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Guest Post: Facts Don’t Equal The Conclusion in Europe

Tyler Durden's picture


Submitted by South Of Wall Street

Facts Don’t Equal The Conclusion in Europe

Very simply, the facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence.  The fact of the matter is that European Sovereigns are massively indebted and European banks are massively under-capitalized.  The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke.  
If I walk away from a home I owe $200k on and its fair market value is $100k (a 50% haircut), does a loan to my bank for $100K from the institution overseeing it change the impairment?  No.  You’re shuffling the cards.  Instead of taking a $100k loss, they now have an asset worth $100k and a new liability of $100k.  The asset is still worth $100k. Even though their little maneuver technically gives them an asset of $100k and cash of $100k, my bank now has $100K less to lend against.  Thus, their leverage increases.

This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc).  At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party. 

The nuclear rub occurs when the credit insurance written against my newly written down loan triggers a default on that debt, and the counter party demands cash settlement.  Bad news.  There is no cabbage, because that new liability put a strain on existing cash as more capital was required to be in compliance with regulatory ratios.  Here's the bitch.  To raise cash, you have to tap the capital markets, which scares investors as they equate this with being under-capitalized and pull their existing funds (the bank's capital) from said institution. Markets then take control. Market participants (like me) subsequently pull bank from lending to that bank by refusing to buy newly issued debt and shorting the daylights out of their equities.  All this just as the bank desperately needs to raise more capital.  With no more suckers willing to pony up and no more equity value, you're either toast or the government is forced to fill the void (TARP, TLGP).  

During our melt down we had one MF who took the reigns and solved the issue: Hank Paulson.  Europe doesn't have a "Hank", and thus nothing is going to be done. 
The void for these sons of bitches is a little too big. Combine that with the fact that there are all kinds of EuroCrats who have political agendas. They'll figure it out once the market takes control and the financial equivalent of a nuclear bomb goes off.

The bottom line is that this is obviously overly simplistic (I'm not real bright), but at the end of the day you have to take a position:

  the under (don't figure it out of time) or the over (figure it out...puppies and cupcakes) on whether or not the same politicians that haven't been able to figure this out over the last 2 years are going to be able to do so before the nuke goes off.  I'm taking the under and it looks like the bond market agrees with me.

Simon Johnson (MIT economist and former chief economist for the IMF):
I wonder whether we'll say 2008 wasn't the real crisis — it was a warm-up, but the real crisis was the sovereign debt crisis in Europe.


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Tue, 10/25/2011 - 16:03 | 1809712 trav7777
trav7777's picture

shell games, bitchez

Tue, 10/25/2011 - 16:07 | 1809732 Ahmeexnal
Ahmeexnal's picture

Seems that now that SJ is gone, the eurokleptocracy holds the monopoly on the reality distortion field.


Tue, 10/25/2011 - 18:21 | 1810198 Die Weiße Rose
Die Weiße Rose's picture

when it comes to Reality Distortion fields,

no-one can out-warp the Fed, the MsM and "financially engineered" Wall Street vehicles (CDS)

this is where all this shit started and that's where it will end.

The fence-pole stuck in everyones eye is called Credit Default Swaps (CDS).

Due to CDS derivatives, Hedgefunds and other vultures take highly leveraged risks on Junk-Bonds, using CDS as insurance to hold entire sovereign nations to ransom. Think AIG, think Lehman Brothers, think USA, think Goldman Sachs...

without Credit Default Swaps all this distortion and fraud would not be possible !

without Credit default Swaps the USA would not have needed to bail out AIG and paid off Goldman Sachs 14 billion !

without Credit Default Swaps nobody , including Goldman Sachs would venture into leveraged high risk Junk Bonds, while waiting for the next bail-out from the next government !

Without Credit Default Swaps no-one would be idiotic enough to touch Greek Bonds !

Without Credit Default Swaps (CDS) there would not be a Debt Crisis !

but of course everyone knew that,

and that's why the USA is the most fucked up warped distortion hole in the entire Universe !



Tue, 10/25/2011 - 18:55 | 1810318 Hedge Fund of One
Hedge Fund of One's picture

The U.S. should not have made Goldman et al whole. They should have told AIG that they were going under while protecting their profitable subsidiaries. Instead of 100% payment to Goldman, Deutsche, etc., they should have told them that there was evidence that as sophisticated investors, they knew that AIG was unable to pay, so they could take or leave 1/3 to 1/2 payment - yeah, a payment from the government, but a sharing of the loss and no bonuses to rage about in Congressional hearings. Then, let AIG execs fight creditors in bankruptcy court for their bonuses and let Goldman et al take similar medicine. 


