“Alarm Bells Ringing” for Europe…

And, as of eight short months ago, U.S. banks appear to be exposed:

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Nov 13, 2013 (Reuters) – “U.S. prime money market funds raised their of euro zone debt holdings in October to the highest level since August 2011 as pessimism over that region’s economy continues to abate, a report by JPMorgan Securities released on Wednesday showed.

Prime money funds’ exposure to the euro zone grew by $22 billion to $251 billion last month. Since the end of 2012, the funds have raised their holdings of that region’s bank paper by $49 billion, JPMorgan said.

The bulk of the July increase was in French and German bank debt, which grew by $10 billion to $151 billion and by $9 billion to $43 billion, respectively.”

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And so, how are things ‘playing out’ in Europe now…?

Excerpts from Zero Hedge 08/02/2014 (Erico Matias Tavares of Sinclair & Co.)

Alarm bells in the European banking system have been ringing for quite a while but nobody seems to be listening. The roaring capital markets are just too loud.

But we have been keeping track of a few things.

Private sector lending is dropping sharply in the Eurozone…..

Periphery back in play? Very recently the second largest private bank in Portugal was caught in the bankruptcy of the Espirito Santo conglomerate, reporting the largest ever corporate loss in the country’s history just last Wednesday, and raising the specter that all might not be well in the Eurozone’s periphery……

BIS issues a(nother) warning. This should not be a surprise. In its 2014 annual report, released at the end of June, the Bank of International Settlements (“BIS”) warned that “banks that have failed to adjust post-crisis face lingering balance sheet weaknesses from direct exposure to overindebted borrowers and the drag of debt overhang on economic recovery,” with this situation being the most acute in Europe. It also stated that increases in government debt ratios in several cases appear to be on an unsustainable path. It appears that debt levels matter for (some) economists after all.

Bad loans rising. Before we had Fitch, the ratings agency, stating last May that in a sample of 124 Eurozone banks which participated in the latest stress test impaired loans increased by an average of 8% in 2013, with no less than 30 banks seeing an increase of 20%. This could have certainly contributed to the massive contraction in private sector credit that we are now seeing on its own. But there’s more.

Emerging dangers. Trillions more in fact. In February Reuters reported that European banks have loaned in excess of $3 trillion to emerging markets – a little less than the entire GDP of Germany, and more than four times the exposure of US lenders to those countries. Fitch chimed in saying that “a handful of large EU banks are materially exposed to more fragile emerging markets.”…..

Where’s the capital?  Another eye-opener came over a year ago. In April 2013, Jakob Vestergaard and María Retana at the Danish Institute for International Studies published “Smoke and Mirrors: On the Alleged Recapitalization of European Banks,” a report partially funded by the World Bank. The title says it all. According to the authors, by using broad capital measures based on risk-weighted assets European banking regulators have overstated the banks’ soundness and resilience in their stress assessments. Accordingly, “recent increases in risk weighted capital ratios have been little more than a smokescreen.”
By focusing on leverage ratios instead, the authors reached some interesting conclusions. The least well-capitalized banking sector among the larger Eurozone countries is not the Spanish or Italian… but the German, closely followed by the French! According to their estimates, a five-fold increase in equity capital is needed in order to reach “adequate” levels of soundness. It is well worth reading the entire report, including the discussion on why regulators seem to be consistently behind the ball on bank recapitalization.

Figure 1: Eurozone Government Debt-to-GDP (Maastricht Definition)
Source: European Central Bank

Sovereign debt jumps. But alarm bells should have been ringing even before that. In the third quarter of 2012, the overall government debt-to-GDP in the Eurozone surpassed 90% for the first time ever, as shown in the graph above…
Full article: http://www.zerohedge.com/news/2014-08-02/alarm-bells-ringing-behind-smoke-and-mirrors-european-banking-system

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And now:                                                                                                                                    August 2, 2014:  Banco Espirito Santo Plunges 20% As Goldman Cuts Stake

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Perspective:                                                                                                                               Thank you, U.S. Federal Reserve, for the trillions of dollars in liquidity transfusions you provided for major U.S. banks and foreign banks during the height of the financial crisis – all courtesy of U.S. taxpayers….

… so the ‘wild-eyed, fat-bet dice-rollers’ at these august institutions could ‘resume play.’

They may need a little more liquid ‘go-juice’ …. if things don’t turn around soon.

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Note – there is one way to change things up, before it’s too late – for the U.S., Europe, Canada, South America…:

The Leviticus 25 Plan.

 

 

 

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