Europe On The Brink

[Matter-Eater Lad]

This has been an ongoing topic of mine for quite some time. And it is good to see that more than just a few primarily North American focused analysts are casting an eye across the pond and chiming in on what they see.

 

This week, John Mauldin takes out a knife and defines what he sees as a potentially mammoth shoe hanging overhead. His article can be read in its entirety here. I will post some excerpts.

 

But Europe's banks have been much more aggressive in funding emerging-market expansion than US or Japanese banks. Western European banks have lent $4.5 trillion to various emerging-market countries, businesses, and consumers. Many Eastern European businesses borrowed in low-interest-rate euros. New homeowners in Hungary and the rest of Eastern Europe borrowed in Swiss francs and euros, and as their currencies have collapsed they now find they owe more on their homes than they're worth.

 

And here's the problem. Europe's banking system is in far worse shape than the US system. The losses may be bigger, and their capital to meet those losses is certainly less. Let's look at some charts. Remove sharp objects or pour another adult beverage.

...

In the first few years of the G.W. Bush administration, the banking authorities decided it would be OK to allow five banks to increase their leverage from 12:1 up to 30:1. Which five banks, you ask? Bear Stearns, Lehman, Merrill Lynch, JPMorgan, and Goldman Sachs. How did that work out, just five years later? Three are gone and two survived with large dollops of taxpayer money.

...

Thirty times leverage means that if you lose 3.3%, you wipe out all your capital. And we watched as banks too big to fail were bailed out with taxpayer dollars. Slowly, banks are buying time, writing down assets. Remember, this month is the second anniversary of the onset of the credit crisis. I wrote back then that the strategy would be to stretch this out as long as possible. Time heals a lot of bad debts, especially at a 0% Fed Funds rate.

...

I am going to give you four charts showing the leverage of banks in the US, the United Kingdom, the Eurozone, and Switzerland. The bottom, blue portion is assets to common and preferred stock; the red is assets to common equity, which can include good will; and the purple is assets to tangible common equity.

 

Tangible common equity is all the rage, and that is what the recent "stress tests" measured, as opposed to tier 1 capital, which includes preferred stock (which would basically be the blue portion.) TCE only includes common shares. Now, let's start with the US. These graphs show leverage. The average leverage of tier 1 capital of the five largest banks is in the range of 12:1, and is actually down from ten years ago. (By the way, a very good and simple explanation of all this can be found at

 

http://futronomics.blogspot.com/2009/07/mauldin-europe-on-brink.html

[Saffire]

Fascinating article. I've known for a while that America's mismanagement of its economy isn't unique, but I wasn't aware of how bad things could get for Europe. Europe's status as a socialist continent has made them sort of accept higher unemployment rates as the norm. I think within 10 years, an 8 or 9% unemployment rate will be the norm here in America as well.

 

Nick, give me a rundown of the sites you visit on a daily basis. I want to know where you find these articles.

[Matter-Eater Lad]

Ronpaulforums.com has users that post a lot of random articles, its probably my favorite.

NakedCapitalism.com

http://www.chrismartenson.com/

321gold.com

Maxkeiser.com

http://market-ticker.denninger.net/

Prudentbear.com

FT.com

Markewatch.com has a few good articles but I mostly like the user posted comments on stories.

[Saffire]

Thanks for that list, I'll check them out.

 

I saw this article on Drudge, you might enjoy it:

 

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5857074/Fiscal-ruin-of-the-Western-world-beckons.html

 

EDIT:

 

Wanted to add this:

 

http://libertyunbound.com/article.php?id=342

 

A prediction of the likely outcome of the coming depression.

[Matter-Eater Lad]

Were creating a even bigger crisis out of this crisis...just as many Austrians said. I think it was Jim Rogers said he didn't fear what was happening now but what the governments will do because of it.

 

Thanks for the articles Jay.