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Why the EU Crisis Will Be Bigger and Worse Than 2008

Phoenix Capital Research's picture




 

 

As noted earlier today, the entire European banking and corporate system is over-burdened with debt.

 

Jagadeesh Gokhale of the Cato Institute puts the situation as the following, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”

 

Suffice to say, no EU country has that kind of money lying around.

 

Moreover, the argument that the ECB or Federal Reserve could stop this from happening is misguided. True, the Central Banks have managed to prop up the markets for several years now.

 

So what makes this time different?

 

Simple: the Crisis coming from Europe will be far, far larger in scope than anything the Fed or Central Banks have dealt with before.

 

Let me walk through each of these one at a time.

 

Regarding #1, we have several facts that we need to remember. They are:

 

  1. The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).

 

  1. The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).

 

  1. Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)

 

So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.

 

And all of this is occurring in a region of 17 different countries none of which have a great history of getting along… at a time when old political tensions are rapidly heating up.

 

To be clear, the Fed, indeed, Global Central Banks in general, have never had to deal with a problem the size of the coming EU’s Banking Crisis. There are already signs that bank runs are in progress in the PIIGS (Spain has lost 18% of deposits this year alone) and now spreading to France.

 

Thus, the World’s Central Banks cannot possibly hope to contain the coming disaster. They literally have one of two choices:

 

  1. Monetize everything (hyperinflation)
  2. Allow the defaults and collapse to happen (mega-deflation)

 

If they opt for #1, Germany will leave the Euro. End of story. They’ve already experienced Weimar and will not tolerate aggressive monetization.

 

So even the initial impact of a massive coordinated effort to monetize debt would be rendered moot as the Euro currency would enter a free-fall, forcing the US dollar sharply higher which in turn would trigger a 2008 type event at the minimum.

 

In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years.

 

On that note, if you’ve yet to prepare for Europe’s BIG collapse…we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (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://gainspainscapital.com/eu-report/

Best Regards,

Graham Summers

PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:

http://gainspainscapital.com/gpc-inflation/

 

 

 

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Mon, 10/22/2012 - 17:06 | 2910803 Zero Govt
Zero Govt's picture

"..the ECB is now leveraged at over 36 to 1..."

That's what i like about bwankers, from bottom to top they're all out to build a house of cards as systemically secure as Humpty Dumpty sitting on a wall

we are 'governed' by village idiots, there's gotta be a better way

Stop Paying Tax ...don't feed the turkeys

Mon, 10/22/2012 - 17:30 | 2910862 Panafrican Funk...
Panafrican Funktron Robot's picture

So, to reach a 5:1 leverage ratio, they would just need to revalue the Euro at 7.2/1?  Sounds about right (assuming they don't use that new devalued currency to leverage right back up, which is a probably wrong assumption).

Mon, 10/22/2012 - 17:03 | 2910790 Dareconomics
Dareconomics's picture

Graham is being a bit dramatic today. Europe has done an excellent job maintaining the status quo. I see the EU continuing the charade for longer than anyone thinks possible.

One day, they won't be able to hold it together any longer, and it will stop. Tomorrow? Next month? Next year? Who knows?

http://dareconomics.wordpress.com/2012/10/17/eurocrisis-endgame-scenarios/

 

Tue, 10/23/2012 - 17:19 | 2914046 Tango in the Blight
Tango in the Blight's picture

When is Graham not dramatic? Drama sells newsletters just like a nice girl with big tits on page 3 sells newspapers.

Mon, 10/22/2012 - 16:43 | 2910706 Randall Cabot
Randall Cabot's picture

Oct. 19, 2012, 12:56 p.m. EDT

Investor fears of euro-zone catastrophe fading

 

FRANKFURT (MarketWatch) — Despite nearly three years of dithering, infighting and backtracking by European leaders, some strategists now say the euro-zone debt crisis no longer poses the immediate danger that has kept investors on the lookout for the next market-sinking headline.

http://www.marketwatch.com/story/investor-fears-of-euro-zone-catastrophe-fading-2012-10-19

Mon, 10/22/2012 - 16:32 | 2910662 Heyoka Bianco
Heyoka Bianco's picture

Apparently they don't read ZH, since there was just a post pointing out that Germany's not the robust and healthy savior of the EU. They've got unfunded liabilities and stealth debt up the wazoo, and they still have to deal with their undercapitalized, which, despite the common image of Teutonic diligence and caution, were often the much-derided "greater fool" buying what ever sacks o' feces the TBTF banks were shoveling out.

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