Why
Europe Matters… And How Spain Could Wipe Out Your 401(k) Posted by :
Phoenix Capital... Post date:
08/06/2012 In simple terms Europe is a HUGE deal for everyone. We’re not
talking about some distant region far off in the distance that we will watch go
down from our decks. We’re talking...
http://albertpeia.com/eumatterswipeoutyour401k.htm
August 6, 2012 By gpc1981
‘Many
people have been writing in to ask me, “why
are you focusing on Europe so much? Who cares about Spain?”
The
short answer is that everyone
should care about Spain.
Spain could potentially take down the banking system in Europe, which would
mean the US
facing a Financial Crisis at least on par with 2008.
How
would this unfold?
To
understand this, you need to understand how the European banking system works.
By now everyone knows that many European countries have massive debt problems: Portugal, Italy,
Ireland, Greece, and Spain, the infamous PIIGS.
Well,
when these countries issue debt, it is mainly the European banks that buy it.
So let’s say Spain
issues €5 billion in new debt. Most of that will be snatched up by Spanish
banks or some other European financial entity.
This
bank will then park this debt on its balance sheet as a “senior asset” or an
asset that has the least amount of risk (I realize this sounds insane given how
bad Spain’s
finances are, but this is how the banking system’s “risk models” work).
The
bank will then use this Spanish bond to backstop loans to Spanish businesses,
developers (not so much any more) even student loans: pretty much every other
type of loan the bank might make.
On
top of this, the bank will also
use this Spanish bond to backstop hundreds of billions of Euros worth of
trades.
Do
you see the problem with this? If Spain defaults, one of the most
important “assets” used to backstop its loan and trade portfolio goes up in
smoke. At that point the bank is essentially insolvent and would have to
liquidate its loan portfolio while trying to stave off a bank run (as you’ve
likely noticed, Spain
is facing bank runs galore).
So
what? Who cares? This is Spain’s
problem right?
Wrong.
This is Europe’s problem as
European banks across the board are sitting on Spanish debt: Spain’s
sovereign bond market is €2.1 trillion in size.
So if
Spain defaults, then a heck
of a lot of EU banks (and some US
banks for that matter) will see some of their “Senior Assets” go up in smoke,
rendering them insolvent. This in turn could spread like wildfire throughout Europe’s banking system.
This
is why the Spanish bank bailout was so rapid (it took only one weekend). EU
officials know that if Spain’s banking system goes down, most of Europe will as well. This is also why EU officials
continue to give money to Greece
despite the clear fact that Greece
is completely and totally bankrupt and has failed to meet fiscal demands placed
on it throughout the EU Crisis.
Indeed,
I wager most people at some point have asked themselves, “what’s the big deal about Greece? It represents only 2% of the
EU economy. How is it that a country this small is still an issue after TWO
YEARS!?!”
Now
you know. By some estimates, Greece’s
true debt exposure is north of $1 trillion. Lehman brothers had $649 billion in
assets when it collapsed. Can you imagine the impact that a $1 trillion vacuum
would have on the EU’s banking system (a banking system which backstops well
over €200 trillion in derivative trades by the way).
How
would the debt implosion of Spain’s
$2.2 trillion in sovereign bonds affect the financial system? What about the
effect of Europe’s $46 TRILLION banking system
collapsing?
It would
be Lehman by a factor of ten, easily.
So
what does this have to do with the US?
The US banking
system is $12 trillion in size. And this backstops over $220 trillion in
derivative trades. Of this $220 trillion, 85% are based on interest rates. So…
If Spain, or any of the other PIIGS default, and
Europe’s banking system (which is $46 trillion in size by the way) crumbles,
interest rates across Europe will spike as the
EU sovereign crisis spreads.
At
the same time, Treasuries will spike pushing interest rates close to ZERO in
the US,
if not into negative territory (this happened when Lehman went under).
This
in turn would very likely trigger an implosion of all those derivative trades
based on interest rates. This blows up Wall Street and likely results in bank
holidays and the stock market even being closed down for a period.
This
is why Europe matters. This is why Spain could
wipe out your 401(K). This is why European leaders are so frantic NOT to let a
default occur in Greece or Spain
(remember, the Spanish bailout was rushed through in less than a weekend).
In
simple terms Europe is a HUGE deal for
everyone. We’re not talking about some distant region far off in the distance
that we will watch go down from our decks. We’re talking about systemic risk on
a scale that would make 2008 look tiny in comparison.
This
is why I keep talking about Europe so much.
And it’s why I’m more concerned now than I was in early 2008. No joke. What’s
coming will be truly horrific. I believe we have, at most, maybe 9-10 months to
prepare for all of this (possibly less)…’