The EU is Out of Money. End of Story. And Neither the Fed Nor the ECB Can "Print" To Save the Day

Phoenix Capital Research's picture


While various media outlets and “analysts” try to claim that the EU summit was somehow a success and that Europe’s issues are solved, the fact remains that Europe is out of money.  And I mean TOTALLY out of money.


I realize this flies in the face of what 99% of analysts are claiming. But this is a proven fact. Of the various entities that could hold the EU together (the ECB, the IMF, Germany, and the two bailout funds: the EFSF and the ESM) none and I mean NONE of them actually have the capital to do it.


I am continually bombarded with emails from people saying, "well, if things get bad the Fed or ECB will just print and everything is solved."


This is beyond wrong. It is just groupthink based on the idea that the Fed has intervened ever since the Great Crisis began in 2008 (ZeroHedge recently ran an article showing that the Fed has intervened in over two thirds of the months since the Crisis began).


However, even Fed intervention has a limit.


To whit, the Fed has now pulled back from any aggressive monetary policy for over a year. There has been no money printing. Instead, the Fed has re-arranged its portfolio to attempt to flatten the yield curve.


Why is the Fed doing this instead of simply engaging in more QE? The answer is because QE removes Treasuries from the banking system. We are facing a solvency Crisis and Treasuries are the senior most asset on US bank balance sheets.


When the Fed buys a Treasury from a US bank, it is providing liquidity (cash) to the bank to meet the bank's short term funding needs.


However, by removing the Treasury from the bank's balance sheet, the Fed is removing one of the banks senior most assets: the very asset against which the bank has leant or traded hundreds of billions and  possibly even trillions of Dollars' worth of loans  and trades.


Put another way, the Fed, by buying Treasuries is making insolvent banks even more insolvent. It is a short-term gain (liquidity) for a long-term disaster: banks need as much collateral as they can get their hands on right now. And with Treasuries rallying (raising the value of the banks' assets) any aggressive Fed program to take Treasuries out of the system would be a MAJOR step towards another solvency Crisis a la 2008.


The same pattern is playing out in Europe right now though on a much grander scale (its banking system is nearly four times as large as that of the US).  While everyone continues to believe the ECB can save the day, the fact remains that the ECB has NOT bought a single sovereign bond in 14 weeks.


Why is this? The same reason that the Fed is not doing more QE: Europe is facing a solvency Crisis. Removing sovereign bonds from the market may be helpful from a purely liquidity standpoint (cash for trash) but the Crisis in Europe is not based on liquidity, it’s based on solvency. And EU banks need as much senior assets as they can get.


Everytime the ECB buys a sovereign bond it's removing much needed collateral from the EU banking system (a sovereign bond may be garbage, but it's usually less garbage than a EU mortgage loan or an EU corporate loan).


This in turn only increases the solvency issues in the EU banking system. And remember, bank runs are already underway in Spain, Italy, France, and Greece. So banks are desperate for capital and collateral.


THAT is why the ECB cannot and will not simply print to "save the day": doing so would NOT save the day but would in fact accelerate the EU banking Crisis.


So the Fed and the ECB WILL NOT be stepping in unless the entire system starts to go. This leaves the IMF which is a US-backed entity and thus cannot perform a large-scale EU bailout (it's an election year in the US and voters will not tolerate a US-lead bailout of Europe).


So all that is left to prop up Europe are the two mega-bailout funds (the EFSF and ESM) and Germany.


The EFSF's capital is already full committed and stretched to the limit in propping up Portugal and Ireland. So it's not an option anymore.


As for the ESM... well, it doesn't even exist yet: it has yet to be ratified by all the countries that need to vote on it. Moreover, Spain and Italy together are to account for 30% of the ESM's funding. So... these countries would be bailing themselves out!?!


Finally, both Finland and Netherlands are rejecting the idea that the ESM can be used to buy bank bonds. So the ESM, assuming it can even get ratified, will face

major political pressure regarding how it spends its capital.


This leaves Germany as the one and only true EU prop. However, Germany is stretched to the limit.


First off, 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%.


In Euro terms, Germany now has €1 trillion in exposure to the EU via its various bailout mechanisms. That's EQUAL TO roughly 30% of German GDP.


If even a significant portion of that €1 trillion goes bad (which it will as this money has been spent helping the PIIGS), Germany's financial system will take a MASSIVE hit.


This will guarantee Germany losing its AAA status, which in turn makes its funding costs much higher (see what happened to France in the last year: that country is now facing bank runs and its own solvency Crisis which you'll be hearing about in the coming weeks).


