Earlier this week, Standard & Poor’s (S&P) downgraded 24 Italian banks and financial institutions. The ratings agency cited renewed concern of a European crisis and “dimming” economic growth prospects… This is the fourth round of Italian downgrades S&P has carried out in less than a month. On a side note, credit-ratings agency Moody’s also warned it may downgrade France’s triple-A rating.
The downgrades started September 19, when S&P downgraded Italy’s credit rating from single-A-plus to single-A. The next day, we described Italy’s dire situation…
[ad#Google Adsense 336×280-IA]Days after the initial Italian downgrade, S&P downgraded six Italian banks… And 11 city and regional governments followed a few days later. Regular readers know our view on the mainstream ratings agencies (Moody’s, S&P, and Fitch). When they start downgrading, it’s already too late.
The European situation is still deteriorating daily. Late yesterday, Standard & Poor’s downgraded Italy’s credit rating from single-A-plus to single-A. And the agency maintained a negative outlook on the debt. On cue, the European Central Bank stepped into the market today to buy Italian bonds. (It’s been buying Spanish and Italian debt for weeks.) The yield on 10-year Italian government debt dropped to 5.603% in early trading today, down from an earlier high of 5.67%. Despite the government intervention, credit default swaps on Italian government debts are at all-time highs.
There’s simply no way Italy can finance its debts… It must refinance 192 billion euro this year, 168 billion euro next year, and another 100 billion euro in 2013. Italy is the world’s third-largest sovereign borrower with public debt of 1.7 trillion euro. And it runs a 3.9% annual GDP deficit. While it’s not as far gone as Greece, Italy’s time is nigh… And the ECB will continue pumping cash to delay the problems. That’s why we’re still bullish on gold and silver (and hedging our portfolio with short sales)… – S&A Digest, September 20, 2011
One glaring omission from S&P’s victim list is UniCredit – Italy’s largest bank and our bellwether for Europe’s banking sector. UniCredit hasn’t been downgraded since the initial cut on September 19. But it’s a temporary phenomenon…
On Wednesday, a court in Milan seized $337 million of UniCredit’s assets, as former CEO Alessandro Profumo is being examined in a tax-evasion probe. Prosecutors are examining whether UniCredit committed fraud through an international investment scheme called Brontos. The bank used Brontos to increase the bank’s “economic benefits,” Profumo said at UniCredit’s 2010 annual meeting. The plan increased pretax profit, a bank spokesman said at the time.
The plan, it appears, was a scam. The judge says Brontos disguised interest earned on deposits as dividends earned from fake securities. Interest earned on deposits is taxed in full, while dividends are taxed at 5%. This scheme took place in 2007 and 2008. This isn’t Profumo’s first brush with scandal. He stepped down in September 2010… after taking heat for accepting a massive bailout from Muammar Gaddafi.
Earlier this week, JPMorgan said UniCredit is among the worst-capitalized banks in Europe – quite an accomplishment these days. Italy’s largest bank would need to raise $18.7 billion if European banks underwent stricter regulations and wrote its sovereign debt holdings down to market. The only bank worse off than UniCredit, according to JPMorgan, is the Royal Bank of Scotland (RBS). The bank, which Porter Stansberry shorted in the July issue of Stansberry’s Investment Advisory, would need to raise more than $26 billion.
One final piece of bearish news on Europe… Germany, the European Union’s strongest member, tried to sell five billion euros of government bonds this week, but received only 4.55 billion euros in bids. The market is worried – as we’ve been from the beginning – that the euro nations’ ever-increasing bailout needs will fall on Germany (and, we predict, the U.S. Federal Reserve).
In his latest issue, Porter warned the rising markets shouldn’t fool you into believing Europe’s problems were over. We’ll see more and more printing soon…
Lately, the markets have rebounded significantly, based on the hope that Europe can somehow contain the fallout from a Greek default.
Such a painless and happy resolution is a pipedream. The first major European bank to fail, Dexia, was a major holder of Greek debt. It couldn’t survive even a 21% decrease in the value of its Greek bonds. I’m certain the public has no idea what the impact on the European banking system will be if Greek bondholders are asked to write off 50% of the value of their bonds.
The European crisis is far from over. And as I’ve said many times, the endgame will be a bailout of the entire European banking system organized and financed by the Federal Reserve. Such an action would be hugely inflationary and could have severe political consequences in the U.S. – Porter Stansberry, October 2011, Stansberry’s Investment Advisory.
If you don’t have enough gold exposure leading into what promises to be a multitrillion-dollar government bailout, it’s not too late…
“It’s time to ‘back the truck up’ on gold stocks,” Jeff Clark says.
In an update sent to his S&A Short Report subscribers earlier this week, Jeff said the gold market is flashing a buy signal… And it’s “time to aggressively buy gold stocks.”
— Sean Goldsmith[ad#jack p.s.]
Source: The Growth Stock Wire