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Mark Grant On The Increased Risks of Owning European Sovereign/Bank Debt
From Mark J Grant, author "Out of the Box and onto Wall Street"
The Increased Risks of Owning European Sovereign/Bank Debt
Many lessons are available to learn from the Greek debt crisis. Several more are probably to come as the intended and unintended consequences of what the Europeans have done begin to infect the bond markets. I point this morning to the vast differences now between the ownership of American debt and European debt and, as the immediate effects of the LTRO begin to wear off, several dawning realizations that I think will cause European debt to gap out against American debt regardless of the yields of Treasuries.
The first issue is structural. In exempting the ECB and the EIB from the “Collective Action Clause” the European Union has demonstrated that they are above the law and that they do not share the same consequences as the private sector. It is not just some academic discussion that the Rule of Law has been abrogated but a very real distinction that has now been cemented in the sand for all bond holders. I point out again that if this clause in a sovereign indenture can be applied at will by the EU that then they can do anything they like with ANY clause and if they can do it for Greece then they can do it for ANY country and most probably for any bank. Let us suppose for a moment that a major European bank got into trouble; we could find a retroactive “CAC” mandating that the ECB and then the EU Stabilization Funds got their money back before private debt owners. It is not just the factual comment now that private debt holders have become subordinated to the whims of the European Union but that retroactive measures have been implicitly approved by the EU with no objection coming from any country in the nations using the Euro or even the larger group of nations. British or Swiss law may have the last word but there was not one national voiced raised in objection to the pilferage of the private sector. I think there will also be a very negative reaction to “local law” bonds as investors shy away from anything not governed by American or British law though British law bonds may also trade at a discount as there have been no objections to what was done with Greece from anyone in London.
Now let us turn our attention from structure to credit and from the sovereigns to the European banks. I will state my conclusion first; the credit quality of European banks has massively eroded due to the new European policies and any debt ratios based upon their balance sheets now has zero accuracy. This would be as incorrect, a fallacy and not even close to reality. I make my case:
- The European banks are, in most cases, carrying sovereign debt at cost and they are not marking the bonds to market.
- A tremendous amount of “covered bonds” have been issued in Europe and the assets pledged to those bonds is no longer available for senior creditors.
- The LTRO program concocted by the ECB has demanded collateral and all of the collateral pledged to the ECB is no longer available to the unsecured holders of the debt of the European banks.
According to a report issued by Barclays, and pre-LTRO, on average the major European banks have encumbered twenty-one percent (21%) of their assets. Now since many banks have not released their LTRO funding amounts it is not possible to know exactly how much of their assets are encumbered now but it is obviously an even larger number. For all of the above reasons mentioned I suggest that you take very long and hard look at exiting the debt of the European banks en masse before spreads widen further and before someone or another gets in trouble as the assets guaranteeing the senior debt owners continues to rapidly diminish. Also bear in mind that the three year ECB loans will have to be paid back and how that actually gets accomplished now is anyone’s guess. I also point out that the collateral standards at the ECB have declined past any point of prudence so that “hand backs” will surely be forthcoming as many securitizations at the ECB default or become impaired. In the shortest of runs European sovereigns and banks have tightened but this will not last, cannot last, as the initial injection of liquidity dries up.
For those of you who are more aggressive and want a bigger play then I suggest shorting the debt or equity of the European banks. My best picks here are Spain, Italy and France. My calls, as usual, are generally early but I think some rather large rewards can come from this bet. I am forbidden, by compliance, from making specific suggestions but I am sure you can ferret out the appropriate plays.
The ECB will not tell us of course and the banks in Europe have remained mum but I think the collateral pledges are now down to bank name stamped pen sets, signed lithographs of Charles de Gaulle and teller window #17 at some branch in Rome.
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Increased risk in Europe?
Clearly Mark is a rocket scientist.
You know I would NEVER have thought that...
Pure fucking genius, absolutely...
The suggestion that the US should have a Rule of Law premium over Europe is absurd.
There is no Rule of Law in the US. As exhibit A, I offer Jon Corzine. Do let us know when he is arrested.
Ok, will do, but I think you have a better chance of your arse healing up...
Just sayin'...
