Tuesday, 09 February 2010 18:00

What Country is Next in the Coming Pan-European Sovereign Debt Crisis?

UPDATED -It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The mere concept of global equity rallies should have macro traders and fundamental investors chomping at the bit. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based, inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered printer ink as the presses go berserk!

In part 2 of my series on the Pan-European Sovereign Debt Crisis, we will review Italy and Ireland in comparison to the whipping child of the media - Greece (see "The Coming Pan-European Sovereign Debt Crisis" for part one covering Greece and Spain along with tear sheets for the Spanish banks at risk for subscribers).

Click to enlarge...


As seen above, Italy's gross debt as a % of GDP is worse than that of Greeces. Spain's stuctural balance is nearly as bad as Greece's and their GDP is heading backwards at a faster rate than Greece. Spain's high unemployment trumps all in the comparison, with Ireland coming a close second. Despite all of this, Greece has two to three times the CDS spread. Greece is a dress rehearsal for sovereign debt failure in several larger countries. Ireland is in very bad shape, and the UK is heavily levered into Ireland through the banking system and bonds (to the tune of $190 billion+) which exacerbates the issues that the UK already has (we will get to this in a future post). Spain and Italy combined are a sizeable chunk of the entire EU, and they are at risk. I say this just to keep things in perspective. We still have at least 9 or 10 more nations to review, and it doesn't necessarily get any better from here.

As was prodigiously reported in the news, Greece is under fire by the market and the EU to reduce a deficit of 12.7 percent of gross domestic product last year to within the EU’s 3 percent limit in 2012. This is a rather unlikely accomplishment for any country, and apparently even less likely for Greece.

Feb. 10 (Bloomberg) -- Prime Minister George Papandreou’s drive to get Greece’s ballooning budget under control will be challenged in the streets today as striking labor unions shut down schools, hospitals and flights.

Air-traffic controllers and civil-aviation workers are effectively closing down Greek air space as part of the 24-hour work stoppage by ADEDY, the umbrella group representing about 600,000 civil servants. Some 483 international and domestic flights have been cancelled, a spokeswoman for Athens International Airport, Greece’s biggest, said by phone.

Protests against Papandreou’s plans to freeze wages and reduce benefits come after European Union leaders, set to meet at a summit in Brussels tomorrow, signaled they may aid the country if progress in cutting the deficit is made. Bonds have slumped in Greece and in the euro area’s southern edge as investors examine budget shortfalls across the 16-nation bloc.

“The concern is whether the strike will be a one-off or the first of a long series of street demonstrations involving other parts of the economy,” said economistGiada Giani of Citigroup Global Markets in London. “We need to see a prolonged period of strikes before we know whether the government’s willingness will be affected.”

ADEDY opposes Papandreou’s plans and may call out its workers again on Feb. 24, when the biggest private-sector group GSEE holds its own 24-hour strike. Today’s walkout, with rallies in Athens and other cities and towns, is organized labor’s first major challenge since the Oct. 4 election of Papandreou, a socialist that unions backed in the vote.

Union Threats

“Cutting public-sector salaries is an easy political choice,” Spyros Papaspyros, chairman of the ADEDY civil servants union, said this week. “Attacks that start on the public sector will lead to attacks on all.”

The unions are contesting measures demanded by the EU and investors to reduce a deficit of 12.7 percent of gross domestic product last year to within the EU’s 3 percent limit in 2012.

It is nonsensical to assume strikers will institute just "one" strike, knowing full well that a single strike will not drive the point home. It is beyond wishful thinking. Even if that was the case, all the union leaders need to do is read Bloomberg to sharpen their plans.

I have harped on this topic in my previous Pan-European
Soverign Debt Crisis
post, but let me drive it home again. Greece is merely a test drive by traders and those who are truly concerned about the debt overhang from the global bailout. Yes, it has the highest debt to GDP ratio, but it is closely followed by much larger nations with much worse, and much more immediate debt and NPA issues.

As initially illustrated in my last post on this topic, when pondering the sovereign debt
status of Italy, Spain and Ireland, keep in mind how much of their GDP is
bogged down by NPAs in their banking systems - and this is what is
reported, knowing full well that the reporting is at best, lagged in
terms of non-performing assets...


So who will be the first (second, third) to fail in a government bond offering?

Governments all over the world are selling record
levels of debt to investors, and quite often buying most of it too through their respective quantitative easing programs. Without that guaranteed government bid, it is likely that either not all the bonds will be sold or they will have to be sold at a substantially higher yield. This comment is aimed at the US, UK and Japan, the world's economic powerhouses, which I will get to in detail in later installments of this series. Reference the following and keep in mind that we have just begun to see what will be a worldwide record issuance of sovereign debt, or at least an attempt at such:

  • BBC: The UK Treasury has failed to sell all its government bonds in an auction for the first time since 2002 (these are the guys with9% of their GDP tied up in non-performing bank assets, ex. RBS, Loyds, etc.)
  • FT.com / Markets - German
    bond sale’s fate signals trouble ahead
    : A German sovereign bond auction failed on Wednesday as investors
    shunned one of the most liquid and safe assets in the world in a warning
    for governments seeking to raise record amounts of debt to stimulate
    slowing economies
    . The fate of the first eurozone bond auction of
    2009 signals trouble ahead as governments around the world hope to issue
    an estimated $3,000bn in debt this year, three times more than in 2008.The 10-year bonds failed to attract enough bids to reach the €6bn the
    German government wanted. Bids of €5.24bn, a cover of only 87 per cent,
    amounted to the second worst auction on record in terms of demand.
    developments were rare before the credit crisis. Before the seven
    German bond auctions that failed last year, the last German bond auction
    to fail was in July 2000 after the dotcom crash
    .Analysts said
    the vast amount of supply is deterring investors and a growing number of
    countries, including those with deep and mature bond markets, such as
    Germany, the UK and Italy, are struggling to attract buyers.The
    Netherlands has seen bond auctions fail, the UK and Italy have been
    forced to offer investors higher yields to meet their auction targets,
    while Spain and Belgium have cancelled offerings because of a lack of

Now, let's put this into perspective.

