Credit - The Raft of the European Medusa
"The man who has experienced shipwreck shudders even at a calm sea."
Ovid
"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:
Spanish 10 year government yield intraday movements on the 16th of May - source Bloomberg:
Moving fast and furiously towards 6.50% yield levels before receding due to rumors of ECB emergency meeting and possible re-activation of SMP (Securities Market Programme).
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:
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
Stay tuned!
Ovid
"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".
"In
an effort to make good time, the "Méduse" (Medusa) overtook the other
ships, but due to poor navigation it drifted 100 miles (161 km) off
course. On July 2, it ran aground on a sandbank off the West African
coast, near today's Mauritania. The collision was widely blamed on the
incompetence of De Chaumereys, a returned émigré who lacked experience
and ability, but had been granted his commission as a result of an act
of political preferment." - source Wikipedia.
Similar to the fate of the Medusa
ship, the story so far has been the European Commission in an effort to
make good time in reducing budget deficits, decided to impose
unrealistic budget reduction objectives ("A Deficit Target Too Far")
while imposing drastic reduction in bank leverage and balance sheets,
courtesy of the European Banking Association (EBA) June 2012 deadline of
9% of Core Tier 1 capital. These combined actions led to credit
contractions, no surprise there, leading to reduced economic growth in
Europe compared to the US ("Growth divergence between US and Europe? It's the credit conditions stupid...").
While utter financial meltdown disaster was narrowly avoided thanks to
the ECB's LTRO operations, the lack of experience or ability (or
both...) of the captains of our "European Flutter" ship have indeed landed the European project on a sandbank, with of course, a "raft" full of "unintended consequences"
such as mutiny, with Greek bond subordination during the recent PSI
leading to insubordination (a buyers strike...) in parts of the European
bond market.
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
price action was undoubtedly experienced in the European morning
session with a significant widening of most Itraxx Credit indices coming
from rising tensions in the European Government bonds space. Itraxx
Crossover 5 year CDS index widened to 751 bps (50 European High Yield
entities), before receding in the afternoon to end up around 740 bps.
Itraxx Main Europe 5 year CDS representing 125 Investment Grade entities
widened as well, and moving towards the 200 bps, indicating significant
risk perception rising in the European credit space. This index, like
most, has been steadily rising for the last seven days. Both indices
have reached their highest level since the 9th of January according to
Bloomberg. The financial space wasn't spared either with Itraxx
Financial Senior 5 year CDS index, representing a gauge for renewed
financial tensions, touched 300 bps before receding slightly in the
afternoon, whereas the Itraxx Financial Subordinated 5 year CDS index
jumped towards the 500 bps level, closing around 480 bps. Upcoming
additional Moody's downgrades of additional European banks (Moody's has
already cut 26 Italian banks), will cause this index to drift wider
still. We have discussed the impact of the upcoming downgrades on
subordinated bank debt in our last conversation "Interval of Distrust".
The relationship between the Eurostoxx volatility and the Itraxx Crossover 5 year index (European High Yield gauge):
High Yield Risk perception rising in conjunction with Volatility.
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:
The spread between the Itraxx SOVx Western Europe and Itraxx Financial Senior is moving towards 0 clearly indicating the LTRO effect is a becoming a distant memory with an increased correlation of both indices with rising sovereign risk concerns (Spain, Italy). The drop witnessed in March in the graph is due to Greece falling out of the SOVx index (15 Western Europe countries) and replaced by Cyprus ("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
The relationship between the Eurostoxx volatility and the Itraxx Crossover 5 year index (European High Yield gauge):
High Yield Risk perception rising in conjunction with Volatility.
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:
The spread between the Itraxx SOVx Western Europe and Itraxx Financial Senior is moving towards 0 clearly indicating the LTRO effect is a becoming a distant memory with an increased correlation of both indices with rising sovereign risk concerns (Spain, Italy). The drop witnessed in March in the graph is due to Greece falling out of the SOVx index (15 Western Europe countries) and replaced by Cyprus ("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:
Moving fast and furiously towards 6.50% yield levels before receding due to rumors of ECB emergency meeting and possible re-activation of SMP (Securities Market Programme).
