How long can it be before Emerging Markets turmoil , Japan market turmoil - finds its way to the PIIGS of Europe ? Keep an eye on Portugal , Spain and Italy !

Monday, February 03, 2014 9:22 PM

Portuguese Debt About to Implode? What About Spain?

Is Portugal about ready to implode?

That's what one hedge fund manager believes. For now, interest rate action suggests otherwise.

We will explore the case for implosion but first consider this chart of 10-year sovereign bonds.

Portugal 10-Year Sovereign Debt Yield




One certainly could have made a fortune plowing into 10-year Portuguese bonds. Does that mean Portugal is out of the woods?

I don't think so, and neither does Tortus Capital hedge fund manager David Salanic.

The New York times describes the setup in A Lonely Bet Against Portugal’s Debt, but I am more interested in Tortus Capital's thesis.

Salanic maintains the status quo is not sustainable. Here is his overall thesis.

Portugal Debt Implosion Thesis

• The Troika Program is off track. Portuguese bondholders are at the mercy of that market.
• Portugal has excessive public and private debt financed from abroad. Portugal can neither grow nor devalue that debt.
• Austerity fatigue has set in as the people carry the full burden of the adjustment.
• Corporates are defaulting en masse and cannot sustain their debt burdens, leading to a vicious cycle of deleveraging.
• The long-term outlook is bleak.
• Debt-to-GDP is very high and growing one percent per month. Portugal is the third most leveraged country in the Eurozone.
• Accounting for growth and interest expense, Portugal's debt is the highest in the Eurozone and is not sustainable.
• Portugal can neither raise taxes nor cut expenditures, leaving little room to improve debt-servicing capacity.
• 40 consecutive years of deficit and 18 years without a primary surplus confirm that Portugal cannot sustain so much debt.
• In the most optimistic case, the Portuguese sovereign has at least 30% too much debt.

Salanic does a fantastic job presenting his case in a 62 page document, Rehabilitating Portugal.

I recommend reading the presentation in entirety, but here are a few charts.

click on any chart for a sharper image 

Solidarity



Missed Deficit Targets



Missed GDP Targets



Wishful Thinking



Subordination



Debt Financing



Credit Ratings



Inability to Outgrow or Devalue Debt



Corporate Debt Levels



Debt to GDP



Debt to Revenue



Interest Expense vs. Revenue



Target 2 Liabilities 



ECB Liabilities



Mish Comments

That was a lot of charts, but there are another 40 or more in the article. I didn't count.

Other than target 2 imbalances (debt owed to other countries), Spain appeared at least as bad in most of the comparison charts.

Portugal alone is enough to sink the Eurozone given ECB leverage.

I have said repeatedly there is absolutely no way the Eurozone can stay intact and the above analysis strongly supports my claim.

That bond yields are so low in spite of the fundamentals is not an indication things are getting better. Rather, it is a strong sign of a bubble-supportive speculative mentality that central banks have fostered.

I do not know what the catalyst for a breakup will be, or when it happens, but Portugal is clearly back on my radar of things to watch.

Sincere thanks to Tortus Capital fund manager David Salanic for an outstanding report.

Mike "Mish" Shedlock

Spanish Suicides Rise To Eight-Year High

Submitted by Tyler Durden on 02/03/2014 21:43 -0500

• Global Economy
 
• Greece
 
• Gross Domestic Product
• recovery
 
• Unemployment

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Europe has an odd definition of recovery: we already knew that in Greece "recovery" means record high unemployment, an entire generation unable to find work, the return of neo-nazism, no ink with which to print tax forms, and even instances where people infect themselves with HIV to get medical benefits. That, and of course, soaring suicides. Now it is Spain's turn.

While the Iberian nation is furiously scrambling to catch up to Greece in terms of sheer economic collapse, even if the government has changed the definition of GDP so many times, somehow Spain dares to look people in the eye and claim its GDP is growing with 26% total, and 54% youth unemployment, one statistic Spain can't change is that the suicide rate has soared and is now the highest in eight years.

The Local reports, using figures from Spain's National Institute of Statistics that in the most recent data from 2012, released on Friday, 402,950 people died in Spain, some 15,039 (3.9 percent) more than in 2011. Of these deaths, there were 3539 suicides (2,724 men and 815 women), up 11.3 percent from the year before, a rate of 7.6  per 100,000 inhabitants. The figures were the highest since 2005.