So the Europeans failed to speak-out against this foolish step toward collapse? Bernanke is a useless clown in an hopium powered clown-car. It's a case of dumb and dumber and they both want your daughter.
The JUE's are in decline and preparing to go out with a bang - Mr Popular will strike at isolated Syria not Iran. Are we running-out of live stuff to bomb yet?
I sense Germany and China are making other plans. Germany (Scheuble) actually said positive things about Greece - that has to be conter-indicative.
Jesus is coming! Try to look busy.
Treasuries yield...... LMFAO.
withdrawal symptoms already!!!
When the American risk starts looking "attractive", that's when you know you've been at the bar too long.
British law bonds
This is getting tedious. There is NO "British" Law, no such thing. There is no way you can talk about Roman Law in Scotland and mix it with English Common Law. It is about as stupid as deciding Washington and Brasilia are both American Cities and therefore similar.
Anyway, if Greece wants to tell an ENGLISH Court to Foxtrot Oscar it can - US Courts do so on Libel and many other matters. It is an American Conceit that Law can be Extra-Territorial and Universal. In most places it stops at the border. Try enforcing anything against Greece......who enforced anything against Mississippi when it defaulted on English Bonds ?
Argentina still cant access credit markets due to british law bonds. U.K. courts can authorize seizure of assets, and good luck protecting assets outside of greece.
Risk of adverse international court judgments caused me to bring back all venezuela gold from overseas.
british law bonds. U.K. courts
NO such thing as "UK Courts" and never has been. No such thing as "British" Law Bonds. Never has been.
As for Argentina - read the WSJ
An estimated $4.5 billion holdouts resisted the debt swaps and pushed a large number of legal cases in international courts. Ten years later, they have zero recovery on their investment.
I recommend you read
http://www.google.co.uk/url?sa=t&rct=j&q=argentina%20%20%20englishj%20la...
http://www.nortonrose.com/knowledge/publications/54793/uk-supreme-court-...
MARKET RUMOUR HAS IT:-
ALL EU DEBT AND FUNDS MOVING INTO LATAM ECONOMIES SUCH AS MEXICO, BRASIL, COLOMBIA, VENEZUELA AND PERU...LARGE AMOUNT OF MONIES FROM CHINA AND OTHER SOVEREIGN WEALTH FUNDS BETTING ON MEXICAN PESO AND CANADIAN DOLLAR. BOTH PROVIDING BETTER RETURNS THAN EXPECTED
Stop yelling.
"major European banks have encumbered twenty-one percent (21%) of their assets."
Encumbered...now where have I heard that word before...
If SE Asians are laughing at the IMF and Europe, they should be...farce, farce, farce.
Asia must be fuming. To have put themselves through so many hoops during the Asian financial crisis to now discover what a fix the markets really are, they must be absolutely livid.
Why should they fume? Their currency got devalued and as a consequence they did very well in the following decade. They were at least masters of their own fate. Greece on the other hand will forever be a slave.
Because if this doesn't show what an outright sham the markets really are, and that they needn't have gone through any pain to get through it, nothing will...
The markets are desperate for good news DESPERATE!
New downtrend forming in GSR:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&p=36816#p36816
Euro Market turning red as Greek fanny odor spreads.
Fun watching these greedy assholes & their stupid little games. It ain't about paper & digital money ---- its about stuff. Yet all they do is fuck around with funny money.
New Greek bonds trading at 'distressed levels' says the Financial Times
http://www.ft.com/intl/cms/s/0/d5440e3c-6c29-11e1-8c9d-00144feab49a.html#axzz1oqTSrw3h
if this advice is as good as the story about the "The Eight Hundred Pound Greek Gorilla Enters The Room".... i am sorry but i 'll skip
Oh no!
Dude you opened up a potential hornets nest praising american debt over european. Let the flame wars begin!
'For those of you who are more aggressive and want a bigger play then I suggest shorting the debt or equity of the European banks. My best picks here are Spain, Italy and France. My calls, as usual, are generally early but I think some rather large rewards can come from this bet. I am forbidden, by compliance, from making specific suggestions but I am sure you can ferret out the appropriate plays'
last summer there was a ban on short-selling EZ financials in the very countries you now advise others to go glean "rather large rewards" by short-selling
tyler, can you please read what this sophomoric "economic analyst" writes before publishing it?