“At first you are so sick you are afraid you will die, and then you are so sick you are afraid you won’t die.” – Mark Twain

 

“Oh God, please just get me off this boat and back to the dock. Please God, just get me back to land.” – Cliff Draughn

 

There are certain moments in your life that you never forget: your first car, first date, first day of college, first paying job. These are life events that bring a smile to your face. And then there are those events that are gut wrenching: first heartbreak, first car wreck and, for those of us unlucky enough to suffer from motion sickness, that first deep-sea fishing trip where you spend the day feeding the fish. As I stare at the abyss of the third-quarter stock market statistics, I am reminded of how I hung onto the rail of the boat for hours, pleading to be returned to shore and enduring the laughter of the captain and my friends. As the markets roiled and flowed, with 20-foot waves hitting investment portfolios, stocks were tossed around as if they were toy boats in the perfect storm. For the record, Q3 2011 returns for the major equity indices were:

• S&P 500                  -13.87%
• MSCI EAFE              -20.55%
• MSCI Emerging     -26.27%

The stunning part regarding the third quarter was the amount of volatility we experienced, which is the reason investors are getting seasick. There were some compelling market statistics that causes one to pause – or puke: 

 

• Of the 64 trading days during Q3 2011, we had 33 event days and 31 non-event days. An event day is one where the market moves more than 1% in either direction.
• 16 days with returns greater than +1%
• 17 days with loss returns greater than -1%
• Largest single-day gain was +4.74% on 8/9/11, with volume of 1,861,723,648
• Largest single-day loss was –6.66% on 8/8/11, with volume of 1,938,670,720
• Average volume for event days and positive returns greater than 1% = 924,521,060
• Average volume for event days and negative returns larger than –1% = 1,077,991,360
• Average volume for non-event days = 841,337,350

The month of October provided the best monthly percentage increase in the S&P 500 since December of 1991, with a 10.77% recovery from Q3. And, we experienced the third largest monthly gain ever measured by the Dow Jones Industrial. However, October was no less volatile:

 

• No. trading days = 21
• Event says (returns greater than +/- 1%) = 15  (71% of the time)
• Non-event days = 6
• 10 days with returns greater than 1%
• 5 days with losses greater than 1%
• Average event day gain was 2.071%; highest return = 3.43% (10/27/11)
• Average event day loss was -2.104%; lowest return = -2.85% (10/3/11)

 

So, as we continue to hang on to the rail of volatility and suffer the rolling sea, one has to ask, “When can we please get back to land and dock this boat?” And, in the manner of the captain and my friends consoling me on the first and last deep-sea fishing expedition of my life, my answer to you is: When the forces that govern the EU and the USA understand the perils of government-promoted, debt-driven economic bubbles that lead to currency debasement followed by severe recessions, then the seas will calm. Until then, hang on to that rail and, no, don’t take off your life jacket.

 

Our focus factors for the remainder of 2011 and going into Q1 2012 are as follows:

 

• The Numbers: Valuations and Economic Activity
• Apocalypse Now?
• Greek Default or Voluntary Concessions: The Lunacy of Credit Default Swaps

 

 

 

The Numbers

 

From a consumer and earnings perspective it is difficult to substantiate all of the gloom and doom forecasts due to geo-political risks that have roiled the markets. Unemployment, while not being significantly reduced, has seemingly found a bottom, as evidenced by September’s increase in nonfarm payrolls. This is confirmed by ADP’s report of an 110,000 increase in nonfarm for the month of October. These moderate employment gains are consistent with a sluggish, muddle-through GDP growth, which is what we are predicting going into Q1 of 2012. The ISM Manufacturing Composite stands at 50.6,and this represented the 27^th straight month of manufacturing growth.

 

 

Although the Consumer Confidence Index, at 39.8, is at a low not seen since Q1 of 2009, personal consumption for the month of October increased 0.6%, with increases in both motor vehicles and durable goods. The spending coincided with a reduction in the personal savings rate from 4.1% to 3.6%. Loss of confidence typically means a reduction in spending, but this was not the case for Q3 2011. My conclusion is to go against the ECRI and the consensus that a double dip is inevitable and predict we are going to continue to muddle through, barring some sort of Armageddon event from the EU.

 

Equity markets around the globe rebounded sharply in October, reflecting hope that the ECB and European nations are going to resolve the Greek debt crisis. Behind the stock moves, however, a number of positive forces are at work:

 

• Dividend yield is consistently the most positive value factor for large-cap equities. For the first time since the Great Depression, dividend yield on the S&P 500 is greater than the 10-year Treasury yield.
• Average earnings growth for Q3 2011 versus Q3 2010 is higher. With 392 out of the largest 500 S&P companies having already reported earnings for Q3, the average growth for the cap-weighted index is 25.1% and equal-weighted 18.4%. If we drop out financials, the numbers improve to 28.9% in the cap-weighted and 22.4% for equal-weighted.
• As evidenced in the difference between the above-stated cap-weighted versus equal-weighted earnings growth, we can conclude that large-cap stocks are growing earnings at a faster rate than their mid-cap or small-cap brethren.

