For more market commentary and economic insights, as well as a number of free reports aimed at helped individual investors navigate the markets successfully, come visit us at http://www.gainspainscapital.com [8]
Mario Draghi claims he can save the Euro.
I don’t buy it… even for one second. As far as I can see the ECB has one of two “Bail Mary” options. They are:
- Massive money printing and buying of sovereign debt
- The issuance of Euro-bonds along with across the board banking backstops.
As I noted in a recent article [9], #1 is impossible. If the ECB does this it will implode the bond market, which means GAME OVER for all intervention. Look at the impact QE had on Treasuries and you’ll see what I mean. And that’s Treasuries we’re talking about… not PIIGS debt.
Now let’s consider the ECB’s second “Hail Mary” option: the issuance of Euro-bonds and across the board backstopping of EU banking deposits.
For starters, Angela Merkel has said that there will not be Euro-bonds for “as long as [she] live[s].” This is not a bluff. The issuance of Euro-bonds goes against the German constitution. If Merkel were to even consider this option she would likely be kicked out of office (remember she’s up for re-election next year).
This would also result in Germany losing its AAA credit status. Germany is already approaching the dreaded Debt to GDP level of 90%. And thanks to nearly €1 trillion in back-door bailouts to Europe, the country is already on the hook for potentially tens if not hundreds of billions of Euros worth of losses: money Germany doesn’t have.
As for backstopping EU deposits… no entity on earth has the capital to do this. Total Eurozone deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion. That’s nearly TWO TIMES the size of the ECB’s balance sheet and over FOUR TIMES the size of the various EU bailout funds (the EFSF and ESM, the former of which only has €65 billion in capital left by the way).
Again, in very plain terms, NO ENTITY on planet earth has the money needed to backstop banking deposits for the PIIGS, let alone the entire EU. So scratch that idea off the list.
What does this leave?
It leaves us precisely where we are today. Where is that?
|
Bailout Entity |
Remaining Firepower |
|
EFSF bailout fund |
€65 billion |
|
ESM |
€700 billion assuming Germany and Italy ratify it (they haven’t yet) |
|
IMF |
€38 billion (maybe) |
|
ECB |
Technically, the ECB could print a couple hundred billion Euros, but doing so would have severe political and monetary ramifications so this option is questionable. |
|
Germany |
If it ratifies the ESM it’s on the hook for €190 billion Euros as well as the nearly €1 trillion it’s committed to EU bailouts already. German GDP is only €2. 89 trillion. So the country is already getting close to its own solvency crisis. |
The above is not opinion or idle conjecture; these are all verifiable facts, which is why I believe Mario Draghi is bluffing when he says the ECB can act and that its actions be “enough.”
Indeed, as a merely philosophical inquiry, ask yourself, when has a Central Banker said “believe me,” and proven to be correct about anything in the last five years?
With that in mind, I’m helping individual investors prepare for the inevitable EU fall-out with a FREE one time Special Report titled How to Play the Collapse of the European Banking System [10]. It’s 10 pages in length and covers in great detail the systemic risks posed by the EU to the financial markets. I also outline a number of investment strategies that will prove quite profitable as Europe crumbles.
You can access this report here. [10]
Best Regards,
Graham Summers