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Euope and Da Banks

Reality of the European crisis are finally hitting market prices.  Also this weekend the Saudi oil minister said that SA was reducing production, because there’s just not enough demand to justify the current production level, which would seem to indicate that a good chunk of the current market pricing is driven by financial market hysteria – wow something new.

Back to Europe, over the weekend two developments:  the Finns elected parties that are against further PIIGS bail outs.  The second event was that the British government has indicated that they will no support any further financial aid beyond the help they have given so far under current European agreements.  Then this morning a spokesperson for the German ministry of finance indicated that Greece debt will be restructured before the summer.  

Once it is generally accepted that restructuring is required, the issue then becomes how much of a hair cut will be required.  The generally agreed (and to a certain extent priced) cuts for Greece, Ireland and Portugal is around 30% to 35% for the bond holders.  Implications for many German, French and Spanish banks are very serious, since they still hold huge amounts of sovereign paper on their books (and have much higher leverage than their American counterparts).  This morning’s CDS rates for Portugal (615), Italy (156) Ireland (588) Greece (1225) and Spain (250) were all rising (BTW anything over 400 is insolvent territory).

Another development, largely unnoticed, is that two CFO of TBTF U.S. banks resigned over the past few weeks (Bank of America and Wells Fargo); personal reasons were given, but those who read the tea leaves are taking the view that these CFO couldn’t be pushed anymore.  How to justify that JPMChase was able to further cut loan loss reserves while its CEO was saying that they don’t know what to do with all the homes they’ve owned for more then 500 days, no income and no outlook to sell these properties.  .

Finally about 30 minutes ago, S&P has put the U.S. rating in negative watch.  Still has its AAA/A-1 rating, but negative watch has been implemented.  No one expected S&P to take such action.  

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