 

Third quarters are often cruel, as the -13.87% decline in the S&P 500 reminded us. Since WWII the S&P 500 has produced 10 quarters of -14% or more. Six of the ten were third quarters. The good news is that in 89% of the cases where we experienced a huge negative quarter, the following quarter was positive. The following chart documents investor sentiment, as recorded by the Ned Davis Research Crowd Sentiment Poll. We pay attention to the trend in this chart, as our discipline is to be contrarian to the crowd. At the first of October, we tilted our allocations to be more favorable to high-quality, dividend-paying stocks, and view bonds as having significantly more downside risk than the other asset classes.

 

The next two graphs after the NDR Crowd Sentiment indicate (a) the superiority of dividend-paying stocks as opposed to non-dividend stocks and (b) the cheapness of stocks when using a comparison of T-Bill yields to S&P 500 dividends. In the case of dividend-paying versus non-dividend, compare the black and red lines versus the green line. In the case of comparing T-Bill yields to dividends, we have entered a valuation territory not seen since the Great Depression.

 

 

 

 

We recognize that fear trumps valuations when geo-political risks become the focus point of the markets. Political paralysis on both sides of the pond (US debt debacle and Euro Sovereign debt defaults) has been the jet stream for investment returns. These geo-political risks will remain a feature of the investment landscape that we will not ignore. Major market disasters such as Lehman in 2008 rarely occur when everyone is expecting one. By definition, black swan events are unpredictable. Today, everyone and his brother recognize the European disunion and the impending bankruptcy of Greece.

 

Apocalypse Now?

 

For the past 22 months the question has lingered: when will Greece default? The markets are beginning to learn from the prior three Euro-crises what to expect from European policymakers. In the end it will be what Germany wants, as they are seemingly content to amputate the leg of Greece six inches at a time. Even prior to this past weekend’s summit, German Chancellor Merkel complimented now former Prime Minister Papandreou for stepping down but implored the new Greek policymakers to carry out the Brussels decisions completely and immediately. This past weekend’s summit to end all summits of the G-20 at Cannes followed a now-familiar pattern:

 

• Let’s play Liar’s Poker. Policy makers are amplifying the problems in attempts to get as many concessions as possible from European bank bond holders and capital assistance from the international banking community. The attempt is to bring in the IMF, US, Chinese, and any other international player who fears contagion risk and is willing to be a part of the solution (i.e., give away money).
• As various lines in the sand get stepped over, Germany is more and more assuming the role of dictator, imposing its will on the other European nations. The ECB, while under new leadership, is clearly taking direction from Merkel and company. The announcement from Merkel that Greece is free to leave the euro is a protectionist action based on the notion that euro-zone countries should not become liable for each other’s debts. Really?
• The European financial crisis is in reality a political crisis. Germany is intent on not engaging in any large-scale fiscal transfers to countries like Greece or Italy or any other struggling euro-zone country. This will play on until December, when the German constitutional court will decide whether the Bundestag can approve funding of the EFSF (European Financial Stability Fund). Although it is more than likely the court will rule in favor of funding the EFSF, there is always the political risk that Germany will play an even tougher hand.

 

The Euro-crisis is far from over. Any solving of the problems facing Europe will require a complicated coalition of European banks agreeing from both an economic and political perspective that it was not a handful of small countries making poor decisions that brought them to brinksmanship of the highest order; but rather it was the banking community’s willingness to continue buying the bonds of these countries when their economics were clearly deteriorating. One needs to remember that the European banks were the primary purchasers of sovereign debt, and no one held a gun to the heads of the banks to purchase what will eventually be defaulted obligations. Nevertheless, European policymakers are conscious of the mistakes the US made during the Lehman bankruptcy and the counterparty risks that surfaced in the credit default swap arena. I expect that each partial Greek amputation will be commensurate with a rising pain level, and with the pain the remaining countries will become more and more politically aligned rather than also face disownment by Germany. Greece will eventually default and leave the euro, but the real struggle here is a political one as to who is going to solidify and control the euro, as though the euro zone were one state. In our opinion, the political risks of a European meltdown have been overpriced in the financial markets, though there does remain a chance of financial meltdown.

 

Greek Default? Or Voluntary Concessions?

