The Eurozone Banks

[Gumby]

Has anyone been following the Sarkozy/Merkel agreement-to-plan-for-a-plan to shore-up the Eurozone banks? It's absolutely bonkers. In my opinion, the US corporate media hasn't really covered the story very well — giving the impression that steps are being made to avert a catastrophe. But, if you look a little closer, it becomes very apparent that the sh*t is about to hit the fan if a real plan isn't finalized very soon.

Here's where it starts to get crazy...

The European "stress tests" that were recently performed showed Dexia — the Belgian bank that imploded over the weekend, and was just nationalized — as one of the safest banks in Europe.

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And while Dexia went under this weekend, a Danish bank and a Greek bank were just nationalized as well. The wheels are coming off every day, and every time Sarkozy/Merkel send out a press release about how productive their meetings have been, the US markets rise — even though nothing has changed. The HFT algorithms are too gullible.

Not too many people in the US corporate media seem to be concerned about the situation, but here's a very ominous opinion from IMF advisor (and former White House advisor), Dr. Robert Shapiro the other day on the BBC's "Newsnight"

IMF advisor says we face a Worldwide Banking Meltdown

As Shapiro says, unless there is a credible plan very soon, we are likely on the verge of a worldwide banking crisis.

There is no plan to fix the problem, but even if there were a plan, it's unlikely that the European electorates would ever support it. I think this is going to end very, very badly over the next few weeks as more and more banks go under. The wheels are already coming off and nobody in the US seems to be reporting about it. Totally crazy.

(On the other hand, I'm feeling very good about the PP while this all plays out)

[Coffee]

Will that mean that money rushes into US Banks and the $USD ?

[MediumTex]

Will that mean that money rushes into US Banks and the $USD ?

I would think so.

[Gumby]

The only problem is that US banks are not immune to the European crisis. Our largest banks are so interconnected (as Shapiro also pointed out).

Much of the interconnections between US banks and European banks are done through the (unregulated) shadow banking system. For instance, here is one example...

IFRE: Desperate banks turn to US repos

So, if European banks start toppling, large US banks may very likely need bailouts as well.

Japanese banks also have many interconnections with European banks. So, the contagion could potentially spread everywhere.

And keep in mind that many of the Fed's Primary Dealers (i.e. banks that create a market for US Treasuries) are foreign banks.

The Primary Dealers are:

1.  Bank of America
2.  Barclays Capital Inc.
3.  BNP Paribas Securities Corp.
4.  Cantor Fitzgerald & Co.
5.  Citigroup Global Markets Inc.
6.  Credit Suisse Securities (USA) LLC
7.  Daiwa Securities America Inc.
8.  Deutsche Bank Securities Inc.
9.  Goldman, Sachs & Co.
10. HSBC Securities (USA) Inc.
11. J. P. Morgan Securities Inc.
12. Jefferies & Company Inc.
13. Mizuho Securities USA Inc.
14. Morgan Stanley & Co. Incorporated
15. Nomura Securities International Inc.
16. RBC Capital Markets
17. RBS Securities Inc.
18. UBS Securities LLC.

So, as the dominos start to fall, we could really be looking at a world-wide banking crisis.

[moda0306]

I think with rates at pathetic lows and banks with pretty big risks associated with them, holding a decent sum of money in pure cash isn't a bad idea.  Maybe some in your own safe and some in a safety deposit box at the bank.

[stone]

Stuff about this here:-
http://www.bbc.co.uk/news/business-15217615

"If we now see a round of bank recapitalisations and long-term sovereign bond-buying by the ECB it will leave Europe at least in a state described by one of my City contacts thus:

"I think that we face the quite real prospect that the market is removed as the determining mechanism for setting the price of capital within the eurozone at the sovereign level."

That is, Europe, through emergency, ad-hoc fiscal union, effectively removes its sovereign debt from the influence of market forces. If, in the process, the national states (backed by the IMF and EFSF) take major ownership stakes of recapitalised banks, you then also get the beginnings of state-directed lending, says my interlocutor:

"This would put internal credit creation back under the control of the state," they say, even if it only took the form of SME lending targets, credit easing and some infrastructure programmes.

Once you consider the enormity of this - a situation that many in modern politics, finance and economics might regard as the definition of "unfreedom", you understand why it has become so hard for Barroso, Merkel et al to formulate a plan. The plan is also their nightmare."

[Gumby]

Stuff about this here:-
http://www.bbc.co.uk/news/business-15217615

My God, stone. That is a frightening history of how fiscal decisions can mutate into war.

[Indices]

Austerity can lead to military coups/dictatorships. Watch Greece closely.

[moda0306]

I recently posted an article about Greek "riots" where citizens were beating muslims with bats.  I think this could all get pretty ugly.

I tend to think of bonds as finally being "overpriced," but I think there's a lot more to see regarding Europe.

[Gumby]

If you're looking for a good description of how/why things might go very bad, Chris Martenson just posted a very dark warning on his blog:

http://www.chrismartenson.com/blog/big- ... wing/63455

I only find it interesting because I've come to similar conclusions. However, it's worth noting that he's also written this to try to scare people into signing up for his newsletter so that people can "prepare" for the looming crisis. Nevertheless, I think he raises some very valid points about the risks the global economy faces.

[stone]

Very illuminating (for me anyway) artical about this: http://www.hussman.net/wmc/wmc111024.htm

"Of course, Europe wouldn't need to blow all of these public resources or impose depression on Greek citizens if bank stockholders and bondholders were required to absorb the losses that result from the mind-boggling leverage taken by European banks. It's that leverage (born of inadequate capital requirements and regulation), not simply bad investments or even Greek default per se, that is at the core of the crisis.

The bottom line is a) European leaders will likely initiate a forced bank recapitalization within days; b) Greece will default, but the new hold-over funding may give the country a few more months; c) the EFSF will not be "leveraged" by the European Central Bank; d) banks are likely to take haircuts of not 21%, but closer to 50% or more on Greek debt; e) much of the EFSF will go toward covering post-default capital shortfalls in the European banking system following writedowns of Greek debt; f) the rest will most probably be used to provide "first loss" coverage of perhaps 10% on other European debt, which may be sufficient to limit contagion provided that implied default probabilities on Italian and Spanish debt don't breach that level and the global economy stabilizes; g) uncertainty following a Greek default is likely to create significant financial strains, even in the absence of a recession; h) all bets for stability are off if the global economy deteriorates markedly from here, which is unfortunately what we continue to expect."