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.


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Good Investing!


Graham Summers


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deebee's picture

timing is a bitch!

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.

AcidRastaHead's picture

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

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. 

Reese Bobby's picture

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

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 ?

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...


long_and_short's picture

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

virgilcaine's picture

More restaurant reviews please.

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?

Mountainview's picture

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

FunkyMonkeyBoy's picture


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

pupton's picture

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