Sunday, 30 October 2011

Europe Will Make Lehman Look Like a Joke

So now that one day has passed and we’ve seen a ridiculous 3% move in stocks based on a “bailout” that is nothing short of moronic (Greece is still insolvent and didn’t take a big enough default), the financial world is actually asking itself questions such as:
  1. Does giving a bankrupt nation more money right after it defaults a good idea?
  2. Does requiring an additional $100+ billion in capital for banks that need north of $1.77 trillion in new capital really accomplish anything?
  3. Do bailouts involving more leverage and debt work when the entire banking system is insolvent?
Think about it… Greece is supposed to get its Debt to GDP ratio to 120% by 2020… Can you imagine being a political leader and expecting the markets to buy that?!? Greece had a Debt to GDP of 120% in 2009 when this whole mess started!!!

Already Germany is pouring cold water on it.

Eurozone bail-out: holes emerge in the ‘grand solution’ to solve EU debt crisis
Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds. “It is tied to higher risks of losses and to increased sharing of risks,” said Mr Weidmann. “The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks.”

Again, this entire deal is moronic. It accomplishes nothing. It’s a purely symbolic move. All Europe has done is use up the verbal intervention/ bazooka card.

Oh, and then there’s the issue of the German people and court system:

German Constitutional Court Halts Special Euro Panel

Germany’s highest court has issued a temporary injunction banning the work of a new panel convened by the country’s parliament to quickly green-light decisions on disbursement of taxpayer funds through the euro bailout program. The decision could lead to further delays in German decision-making in efforts to rescue the beleaguered common currency.

Folks, this issue isn’t over… it’s not even close. The credit markets know this, which is why they’re predicting more Greece haircuts in the future. It’s also why IMF has decided to lend Greece another $137 billion… right as the country defaults.

The reality is the following: the. Euro. In. Its. Current. Form. Is. Finished.

We had the exact same market action after Hank Paulson’s “Bazooka” in 2008: a massive rally based on a pointless waste of money. Do people forget that the following 2-3 months after that was when the Crash hit?

That was only three years ago. Do you really think Europe, which is even MORE insolvent that the US, is somehow going to experience a different ending? They’re in far, FAR worse fiscal shape that the US was in 2008 (including unfunded liabilities, REAL Debt to GDP levels for most EU members is north of 400%… heck even Germany’s is over 200%).

How do you really think that will play out? EU banks are leveraged at 26 to 1 and need to roll over between 15% and 50% of their total debt in the next 14 months. How do you think that will play out when the PIIGS and Germany are having trouble with sovereign bond auctions?

Folks, Europe is going to go the same way we did in 2008. The only difference is that the European banking system is MASSIVE ($46 trillion in assets… an amount equal to 82% of global GDP)… so when it goes down, it’s going to make Lehman’s failure look like a joke.

by: Graham Summers


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