Tue, 10/25/2011 - 19:50 | 1810464 samslaught
samslaught's picture

there can never be too much debt because Gold extinguishes all debt.  Always has, always will.  The use of fiat currency, at its very core, is a game of kicking the can down the road.  The can just isn't rolling very far down the road anymore.  The coming "collapse" is not a collapse but a transition.  One that many have long ago made ready for.  Many others are using this purgatory period to get ready.

Tue, 10/25/2011 - 20:15 | 1810506 Ahmeexnal
Ahmeexnal's picture


Even the ancient Maya predicted the return to the gold standard on december 2012.  No more fiat. Ever.

Wed, 10/26/2011 - 00:36 | 1811282 jeff montanye
jeff montanye's picture

ever?  i'll take the under.

Tue, 10/25/2011 - 20:49 | 1810580 BobPaulson
BobPaulson's picture

Well the institutions you mention, Goldman Sucks and Douchebank are now having trouble running faster that the massive snowball behind them. Can kicking it is. Through the lens of time, the delay this bought will seem like the blink of an eye.

Wed, 10/26/2011 - 00:39 | 1811285 jeff montanye
jeff montanye's picture

true, true.  yet it seemed so much longer than the six months to april, 1930.

Tue, 10/25/2011 - 16:03 | 1809714 thedrickster
thedrickster's picture

Lever the ponzi bitchez.

Tue, 10/25/2011 - 16:04 | 1809717 thedrickster
thedrickster's picture

And screw you Trav, posting with your co-located iPad.

Tue, 10/25/2011 - 16:06 | 1809724 PAPA ROACH
PAPA ROACH's picture

This Eurozone marriage reminds me too much of Anna Nicole and JH Marshall......

Tue, 10/25/2011 - 16:44 | 1809772 TruthInSunshine
TruthInSunshine's picture

...Except that the net aggregate debt of EU Member States is about 20 trillion (in reality, it's probably closer to 50 trillion, you know, Greek, Spanish, Italian and French record keeping and all, not including derivative exposure and knock-on effects of any degree of default beginning with Greece running through PIIS+France, and it's probably closer to somewhere in the ballpark of 250 to 300 trillion if one were to include future entitlements [see this for a corollary tale]:

True Federal Debt $202 Trillion


But who's counting, anyways, and once it's past a certain number, who cares...since there's no coming back.

Whether a bankruptcy over $1 or a Quadrillion, the effect is the same (though the number of those mercilessly screwed will definitely vary).

Good luck in the task of stretching the few in the EU who are actually solvent into thin enough molecular taffy to cover the black hole that is the EU Debtapocalypse, bitchez.

Tue, 10/25/2011 - 16:06 | 1809725 Unprepared
Unprepared's picture

I love cupcakes

Tue, 10/25/2011 - 16:06 | 1809726 SDRII
SDRII's picture

Where is hank?

Tue, 10/25/2011 - 18:13 | 1810186 earleflorida
earleflorida's picture

enjoying his $3/4 bn deferred goldman sachs entitlement, and lap-dancing with np,...?

Tue, 10/25/2011 - 16:10 | 1809727 GeneMarchbanks
GeneMarchbanks's picture

That's some ice cold sanity, post here more often.

I'm looking forward to further 'solutions' from the Eurocrats, who in the end, will have one last bailout and that is known as monetization or easing.

Tue, 10/25/2011 - 16:28 | 1809766 Ghordius
Ghordius's picture

the "EuroCrats" (why does everybody assume EU politicians are completely out of touch from anybody here?) are trying hard to get Greece to default. Because it's setup is rotten and beyond repair.

The banks and the MegaBanks don't want it and are trying hard to find why, including the threat of a collective collapse.

So those "EuroCrats" are calling the bluff by setting up the same sort of shit the banks call sound banking technology and doing what all politician can do best: delay, parlay, delay.

And telling them to recapitalize. Which is again somethings banks don't like to do (because they know best). This in a continent where people see them more as a public utility service then in the UK and US. And are less free-market-capitalistic, or, for a better explanation, think that the power to create credit derives from the sovereign.

