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The Eurocalypse Has Arrived, Where Do You Put Your Capital?

Reggie Middleton's picture




 

Today's top MSM headline - European Commission Recommends Euro Banking Union:

The euro zone should move toward a banking union and consider recapitalizing its banks using its permanent bailout fund, the European Stability Mechanism, the European Commission said on Wednesday, in remarks that briefly boosted stocksand the euro

The European Union's executive arm said in documents laying out recommendations for theeuro [EUR=X  1.2422 (-0.51%)]area that the crisis had slowed the financial integration process and "ambitious steps to accelerate and deepen financial integration may be needed."

"More specifically, a closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of [the Economic and Monetary Union]," the European Commission said in the documents.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM might be envisaged," it added.

Hmmmm... BoomBustBloggers crossed this intellectual Rubicon over 2 years ago. I was explicit in explaining that the bulk of the sovereign nations' debt woes stem from thier feeble and failed attempts to prop up their banking systems. I posted a refresher to this thesis a few weeks ago in So, Can Europe Nationalize All Of Its Troubled Banks? 

In a discussion that I had over at ZeroHedge there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

 Literally years later, the sell side is now chiming in: Banks No Longer 'Float Above Their Countries': Deutsche

Banks' countries of origin have become important again. 

No shit, Sherlock!!!

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 Most of the developed EU nations don't stand frozen raindrop's chance in hell of bailing out banking systems that are literally multiples of the GDP of the domiciles themselves. 

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The problems is getting worse over time, not better, as risk, leverage and unrecognized NPAs continue to pack the banking system. 

I warned heavily last year about the connection between overleveraged, garbage laden banks and over-indebteded sovereigns...

Just as in the case of my call on the fall of Bear Stearns (again, I believe I was the only to make such a call so far in advance), this situation consists of something you NEVER hear in the media or investment circles. This is not merely a liquidity crisis of even a solvency crisis. For the first time in recent history, it is BOTH!!! As a matter of fact, it's not just both. There is a another problem that came into play, and it is the direct result of tomfoolery at the hands of the sovereings themselves. The games that they played to assist the banks in hiding thier problems has materially weakened the entire financial system by sowing rampant mistrust. Plain and simple, government endorsed lying has made the entire system afraid to do business with itself. Let's walk through this step by step.

The Liquidity Issue 

From The BoomBustBlog BNP Paribas "Run On The Bank" series...  "As The French Bank Runs...."... Saturday, 23 July 2011 The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!


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The solvency issues

From the research note to subscribersFile Icon The Inevitability of Another Bank Crisis followed by the free blog posts on the same, see Is Another Banking Crisis Inevitable?

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

And last but not least...

The credibility crisis, whose sole responsibility lies dead center on the sovereigns themselves...

 BNP_Paribus_First_Thoughts_4_Page_01

You see, as you bend the rules to reporting, you resuce the banks for a day, but doom them for a decade (or in the case of Japan, 2.4 decades!!!). Now, the counterparties simply CANNOT trust each other!

BNP_Paribus_First_Thoughts_4_Page_07

... and why should the counterparties trust each other when all are privvy to the games that they are playing on each other! 

BNP_Paribus_First_Thoughts_4_Page_09

Before government officials start crying innocent, remember the tricks that you youreselves have played to bring use where we are now. In case your memory is failing, simply review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 

Now, I ask all... How in the world will grouping all of these increasingly unmanageable individual soveriegn problems cure the overall problem. By gathering all of the roaches into a big pile, you don't get less roaches - you just get a big pile of roaches! The bank failures will increase in both speed and intensity as time progresses and the drag will simply engulf the EU as a whole versus engulfing the states individually. At least individually, the better run states will recieve less pressure, and suffer through crossborder and financial contagion and counterparty risk rather than through this pooled method wherein direct pipes of contagion are being engineered to transmit the problems deep within each country. Does it sound like a good idea to you? I have my own ideas, of course....

How To Prevent Bailouts, Bank Runs & Other Fun Things To Do With Your Hard Earned Dollars

Subscribers, see 

I really want my subscribers to focus on this European bank, for it is primed to implode between its heavy derivative exposure  AND its sovereing exposure - Haircuts, Derivative Risks and Valuation
 
Later posts today will review my recent opinions on this bank in a little more datail as well as the related insurer at risk. Tomorrow we revisit what I believe to be a near slam dunk CRE short. I post graphs and profit potential as well. 
 

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Wed, 05/30/2012 - 17:23 | 2477403 anonnn
anonnn's picture

Locked into the insanity of privilege.

Premise 1: The rich-and-powerful families/dynasties are not knowingly suicidal.

Premise 2: Any change to the status of the  rich-and-powerful will  occur in stepwise manner and will be modulated  by them. They will not subject themselves to nuclear war unless they truly believe they will survive.

