While the US continues to digest the details of the US Fiscal Cliff Deal (the only important item is that it does nothing to address our debt or deficit problems), the EU continues to proclaim the worst to be over… while its financial system crumbles from within.
The latest EU official to sound the all clear is German Finance Minister Wolfgang Schauble. On Friday he told German newspaper Spiegel Online that he believes “we have the worst behind us” in the Euro Crisis.
It’s an odd statement given that in just October Schauble wasn’t sure that the worst was past. What’s changed since then? Not much aside from Greece finally getting another €57 billion that it’s been waiting for since June.
Indeed, Spain’s second largest bank, Bankia, (the bank which received nearly €24 billion in bailout funds in mid-2012) just announced that it needed another €18 billion on Friday. This came after Spain’s own Fund for Orderly Bank Restructuring announced that Bankia had a negative value of over €4 billion.
Again, the bank already received €24 billion in bailouts… and it’s worth negative €4.15 billion today. Given that this is the same bank that revised its 2011 €309 million profit to a €3 billion loss what are the odds that even this awful assessment is a bit too rosy?
Lest we think Bankia is a special case, consider that the entire Spanish banking system is on life support from the ECB, drawing over €300 billion (for a banking system with a total market cap of a little over €100 billion this is extraordinary).
Then of course there’s Greece where the four largest banks announced that they need another €27.4 billion (the entire banking system needs €50 billion). To give this number some perspective, the entire capital base of the Greek banking system is only €22 billion. Keep that €22 billion in mind when you consider that Greek banks are sitting on €46.8 billion in bad loans.
With this in mind, and considering that Wolfgang Schauble has historically been one of the more negative voices in the EU political sphere, I take his “the worst is over” proclamation to be extremely worrisome.
Indeed, when you consider that France’s Francois Hollande recently claimed that the EU Crisis is “over” you have to wonder just what exactly is going on behind the scenes that these folks feel the need to state everything is great?
My view is that they know the entire move in the equity and bond markets since June 2012 has been based on verbal intervention from the ECB (despite promising unlimited bond buying, it has yet to actually do anything) and are trying to milk this thing for all it’s worth.
After all, it’s clear at this point that the entire EU financial system is essentially held together via duct tape by the ECB. And with Spain and Greece’s banking systems once again in dire need of capital I’m very concerned that the next round of the EU Crisis is fast approaching and EU leaders are trying to start the damage control in advance.
On that note, we recently outlined a number of targeted trades to help our Private Wealth Advisory newsletter subscribers profit from the next round of the EU Crisis negotiations. These are the same “back door” investments our clients have used multiple times to pocket gains whenever the EU starts to crumble.
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Phoenix Capital Research
Happy New Year Germany: Greece Needs A New Bailout
When it comes to the main sovereign story of 2011 and 2012, namely the endless bailout of Greece, now in its third iteration, the conventional wisdom is that courtesy of the near elimination of the country’s private sovereign debt and the fact that its official foreign debt held by benevolent taxpayer funded globalist powers (IMF, ECB, EFSF) has been mostly converted into a zero-coupon, perpetual piece of paper, the country is fine. After all it has no debt interest expense to finance, and the only shortfall it has to plug is that created by its primary budget deficit (which as we showed earlier is “improving” on a year over year basis not because the economy is improving, but because the Greek government is simply refusing to pay its bills). So there is nothing more to do but sit back and wait while the economy slowly recovers, the unprecedented internal imbalance with Germany is gradually aligned, are the unemployment rate drops, (while hoping that the population does not die out first) right? Wrong.
What everyone is forgetting is that the heart of the Greek problem is not the Greek sovereign debt, and certainly not the rate of interest, but the fact that Greece’s financial system, i.e. its banks, are utterly insolvent: and with the private banking system no longer creating money by handing out loans to a just as insolvent broader population (and the ECB certainly no longer injecting direct liquidity into the Greek economy) there is little that supports any form of economic growth (the Austrians out there will immediately recognize the problem: if money is not being created, the economy is not “growing”, period). After all there is a reason why of the countless billions in Greek bailouts, of which the majority was used primarily to fund interest and maturity payments to other banks such as Deutsche Bank, the biggest portion that remained on the ground in Greece never made it to the actual people, but served to prop up the Greek banks, some €50 billion.