By Reggie Middleton
There has been a lot of noise in both the alternative and the mainstream financial press regarding potential risk to the ECB regarding its exposure at roughly 48 to 72 cents on the dollar to sovereign debt purchases through leverage, and at par at that. This concern is quite well founded, if not just over a year or so too late. In January, I penned The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults. The title is self explanatory, but expound I shall. Before we get to the big boy media’s “year too late” take, let’s do a deep dive into how thoroughly we at BoomBustBlog foretold and warned of the insolvency of both European private banks and central banks, including the big Kahuna itself, the ECB! The kicker is that this risk was quite apparent well over a year ago. On April 27th, 2010 I penned the piece “How Greece Killed Its Own Banks!“. It went a little something like this:
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.
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)…
The same hypothetical leveraged positions expressed as a percentage gain or loss…
Relevant subscription material for BoomBustBlog paying members:
- Greece Public Finances Projections
- Banks exposed to Central and Eastern Europe
- Greek Banking Fundamental Tear Sheet
Online Spreadsheets (professional and institutional subscribers only)
Greek Default Restructuring Scenario Analysis
Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
Several months later I posted several follow-up pieces along the same vein:
To Cut or Not to Cut, The Irish Threaten To Play Rough With Those Clippers: Threats of Haircuts Rattle the ECB! Thursday, March 31st, 2011
A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Wednesday, May 26th, 2010
For our professional and institutional subscribers, the Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts are available online. All subscribers have access to the Irish Bank Strategy Note which adequately warned before Irish banks dropped 85% in value. The Ireland public finances projectionsis also available to all paying members.
To continue reading the full article and much more please follow link to source:
The Irish government spends millions every year on financial advisers I suggest they instead pay Reggie to advise then better still Reggie should be Finance Minster. I have been following his observations and conclusions for three years now and I only wish I had heard of him earlier. There is no substitute for the real facts and the truth!
Thank God there are people like this man around; otherwise the small investors would be history. Great article Reggie and Thank you .