Sovereign Risk

Morning Gold Fix: August 16

Deflation talk has the markets spooked during these last couple weeks. Since Bullard's comments (preparing the ground for QE2) and Bernanke's promises to combat deflation through treasury purchases, even the CNBC talking heads are discussing it. Editor's Contrarian note: Probably time to consider unwinding your bond longs if T.V.'s equivalent of your shoe shine boy is telling you deflation is coming. In deflation, Gold should be the tallest pygmy. Even If it drops 40% in a deflationary depression, it will still stand tall among the financial wreckage that is defaulted debt and worthless equity. But, if the Fed succeeds in combating this event (preemptively or after the fact), Hyperinflation becomes a high risk and we know what that portends for fiat currency.

Reggie Middleton's picture

Second-quarter GDP in Greece estimated to have fallen by 3.5% year-on-year. I'd like to bring to your attention that this is a pace that is over 11.5x WORSE than the projections that Greece used to get the austerity package-based bailout!!! It is also much more in line with what we anticipated at the research group of BoomBustBlog. Anybody want dibs on whether we are also more accurate about the point of Greece's restructuring causing a contagion effect?

Meredith Whitney Even More Bearish On Housing And Financials

Meredith Whitney appeared on CNBC earlier and was about as bearish as ever, not only on financials, but on housing as well. In addition to saying that she expects the housing market to get worse in Q3 and Q4, the maven again reiterated the blatantly obvious, namely that all the recent earnings beats by financials have been an accounting sham driven by:

  • Provisioning for less future losses, by reducing NPLs in the current quarter, thus generating profits out of manipulated air (particularly relevant for HSBC's results yesterday, which were the main factor in pushing the market 25 points higher)
  • Increasingly more difficult for consumers to get loans. Not much of an issue - Obama will simply blame this on the previous regime.
  • And the glaringly obvious, i.e., that all European banks sit on bloated amounts of largely overvalued sovereign debt. Should another sovereign risk flaring appear (and it is Zero Hedge's belief that this will occur promptly, as soon as the European vacation season is over), it will be time to dig up the old skeletons of financial insolvency once again, only this time with EUR LIBOR and Euribor about 100% higher than where they were in May.
Reggie Middleton's picture

European banks are already struggling to collect from fellow defaulted, sovereign (allegedly) backed banks yet we are hearing that there is no need to model in default or restructuring in the European bank stress tests. Of Iceland, Greece, Portugal, Ireland and soon Hungary are all just one-off occurrences.

German DZ, WGZ Banks Confirm They Only Passed Stress BS Due To "Mark To Maturity" Loophole

Next time your broker calls you and tells you you have a margin call on your short in stock XYZ, tell them you refuse to comply as you have it "marked to maturity", and on a long enough timeline, every stock will go to zero. This is precisely what (technically the inverse) German banks DG and WGZ, which had previously refused to post the details of their stress test "passage" did in order to pass the "Stress BS." Dow Jones reports: "WGZ's disclosure showed that it had accounted for almost all of a EUR35 billion portfolio of sovereign bonds as "held to maturity," thus avoiding the need to subject them to the discounts required by the "sovereign risk shock" in the tests." As we had previously expected, all banks would promptly reclassify their worst debts (Greek and Spanish exposure) as their best: i.e., as part of the Held to Maturity book. This is precisely what happened, and why Europe is still as insolvent as ever. And get this: 'bonds held in the banks' trading books were subjected to theoretical markdowns of up to 23% in the case of Greece, but the regulators didn't apply that to long-term assets, as that would have implied recognition of the possibility of a sovereign default--something they said was "unthinkable."' So the test tested for everything except for the all too real six sigma events that blew up Bear Stearns, Lehman, AIG, Merrill, WaMu, RBS, Northern Rock, Hypo, and the 7 or so banks to go tits up each week in the US (what is the latest MTD tally on bank failures in the US: 100? 1,000?), not to mention every bank in the world had the US taxpayer not involuntarily bailed them all out... And since this is precisely the same stress test architecture that the one and only tax cheat #1 created in the US a year ago, one can only imagine the level of scammery involved domestically, which had even less testing disclosure than in Europe.

Leo Kolivakis's picture

Occasionally, though, there arises a very different and far deeper type of fear: the terrifying thought that the entity of profit – and, worse still, the very institution of capitalization on which the entire capitalist megamachine stands – might cease to exist. This latter fear is associated with systemic crisis – that is, with periods during which the very future of capitalism is put into question. It is what Hegel meant when he spoke of the bondsman’s “fear of death”.

Reggie Middleton's picture

For the first two quarters of this year, we’ve been pounding the
pavement on the risks inherent throughout Europe. The 50+ article (and
counting) series known as the Pan-European Sovereign Debt Crisis is
rife with opinion, analysis, commentary (albeit rather smart ass
commentary), and data that is hard to come across from objective

Goldman Sachs On How To Navigate The Slowdown

Remember when a week ago the world was slowing down? Apparently all it takes to forget reality is for Europe to sweep the fact that its banks are insolvent under the rug courtesy of a systematic farce conducted by the very system the banks are part of, rendered even more "credible" since as of today it appears no banks will fail the stress test. On the US earnings front, a materials company beating reduced expectations and a chip maker having just record the best quarter in its history (what growth next for Intel: 80% margins? 90%? every household in China buying an i7 980 for their 7th toaster in their 5th house?), even as global trade is paradoxically stalling following an all time record month for Chinese trade? Americans may be unemployed and homeless but they sure like their iPads and their fast PCs. Either way, to remind readers that despite the latest market run up on no actual positive economic data, here is Dominic Wilson, Director of Global Macro & Markets Research at Goldman, with advice to clients on how to navigate the "slowdown."

Moody's Downgrades Portugal From Aa2 To A1

Moody's believes that the Portuguese government's financial strength will continue to weaken over the medium term, as evidenced by the recent and ongoing deterioration in the country's debt metrics. "The Portuguese government's debt-to-GDP and debt-to-revenues ratios have risen rapidly over the past two years," says Anthony Thomas, Vice President - Senior Analyst in Moody's Sovereign Risk Group. "This deterioration came about due to the government's anti-crisis measures and the operation of the budget's automatic stabilizers, such as higher unemployment benefits, when the economy went into recession." Looking ahead, Moody's expects the government's debt metrics to continue to deteriorate for at least another two to three years, with the debt-to-GDP and debt-to-revenues ratios eventually approaching 90% and 210%, respectively, before stabilizing once the budget has moved back into a primary surplus position.