't we? The IMF injects funds under strict austerity and calls the
shots, just like it does with (other?) third world nations. There are
ramifications here that are simply lost on most, but I will help most
find it! Please continue reading...
The ECB as well as many local
banks and pension schemes are being forced to buy these bonds to
maintain a facade of a bid in a near bidless market (at least bidless
from the perspective of avoiding total price collapse), but what does
that portend for the entities doing the buying if the sellers are losing
so much money and the yields are still flying through the roof? Well I
addressed that in early 2010, reference How Greece Killed Its Own Banks!.
Yes,
it's ugly, and it gets even uglier! Nouriel Roubini Tweets this morning
"Italian yields at Ponzi levels: having to borrow more just to finance
the interest on debt leading to vicious unsustainable debt dynamics." I
respect this man's opinion, but he is just scraping the surface. Look
back to last year when I really started bringing up the case of
defaults, liquidations and recoveries in the iconic piece How the US Has Perfected the Use of Economic Imperialism. Warning, this is going to piss off many an oligarch! As excerpted...
How
many of those Greek, Portuguese, Irish and Spanish bondholders have
factored the near guaranteed "additional" haircut (/scalping) they will
receive having to stand behind the IMF in the event of a (probably
guaranteed) default or restructuring? Do you think the investors of
European banks (that includes central banks) that are holding/and
currently still buying a boat load of these bonds have factored this
into their valuations?
The IMF, like many other international institutions, asserts that it has a "preferred creditor status",
and this has been a practiced convention in the past. Thus, IMF has de
facto seniority rights over private creditors despite the fact that
there is no legal or treaty-based foundation to support this claim and
this seniority of rights for IMF will continue under the recent EU
rescue plan announced as well as it has not been noted otherwise
implicitly nor explicitly. This is the reason why Sarkozy said it is a
said day when the EU has to accept a bailout from the IMF (aka, the US).
The EU now, and truly, contains a significant parcel of debtor nations.
To
add fuel to this global macro tabloidal fire, the Euro members’ loan
will be pari passu with existing sovereign debt i.e. it will not be
considered senior. Although there is no written, hard evidence to
support this claim, it is our view that otherwise there will be no
incentive for investors to hold the debt of troubled countries like
Greece, which will ultimately defeat the whole purpose of the rescue
package. Moreover, there are indications that support this idea. As per
Dutch Finance Minister Jan Kees de Jager, “We are not talking about a
special preference for the eurogroup loans, that’s not possible because
then you would have the situation that already-existing rights of
creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html).
Of course, if more investors did their homework and ran the numbers,
that same disincentive can be said to exist with the IMF's super senior
preference given the event of a default and recoverable collateral after
the IMF has fed at the trough.
The above-referenced article
is a must read and an eye-opener to all of those who think that those
60% haircuts that BNP et. al. are taking are anything near sufficient.
And on that note, what haircut is sufficient to mark Greek debt to
market for these big banks and funds? Stay tuned boys and girls, I
answered this question last year...
And in the End, What Does It All Mean?
LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?
Take
note that this update will include several American banks and the risks
they face from writing nearly all of the richly priced CDS purchased by
said European banks. This is an interesting and complicated story
because all of those IMF/EU bailouts, besides adding more debt to
already debt laden countries, have considerably subordinated the claims
of the stakeholders involved. The following was written over a year ago,
and has proven to be quite prescient:
The year
2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time
when Greece will have to refinance the debt to pay the IMF. However,
since the current debt raised by Greece is at fairly high rates, new
debt will only be available at much higher rates (as markets should
price-in the risk of high debt rollover) unless there is some saving
grace of a drastic plunge in world wide interest rates and a concomitant
plunge in the risk profile of Greece. At a 150% debt ratio,
historically low artificially suppressed global interest rates that have
nowhere to go but higher and prospective junk ratings from the US
rating agencies, we don’ t see this happening. Thus, the cost of
borrowing for in 2013 is likely to be much higher in the market than the
nearly five percent for the existing debt. Greece will either be unable
to fund itself in the markets at all, and will have to convince the
Euro Members and the IMF to extend the three-year lending facility just
announced (reference What We Know About the Pan European Bailout Thus Far)
or, it will get the debt refinanced at very high rates. In both cases
the total debt as a percentage of GDP will continue to rise, and this is
not a sustainable scenario over the longer-term. In addition, if it
accept the EU/IMF package and there is an event of default or
restructuring, the IMF will force a haircut upon the private and public
debtors beyond what would have normally been the case. This essentially
devalues the debt upon the involvement of the IMF, a scenario that we
believe many sovereign bondholders (particularly Greek, Spanish and
Irish) may not have taken into consideration. This also leaves the
possibility of a significant need for many banks to revalue their
sovereign debt – particularly Greek sovereign debt – holdings.
