New European Bail Out Announced - Greek Debt Gets a HairCut

We have another Eurozone bail out. The Euro Summit has released a 15 page statement (pdf) overviewing the agreement. The plan was ratified by all 17 Member States of the euro area.

First, there is a haircut on Greek debt, which while pretending to be voluntary, the volunteer or else threat behind it would allow a complete Greek default, where bond holders would get nothing and banks would probably be ruined.

We invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro.

The plan is to reduce Greek debt to 120% of GDP by 2020 and is about €100 billion reduction with yet another €100 billion in additional aid.

European Banks Fail Stress Test

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:

Greece Downgraded Again, Credit Default Swaps Soar

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?

It Would Hurt the Banks....

The latest request to restructure Greece's debt has been denied. with a quote from the ECB that should be classic:

A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi.

Look at this quote on their demand to privatize:

“Privatization makes a real difference,” said Poul Thomsen, head of the IMF’s Greek mission, which is in the process of reviewing the country’s progress on the bailout conditions. “If targets can be met, it will make a change to debt sustainability.”

Oh really? And that is why the US deficit is so small today, or other nations who privatized?

Seems The Greece Prime Minster, George Papandreou, is all for denying Greece any debt restructuring as well.

Greece must avoid debt restructuring and push on with budget cuts and privatisations to overcome its debt crisis, the country's Prime Minister George Papandreou and senior ECB officials said on Saturday.

Papandreou also said:

Henceforth, the European Union will escort Greece's privatisation programme as if we were conducting it ourselves

Dear Portugal, You Get a Bail Out and a Recession

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.

Europe Probing Goldman Sachs on Sovereign Credit Default Swaps

YES! Bloomberg is reporting 16 banks, including Goldman Sachs are being probed by the EU for anti-trust for manipulation of the the financial derivative, credit default swaps, market.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and 14 other investment banks face European Union antitrust probes into credit-default swaps for companies and sovereign debt.

The EU is investigating whether 16 banks, including Citigroup Inc. and Deutsche Bank AG, colluded by giving market information to Markit Group Ltd., a data provider majority-owned by Wall Street’s largest banks. It will also examine if nine of the firms struck unfair deals with Intercontinental Exchange Inc.’s European derivatives clearinghouse, shutting out rivals.

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” Joaquin Almunia, the EU’s competition commissioner, said in an e-mailed statement. “I hope our investigation will contribute to a better functioning of financial markets.”

Global regulators have sought to toughen regulation of the $583 trillion credit-default swaps market, saying the trades helped fuel the financial crisis. The EU’s probes add to separate investigations in the U.K. and U.S. into whether banks colluded to manipulate the London interbank offered rate.

Credit default swaps allow anyone, not directly involved in the underlying asset, to place bets on whether that underlying security, asset will default or not. Credit default swaps are used for speculation. In the case of sovereign debt, that causes the cost of financing that debt to increase, dramatically.

Thar Blows Portugal Straight into the IMF Austerity Plan

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.

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

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.

Greece Calls Out IMF

Greece is growing a spine. Seems the EU and the IMF are demanding Greece sell off their public assets, and in response to these demands, Greece said:

"The behavior of the representatives of the EU, IMF and ECB during yesterday’s press conference was unacceptable,” government spokesman George Petalotis said in a statement today, referring to the European Central Bank. “The only agent responsible for these decisions is the Greek government. We take orders only from the Greek people.”

Associated Press:

It was the first time the government has publicly struck back at the IMF and the European Union, which rescued Greece from bankruptcy but at a price that many Greeks consider too harsh.

The IMF, the European Central Bank and the European Commission delegation said Greece must privatize euro50 billion ($68 billion) in state assets and speed up structural reforms in the next few months to keep the country's troubled finances afloat. The IMF representative also said some of the frequent demonstrations against the Greek government's reforms were being carried out by groups angry at losing their "unfair advantages and privileges."

Just incredible and good for Greece. The IMF is pushing their austerity program, which is privatization and reductions in pensions, social safety nets for workers, who I guess are those of unfair advantage and priviledge.

European Bail Out Brew Bubbles Over Again

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.

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