The media is rife with misrepresentations and analysis of the EU. Here’s the real deal.
- The ECB is tapped out. Having provided over €1 trillion in funding via LTRO 1 and LTRO 2, taking on over €700 billion in PIIGS debt putting its own solvency at risk, it simply cannot launch another LTRO scheme for the following reasons:
- Those banks accepting LTRO funding are being punished by the market, thereby indicating that ECB funding is no financially toxic to a firm’s reputation in the market place
- The positive effects of LTRO 2 lasted only one month compared to several months for LTRO 1. Thus, we find that with each additional intervention the benefits are shorter lasting.
- The Federal Reserve cannot step in. I know the blogosphere is rife with claims that the Fed will just print and print and print to save the day. The people writing these claims fail to see that:
- The last time the Fed printed (just $600 billion at that) food prices hit all time records and revolutions erupted around the world.
- Back home in the US the Fed came under massive political pressure forcing it to go on damage control mode (Bernanke’s town hall meetings and opening the Fed to Q&A sessions)
- This is an election year. The Fed has done all it can to support Obama’s re-election (for good reasons: Obama re-elected Bernanke and the GOP is targeting the Fed as a major issue). If the Fed launched some massive printing campaign, Obama will certainly lose.
- The IMF cannot step in because:
- It’s ultimately a US-backed entity
- The political environment in the US will not tolerate a bailout of the EU (see the negative political reaction to the Fed’s moves to lower Dollar swap costs during November 2011).
- This is an election year: how many times has the IMF asked for additional funding and been rejected?
- Germany is politically fed up and monetarily tapped out:
- Merkel’s political party is getting destroyed in state elections due to her support of the EU. And Merkel is running for re-election in 2013.
- Merkel is committing political suicide by continuing to put Germany on the hook for Europe’s problems. Speaking of which…
- Germany is already on the hook for over €1 trillion in EU losses… and the ECB has made it so that it can roll the losses from its PIIGS portfolio back onto National Central Banks (AKA the Bundesbank).
- Inflation is showing up in Germany and becoming a political issue: see recent union demands (and success) for pay raises.
- The German constitution does not permit the creation of Eurobonds.
- If Germany permits additional bailouts or funding it will lose its AAA rating, leaving Europe without an AAA rated large economy to fall back on.
- China cannot be a savior:
- Having pumped its system full of liquidity it now faces inflation at the same time as its economy is slowing. This in turn means…
- That China’s Government is starting to lose its already tenuous control of the populace. As a result…
- China will be focusing on domestic issues rather than saving Europe (when was the last time the “China to back the EU” story appeared in the media?)
- Germany and others have already taken steps to prepare for a break-up of the EU. In Germany’s case:
- It’s re-instated its emergency bailout fund providing €480 billion in potential assistance to Germany banks in case of a Crisis.
- German banks will be permitted to dump their EU bonds into the emergency fund if need be.
- German corporations with operations in Greece have put clauses in their contracts to allow for the acceptance of the Drachma.
- The ECB has taken similar actions permitting it to roll back the losses from its PIIGS holdings onto National Central Banks.
- Spain is on the verge of a banking collapse. Its efforts to deal with an insolvent banking system by merging crappy banks and shifting losses onto its public balance sheet are proving to be absolute failures due to the fact that:
- Total Spanish banking loans are equal to 170% of Spanish GDP.
- Troubled loans at Spanish Banks just hit an 18-year high.
- Spanish banks need to rollover 20% of their debt this year.
- Spanish private sector debt is nearly 300% of Spanish GDP.
In plain terms, having spent two years and hundreds of billions (even TRILLIONS of Euros) dealing with the EU Crisis, the powers that be over there have backed themselves into a corner from which they cannot escape. Let me be blunt:
THERE IS NO ENTITY ON EARTH THAT CAN BAILOUT EUROPE.
It’s game over for that idea. And the idea that one bankrupt nation (even Germany sports a REAL Debt to GDP of over 200% when you include unfunded liabilities) prop up several others is ridiculous.
And all of this is happening at the precise time that Spain is about to implode.
This is the REAL DEAL for Europe. Anyone who has some kind of counter-argument to these points either doesn’t understand the political environment we’ve entered (even Central Banks are fed up with bowing to political pressure from politicians) or is simply hoping that by ignoring these realities they (the realities) will go away.
They won’t. Europe’s banking system as a whole is at risk a la 2008. And it’s nearly four times the seize of the US banking system.
So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. The US will not escape from this unscathed. No one will. The global banking system is too interconnected: some estimates put US exposure in the ballpark of several TRILLION Dollars.