 

In efforts to increase earnings, large US and European banks have sold huge amounts of insurance against both sovereign and corporate bond defaults, in the form of an instrument known as a “credit default swap” agreement. Credit default swaps (CDS) originally had the purpose of giving institutions the ability to insure against bond default for securities they owned. The seller of the insurance hopes to pocket the premium and never pay a claim; the buyer of the insurance is attempting to insure against a loss. During the US mortgage meltdown in 2008, firms such as AIG and Lehman were net big sellers of insurance against mortgage default, which put multi-billions of risk on their trade desks. As with all insurance, everything is fine until something goes wrong, and then claims have to be paid. The term that then surfaces is counterparty risk, when firms such as Lehman and AIG declare bankruptcy and state they cannot honor their commitments, thereby imperiling the likes of CitiGroup, Goldman, and Morgan Stanley, who were buyers of insurance and ended up both (a) losing the premiums they had paid to AIG and Lehman and (b) staring at large losses from mortgage paper they owned and being forced take the losses from the positions they thought they had insured against.

 

In the CDS world, there is supposedly a winner and a loser, but the US government decided in 2008 to socialize the losses by bailing out AIG and paying off the CDS claims with taxpayer money. What did US banks learn from that experience? One, if you make really BIG mistakes and are too big to fail, then you get bailed out. And two, as a trader on a bank prop desk, you have no risk, so load up the wagon with big bets and collect your year-end bonus. If you are right, then the bank pays you for performing. If you’re wrong, then the bank or financial institution whose capital you exposed to risk may face the threat of going under and need bailout money; but you as the trader simply walk away, ala Joe Cassano. Who is Joe Cassano? He was the head trader for AIG’s CDS unit, who ended up with the moniker Mr. Credit Default Swap. His unit caused the bankruptcy of insurance giant AIG and resulted in a $280-billion-dollar bailout from the US government (us taxpayers) to settle AIG’s CDS liability claims. In 2008 (the year AIG declared bankruptcy) Mr. Cassano received a $34-million-dollar bonus, and his total bonus compensation from 2000-2008 for writing CDS agreements was $280 million. Mr. Cassano never faced any criminal or civil charges and walked away a very rich man at the expense of you and me.

 

 

 

The Lunacy

 

According to Bloomberg, US banks greatly increased their sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish, and Italian debt during the first half of 2011. According to the Bank for International Settlements, guarantees from US banks on debt of those countries rose from $80.7 billion to $518 billion. The banks counter that their “net” positions are far less than this number, as they have other trades where they too have purchased CDSs to reduce their exposure. Five banks – JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup – underwrite 97% of all credit default swaps in the US – that statistic from none other than the Comptroller of the Currency. The banks refuse to disclose/identify the counterparty risks should a default occur.  Just this past week Bank of America, according to Bert Dohmen, reportedly shifted derivatives in its Merrill Lynch investment banking unit over to BofA’s depository arm, thereby gaining FDIC protection from the derivatives exposure. According to Bert,

 

“This means that the investment bank’s European derivatives exposure is now back stopped by U.S. Taxpayers. Bank of America did not get regulatory approval to do this; they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to give relief to the bank holding company, which is under heavy pressure.”

 

Rest assured that if BofA is allowed to do this, JPMorgan, Morgan Stanley, Citigroup, and Goldman Sachs will not be far behind. This is insanity. This is the reason the European governments structured the Greek debt haircut of 50% as “voluntary,” thereby technically not triggering default and avoiding claims from owners of CDS insurance. But what good is buying CDS insurance when there is no default … technically?

 

The probability is that there is going to be another AIG moment, because Dodd-Frank did absolutely nothing to deal with the CDS markets. In my opinion, Congress should enact legislation to prohibit any financial institution that has government-insured deposits from engaging in any derivative transaction that is unregulated and not part of a listed exchange. The massive amounts of CDS being floated do absolutely nothing to promote the formation and allocation of capital and do everything to create a leveraged gambling casino within our financial system, where traders use house money (taxpayer guarantees) as their betting capital. The credit default swap market, in its present form, is a cancer within our system and will come back again and again if not eradicated.

 

 

 

 

 

Summary

 

The past four months have proven to be a challenging time to be a money manager. Stock prices are moving in step with news surrounding the euro-zone debt crisis and the US deficit rather than business fundamentals. Economic conditions are not great, but not bad either. Earnings season has proven that corporate America is healthy and has increased the amount of cash being held on the sidelines. If Europe falls prey to the cold reality of political paralysis, dogmatism, and deep philosophical divides, we could experience another meltdown. If Merkel and company can come up with a credible plan, then we will have a melt-up. The safety of depositor funds in European banks must be unconditionally guaranteed for any EFSF funding to work. My prediction is that eventually there will be some form of euro monetization, with the Germans in control. Greece eventually opts out of the euro, probably in March of next year. The risk of a euro implosion, while low in probability, cannot be discounted. US GDP, while declining, will remain sluggishly positive. Global GDP will suffer from a potential Euro recession but the emerging markets should continue to propel positive growth.

