Monday, 13 June 2011

European issues and the Greek jinx - Macro update, a focus on Iceland and more.

New week, new records on the CDS front, new downgrades...

As I am typing this evening, Greece got whacked to CCC by S&P.
with negative outlook...

Greece 5 year CDS now standing above 1600 bps, at 1612 bps according to Markit, up from 1510 bps from my last post from the 9th. New day, new record.
Spain 5 year Sovereign CDS at 283 bps.
Italy 5 year Sovereign CDS at 178 bps.
Portugal 5 year Sovereign CDS at 763 bps, wider now than Ireland at 736 bps.
SovX western Europe 5 year index at 215 bps, top level was 222 bps on the 10th of January (as I posted previously, Greece's weight in the index is 1/15th of the whole index).

Iceland is now trading tighter than Spain, Ireland, Portugal and Greece at 266 bps as of the 10th of June, cumulated probability of default for Iceland amounts to 21.82% according to CMA. Iceland decided not to bailout its banks and went for massive short term pain. Iceland went back to fishing:
Iceland GDP Growth Rate
"The Gross Domestic Product (GDP) in Iceland contracted 1.5 percent in the fourth quarter of 2010 over the previous quarter. From 1997 until 2010, Iceland's average quarterly GDP Growth was 0.71 percent reaching an historical high of 8.41 percent in March of 2004 and a record low of -5.07 percent in December of 2007."
Source Trading Economics

Deep pain for Iceland but a tamed inflation:

With lower interest rates than before the crisis:

But unemployment rate is still stubbornly high:

Iceland's stock market has been obliterated...
"Iceland's main stock market index, the ICEXI, declined 59 points or 10.53 percent during the last 12 months. From 1992 until 2011 the ICEXI market value averaged 2001.82 points reaching an historical high of 8174.28 points in July of 2007 and a record low of 314.93 points in May of 1993. This page includes: Iceland Stock Market Index chart, historical data and news."
Source Trading Economics

Obliterated back to 1996 levels...

And in the process its currency divided by two versus the USD:

Any similarities with what's happening with Greece's stock market?
"Greece's main stock market index, the ASE, declined 232 points or 15.62 percent during the last 12 months. From 1987 until 2011 the ASE market value averaged 2019.58 points reaching an historical high of 6355.04 points in September of 1999 and a record low of 97.36 points in January of 1987."
Source Trading Economics.

20 Stocks in the ASE Greek index, guess how many banks?
Alpha Bank
ATE Bank
Bank of Cyprus Group
National Bank of Greece (exposure to Greek Government bonds = 218% of equity)
EFG Eurobank Ergasias SA
Marfin Laiki Banks (exposure to Greek Government bonds = 72% of equity)
Marfin Investment Group
Piraeus Bank

As I stated before, banks are like second derivatives of an economy, if Greece gets downgraded, so will its banks, pushing them even more into difficulties.
You can draw from the above list where the ASE Greek index is heading...

For more on the subject on Greek Banks:
Banks Are Greece's Achilles' Heel - WSJ

And by the way Allied Irish Bank just defaulted. I was expecting it for a long time "Bye Bye Irish Bank Debt".
Junior bond holders are getting a 90% haircut on their holdings. CDS Sub to be triggered. As reminder, last year, sellers of CDS for Anglo Irish Bank paid out around 82%. That was 8% more than for Allied Irish Bank.
Roman Abramovich's family office Millhouse just took a big hit following a stupid gamble. I commented on this very subject last year - "Ireland in the need of a lucky Shamrock..."
This is what I wrote at the time:
"Subordinated bonds pay higher yields than senior debt to reflect the fact that they are more likely to take losses if the issuer gets into difficulties."

There are some greedy people, they are some stupid people, and they are also some stupid greedy people.
There is no free-lunch when you buy risky sub debt...If his team had done a proper risk assesment of their investment (which they are supposedly paid for...), they would have seen that the government guarantee's expiry was running out on the Thursday 30th of September.

There should not be bailout for stupid investors....

In addition to my previous posts where I indicated why I strongly feel it is not time to be buying bank common stocks, you can read some additional very valid points from the excellent David Goldman here - One More Time: Why You’re STILL Not Supposed to Buy Bank Common Stocks.

Or you can disregard my comments and agree with Otto Waser, chief investment officer at R&A Research & Asset Management AG, who made recommendations to buy Wells Fargo and JP Morgan stocks on the 8th of June as reported by Bloomberg.

But Otto, you might want to look at this bloomberg article:

Maiden Lane Sales Trigger Stampede to Dump Risk: Credit Markets

"Default swaps on the six largest U.S. banks have gained an average of 19.4 basis points to 137.2 basis points since May 31, according to data provider CMA".

It is still "Risk-Off"...

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