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Guest Post: Banking Crisis: Europe Banks The Next To Fail En Masse

Tyler Durden's picture





 

Submitted by Taylor Cottam of EconomyPolitics.com (for Zero Hedge's previous analysis on Libor fixings by bank, indicating WestLB's outlier status, click here)

Banking Crisis: Europe Banks the next to fail en masse

European banks are in a freefall similar to what happened to US banks.  We saw this coming months ago when I wrote in a blog post about the state of US, Europe and Canadian Banks.  I said that of the three, I worried most about the European banks because asset prices had not fallen like they had in the states, and that the debt level of German and UK banks could precipitate another crisis.  There are some very concerning things happening now in European Banks. 

The market is disounting them as practically insolvent.  And even worse, there is some real problems with what is happening in state insured banks like West LB which has been bailed out and is state owned.  It would be the same if the markets charged Fannie Mae the subprime borrowing rates they deserve.  Fannie Mae's cost of funds is below any private bank simply because they are considered part of the treasury.  In fact, because it is guaranteed, if their borrowing costs were too high, one could buy Fannie Mae bonds, sell gov't bonds and make a risk free spread. 

Well, that is exactly what is happening at West LB.  "WestLB AG, the German state-owned lender bailed out during the financial crisis, is among banks paying the most to borrow for three months in euros, dollars and pounds, according to data from the British Bankers’ Association."  So one could technically buy short term debt from West LB and Sell German bonds for a risk free return.  Its a no brainer... or is it?

It could be just a technical phenomenon, i.e. collateral damage, or the market is spooked that either the gov't is not going to honor its guarantee.  The third and most scary possibility is that the Sovereign debt crisis is going to suck Germany in whole.  While I would not subscribe to that theory, it is enough to make one wonder.  The leverage on Germany's banks would make any American bank blush, and if there were banks to fall under pressure, they would likely not be able survive with such debt loads. 

More on European debt via Bloomberg:

European banks at risk of writedowns from the sovereign debt crisis face a funding squeeze that may depress earnings, curb lending and imperil economic recovery in the region.

Investors are shunning bank securities on concern Greek, Portuguese and Spanish bonds held by the lenders will plunge in value. Bank bond sales slowed in May to the lowest since Lehman Brothers Holdings Inc.’s failure in 2008 as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, depositing record funds with the European Central Bank.

The cost of insuring bank debt from default rose close to a record last week. The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed to 208 basis points on June 8, approaching the all-time high of 210 basis points set in March 2009, JPMorgan Chase & Co. prices show.

 


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Mon, 06/14/2010 - 18:28 | Link to Comment mikla
mikla's picture

Mon, 06/14/2010 - 19:19 | Link to Comment Mitchman
Mitchman's picture

Nice!

Mon, 06/14/2010 - 18:29 | Link to Comment Rainman
Rainman's picture

Now the ECB can bloat up as fat as Bennie and the Fed.

How do you say " rescued from the brink of disaster " in Deutsch ?? 

Mon, 06/14/2010 - 19:01 | Link to Comment Great Depressio...
Great Depression Trader's picture

gerettet aus den Rand der Katastrophe

Mon, 06/14/2010 - 19:20 | Link to Comment Rainman
Rainman's picture

Ah yah ..........mit tiefer dankbarkeit !!

Mon, 06/14/2010 - 18:33 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

I am not an expert on Europe, but I think that some conclusions can be drawn:

1) The countries with laziest workers go down first.

2) The more socialist a country is goes down quickly as well.

3) .govs do a bad job with anything financial they own.

4) Germany will not and cannot prop up the rest of Europe.

Mon, 06/14/2010 - 18:58 | Link to Comment Muir
Muir's picture

You are right.

You are not an expert.

Mon, 06/14/2010 - 22:48 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

+ 4

I told you.  And, no, I did not junk you.

More constructive remarks might have enlightened me further though.

Mon, 06/14/2010 - 23:29 | Link to Comment RockyRacoon
RockyRacoon's picture

In keeping with my rule, this is the comment commensurate with the junking.  Here's the reason.  I'm presuming that you are a European expert so you should have elucidated upon your observation that poor DCRB is not an expert.  We are breathlessly awaiting your analysis.  Quickly now, I am old and I wind easily.

Mon, 06/14/2010 - 23:52 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Rocky, I'm getting old too.

My doctor told me no shocks, or moving heavy stuff around, to my system until they find out what is wrong with me (weakness in my left arm, would that be a bad disc or something neurological...?  Shi'ite...).

