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Watching international financial
policy persisting on a
concept to fight debt with more debt in an environment where official GDP growth rates only remain positive because of ridiculously low deflators, while interest rates apart from those central bank help for banks via laughingly low interest rates begin to surge everywhere else, this observer begins to wonder if one can expect anything
else than a fast-rolling, simultaneous European banking collapse.
Engulfed in more exponentially
rising debt on public and
private levels than ever before
there simply cannot be another
end of the longest growth
cycle in history than a simultaneous collapse of international banking when lending freezes up due to fears about the real creditworthiness
of the respective counter party.
Globalization will have
made it possible.
Bank Reserve Requirements:
EU 2% - China 21%
The rise of supra-regional
financial institutions that
have evolved from two decades of radical deregulation of financial markets and are now too big to fail
overshadows all major industrial
nations as it has given birth to unprecedented bulks risks never
seen before. The
situation gets aggravated
by the fact that banks have never held more derivatives than nowadays.
At a notional volume of
$580 trillion as of 2010 derivatives now exceed global GDP of roughly $50 trillion by a factor of 12. It strongly appears this world is overleveraged as derivatives
volumes have remained at this level for the last 3 years.
Minimum reserve requirements
of a paltry 2% in the Eurozone
mean that European banks are geared 1:50 (and possibly higher through the use of off
balance sheet vehicles).
An adverse 2% move of markets can
wipe out any bank overnight.
Compare this with China where minimum reserve requirements have been raised
to a staggering 21%
in order to curb speculative lending.
But while China takes aggressive steps in order to reduce private indebtment the Western
world remains in wishful
mode. A lot has been written about national debts, sitting at record levels and rising strongly due to investors suddenly asking higher risk premiums for government debt like Greece's,
where 2-year issues now yield above 25%, confirming the foreseeable
default of a country that was
bankrupt one out of two years in the last two
centuries.
The stream of news has not changed
much since late last year when the EU inofficially split into the Euro hardcore area of
AAA-rated Germany, Austria,
Finland, Luxembourg and the Netherlands
and the risky rest which is only
half represented under the acronym PIIGS.
I do not include AAA-borrower
France in the core group as it
is heavily exposed to the coming Spanish and Italian crisis which will have the same roots as all banking crises around the world: reckless lending to irresponsible public
and private borrowers that fuelled a property boom thanks to the lowest interest rates in history. Holding Greek bonds with a volume of €54 billion, French and German banks were the main benefactors of Greece's first €100 billion bailout
in May 2010.
The hard landing is only
a question of time. European politicians
are stuck in a deadlock
over the resolve of the crisis
while tending to lend their ears
to bankers who are trying to cover their ass as their low interest
rate strategies will not work any longer in a world of surging commodity inflation that will take
its toll on consumers and and industry alike.
With the creation of a monetary union without a fiscal
union the Euro will become
the death trap of the old continent as the inventors
of the common currency raced down a one-way street, never thinking about the possibility
of an exit of a Euro member.
Current negotiations on
an inevitable restructuring
of Greek debt have not moved since last winter. Recent discussions to extend Greek debt for 7 years beyond maturity will lead into the same dead end all previous meetings have ended before as governments shy away from
calling to account private debt holders.
This preference of investors
over taxpayers has led to
the mess we are in. Regaled
investors bulk at the idea of a haircut and force governments with the threat of withdrawal from their debt
auctions to keep the status quo where they are essentially bailed out by taxpayers.
This does not go down well
with 500 million European
non-millionaires who have
been squeezed between stagnating salaries and doubling
of costs since the
introduction of the Euro 10 years ago.
Massive protests against austerity programs have been spreading
in Europe since a year. Beginning in Greece a wave of protests has mushroomed to
London, Paris, Madrid, Barcelona, Lisbon, Berlin
and Brussels.
These protests against an "everything for
banks and austerity for
the people" policy are justified
by the global economic outlook
best described as stagflation giving
way to hyper inflationary
depression.
