Europe’s Nightmare comes to a head this year. We’ve been discussing forecasts for the year 2012 and beyond and today we’ll cover the European Sovereign Debt Crises. We’re writing this on a Friday to post on Monday. If we had put this up yesterday, you might have said, “What are you talking about, they fixed that problem today.”
Today’s news is that they don’t have a deal and Greece may default. What will the news be by the time you read this on Monday? We have no idea, but we’re focusing on the big issue that does not change whether or not Europe has a conference and declares an agreement.
The reality is that the European debt crises cannot be solved in any reasonable way. We had a live symposium almost two full years ago where we told the entire audience exactly this fact.
It doesn’t matter how confidently the politicians assure us that they have it all under control. It doesn’t matter how slickly the media impresses us with the brilliance of these same politicians and bankers. The hard cold reality is that there is too much debt and no way to pay for it.
Let’s look at a couple of the problems…
1) Most (every?) country in Europe has a pretty serious debt level with about half of them being in a dangerous red zone of concern.
Greece is the country most in the news (and is certainly the first to come to a head), but Italy, Spain, Portugal, Ireland, & Belgium all have way too much debt and no way to pay for it. Germany and France are the two big countries that the market wishes would bail them out, but they can’t realistically do this. France’s debt situation is more and more in the public’s eye now and would see a major downgrade if it tried to shoulder all these countries burdens. Germany in and of itself is not in the danger zone of debt burdens, but it would be right there with the US if all the unburdened countries agreed to equally share the debts of the over burdened ones.
And the people of these countries will not stand for this kind of decision which is popular for the one world government types who make decisions. So this won’t be allowed.
We used to say that Germany will not allow the European Central Bank to print its way out of the problem the way the Federal Reserve in the US has been doing it. However, that was wrong. The ECB likes to make public pronouncements that they will not print to try to create growth, but in fact, the policies they have put into place have done exactly that. The ECB’s balance sheet has grown almost to the size of the Fed’s and they don’t steward the world’s reserve currency. So the printing has been out of control.
Even then, it’s not nearly enough.
2) European banks are dreadfully over leveraged and hold a tremendous amount of bad debt (with much of that being of these over indebted Sovereigns).
American’s have become keenly aware that US banks have far too much leverage and shaky at best assets. Most people now know that US banks are barely standing. The US Government agencies have certainly had to pull all sorts of tricks in order to hide the fact that every bank is basically insolvent if true and prudent accounting rules were used (marking assets to market, etc.)
However, European banks are in far worse condition. They are leveraged four times as much as US banks. Over the last decade, the governments of Europe wanted to encourage banks to buy their debt (to keep their borrowing costs low), so they, in conjunction with the BIS, came up with banking rules which encouraged banks to buy (lend) unlimited amount of government bonds. These bonds were seen as “risk free” assets because there’s no way a European government could default, right?
So these banks were encouraged to buy what they should have seen with their own eyes was incredibly risky assets with their “safe money” held in reserve.
So while the governments were supposedly making banks safer for people, they actually encouraged them to become far more risky and destructive (this is economics 101 if you’re the type to ever turn to the government to fix a problem.)
Anyways, that’s how they got to this place, but what does it mean now?
The banks are in serious danger of going under and taking the entire economies of Europe with them. The countries of Europe won’t let this happen and have already been offering them unlimited cheap 3 year loans so that they don’t go under. They would have already gone under last fall if not for these loans. But there’s a whole lot more bailing out that needs to happen. And that (in our current government manipulated environment) falls on the governments. So billions (and perhaps trillions) are needed to bailout these banks by the governments that are already broke! Got it?
The government prints money (and don’t forget the swaps set up last fall where the Fed offers to do the printing in many cases). With this new money, they offer cheap loans to banks. Banks are then encouraged to buy government bonds from these governments who are going under. This of course puts the banks in worse shape.
You see the master plan these brilliant guys have come up with to solve the problem? It’s a symphony of stupidity. But it does kick the can down the road a week or month further.
This is the year that these types of tricks won’t work any longer. We will see resolution. The only question left is what that catastrophic outcome will be. On Wednesday, we’ll cover some possibilities.
This is the seventh post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012. You can also watch the most recent series of Economic Update videos at: 1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global, 4) Gold & Silver Pt 1, 5) Gold & Silver Pt 2, 6) Gold & Silver Pt 3, 7) World Economic Update., 
World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, & 13) US Economic Update 2.