Premise 3. The rich-and-powerful will risk nuclear war as part of their stepwise strategy to maintain their status, but not definitively make nuclear war that ensures their death.

Conclusion: The rich-and-powerful will never give-up their status. Their mindset ensures successive steps of more risk until  nuclear war begins for all of us.

Only establishment of global fairness, AKA justice, system by removal of the rich-and-powerful families' privileges to escape fairness, will change this.

What did you expect?

Wed, 05/30/2012 - 15:18 | 2476912 Occams Aftershave
Occams Aftershave's picture

Ok, Reggie, great exposition of the problem.   What about the other part?  Where do you put your capital?

Wed, 05/30/2012 - 15:36 | 2476995 Da55id
Da55id's picture

Yeah - He always does this. Bait w/the headline -"Where do you put your capital?" and then doesn't answer his own headline. I love ZH for the facts and POVs, not marketing hype. Yeah Reggie's been right alot. so have, the Tylers, Bruce K, Cog Diff, and tons of others who frequent this site who DON"T shamelessly self-promote. Reggie - you have an "I" problem. Over and out.

Wed, 05/30/2012 - 15:32 | 2476972 PSEUDOLOGOI
PSEUDOLOGOI's picture

What's wrong with you??? bitch slap you.

Wed, 05/30/2012 - 15:20 | 2476909 Swarmee
Swarmee's picture

Dupe comment.

Wed, 05/30/2012 - 15:10 | 2476865 John Wilmot
John Wilmot's picture

Could they be any more clear about their endgame?

"The euro zone should move toward a banking union and consider recapitalizing its banks using its permanent bailout fund, the European Stability Mechanism, the European Commission said on Wednesday, in remarks that briefly boosted stocksand the euro. 

The European Union's executive arm said in documents laying out recommendations for the euro area that the crisis had slowed the financial integration process and "ambitious steps to accelerate and deepen financial integration may be needed."

"More specifically, a closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of [the Economic and Monetary Union]," the European Commission said in the documents.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM might be envisaged," it added.

The claim that "the crisis had slowed the financial integration process" is hilarious though. Far from slowing it, the crisis has provided the ideal pretext for the EU politburo to accelerate integration plans - as they say, "ambitious steps to accelerate and deepen financial integration may be needed." Like, turning the EFSF into a permanent bail out fund, for example, which, as the crisis deepens, will grow in size until it just "makes sense" to create a fiscal union and replace all sovereign debt with eurobonds backed by the pooled revenues of all the sovereigns?

...why, it's almost as if that was the plan all along... ;  )

Wed, 05/30/2012 - 15:21 | 2476926 Chief KnocAHoma
Chief KnocAHoma's picture

I don't doubt the ultimate goal is for more centralizarion. I do however doubt their ability to GET ER DONE.

These fucktards can't wipe their own ass, so don't worry about them taking over the World. 

Now can they severly FUCK UP THE WORLD, causing war and mass starvation? Absolutely.... and we can also string them up!

See it is a two way street, and the game has not changed since the days of Christ. Remember, he threw the money changers to the curb, and was hanging a cross three days later.

Only this time, the good guys will be left standing!

 

Thu, 05/31/2012 - 04:53 | 2478539 Zero Govt
Zero Govt's picture

sounds like the Eurocrats are grasping at straws with this Euro banking cartel idea ...the key political figures in Germany are baulking at anymore Euro integration knowing what a friggin mess the PIIGS are in and their own re-election chances going down the tubes if they're seen supporting anymore of this Eurozone madness

the British will whimper, the French will cluck but the key is what the Germans will do next.. if they pull the plug the EU is history

Wed, 05/30/2012 - 15:01 | 2476826 xcehn
xcehn's picture

Just wait til the sheeple awaken, gold will quickly hit 2k.

"In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them." The End Of The Euro: A Survivor’s Guide (Peter Boone and Simon Johnson)

http://baselinescenario.com/2012/05/28/the-end-of-the-euro-a-survivors-g...

Wed, 05/30/2012 - 15:15 | 2476896 knightowl77
knightowl77's picture

I hope you are right....but sheeple don't tend to wake up until someone or something is chewen on their face.....so it may yet be awhile to see the masses figure this out....

 

Iffen they ever do................................

Wed, 05/30/2012 - 15:29 | 2476933 optimator
optimator's picture

Well, it wasn't till a year ago there was even a mention on TV of gold or gains in gold -- they had to mention it after all those adds started appearing!

I played with gold from 1997 on, and listed to that radio guy that printed the "Bulletin" to buy the Q's at 85,  laugh at gold for ten years.

Wed, 05/30/2012 - 14:42 | 2476723 stormsailor
stormsailor's picture

reggie,  do you have any theories on what event would blow down the ponzi house?

 

given your in-depth knowledge i'm sure you have a likely trigger event.

