This page has been archived and commenting is disabled.

The Greek Deal is Pointless... European Banks Need TRILLIONS in New Capital

Phoenix Capital Research's picture




 

The markets are exploding higher this morning on news of the expanded Euro Bailout. The numbers at the moment are

 

1.     A 50% haircut for private Greek bondholders

2.     European banks have eight months to raise about $147 billion in capital

3.     An expansion of the European Financial Stability facility to $1.3 trillion.

 

First off, let’s call this for what it is: a default on the part of Greece. Moreover it’s a default that isn’t big enough as a 50% haircut on private debt holders only lowers Greece’s total debt level by 22% or so.

 

Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it’s expected to bring these levels to 120% by 2020.

 

And the IMF is giving Greece another $137 billion in loans.

 

So... Greece defaults… but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.

 

Forgetting that any and all official estimates for Greece’s financial condition have been off by a mile, not to mention that Greece still hasn’t paid back its first round of bailout funds, this move is nothing short of moronic.

 

The reasons are:

 

1.     The default is not big enough (I expect Greek bondholders to get 20-30 cents back on the Dollar at best in the future)

2.     It accomplishes nothing of significance (Greece is still broke), and…

3.     It will trigger a credit event and has the makings of systemic risk.

 

Let’s put some of the other numbers from this deal into perspective. According to the agreement, European banks are supposed to raise $147 billion in new capital by June.

 

Well, German banks alone need to raise $173 billion in new capital. So… this new capital “requirement” from the deal is pointless.

 

Indeed, the European banking system as a whole is insolvent.

With OVER $46 trillion in assets outstanding, this means that European banks would need to raise $1.77 TRILLION in capital to bring their leverage levels down to 13 to 1.

 

Yes… $1.77 TRILLION...

 

Now you see why the extra $147 billion in new capital is pointless. It’s like pouring a bucket of water into a desert and expecting it to sprout a jungle.

 

Folks, let’s get honest here. This deal accomplishes nothing. It’s just more “kicking the can” to avoid the reality. The reality is that the entire European Banking system is leveraged at near Lehman Brothers levels. And European banks need to roll over between 15-50% of their total debt (depending on which country they’re in) by the end of 2012.

 

The credit markets know this, which is why they’re predicting more Greece haircuts in the future. It’s also why IMF has decided to lend Greece another $137 billion… right as the country defaults.

 

Ignore this latest pop in stocks and the Euro. This mess isn’t over… not by a long shot. And before the smoke clears, much of Euro will be in default/ banking collapses.

 

On that note, if you’re looking for specific ideas to profit from this mess, my Surviving a Crisis Four Times Worse Than 2008 report can show you how to turn the unfolding disaster into a time of gains and profits for any investor.

 

Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).

 

Best of all, this report is 100% FREE. To pick up your copy today simply go to: http://www.gainspainscapital.com and click on the OUR FREE REPORTS tab.

 

Good Investing!

 

Graham Summers

 

PS. We also feature four 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 my proprietary Crash Indicator which has caught every crash in the last 25 years or the best most profitable strategy for individual investors looking to profit from the upcoming US Debt Default, my reports covers it.

 

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

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 10/27/2011 - 17:55 | 1818832 deebee
deebee's picture

timing is a bitch!

Thu, 10/27/2011 - 15:36 | 1818383 IQ 145
IQ 145's picture

Just imagine how broke you'd be if you actually listened to this one note band. I'm up $9,000 a contract on my Long Bond Short from 144.25 put on on Oct. 3thd; and anounced here. Join the party; the Bonds have a long ways to go; down. And that's the way they're headed, folks.

Thu, 10/27/2011 - 15:20 | 1818317 AcidRastaHead
AcidRastaHead's picture

Good points.  I only wish there was a guide available to show me how to make money in a crisis.

Thu, 10/27/2011 - 15:37 | 1818385 StrangerThanFiction
StrangerThanFiction's picture

There is, start selling popcorn.

Thu, 10/27/2011 - 15:17 | 1818305 spartan117
spartan117's picture

They just kicked the can down the road.  I agree we are doomed, but it's not going to happen next month.  That is why I don't trade, and especially don't short. 

Thu, 10/27/2011 - 15:10 | 1818278 Reese Bobby
Reese Bobby's picture

"...you ain't seen nothin' 'til you're down on a muffin."

Thu, 10/27/2011 - 14:46 | 1818173 aleph0
aleph0's picture

The EFSF "leverage" was explained to the German public on TV last night :

Private Investors (China) are supposed to lend the EU money and get a 20% insurance on a possible loss.
OK, now it's apparently 25% , but still.

Can someone here tell me if I've got it wrong .. or is that really the deal ?
TIA

Thu, 10/27/2011 - 14:38 | 1818132 b_thunder
b_thunder's picture

46T in assets with 26:1 leverage  means they have 1.7T in catital.

In order to bring ration to 13:1, they need to double CAPITAL from 1.7 to 3.4T

That's NOT 21T!  Check your math...

 

Thu, 10/27/2011 - 16:01 | 1818486 Randall Cabot
Randall Cabot's picture

Where do you see 21T?

Thu, 10/27/2011 - 14:17 | 1818062 long_and_short
long_and_short's picture

this will resurface some time in Q1 2012 for now its Risk On !!

Thu, 10/27/2011 - 14:10 | 1818038 virgilcaine
virgilcaine's picture

More restaurant reviews please.

Thu, 10/27/2011 - 13:54 | 1817989 St. Deluise
St. Deluise's picture

yes, they're going to need much more money.

where are they going to get that money?

what will that do the purchasing power of the money already in exsistence?

now, and here's the important one,

what will that do to assets priced in that currency?

Thu, 10/27/2011 - 15:57 | 1818463 Mountainview
Mountainview's picture

Is the deal relly done! I mean, who decided in the name of "the banks"?

Thu, 10/27/2011 - 13:41 | 1817905 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Graham,

How's that 'proven' crash indicator of yours, that's been flashing red all October, hanging!?

Thu, 10/27/2011 - 13:35 | 1817884 pupton
pupton's picture

"On that note..."  hehehehe.  Actually it was decent info this time, but still not buying your damn newsletter.

Do NOT follow this link or you will be banned from the site!