I would not be astonished if the EFSF would end as a nationalization vehicle for banks  - here is the money, give us lots of your stocks, up to controlling majority. By the way, you are fired and your bank is going to be broken up. See Dexia, only larger, harder.

Tue, 10/25/2011 - 16:29 | 1809847 GeneMarchbanks
GeneMarchbanks's picture

'And telling them to recapitalize. Which is again somethings banks don't like to do (because they know best). This in a continent where people see them more as a public utility service then in the UK and US.'

Good luck with that. I'm not sure the history of banking in Europe is your forte, but how people see the banking system is irrelevant if they don't understand that it(the current banking system) is complete fraud.

Tue, 10/25/2011 - 16:53 | 1809884 Ghordius
Ghordius's picture

History of sovereigns is my main "forte". Sovereigns default, go to war, default twice, rince and repeat.

This article says in a nutshell "European Sovereigns are massively indebted and European banks are massively under-capitalized"

Explain Japan - my two cents is that if you keep your debt inside your zone you can go up to 200% (or like the UK after Napoleon 150-170% - which they brought back to half in seventy years, courtesy of an empire and budget surpluses)

Undercapitalized? The EZ sovereigns are already guaranteeing depositors (€100k in Germany) and the local banks have a different structure in the EZ, they lend more directly to businesses instead of dealing commercial bonds, for example. You know how much bank capital you can buy if you change the law regarding what a gov can do to banks?

I remember when practically all Italian Banks were national (and of course stuffed with sov bonds) and if you look at the history of economic interventions of France, Germany and Italy you will see that they practically have a track record of deciding in parliament to "own" some chunk of the economy. In France, it's called dirigisme, in Italy and Germany it's "let's go back to the old system".

Banking a fraud? Yes and no. A bridge is the solution an engineer uses so that he does not have to build a dam. Eventually, all bridges need maintenance and will fail. Failure is part of any human endevour. Eventual default (either straight or by inflation) is typical of sovereigns, yes.

Tue, 10/25/2011 - 16:56 | 1809948 Raging Debate
Raging Debate's picture

Excellent contribution. Useful hedging analysis and net-out as a plus.

Tue, 10/25/2011 - 16:57 | 1809956 Ghordius
Ghordius's picture

Do you want to own the banks or do you want to be owned by the banks?

There, I knew I could put it more succintly.

Tue, 10/25/2011 - 16:22 | 1809810 ReallySparky
ReallySparky's picture

Agreed, very good post.  Nothing but facts, blunt and to the point.

Tue, 10/25/2011 - 16:07 | 1809731 YesWeKahn
YesWeKahn's picture

AMZN just dropped 40$.

Tue, 10/25/2011 - 16:07 | 1809734 qussl3
qussl3's picture

This would also imply a massive EUR squeeze, with the swap lines on full, wouldnt it just be epic with the EUR@2 when France gets downgraded to junk cos its on the hook for the rest of the EZ's crap?

Tue, 10/25/2011 - 16:08 | 1809738 mynhair
mynhair's picture

Who'd let Jeetner around an 8-yr old anyway?

Birthday party, or not.

Tue, 10/25/2011 - 16:09 | 1809739 danger close here
danger close here's picture

picked up some Amazon oct 205 and 215 puts; wish me luck




Tue, 10/25/2011 - 16:12 | 1809759 YesWeKahn
YesWeKahn's picture

Good job. That remind me that a flying pig is still a pig.

Tue, 10/25/2011 - 20:17 | 1810515 Ahmeexnal
Ahmeexnal's picture

And a flying pig with makeup is...Merkel on an Airbus A380.

Tue, 10/25/2011 - 16:08 | 1809740 zonkie
zonkie's picture

All these gimmicks - meeting today, no..tomorrow.. hold on wednesday... by the weekend... are all a scramble to buy time. Germany, France and most others who can are trying to shore up capital for their banks, pushing banks to fill their coffers with as much Euros as possible.  Everything else is a eye wash. They will come up with another plan for plan for mid Nov. Remember apparently Greece has cash until then. By that time Euro zone banks will tighten all seat belts and get into brace position. Then they will wait for Santa Clause to save them. 

Tue, 10/25/2011 - 16:52 | 1809933 route40misery
route40misery's picture

I wonder if the Greece miracle will happen on this date?

Tue, 10/25/2011 - 18:39 | 1810258 Uncle Sam
Uncle Sam's picture

This might be the False Flag the PTB is looking for. This is when YU55 passes between the Earth and Moon, and may/or may not slam into the Earth/Moon.

