This is Golem XIV's most recent posting:
"I think there is something big, possibly very big, about to surface in the Sovereign debt bond markets.
What follows is pure speculation. so please take it as no more than that. But the signs seem ominous to me.
First the facts.
On Friday Italian government bonds got a kicking. The demand for Italy's standard 10 year bonds dropped, and the cost of insuring them against default (CDS cost) jumped. The reason reported was renewed fears that Italy's finance minister Mr Tremonti would leave his post after he was linked to a corruption investigation on top of the ongoing rift with Berlusconi.
Then, also Friday, UniCredit, Italy's Trillion Euro bank had trading in its shares suspended after they dropped 6%. That is a big drop. The reason reported for that was fears that some Italian Banks might fail the latest European Bank Stress Tests whose results are due on the 15th of July. And that UniCredit, which has constantly denied it has any problems whatsoever, might nevertheless have to raise new capital. UniCredit is the only one of the global European Banks not to have raised more capital so far in this crisis.
Then it was reported today (Sunday 10th July) that European finance ministers are to hold an emergency meeting on Monday, "to discuss the possibility that the debt crisis could spread to Italy from Greece...." Suddenly we there is some tlink from Greece to Italy and we skip Spain and Portugal.
This looks to me like something unravelling.
First let's remember that Mr Tremonti is Italy's answer to America's Greenspan. He has governed Italy with Berlusconi for 15 of the last 17 years and spent many of them as finance minister. During that time Italy's debt has climbed to about 120% of GDP and over 2 trillion euros. Right or wrong people see Tremonti as the man who has protected Italy and her banks. They fear that without him something bad will happen. I think they're right. Without him some bad things will surface.
Turning to UniCredit, it is always noted that somehow, despite Italy's vast debt, both Italy's banks and Italy herself have avoided the worst of the financial crisis. That Italy's banks have not suffered downgrades and insolvency has always surprised me. And apparently it surprises the markets as well who have been jittery about UniCredit all through the crisis.
Friday's plunge in UniCredit's share price and the suspension of trading is not the first time. From the beginning of the banking crisis UniCredit has seen its share price plunge and had to suspend trading in them, over and over again. Just a quick look back reveals trading in UniCredit shares being suspended in June '08, several times on July 10th '08, again on 30th Sept '08 and Oct 6th and again in January of '09. There may be others I didn't spot.
The key to this is what the ratings agencies said when they were questioned about why they gave Northern Rock a good rating only days before it collapsed. They said at the time that part of their evaluation of the 'health' of the bank was how likely they thought it was that it would be bailed out by the government in event of a crisis. Thus they were not evaluating the bank, purely financially - as we might once have assumed - central to their evaluation of the bank's 'health' was how likely it was to have the guarantee of a government bail out. Being likely to be bailed out equaled, in their eyes, a 'healthy' bank.
This is the logic that I think explains why the market sells UniCredit like it has the plague at the slightest hint of trouble. I think the market knows or at least suspects that UniCredit is a very bad shape and will only survive for as long as it's friends have total control over Italian regional and National politics. Should Tremonti, in particular, lose his grip, then UniCredit's viability suddenly looks very fragile indeed.
And if UniCredit looks fragile then so does Italy as a whole. UniCredit's fall would bring Italy down, gold reserves or no gold reserves.
In my opinion Italy as well as UniCredit is in far, far worse shape than has so far been admitted. Italy has, I think, hidden debts in its Cities and regions, particularly those of the North. I think we will see 'new' debts surfacing, particularly if Berlusconi and or Tremonti goes.
But why should you accept my feeling that UniCredit is in trouble? I have written about UniCredit's debt problems before in Dominoes Falling from the East. In that article I detailed how exposed UniCredit is to East European debt. WIthout going in to details, UniCredit owns Austria's largest bank, Bank Austria, which is one of the largest players in Eastern European lending in countires such as Hungary, Poland and Romania. These and other countries of Eastern Europe and the Balkans have a common problem.
