The big banks of Europe are facing disaster if Italy defaults. Unless the European Central Bank starts inflating, and soon, Italy will default.
Will Europe let the banks go under? I doubt it. The leaders will finally save the system by bailing out the banks. That is the problem. David Weidner explains.
If you understand anything at all about the euro zone crisis, you should know that the real conflict is not between have and have-not nations. It’s not about pensions. It’s not about taxes or spending. It’s about banks and shadow banks that allowed all of those players to run up massive debt during the last decade.
It’s about Deutsche Bank AG the world’s No. 2 bank by assets with $2.5 trillion. It’s about BNP Paribas , the No. 1 bank by assets. It’s about Credit Agricole , No. 7 in the world. It’s about UBS AG , No. 20, UniCredit, No. 24, and Societe Generale , No. 19.
These are gigantic banks. They are at risk because they bought too many Italian bonds. Spain is also at risk of default.
These are the buy-side banks that underwrote, bought and sold all of the debt and derivatives. They’re the ones with the counterparty exposure and lack of reserves. If they don’t hold, say, Italian debt, then they have a lending relationship with a pension fund or another bank that does. You see the problem: it was garbage in, garbage out. Now everything stinks.
The banks are the ones that need the bailout. They’re going to need it from taxpayers. The ultimate package will be bigger than TARP, bigger than any bailout the world has seen.
“Bigger than the world has ever seen.”
Weidner points out that 27% of U.S. exports go to Europe. If Europe goes down, our economy goes into the tank.
Here is the problem: “The bigger the bank, the worse the headache for politicians who must now convince voters to cough up taxes to fund bailouts.”
But wait! The governments are all running huge deficits. How can they bail out the banks. By borrowing, of course.
From whom? Using what as collateral? At what rates of interest? For how long?
Here is his advice:
A smart investor would stay away from these banks. He or she would try look for overvalued asset management firms. They’d probably keep cool on their U.S. counterparts such as Citigroup Inc. and J.P. Morgan Chase & Co. , which are both big and present in Europe and could see some fallout.
Wait a minute! These are two of the four largest American banks — banks that have 55% of all deposits in the American banking system. A third bank, Bank of America, is already in trouble.
We are at the edge of the abyss.