Europe Is Finished

Includes: ADRU, ERO, EU, EUFN
by: Graham Summers

Thus far, my analysis of Europe has focused on the super-leveraged banking system (26 to 1). At these levels, even a 4% drop in asset prices wipes out equity. That alone warrants concerns of systemic risk.

The situation is not much better at non-Financial European corporations. Indeed, the debt situation is so endemic to Europe as a whole that corporate Debt to Equity ratios for all of the PIIGS as well as the supposedly fiscally conservative countries of France and Germany are terrible.

What I’m trying to point out here is that Europe’s debt problems extend well beyond Greece’s debt. Indeed, the entire European banking and corporate system is over-burdened with debt.

The situation is no better for European Sovereign states themselves, which are facing their own debt roll over issues at a time when investors are rapidly losing their appetite for sovereign debt.

To wit, Spain, Portugal, and Italy have all relied heavily on the ECB to buy their debt at recent auctions. Germany actually just had a failed debt auction Friday morning. And in this environment , these nations need to meet the following debt roll over obligations:

And this is just maturing debt that’s due in the near future: it doesn’t include unfunded liabilities.

Jagadeesh Gokhale of the Cato Institute puts the situation as the following,

The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.

As I said before, Europe is finished. The region’s entire banking system is insolvent (with few exceptions). European non-financial corporations are running massive debt to equity ratios. And even EU sovereign states require intervention from the ECB just to meet current debt issuance, to say nothing of the huge amount of sovereign debt roll over that is due over the next 14 months.

Again… Europe. Is. Finished.

The Great debt Implosion will hit Europe within the next 14 months and likely much much sooner. When it dues, we will see numerous debt defaults and restructuring on both the corporate and sovereign levels. We’re also very likely going to see significant portions of the European banking system collapse “Lehman-style” along with subsequent HUGE losses of capital.

The impact of this will be global in nature. The EU, taken as a whole, is:

  1. The single largest economy in the world ($16.28 trillion)
  2. Is China’s largest trade partner
  3. Accounts for 21% of US exports
  4. Accounts for $121 billion worth of exports for South America

So if the EU banking system/ economy collapses, the global economy could enter a recession just based on that one issue alone (ignoring the other issues in China, Japan, and the US).

So if you have not already taken steps to prepare for these events, you should do so now. The EFSF deal is by no means a done deal. And should things take a turn for the worse in any way, we could see a full-scale crash occur.