Tuesday, November 8, 2011

More proof that holding European sovereign debt is toxic

Société Générale on Tuesday moved to calm jittery investors by announcing sharp cuts to the euro-zone sovereign-debt exposure that has weighed heavily on its stock in recent months, lifting its shares despite reporting lower-than-expected net profit for the third quarter.
Net profit at the Paris-based lender fell 31% to €622 million ($856.9 million) from €896 million a year earlier, undershooting analyst forecasts of €732 million. It was hit by higher provisions against Greek sovereign bonds, and as volatile financial markets pressured its corporate and investment bank. (Wall Street Journal, 08/11/11)

If any additional proof was needed, now the French banks are looking at "provisioning" or liquidating their European sovereign debt portfolio.  Taking the PIIGS + Belgium (country without a government for 2 years) total sovereign debt (including banks) is Euro 5 trillion, looking at a 30% to 50% hair cut the world is looking at a Euro1 to 2.5 trillion hole.

Once the banks are out, it leaves the insurance companies and the pension funds "holding the bag"  imagine with the Portuguese, Irish, Italian, Greeks and Spaniards realize that their pensions are funded to the level of 20% to 30% -- that there is no money available.  Those who purchased annuities from insurance companies or life insurance (a form of savings in Europe because of the tax code) will realize that the money is simply not there anymore.  This is going to end badly (not that there could be any other outcome).  The reality of solvency problems (while the intelligentsia has been selling liquidity) will hit those Europeans very soon.  I remember being in Seoul in 1997 during Asia's financial crisis, the anger was palpable...  


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