As indicated by Bloomberg, Spain spread over bund at 450 bps, has been previously a key level for previous European bail-outs - source Bloomberg:
"With
Spain's CDS reaching new highs (544 bps), the spread of its 10-year
sovereign over the German bund has reached 4.5%, a level viewed as
significant for triggering bailouts in both Portugal and Ireland. At
a time when profitability is falling thanks to new provision rules,
elevated sovereign CDS and spreads will also drive higher funding costs
for Spain's banks." - 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:
"LCH
said in October 2010 that a yield premium of more than 450 basis points
would “be indicative of additional sovereign risk,” and may cause it to
“materially increase the margin required for positions in that issuer.”
Clearing houses guarantee trades are completed by standing in
the middle of two counterparties, and raise margin requirements to
protect themselves against losses should one side of the trade fail."
"Spanish
government bonds risk incurring higher trading costs at LCH Clearnet
Ltd. as their performance relative to Europe’s safest assets
deteriorates. The CHART OF THE DAY shows the difference in yield between
Spanish 10-year bonds and a benchmark of AAA rated euro-region
sovereign debt is approaching 450 basis points for the first time since
the shared currency was created. LCH, Europe’s biggest clearing
house, increased the cost of trading Irish and Portuguese bonds by 15
percent when yield spreads for those securities climbed to similar
levels." - source 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:
As a reminder, bear in mind we previously saw a spike in Germany's sovereign CDS back on the 29th of November 2011 ("The Eye of The storm"),
prior to the German "failed" auction which lead to a significant
widening of the German Bund yield above 2.30%, when Germany's sovereign
5 year CDS went above the 100 bps level. We are getting closer to 100
bps for Germany's sovereign CDS. The cost of insuring German debt is
rising fast, even as its bond yields are falling. Credit-default swaps
on Germany jumped 10 basis points this week to a four-month high of 98,
signaling worsening perceptions of German credit quality. The German
Sovereign CDS was at 67 basis points on March 19 according to Bloomberg.
In
relation to Spanish banking woes, Bankia share price is indeed
suffering from the "partial" nationalization process undertaken by the
Spanish government and from the plight of its real estate issues and
significant exposure, being the focus of attention - source Bloomberg:
The
second phase of real estate provisioning reforms announced on the 11th
of May, enforces a 30% generic reserve coverage of performing loans
instead of 7% and make it compulsory for banks to transfer all problem
foreclosed assets into a separate work-out subsidiary at "fair value",
which will have to be appraised by an independent auditor, in similar
fashion to what Ireland did for the set-up of its work-out entity NAMA.
The additional cost to banking giant Santander will be 2.7 billion euro
of provisions in addition to the 2.3 billion euro ear-marked for
provision to be passed before end of 2012. While Santander, has not
provisioned the 2.3 billion needed under RDL 1 (Royal Decree Law 02/12),
BBVA has so far provisioned 175 million euro in the first quarter. The
total cost for each of them will amount to one or two quarters worth of
earnings on a net basis according to CreditSights (5 billion euro for
Santander, around 4.025 billion for BBVA). For our ailing Bankia, the
cost will amount to 4.7 billion euro pre-tax, which is more than ten
times 2011 pre-tax profit...Oh dear...
According to CreditSights, the New Real Estate Rules means significant additional provisioning under RDL 2:
"Additional provisioning under
phase 2 will cost the whole banking system almost 30 billion euro in
2012, on top of 39 billion euro from Phase 1, most of which has still to
be charged to income statements over the next three quarters."
As we type, Bankia shares have touched a new low, falling another
26% to 1.29 euros experiencing a similar fate witnessed with Portuguese
banks Banco Espirito Santo and Banco Comercial Português (BCP).Banco Espirito Santo stock price evolution - source Bloomberg:
Banco Comercial Português (BCP) stock price evolution - source Bloomberg:
We
believe subordinated debt to equity swaps are coming for some weaker
financial institutions with more pain for both shareholders and bond
holders ("Peripheral Banks, Kneecap Recap").
