Hurricane-force winds blew through Los Angeles last night (ripping half the shingles off my roof in the process) and may be a prelude to the hurricane-force winds that are about to rip through the European sovereign debt markets in December.
Clearly, some U.S. investors were relieved this week that the world's central banks are taking concerted action to protect one or several major institutions from failure -- according to Forbes -- but assisting in a short-term liquidity crunch is just putting a finger in the dike. More leaks are coming, and there is a flood of problems just over that wall.
Master strategist Bill King compiled an excellent list of the rollover funding needs of major European governments this month:
- Dec. 1: Spain to sell new three-year benchmark Bono
- Dec. 1: Spain's Tesoro to make an announcement on issuance
- Dec. 4-5: Provisional date for Greek referendum
- Dec. 7: European Central Bank three-month dollar tender
- Dec. 7: Portugal sells three-month T-bills for 750 million to 1.25 billion euros
- Dec. 13: Spain sells 12- and 18-month T-bills
- Dec. 15: Belgium T-bill redemption for 6.763 billion euros
- Dec. 15: Italy T-bill redemption for 11.162 billion euros
- Dec. 16: Greek T-bill redemption for 2.0 billion euros
- Dec. 16: Spain T-bill redemption for 9.282 billion euros
- Dec. 19: Greek bond redemption for 4.40% 2011 for 1.172 billion euros
- Dec. 20: Spain sells three-month and six-month T-bills
- Dec. 22: Greek zero-coupon bond redemption for 979.6 million euros
- Dec. 23: Portugal sells three-month T-bill for between 750 million and 1.25 billion euros
- Dec. 23: Greek T-bill redemption for 2.0 billion euros
- Dec. 27: Italy T-bill redemption for 2.5 billion euros
- Dec. 29: Greek zero-coupon bond redemption for 5.231 billion euros
- Dec. 30: Greek bond redemption for 5.00% 2011 for 714.7 million euros
- Dec. 30: Italy T-bill redemption for 8.8 billion
Considering that the blue-chip credit Germany couldn't get an auction done just a few days ago, it seems improbable that these deals can go off without the buying power of the European Central Bank. The ECB is trying to sterilize its purchases, but it failed to fully sterilize its last tranche this week. I fully expect one or more of these auctions to fail (meaning it will need ECB intervention) this month, and that will bring the crisis back to the forefront.
When the U.S. blew up in 2008, I often made the point that the losses had already occurred and that the financial market stress was simply an exercise in who was going to bear the burden.
Similarly, in Europe, the assets are already gone. Bank lending to sovereigns funded mostly consumption, so there is no productive asset there to ever "pay back" this debt. The losses have occurred, and now there is an ugly fight behind the scenes to see who can avoid bearing the losses. Someone will be left holding the bag. Every European government but Germany wants it to be the common citizen, who will pay the price as euro-inflation rages as the euro is devalued via money creation. I give credit to the Germans for being truthful in not wanting the populace to bear that pain, as only Germany seems to understand where that can ultimately lead.
Tom Graff had a great piece last week on why exiting the currency union would be nearly impossible for Greece, and of course it applies to all the member states. I used to believe the euro could disintegrate, but on the basis of his analysis, I believe straight-out default (and a resulting depression) is the only realistic endgame for Europe now.
Use rallies wisely!