The European financial ‘bailout’ and its implications for the USA

I’m sure readers have been following the news of the just-agreed ‘bailout’ for Greece, and the promise of ‘stability’ it allegedly brings to the European economic zone.

Let me sum up the true meaning of these developments in a single carefully-selected, suitably descriptive word.


The European agreement is not only worse than useless; it’s a harbinger of what I believe will be massive economic disruption in Europe, the effects of which are inevitably going to spread to the USA as well. Here’s why.

1. The deal rewards Greece for its lying, corrupt, spendthrift ways. It doesn’t impose any penalties for past misconduct – only for future noncompliance with the latest agreement. Given the lack of any consequences for past misdeeds – including failing to comply with the terms of the first ‘bailout’ agreement – does anyone really believe Greece won’t do exactly the same thing again? Why shouldn’t they? After all, what have they got to lose?

2. Other problematic European economies – most notably Ireland, Italy, Portugal and Spain – are in almost as much trouble as Greece. I’ll bet my pension to a penny that the fiscal authorities in those countries are now figuring that if Greece can get away with murder, financially speaking, they’re going to do the same – whether the EU likes it or not. Again, what have they got to lose by trying? Nothing whatsoever. (The good people at Zero Hedge appear to agree with me.)

3. Europe’s banks are amongst the most highly leveraged in the world, with an average 25-to-1 ratio across the continent. This means that even a 4% drop in asset prices wipes out – I repeat, WIPES OUT – their equity. These same banks have just been informed by the European fiscal authorities that they must – MUST – accept a 50% write-down of their investments in Greek bonds. The big gun is being held to their heads by their own politicians, out of sheer desperation to find a solution . . . and it won’t work. As Zero Hedge put it on Tuesday:

Folks, something VERY bad is brewing behind the scenes. The Sarkozy-Merkel talks, the short-selling bans, the halted stocks, the leveraged EFSF, the hints of QE 3, all of this is telling us that the financial system is on DEFCON 1 Red Alert.

Ignore stocks, they’re ALWAYS the last to “get it.” The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.

So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from Europe’s banks imploding.

There’s more at the link. I agree with their perspective. I can’t see any way many of the largest European banks can survive this without massive government intervention – and even that will be a mirage, a chimera, printing money rather than using real assets to save the banksters from the results of their own folly.

4. Nor are leverage issues the only problem. Seeking Alpha sums it up as follows:

FACT #2: European Financial Corporations are collectively sitting on debt equal to 148% of TOTAL EU GDP.

Yes, financial firms’ debt levels in Europe exceed Europe’s ENTIRE GDP. These are just the financial firms. We’re not even bothering to mention non-financial corporate debt, household debt, sovereign debt, etc.

Also remember, collectively, the EU is the largest economy in the world (north of $16 trillion). So we’re talking about over $23 TRILLION in debt sitting on European financials’ balance sheets.

Oh, I almost forgot, this data point only includes “on balance sheet” debt. We’re totally ignoring off-balance sheet debt, derivatives, etc. So REAL financial corporate debt is much MUCH higher.


FACT #3: European banks need to roll over between 15% and 50% of their total debt by the end of 2012.

That’s correct, European banks will have to roll over HUGE quantities of their debt before the end of 2012. Mind you, we’re only talking about maturing debt. We’re not even considering NEW debt or equity these banks will have to issue to raise capital.

Considering that even the “rock solid” German banks need to raise over $140 BILLION in new capital alone, we’re talking about a TON of debt issuance coming out of Europe’s banks in the next 14 months. And this is happening in an environment prone to riots, bank runs, and failed bond auctions (Germany just had a failed bond auction yesterday).


FACT #4: In order to meet current unfunded liabilities (pensions, healthcare, etc) without defaulting or cutting benefits, the average EU nation would need to have OVER 400% of its current GDP sitting in a bank account collecting interest.

. . .

Folks, the EFSF, the bailouts, China coming to the rescue… all of that stuff is 100% pointless in the grand scheme of things. Europe’s ENTIRE banking system (with few exceptions) is insolvent. Numerous entire European COUNTRIES are insolvent. Even the more “rock solid” countries such as Germany (who is supposed to save Europe apparently) have REAL Debt to GDP ratios of over 200% and STILL HAVEN’T RECAPITALIZED THEIR BANKS.

Again, it DOES NOT matter what Sarkozy and Merkel say. It doesn’t matter how much leverage the EFSF gets. Europe is broke. End of story.

. . .

The impact of the fallout from this will make 2008 look like a joke. The EU is the largest economy in the world. So if its banking system collapses (and it will) we’re facing a full-scale Global financial meltdown (the IMF has even warned of this).

Again, more at the link – and it’s very worthwhile reading.

5. Note the mention of ‘derivatives‘ in the Seeking Alpha article above. They’re a nightmare in themselves. As another Seeking Alpha article outlines:

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.

The notional value of the derivative market is roughly $1.4 QUADRILLION.

I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.

$1.4 Quadrillion is roughly:




. . .

If these numbers scare you, you’re not alone. As early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives. She said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation, the market would implode.

Remember, this was back in 1998: a full DECADE before the Crisis hit. And already, the guys in charge of the markets knew that derivatives were such a big problem that trying to regulate them or increase their transparency would destroy the market. If you think I’m exaggerating, you can read the actual Washington Post story here.

. . .