Bankia's IPO initiated in July 2011 drew 347,000 investors, most of
them individuals, have lost as of today's price action two-thirds of
their ill-fated 2011 investment. The IPO, as indicated by Bloomberg was
successful because it was made on "illusory promises":
"To
lure buyers, Bankia held out the promise of distributing about 50
percent of its net income as dividends. “The IPO was mainly a dividend
play, so it appealed particularly to retail investors when interest
rates elsewhere are so low,” said Ipox’s Schuster. “Bankia has a strong
retail network and that’s basically how the deal got done. Now not only
their shares get diluted, it’s also a question mark whether Bankia will
be able to deliver future dividends.”
15 underwriters or undertakers, one as to ask oneself, given as indicated by Bloomberg:
"A total of 15 underwriters led by Bank of America Corp., Deutsche Bank AG, JPMorgan Chase & Co. and UBS AG earned a commission of about 1.2 percent on the 3.1 billion-euro IPO, or about 37 million euros, data compiled by Bloomberg show.
While managers were taking orders for Bankia’s IPO, investor concern
about Europe’s deepening debt crisis was already propelling Spanish bond
yields to what was then a euro-era record. The lender had to reduce its IPO price by about 26 percent from its initial range in order to complete the sale.
The
IPO “has been considered a reference point for the Spanish banking
industry” and was completed “in the middle of a true storm in the
markets that imposed the toughest financial conditions of the last
decade,” Rodrigo Rato, Bankia’s chairman at the time, said in a speech
on July 20."
Individuals bought about 60 percent of the shares on sale in the IPO...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:
Greek banks had negative equity given
their very large exposure to Greek government bonds. As a reminder Greek
banks are required to reach 9% Core Tier 1 by September 2012 first via
private sources and if it fails then government. We discussed the issues
of raising private sources faced by Apostolos Tamvakakis, chief
executive of National Bank of Greece, launching a recent desperate
last-ditch attempt in securing private funding in our recent
conversation "Kneecap Recap".
Greek private bank shareholders will be wiped-out. 30% of National Bank
of Greece shares are in the hands of foreign investors such as Bank of
New York Mellon, BlackRock, Allianz, Pictet, Prudential Financial,
Aviva, AXA, HSBC and BBVA, according to Bloomberg data as we indicated
in our recent post.
No wonder the Greek stock index is still tanking on the 16th of May - source Bloomberg: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":
"Given the outstanding weight of
financials in the Greek ASE index and knowing their current Greek debt
holdings, Alpha Bank, National Bank of Greece, EFG Eurobank and Piraeus
bank respective equity is probably worth zero. It should in theory
equate to an additional write down of at least 16.74% of the ASE Greek
index." - Macronomics - 4th of March 2012.
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:
"A key problem faced by the
Argentine banks as fears of devaluation drove depositors to switch to
foreign currency was the resultant currency mismatch on its balance
sheet. Pressure to address this drove many banks to increase
foreign-currency lending, which brought with it increased default risk,
an issue which Greek banks may need to address."
Greece is not Argentina, and will fare worse as indicated by Bloomberg:
"GDP growth was negative in Greece
during the last 14 quarters. While Argentina's banks and economy
recovered quickly with 9% GDP growth and a rebound in consumer spending
in 2003, austerity measures and lingering sovereign concerns suggest
that Greece and its consumers may struggle to achieve this, implying a
slower return to profitability for its banks."
Argentine Banking Asset Loss a Stark Warning to Greek Banks - source Bloomberg:
"While
Argentina suffered significant deposit outflows prior to devaluation,
deposit growth was 19% by the end of 2002, rising to 26% in 2003. By
contrast, loans in the system did not return to growth until 2004 and
many years later the recovery in assets is far behind deposits. Should a
similar fate befall Greece, funding for recovery may be hard to secure." - 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:
A
total of 220,000 people and 77,600 vehicles crossed the border at the
five checkpoints between Bulgaria and Greece on the four days off at
Easter (between Friday and Sunday). For comparison, nearly 48,000
vehicles and 142,000 people crossed the border at Easter in 2011...
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 Krugman now suggests a
solution based on three elements: Firstly, the ECB should buy government
bonds. Secondly, the foreign trade imbalances between the member states
should pursue an expansionary policy to help countries reduce their
debt through moderate inflation."
