ECB Banking Standards and Other Great Works of Fiction
- Cato Institute
- Central Banks
- European Central Bank
- Germany
- Gross Domestic Product
- Hyperinflation
- Monetization
- None
As noted in numerous articles, the entire European banking and corporate system is over-burdened with debt.
Jagadeesh Gokhale of the Cato Institute puts the situation as the following, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”
Put another way, for Europe’s Government to fund all the entitlements they have, they would need an amount equal to 400% of GDP to be sitting in the bank collecting interest.
Virtually NO European country is running a surplus, let alone has an amount equal to 100% of GDP let alone 400% of GDP sitting around.
How come no one is openly admitting this?
The reason none of this shows up is because Europe’s accounting for unfunded liabilities as well as its accounting for banking liabilities. As noted by Mark Grant, the ECB even ADMITS that it doesn’t record most of the garbage it owns:
“Recognition of assets and liabilities
An asset or liability is only recognized in the Balance Sheet when it is probable that any associated future economic benefit will flow to or from the ECB, substantially all of the associated risks and rewards have been transferred to the ECB, and the cost or value of the asset or the amount of the obligation can be measured reliably.”
So the ECB has openly admitted: “we don’t actually count something as an asset or liability unless we believe it should be.”
In other words, the ECB’s balance sheet, which backs up the entire EU banking system it essentially a work of fiction. Unless the ECB officials feel like admitting something is an asset or liability, it doesn’t exist.
At this point, no sane person could possibly invest in Europe. And given that EU bureaucrats are now proposing STEALING depositors savings, I can’t think why anyone would have a bank account there either.
At the end of the day, this is all you need to know about Europe’s Crisis:
- The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
- This banking system is officially leveraged at 26 to 1. Realistically it’s likely closer to 50 to 1.
- The ECB’s balance sheet is entirely made up based on how the ECB feels like valuing what it owns (how’d that concept work out for Wall Street banks in 2008?)
- Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1…
And all of this is occurring in a region of 17 different countries none of which have a great history of getting along… at a time when old political tensions are rapidly heating up.
To be clear, the Fed, indeed, Global Central Banks in general, have never had to deal with a problem the size of the coming EU’s Banking Crisis. There are already signs that bank runs are in progress in the PIIGS.
Thus, the World’s Central Banks cannot possibly hope to contain the coming disaster. They literally have one of two choices:
- Monetize everything (hyperinflation)
- Allow the defaults and collapse to happen (mega-deflation)
If they opt for #1, Germany will leave the Euro. End of story. They’ve already experienced Weimar and will not tolerate aggressive monetization.
So even the initial impact of a massive coordinated effort to monetize debt would be rendered moot as the Euro currency would enter a free-fall, forcing the US dollar sharply higher which in turn would trigger a 2008 type event at the minimum.
In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years.
On that note, if you’ve yet to prepare for Europe’s BIG collapse…we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You and Your Savings and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.
You can pick up a free copy here:
Best Regards,
Graham Summers
PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:
http://gainspainscapital.com/gpc-inflation/
========================================
========================================
Notes From Underground
Where 2+2=5 is also a beautiful thing
Notes From Underground: Jeroen Dijsselbloem and the Template of Doom
It made little sense to blog about Cyprus last night because the initial news release was so vapid it was of little use. Those who perceived a risk-on based “settlement ” proved to be disappointed this morning. Long before Dutch Finance Minister Dijsselbloemopened his mouth, the euro and its various correlated trades were in a turnaround from last night’s movement. Mr. Dijsselbloem also serves as the head of the ECOFIN (European Finance Ministers) so his voice carried more weight than the usually opining of a podium-addicted eurocrat. It seems that the ECOFIN honcho made it known that the severe punishment of investors and depositors in Cyprus was to serve as the TEMPLATE for all future European banking insolvencies. The stern tone of the message sent global equities lower and the DOLLAR and any currency not in Europe, rallying.
When Dijsselbloem was recovered from his power hangover saw the damage the TEMPLATE COMMENT did to the markets, heimmediately recanted and claimed Cyprus was a one-off resolution. There are those who are applauding the firm stance taken by the German core hard-money crowd as it will drive a stake thru the blood suckers feeding on “MORAL HAZARD.” In a normal economic environment I might agree, but in times of economic downturn it is kicking the hornet’s nest to start invoking severe credit outcomes on the financial system. The overall unemployment rate in Europe is close to 12% and we know that Spain’s official jobless rate is close to 27%. Do you really wish to pressure bank balance sheets at a time that the economy is already squeezing troubled borrowers.
It is madness to keep money in European banks when depositors are so unsure as to the remedies of any crisis resolution. Spanish banks are going to be tested and the ECB is going to be challenged. It is of no small matter that ECB President Draghi has been so quiet throughout this most recent crisis. There has been no call for the Outright Monetary Transaction (OMT), the EuropeanQE program, though if depositors in Spain become nervous that will change. I advise you to remember that the OMT is based on the requesting country to adhere to an agreement to imposing harshCONDITIONALITY on itself to meet the borrowing stipulation. Austerity in the face of a sovereign and/or banking crisis is a recipe for disaster. Mr. Dijsselbloem, did you really think about the words that came out of your mouth?
I wish all my readers a Happy Passover or Easter and wish you a holiday season of peace. It is spring and the calendar says redemption or resurrection are the words of the season. Peace to all of my readers.
Yra Harris
NOTE: I am going to repost two pieces from last week that have become my relevant after the lunacy of today
Posts