As
illustrated above, there is a higher probability for a Greek sovereign
debt restructuring in 2013, which will definitely not hurt IMF (since it
has a preferred right) but the Euro Members and other investors who
will be holding the Greek debt.
image021
LGD: Loss Given Default... ~100%???
We're
talking damn near complete wipeouts boys and girls. There are
practicaly no entities holding this debt at par that are leveraged under
30x. The starting point in case of default for Greece is between
roughly 48% to 52% of par. You've seen the math on BoomBustBlog many a
time - Over
A Year After Being Dismissed As Sensationalist For Questioning the
ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
talking damn near complete wipeouts boys and girls. There are
practicaly no entities holding this debt at par that are leveraged under
30x. The starting point in case of default for Greece is between
roughly 48% to 52% of par. You've seen the math on BoomBustBlog many a
time - Over
A Year After Being Dismissed As Sensationalist For Questioning the
ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!
I
will have some more goodies along these lines that still HAVE NOT been
broached by either the pop media or the sell side for BoomBustBlog
subscribers very soon.
Tools for tracking the ever elusive path of contagion for BoomBustBlog subscribers:
Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)- Sovereign Contagion Model - Pro & Institutional
Additional posts on the topic of Bank Runs
- The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement
- What Happens When That Juggler Gets Clumsy?
- Let's Walk The Path Of A Potential Pan-European Bank Run, Then Construct Trades To Profit From Such
- Greece Is Fulfilling Our Predictions Of Default Precisely As Predicted This Time Last Year
- The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
- The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!
- Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run
- Observations Of French Markets From A Trader's Perspective
- On Your Mark, Get Set, (Bank) Run! The D…
I am working on an interesting project closely connected to the issue
that European (and now American) banks are facing. The firs of several
reports should be available to paid subscribers in about a week. In the
meantime, let's make a few observations that may or may not have been
lost on market participants.
Paid subscribers should reference the quarterly results of the bank that was illustrated in our most recent forensic report - Haircuts, Derivative Risks and Valuation. Yes, BoomBustBlog has hit the skin off the ball once again. I will be available in the private forums to discuss this, as well as provide links for those who have not seen the news yet.
For those who are interested in getting the real nitty gritty, click here to subscribe.
Interested parties can follow and contact me via:
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Mega again Reggie
Yes i'd follow you in the private forums.. only problem being i have enough friggin trouble getting into my subscriber account let alone follow you anywhere else!
You've cleaned up your articles on ZH somewhat but your website is still a pain in the arse to get anything out of (i'm still locked out for the umpteenth time) and why you also have a string of other areas (eg. Twitter) to follow you on just adds to the confusion (and all-round mess)
Any chance of cleaning up the act... with simple tabs for new articles, new calls/puts for investors, Meet-Ups etc etc ???
It shouldn't be a problem to follow the new material on the site. Email directly so I can solve your issues. Regge at boombustblog dot com.
Will Do ..cheers :)
take no prisoners ...
the pen of truth..
Vote up! 0
Vote down! 0
Reggie,
Looks like your and Tyler's work product is not completely lost on Roubini after all.
I would love to see him produce some work product to substantiate his claims and then.. see how much of it is Your or Tyler's work that has been plagiarized or spun to try make it look original.
JW
and when I say your work Reggie.. I mean your out sourced to India work product that is provided to you, at a severe discount.
i've serious doubts about Roubini ...every time i see him interviewed he looks more and more like a windbag who got lucky (once) calling 2008
his recent nonsense about a double dip being "60% likely" yabba yabba ... i mean who makes predictions like that except for morons like the UN's IPCC climate change fraudsters!
+4 for analysis, -1000 FOR NO SHIRTLESS PICS
I've recently found Reggie's work, and become more and more impressed with his prudent-yet-poignant observations, gentlemanly descriptions on subjects, and sound math to back up his points which day-by-day, I am learning more and more about. Thx, Reggie.
Also goes to show why traders are often better at market evals than economists; economists HAVE to take prudent-yet-reactive stances, so that oligarchs won't get mad and cut their funding. Traders MUST be PROactive, otherwise they'll die. I feel bad for Nouriel (well, not too bad - he's fucking loaded). He really can't say what he wants to say w/o going out on limb, which is something 99% of economists don't do (part of problem).