Wed, 05/30/2012 - 14:24 | 2476622 Downtoolong
Downtoolong's picture

The best reason to buy gold and silver is that there is no good, reasonable, or better than vile reason to do anything else.

Wed, 05/30/2012 - 14:47 | 2476758 Sequitur
Sequitur's picture

Fair point. Where does one turn to invest, to seek a safe asset? Certainly not the Swiss Franc, as anyone who remembers the Swiss devaluing the Franc 10% in one night.

Wed, 05/30/2012 - 15:21 | 2476923 Swarmee
Swarmee's picture

Don't worry, the swiss franc will do just fine....

Oh, sorry, I meant the one with a pretty lass on it full of .1867 oz of the good stuff.

Wed, 05/30/2012 - 14:10 | 2476563 misnomer
misnomer's picture

"By gathering all of the roaches into a big pile, you don't get less roaches - you just get a big pile of roaches!"

That's a bit uncomplementary towards roaches comparing them to banks/banksters... and they do say that roaches would survive the coming apocalypse.  Let's hope the same cannot be said for banksters.

As always, an interesting read, Reggie.  Keep up the good work!

Wed, 05/30/2012 - 15:29 | 2476957 rosiescenario
rosiescenario's picture

.....bearing in mind that for every piled roach there are 10,000 more in hiding...so you have the roaches you know of, and then you have the real roach count that you have no way of knowing until the buzzards come home to roost.....

Wed, 05/30/2012 - 14:04 | 2476543 Its_the_economy...
Its_the_economy_stupid's picture

so, now remind me, which US banks have sold CDS's to insure all this sovereign bond garbage to which foreign banks that bought all the sovereign bond garbage and when do these CDS's get triggered and why should the EU bailout these sovereigns when the foreign banks holding their worthless bonds are insured by the US banks that sold the CDS insurance policies after all and will the FED allow these CDS's to be activated or will the FED step in and execute swaps with the foreign sovereign banks to prevent the collapse of US banks that sold the CDS's to the foreign banks that own all the worthless foreign bonds????

This thing is never going to unwind....ever. This life support from the EU and the FED will never allow a reset. There will be no day of crisis. There will only be ongoing continuing mini-crisises without end....forever. And meanwhile no commodity will be permitted to challenge fiat currencies.

This will be the equvalent of the death of a thousand cuts (without the dying part).

 

Wed, 05/30/2012 - 15:26 | 2476949 rosiescenario
rosiescenario's picture

"This will be the equvalent of the death of a thousand cuts (without the dying part)."

 

...Zombification by 1 trillion paper cuts....

Wed, 05/30/2012 - 14:23 | 2476619 erheault
erheault's picture

Since Helicopter Ben is allowed to operate in secercy and cannot even be audited I suspect that boat loads of our monies have allready made its way into the world banking system and we will not find out about untill we have our own crash.

Wed, 05/30/2012 - 13:50 | 2476475 mptrader
mptrader's picture

Very interesting that spot gold pierced its prior low early today, but has since reversed strongly by about $30/ounce and into positive territory despite downside continuation in the Euro/USD to new multi-month lows.  My pet theory has been that at some point sooner than later, gold will become increasingly "used" as a flight-to-safety vehicle as Treasury bond yields press lower and lower. As we speak, U.S. 10-year T-bond yield is pressing on 1.62%, breaking last September's low of 1.68%. This move appears to have coincided with the upside reversal in spot gold, regardless of the negative influence of the Euro/USD.

Wed, 05/30/2012 - 13:43 | 2476437 El Oregonian
El Oregonian's picture

The Euro Motto should of been: "Sin to get IN!"

Wed, 05/30/2012 - 13:40 | 2476428 xtop23
xtop23's picture

I want to know if Reggie had any luck with Lauren from RT.

He was layin' down a pretty good rap.

Good post Reggie thanks.

Wed, 05/30/2012 - 13:36 | 2476414 Uchtdorf
Uchtdorf's picture

So where do I put my capital, dang it?

Wed, 05/30/2012 - 13:26 | 2476360 slackrabbit
slackrabbit's picture

"This is not merely a liquidity crisis of even a solvency crisis. For the first time in recent history, it is BOTH!!! As a matter of fact, it's not just both. There is a another problem that came into play, and it is the direct result of tomfoolery at the hands of the sovereings themselves. The games that they played to assist the banks in hiding thier problems has materially weakened the entire financial system by sowing rampant mistrust. Plain and simple, government endorsed lying has made the entire system afraid to do business with itself.

 

Absolutly sums it up. 

When lying becomes the norm, your market shuts down.

 

Wed, 05/30/2012 - 15:18 | 2476907 JLee2027
JLee2027's picture

"tomfoolery" - describes it perfectly.

Wed, 05/30/2012 - 12:34 | 2476082 eddiebe
eddiebe's picture

Way to go Reggie!

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