Dr Felsenheimer's clearly indicates why Dr Krugman's assessment is incorrect, given Dr Krugman seems to ignore the interdependence of banks and governments:
"The purchase of government bonds by the ECB (however it is implemented) increases precisely this interdependency further still.
You don't need to be a market moralist (if such a thing exists) to see
the purchase of government bonds by a central bank as a Ponzi game. But
to force the reduction of foreign trade imbalances is to argue against
all microeconomic reason. Such a policy would of course solve the
problem of the target II balances en passant. However, we should first
of all ask how such an imbalance reduction could be achieved. It is
clear that reducing a trade surplus is easier than reducing a deficit.
This means that Germany in particular would have to accept export
restrictions, which would be in direct opposition to the desire for
growth impetus. Ultimately, the ECB's extremely expansionary policy must
be held partly responsible for the crisis. The demand for further
expansion in turn represents the danger of further speculative bubbles.
The
US has pursued a response to the crises of recent years very close to
that of Krugman's theory, at least regarding the role of the FED (the
largest investor in US government bonds). Any sustained success however
is questionable. Even though Europe has pushed the US out of the
headlines in recent months, the US debt situation has not improved at
all.
Should we not maybe do exactly the opposite of what classical theory suggests? Does
a restrictive monetary and fiscal policy not mean that the entire
banking system has to "deleverage" and shrink its enormous balance
sheets? It could be argued that the state should step
in to help during such a transition (e.g. by partially compensating for
the cuts in lending that would be expected), however that is something
completely different to pursuing expansionary policies itself.
Less
liquidity in the banking system reduces the danger that speculative
bubbles will form, it forces the necessary consolidation in the banking
system and it puts pressure on countries to pursue a sustainable
economic policy to attract investors. The logical consequences
of the European solution (assuming that this is largely continued even
during Hollande's presidency) is that it involves a painful adjustment
process that already been underway for two years. The
Anglo-Saxon method does not promise a solution, but rather a
postponement of the problem. It does not solve the fundamental problems
of the euro zone."
A bank is a leverage play on the economy. It is the second derivative of a sovereign.
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.
Sweden,
suffered a banking crisis in the early 1990s and then again in 2008
and 2009. They chose to inject capital into struggling banks only in return for equity to avoid raising deficits and burdening taxpayers. The
government in 2008 set up a financial stability fund by charging banks
an annual fee and enacted various crisis-management measures including
a bank guarantee program to help support lending.The fund
will grow to 2.5 percent of gross domestic product by 2023 and stood at
35 billion kronor ($5.2 billion) at the end of 2010, including shares
in Nordea Bank AB, according to the Swedish National Debt Office.
The
Swedish example comes to mind when thinking about the ongoing
interdependence between banks and governments. Cheuvreux in their recent
note "Why the nordics are a safe haven" touched on the deep
restructuring process followed by Sweden, which lead to the
disappearance of some banks (survival of the fittest) and the following
results:
"The rule is only: spend less than you earn…
In
addition to substantial tax increases to balance the budget and reduce
debt, the social security payments were capped resulting in real
decreases as the pay-outs were not kept in line with GDP growth. In
addition, checks and balances were introduced with automatic stabilisers which did not allow spending to outstrip growth, such as seen in the pension system where significant reform was passed by all the major political parties in 1995.
Furthermore
in the budgetary process the role of the Ministry of Finance has been
strengthened forbidding spending ministries to launch proposals without
financing, not allowing parliament to make unfunded amendments,
introducing a rolling budget ceiling that must not be breached as well
as a 1% budgetary surplus intended as a saving to handle the retirement
of the baby boomers in the 2020s, i.e. a Swedish balanced budget
includes a 1% extra margin of safety which can be compared to the
European average budget deficit of around 6%." - Cheuvreux - Why the nordics are a safe haven - 2012.
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...):
"Spanish banks increased their sovereign holdings by 48% since November 2011, Italy increased theirs by more than 30%. Argentine bank sovereign holdings and government loans rose to 21% from 10% of total assets in 1995-01. A
consequence of this was less private sector funding, a risk for Spain
and Italy should conditions worsen and deleveraging continue." - source Bloomberg.
“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
Stay tuned!