… you simply cannot discuss the Financial Crisis without mentioning derivatives. What do you think subprime mortgage backed securities were? Derivatives. What about Credit Default Swaps? Yep, derivatives again. Heck, even the Greece crisis involved that country using derivatives to hide its true liabilities in order to join the European Union.

In plain terms, derivatives are THE cause of the Financial Crisis. They are behind EVERY failure/ default that has occurred thus far. The fact that virtually no one is willing to address this issue or include it in the discussion of how to insure we don’t have a Second Round of the Crisis only confirms the fact that no one has a clue how to resolve this situation.

Again, more at the link. It’s almost beyond belief . . . but it’s all true. Read it and weep.

6. The USA will be dragged into this whether we like it or not. Consider the behavior of the Federal Reserve in the recent past – lending trillions (yes, trillions) of dollars to US and European banks and financial institutions to help keep them afloat. You want to bet the same thing isn’t on the cards right now? If you do, there’s a bridge in Brooklyn, NYC I’d like to sell you. Cash only, please, and in small bills. The Fed daren’t let European banks go down the tubes, because that would impact the entire global economy, including those who buy US bonds and thereby fund the operations of the US government (which borrows close to half of every single dollar it spends). Therefore, it’ll print dollars like there’s no tomorrow, and hand them out by the trillions to prop up a failing Europe, because it can’t afford to let it fail. For you and I, the men and women in the streets, that means more inflation on the way, coupled with negative real interest rates and the collapse of our retirement savings. As one knowledgeable observer puts it:

Bearing in mind that monetary debasement is accelerating throughout the world, I anticipate a serious inflation problem. Although the governments in the West want you to believe that inflation is running at 2 or 3 percent per annum, the reality is that consumer prices are exploding all over the world and the establishment is under-reporting the price increases. Throughout history, precious metals and other hard assets have protected one’s purchasing power during economic turmoil and I expect a similar outcome in this great inflation. Now, it is conceivable that if the governments and central banks continue to create “money”, we may all become billionaires. Unfortunately, when that occurs, it will probably take five hundred dollars to buy a cup of coffee! Well, you get the idea.

Again, more at the link – and very worthwhile reading. Bold print is my emphasis.

Friends, I’ve been warning of dark times to come for many months now. Some people still believe I’m way too negative, that things will somehow magically ‘be all right’. I’m afraid not. What you’re seeing right now is the inevitable result of years – decades! – of laissez-faire deregulation and the resulting liberation of banksters’ greed. The financial chickens hatched during those years are now coming home to roost.

Get under cover and stay there, folks. This is going to be a wild ride.



  1. Peter… your analysis is frightening, and I cannot find fault with it.

    A request: If you have thoughts on how best for an average Joe to weather the storm, could you post them?

  2. I have to admit, I don't understand the 1.4 quadrillion thing. How can there even be that much volume to the world economy? I mean, the US National Debt is "only" 14 trillion, 1.4 quadrillion is a hundred times that.

    That's like, "buying whole countries and all their infrastructure" money.

    Is it all made up?

  3. perlhaqr – Yes, it's all pretty much made up. Derivatives are, as I understand it, high stakes bets on other investments. It's like comparing the purse for a horse race against the amount of money that's bet on the race.

    Now y'all excuse me while I go buy a few years worth of clothing and shelf-stable food.

  4. Joe in PNG, it's not 1914, it's 1930. The world looked – briefly – like it was weathering the crisis, when in fact the second round was going to be way worse.

    The question then – as now – is what happens politically in Europe, because die Deutsche Volk were sick of being milked.

    We know that they can go from zero to Jackboots in five years, and even Merkel is warning about that today.

  5. Actually, it feels more like Russia in 1991 or Germany in 1920. We're at the end of something, but at the top of another, more violent drop.

  6. I would like to second CartechO's request, Peter: do you have any suggestions how the average American can prepare for the coming crisis? My husband is self-employed and has lost more than 30% of his clients due to the economy in the last six months alone. Since I (finally) got a full-time job four months ago (after being underemployed for more than five years) we have managed to slowly reduce the credit card debt acquired while I went to college (I didn't qualify for much aid and didn't want to get student loans) by living below our means, but cost-of-living increases are making this ever more difficult. How can we possibly prepare for what's coming??

  7. To those who've requested some advice as to how to cope with what's coming: there are some things one can do. I'll address them in an article tonight. However, there's no easy answer, and we're all going to be hurting.

  8. The reason I use 1914 instead of other eras of catostropic change is that WW1 was a bigger shake up in how the world was run- face it, having four empires (Germany, Austria-Hungary, Russia, Ottoman) just disintergrate, and even the victors were pretty damaged by the results. Afterwards, the way the entire world was run became totally different.
    What's coming up may be just as total and earth shaking..

  9. Minor quibble: I don't think the deregulation you credit for unleashing risk-seeking investment banks can properly be called laissez-faire, if for no other reason than that laissez-faire also implies laissez-mourir for banks that run up too much risk and implode. Rather, it seems to me to be a simple case of regulatory capture: large banks hire lobbyists to influence legislation, putting new obstacles in the paths of smaller competitors and getting rid of the ones that seem most annoying. Then the political propagandists call this "free-market capitalism", Team Elephant bragging about it and Team Donkey castigating it. And it all ends up in privatized gains and socialized losses for the biggest players that can afford to hire the largest section of K Street.

    Otherwise, the European banking situation scares the hell out of me, and I wish I could point to alarmism in your analysis.

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