August 23, 2011

Europe's Banking Situation

Last week, Nicholas Sarkozy and Angela Merkel got together to talk about the European economic issues. Their response was not amazingly political: what is needed is another eurozone governing body overseeing fiscal debt and promises by governments not to run large deficits. They also said that they will harmonize their tax structures within five years. As John Mauldin notes, the problem is not tax structures, it is debt that cannot be repaid.

Lars Frisell is the Swedish Financial Supervisory Authority Chief Economist - the Swedish group that regulates that nation’s banking system. A few days ago he was quoted as saying:
“It won’t take much for the interbank market to collapse. It’s not that serious at the moment, but it feels like it could very easily become that way and that everything will freeze.”

Porter Stansberry wrote the other day:
“In Europe, the problem is a bit different … and slightly more technical. Most of the debt in Europe is held by the big banks, not the sovereigns. Look at just two French banks, for example. Credit Agricole and BNP Paribas have combined deposits of a little more than 1 trillion euro. But they hold assets of 2.5 trillion euro. Those assets equal France's entire GDP. And those are only two of France's banks. Right now, the tangible capital ratios of these banks have fallen to levels that suggest they are probably bankrupt – like UniCredit in Italy and Deutsche Bank in Germany. BNP's tangible equity ratio is 2.85%. Credit Agricole's tangible equity ratio is 1.41%. (UniCredit's is 4.42%, and Deutsche Bank's is 1.92%).
“These banks have long been instruments of state policy in Europe. They've funded all kinds of government projects and favored industries. Making loans is far more popular with politicians than demanding repayment for loans. As a result, these banks are left with nothing in the kitty to repay their depositors. If there's a run on these banks (and there will be), how will they come up with money that's owed?”

Again, from John Mauldin, "If there is a sovereign debt credit crisis in Europe, it is entirely possible that a majority of Europe’s banks will be technically insolvent, depending on the level of the crisis. Frisell could be eerily prescient. We gave them subprime; they may pay us back with their own crisis and in spades. The next real crisis in Europe that is not bought off with yet more debt will push the world into recession. It is that serious. That is why the ECB keeps ignoring its charter and taking on bank debt and buying sovereign debt they know will be marked down."

Does reading any of this from some very educated people sound like the world's banking system is stable? We are talking BIG European banks. And they are all inter-connected through a myriad of swaps, derivatives, etc... with most of the other large banks in the world. Just out today is a great story that tells us that the bank bailout in 2008 wasn't the $500 billion that was advertised - it was $1.2 TRILLION:
What's going to happen when people really start thinking about these events?

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