What NASA doesn't really get into is the effect of the Earth/Moon's gravity pull on YU55.

If it hits land, it might kill millions. If it hits water, the tsunami may kill millions. Or maybe not. I think NASA uses FASB math.

Even if it doesn't hit, the government will control the world's communications. Why let a crisis go to waste?

Tue, 10/25/2011 - 20:46 | 1810523 Ahmeexnal
Ahmeexnal's picture

No, if that glorified can of chips disguised as a rock plunges to earth, it's gyroscopic activated self destruct mechanism will go on.

A shower of debris will be picked up as a fireworks show that will make top video on youtube for a day or two.

Wed, 10/26/2011 - 02:49 | 1811392 Cast Iron Skillet
Cast Iron Skillet's picture

It's clearly an alien starship full of creatures that like to eat paper money. They're attracted by the smell of debt ...

Tue, 10/25/2011 - 16:56 | 1809947 Rainman
Rainman's picture

The stalling around is to set up the real EZ target.... the IMF....just as expected.



Tue, 10/25/2011 - 16:09 | 1809741 LloydBlankenfiend
LloydBlankenfiend's picture

Master plaster polluted ponzi suckas!

No wait Dwarfkozie will sort it out.

Tue, 10/25/2011 - 16:09 | 1809742 Vergeltung
Vergeltung's picture

maybe Merkozy should dress up as party clowns for their next photo op.


Tue, 10/25/2011 - 16:10 | 1809745 Spitzer
Spitzer's picture

Funny how we have this inflation vs deflation debate as far as the US dollar is concerned.

Yet with the Euro, the same people are lost for words.

So priced in Euro's, will we have inflation or deflation in Europe ?

Tue, 10/25/2011 - 16:12 | 1809755 mynhair
mynhair's picture

Neither.  There will be no Euro.

Tue, 10/25/2011 - 18:03 | 1810155 Spitzer
Spitzer's picture


Thats exactly what I mean.... Can you tell me a time in history where a currency just simply dissapeared off the face of the universe ?

Tue, 10/25/2011 - 19:55 | 1810470 slewie the pi-rat
slewie the pi-rat's picture

before 1971, currency could not be raptured...

...with fiat, all things are possible

Tue, 10/25/2011 - 20:47 | 1810577 Ahmeexnal
Ahmeexnal's picture

The euro will suffer the same fate as the Hungarian pengo.

Tue, 10/25/2011 - 16:12 | 1809756 Belarus
Belarus's picture

Rember how Merkozy came to an 'agreement" and the Grand Plan was going to be announced on the 23rd (this a couple weeks ago)? Then, came the Grand Plan being pushed to the 26th? Now we're being told likely not a lot of details as they still can't agree on a few things.

So the bill is due, and no one wants to pay for it. It's that simple. It's timeto panic: because how in the world can the markets act so complacent given a 1000 point run-up based on an "agreement" that wasn't to be. In a nutshell, Merkozy ageeed something must be done, yet nothing can get done. Good luck, machines. I have a feeling you might get over-run soon. 


Tue, 10/25/2011 - 16:12 | 1809757 xcehn
xcehn's picture

One big 'the check is in the mail' routine, as ZH has already submitted.  The next big hype is the G20 in early November.  If they solve this, they can solve anything; all they're asking from the markets is 'suspension of disbelief.'  A miracle is in store for us in time for Christmas.  If we will only believe!  LOL

Tue, 10/25/2011 - 16:12 | 1809762 LloydBlankenfiend
LloydBlankenfiend's picture

the result will be conflagaration...

Tue, 10/25/2011 - 16:14 | 1809767 azzhatter
azzhatter's picture

Weren't Paulson and that Neil Kashkari gay together? Not that there is anything wrong with that. 

Just trying to figure out Merkel dances with Sarko or LaGarde

Tue, 10/25/2011 - 16:14 | 1809768 monopoly
monopoly's picture

So lets see, AMZN earned .14 cents for the quarter. Give them a 20% growth rate premium and you get about $1.00 for the year. PE of 25 for growth and we are looking at about 30 or so. Long way to go.

I do not care if you sell 10 billion. How much do you earn after expenses. Freaking absurd market.

Tue, 10/25/2011 - 16:19 | 1809788 Curtis LeMay
Curtis LeMay's picture

LMAO - Breaking/from the Grauniad...

