PIGS

European Banks Fail Stress Test

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Eight banks out of 90 failed the European Stress Tests, five in Spain, two in Greece and one in Austria. Sixteen banks are close to failing, defined as below the 5% capital ratios for the next two years. Another German bank would have failed, but they refused to disclose their data.

Banks were allowed to cheat and raise capital months before the actual test:

For the 2011 exercise, the EBA allowed specific capital increases in the first four months of 2011 to be considered in the results. Banks were therefore incentivised to strengthen their capital positions ahead of the stress test.

In spite of raising €50 billion in 2011 before the tests, 8 banks failed anyway with 16 being damn close to failing. Without the raising of additional capital cheat, 20 banks would have failed. The test involved a lowering by 4% of GDP, but no exposure to sovereign default. From the EBA press release:

Guess What Portugal, You're Junk

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Portugal was just downgraded by Moody's to junk status:

Moody’s cut its rating on Portugal’s long-term government bonds to a non-investment-grade rating of Ba2 from Baa1 and said the outlook was negative, suggesting more downgrades lie in store.

The ratings agency cited the risk that Portugal will need a second bailout before it can tap the bond markets again, and that private sector lenders will have to share the pain.

It also warned that Portugal might fall short of the financial targets it worked out with the European Union and the International Monetary Fund under the terms of its bailout because of the “formidable challenges the country is facing in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.”

Greece was told by S&P that their new bail out plan, simply because they are rolling over debt to a longer term repayment schedule, is a sovereign default de facto.

Even the United States has been scolded and threatened by credit rating agencies.

One of the big fears is the European crisis spreads and creates contagion. Seems the credit ratings agencies are determined to make that happen.

Greece Downgraded Again, Credit Default Swaps Soar

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Greece has been downgraded to CCC, a drop of three credit rating grades, by the almighty S&P credit ratings agency.

Greece had its credit rating cut three levels by Standard & Poor’s, which branded the nation with the world’s lowest debt grade and said a restructuring looks “increasingly likely.”

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement today. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

The problem now is soaring credit default swaps:

Credit-default swaps on Greece, Ireland and Portugal surged to records on concern European governments’ struggles to resolve the deficit crisis will threaten their ability to pay their debts.

Swaps on Greece jumped 47 basis points to an all-time high of 1,610 as of 5:30 p.m. in London after Standard & Poor’s downgraded the nation, according to CMA. Contracts on Ireland soared 27 basis points to 740, Portugal climbed 22 to 764 and the Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 7 basis points to 218, approaching the record 221.75 set Jan. 10.

Remember those from the financial crisis? Credit default swaps are insurance policies, anyone can buy, which pay out when a nation defaults.

Greece loses, they win. The problem is those who issue CDSes will have to pay out. Remember AIG?

Dear Portugal, You Get a Bail Out and a Recession

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Portugal is getting an IMF, EU, ECB crafted bail out of €78 billion where the austerity terms will throw them into recession.

Portugal's main opposition party met European and IMF officials on Wednesday and said they would consider whether to back a 78-billion-euro bailout after a source said the terms would propel the economy into two years of recession.

Why would the opposing party say that? The IMF is requiring Portugal to enact draconian cuts to the deficit, 9.1% to 5.9% of GDP in 2011 and less than a 3% GDP to debt ratio by 2013. The Guardian:

Health and education spending will be cut by €745m, civil service pay and pensions will be frozen, and people on state pensions above €1,500 a month will have them reduced.

Civil service staffing is to be squeezed by 1% a year in central government, while regional administrations and town halls will be told to shed 2% of their employees annually.

Banks will get €12 billion of the bail out. Earlier Banco Português de Negócios was nationalized, so the bail out requires Portugal to sell it at a greatly reduced price. In fact there is no minimum price specified.

Portugal is expected to reduce public spending by 3.4% of its GDP this year and raise an extra 1.7% of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes.

Thar Blows Portugal Straight into the IMF Austerity Plan

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Portugal is asking for a bail out.

Portugal's prime minister said Wednesday his country has asked for financing assistance from the European Union due to its high debts and difficulty raising money on international markets.

The amount is €80 billion, with the Wall Street Journal reporting €90 billion.

Germany is already backing the bail out.

Of course the help will have a catch, that infamous, vague term, austerity. So far this has been an attack on workers, wages and social safety nets.

