First, a quick historical synopsis of where I'm coming from. If you have followed me regularly, then feel free to jump down to the next bold heading to get started - all others please read on...
I have been warning of the collapse of the European banking system, the Euro as we know it, and periphery states of the EU for going on three years now. What many thought was tomfoolery back then, is thought of as prescient now - reference the Pan-European Sovereign Debt Crisis series which started in late 2009. I then went on to explicitly query Is Another Banking Crisis Inevitable?, of which I believe most of the realistic among us already know the answer.
Walking through European bank collapse is not enough, even through we did it in detail through BoomBustBlog, reference The Anatomy of a Serial European Banking Collapse, a nearly guaranteed scenario. If one were to even come close to marking the EU banks' books to reality, market prices, or anything in between, the Lehman situation would look tame in comparison!
You see, you can avoid reality for but so long, primarily because reality is... well, reality! What happens when reality hits bank asset prices and liability values...
Now, since we have finished that quick traipse through recent history as a summary of events and opinion, let's move on to the topic at hand. Last week, ZeroHedge posted a scathing article on the IMF's "Global Financial Stability Report", as excerpted:
...especially as pertains to Europe's insolvent banking system. The most notable finding of said report is the admission that the IMF was only kidding when it said six months ago, in April of this year, that the worst case outlook now has European banks deleveraging to the tune of $3.8 trillion through the end of 2013, or over the next 14 months: now this number is 18% higher, or a gargantuan $4.5 trillion (12% of bank assets). This is how much debt Eurobanks will need to shed in a "weak policies" case in which Europe continues to delay implementing fiscal reform, aka austerity, as per Figure 2.14. Even the baseline (and this being the IMF it means it has zero chance of happening) scenario is not much better, at a revised $2.8 (7.3%) trillion in deleveraging.
Although it seems as if Tyler is being a smart ass, he couldn't be farther from the truth. Reference my piece Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! concerning the accuracy of the IMF's baseline scenarios...
And back to the ZH post:
....Breakdown of IMF deleveraging forecasts for the three scenarios, of which the realistic one is highlighted:
- Under weak policies, the withdrawal of foreign investors accelerates to twice the pace seen since 2009. Periphery spreads widen by about one standard deviation above the baseline.
The biggest loser here, as in every other category: Germany, which will end up seeing €2 trillion in TARGET2 claims which in turn will never be satisfied as the system merely accelerates its collapse into a debt supernova.
EXACTLY!!! BINGO!!! Now, we are all starting to come to the BoomBustBlog way of thinking, aka, REALITY! In the beginning of this year, I penned The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... In short, this piece made clear that Germany poses the biggest threat to global harmony for 2012. The widely accepted belief that Germany is economically bullet-proof and somehow immune to malaise effecting the periphery as long as it does not attend the bailout party is fallacious, indeed. Please click the afore-referenced link for the full story on Germany and why some should consider the "Bund short play". Back to Tyler...
The big picture, of course, is that even the IMF now concedes Europe is in a closed loop Catch 22: unless European countries manage to restore "foreign" confidence which in turn would mean putting their fiscal houses in order, something which has proven absolutely impossible in Europe absent such one-time gimmicks as LTROs and otherwise hollow confidence boosters as ECB warnings to not fight the ECB (which work until they are tested, but first need to be activated, ahem Mariano Rajoy), the banks will be forced to delever even more, which would mean the ECB would have to "onboard" even more of their debt as nobody else will, which means even more foreign creditor flight, which means greater deposit outflows, which means more ECB intervention, until finally, the ECB is the only player in town...
Ah, yes! The Truth gets outed... I went through this in EXPLICT detail throughout 2011-12. Reference the following:
- On Your Mark, Get Set, (Bank) Run!
- ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme
- The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
- The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style
- European Bank Run Watch: Swiss Edition - BoomBustBlog
- European Bank Run Watch: Spaniard Edition - BoomBustBlog
- Bank Run! Italiano Style? - BoomBustBlog
- French Bank Run - BoomBustBlog
Back to that Tyler piece:
...a process which can be visualized (in progress) in the following capital flow image, especially Figure 1.7:
At the point when the ECB is the sole owner of all European financial debt (and sovereign debt via repo), the endgame for the fiat system will finally be here, as the only thing more dangerous than the ECB will be all other central banks which will have no choice but to follow suit and monetize everything in the global race to debase currencies, and monetize ever more budget deficits in a world in which the rich increasingly preserve their wealth, and refuse to pay taxes (converting financial assets into hard ones), having finally grasped the endgame.
I couldn't have said it better myself... Okay, maybe I could have, as I rearticulate - ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme
Tyler ends the piece in stylish fashion: "As for the immediate task at hand: how European banks will deleverage to the tune of $4.5 trillion over the next 14 months, Europe has our blessings." Oh, they may need a little more than your blessings, and they may even get a little more than your blessings as well, to their chagrin. My next post will wrinkle some feathers - The Economic Face Of Europe Will Look A Lot Browner If The UAE Plays Its Cards Right! Stay tuned...