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Recapitalizing Europe
The implications of the crash of 2008 have made one thing very
clear. China has emerged as the engine of growth in the world. The US
became the land of sub-prime loans, and Europe is the land of finely
dressed paupers. The Europe of today is not the Europe of old.
When the economic crash came, it took a second Marshall plan,
with the US pouring trillions of US dollars into European banking
subsidiaries, helping to prop up the western economic system.
The reality is that European bankers did not have the capital to
cover the trades they held on their books. Risk management is Risk
management. You only have to look to the rogue French trader for
context of the risk management controls in place during the build up to
2008.
A full two years have passed, and the only area in the world where
the economic storm is still unfolding is in Sovereign European
finances. The US has many economic issues of its own, but let’s be
honest. The US Treasury, with access to the Federal Reserve system as
it stands today, has a self funding structure unlike that to which the
EU has access.
The EU understands it doesn’t have access to real capital on the
scale that the US Fed/Treasury do. Ergo, they’ve raised their deposited
capital to 10 Billion Euros from its earlier 5 Billion. Yes, those are
real numbers.
The E.C.B. said the increase in capital to €10.76
billion, or $14.2 billion, from €5.76 billion, the first such increase
in 12 years, would help it to better offset risks as the volume of its
financial activities grew.“The capital increase was deemed appropriate in view of increased
volatility in foreign exchange rates, interest rates and gold prices as
well as credit risk,” the E.C.B. said in a statement.
The ECB is running at triple digit
leverage internally. While they can try to print money, they do not
have a US Treasury equivalent bond. It is each state for itself. This
is what is causing a run on the yield in their weaker states. The lack
of a Euro bond to support the overall EU governments borrowing needs.
The triple A rated states of Europe do not want to subsidize the overall
borrowing costs of the less rated ones.
If you look at the bail out of Ireland, so far the only money that
has been disbursed is to the Irish Retirement funds. In fact, Europe is
trying to get everyone, including the IMF, involved. It’s quite
simple. Europe is not properly capitalized to keep up the lifestyle it
demands. There is no quick solution to a shortage of an estimated 5
trillion or more of new real capital. That is my estimate.
So now it is China’s turn to pour its cash reserve resources into
buying European bonds from the failed economic states that make up the
EU experiment. They are expected to purchase up to 6-18 Billion in
PIIGS debt in the near term. This is happening exactly as Switzerland
places Portugal on the do not buy list.
This action was taken in such a way as to apply their debt for margin on swaps. It’s a very intentional slap in the face,
and one not needed when the real volume of trading in their bonds in
Switzerland is considered. It was, however, a very public form of
disavowing a struggling financial neighbor, and one that will not be
forgotten.
If Switzerland, which needed capital from the US Federal Reserve, is
intentionally preying on its weakened European sisters, things will get
interesting quickly. This is the same Switzerland which lost $30
Billion dollars buying Euro’s, while shorting themselves last year, so
anything is possible.
If Switzerland is intentionally affecting the bond markets by having
their banks short the debt, and then a pulling of the swap markets for
effect, it won’t last long. These kinds of events heat up quickly, once
the actions become noticeable.
Ironically, it appears that the Irish collapse happened about the
time that Switzerland was putting Irish debt on the do not buy list
internally. As a Zerohedge article by Bruce Krasting pointed out, this smells.
The European bluff and bluster of 2008, was to cover up the fact they
were broke. Every international action taken by the two world
economic super powers (US & China) since has been to prop up the
floundering, and now failing, European state.
While the US provides currency swap lines with the ECB, China is
bidding up the bonds of European states that can’t sell their junk debt
in the open market anymore. The jig is up, and Europe is the epicenter
for the reality of tomorrow.
You only have to look to the “REAL” actions taken by the US Federal
Reserve during the crisis. While US Banks, Insurance, Money Markets
companies & Automotive industry’s were going BK seemingly overnight,
the US Fed was pouring Trillions into Euro institutions to keep them
alive.
We are not talking about Billions in loans, we are talking about
Trillions in liquidity provisions. The amount provided was equal to the
US national debt at the time. This is not an insignificant amount of
liquidity. There was no nation but the US, which could have provided it
to the world at the time. Not China, Not the Middle Eastern Nations.
Only America could.
So how does Europe fix its finances? It has to do to its banks what
the US did with GM and Chrysler to name two… It has to kill the equity
holders of the banks. It should convert the Junior debt holders to
equity, and only the Seniors continue to stay on the bond side of the
balance sheet. This is why these bonds were rated SENIOR when they were
issued.
The system needs a reset. Debt needs to be converted to equity if the system can’t afford to continue to roll its debt.
It will be interesting to watch reality unfold in Europe in the next
year or so. They have had their Bear Stears moment, but they have not
had their BIG WEEK yet.
