"A blockbuster draft report from the European Commission saw the light of day recently, thanks to some reporting from Bloomberg. It highlights an incredibly dangerous Catch-22 facing many sovereign nations — the “Snowball Scenario.”
Let me give you an example how this works …
Suppose country A’s economy goes into the tank. The government responds by borrowing boatloads of money and spending like mad on stimulus packages.
The markets allow it to go on for a while. But then investors start to get antsy about all the debt being added to the government’s balance sheet. So they start dumping its bonds, driving prices lower and rates higher. That, in turn, forces the country to implement austerity measures to get its debt and deficit under control.
The problem?
Those moves send the economy BACK into the crapper! Government spending has to rise yet again to pay for things like unemployment insurance, new stimulus packages, and so on … at the same time tax revenues fall. That drives debts and deficits even higher.
The end game in this snowball scenario? A sovereign default!
And that’s not just a theory. In fact …
Snowballs Are Already Rolling Downhill in Spain, Greece, and Portugal"
Showing posts with label PIGS. Show all posts
Showing posts with label PIGS. Show all posts
Friday, June 18, 2010
Thursday, June 17, 2010
Is Spain Next?
"The data illustrate quite clearly how the PIGS' problems could become a broader European (if not global) financial crisis (emphasis added):
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks' exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector. "
at http://www.econbrowser.com/archives/2010/06/is_spain_next.html
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks' exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector. "
at http://www.econbrowser.com/archives/2010/06/is_spain_next.html
Wednesday, June 16, 2010
SPAIN MAY BE THE NEXT DOMINO TO FALL
"As Spain wrestles to contain its budget deficit which in turn is leading to a drop in bond market values, local banks are having a difficult time in locating funding due to their holdings of underwater government debt.
Chairman for one of Spain’s largest banks, Francisco Gonzalez said yesterday that for many of the country’s financial institutions, the “international capital markets are closed”. In addition, Spain’s Treasury secretary, Carlos Ocana said that the current environment for banks and corporations was “definitely a problem”.
Generally, European banks rely heavily on lenders from abroad for funding and less so on traditional deposits according to The Economic Times. They turn to the international capital markets in both money market land and in longer-term debt, to finance about 40 percent of their 33 trillion euros of assets. The remaining amount comes from deposits which is about half and the balance through equity.
With the inability to attract funding as evident by the rise in the interbank short term lending rates, Spanish banks are turning to the European Central Bank as a lender of last resort.
According to a Financial Times article, Spanish banks borrowed 85.6 billion euros from the ECB last month which was twice the amount needed right before the last credit crunch which was triggered by the fall of Lehman Brothers in September 1998. Furthermore, it is the highest amount since the beginning of the Euro Zone in 1999. Comparatively, the borrowing is an increase of about 14.4 percent from April’s tally of 74.6 billion euros."
at http://pragcap.com/spain-may-be-the-next-domino-to-fall
Chairman for one of Spain’s largest banks, Francisco Gonzalez said yesterday that for many of the country’s financial institutions, the “international capital markets are closed”. In addition, Spain’s Treasury secretary, Carlos Ocana said that the current environment for banks and corporations was “definitely a problem”.
Generally, European banks rely heavily on lenders from abroad for funding and less so on traditional deposits according to The Economic Times. They turn to the international capital markets in both money market land and in longer-term debt, to finance about 40 percent of their 33 trillion euros of assets. The remaining amount comes from deposits which is about half and the balance through equity.
With the inability to attract funding as evident by the rise in the interbank short term lending rates, Spanish banks are turning to the European Central Bank as a lender of last resort.
According to a Financial Times article, Spanish banks borrowed 85.6 billion euros from the ECB last month which was twice the amount needed right before the last credit crunch which was triggered by the fall of Lehman Brothers in September 1998. Furthermore, it is the highest amount since the beginning of the Euro Zone in 1999. Comparatively, the borrowing is an increase of about 14.4 percent from April’s tally of 74.6 billion euros."
at http://pragcap.com/spain-may-be-the-next-domino-to-fall
Monday, June 14, 2010
BIS reports Bank Exposure to Euro area countries facing market pressure
"The Bank for International Settlements (BIS) put out the BIS Quarterly Review, June 2010 yesterday. As part of the review, the BIS estimated the exposures of banks by nationality to the residents of Greece, Ireland, Portugal and Spain:
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector."
at http://www.calculatedriskblog.com/2010/06/bis-reports-bank-exposure-to-euro-area.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).
French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively), although the sectoral compositions of their claims differed substantially. French banks were particularly exposed to the Spanish non-bank private sector ($97 billion), while more than half of German banks’ foreign claims on the country were on Spanish banks ($109 billion). German banks also had large exposures to residents of Ireland ($177 billion), more than two thirds ($126 billion) of which were to the non-bank private sector.