"Everybody realises that we are on the brink of such a total catastrophe that anything that prevents it and a huge recession must be grasped," one EU diplomat said. "The markets will kill us if they haven't laughed themselves to death."

Too late bitchez. Das Teuro is kaput...

Frankly, die Teuro was kaput from day one.

Love to all

Tue, 10/25/2011 - 16:19 | 1809793 vegas
vegas's picture

Clowns all over the world feel insulted.

Tue, 10/25/2011 - 16:22 | 1809807 Odin
Odin's picture

Yeah, cep all Hank really did was kick the can down the road......... End Game Beotch!

Tue, 10/25/2011 - 16:23 | 1809812 sharjeelfar
sharjeelfar's picture

Euro is dead, who benefits from it?

Tue, 10/25/2011 - 16:43 | 1809907 eddiebe
eddiebe's picture

the $.

Tue, 10/25/2011 - 20:33 | 1810545 letitgo
letitgo's picture

The $?!?  Funny.  Maybe in the very short term, i.e, until the US BTB print for their Wall St and Europe instead goes the austerity and screw the banks over route. 

If only I had a gold coin for every time I was told "that's it, the euro is dying" and it instead rose against the USD on the markets!


Tue, 10/25/2011 - 16:25 | 1809827 LloydBlankenfiend
LloydBlankenfiend's picture

We are at the edge here. No more time can be spared. Time for measured, resolute and immediate action.

Time for Dwarfkozie to step up even if it takes a dirty sanchez and donkey punch to make muffkel pay up.

The time for action is now. Dwarfkozie step forth and do France proud.

Tue, 10/25/2011 - 16:38 | 1809889 slackrabbit
slackrabbit's picture

my theory is they knew they were screwed last its just going thru the motions so everyone on both sides of the adlantic, can say they tried and 'here's the proof', before they rollaly fuk everyone.

Tue, 10/25/2011 - 16:47 | 1809917 TruthInSunshine
TruthInSunshine's picture

Kick the can is all fun and games until a continent is missing an eye.

But I'm sure that Germans will be willing & can afford to bail everyone out /sarc/ (without the creation of a literal WWIII /not sarc/).

Tue, 10/25/2011 - 16:45 | 1809911 FinHits
FinHits's picture

The weak link of the post: "The nuclear rub occurs when the credit insurance written against my newly written down loan triggers a default on that debt, and the counter party demands cash settlement. "

Clearly the poster has not studied Eurozone la-la-land version of the insolvency law, where defaults simply don't get triggered on debt. Greece anyone? ;-)


Seriously though, that CDS written by EFSF will never be triggered. There will be no shortage of fools who think otherwise, though.

Tue, 10/25/2011 - 17:32 | 1810078 Poor Grogman
Poor Grogman's picture

This is similar to the USSR breakup and default only more publicized.
Didn't that happen over a weekend too?

Wed, 10/26/2011 - 02:24 | 1811372 Peter K
Peter K's picture

Yes it is. This is the collapse of Western European Socialism.

And the basis for this fail is exactly like the failure of Northern Rock. They lent long, borrowed short, and the mm cut them off:)

If only Northern Rock had access to Fed lines. They would still be an ongoing concern:)))))

Tue, 10/25/2011 - 17:46 | 1810115 twotraps
twotraps's picture

France held up the launch of the Euro in dramatic behind the scenes fashion by demanding a side-agreement that a French Guy gets named head of the ECB in less than the agreed upon term of the first ECB President., Vim D.    So, there they all are...standing around waiting to face the cameras and cut-the-fucking-ribbon photo op and France has a fit!  Strangely, only 2 yrs into his term Vim D decides to move on to other opportunities and we have Mr Trichet.  Nothing against Trichet himself, of course.

I can't imagine the fit France is having now that they are under a little pressure.

Tue, 10/25/2011 - 18:03 | 1810156 mjk0259
mjk0259's picture

They are lucky they don't have a Paulson. Whatever they eventually come up with will almost certainly be better than what the US did at least for parts of Europe.

Tue, 10/25/2011 - 21:22 | 1810681 city
city's picture

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Tue, 10/25/2011 - 21:30 | 1810714 PulauHantu29
PulauHantu29's picture

What happens to the ECB money supply (their M3) when these banks (and/or countries) start defaulting?

Sounds very defaltionary with the destruction of money.

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