According to official broadcaster RTVE, suicide was second only to cancer (15 percent of deaths) in the overall 25-34 age group, but the leading cause of death in young men (17.8 percent). Fatalities as a result of traffic accidents fell by 9.5 percent, to 1,915 - that's probably because so few young men and women can afford to buy a car. Or gas. Or both.

Finally in tangential news, a 21 percent spike in the death rate in February and March compared with the previous year was attributed to a late-breaking flu epidemic. The same period saw deaths as a result of respiratory failure rise 53.6 percent year-on-year.

So the next time you hear about the PIIGS much trumpeted "recovery" (which now is finished even before it started courtesy of the sharp relapse of the global economy courtesy of EMs, and in the case of Greece, quite literally based on the latest growth forecasts), think:

Spanish Soccer Players Refuse To Play Ball After Going Unpaid For Months

Submitted by Tyler Durden on 01/31/2014 14:52 -0500

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The players of Spain's Racing Santander soccer club have not been paid for several months. While recent 'plans' for Europe's youth unemployed being placed into 'slavery' may be popular among the European politicians, it seems the Spanish soccer players have drawn the line. As Euronews reports, In an incredible show of dissatisfaction at management - which fans call "cheats" - the entire team and coaching staff refused to play ball - standing stoically in the middle of the field as their King's Cup game began against big rival Real Sociedad...

Incredible...

Via Euronews,

Football players of Spanish club Racing Santander declined to compete against Real Sociedad in the second leg of the quarter-final of the Copa Del Rey (King’s Cup) in protest at not having being paid for several months.

Racing’s manager as well as all members of the technical staff have also received no money from the club in that time.

Santander showed up for the game at its home ground, El Sardinero and the players warmed up as usual. Then, as soon as the referee had blown his whistle for kick-off, the Santander players gathered in the centre of the pitch and refused to participate in the match.

Sociedad’s players passed the ball around in their own half for a short while before one kicked the ball into touch. At that point the referee abandoned the game.

Racing’s fans were warned in advance about the players’ decision but many braved heavy rain and low temperatures; around 7,000 of them showed up in El Sardinero to stand by the players, applauding as the protest began.

Some had prepared large anti-management banners and had worked on a chant directed at the club’s management: “Go away cheats”.

Club chairman Angel Lavin did not show up at the match. Directors Leticia Vila, Jorge Madrazo and Lavin’s nephew, Jairo Lavin, were jeered as they entered the ground but failed to appear in the directors’ box.

On the bright side - at least if and when they get paid they won't have to pay 75% of it to the government like French soccer players...

Italy Unveils Most Bizarre Bank Bailout Yet

Submitted by Tyler Durden on 02/01/2014 11:18 -0500

• Bond
 
• European Central Bank
 
• Italy
 
• Monte Paschi
 
• non-performing loans
 
• Reuters
 
• Silvio Berlusconi
 
• Stress Test

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The biggest problem facing European banks - one we highlighted most recently yesterday when we showed the latest 20% surge in Spanish Banco Popular Non-Performing Loans to a fresh record - and one we have been covering since 2010, which as of 2012 amounted to some $4.5 trillion that needs to be "remedied" - is the staggering amount of bad debt on the books of Europe's numerous banks, the bulk of which especially in the periphery are cojoined with their sovereign host in an unbreakable bond which despite Europe's theatrical attempts to sever, only keeps getting stronger.

But while, so far at least, the conventional "under the table" can-kicking European bailout mechanism involved a process whereby banks would issue bonds with a sovereign "guarantee", then promptly repo them to the ECB at virtually no haircut as the Goldman alum-led central bank did everything in its power to keep injecting liquidity in an insolvent continental banking system (while everyone pretended to not realize what was going on as the "A-ha" moment of public epiphany would mean the emperor would suddenly have no clothes and the jig was up), this week things changed.

On Wednesday, Italy's government voted final approval to a decree hiking the value of Bank of Italy's share capital from €156K to €7.5 billion - something that had not been done since the 1930s. Of course, politicians determining the fictitious value of a central bank is one thing, as idiotic as it may be. However, what is truly preposterous is the covert bailout that accompanies the decree: a key part of the decision was setting a 3% ceiling on the stake that the bank's shareholders can own in the central bank. This means, as Reuters reports, that Intessa and UniCredit, currently the central bank's largest shareholders with stakes of 42 percent and 22 percent respectively - not to mention two of Italy's most NPL-heavy banks - will have to sell the bulk of their central bank "equity" stakes. And who will they sell them to?Why the central bank itself, and in return they will pocket up to €3.5 billion ($4.7 billion) from the sale of their central bank holdings. Said otherwise, Italy took not only bizarro accounting, but also monetary financing of insolvent banks by the monetary authority, and thus Italy's taxpayers, to the truly next level.