So hurry up Muir!  Straighten out the Bearing with your wisdom.

Tue, 06/15/2010 - 00:02 | Link to Comment SWRichmond
SWRichmond's picture

deleted

Tue, 06/15/2010 - 04:57 | Link to Comment AnAnonymous
AnAnonymous's picture

All you can say is about the level of expectation the guy has on the quality of analysis an expert must provide.

Thanks to the Internet, I found out this side, especially among US citizens.

You dont need to know the correct answer to know that an answer is flawed.

Yet for many US citizens (as sampled by daily life and the Internet), this little piece of reality completely evades.

If you are not able to provide  the correct answer then outlining that an answer is wrong is moot.

Once, there was that guy big on that behaviour. Any time a wrong answer was outlined as a wrong answer, he kept asking the proper answer as an evidence.

Funnily enough, one of his walls got built not vertically. In a matter of self derision, I asked if he knew how to lay up a wall vertically so he could tell about wrong answers. I thought the guy would laugh at himself but instead, he somehow grew violent. Which outlined another strong trait in US citizens, what is good for others is not forcefully good for them.

So if we start  with the idea that the guy expects a certain level of quality in the answer to an issue, the list fails miserably.

The guy is more interested in seeking evidences to validate a pre-conceived  point of view than analysing facts (a propagandist then)

Because if one cast the little reminder that Iceland was the first european country to fail (and not Greece as it is obviously the case in this man's mind), the first two lines might be accepted as consensually as this propagandist hoped they would.

Mon, 06/14/2010 - 19:46 | Link to Comment Anarchist
Anarchist's picture

Most of your examples are wrong since the world has never had true democracy, socialism, facism, communism...etc. The world is full of people gaming whatever system they live under. It is human nature to degenerate into haves and have-nots. The US will go back the way it was 75 years ago. 5% of the population own 90% of the wealth.

Mon, 06/14/2010 - 23:45 | Link to Comment WeeWilly
WeeWilly's picture

Anarchist, 75 years ago I can live with. It's going back to 400 years ago that worries me...

Mon, 06/14/2010 - 20:10 | Link to Comment Village Idiot
Village Idiot's picture

"A" for effort, DoChen, but Muir's response desrves an "A" too - funny!  As the VI, I know nothing, of course.

Mon, 06/14/2010 - 23:31 | Link to Comment RockyRacoon
RockyRacoon's picture

Ha!  Oh, your village called.  They want you back.

Tue, 06/15/2010 - 09:30 | Link to Comment Village Idiot
Village Idiot's picture

Oh, Rocky, that wasn't very nice. Look for the humor.

Tue, 06/15/2010 - 03:59 | Link to Comment Innocent Bystander
Innocent Bystander's picture

"1) The countries with laziest workers go down first."

I'm no expert either, but if I were to put my money on collapse of countries, I would wager that countries that are hard working and more advanced, would fall first and would fall really hard. 

There are two reasons,

First, advanced hardworking countries usually have a major part of their GDP coming from intangibles (this is how I see it), a big one being financial innovation - such as securitization, derivatives, etc.  that is to say these countries have moved on from brick and mortar, manufacturing and such to highly evolved methods of creating wealth if you will. 

Secondly highly developed countries, do not have a shadow economy, all though in an ideal world, shadow economy and tax evasion are cancers that can bring down the whole system, when we are talking of collapse of a country we are assuming collapse of government, and given this situation, (I cannot explain here due to lack of time,) you will be surprised, but to have a shadow economy will be beneficial and will help support, in the short run, and maybe help rebuild.

e.g. 

 Germany - Greece:  DB alone can take Germany down, and it will be quick if it were to come to that, however Greece with all its laziness (for lack of a better word) and indebtedness, will pull thru much better than Germany, given its unaccounted wealth (will need more explanation, I’ll try to put something for ZH, when possible) and shadow economy.

2) US - Mexico: Fredy, Fannie,  BAC..well there are so many institutions that can bring down the system at a rapid pace, not so much in Mexico, will not go into details, but hope I have been able to convey my point of view, for whatever it is worth.

 

Tue, 06/15/2010 - 04:17 | Link to Comment Escapeclaws
Escapeclaws's picture

+1

Tue, 06/15/2010 - 11:06 | Link to Comment marc_hanes
marc_hanes's picture

Perhaps this would be a case of "those with the fewest toys win"?

The less you have to lose the easier it is to survive, survival being closer to your existing state of being.

Tue, 06/15/2010 - 04:00 | Link to Comment Innocent Bystander
Innocent Bystander's picture

"1) The countries with laziest workers go down first."