Angela Merkel is up for re-election next year. There is no way on earth she'll opt to let Germany get dragged down by the EU. She's even said she will not allow Eurobonds for "as long as [she] lives."


This is not empty rhetoric. This is fact. Germany has expressed its intentions dozens of times in the last month: NO Eurobonds and NO guarantee of EU banking deposits.


The reasons for this are simple: EITHER option renders Germany insolvent. It's already teetering on insolvency to begin with. But to allow Eurobonds or some kind of guarantee of the EU banking system to occur on top of the money Germany has already spent propping up the EU will take Germany down.


The German economy is already slowing. Most Germans are fed up with the Euro. Merkel would rather die than let her country become like Greece (which the creation of Eurobonds or EU deposit guarantees would most assuredly result in).


So Germany is tapped out as well. This leaves... NOBODY.


Again, Europe is out of money. End of story. This is the truth and investing based on the idea of some magical bailout occurring is like investing on Hank Paulson's Bazooka policy for Fannie and Freddie (three months later the markets imploded).


Smart investors are using this latest rally in the markets to prepare for what’s coming: an EU banking Crisis that will make 2008 look like a joke. 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:


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:







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SAT 800's picture

I agree with you. It's hilarious to think of Spain participating in bailing itself out; what will we be expected to believe next? Tooth Fairies, I suppose. The Euro was an interesting experiment that didn't last very long; that's that.

Ned Zeppelin's picture

For all the crap Graham gets about being Chicken Little around here. . . . the guy is right.

Savyindallas's picture

Right  -don't blame Graham because these assholes can kick the can down the road a little farther. We all know he is right. He never claimed to know the exact timing. If I had known the timing, I would be rich- instead of poor. Screw the bastards. may they all rot in hell  -but first suffer a miserable agonizing death here on Earth.

TheObsoleteMan's picture

What did this blow-hard just say;"There will be no IMF bailout of Europe via the US Fed, it is an election year, and the american people will not stand for it"? HAHAHA! Yeah, right. They WILL print, because they MUST print. He went on to say the only reason they would print would be if the whole system was in danger of imploding. Well guess what, IT IS! With all of the leverage involved, and all of this malinvestment spread all around the globe, we will get the same domino effect that was upon us back in 2008. The american people can pound sand {in their eyes}. When was the last time they consulted with us serfs anyway on monatary/fiscal policy? Get real. This isn't about us, never has been. They will do whatever it takes to preserve their system.

Savyindallas's picture

So Graham says Armeggeddon is coming and they won't print until later. You say Armeggeddon is here and they will print-I assume now or very soon. Who is chicken Little here?

andrewp111's picture

They can print to buy non-sovereign assets, like newly issued bank stock, corporate bonds, and mortgage debt. And they will. The Fed's next round of QE will be mortgages again.


They can also print to directly monetize massive government stimulus.

Solarman's picture

I don't know  about Europe, but the Fed can directly  inject cash into the system. He is named Helicoptor Ben for a reason.

bshirley1968's picture

Graham gives great information and facts.  He tries his best to interpret this info and the outcome.  It is very hard to do this in a world where 2+2 equals ANYTHING but 4.

I think his assessment is right.  The key issue is that the problem is not LIQUIDITY but SOLVENCY.  There is a massive amount of money out there and the banks hold gobs of it.  Problem is all that "money" is attached to debt.  If you don't understand, go watch "Money as Debt" on UTube.  You will be enlightened.  All the real assets in the world have been re-hypothecated over and over.  Today we make up "assets" like Mortgage backed Securities and CDS so there is something to loan against.  The game is up because there are no more assets to create money against to keep the music playing.  I don't know how they will try to solve it.  I think they will print at some point but they will have to attach it to some "asset" and call it debt.  This will require some creativity as anything meaningful has been used up several times over.  Until then they can move pieces around and play with rates in some big "circle jerk".  This could go on for a while.  They will hold on as long as they can because it is what they have worked so hard for and have NOTHING without control of our lives and our confidence in their ability to ruuuuuuulllee ttttthhhhee wwwwwwooooorrrrrlllldddd.

The only way we can break the lock on us is to back away from the system and cause it to shut down.  I don't see that happening because not enough are willing to quit being stupid and put down the Starbucks cup or to quit running up the credit cards trying to keep up with their neighbors who are trying to keep up with their neighbors.  Too many idiots standing in line to buy the next gadget.  Too many working like a dog to make their lives "easier" by affording more conveniences.  If we were willing to sacrifice and step away for just a little while we could break these blood suckers once and for all.  THEY NEED US!  We choose to need them.  Obviously things aren't bad enough right now for people to take action.  All they will do is talk.  Some day I hope we will stand up to these punks that have all this money and power because we gave it to them.