Next week should be interesting.... Very Interesting.
This story and others are available www.jackhbarnes.com
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EUR/USD high probability short term trade target 1.2750
EUR/USD likely short term trade target 1.2650
EUR/USD high probability longer term trade target 1.2250
EUR/USD possible longer term trade target 1.1750
cancel longer term trades before european leaders bailout meating
Why pick on the Swiss? They are not even in the EU and plenty of others, including Norway's sovereign wealth fund, have put dodgy peripheral debt on the no buy list. The Swiss are just that, Swiss, they have nothing to do with the EU block and can do what the hell they please, neighbourliness be damned.
I'm wondering whether the writer actually owns a passport.
The Euro currency falls to the lowest level in 4 months as yields on the P I I G S 10 Year notes hit All-time-hi levels never seen before. The implications are that Portugal, Ireland, Italy, Greece and Spain will be paying more to finance their debt and as the spreads (see charts) between the 10 year notes of these 5 Sad Sack countries increase between that of the German Bunds the risk for eventual default grows ever greater...
http://chart.ly/e5ivnj4
GM? Kill the equity holders of the banks? NO, NO, NO!
The bailouts are the problem; the speculative leveraging on bad debt using mortgage debt to generate nothing more than commissions and bonuses is the problem.
The United States and Europe becoming engines of parasitic debt speculation and vampire squid financial engineering rather than production is the problem.
Before long the Palaces and Capitol buildings of the west will be tourist attractions for Asians as they are waited upon and served some Chipotle or Chili's or In and Out (figuratively and literally) by our children and grandchildren.
We've been sold out and sold ourselves out; collapse of empires, end of ages.
Well dressed paupers.
Having lived in both cities, residents of Paris are no better or worse dressed than the residents of Baltimore, a sort of clueless, color blind peasant look. The rest of the article is worse.
Government printing does not produce capital. Capital comes from savings/equity in the hands of people who earned it and know what to do with it.
States and municipalities are exactly in the Euro-condition..., up a shit creek without a paddle.
The photo was nice;)
The game was invented by Robert Rubin and Alan Greenspan in 1994. Export inflation to China in exchange for access to cheap labor and goods. It has worked quite well and enriched the elites in China, the EU and the U.S., but now the imbalances must be reconciled and no one wants to face the painful reality.
The pitchfork holders number close to two billion, where will all the G-IVs land?
Various ways to reconcile imbalances. One is to further them.
'94 or '79?
China is a smoldering rubble heap without American and European consumers continually flooding them with currency.
deleted
Im not knowledgable enough to know the exact numbers game regard who
is in reality insolvent or not . But i do know the trade and currency balances for The EU and The US respectively for a considerable number of Years . Using these numbers as a rough estimate of real regional ( external ) solvency can only give one answer as to who aught to be insolvent ..and who not
...in a sane world !
Silversteins obsvervation that a huge chunk of EU capital was lost having been lured by Tripple A ratings ( and greed ) to invest in fraudulent US mortgage derivates is true. Without that loss the situation in EU may have been serious but could have been weathered including the bailouts which have been necesary on EUs eastern frontier .
The US has not had this tripple challenge ( US Mortgage , EastEU bailouts and now PIGGS bailouts ) but only its own mess to deal with and is still numberwise , tradebalance wise and currency account wise in a far worse shape than the EU .
Not to speak about as "banker in bruxelles " observes an EU with an infrastructure far superior to that of the US .
That said ..also the EU has acted irresponsible for quite some years regard its financial position mainly as it did not adhere to the wise principles laid down in the Maastricht treaty
Anyway in my personal opinion the future for EU lies east and the mantra for EU must be : Go east ..Young man ... and i therefore wellcome any collaboration eastward including a helping hand financially from China . It is understandable considering the financing needs of the US that this entity does not appreciate available and restricted capital to go anywhere else than into purchases of US Treasuries
If the EU can find the political will to solve its problmes ..no one can know .. but as it may enfold .. the Solvency of EU Sovereigns is in the end an internal european affair ... where eventual losses mainly will be european contrary to the US where eventual losses mainly will be outside the US ... as we all know ..the current blackmail situation is . If ..in the cynical world we live in that is positive or negative for either entity ... is hard to say .
The Fed will buy the dips on the Euro untill the wheels fall of of the economic system. The Fed "can" "print" "monie" and so they will do so for the world. The world reserve currency is the dollar and the fiat charade will end with the dollar. The Eur/Usd could move as low as 1.15, but the Fed will step in there. The three legged race being fun by China, Europe, and the US is a non issue really. The discussion should be gold vs fiat and the validity of fiat. I say there is none. China can keep its finger in the dike as long as it wants, the levy is going to break.
http://www.panamalaw.org/counterfeit_gold_coins_and_bars.html
Here are a couple of interesting news articles:
http://translate.googleusercontent.com/translate_c?hl=en&ie=UTF-8&oe=utf...
http://www.reuters.com/article/idUSLDE70104W20110102
There seems to be an interesting role for China within the domestic European landscape. I assume the Americans and British are already there.
