Tuesday, 27 April 2010 13:25

How Greece Killed Its Own Banks!

Yes, you read that correctly! Greece killed its own banks. You see, many knew as far back as January (if not last year) that Greece would have a singificant problem floating its debt. As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market. So, what happens when these relatively small banks gobble up all of this debt that is summarily downgraded 15 ways from Idaho.

Reference (Bloomberg) Stocks Plunge as Dollar, Treasuries Gain After Greece, Portugal Rate Cuts and (the Wall Street Journal) S&P Downgrades Greece to Junk Status:

S&P cut Greece's ratings to junk status, saying the country's policy options are narrowing as it tries to cut its large budget deficit. The news, combined with an S&P downgrade of Portugal, pushed down the euro to $1.3269, hit U.S. stocks and sent Treasury prices higher”.

  • Stocks Plunge, Asia Bond Risk Climbs on Greece, Portugal Default Concerns
  • Greece's Junk Contagion Pressures EU to Broaden Bailout After Market Rout
  • Trichet Travels to Berlin on Diplomatic Mission as Merkel Nears Greek Vote
  • Greece Bondholders May Lose $265 Billion in Default as S&P Sees 70% Loss
        April 28 (Bloomberg) -- Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s.

    The ratings firm cut Greece three steps yesterday to BB+, or below investment grade, and said bondholders may recover only 30 percent and 50 percent for their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, data compiled by Bloomberg show.

    The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes to as high as 19 percent from 4.6 percent a month ago as concern deepened the nation may delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product.

    “It’s now not just market sentiment, but a top rating agency sees Greek paper as junk,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam.

    Before yesterday, Greece’s bonds had lost about 17 percent this year, according to Bloomberg/EFFAS indexes. The 4.3 percent security due March 2012 fell 6.54, or 65.4 euros per 1,000-euro face amount, to 78.32.

    ...

    S&P indicated the cuts, which may force investors who are prevented from owning anything but investment-grade rated bonds to sell, may not be over, assigning Greece a “negative” outlook.

    “The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory,” S&P credit analyst Marko Mrsnik said in a statement.

    Credit-Default Swaps

    Traders of derivatives are betting on a greater chance that Greece fails to meet its debt payments.

    Credit-default swaps on Greek government bonds climbed 111 basis points to 821 basis points yesterday, according to CMA DataVision. Only contracts tied to Venezuela and Argentina debt trade at higher levels, according to Bloomberg data. Venezuela is at about 846 basis points and Argentina is at about 844, Bloomberg data show.

    Just minutes before lowering Greece’s ratings, S&P cut Portugal to A- from A+. Yields on Portugal’s two-year note yields jumped 112 basis points to 5.31 percent, while credit- default swaps on the nation’s debt rose 54 basis points to 365.     The downgrades may force banks to boost the amount of capital they are required to hold against bets on sovereign debt, said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut.

    While bank capital rules give a risk weighting of zero percent for government debt rated AA- or higher, it jumps to 50 percent for debt graded BBB+ to BBB- on the S&P scale and 100 percent for BB+ to B-.

    “These downgrades are going to cause people to increase their risk weightings,” Yelvington said.

Well, the answer is.... Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...

image001

The same hypothetical leveraged positions expressed as a percentage gain or loss...

image003

When I first started writing this post this morning, the only other bond markets getting hit were Portugal's. After the aforementioned downgraded, I would assume we can expect significantly more activity. As you can, those holding these bonds on a leveraged basis (basically any bank that holds the bonds) has gotten literally toasted. We have discovered several entities that are flushed with sovereign debt and I am turning significantly more bearish against them. Subscribers, please reference the following:

To date, my work both free and particularly the subscription work, has shown signifcant returns. I am quite confident that the thesis behind the Pan-European Sovereign Debt Crisis research is still quite valid and has a very long run ahead of it.  Let's look at one of the main Greek bank shorts that we went bearish on in January:nbg since research

The Pan-European Sovereign Debt Crisis, to date:

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
  3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.
  4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  6. The Beginning of the Endgame is Coming???
  7. I Think It’s Confirmed, Greece Will Be the First Domino to Fall
  8. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  9. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  10. “Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  11. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…
  12. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino
  13. As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis
  14. Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?
  15. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  16. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  17. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks
  18. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!
  19. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight
  20. Grecian News and its Relevance to My Analysis
  21. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis
  22. Euro-Gossip Debunked, Courtesy of Trichet and the IMF!
  23. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?
  24. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
  25. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
  26. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

Latest Pan-European Sovereign Risk Subscription Research - The Good Stuff!!!

Actionable Intelligence Note For All Paying Subscribers on European Bank Research - This was certainly one very timely call!!!


File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective - retail.pdf

File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective - professional

File Icon Ireland public finances projections

File Icon Spain public finances projections_033010

File Icon UK Public Finances March 2010

File Icon Italy public finances projection

File Icon Greece Public Finances Projections

File Icon Banks exposed to Central and Eastern Europe

File Icon Greek Banking Fundamental Tear Sheet

File Icon Italian Banking Macro-Fundamental Discussion Note
File Icon Spanish Banking Macro Discussion Note

Last modified on Wednesday, 27 July 2011 09:12

7 comments

  • Comment Link Matto Wednesday, 28 April 2010 20:44 posted by Matto

    Thanks reggie, was looking into timing of puts.

    Report
  • Comment Link Reggie Middleton Wednesday, 28 April 2010 09:15 posted by Reggie Middleton

    I'm not sure if I will get around to it.

    Report
  • Comment Link Raymer Wednesday, 28 April 2010 09:11 posted by Raymer

    Reggie, I am surprised that you did not create an analytical report for JP Morgan Chase's 1Q 2010 earnings report. Will we see one?

    Report
  • Comment Link Reggie Middleton Wednesday, 28 April 2010 01:10 posted by Reggie Middleton

    Debt will not solve the crisis, and if the bond vigilantes are on their p's and q's, it will not even buy more tine for it simply exacerbates teh problem of too much debt in teh first place.

    Report
  • Comment Link Matto Tuesday, 27 April 2010 21:51 posted by Matto

    Reggie do you see the EU/IMF being able to put a package together to buy some more time on the sovereign debt crisis?

    So far they've failed at each step but the IMF is now loaded up with cash and we havent reached crunch time just yet.

    Report
  • Comment Link Reggie Middleton Tuesday, 27 April 2010 16:07 posted by Reggie Middleton

    Most definitely. If my research is correct, this is going to make 2008 look like a bull market. There is an immense amount of risk and debt about in Europe, heavily linked to banks that will fall back here. Read the most recent research.

    Report
  • Comment Link shaunsnoll Tuesday, 27 April 2010 15:49 posted by shaunsnoll

    does this whole situation remind anyone of 2007 and 2008 when bank and CMBS CDS were blowing out while the equity rallied?

    Report
Login to post comments