55 Trillion Reasons Europe is Doomed

On the heels of the announcement of Euroland’s “solution”, the S&P500 moved up another 3.8% last week.  This brings the S&P back to where it was, approximately, in July—still over 6% below it’s highs of the year.  Volume was moderate.  And volatility (as measured by the VIX) is still quite elevated…meaning things have not returned to normal.

In macro news, the US economy is still struggling.  Home prices are still falling, per the Case-Shiller index which showed a further 3.6% year-over-year decline. New home sales are scraping bottom, and what’s worse: median prices fell over 10% year over year. Pending home sales plunged almost 5%. Consumer confidence is collapsing.  Durable goods orders slipped. Initial jobless claims are still stuck above 400,000. Growth in personal income ground to a virtual halt, while spending continued–this means that households are draining their savings to make ends meet. Not a good sign, and not something that’s sustainable.

Technically, the S&P500 is extremely overbought on a daily basis.  A pullback, even a modest one, is VERY overdue and very likely. On a weekly basis, the downtrend that began in May is not broken. In fact the possible upside “bounce” targets, that we outlined a few weeks ago, within this overall downtrend, are only approaching:

“..the S&P could continue to bounce for a another 5+% (up to 1,300) before running into stiff resistance.  In other words, there is no good reason why this bounce must come to an end anytime soon.”

A few days ago, Oliver Sarkozy—the brother of the president of France—published a piece in the Financial Times.  In it, laid out a strong argument why Europe’s leaders, together with the ECB, must take huge steps to confront the financial crisis in Euroland.

The essence of the argument was that Europe is SO over-leveraged in its banking system, that the leaders cannot afford not to act boldly….and fix the problem.

But another take on this argument is that Europe is SO over-leveraged, that it’s beyond saving.  The hole that it dug for itself is simply too deep to crawl out of.

How deep is the hole?  Sarkozy points out—horrifically—that the European banking system alone (ignoring sovereigns and households) have $55 trillion of debt, that must be serviced by a $15 trillion GDP. This compares to only $13 trillion of debt in the US, which services this debt with a GDP that’s also $15 trillion.

The European banking system is over FOUR times more leveraged than the US banking system.

But that’s not all.  Whereas in the US only $3 trillion (of the 13) is funded by risky short-term wholesale funding markets, in Europe, $30 trillion (of the 55) is funded by risky short-term sources.

And there’s more. Non-banking (think corporations and households) hold a HUGE amount of debt as well—about 150% of GDP.  That’s another $22 trillion of private debt that must be serviced by the SAME $15 trillion of European GDP.

And there’s even more.  Public, or government, debt in Europe is at least 100% of GDP (on average). So this adds another $15 trillion of debt….once again, debt that must be serviced by the SAME $15 trillion of GDP in Europe.

Add it all up and you’ve got over $90 trillion of explicit, interest-bearing debt…..ALL of which must somehow be serviced by that comparatively TINY $15 trillion of GDP.

Europe is horrifically over-indebted.  It’s far more indebted than the US, which itself is over-indebted.

And as far as “solutions” go, there’s nothing—with any realistic chances—that can happen, whether organically or from top-down “plans”, that can make this massive over-indebtedness go way.

The only way it will go away is through a deflationary collapse, OR through a hyper-inflationary money-printing program….which would also lead to collapse.

Euroland is doomed.  Sooner, or later, Euroland will collapse.

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