Sunday, November 13, 2011

Hussman's Weekly Market Comment on the European Banking System

From the latest Hussman weekly market comment:

"Given leverage ratios of more than 40-to-1 for most European banks, there is no way to meaningfully restructure Italian debt without wiping out the capital base of Europe's banks, and forcing the nationalization of the entire European banking system."
That is exactly right. There are banks that have several times their market capitalization invested in the debt of the PIGS countries. Even modest haircuts as part of a restructuring plan would render these banks insolvent.

I sense an enormous amount of complacency regarding the European sovereign crisis and insolvent banking system. People seem pretty sure that the ECB will paper over the problem by printing money. Unfortunately, there is a reason that Zimbabwe has not printed its way to success yet:
"[Germany] is reluctant to use the ECB as a money-printing machine not just because the Germans are stubborn, but instead because the whole operation would divert real fiscal resources toward fiscally irresponsible governments, rather than to Germany's own citizens. [...] The desire to use the ECB to print money is nothing more than a veiled desire to steal fiscal resources disproportionately from the German people."
The massively leveraged lending by European banks to the PIGS countries happened as a result of an incentive problem.

Amazingly, people will lend money to these European banks on a "pay if you want to" basis at single digit interest rates!

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