 

We will remain biased to commodity-driven companies and assets and large-cap US quality, with a focus on dividends and emerging markets. The one asset class we are avoiding is long-term Treasuries, even though they were the best-performing asset class for Q3 of 2011. Consider the following:

 

		Annualized Returns
		Long-term	One-month
Bond Environment	S&P 500	Treasuries	T-Bills	Inflation
Bull Market 1982-2011	10.7	11.1	4.7	3
Bear Market 1941-1981	11.1	2.2	3.6	4.7
	10-year Treasury rates
	1-Jan-41	1.90%
	1-Jan-82	14.60%
	11-Oct-11	2.00%

 

 

In closing, I attach a link of Phil Donahue interviewing Milton Friedman in 1979. Take 2:24 minutes and watch this; it sums up the case against Occupy Wall Street and class warfare of the rich versus the poor. Our issues in 1979 were very similar to our issues today. Copy and paste the following to your web browser:

 

http://www.youtube.com/watch?v=RWsx1X8PV_A

 

Keep a cool head and maintain your discipline in these types of volatile markets. It’s very easy to find yourself tossed overboard and searching for a lifeline. And if you don’t have a captain to steer the boat and kid you over your seasickness, get one, take some Dramamine, and maintain your sleeping point.

 

 

 

Appendix

A history of the European Crisis, from the Maastricht Treaty to Papandreou:

 

1992

Feb. 7: Maastricht Treaty signed, setting up an “irrevocable”

monetary union without a central finance ministry or a mechanism to leave the euro.

 

16 Sept: Europe’s Exchange Rate Mechanism blown into disarray when the U.K. is forced to exit the currency regime, a precursor to monetary union. Billionaire George Soros reportedly makes $1 billion selling the pound. Italy later exits and the Spanish peseta, Portuguese escudo and Irish punt are devalued.

 

1996

Dec. 13: In the absence of a euro finance ministry, EU leaders consent to a German-inspired “Stability Pact” designed to impose financial penalties on countries that overstep deficit limits.

 

1998

March 14: Greece enters the ERM.

 

1999

Jan. 1: Euro established with 11 founding members.

 

2001

Jan. 1: Greece enters euro region. Greek 10-year bonds yield

5.36 percent, Spanish 10-year bonds 5.09 percent and Italian 10- year bonds 5.16 percent. Germany’s 10-year bund yields 4.85 percent.

 

2003

Nov. 24-25: Germany, France override EU budget rules after saying they expect to exceed the EU’s 3 percent deficit limit for a third year. Spain, Netherlands, Finland and Austria object.

 

2005

March 20: EU finance ministers bow to German pressure to relax deficit rules.

 

2008

Sept. 15: Lehman Brothers files for bankruptcy, triggering worldwide market panic.

 

Sept. 30: Ireland guarantees all deposits and most debt liabilities of its banks. Irish 10-year bonds yields 4.590 percent.

 

2009

Jan 14: S&P cuts Greece to A- from A. The rating company cites the country’s weakening finances as the global economy slowed.

Greek 10-year bond yields rise to 5.43 percent the next day.

 

Jan. 15: Ireland nationalizes Anglo Irish Bank.

 

Jan. 19: S&P cuts Spain to AA+ from AAA.

 

May 6: Spanish Finance Minister Elena Salgado sees “green shoots” in Spanish economy. Ten-year bonds yield 3.93 percent.

 

Oct. 4:  George Papandreou leads Socialist Pasok Party to landslide victory in Greek elections, beating New Democracy by the widest victory margin since 1981 on pledges to boost spending and wages.

 

Oct. 20: New Greek Finance Minister Papaconstantinou says deficit will balloon to 12.5 percent of GDP this year, more than double the previous government’s forecast. Yield on Greek 10- year bond 4.58 percent.

 

Oct. 26: Former head of Greek National Statistics Service says his body “holds no responsibility” for the revision of deficit figures since 2008.

 

Nov. 5: Papandreou announces first budget. The plan aims to trim the deficit to 9.4 percent GDP in 2010.

 

Dec. 16: S&P Cuts Greece to BBB+ from A-, three steps above junk.

 

2010

Jan. 14: Greece adopts three-year plan to bring the European Union’s biggest budget deficit within the EU limit in 2012. The same day, ECB President Jean-Claude Trichet said Greece won’t win any special treatment from the central bank.

