This headline is scary enough.
European bank bail-out could push EU into crisis
The article talks in vague terms about "secret reports".
The problem is that the article has been changed. A Google search will reveal it's original headline which is much scarier.
European banks may need £16.3 trillion bail-out, EC document warns.
The Telegraph changed more than the headline. They had also removed two paragraphs from the original news article. Fortunately other blogs had captured those missing paragraphs.
European Commission officials have estimated that impaired assets may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the trading book total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.
In addition, so-called 'available for sale instruments' worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.
Suddenly the article isn't vague anymore.
£16.3 trillion is equal to $25 Trillion. Where can Europe find $25 Trillion in a hurry? Only one place - the European Central Bank printing presses.
$25 Trillion is twice as large as the GDP of the European Union. A bailout of this magnitude cannot be hidden. Will the German public stand still for this massive bailout of its weaker neighbors? How much hyperinflation will all this printing cause?
The fact that the Telegraph intentionally censored itself speaks volumes, and there is no doubt as to why they did it - to not scare the public. The last time I remember the media doing that was during the Great Depression, when they stopped reporting food riots.
Fighting a Two Front War
On the western side of Europe we have the fallout of from the massive housing bubbles in Ireland, Britain, and Spain.
Ireland is in the worst shape, with a real chance that its government will default on its debts. Credit default swaps on Irish debt is running at 355 basis points, the highest rate in Europe and almost half way to Iceland's rate (which has already defaulted).
The unemployment rate in Spain has reached 14.4% while industrial production has plunged by 20% from a year ago. Some are openly questioned whether British banks can be saved at all.
Meanwhile on the eastern front we have the entire swath of eastern Europe, from Greece and the Ukraine in the south, to Latvia and Lithuania in the north, with economies that are "clinically dead".
In the eye of the storm lies Europe's healthiest economies, Germany and its immediate neighbors. However, they too are in serious trouble.
Eastern European countries have borrowed heavily from western European banks. Banks from Sweden, Italy, Austria, France, Belgium, and Germany account for 84% of all of those loans. The debt is denominated in western European currencies, so when the currencies of eastern Europe collapse the debt burden becomes almost unpayable. If the debt burden of eastern Europe goes into default then that means trouble for even the strongest of western European nations.
Swiss banks have given billions of credit to Eastern Europe - now the customers cannot pay back the money. Switzerland is threatened with the fate of Iceland, says economist Arthur P. Schmidt.
...
Yes, the system has only worked as long as the exchange rate between the franc and the currencies were reasonably stable. But that is not currently the case. For example, the Hungarian forint and Polish zloty have lost over a third of their value against the Swiss franc in recent weeks. Because of the devaluations of the national currencies, the debt to Switzerland has increased by more than one-third. Many of the Eastern European countries have serious payment difficulties, and are virtually bankrupt.
Meanwhile back on the home front
Part of the Friday evening news dump, intentionally meant to not be noticed by the general public, was a very scary statement by the foremost expert on currencies.
Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.
Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
I find the fact that Soros is saying things like this to be terrifying. But it doesn't stop there. Paul Volcker, the former Federal Reserve Chairman and member of the Obama economic team, basically backed up what Soros had said.
Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
I wish I could end this diary with something positive, but I can't think of it right now. We are looking at a future with either massive bank defaults that will overwhelm the ability of the government to guarantee your savings, or hyperinflation caused by massive government bailouts.
Unfortunately the time has come to hunker down.
[Update: Some people have questioned my sources, which is a perfectly legit thing to do. It forces me to make a better diary. So here's some more information to back up what I've typed above.]
#1) Britain is in the deep end of the pool.
The government's rescue of some of Britain's biggest banks will more than double the national debt at a stroke after government statisticians decided to classify Lloyds and Royal Bank of Scotland as public corporations. Their liabilities – up to £1.5tn – will be added to the taxpayer's balance sheet.
That could push the country's debt levels up to 150% of national income, from a three-decade high of 48% now.
#2) Germany may be forced to bail out entire nations, not just banks.
Germany and France may be forced to contemplate the bailout of entire nations rather than just individual banks as European government budgets buckle under the weight of recession.
German Finance Minister Peer Steinbrueck became the first senior policy maker to broach the topic this week, saying some of the 16 euro nations are "getting into difficulties" and may need help. French officials are also concerned about market tensions as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen.
The nightmare for Angela Merkel and Nicolas Sarkozy is that widening deficits will prompt investors to shun the debt of some countries, sparking a region-wide crisis.
...
Eddington Capital’s Allen, who runs a fund of hedge funds, says the market currently "vastly underestimates" the risks and expects credit-default swaps for Greece, Italy, Spain and Portugal to double in the next 12 months.
Any state-funded rescues may meet with opposition from the ECB, which has repeatedly said the Maastricht Treaty forbids bailouts.
#3) Economist Nouriel Roubini is concerned with Europe's banking system as well.
Europe’s banking system faces growing risks because of losses in the region’s emerging markets, and the crisis may require a region-wide rescue effort, said New York University economist Nouriel Roubini.
"The banking problem in Europe is becoming more severe," Roubini said in a Bloomberg Television interview. "You have a series of countries that are really in trouble," Roubini said, citing Latvia, Estonia, Lithuania, Hungary, Belarus and Ukraine.
...
Roubini said European nations may go further and assist member states that are unable to rescue their own banks. "Even the European Union now is thinking of helping those sovereigns and their banking systems," he said.
"There are significant problems in terms of debt and also banking problems in places like Ireland, for example," Roubini said. "But also a country like Greece has a huge amount of stock of public debt."