Credit revulsion has hit Belgium; France and Austria dragged in tow

I will be on BNN at 12:30 ET to talk to Howard Green and a guest from Reuters. We will be talking about bank earnings. But we will also be talking about the European sovereign debt crisis.

Look at these charts that Win Thin has crafted on sovereign bond spreads. this is what I want to discuss at 12:30.

Yes, the periphery looks bad. But look at Belgium, Austria and France. That’s the euro zone core.

As I predicted in August and reiterated most recently last week when I saw Belgium’s CDS indicating a one in four chance of default:

we are going to get another crisis flare. What you need is a trigger for a gap up move in yields that would signal the next flaring of the crisis. The trigger and its timing are unknown, but the crisis they will precipitate is inevitable until the euro zone’s structural deficits are dealt with. As this is a rolling crisis, any gap up will also infect Belgium and France and potentially Austria.

My hope is that Europe moves to address the medium- and long-term issues before the crisis flares. However, I don’t anticipate they will.

Felix Zulauf on the inevitability of further crisis in Europe

Belgium is clearly suffering some serious credit revulsion. France and Austria are being carried in tow. That’s where we stand now.

  1. Finance Addict says

    Edward, what do you think the effect will be of the coming ban on naked CDS in Europe?

    1. Edward Harrison says

      I don’t know what the immediate effect will be but the medium term effect will be to diminish speculation and free riders on credit events.

  2. David Lazarus says

    I have been concerned about Belgium and Austria for longer than most. France while has its problems with its entire banking system being over-levered it can avoid problems by not guaranteeing its banks. So far they have avoided that. They are not planning on re-capitalising the banks with state money. If they let its banks collapse they can always nationalise the branch networks and start afresh.

    Austrian banks were suspect from the last credit crunch. It managed to limp along avoiding the lime light. Same for Belgium. As for credit revulsion I would say that credit revulsion has taken over much of Europe. People do not want to borrow at the terms that the banks are now demanding.

  3. JPG101 says

    If France doesn’t step in to protect its’ bank and simply nationalizes the branch network, wouldn’t thatbsimply accelerate a massive collapse through couterparty effects?
    There doesn’t seem to be any easy way out of any of this… How do you preserve wealth in these ponzi shutdowns?

    1. David Lazarus says

      That was partly the objective. If that happened then it would ease the problems for the eurozone periphery. All that the bailouts do is cost tax payers trillions to keep a few super rich bankers in a life of luxury. Lending has not improved, terms of credit are not easing, foreclosures are not falling. What is happening is that the average person is losing out multiple ways. Interest rates are far too low. That hits pensioners, it deters savings, it does not encourage debt repayments, it encourages riskier behaviour from them to get adequate returns to cope. This is one reason why stock markets have done so well. Though if you look at the underlying figures retailers are suffering and we are going into a serious debt spiral without the prospect of a government stimulus program at the end. What the world is facing now as a result of mismanagement is twenty or even thirty years of austerity and depression.

      1. JPG101 says

        Sadly your answer makes to much sense unless a reset is done by inflation: which might be the only ‘solution’. So where do you hide?

        1. David Lazarus says

          Yes but that would mean a massive admission that monetarism and supply side economics simply does not work. That would make most economists unemployable as their models are simply wrong.

          If inflation is the end result then the only solution is gold. That would definitely support the austrians but I would imagine that the response to that is the banning of private holdings of gold.

          The problem throughout is that the banks like Noriel Roubini reported in 2007 are insolvent. The Central banks have lowered the cost of funds for banks to zero to allow the banks to raise margins, and thrown trillions of extra liquidity in their direction to hide the fact that they are insolvent. This bank subsidy is not working as banks are still gambling on derivatives and commodities.

      2. Dave Holden says

        Well put.

  4. fredw says

    Ed , are you concerned about the effect on cash bonds due to making the ban on naked shorting of CDS ? Also , as there seems to be quite the effort to make an default of Greece “orderly ” , ” voluntary ” so as to no trigger CDS payments , doesn’t this in the end hit banks using CDs as a hedging tool ? If CDs is an ineffective hedge , why wouldn’t a bank seeking protection simply sell the cash bond rather than the CDS – if that occurs , what has been accomplished ? Thanks in advance…..

    1. Edward Harrison says

      Someone else was asking me about naked CDS and I said I have no problem with outlawing naked CDS because it stops free riding. As for avoiding the CDS trigger, I think those days are over. The French plan was the last one crafted that did this and that one didn’t pass muster. CDS will definitely be triggered in Greece in any restructuring. And I certainly believe we will see bank recaps and a hard restructuring in any event.

      1. JPG101 says

        If CDS are actually triggered and seeing the near obsession France has with not triggering Greek CDS I presume French banks are amongst the most exposed?
        If the French state doesn’t protect its’ banks and their obligations fully this could get ugly very quickly? If the French banks are that exposed to a Greek default doesn’t this basically make the whole recap purely a German thing and will the Germans accept this? A lot of questions… I missing something?

        Thanks for any clarification,

        A confused ‘long term investor’ who is now hiding in US cash and even scared of anything above a few months duration…

      2. fredw says

        Thanks for your reply. A couple of quick questions. First , do you think attempts to achieve a voluntary ( I know you don’t believe that will happen for Greece ) restructure will decimate the market for CDs if that does occur ? Second , the 100 billion number being floated to recap Eurozone banks seems too low , what is your thought ? finally , do you subscribe to the view of Peter in the piece below ? Thanks in advance !

      3. David Lazarus says

        The plans for re-capitalisation are seriously underfunded. A re-capitalisation of €2 trillion would end the crisis, but look at the schemes to get around the publics unwillingness for more bailouts. The sooner they all take their losses the better. It is the uncertainty that is creating panic. Naked CDS are wrong. If they are allowed we need a register of whom owns them and whose liable in the event of a default. Though I can see this having ramifications through US business. No more peasant insurance and no more naked CDS.

  5. fredw says

    BTW , has anyone been following this aspect of Dexia ? Interestingly , Communal Holding will decide whether to file for bankruptcy this weekend , just as the EU Summit is warming up for their announcement of a plan to have a plan – details to still follow.

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