 

Jan. 21: Papaconstantinou says Greece won’t need a rescue package. The yield on Greece’s 10-year bond reaches 6.248 percent, a euro-era high.

 

Jan. 29: EU Commissioner Joaquin Almunia says in Davos there is no ‘Plan B’ for Greece. “Greece will not default. In the euro area, default does not exist.”

 

Feb. 2: Greek government announces austerity package to get deficit to 3 percent of GDP in 2012.

 

Feb. 11: EU leaders hold first emergency summit on Greece. EU agrees to take “determined and coordinated action” to protect financial stability of euro area, without giving further details.

 

Feb. 15: Papaconstantinou says “we are basically trying to change the course of the Titanic. People think we are in a terrible mess. And we are.”

 

March 4: Germany snubs aid for Greece in “historic moment” for EU as protesters seize Finance Ministry in Athens.

 

March 8: Portuguese government announces new budget cuts, more asset sales and a freeze on public wages.

 

March 10: Former Italian Prime Minister Romano Prodi says Greece’s problems are “completely over. I don’t see any other case now in Europe.”

 

March 16: Euro-region finance ministers lay groundwork for making emergency loans available to aid Greece. S&P affirms Greece BBB+ rating and takes it off Creditwatch negative.

Papaconstantinou says the EU needs a “loaded gun” to fend off speculators.

 

March 18: Papandreou calls on EU partners to come up with specific aid measures within a week to help Greece, hints he might seek support from IMF if EU partners don’t act.

 

March 24: Fitch cuts Portugal’s credit rating to AA-.

 

March 25: Trichet says that the ECB will continue to accept bonds rated as low as BBB- as collateral, reversing his January refusal to give Greece special treatment. Later that day in Brussels, Trichet abandons his opposition to IMF involvement in a Franco-German plan to give Greece bilateral loans at market rates.

 

March 26: Head of Greek debt agency says rescue deal “wipes out the risk of default.”

 

March 30: Ireland says country’s banks need to raise an additional 31.8 billion euros of capital.

 

April 8: Greece’s 10-year bond yield reaches 7.4 percent, pushing the spread on German bunds to a euro-era high of 442 basis points.

 

April 12: Euro-area finance ministers agree to provide up to 30 billion euros of loans to Greece over the next year with the IMF agreeing to put up another 15 billion euros in funds.

 

April 21: Greece, facing 8.5 billion euros in bond redemptions the following month, begins talks with the EU, the ECB and the IMF on conditions tied to 45 billion-euro in aid.

 

April 22: The EU revises Greece’s 2009 budget deficit to 13.6 percent of GDP, higher than the government’s previous forecast of 12.9 percent. Ireland overtakes Greece as the EU nation with the largest deficit with its shortfall revised to 14.3 percent.

Moody’s cuts Greece one level to A3.

 

April 23: Papandreou asks EU for a 45 billion-euro bailout from the EU and IMF, calling it a “a new Odyssey for Greece.” “But we know the road to Ithaca and have charted the waters,” he added, referring to the return of mythological hero Ulysses to his island home.

 

April 27: Ireland can “easily” weather the impact of the Greek crisis on financial markets, the country’s debt agency head said.

 

April 27: S&P become first rating company to cut Greece to junk, downgrades Portugal to A-.

 

April 28: S&P cuts Spain’s credit rating for second time since January 2009, pushing the euro to a one-year low of $1.3115.

 

May 2: Euro-region agrees on a 110 billion-euro rescue package for Greece. Greece agrees to 30 billion euros in austerity cuts over the next three years in exchange for the aid.

 

May 3: The ECB says it will indefinitely accept Greek collateral regardless of the country’s credit rating.

 

May 5: Protests in Athens against the government’s austerity plans turn violent and three people are killed when they become trapped in a bank set ablaze by demonstrators.

 

May 6: Greek Parliament approves deficit cuts. Greek 10-year yields reach 12 percent the next day.

 

May 7-8: European leaders agreed to set up an emergency fund to stem the sovereign crisis and said the workings of the financial backstop will be hammered out before the markets open May 10.

 

May 9-10: EU finance chiefs, in a 14-hour overnight session in Brussels, agree to set up a 750 billion-euros rescue mechanism for countries facing financial distress and the ECB said it will buy government and private debt in the biggest attempt yet to end the sovereign-debt crisis. The meeting gives birth to the European Financial Stability Facility, the region’s temporary bailout mechanism, with initial capital of 440 billion euros.

 

May 10: Merkel’s party suffers its worst postwar defeat in Germany’s most populous state after a regional vote overshadowed by aid for Greece. The result cost Merkel control of the upper house of parliament. Bundesbank President Axel Weber publicly criticizes ECB bond purchases.

