What's New In "Avoid Debt Destruction By Any Means" European Soap Opera Today? Additional Proof That Bank Failure's Imminent

Reggie Middleton's picture

The pop media is reporting that Italian yields are falling relative to the last auction, but they are failing to mention that the relative yields on Italian debt as compared to the German Bund are already rising despite the ECB intervening and buying up Italian debt in the secondary markets in order to support its price. Historically, the ECB has failed to support bond prices of all indebted EU nations it has tried to save since the beginning of the malaise. As I commented yesterday in Did You Know That The Upcoming Italian Auction Can Spark Contagion That Touches US Banks: 

When the central bank began its bond program on May 10, 2010 -- buying 16.5 billion euros ofgovernment securities in a bid to support the Greek market -- Greece’s 10-year bond yields fell more than 4.5 percentage points to 7.77 percent. Ten weeks later, as the ECB’s spending dwindled to 176 million euros, Greek bond yields climbed to 10.43 percent. They reached as much as 18.18 percent today.

The bond-buying program didn't provide enough support to prevent Ireland and Portugal following Greece in requesting financial aid. Ireland’s 10-year yields fell to 4.72 percent on May 10, 2010, the day the ECB began buying, from 5.86 percent the previous trading day. They had climbed to 8.9 percent by Nov. 11, the week before the nation requested aid.

Portugal requested a bailout on April 6 this year as its 10-year yields surpassed 8 percent even after the ECB had spent 77 billion euros on government debt. Its yields climbed to a record 13.44 percent on July 11 as the central bank took a five-month pause from bond buying.

“The risk is that the ECB stays out of the market, yield spreads widen significantly and then trading out of Italy is a challenge,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There’s a decent risk that investors will have to buckle up for a yield increase above 6 percent.”

Here's the take from BoomBustBlog trader Eurocalypse:

"Your piece on Italian auctions is right on spot. The auction apparently went poorly (10Y @ 5.22% from 5% "ecb" levels), not surprising at all. We know already the scenario with Greece Ireland and Portugal, and this time it will happen even faster as every trader already knows what happened to those other countries.

We had the warning shot in when Italian bond broke 5% and traded quickly above 6% in july.

As I wrote before, Volatility in Italian bond and thus VAR went through the roof, 5 or 10 timest the previous levels. thus any trader in a bank or any portfolio manager has to cut losses and can't take any positions (or 5 or 10 times smaller than before if theyre stupid enough to go long). The only demand in the auction is from some passive domestic buyers, yet certainly not enough because that supply used to be balanced with non-domestic buyers, and perhaps some light profit taking from the few shorts willing to take off chips here.

The lack of auctions during summer could buy some time but the truth is out there and should be clear for anyone. The market will trade poorly and will be wary of ECB activity but we can only drift higher because of that supply until the bid totally dies off and its game over. It's only a matter of a few auctions from here. At some stage, the stock market, especially financials will notice.

I don't want to make any bearish bets in EURUSD on the back of that though. It wasn't a good idea in 2011. I keep the neutral stance developed before. The only solution would be for ECB to buy 10x more PIIGS debt than they do currently, but thats very, very unlikely to happen given how Germans see things today. As things get worse, as in Greece, we might start to see bank runs on Italian and Spanish names. that would really spell the endgame of the euro. thats the thing to watch"

Remember, we have identified one of the large American banks most susceptible to an Italian bond failure - by way of contagion through the French bank we identified as most susceptible to a major bank run

I have included a quick update for those subscribers who have been following and/or have a position in/against our bank run candidate, to be downloaded here: File Icon French Bank Run Forensic Thoughts - Addendum and Update. Those who don'tsubscribecan get an idea of what we are doing by downloading theFile Icon French Bank Run Forensic Thoughts - pubic preview for Blog.

Here are a few screen shots from the free public abridged version of our professional level document, that easily demonstrates the problem with the French banks cannot be solved by banning short selling or buying profligate state bonds. The problem is inherent in the banks themselves. Please click to enlarge to printer quality...




Subscribersare urged to download and reread File Icon Actionable Note on US Bank/French Bank Run Contagion after reading:

File Icon French Bank Run Forensic Thoughts - Retail Valuation Note
File Icon Bank Run Liquidity Candidate Forensic Opinion (the extensive professional note version of the document above)
File Icon The Contagion Prone US Bank Forensic Review - Retail
File Icon The Contagion Prone US Bank Forensic Review - Professional

In the meantime here are some other interesting tidbits found in European news...

Finland’s Collateral Demand Leaves EU Faced With Rewarding Bailout Fatigue 30 Aug 2011: Finland' s demand for collateral on new Greek loans leaves European leaders... referring to Finland's agreement with Greece for protection. Collateral accords would be'' fatal...

The nerve of those damn Finn's. Can you believe they actually have the balls to demand (not plead, mind you, but actually "demand") collateral for a loan to a profligate state with a history of lying about its finances and not paying its loans back in full. The nerve of those people. Luckily, we have have Germany to set them straight and force them to use politics instead of math when making financial decisions that may hamper taxpayer and country...

Germany’s Hoyer Tells Finns to ‘Not Rock the Boat’ on Euro 29 Aug 2011: German Deputy Foreign Minister Werner Hoyer warned euro-area countries not to destabilize the currency after Finland ... The euro is'' of utmost importance to all of us in Europe, in particular for countries like Finland ... Hoyer was speaking after euro-area countries including Austria criticized the bilateral deal on collateral, unveiled on Aug. 16, struck by Finland ..