 

I'm no expert either, but if I were to put my money on collapse of countries, I would wager that countries that are hard working and more advanced, would fall first and would fall really hard. 

There are two reasons,

First, advanced hardworking countries usually have a major part of their GDP coming from intangibles (this is how I see it), a big one being financial innovation - such as securitization, derivatives, etc.  that is to say these countries have moved on from brick and mortar, manufacturing and such to highly evolved methods of creating wealth if you will. 

Secondly highly developed countries, do not have a shadow economy, all though in an ideal world, shadow economy and tax evasion are cancers that can bring down the whole system, when we are talking of collapse of a country we are assuming collapse of government, and given this situation, (I cannot explain here due to lack of time,) you will be surprised, but to have a shadow economy will be beneficial and will help support, in the short run, and maybe help rebuild.

e.g. 

 Germany - Greece:  DB alone can take Germany down, and it will be quick if it were to come to that, however Greece with all its laziness (for lack of a better word) and indebtedness, will pull thru much better than Germany, given its unaccounted wealth (will need more explanation, I’ll try to put something for ZH, when possible) and shadow economy.

2) US - Mexico: Fredy, Fannie,  BAC..well there are so many institutions that can bring down the system at a rapid pace, not so much in Mexico, will not go into details, but hope I have been able to convey my point of view, for whatever it is worth.

Mon, 06/14/2010 - 18:50 | Link to Comment Currently Smoki...
Currently Smoking Cannabis's picture

Timmy G:  You boys ready to do things my way now?!  Cause I don't know what the time difference is, but it sounds like it's 2008 in Europe!

 

Mon, 06/14/2010 - 18:55 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Not a bad idea to buy the bank's debt against sovereign risk.

The key is buying in senior to where the government will buy in.  For example, the US govt has been coming in at the preferred level, so buying junior debt on up is the place to be.

Mon, 06/14/2010 - 18:59 | Link to Comment Treeplanter
Treeplanter's picture

How exposed are the big US banks to this?

Mon, 06/14/2010 - 18:59 | Link to Comment piceridu
piceridu's picture

Is this a shot over the US bow? Is the need for the USD as a reserve currency being reduced even at a snail's pace?

http://english.caijing.com.cn/2010-06-11/110457673.html

Mon, 06/14/2010 - 19:44 | Link to Comment zen0
zen0's picture

So Iceland will trade cod and volcanic ash sculptures for rice.

 

A reserve currency is just a vehicle for settling international transactions. Everyone has to agree that this is the vehicle. Anything that has challenged the U.S. dollar has lacked a sufficient weight of support to supplant it. Iran is selling Euros. If China wants to replace the USD, it has to demonstrate enough capability to engender overwhelming confidence in the vast majority of the world. This has not yet happened.

Mon, 06/14/2010 - 19:52 | Link to Comment Anarchist
Anarchist's picture

China has cut deals with many of it's trading partners that cut out use of the dollar or any currency. The Chinese trade consumer goods, cars, weapons, even resources for other countries resources and goods. In the papers the claim is that both parties have agreed to accept each others currency. In reality only the net value of the two currencies in relation to probably the dollar will be used. The end result is that no dollars will be purchased.

Mon, 06/14/2010 - 21:27 | Link to Comment cbaba
cbaba's picture

Its not just a vehicle, its the money you saved and keep your savings parked in.

Mon, 06/14/2010 - 23:31 | Link to Comment brushfire
brushfire's picture

Its not just a vehicle, its the money you saved and keep your savings parked in.

a reserve currency is supposed  to be a means for storing wealth, but the dollar is nothing more than a vehicle masquerading as a store of wealth. generally, the larger the underlying assumption, the larger the eventual blow up when the assumption is proven to be a false one.  fundamentally misunderstanding what the dollar is is a pretty large false assumption.

Mon, 06/14/2010 - 23:45 | Link to Comment zen0
zen0's picture

If the world decided that international settlements would be made in iron bars, iron bars would be the reserve currency.

It all might end up being something akin to paypal.....

Tue, 06/15/2010 - 08:45 | Link to Comment Al Gorerhythm
Al Gorerhythm's picture

In its current form, the dollar is not used to settlement accounts. It is an unbacked, irredeemable, piece of shit, credit note. You are confusing payment with settlement. Settlement occures when the note of credit comes back, to be exchanged for something tangible.  Since the US has reneged on its word, to settle international transactions with gold, there has been no settlement since "71. Well, settlement is due and the piper will be paid. What is there that the US will cough up to appease the world's creditors? More dollars (aka credit notes)?!