The only thing I am bummed about is the fact that Greece is due to refiance by 2013. This correlates with the new "Rich Man's Crash" that was based off of a 1907 model which, if compared to the 2008 crash, points to Jan 2013 for when shits hit all of our fans.
Why am I bummed? I want this thing to crash sooner. We can't get back up until we completely fall down.
careful what you wish for because the crash is coming but the "back up" is going to be a looooong time coming ...think 10 years of economic stagnation before we see much up again!
A solid gold sculpture of Justin Beiber's head is worth $1 Million at scrap gold prices. Looks like a great deal even if you think Beiber has no talent.
http://www.1stgoldbullion.com/2011/07/19/justin-bieber-picture-gold-bullion/
uh, Reg, we knew you'd nailed this contagion thing a couple of months back -which is why I suggested at the time you pencil yourself in for spending time in the Big House(on Pennsylvania Ave)....
Seriously, you're just running victory laps nowadays, and the $ what comes from the subscription base must be just chump change -think about it,
if you broaden your horizons a bit and consider what kind of support a dark horse third party candidate could attract on a properly presented platform, as the two mainstream parties work full time to discredit themselves with the pubic, not to mention ahh, er, donations from previously estranged members of the cephalopod family, well, I think you can see the bigger picture here! Imagine being able to put Dimon or Bleinkenstein on hold while you play with your putter!
Caveat:....the photoshopped abs thing has to go...it's worse that the Obummers birth certificate scam - and forget about the on board parties with the, ahh, support staff - that kind of things just leads to trouble....as Gary Hart will surely testify.
put a trader, not a traitor in charge!
Do you propose a presidential race between:
Barack Obama, Herman Cain, Reggie Middleton?
Can't put my finger on it, but something a bit odd about that matchup.
Cain & the Kenyan are both burnt toast, and Merika ain't yet ready for their first "Hispanomerican transgendered consensus" POTUS foisted upon them by the usual AIPAC puppetmasters....
Reggie up the middle after Bart Starr/RP fakes a sneak and it be a Jim Brown breakout all over agin! RP for Chairman of the FED!
GO BROWNS!
As one of the many commentors who are jealous of your youth, intellect, athletic physique, and beautiful people friends, I still have to give you props for your timely and correct calling of this fiasco. So don't run for office and have to hide who you are.........just keep living large and keeping us balding, fat 60 year olds in the chips with your analysis.
Joyful - nice idea Reggie running for Congress but it doesn't work like that (see Peter Shieff running on a sword of truth platform and getting nowhere)
Until people understand that the only skill you need in politics in ingratiating yourself the penny will never drop why all politicians are a bunch of spineless snake oil salesmen. That's also why honest and talented people firstly do not want to go into politics and secondly why they won't get elected (most voters don't want the truth)
Reggie is much better and more productive in amongst us ...Govt is going to hell, nobody is going to stop that
"running for Congress"
huh?
Bro, Reggie don't run for congress, he just does that Richard Rowntree thingamajig and the girls run for him!
Talkin bout Reg doin the POTUS thing my man! Only one what don't be needin a teleprompter to talk on stage. You see that Rick Perry moment ZH put up here moments ago, you'll get my point!
No need for you RP fanatics to get all upset now: I luv RP as good as anybody, but y'all gotta face the sad, sad truth, the dirty lowdown...
RP's too white. It jus is what it is!
Thanks Reggie for continuing to sound the alarms with a solid foundation of facts and analysis.
Well done, Reggie. Most folks look at priority in bankruptcy after it's too late.
Correct, and it should be done BEFORE the assets are acquired. The problem is that when the US, err.. I mean the IMF steps in after the fact, they can still trample over your liquidation hierarchical rights.
All of the legal fictions set up future fraud. The real money, equity in property, and proprietary interest was lost when acceptance of fiat currency occurred. The horse left that barn, long ago.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
Precisely why only war can establish exactly who "owns" what at this point.
That's the way it has been done since the beginning of mankind. Of course, it's different this time!!!
Nukes do indeed change the bank/war game.
Someone coined it perfectly on ZH a few weeks ago. 2000 years from now, historians will look at 1500 - 2100 as the Warring States Period of Western Civilization.
How long you ask? The word "forever" comes to mind. These are governments Reggie. "They need not pay though they owe."
Wow...
Nice article, Reggie.
Many thanks..!!!!
How many licks does it take to get to the center of the global contagion?
OVER 9,000
http://www.youtube.com/watch?v=0UYvsk6_foc
When you play with other people's funny-money (OPFM) oft times the game ends not so funny.
Got physical assets and tradable skills? You fucking better.
Thanks Reggie.