The U.K., which has cuts social safety nets, workers will contribute £4bn to the Portugal bail out....in order to cut social safety nets, workers and wages.

The Treasury said the UK was not planning to offer bilateral assistance to Portugal in the way that it did to Ireland.

But it confirmed that Britain could be required to provide a loan of up to about £4.4bn – 13.6% of the €37.5bn remaining in the EU "disasters fund" after it was drawn upon by Ireland – as well as 4.5% of any IMF loan.

Earlier in March, Portugal voted against austerity measures and the Portugal prime minister resigned.

Seems the ECB, EU and the infamous IMF are putting together an austerity plan for Portugal which will take 2 to 3 weeks.

Portugal Votes Against "Austerity"

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Anyone notice a pattern? The banks bring about economic armageddon. Governments bail out the banks Carte blanche and then insist on screwing workers everywhere, from pensions to retirement to wages. The new crisis is under the guise that nation must now get out of debt.

What's wrong with this picture? Quite a bit according to Portugal's Parliament:

Opposition parties said the budget - the fourth package of austerity measures in a year - went too far.

"Today, every opposition party rejected the measures proposed by the government to prevent that Portugal resort to external aid," Mr Socrates said in a televised address.

"The opposition removed from the government the conditions to govern."

The vote late on Wednesday came on the eve of a European Union summit to finalise a eurozone debt crisis plan.

On Thursday, Eurozone leaders begin a two-day summit during which they hope to finalise details of a "grand bargain" to deal with the 17-nation group's debt burden.

The country's borrowing costs have surged as investors worried over its financial health.

Lisbon has argued its situation is different from Greece and the Irish Republic - both of which have agreed to bail-outs from the European Union and International Monetary Fund.

It says that its deficit and debt are lower than those nations, that it has not suffered a bubble in property prices and that its banks are sound.

Jose Socrates, Portugal's prime minister, resigned in protest that his plan was rejected. While Parliament won this round, when the EU and IMF come knocking, odds on Portugal's workers are going to lose.

Greece Downgraded. EU Looks to Ban Sovereign Credit Default Swap Speculation

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Greece has been downgraded by Moody's:

Moody's slashed Greece's credit rating by three notches on Monday due to an increased default risk, raising the specter that the distressed euro zone sovereign may have to restructure its debt, perhaps before 2013.

The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs.

Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry.

This downgrade caused Greece's Credit Default Swaps to hit a record high:

  • Five-Year CDS On Greece Hit 1035BPs Intraday, Above Record Close of 1032BPs
  • Cost Of One-Year CDS On Greece Rises 6.1% - Markit
  • $476 Mln New CDS Traded On Greece In Week Ended Feb. 25 - DTCC

The cost to insure EUR10 million of Greek bonds for five years spiked 5.3%, or $52,000 a year,

Meanwhile the EU just did something completely practical, they just voted to ban CDS speculation:

The European Parliament voted Monday to stop investors from buying insurance for government debt if they don't own the underlying bond, as it seeks to fight financial speculation.

European Bail Out Brew Bubbles Over Again

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Europe's never ending sovereign debt and default problems are rearing their ugly head once again. Just a rumor hitting the rounds that Portugal is being pressed to take a bail out, even when those rumors are denied was enough to send their bonds reeling. As it was the European Central Bank has to buy Portugal's bonds.

The ECB intervened to buy government bonds on the secondary market.

"They're buying five-years and 10-years in Portugal, whatever people are offering really," one trader said.

Another trader said the ECB appeared to be buying Greek and Irish bonds too. EU sources say the central bank has not yet bought Spanish government debt.

Credit default swaps for sovereign debt jumped 11 basis points on Portugal and 26.5 basis points for Ireland.

There is a domino theory that if Portugal is the next nation to be bailed out and saved from sovereign debt, Spain will assuredly also go south. Spain is a much larger economy. Ireland & Greece have already taken bail outs. It is assumed Portugal is next in the domino falling list. Contagion is also assumed when it gets to Spain. Contagion means the PIGS sovereign debt crisis will affect the United States and other nations outside of Europe.

Analyst predicts break up of the Euro Zone

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Talk about doomsday analysis, this has to be it. An analyst from Société Générale (French Bank) is concluding the Euro area is headed for a break-up:

Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc, according to Societe Generale SA’s top-ranked strategist Albert Edwards.