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FED UP WITH THE EUR-WOE ZONE

Wednesday November 2nd 2011

 
Given the rout in the European ....indeed global markets it is no surprise to see that the Stoxx Europe 600 Index was higher this morning. Yesterday it retreated the most in 5 weeks yesterday, as the Greek PM called a referendum on its latest bailout package. This raised fears that finally we would have to admit what most of know already...i.e. Greece is bust.
 
Today their is hope that the FOMC will strike a dovish, even if not more accommodative tenor as they will do all that is possible to prevent a double dip in the US.
It is now a dead cert that QE3 is going to happen, although it may not be until Q1 2012. However, look for further curve flattening as longer date Treasuries will be the target. The Federal Open Market Committee  (FOMC) plans to release a policy statement at 12:30 (16:30 GMT) in Washington after a 2-day meeting. The FOMC forecasts will be released at 14:00 (!8:00 GMT), and Bernanke is scheduled to hold a press conference beginning at 15:15  (19:15 GMT).
 
Back to the EUR-WOE ZONE...
 
Of course now we are a week from the triumphalism of Brussels; we can see just how fragile the Euro Zone situation really is. The currency was built on political stability...we do not have that in large supply at the moment.  
 
It may well be that the CEO's of the French banks were due to meet with the French PM and the Finance Minister to tie up loose ends from last week but now a new agenda is on the order paper. Still the French banks insist that a Greek default will not harm them as the collective total exposure to the Hellenic Republic is EUR9Bn. However, the issue is wider as Soc Gen own Greek bank Geniki and Credit Agricole own the larger Emperoriki. Similarly for BNP and Credit Agricole, the exposure to Italy is becoming a major headache.
 
In detail what is the expoure for French banks and insurance companies to the periphery?
 
BNP Paribas (BNP): Exposure to Greek Government Bonds (GGB) seen around EUR5Bn, commercial sector exposure around EUR3Bn, mainly in the shipping sector with loans secured by both maritime and financial assets. Exposure to Italian Government Bonds (IGB) is EUR20Bn.
 
Credit Agricole: GGB  EUR850 million, of which its Emporiki Bank of Greece unit accounts for EUR600m. Greece commercial commitments EUR2.4Bn, mainly secured lending against ships and trading transactions. Greek interbank risk EUR180m. IGB EUR9Bn. Also has minority stakes in Banco Espirito Santo of Portugal and Bankinter of Spain.
 
Societe Generale (Soc Gen): GGB exposure of EUR3Bn at end-April. Overall exposure to Portugal, Italy, Ireland, Greece, Spain around EUR13Bn. SocGen owns a majority stake in Greek bank Geniki. IGB EUR2.2Bn.
 
Natixis: Greek exposure at end-April EUR882m and  GGB EUR160m,  commercial exposure EUR618m, mainly international shipping sector companies, project finance. Greek bank exposure EUR104m.
 
BPCE: Greek exposure at end-April EUR2.1Bn that includes EUR1.4Bn sovereign debt.
 
AXA: At end March, government debt exposure EUR5.2Bn  for Italy, EUR3.8Bn, for Spain, EUR800m for Portugal, EUR500m for Greece and EUR400m for Ireland.
 
CNP Assurances (CNP): Net of policyholder participation and tax, Greece EUR113m, Portugal EUR154m, Spain EUR241m, Ireland EUR103m, Italy EUR438m.
 
 
So now, as if there were not enough shuttle flights across the continent last week we have the ludicrous spectacle of Euro Zone leaders racing in a frantic and fraught dash to prevent their newly hatched debt crisis strategy from becoming a dead duck. Today there are emergency talks today to tell Greece there is no alternative to the budget cuts imposed in the bailout plan.
 
There is an alternative....a large dose of reality that lets Greece default and leave the Euro. The best course is to simply stop wasting more money and time on a bankrupt nation and a dysfunctional government.
 
Yes Papandreou should be spoken to but the EZ leaders had better be careful of pushing too far, the Spartans may just push back and simply decide default in a unilateral action. Papandreou will be lucky to survive the month and one has to be honest and accept that whoever comes next is never going to implement the required level of austerity. To be talking of debt to GDP at 120% by 2020 is just rank lunacy.
 
It is completely clear that as of now there is a compounded risk of a disorderly move on the FX market EUR/USDwith  a decline to the low 1.20s by year end. The risks were there last week as no detail on the EFSF was available. Now, however, such an outcome has increased over the past 24 hours.  Maybe Papandreou will back away from the referendum, in which he should resign but the future political landscape in Greece is casting major doubt over the agreement last week. It is a rerun of the failure of July all over again. 
 
The fluidity of these fast flowing white waters is that both the Italian and Greek situations are going to deteriorate. It is like we are doing a Bungee Jump ...with no rope! Whilst Athens and Rome possess different debt dynamics neither nation can be trusted on its tax collection so that debt:GDP improvements are hard to come by.
 
With that in mind forget EFSF leverage,, no SWF will pour money into this nightmare. If Greece really is a lost cause then Italy will be next as it is highly unlikely that Berlusconi will get his reforms fully implemented. Why would China or Abu Dhabi or Qatar ever want to have exposure to a vehicle that offers a 20% of principal guarantee when far more than 20% in the Italian case will ultimately be written off. Unless it is the sprat that the SWF use to catch the more juicy utilities that have to be sold off, then there is no financial or economic sense.
 
Even then ...in 3 -5 years there will be a huge risk of civil unrest when utility bills soar and the owners are seen as being foreign. Europe is falling apart and the crown jewels are going for a song.
 
Steve
 
Stephen Pope
Managing Partner ~ Spotlight Ideas
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