 

May 12-13: Spain announces public-wage cuts and a pension freeze while Portugal says it will lower the salaries of top government officials and increase taxes. Spain cuts deficit target to 6 percent in 2011 and trims growth outlook.

 

May 18: Greece receives its first bailout loan for 14.5 billion euros, one day before 8.5 billion euros in bonds come due.

 

May 27: Italian Prime Minister Silvio Berlusconi unveils 25 billion euros in deficit cuts meant to help “defend the euro.”

 

May 28: Fitch cuts Spain’s AAA rating one level to AA+

 

June 23: Greek 10-year bond yield closes above 10 percent for first time in euro’s history.

 

June 14 Moody’s cuts Greece to junk.

 

July 13 Greece returns to bond markets for first time since bailout, selling 1.62 billion euros of six-month bills.

 

July 23: Europe publishes the results of bank stress tests. Only

7 of 91 lenders flunk the test.

 

Aug 24: S&P cuts Ireland’s credit rating to AA- because of concern over the costs of shoring up the country’s banking system.

 

Sept. 29: Spain’s first general strike in eight years to protest cuts and an increase to the retirement age.

 

Sept. 30: Ireland prepares to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp.

Moody’s cuts Spain’s AAA rating to Aa1.

 

Oct. 4: Greece announce draft budget plan to cut the deficit to

7 percent of GDP in 2011.

 

Oct. 18: German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Deauville, France and agree that private investors must contribute to future EU bailouts and Sarkozy backs Merkel’s call for a permanent rescue mechanism from 2013.

 

Nov. 4: Trichet signals concern that forcing bondholders to take losses will drive up borrowing costs.

 

Nov. 12: Seeking to calm markets, finance ministers of France, Germany, Italy, Spain and the U.K. issued a statement at a G-20 in Seoul saying any private sector involvement would not apply to outstanding debt and would only come into effect from 2013.

 

Nov. 14: Irish Enterprise Minister Batt O’Keefe says Ireland doesn’t need a bailout, refutes talk of crisis.

 

Nov. 21: Ireland says it will apply for a bailout.

 

Nov. 23: S&P Cuts Ireland two steps to A from AA-.

 

Nov. 28: Ireland gets 85 billion-euro bailout. European leaders scale back proposals to inflict losses on bondholders.

 

Dec. 23: Fitch cuts Portugal to A+.

 

2011

Jan. 14: Fitch follows S&P and Moody’s in cutting Greece to junk.

 

Jan. 24: Spain announces new capital requirements for banks.

Salgado says the capital shortfall won’t be more than 20 billion euros.

 

Feb. 11: Axel Weber resigns from Bundesbank after opposing the ECB’s crisis policy.

 

Feb. 25: Ireland holds general election, with the ruling Fianna Fail swept from power in the worst result in its history.

 

March 11: EU summit agrees to expand powers of EFSF to allow it to buy debt in primary markets and tap its full 440 billion euros in firepower. EU also reaches preliminary agreement to cut the rates on emergency loans to Greece by 100 basis points for first three years and extend maturities of the loans to 7.5 years.

 

March 21: EU finance ministers decide on mechanisms for allowing the region’s permanent bailout mechanism, the ESM, lend 500 billion euros from 2013. The ESM will draw on 80 billion euros of paid-in capital, enabling it to lend a full500 billion euros.

 

March 23: Portugal’s Prime Minister Jose Socrates resigns after opposition rejects austerity package.

 

March 25: European Union leaders cut the start-up capital for the future permanent euro emergency aid mechanism, the ESM, after German demands to make smaller upfront payments.

 

April 6: Portuguese Prime Minister Jose Socrates requests EU bailout, saying he “tried everything” to avoid seeking aid.

 

April 15: Papandreou announces 76 billion euros of austerity measures, later increased to 78 billion euros, running through the end of 2015. The program pledged to raise 50 billion euros from state asset sales and aims to cut the budget deficit to 1 percent of GDP in 2015.

 

April 17: True Finns, who oppose euro bailouts, win 19 percent of the vote in Finnish elections.

 

May 6: Finance ministers from Spain, France, Germany and Italy hold unannounced meeting in Luxembourg that prompt press reports that Greece will leave the euro. Trichet walks out, refusing to attend any meeting that discusses Greek haircuts. Luxembourg Prime Minister Jean-Claude Juncker, who chairs finance ministers’ meetings, says possible further aid for Greece was discussed.

 

May 9: S&P cuts Greece two levels to B from BB-, threatens further cuts.

 

May 11: German Chancellor Angela Merkel signals that she will support Mario Draghi’s candidacy to succeed Trichet as president of ECB.

