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Jubak: Get ready for the next crash

Jim Jubak at MSN has out an assessment of the EU crisis and banking issues, in his regular, esteemed form. You really must read the thing in its entirety.

Financial markets are behaving as if they expect a European banking crisis that would require the bailout or nationalization of some European banks. That would feel like a replay of the financial crisis that followed the bankruptcy of Lehman Brothers in the fall of 2008. Only this time, the epicenter would be Europe instead of the United States, and the ripples would expand from the eurozone outward into global financial markets.

How realistic is that fear? Very, I’m afraid. European banks are facing a very real liquidity and capital crisis that could lead to the need for a government rescue of some globally significant banks.

But the crisis isn’t an exact replay of the 2008 crisis. The effects of the crisis would not be limited to Europe, but the likelihood that a European crisis would take down a major U.S. bank — in a mirror image of the 2008 crisis where problems originating in the United States did lead to the bailouts of banks in the United Kingdom, Germany and Belgium — is relatively small. On the other hand, the crisis is potentially worse this time around because the European Central Bank is much less able to intervene as a lender of last resort than the U.S. Federal Reserve was in 2008.

Understanding this crisis
The current European banking crisis is rooted in the Greek, Italian, Spanish, Portuguese and Irish debt crises. But the repeated collapse-bailout-collapse-again pattern of the prices of bonds of those countries wouldn’t have produced the current mess without a series of missteps by banks, bank regulators and central banks.

European banks hold a huge amount of government debt from the countries involved in the crisis. German banks, for example, held $22 billion in Greek government debt at the end of 2010, according to the Bank for International Settlements. If you add holdings of Greek government debt to holdings of private-sector Greek debt, the exposure gets much higher. For example, in May, Fitch Ratings said that French bank Credit Agricole (CRARY +3.59%, news) had $35 billion in exposure to Greek government and private debt. BNP Paribas (BNPQY -0.82%, news) and Société Générale (SCGLY +6.83%, news) had exposure of about $11 billion each.

The exposure of European banks to Greece, however, is small souvlaki compared with exposure to the much larger Italian economy. BNP Paribas, for example, has an estimated $31 billion in exposure to Italian government and private-sector debt. Even where the total for Italy is not as high as for Greece, the additional exposure is big enough to add to worries. Credit Agricole has an estimated $17 billion in Italian exposure.

But the current banking crisis owes as much to the reaction of banks and bank regulators to the problem as to the size of this exposure. Nobody now expects that Greece will be able to avoid a default in the end. Even Sunday’s announcement of new measures to close a $3 billion budget gap just served to convince financial markets that the more Greece cuts, the more the economy will slow, and the fewer taxes the government will collect. Like last year’s rescue package, this year’s deal, if ultimately approved, only buys time.

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Upgrades and Downgrades This Morning

Upgrades

KEX – Kirby Corp upgraded to Buy at Stifel Nicolaus

PNG – PAA Natural Gas Storage upgraded to Buy from Neutral at UBS

JPM – JPMorgan Chase upgraded to Buy at Stifel Nicolaus

AGNC – American Capital Agency initiated with an Outperform at Wells Fargo

NRGY – Inergy upgraded to Buy from Neutral at UBS

CAVM – Cavium Networks upgraded to Outperform from Market Perform at JMP Securities

AYR – Aircastle initiated with an Overweight at Barclays

LMT – Lockheed Martin upgraded to Neutral from Sell at Goldman

SODA – SodaStream initiated with a Buy at Janney Montgomery Scott

Downgrades

DOW – Dow Chemical upgraded to Outperform at Credit Agricole

GS – Goldman Sachs initiated with an Equal Weight at Morgan Stanley

FDX – FedEx downgraded to Sector Perform from Outperform at RBC Capital

HSP – Hospira downgraded to Equal Weight from Overweight at Barclays

BP – BP target lowered to $55 at The Benchmark Company

NGG – National Grid downgraded to Neutral from Buy at UBS

HCA – HCA downgraded to Neutral from Outperform at Cowen

MLM – Martin Marietta downgraded to Sell from Hold at Citigroup

DLB – Dolby Labs initiated with a Neutral at Merriman

SWI – SolarWinds downgraded to Underweight from Equal Weight at Morgan Stanley

NETL – NetLogic downgraded to Neutral from Buy at UBS

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Gapping Up and Down This Morning

Gapping up 

VVUS +0.6%, BQI +22.4%,  EGO +1.1%,  MGM +1.2%, LXRX +9.4%, GOLD +1.0%, JPM +0.7%,EGHT +1.1%, BBY +2.6%, SPWRB +10.7%,  NBG +4.1%, UBS +2.8%, DB +2.4%, INO +5.3%, WLT +5.1%, ISIL +2.3%,

SVM +2.0%, SPWRB +10.7%, EK +3%,  GFI +1.6%, HMY +1.4%,  TASR +2.8%, SODA +1.5%,

Gapping down

STLD -2.2%, ITMN -7%, E -3.9%, RIG -2.9%,

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