The Looming Collapse of European Banking

[Matter-Eater Lad]

The banking system of Europe is at the edge of the abyss. A brief story by The Telegraph revealed this last week. The original was almost immediately deleted. A new version was substituted.

 

You can see the original headline on Google:

 

European banks may need £16.3 trillion bail-out, EC document warns ...

 

There are dozens of these links. I read the story last week. I saved the link. But, lo and behold, when I clicked my saved link on Monday morning, the story did not mention a specific figure.

 

There was a reason for this. The editors at The Telegraph had taken out the following paragraphs:

 

European Commission officials have estimated that impaired assets may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the trading book total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.

 

In addition, so-called 'available for sale instruments' worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.

 

Fortunately, web sites around the globe have posted the deleted paragraphs.

 

Converted into dollars, £16.3 trillion are the equivalent of $25 trillion.

 

The original paragraphs can be found in several links in the Google list of headlines.

 

Why did the editors do this? A call from some government bureaucrat? Or the realization that the article might start a bank run? I think the latter. In either case, it's scary.

 

The current article begins with a lie: "Last updated: 6:34 GMT, 11 Feb 2009."

 

WHAT THE EUROPEAN ESTABLISHMENT IS FACING NOW

 

The original February 11 story was a shocker. The author claims to have seen a secret European Commission report. The report estimates that losses (write-downs) by European banks will be in the range of $25 trillion.

 

If true, then to save the banking system, European governments will have to find an extra $25 trillion, fast. There is only one source of such funding: the central banks, mainly the European Central Bank (ECB).

 

For comparison's sake, consider the $700 billion banking bailout in the United States last fall. Of this, only about half has been spent. That was sufficient bailing wire and chewing gum to keep the American banking system going. More will be needed, but so far, this has sufficed. The Federal Reserve did a lot of asset swaps in 2008 – Treasury debt for toxic assets – and pumped in an extra trillion dollars or so. But the system has held.

 

Adding these together – the increase in the monetary base and $350 billion in bailout money – the total is around $1.5 trillion. Then think "$25 trillion." This is a sobering thought for some, and a reason to get unsober, fast, for others.

 

The European Central Bank will have to serve as the lender of last resort. There are over a dozen national EC governments. How will they coordinate their respective bailouts? Think of a dozen Barney Franks and a dozen Nancy Pelosis. Think of a dozen Henry Paulsons. Think of a dozen Gordon Browns. Terrifying, isn't it?

 

Here is the story, as airbrushed by the editors.

 

"Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent – of asset relief could be very large both in absolute terms and relative to GDP in member states," the EC document, seen by The Daily Telegraph, cautioned.

 

Very large? That's it? Just very large? Twenty-five trillion dollars in losses are merely very large? That is twice the size of the gross domestic product of European Union.

 

It is not as though there is a lot of time to deal with this. Bank runs can take place very fast. What if Europeans try to pull out currency? There will not be enough currency. So, they will move their assets to American or Japanese banks. They will have to sell their domestic currencies to buy dollars and yen. The euro will crater.

 

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems."

 

Wait a minute. If asset relief is not on this scale, then what will sustain a bankrupt European banking system? You are telling me that these banks are sitting on top of $25 trillion in losses, and this can be concealed? Does no one audit these banks?

 

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

 

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors – particularly those who lend money to European governments – have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

 

National leaders apparently have a clear perception of the public's lack of faith in specific governments' ability to repay. But that does not answer the crucial question: "What are the depositors' fears regarding their individual banks?" It's one thing for a government to be unable to pay back loans over the next two decades. Of course they will not pay it back. No national debt is ever paid back. It is rolled over. It's another thing to deal with bank runs.

 

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate "toxic" bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

 

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

 

Ministers and officials have got the picture. They are facing a breakdown of Europe's economy. If the bailouts are insufficiently large in every nation to reduce depositors' fears regarding their banks, there will be a rush out of the euro and into dollars and yen. If the bailouts are sufficiently large to stem the tide on bank fears, then there will be a rush by bond investors out of government bonds. This will make the existing recession much worse.

 

If each country has widely different rates, the euro will break down. The poorer countries will borrow at low rates from the European Central Bank. The Germans will revolt. They could demand an end to the ECB, which will have become a welfare agency for the Mediterranean governments. That would end the euro. That would end the attempt to create a new European order. This thought brings to mind one of Johnny Mercer's masterpieces.

 

So you met someone who set you back on your heels – goody, goody

You met someone and now you know how it feels – goody, goody

You gave him your heart too, just as I gave mine to you

And he broke it in little pieces, now how do you do?

 

You lie awake just singing the blues all night – goody, goody

And you think that love's a barrel of dynamite

Hooray and hallelujah, you had it coming to y'a

Goody goody for him, goody goody for me

I hope you're satisfied, you rascal you,

I hope you're satisfied 'cause you got yours

 

But I digress.

 

"Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance," the EC paper warned.

 

These considerations are indeed important. But solutions are a lot more important. The report is 17 pages long. The solutions – if any – will be a lot longer.

 

SO FAR, SO GOOD

 

So far, the euro has not collapsed. It has fallen, but there is no rush for the exits. Why not? These answers come to mind.

 

1.

 

The story is not true: no such document.

2.

 

The document is wrong: banks are not really that much in the hole.

3.

 

The banks are in the hole, but public faith in their governments remains high.

4.

 

The report is true, but it is not believed by currency speculators.

5.

 

The report is true, but currency speculators believe that the governments and central banks can handle it without major shifts in currency values.

 

European bank stocks have fallen since the article was published, but they are not in free-fall.

 

http://www.lewrockwell.com/north/north689.html

[mc_squared]

Time to start using "Mr. Mattress", I reckon............................... :rolleyes:

[Saffire]

There are two very silly things in this world: clowns, and central banks.

[mc_squared]

There are two very silly things in this world: clowns, and central banks.

 

And the clowns are working in the central banks!!:rolleyes:

[Black Rose]

Oh America please come and save us.

[Saffire]

Oh America please come and save us.

 

America is only really good at blowing stuff up, so sorry, you're out of luck this time! ;)