Sorry Mario Draghi, Spain is Finished… Here’s Why!
July 30, 2012 By gpc1981 http://gainspainscapital.com
http://albertpeia.com/spainfinishedandfinancialsystemcollapse.htm
‘The following is an excerpt from my
(Summers’) latest
issue of Private
Wealth Advisory in which I
outline how and why
Indeed, in the last two weeks alone we’ve seen:
1)
2) The regions of
Indeed, the following story reveals more than I think
Germany’s finance
minister, Wolfgang Schäuble, will meet his Spanish
counterpart, Luis de Guindos, for crisis talks on
Tuesday amid fears that spiralling bond yields in the
eurozone’s fourth biggest economy will force it to
seek a €300bn bailout from the European Union and the International Monetary
Fund.
Interest rates on
Hints from politicians in
Dealers were unimpressed by de Guindos’s
claim that Spain would not become the fourth eurozone
country to require a formal bailout, after Murcia on Sunday became the second
Spanish region to request financial assistance from the government. The Spanish
finance minister categorically denied that a bailout was imminent, but media reports from
http://www.guardian.co.uk/business/2012/jul/23/spain-crisis-talks-germany-bailout-eurozone
This story tells us several important items:
1)
2) The original bailout request for €100 was an
outright lie or a covering up of the facts (why does
3)
If you need more info on
1) A huge portion of
2) Spanish banks are drawing €337 billion from the
ECB on a monthly basis to fund their liquidity needs.
3) Every political figure and bank in
Indeed, the markets have figured out the
Indeed, the yield on Spanish ten year bonds is now well above
the “we need a bailout” 7% level. Moreover, Spanish Credit Default Swaps (bets
that
And
European political leaders can play their little games, but the
markets have a way of figuring out the truth sooner or later. And the truth is
that
The reason is two fold:
1) Spanish banks need to roll over (meaning renew
terms on) more than 20% of their bonds this year.
2) Spanish sovereign bonds are collateral for
hundreds of billions of Euros’ worth of trades.
With interest rates spiking throughout Spain (meaning Spanish
corporate, bank, and sovereign bonds are falling in value), Spanish bank
bondholders are going to be demanding much higher rates of return when it comes
time to renew their positions.
With Spanish banks already under severe funding stress (again,
they drew €337 billion from the ECB last month), they’re in no position to
start paying out higher interest payments to bondholders.
And with investors realizing that Spain’s banks are all lying
about the state of their balance sheets (remember, Bankia
was talking about paying a dividend
just one month before it collapsed and revised its €41 million 2011 profit to a
€3.3 billion LOSS), we’re going to be seeing plenty of bank failures this year.
Remember,
----------
Why
the Financial System Could Indeed Collapse
July 28, 2012
By gpc1981
In order to understand why we’re at risk of the financial system
collapsing, you first need to understand how the global banking system works.
When you or I buy an asset (say a house, or shares in a stock, or a Treasury
bond), we do so because we’re looking to increase our wealth through either
capital gains or through the income that asset will pay us in exchange for us
parking our capital there.
In simple terms, you’re putting/ lending your money somewhere
(especially if you’re buying a bond) in the hope of increasing the value or
your money.
This is not how banks work. When a bank buys something,
especially a bond, it parks that bond on its balance sheet as an “asset.” It
then lends money out against that asset. This in of itself is not problematic
except for the fact that the financial modeling of 99% of banks base assume
that sovereign bonds are “risk-free.” Put another way, these models assume that
the banks will always get their money back on 100 cents on the Dollar.
Yes, you read that correctly, despite the fact that world
history is replete with examples of sovereign defaults (in the last 20 years
alone we’ve seen more than 15 including countries as significant as Russia,
Argentina, and Brazil), most banks assume that the sovereign bonds sitting on
their balance sheets are risk free.
This phenomenon occurs worldwide, but given that it will be
Europe, not the
You may or may not be familiar with EU banking law. EU banks are
meant to comply with
In terms of capital ratios,
However, the term “risk weighted assets” destroys this premise
because it means that the bank’s loan portfolio and ultimately its leverage
ratio are based on the bank’s in house models/ assumptions concerning the risk
of its loans.
