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.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
trav7777's picture

shell games, bitchez

Ahmeexnal's picture

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


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 !



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. 


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.

Ahmeexnal's picture


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

jeff montanye's picture

ever?  i'll take the under.

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.

jeff montanye's picture

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

thedrickster's picture

Lever the ponzi bitchez.

thedrickster's picture

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

PAPA ROACH's picture

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

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.

SDRII's picture

Where is hank?

earleflorida's picture

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

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.

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.

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.

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.

Raging Debate's picture

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

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.

ReallySparky's picture

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

YesWeKahn's picture

AMZN just dropped 40$.

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?

mynhair's picture

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

Birthday party, or not.

danger close here's picture

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




YesWeKahn's picture

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

Ahmeexnal's picture

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

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. 

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?

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.

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 ...

Rainman's picture

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



LloydBlankenfiend's picture

Master plaster polluted ponzi suckas!

No wait Dwarfkozie will sort it out.

Vergeltung's picture

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


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 ?

mynhair's picture

Neither.  There will be no Euro.

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 ?

slewie the pi-rat's picture

before 1971, currency could not be raptured...

...with fiat, all things are possible

Ahmeexnal's picture

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

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. 


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

LloydBlankenfiend's picture

the result will be conflagaration...

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

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.