Banks are playing a losing
game as their recapitalization dreams rest on a foundation of a artificially low central bank interest rates coupled with high yielding government debt. It is certainly a winner's game to borrow money at 1.25%, only to turn around and buy German Bunds yielding 3%.
The ESM Is A Subprime
Construct
As investors almost fist-fight for German government bonds, chancellor
Angela Merkel's is certainly getting moneyed support from investors who realize that all their other holdings may turn into
ashes if Germany does not keep firing the European debt engine at
lower yields than any other
Euro country.
Alas, the idea of finding cheaper money for the European deficit spenders will stall in its own tracks as the so called European
Stability Mechanism (ESM)
is inherently flawed. European politicians nurse the hope that the ESM will be able to borrow money at rates close to Germany's financing costs. The achilles heel of the ESM are its members. So far Greece, Ireland and Portugal will
be on the receving end of
the ESM, leaving only 14
countries - among them
the insignificants like Cyprus etc. - to back the fresh
debt.
As only 6 nations in the Eurozone
are left with an AAA
rating it is a miracle
how rating agencies can
rate this new debt again with AAA, repeating the CDO failures and aiding irresponsible European politicians in making subprime a business
model for a whole continent!
Total issued government debt of the Eurozone stood at €5.9 Trillion in May 2011.
Current Greek bailout reports yo-yo between
€70 billion and €100 billion for the second attempt
to fix Greece.
Transpose this onto Ireland and Portugal and it looks likely that the €750 billion ESM will
run dry even before it comes
into reality in 2013.
The pressure to increase capital ratios under new international rules between 2013 and 2019 according
to plans of the Bank for International Settlements
(BIS) is designed to suffocate the economy meanwhile, intensifying the beginning of the Kondratieff winter.
As banks have to increase
their capital set against
private and business loans,
a credit crunch is written on the wall, and it will be boosted
by higher interest rates
as lenders will compete for money.
At the same time banks will be
able to continue to zero-weight government
debt in their portfolios according to new proposals by
the European Commission in
500-page legal paper
"CRDIV".
This is clearly a head-in-the-sand strategy. All Euro members can be safely
assigned a negative
rating outlook at this point of time and such a weighting will again only delay,
but never mitigate the banking sector's problems.
The Coming Giga-Credit Event
So far I have not met a critical
member of the financial industry recently who disagreed about the high possibility that the failure of one of Europe's top 25 banks may start a simultaneous
European banking collapse
because markets are intertwined as never before.
When one of these banks cannot meet its obligations, leaving countless counter parties without expected funds, the dominoes will fall at unprecedented
speed in a realtime financial
world.
It all could happen within 24 hours from the breakdown of a major bank
to a Europe-wide market holiday in an attempt to stop
the unstoppable: The reduction
of the banking sector to
a size that meets the needs of the economy and not
the needs of the bankers.
No industry has expanded
more than the financial industry in the past four decades, turning not only Europe, but most parts of
the world into overbanked
territory.
Given the long delay in restructuring banking - the most important step will be to regulate
financial derivatives - thanks to a clueless political elite in the EU, and
the subsequent continued buildup of still more risks a meltdown initiated by early market rumors trickling down into media is the most likely
end scenario.
In the past, financial
crises were limited to
the reach of the affected
currency. As the Euro now
unites 17 countries in a monetary
union that was achieved by political will and not by reason, these 17 members now man a ship with a lot of deficit holes. Finding themselves in a financial tsunami,
one or more countries will jump at
some point.
It could be anybody. Either a weak Euro member
seeking rescue by exiting the Euro and devaluing its own new currency
while KOing investors with a bond haircut or a core Euro member pulling the emergency
break and leaving the mess behind
it.
Either way it goes it
will lead to a discussion about the future integration of Europe as the concept of paying your neighbor's
debts has never worked before.
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