One of the things I have been watching is the remorseless strengthening of the Swiss Frank against the Euro and all other currencies. A huge amount of the loans in countries like Hungary were taken out in Swiss Francs. At the time it made sense to borrowers because the rate was far lower than for loans in local currencies or Euros. Now however, as the Swiss franc crushes all the other currencies, people are finding the money they earn, is worth less and less relative to the Swiss franc denominated loan they have to pay. As the Swiss franc gains, more and more loans in Eastern Europe and the Balkans are going under. UniCredit is the final resting place for those losses.
Now I could be seeing dark clouds where there are none. But two sudden developments make me think I am not imagining them.
First, according to an Italian article reported tonight (Sunday) in ZeroHedge, the Italian regulator is so concerned that there could be a blood bath in Italian Bank shares in this week, that it may enforce a ban on naked shorting. Now whether you like or detest naked shorting, this clearly says the rumour is out that UniCredit, among others, is exposed: Hidden debts and a sugar daddy who might be about to fall himself equals dad, bad ju-ju.
Second, the FT's headline on Monday morning (online version at least) is "EU shifts stance on Greece default". The news is that all of a sudden European leaders ( read - the banks who advise them) are willing to countenance Greece defaulting on some of its debt. The article reports how the French plan which was seen as the answer only a few days ago, has suddenly been abandoned for a version of the German plan which had been considered unworkable.
I think this U-Turn is very significant.
The French plan was complex - I did my best to read the French text - and as far as I could see it would have benefited the big banks much more than Greece. The key to the French plan was time. It extended the time Greece had to pay its debts. but in the end Greece would have paid the banks far more. It was a rotten plan for Greece and pretty good plan for the banks. So why abandon the chance to fleece Greece even more?
The only reason I can see is if suddenly time no longer looked as if it was on the bank's side. As long as the banks felt the situation was going to remain stable for a while, then it made sense to extend the repayments but on harsher terms and get more in the longer run. But if suddenly there was reason to think that the situation might deteriorate then that plan would be disaster for the banks. In the face of an approaching disaster the banks would rather get what they could now, and get out.
And then we read about the new plan in which the banks are suddenly in favour of having Greece repurchase its bonds (its debt) from the banks who currently hold the bonds (the debt) even at a loss. Greece would use EU money to do this, lent to it by teh EU. This would be a technical default and a loss for the banks. But suddenly this seems OK to the banks. They are, it seems in a hurry to get what they can now, even if they do make a loss.
Now I don't believe the banks ever do anything out of a sense of civic duty. They do only what benefits them. The only reason I can see for teh banks do be in a hurry to get paid soon even it it means taking a loss, is if the banks feel there is a larger loss coming. What would trigger a fear of a larger loss and make the banks, who only recently refused out right to ever consider taking a loss on their bonds, consider such a thing?
Italy. If Italy looks like it might be unravelling - the bond markets would start to dump its sovereign and its banks's debts and that would definfitely make it worth getting paid out from Greece now.
Like I said, this is speculation. But something is definitely up."
What follows is pure speculation. so please take it as no more than that. But the signs seem ominous to me.
First the facts.
On Friday Italian government bonds got a kicking. The demand for Italy's standard 10 year bonds dropped, and the cost of insuring them against default (CDS cost) jumped. The reason reported was renewed fears that Italy's finance minister Mr Tremonti would leave his post after he was linked to a corruption investigation on top of the ongoing rift with Berlusconi.
Then, also Friday, UniCredit, Italy's Trillion Euro bank had trading in its shares suspended after they dropped 6%. That is a big drop. The reason reported for that was fears that some Italian Banks might fail the latest European Bank Stress Tests whose results are due on the 15th of July. And that UniCredit, which has constantly denied it has any problems whatsoever, might nevertheless have to raise new capital. UniCredit is the only one of the global European Banks not to have raised more capital so far in this crisis.
Then it was reported today (Sunday 10th July) that European finance ministers are to hold an emergency meeting on Monday, "to discuss the possibility that the debt crisis could spread to Italy from Greece...." Suddenly we there is some tlink from Greece to Italy and we skip Spain and Portugal.
This looks to me like something unravelling.
First let's remember that Mr Tremonti is Italy's answer to America's Greenspan. He has governed Italy with Berlusconi for 15 of the last 17 years and spent many of them as finance minister. During that time Italy's debt has climbed to about 120% of GDP and over 2 trillion euros. Right or wrong people see Tremonti as the man who has protected Italy and her banks. They fear that without him something bad will happen. I think they're right. Without him some bad things will surface.
