Phoenix Capital Research's blog

My point with all of this, is that we’ve just witnessed Mario Draghi’s “bazooka” moment. Remember back in 2008, when Hank Paulson claimed that it he made a big enough monetary intervention threat that the markets would somehow correct themselves? Well, we know how that turned out (the markets called his bluff and the Crash happened).

The US is clearly heading into another recession in the context of a larger depression. And it’s doing this while in the worst economic shape in its post-WWII history. We’ve never once entered a recession when the average duration of unemployment is at an all time high, industrial production has failed to break above its previous peak, and food stamp usage is at a record high. We’ve never done this.

As far as I can see the ECB has one of two “Bail Mary” options. They are: 1) Massive money printing and buying of sovereign debt, 2) The issuance of Euro-bonds along with across the board banking backstops.

As for backstopping EU deposits... no entity on earth has the capital to do this. Total Eurozone deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion. That’s nearly TWO TIMES the size of the ECB’s balance sheet and over FOUR TIMES the size of the various EU bailout funds (the EFSF and ESM, the former of which only has €65 billion in capital left by the way).

Will Germany leave the Euro? I believe so. The country is already  bordering on insolvency due to nearly €1 trillion in backdoor EU bailouts (pushing Germany’s Debt to GDP to 90%). Over 69% of Germans are worried about inflation. Angela Merkel is up for re-election next year (and has gained political points anytime she played hardball with Europe) and Germany has implemented steps to place a firewall around its financial system and passed legislation allowing it to leave the Euro if need be.

So there is literally NO option that could save Europe at this point. We can get verbal interventions and symbolic gestures (such as Draghi's "bazooka" threat), but the fact of the matter is that the capital needed to prop up Europe simply doesn't exist in the EU or anywhere else for that matter.

In simple terms Europe is a HUGE deal for everyone. We’re not talking about some distant region far off in the distance that we will watch go down from our decks. We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.

One has to question… does the Fed really want to be draining Treasuries and Agencies from the banks’ balance sheets. After all, the big banks, which sit on over $200 TRILLION worth of derivative trades, only have $7.12 trillion in assets.

To me the message is clear, Germany is going to do all it can to appear ready to help, but it will forestall any actual helping, especially if it involves increasing Germany’s exposure to the PIIGS (note: Merkel stated that there would never be Euro-bonds for as long as she lived). This is not political posturing. Germany has already brought its own solvency into question (see the Moody’s warning) by propping up the EU. Angela Merkel is not going to lose Germany’s AAA status the year before she’s up for re-election.

Spain is facing a regional, banking, and sovereign crisis all at once. The funds to prop it up simply do NOT exist. To argue otherwise is to ignore math and Germany.

The Moody’s outlook change on Germany lets us know that this time around the debate is more than political posturing. If Germany loses its AAA status, then it’s GAME OVER for the EU: the German population, already outraged by the EU bailouts, and now facing a recession will NOT tolerate a credit rating downgrade. 

As I’ve stated many times, Germany is THE REAL backstop of the EU. And it’s comprised its own solvency as a result: the country is only €328 billion away from reaching an official Debt to GDP of 90%, the level at which national solvency is called into question. Moreover, that €328 billion has already been spent via various EU props. Indeed, when we account for all the backdoor schemes Germany has engaged in to prop up the EU, Germany's REAL Debt to GDP is closer to 300%.

As I’ve outlined in earlier articles, Spain will be the straw that breaks the EU’s back. The country’s private Debt to GDP is above 300%. Spanish banks are loaded with toxic debts courtesy of a housing bubble that makes the US’s look like a small bump in comparison. And the Spanish government is bankrupt as well.

In order to understand why we’re at risk of the financial system collapsing, you first need to understand how the global banking system works

I’ve spent the last six months digging as deep as I can into the financial system to find the unquantifiable risks that aren’t being discussed by the financial industry. I’ve found them. And they are worse than anything I expected to find. Indeed, what I’ve discovered is more horrifying than I’d care to admit.