Some more details on this supremely grotesque, and certainly not last, bailout from Reuters:

The decree says the banks have three years to comply with the new rules.

Should Intesa Sanpaolo sell a 39 percent stake, it could cash in up to 2.3 billion euros before tax according to analysts' calculations based on the new share capital of the Bank of Italy.

UniCredit could pocket a gross capital gain of around 1.15 billion euros from the disposal of its 19 percent stake in the central bank.

The only other lender with a stake in the central bank exceeding 3 percent is Carige which stands to reap a capital gain of 73 million euros if it sold part of its holding to comply with the decree.

And the cherry on top, confirming that Basel III is the biggest regulatory supervision joke conceived in Basel whose only purpose is to perpetuate a system of insolvent banks no matter the taxpayer cost, is that the capital gains from the sale would be used to boost the banks' core capital.

For those asking - yes: Italy's central bank just made sure Intessa and UniCredit pass Europe's stress test with flying color courtesy of a direct $4.7 billion deposit.

Sadly, this most brazen bailout will only benefit the abovementioned two banks:  "The ownership limit will benefit only Intesa Sanpaolo and UniCredit," said Fabrizio Bernardi, analyst at Fidentiis Equities. "It will not help, however, Monte dei Paschi di Siena and Banca Carige, which are desperate for capital," he added. Monte dei Paschi has to raise 3 billion euros later this year to pay back state aid, while Carige needs to boost its capital by 800 million euros.

That's ok, we are sure the MIT diaspora of brilliant bankers who rule the world (literally) will come up with some another ingenious plan to mask the epic insolvency of Monte Paschi in the 11th hour, kicking the can for another several months, until the next leg lower in the European depression forces Europe's banks to get yet another bailout, and so on, until one day there are no more people left to fool.

Perhaps the piece de resistance is that not only is the central bank bailing out insolvent banks, but it is indirectly also funding the sovereign: the new law will also help public finances thanks to the taxation of the capital gain the banks will register.

Simply remarkable.

And it would have been even more unbelievable had nobody in Italy's parliament figured out this was simply yet another taxpayer funded gift to Italy's banks. Somebody, however, did. Guardian reports that late on Wednesday, MPs of Beppe Grillo's M5S "stormed the government benches, put on symbolic gags and kept up a barrage of whistling after the speaker, Laura Boldrini, cut short the debate and ordered a vote on a complicated and intensely controversial measure to square Italy's public accounts. One of Grillo's followers said an MP from the governing majority had slapped her during the disorder. Opposition MPs claim that the measure would hand more than €7bn (£5.8bn) of taxpayers' money to the banks." Of course, what better way to fast-track yet another taxpayer bailout than to cut any debate short.

And this being Italy, where the phrase "political circus" is redundant, things just went uphill from here:

Members of the far-right opposition Brothers of Italy party showered chocolate coins on the government's representatives in the chamber and unfurled an Italian flag. After the vote was taken, Boldrini's party colleagues in the radical Left Ecology and Freedom (SEL) party broke into a chorus of the old partisan song Bella Ciao, prompting the M5S to respond with a rendition of the national anthem.

It is the first time since the foundation of the Italian republic after the second world war that a speaker has used the power to cut short a debate in this way. If she had not intervened, the decree at the centre of the dispute would have lapsed at midnight and Italian homeowners would have been landed with a bill for €2.2bn.

Enrico Letta's left-right coalition government won the vote by 236 to 209.

The decree was the latest stage in the government's tortuous efforts to fulfill an election pledge by Silvio Berlusconi to scrap an unpopular tax on first homes – and to do so without increasing Italy's already vast, €2tn public debt. Part of the cost is being passed to banks. 

But the decree included provisions for an increase in the capital of Italy's central bank – a move that will swell the balance sheets of the commercial banks that are shareholders in the Bank of Italy.

Since the central bank is to use its statutory reserves for the increase, the M5S argued that it amounted to a gift of more than €7bn to the banks.

And they were right. But that's ok - at least everyone get's to pretend for a few months longer that the system, which now needs ever more creative bailouts, is solvent.