Forget the PIIGS, the EU as a Whole is Insolvent

Phoenix Capital Research's picture

 

Europe is heading into a full-scale disaster.

 

You see, the debt problems in Europe are not simply related to Greece. They are SYSTEMIC. The below chart shows the official Debt to GDP ratios for the major players in Europe.

 

 

As you can see, even the more “solvent” countries like Germany and France are sporting Debt to GDP ratios of 75% and 84% respectively.

 

These numbers, while bad, don’t account for unfunded liabilities. And Europe is nothing if not steeped in unfunded liabilities.

 

Let’s consider Germany. According to Axel Weber, the head of Germany’s Central Bank, Germany is in fact sitting on a REAL Debt to GDP ratio of over 200%. This is Germany… with unfunded liabilities equal to over TWO times its current GDP.

 

To put the insanity of this into perspective, Weber’s claim is akin to Ben Bernanke going  on national TV and saying that the US actually owes more than $30 trillion and that the debt ceiling is in fact a joke.

 

What’s truly frightening about this is that Weber is most likely being conservative here. Jagadeesh Gokhale of the Cato Institute published a paper for EuroStat in 2009 claiming Germany’s unfunded liabilities are in fact closer to 418%.

 

And of course, Germany has yet to recapitalize its banks.

 

Indeed, by the German Institute for Economic Research’s OWN admission, German banks need 147 billion Euros’ worth of new capital.

 

To put this number into perspective TOTAL EQUITY at the top three banks in Germany is less than 100 billion Euros.

 

And this is GERMANY we’re talking about: the supposed rock-solid balance sheet of Europe. How bad do you think the other, less fiscally conservative EU members are?

 

Think BAD. As in systemic collapse bad.

 

Indeed, let’s consider TOTAL debt sitting on Financial Institutions’ balance sheets in Europe. The below chart shows this number for financial institutions in several major EU members relative to their country’s 2010 GDP.

 

Country

Financial Institutions’ Gross Debt as a % of GDP

Portugal

65%

Italy

99%

Ireland

664%

Greece

21%

Spain

113%

UK

735%

France

148%

Germany

95%

EU as a whole

148%

Source: IMF

 

As you can see, financial institutions in Germany, France, Italy, Spain, the UK, and Ireland are all ticking time bombs.

 

Indeed, taken as a whole, European financial institutions have more debt than Europe’s ENTIRE GDP.  Let’s compare the situation there to that in the US banking system.

 

Taken as a whole, the US banking system is leveraged at 13 to 1. Leverage levels at the TBTFs are much much higher… but when you add them in with the 8,100+ other banks in the US, total US bank leverage is 13 to 1.

 

The European banking system as a whole is leveraged at nearly twice this at over 26 to 1. That’s the ENTIRE European Banking system leveraged at near Lehman levels (Lehman was 30 to 1 when it collapsed).

 

To put this into perspective, with a leverage level of 26 to 1, you only need a 4% drop in asset prices to wipe out ALL capital. What are the odds that European bank assets fall 4% in value in the near future as the PIIGS continue to collapse?

 

 

 

These leverage levels alone position Europe for a full-scale banking collapse on par with Lehman Brothers. Again, I’m talking about Europe’s ENTIRE banking system collapsing.

 

This is not a question of “if,” it is a question of “when.” And it will very likely happen before the end of 2012.

 

The reason that this is guaranteed to happen before the end of 2012 is that a HUGE percentage of European bank debt needs to be rolled over by the end of 2012.

 

 

I trust at this point you are beginning to see why any expansion of the EFSF or additional European bailouts is ultimately pointless: Europe’s ENTIRE BANKING SYSTEM as a whole is insolvent. Even a 4-10% drop in asset prices would wipe out ALL equity at many European banks. 

 

On that note I believe we have at most a few months and possibly even as little as a few weeks to prepare for the next round of the EU Crisis. On that note, I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investments (both direct and backdoor) you can make to profit from it.

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com