Solarman's picture

One option is for the Fed to refinance every loan in the country at a low rate regardless of colateral value or credit worthhiness of the asset owner and remove the liability off of the banks.  This would unleash cashflow into the consumer market, raise tax revenues through reduce interest deductions and increased economic activity/inflation/velocity.

There are more cans to kick.  

andrewp111's picture

The Obama Administration is planning this for September or October. It is called The Reelection Refinance Plan, and all mortgages will be refinanced by Bernanke at 0% interest.

Dead Canary's picture

Graham Summers, I look forward to your heart warming, uplifting reports. They always brighten my day. (Gotta go count my silver again)


q99x2's picture

Banks have free reign to do whatever at this time. The TBTF control the money. They won't lose until war takes place and it is up to them when. If that were not the case half of them would be in jails by now.

XtraBullish's picture

Yeah ! I agree with Monkey. STFU Graham and quit trying to pump your useless Armageddon newsletter.

MGA_1's picture

And.. they'll figure it out and we'll be talking about the same stuff in 6 months...

Snakeeyes's picture

They will TRY to save the day, and they may get some more equity "froth," but the game is up for Central Banks.

Read my lips. NO MONEY VELOCITY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

SheepDog-One's picture

Exactly, theyre trying to gun the engines but theyre out of gas and at stall speed.

Buck Johnson's picture

It most definitely will stall, and Germany is not stupid.  They won't go down.

Bringin It's picture

I hope they won't get fooled again.  I used to live in Germany.  Have many fond memories.  I hope they won't get fooled again.

GreatUncle's picture

The article states banks need more collateral.

There is a problem with this assumption "what is the value of the collateral really worth?"

For example take an ipad, couple of hundred bucks is that the collateral value when to make it costs a mere fraction of the price. Just not enough substantive worth in the collateral and a bit like going to a pawn shop and getting a quick fix of cash.

Hence QE was no more than a stop gap measure, if not enough collateral can ever be obtained then you implement QE again just to try and extend the process.

QE is no more than an extension of time and if the world was to end tomorrow and the use of QE would gain you one more day QE will be used and then hope that a solution will be found for the next  day.

Think that is what is happening and we are talking hundred of trillions globally of collateral that if everybody tried to change it into worth there is not enough worth to cover it.

Bringin It's picture

QE extends the looting opportunity window.  So yes it will be so. 

Maybe there is time to rip out the copper wire and clear out the booze cabinet after all?

mind_imminst's picture


The FED might try to disguise what they are doing and try to make sure no one (except the TBTF banks) can front-run their actions, but they will print, print, and print some more.

HardlyZero's picture

The FED could print with LIBOR manipulation.

Now interest rates will naturally rise (without LIBOR manipulation).

The next (or very soon) bond and T-bills will have high interest.

Then no more EZ-printing...its all downhill from here.

Now past the Tipping Point.

The Monkey's picture

This is what the market doesn't get.

The world is slowly lurching into another recession. There is nothing in the EU pipeline that is going to change the outcome, and there is little longevity to central bank action. The markets rally out of relief the world isn't ending in fire, only to wake up a few weeks later and find it is ending in ice.

They suckers will continue to bat their wings around the lights until the shine finally fades from the turd. As is always the case, the market never sees these things coming and is happily celebrating the latest solution to the world's problems as trouble spreads. Before long, the headlines will show the all clear, just in time for the last suckers.

Be patient and use the market's foolishness to your advantage. There is too much hope and greed to get bearish.

We have another 25 points to go in ES and then, it's time to sell.

max2205's picture

Graham. Look at the calendar it's not 2008-2009.

This will be your worst call by far. At least call the spx MA's for awhile

ZeroAvatar's picture

But...but....Yahoo sez ' the crisis in Europe is ebbing'.  It's all better now. /sarc

THE DORK OF CORK's picture

The system need unbacked Fiat produced by goverments (see Steve from Virgina posts)

This will provide enough medium of exchange and reduce waste - especially in the burning of hydrocarbons.

I speak from experience when I say people don't have the tokens to even move around using the public transport systems.

The input /output signals are all skewed withen the eurosystem.

 Monetary policey should aim to remove the private car and oil heating from our money exports / energy imports.

Bringin It's picture

Dork - Monetary policey should aim to remove the private car and oil heating from our money exports / energy imports.

Should?  Why?  For you?  You are mistaken if you think Monetary policey is supposed to do anything but support the PTB.  Oil dependance is the policey.  Then, among other things, you need a big hulking, awe inspiring, Armegedon inspiring military to police the trade, the spice trade.

Why don't we use Thorium?  No obvious choke points to throttle.

