Europe’s Date with Reality

It is no secret that the European Unions days are numbered. “After 19 months of denial, propaganda and phony fixes, the political and finance leaders of the European Union are claiming a “comprehensive solution” will be presented by Wednesday, October 26. There have been any number of insightful descriptions of what’s going on beneath the artifice, spin and lies, for example:

Landesbank of Germany, leveraged 53.04 to 1

FACT #1: Europe’s entire banking system is leveraged at 25 to 1. This is optimistic. According to Hussman Funds many banks are leveraged up to 50-1.
American banks are typically leveraged 12 to 1, which is where they were at in 2008, saved only by our corrupt politicians and the Federal Reserve. Historically, before the Federal Reserve, banks were leveraged 4 to 1 through most of the 19 th century, typically lending out 50% to 83% of their funds depending on how risk adverse the individual bank management was. The average was 21% kept in reserves, and 79% loaned out. With the onset of the large central banks the crazy pyramid schemes are creating some truly historic leveraged numbers as shown here;
To further put this in perspective Lehman was leveraged 30 to 1. This means a drop in asset prices of 4% at a leveraged ratio of 25 to 1 wipes out a bank.
Landesbank leveraged 53.04 to 1 with tangible assets of 1.43%.
Dexia SA (Nationalized due to insolvency) previously leveraged at 52.83 to 1 with tangible assets of 1.49%.
Deutsche Bank – RG leveraged 37.82 to 1 with tangible assets of 1.83%.
Danske Bank A/S leveraged 30.68 to 1 with tangible assets of 1.97%.
And the list goes on, Credit Agricole, ING Groep-ADR, Commerzbank, UBS AG-Reg, Barclays PLC, Nordea Bank AB, BNP Paribas, Credit Suiss-ADR (22.86 to 1), SOC Generale, LLoyds Banking, Roayal BK Scotland, and Fortis Banque in the best financial shape at 17.75 to 1 with tangible assets of 5.61%. A far cry from the days when a renegade bank would leverage themselves 5 to 1.

Socialism always fail's. Europe will become a dictatorship or embrace capitalism in the coming years.

FACT #2: European Financial Corporations are collectively sitting on debt equal to 148% of TOTAL EU GDP.
This is just the financial corporations. No derivatives, personal, or other off balance sheet items. Before you feel sorry for the Europeans please note that we owe 364% of the GDP when total private and public debt is accounted for.
FACT #3: European banks need to roll over between 15% and 50% of their total debt by the end of 2012.
Simply put this represents billions of dollars that the European banks will have to raise in 2012 or become insolvent. Similar to the situation the United States federal government has gotten itself into with short term T-Bill debt that must be rolled over every month. US treasury auctions have become lively affairs of late, just imagine the atmosphere that will consume the boardrooms of European banks in 2012 as they teeter, one after another, on insolvency.
FACT #4: According to Jagadeesh Gokhale, Senior Fellow at the Cato Institute, in order to meet current unfunded liabilities (pensions, healthcare, etc) without defaulting or cutting benefits, the average EU nation would need to have OVER 400% of its current GDP sitting in a bank account collecting interest.
That would translate to $64 trillion dollars for the entire EU. Not going to happen. China will not be riding to the rescue anytime soon. KaBoom!

$779 billion is not $3 trillion

Bail out numbers of 3 trillion euros have been thrown around and the total EU member nation pledges for any attempt at a bail out is, at best, 779 billion euros. Not even close. Remove Greece, Portugal, Italy, Spain, and the number drops to 494 billion euros. Continue removing Ireland, preexisting commitments, and other contingencies and the bail out fund becomes 74.6 billion euros.
Our Federal Reserve is leveraged 56 to 1 and contemplating acquiring additional toxic assets from member banks aka Quantitative Easing III. With the demise of Europe in 2012 the United States banking system will undergo a similar catastrophe.
The European banks will fail, popping the money bubble, with deflation and economic recession or depression.
Best option; kick the can down the road. This has been the option since 2008 and the days of doing this are numbered.
Here is a quote from Clive Maund on the consequences of the crisis;
“If Europe should fail this is what we can expect to happen – European banks will crash and burn and take down major US banks, which are already walking wounded basket cases anyway. We are likely to see a lengthy unscheduled “bank holiday” – banks will slam their doors and if your money is still inside their vaults then you are out of luck. Major disruptions in supply and distribution of food and fuel in particular will trigger general panic, and riots and mob violence will spread rapidly – what we have seen on TV happening in Greece will suddenly happen on the streets of the US and many other countries. Stockmarkets will crash in a manner that will make 2008 seem like a “walk in the park”. Virtually every asset class and investment will crater – especially commodities, stocks and Real Estate. The euro will be vaporized. The tidal wave of funds liberated by this mass panic are going to have to go somewhere and normally we would expect them to go into the US dollar and Treasuries, but with US banks failing even this cannot be relied upon. The one surefire investment category that will shine – provided that is that the markets or brokerage houses etc involved with these transactions don’t themselves fail – is “misfortune securities”, meaning bear Exchange Traded Funds and Puts (one party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller, has the obligation to buy the asset at the strike price if the buyer exercises the option).
The gravity of this crisis is such that we are not simply talking about protecting investments and making opportunistic gains out of the mayhem that will ensue, if Europe should fail, we are talking survival issues as well, as due to the interconnected nature of the global economy things could become very ugly, very fast across a broad front. If you want to learn what life is like when banks suddenly slam their doors, then you should read up on the Argentinian crisis of the early nineties. The middle class suddenly found themselves disconnected from their savings, and as many of them lost their jobs at about the same time, they became instantly destitute, and forced to swap their possessions for food. Crime soared and people who had been used to living relatively cushy lives suddenly found themselves living on the edge in a law-of-the jungle nightmare. If Europe should fail this is what may quickly become reality not just in Europe but in the acutely fragile and vulnerable US and many other other countries as well. Other undesirable consequences will be unemployment rising to incredible unprecedented levels, so that students leaving college will have almost ZERO chance of finding work. The travel industry, much of which is non-essential, will be devastated with airlines slashing flights and going bust and hotels suffering extremely low occupancy rates.”
My best guess is five months, but some are predicting as little as five weeks. Best case scenario, Bernanke prints $3 trillion and nobody notices.