Friday, February 24, 2012

Credit crunch in Europe is just starting -- again

My favorit line yesterday from Commerzbank's announcing 4th quarter profits up from Euro 257MM to Euro 316 MM, including in this marvellous performance was a profit from buying back its own bonds in the secondary market of Euro 735MM; so more than 100% of Commerzbank's fourth quarter performance was driven by the ECB's largesses -- in the form of LTRO borrowings; think about it the reason that the bank's debt was prices so low was because the probability of repayment was low, now with the help of the ECB's money, Commerzbank was able to retire that debt at a substantial discount.

At the same time Commerzbank will boost capital by Euro 1 billion, and the bank will improve performance by reducing risky assets (i.e. read here fewer loans).  You can bet serious money that what Commerzbank is doing is also being done by DB, SocGen, BNP.  So companies looking to borrow will find it increasingly difficult, if you cannot borrow you cannot invest -- especially in Europe were there is virtually no corporate bond market, and where companies are much more leveraged than in North America.

So, we now have an official Greek default -- manny don't seem to understand that the recent agreement with the Troika has an automatic (almost) system that forces private lenders to Greece to take a 50% haircut.  They may try to get away with a non-CDS default -- stating that it is voluntary, but since the mechanism can voluntarily force lenders to agree to a 50% haircut...

BTW the premise here is that for the next 7 years Greece will generate at least a 2.4% GDP growth, and that by then DEBT/GDP ration will be 120% -- the likelihood if this outcome is low in my estimation, since a recession is baked in the cake for 2012 (5th year) and it is hard to see the drivers to recovery in 2013 too...

On that note the markets are up again today... don't know why the news is not that good, fuel prices are through the roof (and seem to stay there -- for now at least) as there are supply constraints -- generated by the Iranian Embargo.  Brent crude is over $124/bbl and WTI is around $110/bbl.   I don't know why the European markets are positive (aside from all the cash sloshing around from LTRO) and American companies are doing OK,, but their forward statements are weak.  Nevertheless, up and away!

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