The markets are exploding higher this morning on news of the expanded Euro Bailout. The numbers at the moment are
- A 50% haircut for private Greek bondholders
- European banks have eight months to raise about $147 billion in capital
- An expansion of the European Financial Stability facility to $1.3 trillion.
First off, let’s call this for what it is: a default on the part of Greece. Moreover it’s a default that isn’t big enough as a 50% haircut on private debt holders only lowers Greece’s total debt level by 22% or so.
Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it’s expected to bring these levels to 120% by 2020.
And the IMF is giving Greece another $137 billion in loans.
So... Greece defaults… but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.
Forgetting that any and all official estimates for Greece’s financial condition have been off by a mile, not to mention that Greece still hasn’t paid back its first round of bailout funds, this move is nothing short of moronic.
The reasons are:
- The default is not big enough (I expect Greek bondholders to get 20-30 cents back on the Dollar at best in the future)
- It accomplishes nothing of significance (Greece is still broke), and…
- It will trigger a credit event and has the makings of systemic risk.
Let’s put some of the other numbers from this deal into perspective. According to the agreement, European banks are supposed to raise $147 billion in new capital by June.
Well, German banks alone need to raise $173 billion in new capital. So… this new capital “requirement” from the deal is pointless.
Indeed, the European banking system as a whole is insolvent.
With OVER $46 trillion in assets outstanding, this means that European banks would need to raise $1.77 TRILLION in capital to bring their leverage levels down to 13 to 1.
Yes… $1.77 TRILLION…
Now you see why the extra $147 billion in new capital is pointless. It’s like pouring a bucket of water into a desert and expecting it to sprout a jungle.
Folks, let’s get honest here. This deal accomplishes nothing. It’s just more “kicking the can” to avoid the reality. The reality is that the entire European Banking system is leveraged at near Lehman Brothers levels. And European banks need to roll over between 15-50% of their total debt (depending on which country they’re in) by the end of 2012.
The credit markets know this, which is why they’re predicting more Greece haircuts in the future. It’s also why IMF has decided to lend Greece another $137 billion… right as the country defaults.
Ignore this latest pop in stocks and the Euro. This mess isn’t over… not by a long shot. And before the smoke clears, much of Euro will be in default/ banking collapses.
Indeed, I believe we could see a Euro collapse based on Germany leaving the Euro.
So does Dr Pippa Malmgren, a former economic advisor to George W. Bush and a former advisor to Deutsche Bank. According to Malmgren, Germany has already ordered the printing of Deutsche Marks in anticipation of a possible withdrawal from the EU.
Malmgren states, “the social contract between Germany's citizens and its leaders preclude [debt monetization] given their history.” She adds that, “Germany has already begun to emphasize the need for a new EU Treaty that would compel fiscal harmonization, penalties for those that break the Maastricht Treaty rules and other undertakings that would harden Europe's defenses against economic default risks going forward.”
If this is true, and Malmgren is correct, then the Euro will absolutely IMPLODE. Germany is widely held to be the strongest balance sheet in the EU (though even the Head of its Central Bank admits that the country’s real Debt to GDP is over 200%).
However, compared to the PIIGS, Germany is relatively rock solid from a fiscal point of view. It’s also the largest economy in the EU. So if the Germany pulls out (70% of Germans believe the Euro has no future) then Europe will experience a wave of defaults starting with Greece and spreading throughout the PIIGS.
We’re already seeing hints of this occurring. Germany Vice Chancellor, Philip Roesler said on September 11 that Germany won’t participate in any more bailouts and that any German politicians who approve more bailouts is committing political suicide.
We also have reports of Sarkozy and Merkel screaming at each other in recent meetings. France has announced plans to possibly nationalize several banks just “in case.” And Germany has dropped more than a few hints that it’s fed up with the situation.
Heck, even Alan Greenspan says the Euro is “doomed” to fail.
Folks, something VERY bad is brewing behind the scenes. The Sarkozy- Merkel talks, the short-selling bans, the halted stocks, the leveraged EFSF, the hints of QE 3, all of this is telling us that the financial system is on DEFCON 1 Red Alert.
Ignore stocks, they’re ALWAYS the last to “get it.” The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.
So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We're literally at most a few months, and very likely just a few weeks from Europe's banks imploding.
What happened in 2008 was literally just the warm up. The REAL DEAL is coming in the next 14 months. And it’s going to involve corporate, financial, and sovereign defaults.
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Good Investing!
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