Saturday, December 10, 2011

Europe on the Brink: Bank Failures

Is this the time to start a betting pool on which large European bank fails first or pray for some short-term fix that will delay the inescapable failures?

The horrible truth dawned on Europe’s leaders late last year; the Euro has no future except for the disassembly of the system. Any recent meetings will only stave off the inevitable.

The next leg appears to be failure of multiple banks in Europe. Collectively these institutions need to immediately find €114.7bn of extra capital in order to weather the storm. The banks can no longer depend on the Euro zone governments as a backstop; the major governments are even unable to combine to offer a common bond auction. Individually the recent government bond auctions have been severely under-subscribed; no one wants to purchase European government debt at any type of reasonable price – only at yields effectively implying the entire EU is in default.

Will one of France’s large banks be the first to fail; BNP Paribas, Credit Agricole and Societe Generale. All were downgraded by Moody’s on Friday. Germany’s Commerzbank appears to be teetering on the brink. Do the government coffers in France and Germany still contain enough funding to bail-out these entities with a significant cash infusion, or is the entire Eurozone banking system on the edge of collapse as the banks run out of assets to pledge to keep vital funding lines open.

It appears that the U.K was very wise when they rejected any further involvement with this debacle.