Let me give you an example…
Let’s say XYZ Bank lends out €50 million to a corporation. The
bank won’t necessarily claim that all €50 million is “at risk.” Instead, the
bank will claim that only a percentage of this €50 million is “at risk” based
on the company’s credit rating, financial records (debt to equity, etc), and
the like.
Thus, based on “in-house” risk modeling, European banks could in
fact lend out much, much more than the
Indeed, according to the IMF’s “official” analysis, EU banks as
a whole are leveraged at 26 to 1. I would argue that in reality many of them
are well north of 30 to 1 and possibly even up to 50 or 100 to 1.
The reason I can claim this with relative certainty is because
the EU housing bubbles dwarfed that of the
You can only get bubbles of this magnitude if you’re lending to
literally anyone with a pulse. And you can only lend that much if your in-house
risk models believe that the risk of lending to anyone with a pulse is much,
much lower than reality.
Hench, EU banks are likely leveraged at
much, much more than 26 to 1. Indeed, considering how
leveraged and toxic US banks’ (especially the investment banks’) balance sheets
became from the
This fact in of itself makes the possibility of a systemic
collapse of the EU banking system relatively high. Let me give you an example
to illustrate this point.
Let’s assume Bank XYZ in
So… let’s say that 10% of the bank’s loans (read: assets) are in
fact worth 50% of the value that the bank claims they’re worth (not unlikely if
you’re talking about a PIIGS bank). This means that the bank’s actual loan
portfolio is worth €285 million (10% of 300 is 30 and 50% of 30 is 15).
With equity of only €30 million, the bank, at some point, will
have to take writedowns or one time charges on its loan
portfolio that would erase HALF of its equity. At this point, the bank becomes
leveraged at 19 to 1 (€285 million in assets on €15 million in equity).
This announcement would result in:
1) Depositors pulling their funds from the bank (thereby
rendering it even more insolvent)
2) The bank’s shares plunging on the market (raising its leverage levels even
higher as equity falls further).
Thus, at a leverage ratio of 10 to 1,
even a 50% hit on 10% of a bank’s loan portfolio can result in the bank needing
a bailout or even collapsing.
Now, what if that €300 million in loans is actually the amount
the bank’s in-house risk models believe to be “at risk” and the REAL loan
portfolio is around €800 million?
Immediately, we realize that the bank is in fact leveraged at 26
to 1. At this level even a 4% drop in asset prices erases ALL equity rendering
the bank insolvent.
And yet, based on
Indeed,
With that in mind, take my XYZ bank example, apply it to all of
Europe, assume leverage ratios of 26 to 1 at the very minimum (Lehman blew up
when it was leveraged at 30 to 1), and take another look at the housing bubbles
in the above chart.
In simple terms Europe’s entire €46 trillion banking system is
in far worse shape than even the US investment banks were going into 2008. And
this is based on their leverage ratios alone.
Now, let’s take this process further…
Historically, most depositor banks made their money on the
spread between the interest rates they pay depositors and the interest they
receive on the loans they make. This is why they were so highly incentivized to
leverage themselves to the gills.
Given that a bank’s share price and executive compensation are
closely tied to its profits, you can imagine just why a bank would want to
leverage itself as much as possible.
Even under this traditional banking model,
I’d like to share this information with you… the only problem is
that my private clients are paying me to provide them with this information. So
as much as I think people need to hear it, I have to honor their trust and
their confidence and not make this information free.
However, you can access it via my (Summers’) Private
Wealth Advisory newsletter. As I mentioned earlier this
week, Private Wealth Advisory costs
$329. When you consider that I’ve not only uncovered information pertaining to
the financial system that almost NO ONE in the world knows about… as well as
the fact that I’ve shown subscribers 72 straight winning trades over the last
year (and we haven’t closed a single loser over that time), $329 seems a mere pittance.After all, it’s just $0.90 per day… less than the
cost of a cup of coffee.So if you’re ready to take
the plunge and face the cold hard facts of the financial system, I highly
suggest you take out a subscription to Private
Wealth Advisory. I’ll not only explain to you the risks
that 99.9% of analysts are unaware of, but I’ll show you how to profit from all
of this (and yes, you can profit during Crises, my clients did in 2008 and they
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Wealth Advisory…Click Here Now!!!! Graham Summers,
Chief Market Strategist,