French and German banks were not the only ones with large exposures to residents of euro area countries facing market pressures. Banks headquartered in the United Kingdom had larger exposures to Ireland ($230 billion) than did banks based in any other country. More than half of those ($128 billion) were to the non-bank private sector. UK banks also had sizeable exposures to residents of Spain ($140 billion), mostly to the non-bank private sector ($79 billion). Meanwhile, Spanish banks were the ones with the highest level of exposure to residents of Portugal ($110 billion). Almost two thirds of that exposure ($70 billion) was to the non-bank private sector."
at http://www.calculatedriskblog.com/2010/06/bis-reports-bank-exposure-to-euro-area.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
Euro Up but Spain Under Pressure
"For the fifth day, the euro is recording higher highs and higher lows. It has advanced by roughly 3.25% since last Monday’s lows. While we recognize an improved news stream, the main circumstances of the European debt crisis have not gone away. Spain’s challenges are overshadowing Portugal and Greece.
Last week Spain offered bonds for the first time since the Fitch downgrade. The bonds were well received, but at the price of a roughly 50% increase in yields. Spain will be issuing 10- and 20-year bonds on Thursday. The timing could be problematic given two developments today. First, the chairman of BBVA said in a speech today that most Spanish companies and banks have been closed out of the international credit markets. Second, the ECB reported today that Spanish banks borrowed a record 85.6 bln euros from it in May. The second point would lend even more credence to the first point."
at http://www.creditwritedowns.com/2010/06/euro-up-but-spain-under-pressure.html#ixzz0qrCQALgn
Last week Spain offered bonds for the first time since the Fitch downgrade. The bonds were well received, but at the price of a roughly 50% increase in yields. Spain will be issuing 10- and 20-year bonds on Thursday. The timing could be problematic given two developments today. First, the chairman of BBVA said in a speech today that most Spanish companies and banks have been closed out of the international credit markets. Second, the ECB reported today that Spanish banks borrowed a record 85.6 bln euros from it in May. The second point would lend even more credence to the first point."
at http://www.creditwritedowns.com/2010/06/euro-up-but-spain-under-pressure.html#ixzz0qrCQALgn
Sunday, June 13, 2010
Banks With State Debt Ignore Not-If-But-When Default
"European banking shares indicate a Greek debt default may be just a matter of time.
Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July.
A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.
“Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.”
Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace, an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates.
‘Prisoner’s Dilemma’
Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests.
“From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”
at http://www.bloomberg.com/apps/news?pid=20601010&sid=aVTX9yKZzdJ4
Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July.
A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.
“Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.”
Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace, an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates.
‘Prisoner’s Dilemma’
Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests.
“From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.”
at http://www.bloomberg.com/apps/news?pid=20601010&sid=aVTX9yKZzdJ4
Saturday, June 12, 2010
'We Need to Recognize Reality'
"In a CNBC interview, David Walker, president and CEO of the Peter G. Peterson Foundation, doesn't pull any punches when he discusses our nation's precarious financial condition:
If we do not put our federal financial house in order, if we do not deal with the structural deficits, then our best years are behind us. This is about the future of the Republic; this is about the future of our country; this is about the future of our families. If you are not economically strong, you will not be strong with regard to international influence, with regard to national security, and ultimately our domestic tranquility will suffer. We have to learn from history and we have to not repeat the mistakes that others have made.
The former Comptroller General of the United States also takes issue with the notion that the recent strength in our currency and government bond markets is a sign that America is on the right course:
In the short term, we are a flight to safety, but we should not misunderstand the situation....People are all concerned about Greece -- Greece used to be the cradle of democracy; it was the greatest civilization on earth; it controlled most of the known world. And now, because of their financial situation, it's had a ripple effect -- not just in Europe, but it's affecting us. And guess what? When you look at debt held by the public -- federal, state, local -- we're already worse in the United States than Spain, we're worse than Ireland, we're two years away from being Portugal, and we're 10 years away from being Greece. We need to recognize reality.
Compelling -- and frightening -- as always."
at http://www.economicroadmap.com/
If we do not put our federal financial house in order, if we do not deal with the structural deficits, then our best years are behind us. This is about the future of the Republic; this is about the future of our country; this is about the future of our families. If you are not economically strong, you will not be strong with regard to international influence, with regard to national security, and ultimately our domestic tranquility will suffer. We have to learn from history and we have to not repeat the mistakes that others have made.
The former Comptroller General of the United States also takes issue with the notion that the recent strength in our currency and government bond markets is a sign that America is on the right course:
In the short term, we are a flight to safety, but we should not misunderstand the situation....People are all concerned about Greece -- Greece used to be the cradle of democracy; it was the greatest civilization on earth; it controlled most of the known world. And now, because of their financial situation, it's had a ripple effect -- not just in Europe, but it's affecting us. And guess what? When you look at debt held by the public -- federal, state, local -- we're already worse in the United States than Spain, we're worse than Ireland, we're two years away from being Portugal, and we're 10 years away from being Greece. We need to recognize reality.
Compelling -- and frightening -- as always."
at http://www.economicroadmap.com/
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