There is a lot of chatter lately about the upcoming bond rolls in Europe. There are three major bond markets in Europe in my opinion. The Sovereign one, and the Bank debt and the Corporate Debt market. The first two markets currently have real world issues.
Right now, all eyes are on the Sovereign crisis in the PIIGS (Portugal, Ireland, Italy, Greece, & Spain). The little PIIGS have been locked out of the real market for government funding for months now. They reply on their central bank for a bid in their bonds. Otherwise, the market would provide a real discount to the debts. That’s called a haircut, and no one in Europe wants to have one. Their banks have higher levels of leverage today, than Lehman had when it blew up.
The ECB (European Central Bank) has been providing liquidity to their individual bond markets, propping them up. The ECB has also said that it is running out of capacity to continue to buy debt, with out major political implications. What are those implications you ask?
Those implications being that it is quickly becoming profitable for a PIIGS nation to quit the EU and Euro projects, leaving their debt at the Central Bank unwanted and abandoned. That would generate a major haircut in Sovereign debt levels of the leaving nation, and would at the same time junk the Euro as a currency. Destroying the balance sheets of the banks in the Euro that held the national debt at par.
Its basically the equivalent of dropping the “A Bomb” of Banking on your neighbors. It would end the Euro project as it is now known, almost over night.
Ireland is still very close to going down this path, specifically since the poster child for debt abandonment is Iceland and Iceland is now out of recession. The Irish politicians are stuck trying to tell your people they have to accept 10 years or more of serfdom, so bankers keep their bonuses?
Iceland is growing again and that is going to drive the undercurrents for a failed Ireland deal. Ireland, as a crisis, may not be finished yet.
Portugal has been embracing austerity for over 10 years and still has not enjoyed any major benefits from the Euro project. Their debt is under review by Moody’s for downgrading. They are the quiet nation that plays a joker role.
Italy has to roll about $300 billion Euros worth of debt in 2011 itself. While their debt is internally funded by a wealthy population, Italy is not out of the woods in a Crisis.
Spain is now experiencing an outflow of youth, as 20% unemployment drives up the migration of the next generation outbound. The size of the Spanish debt, is such that leaving the Euro might be a blessing to Spain.
December somehow is nice and quiet on the debt roll schedule, while in January there is about $45 Billion Euro’s that need to be rolled, up from the $5 Billion or so in November. The primary issue is that ECB has become the last and only buyer in the PIIGS Euro bond markets. There is the makings for a real crisis by February in the bond markets in Europe.
A secondary overlay to the above Sovereign debt crisis that is obviously brewing, is that Euro Banks are up to their eyeballs in debts they need to roll. It is estimated that major banks in Europe need to roll about $1 Trillion Euros in 2011. While that would not be a problem in normal times, these are anything but normal times. $1 Trillion in Band debt is going to compete against about $1 Trillion or more in Sovereign debt.
The market for debt in Europe is drying up quicker than a fresh coat of whitewash on a Greek villa. What happens in January when the PIIGs come to market with $45 Billion or so in Sovereign funny money bonds.
No one wants that debt. No one expects to get repaid in full from them. So if the ECB does not save the day in January, hair cuts could start happening randomly. If the haircuts are real, the national level bank balance sheets in Europe will ignite.
Can we say Lehman week in Europe?
Haircuts are coming, its just a matter of when and how much. The longer the ECB and other Central Banks continue to be allowed to debase their nations currency’s to protect their national members bank balance sheets, the worse this gets. The Euro debt crisis wont get better until price discovery happens, and reality is marked to market.
Hair cuts need to be applied.
Just look to Iceland, the little nation that could, has… Now its Europe’s turn.