Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
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Roughly two years ago, I penned a piece called How Greece Killed Its Own Banks! It outlined the end result of Greece attempting to hide sparse demand for its debt by forcing its banks to binge on it using excessive leverage. Of course, once you eat too much garbage, you start to stink, and eventually... Well, let's look at it from a visual perspective:
Greece and the ECB kicked the can down the road for two years, but as fate would have it... Reality rears its ugly head, as exemplified in today's MSM headline from CNBC: Record Losses at Greek Banks Show Pain of Bond Swap
Greece's top banks posted historic losses for 2011 on Friday, hit by a bond swap last month that blew holes in their balance sheets and nearly wiped out their capital base.
Together, National, Alpha, Eurobank and Piraeus, posted an aggregate loss of 28.2 billion euros ($37.3 billion), about 10 times their current market worth or 13 percent of the country's GDP .
The banks treated losses from last month's bond swap to cut the country's debts — part of a rescue package for Greece negotiated with the European Union and International Monetary Fund — as if they took place last year.
Inflicting real losses of about 74 percent on bondholders, Greece's debt swap proved a near fatal financial torpedo for lenders, crippling the sector's capital base.
From the big four banks, only Alpha spelled out clearly where this left its Core Tier 1 capital ratio. The other three reported where capital ratios would land after their use of standby funds provided by a capital backstop, the Hellenic financial Stability Fund (HFSF).
Alpha's core capital ratio (Tier 1) fell to 3 percent. Eurobank [EFG-FF 0.61 
0.004 (+0.66%) 
], the country's second biggest, did not disclose the figure but said the hit left it with total equity of 875 million euros.
National Bank [NAG-FF 1.73 
-0.02 (-1.14%) ], the country's biggest lender with operations in Turkey, said its Core Tier 1 ratio would reach 6.3 percent, taking into account the use of a 6.9 billion euros standby facility provided by the HFSF fund.
Piraeus gave no Tier 1 figure but said tapping up to 5 billion euros of HFSF funds would boost its total capital adequacy ratio to 9.7 percent.
Greek bank shares have shed 74 percent in the last 12 months, underperforming the Greek stock market which is down 50 percent.
...Battered by a shrinking deposit base, rising loan impairments and unable to access wholesale funding markets, banks will need to fill the resulting capital shortfall and meet capital adequacy targets set by the central bank.
They face a core Tier 1 target of 9 percent by end-September.
... With the economy mired in recession...
I think its fair to say "depression' at this point. The destruction of the banking system is what pushed the US over the edge in the early 1900s, and it had a lot more going for it than Greece does.
... and unemployment at a record 21.8 percent, asset quality deteriorated, meaning banks' non-performing loans rose further — by 130 basis points to 12.9 percent of Alpha's loan book. Eurobank's bad debt provisions rose 4.7 percent last year.
Relevant BoomBustBlog research:
Greece Public Finances ProjectionsBanks exposed to Central and Eastern EuropeGreek Banking Fundamental Tear Sheet
Those who follow me know that I have warned of this ad nauseum, through a variety of venues and media, focusing particularly on the destructive damage the bank collapses will bring, again...
This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!
Two years ago in "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! I compared the then Grecian situation to that of Damocles. Well, things have gotten much worse since then and I believe I was one of the most bearish (and accurate) at that time. Now, Greece resembles Icarus tumbling down from the skies, drenched in Hubris. Subscribers can download my full thoughts on Greece's sustainability post bailout here - debt restructuring_maturity extension blog - March 2012. Professional and institutional subscribers should feel free to email me in order to receive a copy of the Greek restructuring model used to create these charts and come to these conclusions.
Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.
The primary balance looks at the structural issues a country may have.
Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!
This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple.
Unlike as portrayed in the media, Greece is not a standout profligate child, but simply a microcosm of what is to come to a good portion of Europe. Just scan today's headlines for evidence of such.... German Manufacturing Shrinks Fastest Since 2009
Of course it did. Germany is a net export nation whose trading partners are dancing between hard landings, serial recessions, and outright depression! Exactly how does one expect this song to be sung? Let me count the ways for you, as Germany is currently the undeserved linchpin to what's left of EU fiscal integrity. Reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...
I believe Germany poses the biggest threat to global harmony for 2012. Here's why...
... That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).
Read the entire article, The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You..., to get the full picture.
Then there's my warnings on the foolishness of believing the Dutch economy will walk through this unscathed. The MSM headlines are awash with Dutch gossip:
- Dutch Face Political Crisis Over Austerity Budget
- Another One Down? Dutch Government Near Collapse: The Dutch government’s failure to reach an agreement in talks to achieve tough spending cuts could see nervous investors push up the country’s borrowing costs.
Alas, the problem is that there is significant weakness driving fears throughout the Dutch government and those that can count in Dutch finance, as clearly described over a year ago. Reference We're At Step 2 Of The Global Real Estate Compression:
I have actually discussed the Dutch market in depth at the ING conference...
Keynote presentation
Yes, "The Real Estate Recession/Depression is Here, Eurocalypse Style". We have already identified a Dutch real estate short candidate - subscribers (click here to subscribe), please download Northern Europe CRE short candidate #1. This company is suffering from a variety of maladies that, on an individual basis, may not seem that bad but once aggregated put it on the same path that GGP was on. The difference? This is after the so-called economic recovery, in the conservative EU state of the Netherlands, and right before the massive rate storm that will bethe Pan-European Sovereign Debt Crisis that I have warned about since 2009. The result, many properties that will either be difficult or impossible to refinance or roll over. Again, subscribers, reference Dutch REIT Debt Analysis, Blog Subscriber Edition. This is a succinct illustration of how this company will not be able to rollover much of its debt, and the absolute lack of recognition of such by the markets. Of interest is the fact that the number 3 short candidate on our short list is over 50% owned by this company (which came in as #!). With friends such as that, who needs enemies!
Q&A and discussion, part 1
Q&A and discussion, part 2
Then there's the obvious that many refuse to admit - Spain's Economy Shrank in First Quarter: Central Bank. I went through this in detail last week in the post The Spain Pain Will Not Wane: Continuing the Contagion Saga.
This is not about doom and gloom, it is simple math. Very simpe math, and it will engulf much of Europe. Again, simply scan today's headlines...
There is significant, and I do mean significant opportunity for those strategic and patient macro-fundamental investors who can sit back and wait. I plan on leading a charge for distressed Euopean assets to be divulged by these banks and their sovereign domiciles and am looking for like minded individuals, reference The EurAsian Global Distressed Asset Acquisition Initiative. I will post more on this initiative for Professional/Institutional subscribers, hopefully later on today or tomorrow.
As usual, I can be reached via the following (or directly via email), and urge all who rely on the perennially wrong sell side to subscribe to BoomBustBlog:
