Why
the ECB Expanded Its Balance Sheet By Over $1 trillion
in Less Than Nine Months
April 5, 2012 By gpc1981
http://gainspainscapital.com
http://albertpeia.com/ecbexpandsbalsheetover1trilllessthan9mos.htm
Between July 2011 and today, the ECB
has expanded its balance sheet by an incredible $1+ trillion: more than the Fed’s
QE 2 and QE lite combined (and in just a nine month
period).
This rapid and extreme expansion of
the ECB’s balance sheet (again it was greater than QE
lite and QE2 combined… in nine months) indicates the severity of the banking
crisis in
The two largest interventions were
the ECB’s LTRO 1 and LTRO 2, which saw the ECB
handing out $645 billion and $712 billion to 523 and 800 banks respectively.
As a result of this, the ECB’s balance sheet exploded to nearly $4 trillion in size,
larger than the GDPs of
So why did the ECB do this?
Simple… because everyone (even German banks)
is lying about their true exposure to the PIIGS. And the European banking system is literally on the verge of systemic
collapse.
Let’s consider the PIIGS’ exposure of
German powerhouse Deutsche Bank (DB) widely considered to be
one of the strongest banks in the EU.
According to the Bank of
International Settlements German bank exposure to
This is a bit odd as according to The Guardian German banks
have nearly 8 billion Euros’ worth of exposure to Greek debt. And they only
include 11 German banks in their analysis. However, of those 11 banks, THREE of
them have Greek exposure equal to more than 10% of their total outstanding
equity.
Let’s consider Commerzbank
as an example. Let’s say
Mind you, I’m just doing back of the
envelope analysis here. But based on this brief analysis right off the bat we
know the following:
1) The Bank of
International Settlements is either completely
clueless about the risks posed to the financial system by PIIGS’
debt OR intentionally downplays those risks (neither is good).
2) The Guardian’s datablog (which obtains all of its data from publicly
accessible records) somehow comes up with numbers that are dramatically
different (and higher) from those published by the Bank of International
Settlements.
Now let’s take our analysis a step
further.
Deutsche Bank trades on US stock
exchanges and so has to publish SEC filings on its balance sheet risk. Well,
according to Deutsche Bank’s own
filings, it had 1.6 billion Euros’ worth of credit exposure to
More interesting that this, the term “
So it’s a bit odd that Deutsche Bank’s
2010 416-page annual report would only mention the term “
This time around, the term “
By the way, Deutsche Bank has only 59
billion Euros’ worth of shareholder equity, so this position alone is worth
roughly 1.5% of the banks’ equity. True, this is not a huge percentage, but if
Greek creditors take a 70-80% haircut, Deutsche Bank would need to raise capital.
On a side note, I want to point out
that we’re completely ignoring the fact that if Greece defaults so will Italy
and Spain whose sovereign debt and financial institutions Deutsche Bank has 14.8 BILLION EUROS worth exposure to: an
amount equal 23% of Deutsche Bank’s TOTAL EQUITY.
But let’s just focus on Deutsche Bank’s
exposure to
So… having taken our analysis one
step further, we find that one single German bank, one of the alleged strongest
I might add, has in fact, far, far more exposure to Greece and its economy than
both the Bank of International Settlements and
the mainstream financial press indicates.
Bear in mind, the numbers presented
in Deutsche Bank’s are simply those that Deutsche Bank’s executives have told
the company’s accountants are acceptable for public disclosure (we have no clue
about the banks off-balance sheet risk).
It’s also worth noting that in 2010
Deutsche Bank claimed to have only 1.6 billion Euros’ worth of credit exposure
to Greece, whereas by late 2011 the number has swelled to 2.8 billion Euros.
I have to ask… how exactly does a
bank, which is supposedly managing its risk levels and adjusting its exposure
accordingly, manage to increase its credit exposure to something as
financially toxic as Greece by 75% in a nine month period?
This hardly strikes me as good risk
management. But here’s how Deutsche Bank’s accountants try to explain that none
of this (even the 2.8 billion Euros’ worth of exposure) is actually a big deal.
If the above chart sounds like it’s
written in obfuscating language, let me translate it for you. According to
Deutsche Bank’s accountants, once you include collateral held (likely garbage
assets valued at mark to model fantasy land valuations), guarantees received
(from GREEK
institutions!?!?!), and “risk mitigation”, Deutsche Bank’s “actual”
exposure to
So… this is a bank whose credit
exposure to
Ok, well if we’re going to play by
those rules, let’s consider that when we include the rest of the PIIGS
countries, Deutsche Bank’s “actual” exposure (as downplayed as it might be) is
still 35 BILLION Euros, an amount equal to 60% of the banks’ total equity.
At these levels, and using the
currently proposed Greek 50% haircuts as a model for future defaults in the EU,
Deutsche Bank could very easily see 10-15 billion in write-downs from its PIIGS’
exposure. This would wipe out 16%-25% of the bank’s entire equity and
render it borderline insolvent.
Thus, by our own analysis we find
that even the German powerhouse of DB has PIIGS exposure that could easily wipe out a quarter of its equity, if not more.
By extension, if this is how exposed
a German bank is
to the PIIGS, how bad do think the rest of the EU banking system is?
BAD.
This
is why the ECB has been
freaking out and pumping so much money into the EU banking system. You don’t
spend over $1 trillion in nine months unless something very very
bad is coming down the pike. That something “BAD” is the collapse of
If you’re not already taking steps to
prepare for the coming collapse, you need to do so now.
With that in mind, I’m already
positioning subscribers of Private
Wealth Advisory for the upcoming collapse. Already we’ve
seen gains of 6%, 9%, 10%,
even 12% in less than two weeks by placing well-targeted shorts
on a number of European financials.
And we’re just getting started.
So if you’re looking for the means of
profiting from what’s coming, I highly suggest you consider a subscription to Private
Wealth Advisory. We’ve locked in 44 straight winning
trades since late July (thanks to the timing of our trades), and haven’t closed
a single losing trade since that time.
Because of the level of my analysis
as well as my track record, my work has been featured in Fox Business,
CNN Money, Crain’s
To learn more about Private
Wealth Advisory and how we make money in any market
environment…
Best,
Graham Summers, Chief Market Strategist,