-Italy's shrinking budget deficit to -3.9% in 2011 from -4.6% in 2010,
-Spanish unemployment level expected to reach 24.3% in 2012,
-Spanish Prime Minister Mariano Rajoy has decided to side step the 4.4% deficit target for 2012, for 5.8%."
As our good credit friend discussed on Friday, in terms of the news flow, nothing has materially changed:
In relation to point number 3 above, EU Banks Greek Sovereign Exposure is down by 15.5 billion USD:
We do agree with the following quote from James Hertling Bloomberg article - European Bailout Bid Gets Vote of No-Confidence as Markets Drop from the 20th of July:
On the 18th of July, Deutsche Bank published in their Bank Research one slide resuming the political stalemate, the opposing positions between stakeholders suggesting the crisis will be a long drawn out affair:
The options market is validating our views as far as game theory is concerned as reported by Bloomberg. "Game-theory analysis shows the options market is underestimating the risk the euro will slide as European policy makers fail to take actions necessary to end their financial crisis, according to Bank of America Corp. “The options market is underpricing the risk of the voluntary exit of one or more countries and a weaker euro,” David Woo, head of global rates and currencies research at Bank of America Merrill Lynch in New York, said in a telephone interview. “Investors are holding out hope, and are complacent in believing, that policy makers will come in and save the day. That is simply wrong because what is good politics in Europe may not be good policies.”
In our conversation "The European crisis: The Greatest Show on Earth", we indicated:
One particular important indicator we follow is the rise in Terms of Payment as reported by French corporate treasurers. The latest report is sending us again a clear warning signal indicative of a growing deterioration:
Do the delays in receiving payments from your clients tend to fall, remain stable or rise?
Delays in Terms of Payment as indicated in their May survey published in June have been reported rising by corporate treasurers. Overall +36% of corporate treasurers reported an increase compared to June (+27.8). The record in 2008 was 40%...
According to their latest survey realised early July 2012, the opinion of French treasurers for large corporates cratered in the last two months from -0.7% in May to -19% in July, the most significant drop in two months since this survey exist (first one was December 2005).
According to an article from John Glover from Bloomberg from the 20th of July - Europe’s $180 Billion of Maturities Lifts Swaps: Credit Markets:
operator Atlantia SpA, whose swaps climbed 72 percent.
Borrowers in Europe, the Middle East and Africa face $84 billion of junk-rated debt maturing next year and $96 billion in 2014, compared with 2011’s record bond sales of $70 billion, Moody’s Investors Service said. Their ability to service debt is being hurt by the worsening economic outlook, with the International Monetary Fund forecasting July 16 that output will shrink 0.3 percent in the euro area this year."
The deterioration in speculative-grade European company credit is being worsened by the outlook for economic growth, hence the risk of seeing a spike of defaults, in this low yield, deflationary environment. Lack of growth means lack of unemployment prospects and reduced tax revenues with increasing pressure in cash flows as indicated by the pressure in the terms of payments from the AFTE monthly survey. It is still a game of survival of the fittest. It’s also causing some companies to pay more to raise money or to be taken over when they cannot pay their debt as indicated in the Bloomberg article quoted above:
"Findus Group Ltd., the frozen-food company owned by private-equity firm Lion Capital LLP, will be taken over by its junior lenders in a debt restructuring after it breached debt covenants that creditors had waived in March, four people with knowledge of the situation said July 7. Under the plan led by Lion Capital, Highbridge Capital Management LLC and JPMorgan, junior creditors will write off more than 200 million pounds ($310 million) of mezzanine loans in return for ownership and provide 70 million pounds in a short-term credit facility, said the people, who declined to be identified because the discussions are private. They will inject 220 million pounds into the company, including 125 million pounds to reduce senior debt, the people said." - source Bloomberg.
Consolidation, defaults and restructuring are going to happen no matter what, for struggling corporates, struggling Spanish regions and provinces, as well as struggling countries. We touched on the subject for the European car industry with Peugeot in our last conversation. In similar fashion to our conversations involving shipping (Shipping is a leading deflationary indicator) and air traffic (Air Traffic is a leading deflationary indicator), the auto industry is as well facing a game of survival of the fittest in this current deflationary environment we argued.
The Bloomberg article concluded with the following quote from Andrew Sheet, European Credit Strategist at Morgan Stanley in London:
"If companies “don’t have cash on the balance sheet” they’re "not in a good place". If a company
generates free cash then it’s in control of its own future."
So, in relation to our title, in true Hooke's law fashion, given the "Yield Famine" we are witnessing, we believe our credit "spring-loaded bar mousetrap" has indeed been set and defaults will spike at some point, courtesy of zero interest rates. (The first spring-loaded mouse trap was invented by William C. Hooker of Abingdon Illinois, who received US patent 528671 for his design in 1894).
"If you build a better mousetrap, you will catch better mice."
George Gobel - American comedian.