Sunday, July 13, 2014

Spain (Italy, Portugal) @ Full Ponzi (Revisited)

Instant insolvency, just add panic
Now we know who has (still) been buying down the yield on Spanish Ponzi bonds. Spanish banks. Unfortunately, unlike regular loans, bonds are "marked to market" daily meaning when they sell off, Spanish banks will be rendered insolvent instantly. Considering that Spanish banks hold ~37% of Spain's debt, that pricing "decision" will be made by the market for the other two thirds of outstanding debt, not by the banks. All it will take is for investors to realize that 2.8% is not an appropriate yield for ponzi bonds.
Momentum feedback loop: Gains from ponzi bonds have masked deep losses from loan write-downs. That sword cuts both ways...

"We'll do whatever it takes"
Are you sure?

March 2014:

"Banks in the eurozone are now more exposed to government debt than at any time since the financial crisis began, with many increasingly using their balance sheets to prop up ailing governments"

"Banks in the region now hold about 1.75trn in government debt, equivalent to 5.7% of their assets and the highest relative exposure since 2006"

"global banking regulations have enshrined incentives to hold government debt by making it zero risk-weighted"

"Cash-strapped peripheral banks - many of which have been shut out of primary markets - have welcomed the opportunity to plug capital shortfalls, ploughing over half of their net borrowings from the ECB's emergency longer-term refinancing operations facility into bonds, while lending a mere 13% to the real economy,"

"Banks in fiscally weak countries have increased their purchases the most, with Italian, Portuguese and Spanish banks increasing their holdings by 62%, 52% and 45% respectively."