A reserve note should be backed by more than confidence, good will and wishful thinking. The reserve part of it means that it has a reserved asset backing it. You are incorrect in your statement that there has to be only one reserve currency in the world. If every currency had gold in its reserves, they would all be classed as a reserve currency. Therefore, why the need for the US centric monopoly? It's a barbarous, deceitful relic and the root of the currency crisis.

Mon, 06/14/2010 - 19:02 | Link to Comment jkruffin
jkruffin's picture

I just pray JPM exposure to this is enormous and they go bankrupt out of business along with Goldman.  I think their exposure is more than they are claiming for sure.  Let's kill all the scum in one financial collapse and get it over with, let the domino's collapse, so we can start from scratch and try to get it right.

Anyone with any kind of common sense, can see that this is going to end very ugly for alot of nations, especially the U.S.

Mon, 06/14/2010 - 21:36 | Link to Comment cbaba
cbaba's picture

Its not going to happen.

They will not let them fail, the Volcker was on msnbc today he and the former fdic chair-ass clearly said the big 5 banks should never go bankrupt, if they do the government should step in and save them again.

They are not even talking about nationalization of the big 5 . We, the taxpayers have to bail them out all the time, and these guys should get billion dollar bonuses.

These are the same guys in the fed and the big banks and the squid. these people will take hostage all America until all of us economy falls into a black-hole.

 

Tue, 06/15/2010 - 07:38 | Link to Comment SWRichmond
SWRichmond's picture

Endless taxpayer money for the big banks, austerity for the middle classes.

Mon, 06/14/2010 - 19:39 | Link to Comment bebasvemir
bebasvemir's picture

I am from Europe. We`ll hold till August.  

Tue, 06/15/2010 - 00:01 | Link to Comment TBT or not TBT
TBT or not TBT's picture

....and then spring into action by going on vacation for a month, possibly quite a lot longer for some of you this particular summer.

Tue, 06/15/2010 - 01:54 | Link to Comment Hdawg
Hdawg's picture

It will all give way together...setting the stage for a main street currency crisis.

Order from Chaos...I fank you.

Mon, 06/14/2010 - 19:37 | Link to Comment zen0
zen0's picture

The leverage on Germany's banks would make any American bank blush.........Taylor Cottam

 

I have been asking people on other sites for a year now, that if Canadian banks leverage (by law) only 12X and U.S. banks leverage 30X (and got trouble), how can it be that European banks leverage 60X and not be in trouble.

No one ever answered my troublous posts.

Mon, 06/14/2010 - 20:10 | Link to Comment Anarchist
Anarchist's picture

You can be 60x if the notes you hold have a low loss rate and fraud is minimal. You can be 3x and fail. The loss rates on loans in say Spain are off the hook. Some European countries did not grow much in the last 10 years so not a lot of risky loans were made. What will kill most of them in the end is the unfunded mandates due to low birth rates and increasing lifespan. Either taxes need to go to 90% or they will be forced to allow Chinese, African or Muslim immigrants.

Mon, 06/14/2010 - 21:02 | Link to Comment peaceful
peaceful's picture

And even if they do allow immigrants what jobs will they have

Mon, 06/14/2010 - 20:12 | Link to Comment Village Idiot
Village Idiot's picture

"No one ever answered my troublous posts."

 

Sounds troublesome.

Tue, 06/15/2010 - 02:41 | Link to Comment A Man without Q...
A Man without Qualities's picture

Part of the reason is that the methodology of measuring derivative assets is different.  The German banks use a gross exposure method (i.e. add up all the derivatives where they are owed money and ignore the ones where they owe money plus they do not include collateral)

I can tell you that if JPM or GS used the German method, it would appear that they were 100x or more leveraged.

For the record, the German method seems silly, unless there is a genuine risk of gross settlement in default, which would mean spell utter disaster for the global derivatives market.  However, it is these uncertainties that are the real drivers behind the TBTF concept.

Mon, 06/14/2010 - 19:59 | Link to Comment Internet Tough Guy
Internet Tough Guy's picture

6 whole weeks?

Tue, 06/15/2010 - 02:00 | Link to Comment Hdawg
Hdawg's picture

until congress adjournment...start of October.

Tue, 06/15/2010 - 01:56 | Link to Comment Hdawg
Hdawg's picture

At least they a letting us sheep enjoy the World Cup before they bring the Chaos...how very thoughtful.

