Eighteen Percent of the EU is Literally Junk, Carried As Risk Free Assets at Par at 30x+ Leverage: Bank Collapse is Inevitable!!!
So, the next domino falls in the Pan-European Sovereign Debt Crisis. As has been the casse for much of the Asset Securitization Crisis and the Pan-European Sovereign Debt Crisis, the ratings agencies have arrived to smoldering pile of ashes littered with charred bones and remnants of the putrid smell of burnt flesh with a fire hose and a megaphone yelling “Get out! We have word there may be a fire here!“
Ireland joined Portugal and Greece as the third euro-area nation to have its credit rating reduced to below investment grade as European Union finance ministers struggle to contain the region’s sovereign-debt crisis.
Moody’s Investors Service cut Ireland to Ba1 from Baa3, citing the probability that the country, which received a bailout last year, will need additional official financing and for investors to share in losses before it can return to the private market to borrow. The outlook remains “negative,” Moody’s said in a statement late yesterday.
Irish bonds dropped for a sixth day today after the downgrade, which came after European finance ministers failed to present a solution to the contagion that’s threatening to spread to Italy from the so-called peripheral euro-area states. Ireland’s debt agency said the downgrade will make it “more difficult” for Ireland to return to the market next year.
While Ireland “has shown a strong commitment to fiscal consolidation and has, to date, delivered on” the terms of its bailout, “implementation risks remain significant,” Moody’s said in the statement.
Irish 10-year bonds fell, pushing the yield on the debt up 31 basis points to 13.65 percent. The premium over German bunds widened 32 basis points to almost 11 percent. Italian yields were at 5.47 percent after surging above 6 percent earlier this week. The euro, which dropped to a four-month low against the dollar yesterday, rose 0.5 percent to $1.4049 as of 9:06 a.m. in London.
One must wonder what took Moody’s so long to come to said conclusion. BoomBustBlog subscribers were well aware of Ireland’s “Junk status” situation at least a year and a half ago. Outside of The Anatomy of a Serial European Banking Collapse nearly guaranteed scenario that I present last month, here are my thoughts starting July 2010:
- Beware of the Potential Irish Ponzi Scheme!
- Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
- Death by a Thousand Irish Cuts: The Poster Child of Austerity Measure Success Gets Downgraded After Several Devastating Expenditure Reductions That Really, Really Hurt the Irish People! Monday, July 19th, 2010
- Many Are Still Underestimating the Damage That Can Be Done By Ireland’s Bank Troubles Wednesday, September 8th, 2010
- As We Have Clearly Anticipated Since Early 2010, Ireland is About to Go Monday, November 15th, 2010
- Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up??? Monday, November 22nd, 2010
- The BoomBustBlog Contagion Model: How We Predicted 9 Months Ago That The UK and Sweden Would Rush To Bail Out Ireland, and Why Friday, November 26th, 2010
- Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! Monday, November 29th, 2010
- A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Wednesday, May 26th, 2010
For our professional and institutional subscribers, the Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts are available online. All subscribers have access tos the Irish Bank Strategy Note which adequately warned before Irish banks dropped 85% in value. The Ireland public finances projections is also available to all paying members.
For those who don’t believe haircuts are possible, remember Denmark already took the clippers out. Ireland looks like they may be bluffing, but suppose their bluff is called???
From Bloomberg Today: Bondholder Haircut from Ireland May Shut Italy & Spain Out of Funding Markets
Ireland making good on its threat to impose losses on senior bank bondholders would precipitate a funding crisis for lenders across southern Europe, according to CreditSights Inc. “The fallout would be big and it would be bad,” said John Raymond, a London-based analyst at the independent research firm. “The senior unsecured market would shut down, at least for a while. Right now, the bigger and better Spanish and Italian banks can still access the market. That could end.”
… Pressure on bondholders to share the burden of banks’ losses is growing. In Denmark, the government inflicted so- called haircuts on senior creditors and depositors of regional lender Amagerbanken A/S, which failed after losing money on investments including real-estate loans. Moody’s Investors Service cut ratings of five Danish banks, including Danske Bank A/S, the country’s biggest, pushing up funding costs. Ireland’s government has similar powers to Denmark’s under the terms of its banking act.
