Why Greece Bailout Games Will Cause The Rest Of The EU To Breakout The Grease

Reggie Middleton's picture

Yesterday I shared my opinion of Grecian bailout games with Capital Account's Lauren Lyster. It was direct, honest, hard hitting and borderline offensive - hopefully par for the course of what is expected from me.

Just in case you didn't get the hints thrown in the video, Greece is truly fuc#ed, truly... The leaked Troika document referenced in the video assumes positive GDP growth of 2% to 4% in a year and a half. Here is where we stand now.

Greece_GDP_YoY

Luckily, employment hasn't been hit that hard. after all we all need to work...

Greece_Unemployment

Because... If you didn't have a job, you wouldn't be able to pay back your loans. Then again, one way to solve this problem is simply not to give anybody a loan, eh?

Greece_Bank_Lending_To_Households

Alas, we don't have to worry about that since the money spigots are just so turned on to the Greek corporate sector you don't have to worry about a scarcity of jobs. With all of that capital sloshing around the system, Grecian companies are bound to start going on a hiring binge ANY MINUTE NOW!

 Greece_Bank_Lending_to_Corporates

I know I was a little skeptical about the optimism of the leaked Troika report, but considering how accurate those EU/IMF guys have been in the past regarding Greece, I should be ashamed of myself for even considering the possibility of doubting my betters, eh? Simply reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!...

This document/blog post alone should serve to sink the Euro and blow out CDS spreads for several European sovereign. Why? Because the truth hurts and the truth is not what has been coming from European sovereign states as of late.

The IMF and the EU have been consistently and overtly optimistic from the very beginning of this crisis. Their numbers have been dramatically over the top on the super bright, this will end pretty, rosy scenario side - and that is after multiple revisions to the downside!!! We can visit the US concept of regulatory capture (see How Regulatory Capture Turns Doo Doo Deadly and Lehman Brothers Dies While Getting Away with Murder: Regulatory Capture at its Best) for the EU, but due to time constraints we will save that topic for a later date. To make matters even worse, the sovereign states have taken these dramatically optimistic and proven unrealistic projections and have made even more optimistic and dramatically unrealistic projections on top of those in order to create the illusion of a workable "austerity" plan when in reality there is no way in hell the stated and published plans will come anywhere near reducing the debts and deficits as advertised - No Way in Hell (Hades/Tartarus/Anao/Uffern/Peklo/Niffliehem - just to cover some of the Euro states caught fudging the numbers)!

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

image005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. image018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

image013.png

The EU/EC has proven to be no better, and if anything is arguably worse!

 image031.png

Revisions-R-US!

image044.png

and the EU on goverment balance??? Way, way, way off.

image040.png

If the IMF was wrong, what in the world does that make the EC/EU?

The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!...

greek_debt_forecast.png

Think about it! With a .5% revisions, the EC was still 3 full points to the optimistic side on GDP, that puts the possibility of Greek government forecasts, which are much more optimistic than both the EU and the slightly more stringent but still mostly erroneous IMF numbers, being anywhere near realistic somewhere between zero and no way in hell (tartarus, hades, purgatory...).

Now, if the Greek government's macroeconomic assumptions are overstated when compared with EU estimates, and the EU estimates are overstated when compared to the IMF estimates, and the IMF estimates are overstated when compared to reality.... Just who the hell can you trust these days??? Never fear, Reggie's here. Download our "unbiased, non-captured, empirically driven" forecast of the REAL Greek economy - (subscribers only, click here to subscribeGreece Public Finances Projections Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb. Related banking research can be downloaded here:

In my post from earlier this week, Grecian Tragedy Formula, Bailout Number 3 I pointed out the abject absurdity of what was contained in said leaked, Troika document.

Greece_public_finances_projections1_Page_06

The Capital Accounts interview above is the culmination of several of these articles on the topic of kicking the Grecian can down the road causing considerably more damage than it can ever hope to solve. Reference: The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media

In Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece! I included output from our subscriber-only File Icon Sovereign Contagion Model (click here to subscribe).

thumb_Sovereign_Contagion_Model_-_Pro__Institutional_demonstration_of_Greek_default

This model details the various paths of contagion that can be taken given default by "XYZ" country. Examples include the effects of a China slowdown on the EU and vice versa. Hey, guess what's in the news today? Eurozone Recession Could Cut China‚Äôs Growth by 50%.

Also in the model and has can be seen in the illustrative chart above, is the signficant influence that the UK has upon the PIIGS. That's right, the same UK that sports 9%+ of its GDP as bank NPAs! And in the news today... UK GDP contraction sparks fear of a technical recession

So, will Greece set off contagion? Well, methinks the EU is not in the condition to find out. More headlines...
  1. Euro Zone Economy To Shrink In 2012
  2. Euro Zone Service Sector Contracted In February
Even the stalwart, supposed savior of the European continent, you know, our cousins from the northwestern Causus mountains, will end up obeying the laws of gravity.
German Final GDP q/q
-0.2% vs. -0.2%

I believe Germany poses the biggest threat to global harmony for 2012. Here's why...

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. 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.

image004

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?