Turning to UniCredit, it is always noted that somehow, despite Italy's vast debt, both Italy's banks and Italy herself have avoided the worst of the financial crisis. That Italy's banks have not suffered downgrades and insolvency has always surprised me. And apparently it surprises the markets as well who have been jittery about UniCredit all through the crisis.
Friday's plunge in UniCredit's share price and the suspension of trading is not the first time. From the beginning of the banking crisis UniCredit has seen its share price plunge and had to suspend trading in them, over and over again. Just a quick look back reveals trading in UniCredit shares being suspended in June '08, several times on July 10th '08, again on 30th Sept '08 and Oct 6th and again in January of '09. There may be others I didn't spot.
The key to this is what the ratings agencies said when they were questioned about why they gave Northern Rock a good rating only days before it collapsed. They said at the time that part of their evaluation of the 'health' of the bank was how likely they thought it was that it would be bailed out by the government in event of a crisis. Thus they were not evaluating the bank, purely financially - as we might once have assumed - central to their evaluation of the bank's 'health' was how likely it was to have the guarantee of a government bail out. Being likely to be bailed out equaled, in their eyes, a 'healthy' bank.
This is the logic that I think explains why the market sells UniCredit like it has the plague at the slightest hint of trouble. I think the market knows or at least suspects that UniCredit is a very bad shape and will only survive for as long as it's friends have total control over Italian regional and National politics. Should Tremonti, in particular, lose his grip, then UniCredit's viability suddenly looks very fragile indeed.
And if UniCredit looks fragile then so does Italy as a whole. UniCredit's fall would bring Italy down, gold reserves or no gold reserves.
In my opinion Italy as well as UniCredit is in far, far worse shape than has so far been admitted. Italy has, I think, hidden debts in its Cities and regions, particularly those of the North. I think we will see 'new' debts surfacing, particularly if Berlusconi and or Tremonti goes.
But why should you accept my feeling that UniCredit is in trouble? I have written about UniCredit's debt problems before in Dominoes Falling from the East. In that article I detailed how exposed UniCredit is to East European debt. WIthout going in to details, UniCredit owns Austria's largest bank, Bank Austria, which is one of the largest players in Eastern European lending in countires such as Hungary, Poland and Romania. These and other countries of Eastern Europe and the Balkans have a common problem.
One of the things I have been watching is the remorseless strengthening of the Swiss Frank against the Euro and all other currencies. A huge amount of the loans in countries like Hungary were taken out in Swiss Francs. At the time it made sense to borrowers because the rate was far lower than for loans in local currencies or Euros. Now however, as the Swiss franc crushes all the other currencies, people are finding the money they earn, is worth less and less relative to the Swiss franc denominated loan they have to pay. As the Swiss franc gains, more and more loans in Eastern Europe and the Balkans are going under. UniCredit is the final resting place for those losses.
Now I could be seeing dark clouds where there are none. But two sudden developments make me think I am not imagining them.
First, according to an Italian article reported tonight (Sunday) in ZeroHedge, the Italian regulator is so concerned that there could be a blood bath in Italian Bank shares in this week, that it may enforce a ban on naked shorting. Now whether you like or detest naked shorting, this clearly says the rumour is out that UniCredit, among others, is exposed: Hidden debts and a sugar daddy who might be about to fall himself equals dad, bad ju-ju.
Second, the FT's headline on Monday morning (online version at least) is "EU shifts stance on Greece default". The news is that all of a sudden European leaders ( read - the banks who advise them) are willing to countenance Greece defaulting on some of its debt. The article reports how the French plan which was seen as the answer only a few days ago, has suddenly been abandoned for a version of the German plan which had been considered unworkable.
I think this U-Turn is very significant.
The French plan was complex - I did my best to read the French text - and as far as I could see it would have benefited the big banks much more than Greece. The key to the French plan was time. It extended the time Greece had to pay its debts. but in the end Greece would have paid the banks far more. It was a rotten plan for Greece and pretty good plan for the banks. So why abandon the chance to fleece Greece even more?
