Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again

Reggie Middleton's picture

So, at what point do we ever learn the basic lesson that "You can't solve an indebted nation's debt problems with more debt"? reports:

lawmakers approved by a wide margin legislation to boost the scope and
size of the euro zone's rescue fund, in a major step toward tackling the
bloc's sovereign-debt crisis.

passed the reform of the European Financial Stability Facility with 523
'yes' votes, while 85 lawmakers voted 'no' and three abstained. The
vote was seen as a test of Chancellor Angela Merkel's center-right

17 euro-zone governments have to approve the expansion, which will
boost the fund’s lending capacity to €440 billion ($595.94 billion) from
€250 billion and expand its powers to allow it to extend credit lines
to banks and buy bonds on the secondary market.

This was the
problem that I had with Paulson's original TARP idea. It just won't work
because it doesn't solve the problem. Instead, it attempts to conceal
the problem in fashion that pretends it never existed. Let's walk
through this so a 5 year old can understand it.


Interestingly enough, Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly fame contend "that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises".
If that is actually the case, then the very goal of the Euro project
was bound to bring about a sting of banking crises and all of this was
actually inevitable. As excerpted:


forgotten history of domestic debt has important lessons for the
present. As we have already noted, most investment banks, not to mention
official bodies such as the International Monetary Fund and the World
Bank, have argued that even though total public debt remains quite high
today (early 2008) in many emerging markets, the risk of

on external debt has dropped dramatically, especially as the share of
external debt has fallen. This conclusion seems to be built on the
faulty premise that countries will treat domestic debt as junior,
bullying domestics into accepting lower repayments or simply 12
defaulting via inflation. The historical record, however, suggests that a
high ratio of domestic to external debt in overall public debt is cold
comfort to external debt holders.

probabilities probably depend much more on the overall level of debt.
Reinhart and Rogoff (2008b) discuss the interesting example of India,
who in 1958 rescheduled its

foreign debts when it stood at
only1/4 percent of revenues. The sums were so minor that the event did
not draw great attention in the Western press. The explanation, as it
turns out, is that India at this time had a significant claim on revenue
from the service of domestic debt (in effect the total debt-to revenue
ratio was 4.4. To summarize, many investors appear to be justifying
still relatively low external debt credit spreads because “This time is
different” and emerging market governments are now relying more on
domestic public debt. If so, they are deeply mistaken.

this is actually the case, then what does it portend for China, whose
markets have seen unprecedented capital mobility and flows, and whose
banking system is tantamount to a hidden NPA factory sitting on top of
an inflationary economy teetering on the precipice of a deflationary

Inquiring minds may want to know, but proactive minds have been following BoomBustBlog all along.

The Complete Pan-European Sovereign Debt Crisis, forecast from the 1st quarter of 2010, complete with a detailed Greek, Portuguese and Irish default scenario(s).

of the French banking debacle, complete with prescient call of the
Franco bank run - culminating with the French bank most at risk:

have no doubt the French government along with the other EU governments
will try to bail out their banks again. The issue is that the bailout
is not the question, neither is the success of said bailouts. The fact
of the matter at hand is that they simply can't afford to bail them out.
I have predicted FIRE sector (including banks) failure at a commendable
rate (see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?).
It's not rocket science, though. It's simply (and actually quite
simple, since my 10 year old can do it) math, coupled with a pliable
understanding of human nature couped in grasp of history. Listen, it was
the (attempted) bailing out of the banking system that got these
countries in this situation to begin with. Bailing out the banks just
two years later??? Do you really thing that will help the sovereign debt
situation or hurt it? If the bailout goes through, you eat the small
losses (relative to the big gains that BoomBustBlog delivered
subscribers) and roll your gains directly into bearish positions on the
bailing sovereigns. It's really just that simple. Don't believe me,
let's look at history...




 So, as I was saying...

the problems have not been cured, they're literally guaranteed to come
back and bite ass. Guaranteed! So, as suggested earlier on, download
your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models
(they range from free up to institutional), read the balance of this
article for perspective, then populate the assumptions and inputs with
what you feel is realistic. I'm sure you will come up with conclusions
similar to ours. Below is sample output from the professional level
model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)


A detailed and accurate picture of what is happening...

  1. Now
    That European Bank Run Contagion Has Started Skipping Across That Big
    Pond... US Bank Risk Stands Woefully Underappreciated!!!
  2. The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download
  3. BNP Bust Up: Yet Another Reason Why BNP Paribas Is Still Ripe For Implosion!
  4. Most Headlines Now Show French Bank Run Has Started, And It's Happening Just As Our Research Anticipated
  5. I Will Fly In The Face Of Common Wisdom & Walk Through A Run On BNP On International Television
  6. And The European Bank Run Continues...

A step by step tutorial on exactly how it will happen....

Stacy Summary: We interview Reggie Middleton about a run on French banks. I notice today that Pimco’s El-Erian is also talking about a run on French banks.
He must have watched the Keiser Report when it aired from late last
night PDT. We know you’re taking our shtick Mr. El-Erian, we’ve got our
eye on you!

Go to 13:07 marker in the video, contrast and
compare and consider watching the smaller more independent shows for the
real scoop every now and then.

For some back ground on the "Kick the Can Triumvirate Three" [BBB
Trademark], go to 20:50 in the video and dedicate 5 minutes to it...

My April presentation in Amsterdam as Keynote detailing the inevitable...

VPRO Backlight and Reggie Middleton on brutal honesty, destructive
derivatives and the "overbanked" status of many European sovereign

VPRO Backlight and Reggie Middleton on brutal honesty, destructive
derivatives and the "overbanked" status of many European sovereign

I believe the next big thing, for when (not if, but when) European
banks blow up, is the reverberation through American banks and how it
WILL affect us stateside!
Subscribers, be sure to be prepared.
Puts are already quite costly, but there are other methods if you
haven't taken your positions when the research was first released. For
those who wish to subscribe, click here.

This bank has members of its peer group who have been identified as at
risk, but no one has pulled the covers off of this one as of yet. I
think I may blow the whistle. It will be a doozy, and a potentially very
profitable one at that since nearly 3/4 of it tangible equity is
embroiled in a region that looks like it is about to blow up. As I type
this, some of the puts have already doubled in price.
I will be releasing additional analysis on this bank this weekend for paying subscribers.