Ireland

As we pointed out yesterday when we correctly summarized that "Spain Appears Unsure What A "Bank Bailout" Means", we said "Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case)." Well, as it turns out there was no ulterior motive behind the stupidity which is merely ad hoc improvisation of the worst kind that we saw back in Greece in the summer of 2011. Because according to IFR, not only is the bailout going to be woefully insufficient, but also, will be a 100% dud, as "Spain is likely to offer some banks the chance to opt out of some of the reforms set to be announced on Friday following heavy lobbying from the industry, according to two people familiar with discussions." In other words an insufficient bank sector nationalization, which will affect on some, but not those who actually need it, in what is now so clearly just another exercise (think stress test) to give the impression that the Spanish banking system is solvent. In the meantime, absolutely nothing will happen with the hundreds of billions of underwater mortgages carried by the big banks, which will merely fester until they finally become the Fed's problem.

Last week, looking at Third Point's best performing positions we noticed something odd: a big win in Portuguese sovereign bonds in the month of April. We further suggested: "We suspect the plan went something like this: Loeb had one of his hedge-fund-huddles; the cartel all bought into Portuguese bonds (or more likely the basis trade - lower risk, higher leverage if a 'guaranteed winner'); bonds soared and the basis was crushed; now that same cartel - facing pressure on its AAPL position (noted as one of Loeb's largest positions at the end of April) - has to liquidate (reduce leverage thanks to AAPL's collateral-value dropping) and is forced to unwind the Portuguese positions. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?" Since the end of April, both AAPL and Portuguese bonds have tumbled, and Portugal CDS is +45 bps today alone, proving that circumstantially we have been quite correct. Today, we have the full Long Portugal thesis as explained by Loeb (it was a simple Portuguese bond long, which explains the odd rip-fest seen in the cash product in April). There is nothing too surprising in the thesis, with the pros and cons of the trade neatly laid out, however the core premise is that the Troika will simply not allow Portugal to fail, and that downside on the bonds is limited... A thesis we have heard repeatedly before, most recently last week by Greylock and various other hedge funds, which said a long-Greek bond was the "trade of the year", and a "no brainer." Sure, that works, until it doesn't: such as after this past weekend, in which Greece left the world stunned with the aftermath of what happens when the people's voice is for once heard over that of the kleptocrats, and the entire house of cards is poised to collapse.

Yep. Now it's official. 

"In less than two years, we are now up to a total of seven European leaders or ruling parties that have been forced out of office, courtesy of the spreading government debt crisis — tack on France now to Ireland, Portugal, Greece, Italy, Spain and the Netherlands. Even Germany's coalition is looking shaky in the aftermath of the faltering state election results for the CDU's (Christian Democratic Union) Free Democrat coalition partner. This is quite a potent brew — financial insolvency, economic fragility and political instability."

At what price?

Two big events down, many, many others more left to go. Below is a full European event calendar for the rest of May and June. Just like in 2011, Europe got unhinged around this time and things peaked by November when only a coordinated global intervention saved the world courtesy of $1.3 trillion from the ECB, expanded FX swaps from the Fed and a PBOC rate cut. Only unlike in 2011, with Silvio and Sarko both now gone, the roster of political scapegoats is getting very, very thin. Whose head wil the vigilantes demand next? We will find out over the summer and fall, which promise to be even more exciting than last year.

And so one more tumbles to the popular wave of anger and discontent.

Francois Hollande wins 51.9% of the vote according to exit polls

The 57-year-old Hollande got about 52 percent against about 48 percent for Sarkozy, according to estimates by pollsters CSA and Harris Interactive

Nicholas Sarzkoy concedes defeat in presidential election to Francois Hollande

While most will be following what appears to be an almost certain Hollande victory in the French presidential runoff elections tomorrow (InTrade odds around 10%), it is very likely that the Greek election will have a greater acute impact on the political and financial facade of Europe, especially in the short term. As we noted in what we dubbed our first (of many) Greek election previews, the biggest problem facing the new political regime will be its near certain inability to form a coalition government (with just 32.6% of the vote going to PASOK and New Democracy)  that does not undo most of what has been achieved through popular sweat and tears over the past 2 years to assist Europe's bankers in transferring what little Greek wealth remains to fund the insolvent European bank balance sheets. This in turn could begin the latest cascading contagion waterfall, which coupled with an anti-austerity drive emanating from a newly socialist France will threaten to topple Angela Merkel's carefully constructed European hegemony.

Arguably, more millionaire money was made during the Great Depression than at any time in history. Well, if that's true then it looks as if history may be poised to repeat itself. The question is, who will be ready?