And in other, seemingly forgotten news… Ireland Says Four Lenders Need $34 Billion After Stress Tests:
Irish regulators instructed four banks to raise 24 billion euros ($34 billion) in additional capital following stress tests on the nation’s lenders.
And back to this most recent Bloomberg article…
Ireland was forced to seek an 85 billion-euro rescue from the European Union and the International Monetary Fund in November as a banking crisis overwhelmed the government.
The European Commission in Brussels said the downgrade “contrasts very much” with recent economic data and the “determined implementation of the program by the Irish government.” The Irish program is “fully on track,” it said.
Moody’s rationale for cutting Ireland echoed its review of Portugal, which was lowered to junk on July 5. European leaders may hold an extraordinary summit in two days in another attempt to stem the debt crisis, Greek Finance Minister Evangelos Venizelos and Irish Prime Minister Enda Kenny said separately yesterday.
Standard & Poor’s cut Ireland’s rating one level to BBB+ with a “stable” outlook on April 1. Fitch Ratings affirmed Ireland’s BBB+ rating on April 14 and removed it from “rating watch negative.” It said the outlook is negative. Both firms’ ratings are three levels above junk.
Ireland’s debt will rise to 118 percent of GDP in 2012 from 25 percent at the end of 2007, the European Commission has forecast. Taxpayers have pledged as much as 70 billion euros to shore up the country’s debt-laden financial system.
“Things need to get worse before they get better,” said Steven Lear, deputy chief investment officer at J.P. Morgan Asset Management’s Global Fixed Income Group in New York, who helps oversee $130 billion in assets. “There has to be a lot of pain before the alternative of pain seems palatable.”
Oh, Mr. Lear, trust me, there will be plenty of pain to go around. The 2nd biggest hedge fund in the world (right behind the US Federal Reserve) is currently busting at the seems (literally) with junk! Think about it. There are 17 members of European Union, and 18% of those members are trading junk bonds as sovereign debt. These junk bonds (in some cases trading 50 cent on the Euro) are carried on HTM books at par, and have been purchased with 30x to 60x leverage. Care to calculate the losses, because I have. Once again, the endgame is The Anatomy of a Serial European Banking Collapse, but the prequel can be found in my many warnings that will lead up to that event, starting with the abject insolvency of the world’s 2nd largest hedge fund – the ECB!:
Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What!
UK banks have pulled billions of pounds of funding from the eurozone as fears grow about the impact of a “Lehman-style” event connected to a Greek default.
Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system.
Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.
Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.
In its interim management statement, published in April, Barclays reported a wholesale exposure to Spain of £6.4bn, compared with £7.2bn last June, while its exposure to Italy has fallen by more than £100m.
One source said it was “inevitable” that British banks would look to minimise their potential losses in the event the eurozone crisis were to get worse. “Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.
Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a
seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more.
Eurocalypse Cometh! Principal Haircuts, Serial Bailouts, ECB Insolvent! Disruptive Sound Of Dominoes In Background Going “Click, Clack”! BoomBustBloggers Instructed To Line Up Bearish Positions Again!
If one were to even come close to marking the EU banks books to reality, market prices, or anything in between, the Lehman situation would look tame in compariosn!
As excerpted from the subscriber document: The Inevitability of Another Bank Crisis
Then there’s the obvious twists from other impetuses:
It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis
For Those Who Failed To Heed My Warnings On Portugal, Visualize The Contagion That Causes European Bank Failure!!!
And in the End, What Does It All Mean?
LGD 100+: What’s the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?
This will be it for posting for the next 20 hours or so, for I have found the next TWO (That’s right! Two as in number 2) Lehman Brothers and Bear Stearns sitting right there smack in the middle of plain site in Europe. The meltdown should occur just as it did here in the US save the world 2nd largest hedge fund probably will not have the resources to pull that funny little, furry financial creature from the family Leporidae out of their hat like the world’s largest hedge fund did in the case of Bear Stearn’s and Lehman Brothers.
I will release preliinary findings, names, facts and figures to subscribers as soon as possible. This would make a very interesting topic for a FIRE sector compan annual board meeting as the keynote speaker, no?