"The Raft of the Medusa (French: Le Radeau de la Méduse) is an oil painting of 1818–1819 by the French Romantic painter and lithographer Théodore Géricault (1791–1824). Completed when the artist was 27, the work has become an icon of French Romanticism. It is an over-life-size painting that depicts a moment from the aftermath of the wreck of the French naval frigate "Méduse", which ran aground off the coast of today's Mauritania on July 5, 1816. At least 147 people were set adrift on a hurriedly constructed raft; all but 15 died in the 13 days before their rescue, and those who survived endured starvation, dehydration, cannibalism and madness. The event became an international scandal, in part because its cause was widely attributed to the incompetence of the French captain perceived to be acting under the authority of the recently restored French monarchy." - source Wikipedia
Following up on the theme of navigation and sailing dear to our heart, given "The Tempest" raging and the unraveling of the "Mutiny on the Euro Bounty" courtesy of the high stakes poker game being played by Greek politicians and their European creditors (reminiscent of "Schedule Chicken" once more...), we have decided to use yet another sailing analogy but this time referring to Géricault's painting masterpiece "The Raft of the Medusa".
So in our long credit conversation, we will of course look at the recent price actions, but we will focus on Greece and the recent comparisons made with Argentina being the comparison "du jour" (of the day), rebuking in the process some "urban legends" and economic myths.
But first our credit overview!
The Credit Indices Itraxx overview - Source Bloomberg:
The relationship between the Eurostoxx volatility and the Itraxx Crossover 5 year index (European High Yield gauge):
At the same time we are seeing Financial risk reconnecting fast with Sovereign risk, as indicated by the convergence of Itraxx Financial Senior Spread 5 year CDS and SOVx Western Europe 5 year CDS - source Bloomberg:
SOVx Western Europe - And Then There Were 14...").
The current European bond picture with Spain experiencing a serious bout of volatility in conjunction with Italy- source Bloomberg
Spanish 10 year government yield intraday movements on the 16th of May - source Bloomberg:
As indicated by Bloomberg, Spain spread over bund at 450 bps, has been previously a key level for previous European bail-outs - source Bloomberg:
The slump in Spanish bonds risks LCH margin increases which is concerning. This margin increase on the LCH exchange could happen given in the past the 450 bps difference with German Bund has been the threshold as indicated by Bloomberg:
The 10 year German Bund and the Eurostoxx seem to reconnect at least from a directional point of view with volatility rising as indicated in the bottom part of the graph - source Bloomberg:
Some change in the "Flight to quality" picture, with wider Germany 5 year CDS closing towards 100 bps and 10 Government bond well below 1.60% yield level - Source Bloomberg:
Banco Espirito Santo stock price evolution - source Bloomberg:
Banco Comercial Português (BCP) stock price evolution - source Bloomberg:
15 underwriters or undertakers, one as to ask oneself, given as indicated by Bloomberg:
Back in November we gave a clear warning:
"First bond tenders, then we will probably see debt to equity swaps for weaker peripheral banks with no access to term funding, leading to significant losses for subordinate bondholders as well as dilution for shareholders in the process." - Macronomics - 20th of November 2011.
Like experienced shipwreckers we did shudder during the calm sea ("Plain sailing until a White Squall?").
Moving on to the subject of Greece being compared to Argentina by many pundits, we would like to make the following points:
Most Greek Banks are most likely bust. Greek Banks 5 year CDS on the 16th of May - source CMA:
We already touched on the value of Greek financial shares in our conversation "Equities, there's life (and value) after default! - Russia, Argentina, Iceland, examples for Greece":
At the time of our conversation the ASE index was at 741...Now below 555.
Financial weights as of the 16th of May 2012 in the ASE index, Banks =15.44% - source Bloomberg:
Greek Banks May Face Same Dilemma as Argentine Banks in 2001-02 according to Bloomberg:
Argentine Banking Asset Loss a Stark Warning to Greek Banks - source Bloomberg:
In relation to Greece, its neighbor Bulgaria (475 kms of frontier with Greece) enjoy a 10% corporate tax rate and a 20 tax rate on individuals. A record rise has been registered in the number of people crossing the Bulgarian-Greek border at Easter:
We have long been enthusiast readers of Dr Felsenheimer from Asset Management Assénagon monthly credit letter. In his latest letter Dr Felsenheimer clearly indicates Dr Krugman lack of understanding of the banking system, core to the current European crisis:
Dr Felsenheimer's clearly indicates why Dr Krugman's assessment is incorrect, given Dr Krugman seems to ignore the interdependence of banks and governments:
A bank is a leverage play on the economy. It is the second derivative of a sovereign.
This is exactly the solution Sweden implemented during its 1990s crisis.
In addition to Dr Krugman's unwillingness of understanding interdependence, the idea that Germany's economic prosperity has been built on "vendor financing" to peripherals countries is a myth. In a recent paper published by François Chauchat from Gavekal we learned that: "exports to Southern Europe have contributed to only 13% of the increase in German exports since 2000 and never amounted to more than 5% of German GDP. In comparison, exports to non-EMU countries rose to 25% of GDP recently, from 15% in 2000. So even though Germany lent a lot to southern Europe - making its financial sector very vulnerable - this financing was used more to buy Chinese products, oil and commodities than German goods."
Eastern promises for Germany according to Moscow-based economist Liam Halligan:
"Russo-German trade Europe's 'biggest untold story' says top economist" - Chris Sloley - Citywire:
"Russia’s biggest trading partner is now Germany and Germany’s biggest trading partner is now Russia, having overtaken France,’ he said.
‘It is the biggest untold story but western papers don’t want to talk about it. It is part of a trend of Germany looking increasingly east and you feel it much more strongly if you are working in the east and how this has changed on the ground.’"
Finally the Argentina crisis should be a warning on Spanish Banks' Sovereign Holdings (we already know what happened to Greek banks bond holdings...):
“Panics do not destroy capital – they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works” - John Mills, “Credit Cycles and the Origins of Commercial Panics”, 1867