 

May 13: EU published new debt and deficit forecasts and predicts that Ireland, Portugal, Greece will all to have debt of more than their total GDP in 2011.

 

May 16: Portugal’s 78 billion-euro bailout approved by finance ministers. ECB’s Executive Board member Juergen Stark says restructuring would be “catastrophe” and wipe out Greek banks.

Bini Smaghi says no difference between soft-hard restructuring.

 

May 17: European finance ministers for the first time float the idea of talks with bondholders to extend Greece’s debt-repayment schedule.

 

May 18: IMF Managing Director Dominique Strauss-Kahn resigns after being charged with attempting to rape a New York hotel maid. The case is thrown out three months later by a Manhattan judge.

 

May 20: ECB’s governing council member and Bundesbank President Jens Weidmann says central bank won’t take Greek bonds as collateral if maturities extended.

 

May 22: Spain’s ruling Socialists suffer worst local election defeat in 30 years.

 

May 24: Greece announces details on additional 6 billion euros of 2011 budget cuts, plan to speed asset sales. ECB governing council member Christian Noyer says Greek restructuring would be ‘horror story.’

 

May 27: Greek Cabinet passes another 6 billion euros in austerity measures and gave some details on planned assets sales.

 

June 5: Social Democratic and People’s Party win majority in Portuguese election, routing Socrates’ Socialists.

 

June 7: EU Monetary Affairs Commissioner Olli Rehn says June may be the “beginning of the end” of the crisis.

 

June 13: S&P Cuts Greece to CCC, the lowest rating for any country it reviews in the world.

 

June 15: Papandreou announces Cabinet reshuffle and confidence vote.

 

June 17: Papandreou appoints Defense Minister Evangelos Venizelos to replace Papaconstantinou as finance minister.

 

June 22: Papandreou survives confidence vote in his government.

 

June 24:  Draghi appointed to succeed Trichet as president of the ECB.

 

June 28: French Finance Minister Christine Lagarde is named the first female head of the IMF with a mandate starting July 5.

 

June 30: Greek lawmakers approve the 78 billion-euro austerity plan after two votes in two days marred by violent protests outside parliament. Berlusconi’s Cabinet approves 47 billion euros in deficit-cutting measures to try to balance the budget by 2014 and protect Italy from the fallout of Europe’s debt crisis.

 

July 5: Moody’s cuts Portugal to junk.

 

July 12: Moody’s cuts Ireland to junk.

 

July 21: EU summit passes second bailout package for Greece and agrees to expand the powers of the EFSF. Bankers agree to take losses of 21 percent on the net present value of their Greek bond holdings.

 

July 29: Spanish Prime Minister Jose Luis Rodriguez Zapatero sets Nov. 20 as date for early elections that polls show he will lose. Moody’s places Spain’s rating on review for a downgrade.

 

Aug. 2 Spain’s 10-year bond reached euro-era record 6.46 percent.

 

Aug. 4 The ECB votes to resume its bond-buying program, buys Portuguese and Irish debt.

 

Aug. 5: ECB sends secret letter to Italy asking for more austerity measures and a plan to balance budget in 2013 rather than 2014. Berlusconi announces he will seek a balanced budget amendment and pledges more austerity Italian yields rise above Spanish yields for first time since May 2010.

 

Aug. 7: After emergency conference call, ECB signals it will begin buying Italian and Spanish bonds in secondary markets as part of its Securities Markets Program. The next day Spain’s 10- year yield falls 88 basis points to 5.16 percent, Italy’s drops 80 basis points to 5.23 percent.

 

Aug. 12: Italy’s Cabinet approves by decree a 45.5 billion euro austerity package to balance the budget in 2013 that helped secure ECB support for the country’s bonds. France, Spain, Italy and Belgium impose bans on short-selling after shares in European banks, including Societe Generale SA, hit their lowest level since Lehman’s collapse.

 

Aug. 16: Finland and Greece strike agreement on collateral to guarantee bailout contributions. The agreement was opposed by other euro members such as Austria and the Netherlands and had to be re-negotiated.

 

Aug. 19: Spain’s Cabinet passes another 5 billion euros of savings and cuts VAT on new home purchases.

 

Aug. 29 Berlusconi bows to pressure from his allies to overhaul the August austerity package and drop a tax surcharge on Italians earning more than 90,000 euros a year.

 

Aug. 31: Portugal raises capital gains taxes and increases levies on corporate profit and high earners.

 

Sept. 2: Inspectors from the European Union, European Central Bank and International Monetary Fund suspend Greece’s fifth review after finding delays in the implementation of the medium term fiscal plan and structural economic reforms. Spain adds budget-discipline amendment to constitution, the second change in its 30-year history.

 

Sept. 6: Italian unions hold general strike.