The spice is getting harder and harder to extract.

Long Ox carts.

Jack Sheet's picture

Bring back Brusca !

YesWeKahn's picture

I have no doubt that Euro will collase, EU will collapse. But it will not happen before 2015.

LawsofPhysics's picture

But wait, I thought that the ECB had lots of Gold on their balance sheet?  Is this a lie?  Say it isn't so.

No Euros please we're British's picture

Do you actually know what you are talking about? The ECB is not allowed to directly buy sovereign bonds. Don't say ha yes LTRO, because that's not what you said.

kikkoman's picture

Haven't you noticed that no one gives a fuck what's allowed or not as long as there's an "or else...."?

stormsailor's picture

i thought that europe would reach another "crisis" within 6-weeks.


but now since graham has opined the same, it will probably go on forever

The Monkey's picture

Graham, you ignorant slut. Nothing you have offered anyone has panned out. Only fools would be acting on your stupid advice.

Tinky's picture

While the broad strokes are no surprise, as a relative newcomer to the world of soverign debt, etc., I found this to be an enlighening article.

Thanks Graham.

SheepDog-One's picture

OK so with this latest 'all is well we fixed it' delusion theyve bought themselves a few more days of time and a bit of market pumping....I wonder if the next 'troubles' in early August or so is when no one believes the shit.

Blue Horshoe Loves Annacott Steel's picture

Here's a question CNBC, the US government, ... - no 1 ever answers:

"If Europe is in that bad shape, how come their money/Euro is still worth more than the dollar?"

We hear all this bad news about a collapse in a continent's currency, yet it is still worth more than a Federal Reserve Noet?

How is this possible when we hear the USA is in better shape?  

Lies.  The USA is in worse financial shape than Europe.

bshirley1968's picture

The euro is simply a counterbalance for the dollar.  It's a "good cop, bad cop" set up.  The dollar goes up the euro goes down.  The dollar goes down the euro goes up.  This way there is a shadow reserve currency and they can get away with a lot more printing and devalutaion and on the futures board nothing has really changed.  They just rock back and forth and are range bound FOREVER. 

The dollar and euro represent 85% of all the currency transactions in the world!  That leaves 15% for the rest to divide up the best they can (that includes the "mighty" Chinese).  Think it through for yourself.  The euro doesn't compete with the dollar, it complements the dollar.  Western Europe and the US are in bed together on EVERYTHING and have been for a long time.  The dollar needs the euro to be higher.  THAT is WHY it is and will stay higher if the Fed has a say in the matter.

LawsofPhysics's picture

ALL fiats are dying, let me know what the "value" is after Germany leaves the Euro.

The answer to your question has to do with the FACT that the EZ keeps taking FRNs from the swap window.  Also might want to check on that Euro inflation.  Yeah, the Euro is strong, in America, where no one uses them.  wake the fuck up, ALL fiats are dead.

ghenny's picture

Wrong Fiats are alive and well and will outlast your ability to short them believe me.  

Bringin It's picture

Had to vote you donw.  Sorry, the MDB job is taken.

SheepDog-One's picture

No doubt, we're only keeping it going by a period of total suspension of disbelief. I dont expect that will last long.

Peter Pan's picture

Insolvency can be solved very simply by a plain old write off. What you cannot solve is the inability of debt holders to understand that the longer they take to accept a write off, the greater their end loss.

AndreiC's picture

I notice how you keep pushing farther the date of the EU collapse. It was Sep 2011, then Dec 2011, then completely collapse before May 2012, then completely collapse in the May-June period. Now completely collapse before the end of the year and most likely before summer ends. And your assertion that Eurobonds would mean disaster is completely false. It's all about confidence. And confidence in Eurobonds, if properly done and executed (hopefully gold-backed), would be vastly greater than the confidence in Treasury bonds (nota bene: US has unfunded liabilities to the tune of 200 trillion USD, and no plans to deal with them in a credible manner).

ghenny's picture

I agree.  Summers is just trying to hawk his wares with his usual castastrophizing.  Europe will muddle through and probably be in better shape in a year or two than the US.  What will our friend dream up then to turn this into a disaster.

Rasna's picture

I'm not listening, I'm not listening...

Hmmmmmmmm, Hmmmmmm, Hmmmmm, Da, Da Daaaaaaaaa

<<Hands over ears, eyes shut tight>>

The Monkey's picture

Graham's scenario is the same crap as the fear-driven presentation being circulated by Raoul Pal. Both are way over the top and help the market limp along simply due to the intense bearishness.

Keep them coming Graham (and I'll keep shorting after every last bear has been steamrolled and every last bull has bought).