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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