 

Sept. 9: Juergen Stark resigns from ECB after opposing the bank’s bond purchases.

 

Sept. 11: Papandreou approves new emergency measures to plug a gap in the budget for 2011.

 

Sept. 14: Italian parliament gives final approval in a confidence vote to a 54 billion-euro austerity package to balance the budget in 2013.

 

Sept. 15: ECB offers banks unlimited dollar loans for three months as worsening debt crisis sparks concern some institutions struggling to access U.S. currency.

 

Sept. 16: Spain brings back wealth tax scrapped in 2008.

 

Sept. 17: U.S. Treasury Secretary Timothy F. Geithner urges European officials to deal with the crisis and avoid “catastrophic risks” after flying to a meeting of European Union finance chiefs in Poland.

 

Sept. 19: Standard & Poor’s cuts Italy’s credit rating for the first time in almost five years, downgrading it to A from A+.

 

Sept 30: Spanish bank bailout fund takes over three more savings banks, valuing them between zero and 12 percent of book value and saying the overhaul of the financial industry is complete.

Portugal revises up 2010 budget deficit to 9.8 percent.

 

Sept. 22: Italian Finance Minister Giulio Tremonti skips a parliamentary vote on whether to permit the arrest of his long- time aid Marco Milanese, straining relations with Berlusconi and key coalition allies.

 

Oct. 2:  Greece’s government approves the draft budget for 2012 which targets a budget deficit of 8.5 percent of gross domestic product and announces it will miss revised deficit target for 2011.

 

Oct. 3-4: EU finance ministers work out a revamped deal on collateral for Greek loans that satisfies Finnish demands and those of other euro-region governments opposed to abilateral deal for Finland. Leaders also hint that private investors may have to accept a bigger haircut on their Greek bonds than what was included in a July 21 agreement.

 

Oct. 4: Moody’s cuts Italy for the first time in almost two decades, lowering the rating to A2 from Aa2.

 

Oct. 6: Spain says banking industry rather than the taxpayer will absorb losses incurred from bank bailouts.

 

Oct. 7: Fitch cuts Spain to AA- and Italy to A+

 

Oct. 10: Greece’s central bank activates a rescue fund set up under the May 2010 bailout to restructure Proton Bank SA, with the Hellenic Financial Stability Fund becoming its sole shareholder.

 

Oct. 11: Troika releases statement on fifth review of Greek economy and suggests the sixth tranche of the bailout payments worth 8 billion-euro be paid.

 

Oct. 14: Berlusconi survives a confidence in vote in parliament that he was forced to call to prove he still had a working majority after losing a routine vote earlier in the week.

 

Oct. 18: French bonds yield 112 basis points more than German equivalents.

 

Oct. 21: Papandreou wins parliamentary approval of latest austerity bill, which includes wage and pensions cuts and plans to lay-off 30,000 state workers. His majority falls by one lawmaker to 153 after he expels Louka Katseli for voting against one of the articles. EU, ECB, IMF issue draft sustainability report on Greece which said debt dynamics remain “worrying.”

 

Oct. 23: European leaders say a summit on the euro crisis won’t produce decisions and set another meeting for Oct. 26. Greek 10- year yields trade at 25 percent. Merkel and Sarkozy smile at a news conference when asked whether Berlusconi can fix Italy’s finances.

 

Oct. 26-27: EU leaders hold 14th crisis summit in 21 months.

After more than 10 hours of talks, leaders agreed to leverage the EU’s temporary bailout fund to boost its firepower to 1 trillion euros, force private investors to accept a 50 percent haircut on Greek bonds, push European banks to raise 106 billion euros in new capital, and extend a new aid package worth 130 billion euros for Greece.

 

Oct. 31: Papandreou stuns EU politicians and Greek lawmakers by calling a referendum on the second bailout agreement.

 

Nov. 1: Stocks and bonds plunged worldwide on concern an unsuccessful referendum will push Greece into a disorderly default. The yield on Greece’s two-year bond rises to a record

84.7 percent. Draghi succeeds Trichet as ECB president.

 

Nov. 2: European leaders cut off aid payments to Greece and say Greece must decide soon whether it wants to stay in the euro.

The ultimatum is at odds with the Maastricht Treaty’s assertion that monetary union is “irrevocable.”

 

Nov. 3: Papandreou backs down on euro referendum. Draghi’s ECB unexpectedly cuts interest rates at his first meeting.

 

Nov. 6: Papandreou agrees to step aside to make way for a government of national unity.

 

Greek 10-year bonds yield 25.52 percent.

Spanish 10-year bonds yield 5.56 percent.

Italian 10-year bonds yield 6.35 percent.

German 10-year bonds yield 1.80 percent.

 

 

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