Tue, 06/15/2010 - 08:53 | Link to Comment Al Gorerhythm
Al Gorerhythm's picture

You enjoy that?!!! I've seen more action at the local oldie's knitting and line dancing club.

Mon, 06/14/2010 - 20:18 | Link to Comment TooBearish
TooBearish's picture

You might be disappointed with the lack of any sort of clarity out of Euro banks, they just don't fess up - ever - no matter how insolvent they may be.  And betting against JPM is likely to disappoint even more.

Mon, 06/14/2010 - 20:32 | Link to Comment AccreditedEYE
AccreditedEYE's picture

And betting against JPM is likely to disappoint even more.

I'm not too sure of that... mega financial short term technicals look like crap. Big volume on red ink days.... JPM looks like it could slip down to 32.

Mon, 06/14/2010 - 20:52 | Link to Comment three chord sloth
three chord sloth's picture

The euro banks are just like American banks, but they've been playing the game far longer. They do the same stuff, just in a quieter, more underplayed fashion. They've got centuries of experience in keeping the curious masses at bay.

Mon, 06/14/2010 - 20:28 | Link to Comment jkruffin
Tue, 06/15/2010 - 05:59 | Link to Comment Oh regional Indian
Oh regional Indian's picture

Funny thing is, even in India now, the "productive sector" is consumption.

Some guy from the Asian Dev. Bank was addressing a large industrial body yesterday and said, errrmmm....ahhh....umphhhh...we need to drive the demand side... in...errrrumppphhh... the Indian common man...errrrrhhaaahoooohhh.... demand must be....errrghhh.... bouyed to meet...errrmmmpphhh.

Load of BS.

Must be a western trained eco-NO-mist.

Everywhere, all around me, all I see and get is offers to finance this and finance that. At interest rates never seeen before in "conservative" India and to the same kind of borrowers (Newspaper delivery boys as an example).

India, man, such a sad joke of could have been.

Now just a serf nation.

As somebody aptly said on ZH some time ago, India is the world's desk clerk.

Harrrrummmphh......

ORI

http://aadivaahan.wordpress.com

Tue, 06/15/2010 - 12:14 | Link to Comment AnAnonymous
AnAnonymous's picture

Every production is consumption.

Mon, 06/14/2010 - 20:54 | Link to Comment Gloomy
Gloomy's picture


"The foreign trade sector will probably deteriorate with renewed recession in Europe. The financial crisis there may have bigger effects on America since U.S. banks have 48% of their global exposure there, or $1.5 trillion."

                        -Gary Shilling

Mon, 06/14/2010 - 23:24 | Link to Comment RockyRacoon
RockyRacoon's picture

So, if I read this right, what should have happened here will happen there -- and cause it to happen here -- which will make it worse over there -- which will then cause Armageddon here?  Have I got it right?  If the U.S. had bitten the dust as it should have, then we might have saved the rest of the civilzed world a bit of pain, or at least they could have put if off a lot longer?  Ah, never mind.  I'm just gonna hot foot it down to the coin shop and pick up a little more silver.  I'll feel better in the morning.

Mon, 06/14/2010 - 23:54 | Link to Comment zen0
zen0's picture

silver is the new gold.

the new paradigms are the triumphant parasites on the old paradigms, and parasites will latch on to them and become triumphant, and then.......

Mon, 06/14/2010 - 23:55 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

+ a little over $18!

Tue, 06/15/2010 - 02:14 | Link to Comment Sudden Debt
Sudden Debt's picture

Tyler, the most interesting banks are actually:

DEXIA

KBC

ING

AEGIS

 

Tue, 06/15/2010 - 05:58 | Link to Comment runforthehills
runforthehills's picture

German banks have pretty crazy levels of leverage: westlb @ 46 times (http://goo.gl/QZBN) and DB @ 43 times (http://goo.gl/hA7o).. I don't see how they can survive the coming economic shrinkage, with "austerity measures" all around Europe..

Tue, 06/15/2010 - 09:29 | Link to Comment bob resurrected
bob resurrected's picture

For an in-depth view of Raiffeisenlandesbank Oberösterreich spin on the Euro

http://www.rlbooe.at/eBusiness/services/resources/media/1575211299243696...

Tue, 06/15/2010 - 09:37 | Link to Comment Grand Supercycle
Grand Supercycle's picture

 

As suggested earlier,  the EURUSD daily chart is giving bullish signals.

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1

Tue, 06/15/2010 - 10:58 | Link to Comment Occams Aftershave
Occams Aftershave's picture

Euro banks certainly not in free fall this morning.

Do NOT follow this link or you will be banned from the site!