It’s now been two weeks since the Federal Reserve lead a coordinated effort to lower the cost of borrowing Dollars worldwide. While the markets initially hailed this move as a “solution” we’ve since seen that it was in fact an act of desperation/ cushioning of the coming European banking collapse.
The REAL implications of the Fed’s move are:
1) Europe was/is on the verge of its Lehman moment.
2) The ECB/ Germany/ IMF/ EFSF bailout options have all failed.
3) The Central Banks are growing truly desperate to prop up the system.
Europe was on the verge of its Lehman moment. I do not think that the coordinated Fed move has stopped this from happening… rather it’s merely pushed back Europe’s Crisis by a few weeks.
Remember, the situation in Europe is one of insolvency, NOT liquidity. Banks across Europe are leveraged at an average of 26 to 1. This means that they own 26 times more assets (read: loans made to consumers, businesses, etc) than they do equity.
At these leverage levels, if the assets fall even 4% in value, you’ve wiped out ALL equity, rendering the bank bankrupt.
Source: IMF data
The key item I want you to notice in the above chart is that French and German banks sport some of the largest leverage ratios of any banks in Europe. On that note, I believe it will prove to be France, not Italy that sees the first BIG bank failure. Indeed, we already see France moving to prepare for this:
The Agency for State Holdings (EPA), meanwhile, has been working for several days in a scheme that would allow the French to enter the capital of financial institutions.
But according to our sources, Paris is ready to act. If the level of European support-which must still be approved by some national parliaments, provides that the EFSF to recapitalize banks, the agency of state ownership (EPA), meanwhile, has been working for several days in a diagram that would allow the French to enter the capital of financial institutions. "It's just in case ..." said a source familiar with the matter. Unlike what happened in 2008, which had pushed Bercy that all banks should call the financial office that had opened so that no-it-is stigmatized, only "two or three banks "This time would be affected by the device. "We're not in the same situation three years ago," says another source. And today, some are not willing to "pay" for others.
Germany just formally passed legislation to permit it to nationalize large banks yesterday:
Commerzbank faces bail-out by state
The German government has begun preparations for a possible state bail-out of Commerzbank if it fails to present a convincing plan by January 20 to fill a €5.3bn capital gap identified by regulators.
German chancellor Angela Merkel’s cabinet on Wednesday agreed a bill to reinstate a state-backed bank rescue fund next year, a move that could pave the way for state aid to Commerzbank, Germany’s second-largest bank by assets.
As I’ve stated before, going forward Germany will be focusing more on domestic bank issues rather than supporting the Eurozone. Put another way, Germany will look out for its national interests above everything else. This includes:
1) Not permitting the ECB to print money
2) Not permitting the issuance of Eurobonds
Germany will not tolerate price instability as it’s already experienced the tail end of it (Weimar). Secondarily, the issuance of Eurobonds goes against the German Constitution, which neither the German courts nor the German people will tolerate.
The reason for this is Germany has its own problems. German banks have yet to be recapitalized and need at a minimum over 100 billion Euros in Capital. With that in mind, Germany will be focusing more and more on its domestic issues and not moving to backstop the EU.
I want to be clear… Angela Merkel will verbally state that Germany wants to remain part of the Euro, but Germany’s actions (not putting up more funds for bailouts without demanding guarantees that are impossible to meet ) speak louder than her words.
Folks, the reality is that Europe is on the verge of systemic collapse. The proposed solutions have failed. And we’re heading into a situation that will be even worse
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