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chinawholesaler's picture

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ocmsrzr's picture

Dear Reggie. The servers for your blog have been down for days. Please fix them. Signed, subscriber.

Epicurus's picture

Great analysis, impeccable research as always.

Question: Don't you think that the system is 'TBTF'. It's not like we're playing poker against a 'loser' with an ace up his sleave, it's worse. They can print new cards and make new rules during play to stabilise the system, whatever it takes.


JW n FL's picture



Reggie is NOT! a Star!!

Reggie has a Choppa in da car!!!

Hedge Hunter's picture

Reggie sure does have a lot of family members on here.

supermaxedout's picture

Yeah, the banks may collapse. It seems nobody can avoid this. And it will hit the US banks which will then be saved by the US taxpayer.


But what I 'm always wondering why should this effect the Euro currency. This magic mechanism has upto now nobody explained to me. Why should the Euro money go kaputt ?

Money is always a matter of trust.  And  I do not see at all that the Euro is loosing its value exept against gold but that is a general occurance.

Ok, maybe some EU countries get the insane idea it is better to drop the Euro as their currency and instead are going to introduce Russian Rubles, or Chines Yuan or even the US Dollar as their new currency. This is the only possible way because you need to have a new currency when you want to drop your old one.

To create a currency from the scratch on their own to say a new French Franc, New Drachma, New Lira, New Peseta, New Escudo, etc seems to be quite a suicidal attempt especially all these countries would then be completely on their own. Without the backing of Germany their currencies would be hardly accepted or only at a very hefty discount. Good Night then to everybody.

falak pema's picture

The euro has a growing circle of support in far east and ME. The only unknown is the extent of a bank run on Europe if the US HFs suddenly put 300 billion on the shorting table in one go; obliging ECB to buy USD to cover the run from Euro into USD. If the FED opens swap lines immediately the run falters. If the FED balks, remember the FED and its PD shareholders have two faces, one to support WS assets one to wage war on the Euro, not necessarily coordinated; as this is a truly mad and contradictory world, its a question of bringing the OTHER currency to its knees first, then the whole shooting match spirals out of control. We have a liquidity problem as its dollar dominated demand.

So the other possibility then is  the Chinese and Japs as USD holders can trade their USD for Euros if the US HFs make a desperate move, if the US FED does not follow suit. This is a big IF, as we can never be sure this dyke will hold out in the face of determined speculators. As for liquidity in pure Euro plays, THERE IS NO LIQUIDITY CRUNCH, AS THE ECB CAN PRINT AWAY. Upto a 3 trillion limit, apparently. But this requires back up by Fail safe bank. Ball in Merkel's court on this.


Clowns on Acid's picture

Yeh but Reggie...Dick Bove has just said "to buy the US banks now because they are undervalued" ! And Dick Bove is ...well....Dick feckin' Bove, me bro'!

Oh yeh thats right 1 week ago or so Dick Bove said "to sell all equities, carry all cash"! Now I understand reversing ones position in the markets as a short term trader looking at chart patterns, price action and the fundamentals as such....But Dick Bove is a Bank analyst...y'know the guy that is the BEST and everybody listens to at all the mutual find managers.

Is this Dick Bove's version of HFT? Sell everything then buy all banks the next week?? Or...did the bejeweled, short fingered barbarians at Treasury contact Dick feckin Bove's employer and have a quiet chat, after his "sell everything " call? Y'know like the quiet chat they had with the EX - CEO of S+P?


Fred Hayek's picture

Enlightening as always, Reggie.  I can't imagine working in affected fields and not trying to get a hold of all your reports.

apberusdisvet's picture

Without picking a specific target, I would imagine that all TBTFs are a super short opportunity.  Will history call it the crash of 2011, or 2012?  Inquiring minds want to know.

Mountainview's picture

The Germans haven't subscribed anything yet...So, the Finns are in an advanced position without cover from the heavyweight...

mt paul's picture

7 pt shot

from the 3rd level 

of the parking garage ...


nothing but net ...

nobusiness's picture

I agreee with all your analysis. except banks don't fail anymore.  I thought they did for years and lost on shorting because when they look the worst so asshole government bails them out.

NotApplicable's picture

Hell, insolvent is the very definition of a bank these days. Especially when their marked-to-unicorn assets are bought by all of those institutions filled with benevolent dictators.

stormsailor's picture

finland wants collateral, how 20th century.

topcallingtroll's picture

If I were a girl I would let you fuck me.

I love you Reggie, but in a pure manly way, not in a dirty, disgusting, faggy, homo way, not that there is anything wrong with it.

falak pema's picture

you are one head in the ass, convoluted thinker...in a pure, manly way of course.

How you can reconcile "dirty, disgusting, homo' and 'nothing wrong with it' is beyond me. 

Ever heard the phrase of 'being sincere in speech and thought'...?

StychoKiller's picture

A sense of humour requires work, apparently, you're too lazy! :>D

PY-129-20's picture

I recommend you here in Germany, Reggie. Your work is brilliant. Thank you.

Sudden Debt's picture

Another masterpiece Reggie!


g's picture

good stuff as always Reg