The only reason I can see is if suddenly time no longer looked as if it was on the bank's side. As long as the banks felt the situation was going to remain stable for a while, then it made sense to extend the repayments but on harsher terms and get more in the longer run. But if suddenly there was reason to think that the situation might deteriorate then that plan would be disaster for the banks. In the face of an approaching disaster the banks would rather get what they could now, and get out.
And then we read about the new plan in which the banks are suddenly in favour of having Greece repurchase its bonds (its debt) from the banks who currently hold the bonds (the debt) even at a loss. Greece would use EU money to do this, lent to it by teh EU. This would be a technical default and a loss for the banks. But suddenly this seems OK to the banks. They are, it seems in a hurry to get what they can now, even if they do make a loss.
Now I don't believe the banks ever do anything out of a sense of civic duty. They do only what benefits them. The only reason I can see for teh banks do be in a hurry to get paid soon even it it means taking a loss, is if the banks feel there is a larger loss coming. What would trigger a fear of a larger loss and make the banks, who only recently refused out right to ever consider taking a loss on their bonds, consider such a thing?
Italy. If Italy looks like it might be unravelling - the bond markets would start to dump its sovereign and its banks's debts and that would definfitely make it worth getting paid out from Greece now.
Like I said, this is speculation. But something is definitely up."
These were my comments:
"Good morning Golem,
Thank you once again for a fascinating read. Speculation or not, there are enough facts in it to make anyone seriously concerned. The increased traffic on my blog over the last few days is another indication that UniCredit is a source of concern not only on our side of the Atlantic, but also in the US, courtesy of Pioneer. It is remarkable how UniCredit did a complete U-turn on its decision to sell Pioneer. First, it was up for sale it is was deemed irrelevant to UniCredit's global business plan, then the markets were told that UniCredit has decided not to sell Pioneer because it was 'the best thing since sliced bread' - to use a common Irish expression. Could it be that no one wanted to buy Pioneer? Could it be a similar story to our very own AIB (Allied Irish Banks) which no one in the market has wanted to touch with a barge-pole?
A tragically comic aspect which I hasten to add to your article above is the following: the regulator presiding over the chaos that is Italian banking is Governor Mario Draghi. He has done such a good job at it, that he has been appointed for the top financial job in Europe - he is to be the next governor of the ECB. Hilarious if it were not true. Hence his efforts last Friday to refute speculation such as yours:
Draghi defends Italy budget and banks, markets fret
"ROME/AIX-EN-PROVENCE, France, July 8 (Reuters) - Bank of Italy chief Mario Draghi delivered a robust defence of Italy's banking sector and public finances in the face of intense financial market pressure on Friday.
Draghi, who will succeed Jean-Claude Trichet as European Central Bank president in November, also saw an "undisputed" need for advanced countries to end the support provided by their fiscal and monetary policies in the last three years..."
Needless to say, I have a very personal interest in all matters UniCredit. Hence, I hope you will not mind the fact that I am enclosing a comment I posted on your blog last January.
Regards,
WhistleblowerIRL, UniCredit Ireland's EX Risk-Manager
---------- Forwarded message ----------
From: whistleblower IRL
Date: 14 January 2011
Subject: Comment on Golem's blog
From: whistleblower IRL
Date: 14 January 2011
Subject: Comment on Golem's blog
In addition to Golem's point about UniCredit being hit with a train load of debt from east, there is more trouble brewing in the west. Kathleen Barrington reported in Ireland's Business Post last Sunday that "The Central Bank of Ireland has initiated another review following further media reports of alleged liquidity breaches at the Irish subsidiary of a leading international bank in 2007." http://www.thepost.ie/
Kathleen Barrington refers to the question raised by Dr. Graf in the Austrian parliament on 23 Dec. 2010, the link to the question is:
A previous article by Kathleen Barrington relates to the curious way in which "UniCredit Bank Ireland reclassified €3bn of assets":
For further reading about UniCredit Ireland and the Irish Regulator's handling of its business conduct, please see the cover story in the recent edition of Village magazine:
For further information about UniCredit Ireland, please visit my blog at:
Regards,
WhistleblowerIRL, UniCredit Ireland's EX Risk-Manager.
