Greece is on fire... S&P downgrades Italy... Italian PM doesn't care... China bails out banks, again... Bernanke: Housing no longer 'secure'...
One day, Greece has a deal to receive its 130 billion-euro bailout. The next day, the European Union (EU) decides Greece's austerity measures weren't enough. They requested additional cuts of 325 million euro. The deal was off.
Throughout the European crisis, the euro and European equities have manically shot up and down with each bullish or bearish piece of news. Last Friday, when the Greek deal dissolved, the euro fell.
Today, it seems, the deal is back on. The Greek parliament agreed to further austerity cuts, "a crucial step forward toward the adoption of the second program," EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today. "I'm confident that the other conditions, including for instance the identification of the concrete measures of 325 million euros, will be completed by the next meeting" of finance ministers on February 15.
The markets are happy, and the euro is up to more than $1.32. But Greek citizens feel otherwise... 45,000 Greeks are protesting at the Greek Parliament and destroying property nationwide. From the British newspaper The Guardian...
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As more than 40 buildings went up in flames, including two historic cinemas and several banks, Athens city centre was left resembling a war zone with cafes and shops smashed and looted as [members of parliament] backed the austerity measures by 199 votes to 74 in the single most important ballot in modern Greek history. |
The language has changed, but it's the same game... Greece has yet to actually do anything. It's all talk at this point. The only critical news you need to glean from today's action: The EU didn't revoke its Greek bailout package.
Greek's looming bailout deal has stolen the headlines for weeks, but let's not forget about Italy – another European time bomb. Last Friday, Standard & Poor's (S&P) downgraded 34 of Italy's 37 banks, including our favorite Italian economic bellwether, UniCredit... S&P cut the credit rating of Italy's largest bank from A to triple-B-plus.
"Italy's vulnerability to external financing risks has increased, given its high external public debt, resulting in Italian banks' significantly diminished ability to roll over their wholesale debt," S&P said in a separate statement on the country's financial industry. "We anticipate persistently weak profitability for Italian banks in the next few years."
We believe UniCredit will fail. And UniCredit's failure will lead to Italy's collapse...
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[I]f there's a run on UniCredit (and I believe there will be), the losses will be too large for Italy to manage without a huge international bailout. UniCredit has borrowed $300 billion from other European banks. And Italy's government already owes creditors more than 120% of GDP. There aren't any easy solutions to this problem. – Porter Stansberry, June 17, 2011, S&A Digest |
Italian Prime Minister Mario Monti dismissed the S&P downgrades, calling them "largely the mechanical effects of previous decisions." In an interview on CNBC, Monti said, "the high public debt of Italy is a well-known fact of life."
It may be a well-known fact, but that debt will still cripple Italy...
Monti said Italy didn't need any money from the U.S. "I have the impression of support" from the U.S., Monti said. "Not financial resources – we don't need them – but political support and an effort on the part of the United States to put the global economy, through the U.S. economy, in a better condition." (Note: whenever a high-ranking government official makes a statement claiming "all is well," you can bet the opposite is true...)
Europe isn't alone with its strained financial system... Jim Chanos, famed short seller and founder of hedge fund Kynikos Associates, has been warning investors about China's banks for years. As of last year, Chanos was shorting "virtually all of the large banks in China."
On October 11, 2011, China's Central Huijin Investment firm (a state-owned entity) purchased shares in four major state-owned banks... China's first bank bailout. Following the bailout, Chanos commented on Bloomberg television, "The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating."
Porter addressed China in the June 17, 2011 Digest...
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China's boom since 2009 was fueled by massive domestic debt issuance, which was unsustainable and is reversing. In addition, one Chinese company after another is being revealed as a fraud – and then crashing. These are not isolated events. I have studied Chinese companies for more than a decade. Out of all the stocks I've analyzed closely, I've only seen a handful I didn't believe were fraudulent. |
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So far, none of the major Chinese banks have come under serious scrutiny. But I believe they will... and I believe major fraud will be discovered. Take the recent weakness in the shares of China Life Insurance (LFC), for example. This isn't a minor company. It's a $90 billion life insurance company. As fraud allegations spread into major Chinese financials, the entire underpinning of the Chinese boom will fall apart. It has all been fueled by debt and fixed-asset investments (land, buildings, equipment, and machinery). Consider just a few of these facts... |
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Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment. |
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In the first five months of 2011, fixed-asset investment grew by 25.8% according to China's National Bureau of Statistics. That's $1.39 trillion worth of investment. |
Today, China instructed its banks to roll over their loans to local governments, a total of $1.7 trillion in debt. Over half of those loans come due over the next three years. This is the second Chinese bank bailout...
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New 52-week highs (as of 2/10/12): Westport Innovations (WPRT) and Philip Morris International (PM).
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Regards,
Sean Goldsmith
New York, New York
February 13, 2012