In a double-whammy of downbeat dystopian discussions, GMO and Kyle Bass are active on the inevitability of Europe's demise. Perhaps that is too strong but the two are focused directly, in separate pieces, on the huge need for capital and the dire dearth of it available. GMO's central focus on the direct capital needs of the European banking system in the case of a recovery (but under Basel III) and under stress scenarios. Dismissing the EBA's efforts, and recognizing that the problem is capital/solvency (if there were more, the market would not be worrying about liquidity and deposit flight), their 'neutron bomb' scenario where sovereign debt is recognized as a 'risky asset' (which seems more than plausible to us), the capital needs are almost EUR300bn with Spanish and French banks dominant but Italian and German banks are close behind. As Kyle Bass notes "There is no savior large enough with a magic potion of capital to stave off this unfortunate conclusion to the global debt super cycle.". This leads to only a bad and worse outcome for Europe, as the cataclysm plays out because the banks do have an alternative to raising capital – shrink the balance sheet. Deleveraging is already going on in a number of countries, with loan-to-deposit ratios dropping in recent months in Portugal, Spain, and Italy. This reduces the capital needs of banks, but fairly quickly starts to cut into the muscle of the financial system. The banks have little alternative but to keep holding sovereign debt in the short term, since it is the collateral for their borrowing needs. And as we have been so vociferously explaining recently, should they be forced to delver even more, and sell reduce these sovereign assets, then the daisy-chain effect of de-hypothecation on shadow banking will not end well for anyone.