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When you are in Ireland,you will experience some of the best moments of your life and wish that these days never come to an end. offers a wide varieties of cars on very reasonable rent so If you want to hire a car than this is right place for you.
Dave Wilson
http://www.entirecarhire.co.uk/ireland_car_hire.htm
Switzerland...they have been backtraced! I knew those sneaky swiss were up to no good.
They are not really native Swiss, you know. They are bankers or common origin and using Switzerland as an economic fortress.
if europe starts buying gold in the open market the dollar is toast... Take a look at the ECB balancessheet and find out why
Actually, what the US has access to - is ultimately - your wallets, your wealth and your labor.
my wallet ? my wealth ? good luck with that ! ......... I used to have quite a bit, so I thought ! ............good luck Mr. Government, getting something out of a 60 year old bread baker earning $8.50 /hour @ PANERA !!!
Don't forget that the general retirement funds of the US Taxpayer haven't been taken yet. There's still a lot of money left up for grabs to feed the Ponzi.
Eventually we'll pull an Ireland, where they came in and raided their retirement funds in order to bail out the German banks.
"The US has many economic issues of its own, but let’s be honest. The US Treasury, with access to the Federal Reserve system as it stands today, has a self funding structure unlike that to which the EU has access."
Ah, so, the USeless can counterfeit at whim, so it's all good, whereas others can't so they're bankrupt. Got it. Stopped reading there. Great article....where'd I put that sarcasm off switch thingy....
The reason Europe got in so much trouble
in the first place was they bought so much
US toxic financial crap in the first place.
U.S fed only provided liquidity to Europe
banks to save their own ass.
U.S is capable of providing instant liquidity
to the system but this does not mean their
more solvable then Europe.
Europe has a lot better trade balance
then U.S.
U.S only ahead because of it's wold reserve
currency status when(not if) this advantage
is gone...............
OMG I have to stop here before I join
the ugly sister contest.
Call my PM dealer and buy myself some
extra gold and silver.
Pffff...feel much better now.
Nice try but too late. The problem is now up one level with sovereign debt being the real issue. The first country to default or say "NO" to the ponzi may experience short term pain but wins in the long term. Iceland is your example on how this will unfold.
You could look at it the reverse way too ... Bernanke forwarded the funds to 'bail out' Europe, in order so we wouldn't re-structure earlier, as our re-structuring would call the game on the US Ponzi scheme ...
It seems the European gov'ts went along with the 'bailout - preserve the debt' model, as a favour to the US, not the other way around!
Soon as we write off the bad debt here, we won't need the '5 trillion in capital' ... and we still have a real economy here including both farming and manufacturing ... great infrastructure and a decent, superior social system, esp. on the north-western Continent, which will still be here despite some upcoming trimming.
The 'Big Week' when Europe transforms ... maybe splits the eurozone, but definitely writes off a big stinking pile of bad debt ... thanks to European people in the streets refusing to accept debt servitude, austerity, and the 'bailout' world ... is the week when the US finally may be forced to face its own situation.
+1
Yes, Jack only seems to tell one half of--one half of the story. Other than the printing press of the mighty US, we don't have much on our side of the pond.
The author uses GM, which is still on money printing life support, as an example of "doing it right." What happens when all the to-large-to-exist bank entities debt implodes?
Quite a possibility. Very few want to force a 'default' when living off a Ponzi scheme. Usually people are forced out of a Ponzi scheme as they would prefer the Ponzi to last forever.
"So how does Europe fix its finances?"
Why not do away with the fundamentally flawed system...the sooner it collapses the sooner a framework that actually has a chance of succeeding can be put in place.
Debt that cannot be repaid, won't. So, its a given that sooner or later all debt based monetary systems will collapse. The hard part is figuring out when. But it always seems that it takes longer than it should for the collapse to occur. Especially when those in charge are/were the wealthiest and most powerful the world has ever known.
the euro is already there :-)
+1
"China has emerged as the engine of growth in the world."
Surely you meant "engine of new debt issuance".
China's money M2 money supply has surpassed ours (in USD).
When calculating real vs nominal growth, inflation obviously has the biggest impact. China reports 2% inflation, 10% GDP growth, raises wages by 20%, and increases money by 20%.
You don't need a Phd in economics to know that inflation in China has been out of control and the only way to stomp it out is to go Volcker. It will never happen.