We were the first to note the dire state of youth unemployment in Europe here, and reiterated here, as this terrible social situation just goes from bad to worse this month. Whether youth unemployment is a proxy for sales of PlayStations or for the much more critical likelihood of widespread social unrest and eventually the dissolution of Europe's political compact is unclear but one thing is for sure - Europe's leaders will be watching this chart and quaking as nation after nation breaks to all-time high levels of joblessness for the critical tinder-box of Under-25 year-olds. The Euro-zone youth unemployment rate is back over 22% for the first time since September 1994. With Spain and Greece over 50% (and rising) and Italy now joining Ireland over 35% at the same time as Germany's youth unemployment falls below 8% for the first time since May 1993 - one can only surmise the rising tensions between the haves and the have-nots (even as Germany's PMI disappoints).

When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell's work on optimum currency areas that provided much of the theoretical cover. However, the concept was flawed from the start.

Over the weekend, just because apparently someone really needed content at any cost (in this case zero), we got a new intellectual stillborn from none other than the man who more than anyone is responsible for the global economic collapse the world has been in for the past 4 years, and from which it is nowhere even close in escaping. The man of course is Larry Summers, who first crushed global finance, then Harvard, and finally Obama's economic platform, whom the FT saw fit to give the chance to pontificate on such concepts at growth and austerity, because apparently, growth through austerity, whereby banking sector debt is written down in parallel is not growth, but there is some subsegment of "growth", heretofore unknown, that Europe has not tried before, and will instead focus on that going forward. To paraphrase Lewis Black: don't think about that sentence too hard, or blood will shoot out of your nose.

As noted earlier, and in the aftermath of both the UK and Spain officially double dipping, very soon a majority of Europe will be submerged under the latest recessionary tide which has already engulfed Spain, UK, Greece, Italy,  Portugal, Ireland, Belgium, Denmark,  Holland, Czech Republic, and  Slovenia. The primary wildcard remains Germany, although there is a more than 50% chance that following some very weak PMI data, the country will follow up its already negative Q4 GDP print with another decline, officially pushing the European growth dynamo into recession as well (as for France which reps and warrants that everything is great, it is not as if anyone actually believes those numbers, especially after Hollande becomes president in one week). For everyone who wants to track the European double dip tsunami in real time, the following interactive chart from Reuters is just for you.

The markets may decide to play along with the renewed talk of growth and the death of austerity, but it is shocking how quickly writers and the media have latched on to the idea that growth will somehow save us and that the entire problem is the fault of austerity. Although it seems like it has been around for awhile, austerity is fairly new.  I don’t think Greece even got nailed with austerity until May of 2010.  In September 2010 when EFSF and ESM were first officially launched, Portugal and Ireland were both contributing members.  The first time austerity was mentioned in Spain and Italy had to be the summer of 2011, if not later? Until that time, I assume growth was part of the policy of most countries?  I find it hard to believe any country engaged in an anti-growth policy?  Was not every policy in Europe, up until at least 2010 if not beyond, actually a “growth” policy?  Why did they fail to create enough growth to stop the debt crisis? Ah, that is the other problem.  It isn’t just growth that is needed, certainly not to comfort the bond market, it is growth that surpasses the amount spent (borrowed) to create it.

The good news: Spanish Q1 GDP printed -0.3% on expectations of a -0.4% Q/Q decline. Unfortunately this is hardly encouraging for the nearly 25% of the labor force which is unemployed, and for consumers whose purchasing habits imploded following record plunges in retail sales as observed last week. The bad news: Spain now joins at least 10 other Western countries which have (re) entered a recession. Per DB: "Spain will today likely join a growing list of Western Developed world countries in recession. Last week the UK was added to a recession roll call that includes Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia. Debt ladened countries with interest rates close to zero have limited flexibility to fight the business cycle and this impotency will continue for many years." Alas, the abovementioned good news won't last: from Evelyn Hermman, economist at BNP - "The Pace of Spain’s economic contraction may increase in coming quarters as austerity measures bite more sharply." Of course, it is the "good news" that sets the pace each and every day, as the bad news is merely a further catalyst to buy, buy, buy as the ECB will allegedly have no choice but to do just that when the time comes. And something quite surprising from DB's morning comment: "If it were us in charge we would allow more defaults which would speed up the cleansing out of the system thus encouraging a more efficient resource allocation in the economy at an earlier stage." Wait, this is Deustche Bank, with assets which are nearly on par with German GDP, saying this? Wow...