End Game Nearing For European Banks

Includes: EU, EWP, EZU, FGM, VGK
by: TrimTabs

By Charles Biderman

I have been braying on this video channel that the European banking problem is so big as to be unsolvable. On a May 29 video, I quoted a Spanish financier as saying: The Spanish loan loss problem has not been quantified by anyone because there is huge pressure not to tell the truth. Spain has engaged in a policy of delay and pray.

Apparently the delay is over, the can has gone as far down road as it could be kicked, whatever. Spanish banks are so broke that they are willing to open their books to the auditors. Tuesday, the Spanish Economy Minister said that three groups of auditors, that include the top five American and one German firm as well as the IMF.

The Reuters story said the IMF will have a sort of audit available by June 11. An IMF audit is, therefore, a suspect audit to me. But the Spanish government has hired Oliver Wyman, a US firm and Roland Berger, headquartered in Munchen, to prepare an audit expected before the end of June. And third, the big Four, KPMG, Deloitte, Ernst & Young and PWC, were hired to conduct a separate audit this is due by September.

I think that the reason six of the world's biggest accounting organizations were hired to do separate audits is that no one trusts the Spanish banks or government. I can imagine the conversation in the room when Spain told its Euro buddies that today, right now without new money, the Spanish banking system collapses. If I were Germany I would then say no way we give you anything until we know how bad the loan losses really are. We do not trust your numbers. You guys lie.

As I said before, one of the auditors is based in Munchen, Germany. I will trust the loan loss number produced by the German auditor ahead of any else's number. Reuters said Spanish banks have identified about $125 billion equivalent of losses and the estimate is for less than $100 billion in additional yet unknown losses on top the $125 billion already known, or $225 billion combined. My guess is that if $225 billion is the public estimate, then the real number is likely well over $300 billion. And this is just Spain. Who know how big the losses are in the rest of Europe?

My guess, and it is solely a guess, but if Spain's loan loss number is $300 billion, then the rest of Europe's loan losses have to be at least another $600 billion. That would be $900 billion, but what is a $100 billion more or less to central bankers who in the back room have a printing press.

Personally, I do not think Germany, nor anyone else, will put up $300 billion, if that is the number, or even $250 billion, to bail out just the Spanish banks, knowing what else is likely coming down the pike. Unless, of course, the rest of Spain is included into the deal. Maybe Germany will make Spain an offer it can't refuse.

Yes, it is a possibility that all the eventual total loan losses will not be system endangering. But I would give that at best a one-in-four chance. I think it is at least 50% likely for the entire Euro banking system go down and a much smaller eurozone emerges. And then I give it 25 percent for financial restructurings to take place, but not in a panic mode.

Time will tell. I am very interested in seeing the audit results.