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The European Sovereign debt crisis – A refresh edition

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The European Sovereign debt crisis basics in September

The Grecian Economy manage a 8% contraction in Q1 and another 7.3% in Q2 over 2010 and that debt is already trading at a 90% probability of default. However with 60-70% private investors ready to roll over the new debt as suggested by Joseph Ackerman. Even with Finland, Austria and others discussing stringent collateral for Greek debt the default would have sill been not more than $70 bln In fact with the Euro now ticking down towards $1.30 and lower it increasingly becomes a local problem, a very happy event for the local European governments esp Germany as ECB unveils more internal bickerings

However Spain, Italy and France debt exposures and thus the default risk in Eurodollars keeps increasing multi-fold by a minimum factor of 2 in each case. Also the EFSF at its current rate is only for a total amount including guarantees for about $350 bln of Government debt unlikely to last the bill for Italy and maybe Spain with due additional contributions from the 17 member nations Greece could seriously mull divesting itself from Eurozone denomination and go back to a new currency which would be simpler for it and an emotional response likely to damage the fabric of the future of the Euro zone as Germans are increasingly likely to vote down the required German contribution to default bailouts from the second instance having given a grudging nod for 85% of the amount in the first vote. The case for France is in fact much more interesting as its lenders include its own banks till now safe desite European debt

The IMF, under new management, is already looking to distance itself from the crisis seeking European banks to pay up more han Euro 200 bln or $260bln of Capital as sovereign debt drawdowns have already been written down between 20-50% and have lost much more in each week of trading in August Geek government has admitted that its cash is unlikely to last till October when it would have nothing left to pay the bills much like the infamous week in the US a the beginning of August

What will happen?

Ringfencing: Ringfencing in the UK could drive bank profits down at RBS, Barclays and even externally domiciled operators like Deutsche Bank. Return on equity could drift to less than 50% of the current anemic 9-10% levels as banks pony up costly Capital per the Basel III norms (2013-2016) and low cost deposits do not cover market risk in the investment book , nor leveraged products off balance sheet and most of the corporate credit book depending on the stringency of the ring fence finally established. That also means credit cannot flow across regional shores to Ireland much less global debt

Writedowns of sovereign debt: Many european banks are unlikely to be in a position to actually book their Greek holdings itself at current market valuation much less the other Spanish, Italian and even French holdings which were in much larger tranches.

(huffpo)Many European banks could go under if they had to accept a “haircut” at current market valuations on their entire sovereign debt holdings instead of the 21 percent writedown that has been proposed on Greek sovereign debt, Ackermann warned.

ECB Buying government bonds/Eurobonds: All said and done, the Germans are remarkably tentative and should be so for time to come in spreading the largesse to defaulted nations by issuing  Eurozone risk in terms of Eurobonds. At a subtle difference is the case of Juergen Stark’s resignation as the ECB continues to underwrite and presevere with buying Sovereign bonds of defaulting countries from the EFSF facility. However, the next due instalment in October  for Greece would also likely be negotiated in the next few days without agreement from the private investors or lenders like Finland and Austria and the Germans will vote of the new emergrncy European Stability fund to be made live in 2013 in due course with their growing discomfort a t paying everyone’s bills given due weightage in the next solution


A depreciation of the Euro: Even in the case of Greece leaving the union, or otherwise only Germany remains a growing economy in the Eurozone and its own growth has become painfully slow as its East European trading partners (markets) and the peripherals deal with contraction. The austerity measures notwithstanding, free contraction in the Economies by itself has almost reached double digits even before any of the inflation and fiscal deficit targets have been met at Greece or Portugal and soon the others that will be added to the list. Thus the Euro is likely to continue its march downwards cementing the current spell of the USD as a safe haven with or without corresponding safe haven status for Gold


French Banks declare susceptibility: Though SocGen and BNP have crashed more than 10% today morning, it is not linked to any of their weaknesses in US mortgages or their French sovereign haircuts right now. They are just going to fall short on the Greek debt haircut as the 21% voluntary acceptance is contingent on the bailout oging through. However that just means there will be more shortfalls later while SocGen fills the immediate hole with asset sales of $4 bln losing precious markets and businesses to this crisis (Updated US 7 am ET)





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