  1. The amount of debt offered in the past will pail in quantity and scope with the amount of debt that needs to be offered now, amid historically record high deficits and dwindling revenues, high unemployment and global uncertainty.

Let's examine exactly how much debt we are talking about and when...

The weaker Eurozone countries will start flooding the market with sovereign debt rollovers starting THIS MONTH. It remains to be seen whether Germany will backstop Greece, but if they do how can they avoid backstopping Spain, Portugal and Italy. The Spanish and Italian backstops will be particularly tricky since there are bank NPAs hidden in their whose extent has been purposely kept a big mystery. Reference the NPA as a percetn of GDP chart above. If Germany doesn't backstop these countries then it's left up to the IMF and their goes the credibility of the Euro. If Germany does backstop the countries, then their goes those Bund rates! An interesting conundrum, indeed.

The near term debt issuance is simply the tip of the iceberg here. According to Merrill Lynch, we have trillions of nigh unwanted sovereign debt to deal with (Click to enlarge, by way of Zero Hedge):


Tyler Durden of ZeroHedge put it quite succinctly, "It is sheer lunacy if the ECB and Germany believe that the guarantee program will not wreak havoc on their plans to quietly fund this massive hole." With these facts in mind, it should be obvious to all that Greece is a comparative non-issue being harped upon by the media and traders. It is so much so, that I will give away the cursory research on the Greek banks that I have found in my next post, as I outline some of the banks and related sovereigns for my paying subscribers that will really show some problems in this upcoming debt crisis.

Further thoughts on...


deficit to rise significantly and state debt will probably reach 117%
of the GDP. As per Moody's, Italian banking sector is relatively less
exposed to further shocks than some other peer banking systems. With
this being said, Italy is still "overbanked"and has banks of material
size still sporting 100% Texas ratios as Italy has more than 2.2% of its
GDP consumed by its bank's non-performing assets. Paying subscribers
should download the 11 page tear sheet featuring 7 Italian banks worth
noting, including one with a 100% ratio (meaning the bank has more
non-performing assets than it has equity = insolvency!) Italian bank
here: pdf Banking Macro-Fundamental Discussion Not" width="16" height="16" /> Italian Banking Macro-Fundamental
Discussion Not
2010-02-09 17:00:40
792.07 Kb


  • It has been reported (I haven't
    verified this personally) that Ireland now has the highest level of
    household debt relative to disposable income in the developed world at
  • IMF
    via the Irish Times
    : IRELAND WILL pay a higher price to stabilise
    its banks than any other developed country, the International Monetary
    Fund (IMF) has warned. The Washington-based organisation estimated the
    cost of stabilising Irish banks will be the equivalent of about €24
    billion, the highest government bailout as a proportion of economic
    output. The IMF said yesterday that "financial stabilisation costs"
    would account for 13.9 per cent of Ireland's estimated €171 billion in
    annual gross domestic product (GDP), the value of all the goods and
    services produced in the State this year. The cost of bailing out the
    banks in the UK and the US fell slightly behind that of Ireland as a
    share of the value of their economies, totalling 13.4 per cent and 12.1
    per cent of GDP respectively, in a list of 19 developed economies. "The
    United States, United Kingdom and Ireland face some of the largest
    potential costs of financial stabilisation (12 to 13 per cent of GDP)
    given the scale of mortgage defaults," the IMF said in its biannual
    Global Financial Stability report. The IMF estimates that Irish
    government debt will increase by more than any other developed country
    over the three years from 2008 to 2010, rising by 41 percentage points.
    The expected amount of debt in issue guaranteed by the Government would
    total $641 billion (€495bn), amounting to 2,700 per cent of the average
    debt issued by the State between 2003 and 2007, it said.
  • Ireland is currently running an estimated
    1.135 billion Euro government deficit

Spain: Subscribers can download a tear sheet on all
Spanish banks
investigated here: Spanish Banking Macro Discussion Note Spanish
Banking Macro Discussion Note 2010-02-09 02:48:06 519.40 Kb

Embedded structural rigidities will prolong the
downturn causing the oft sought after "V shaped recovery" to become an
unlikely occurrence. The very high private sector debt levels most
likely exacerbated the effects of global downturn. A round of
consolidation and restructuring seems inevitable as both the NPAs in its
banks are increasing on a fundamental basis and the banks are forced to
come clean with the true losses on their commercial and residential
real estate in the form of increasing NPAs (see The
Spanish Inquisition is About to
) as well as the share of NPLs which are also increasing.
PWC expected the bad loans ratio to increase to 8% by the end of 2009.
It is apparent that the sector will need refinancing. however, Spain's
loan-to-deposit ratio of 130% is higher than the Eurozone average of
115%, which shows Spain's high reliance of wholesale funding and
securitization channels, both of which have dried up.

Last modified on Tuesday, 09 February 2010 18:00