Over two years ago, the end result was horribly obvious…

July 29, 2010 · 8:45 am | Edit

EUROZONE breaking….new data confirms the ship is sinking.

Total bank exposure to toxicity enormous

Eurobanks get ducks in a row ready for sovereign default

Too much collateral based on soon-to-plunge assets


Overcrowded Bond issue market predicted by Slog already a reality

 It is hard (even for somebody who dismisses ‘decisive markets’ with the disdain I do) to credit that mugs are still piling in to buy bonds in the eurozone. Spain has, in the last week, borrowed more successfully than even the most optimistic Bull might’ve imagined. The usual idiots are popping heads above sniper-infested trenches and saying “I think it’s going to be alright”.

Greece’s borrowing now costs it 745 basis points more than Germany’s. It is still heading for a debt-to-GDP ratio of nearly 150 per cent by 2013, and its economy is not growing. €20bn in customer withdrawals alone have shot out the back door of its banks as quickly as new funds arrived.

Yesterday, twelve lending organisations (The Slog understands that one of them was PIMCO) were approached formally by the EU authorities, with a view to preparations for a national default. When even the loopy-loos know what’s coming down the road, it really is time to worry.

But while the layman still thinks of this as a sovereign debt crisis, it really isn’t the main crap-game in town…in both the British and American senses of ‘crap’. S&P issued a damning report yesterday pointing out that the eurobank exposure to bad debt all up totals 30 trillion euros.

To put that number into perspective, the total global banking bailout in 2008 is estimated to have cost only $23 trillion.

Now Holland has ended State debt guarantees, forcing its banks to go the market as bonds fall due. These bonds must compete with a trebling of Russian debt issues, massive sales of same in Spain, and the UK’s remaining requirement to borrow in the light of our own £6 trillion bad-debt exposure. In the UK, the banks actually own an unhealthy proportion of those gilts, while being the institutions facing the write-offs. The madness of this is hard to express other than in terms of the infamous South Sea Bubble.

Most observers hear or read about these endless numbers, and go glazed within seconds. The endless rows of three-pack zeros seem meaningless….but they aren’t: the EU’s self-styled ‘shock and awe’ fund has €750 billion in it. That’s less than 2.5% of the potential exposure.

A large proportion of the debt is collateralised by property, commercial and domestic. Both are set to collapse along with most other Western asset prices once deflation takes hold. A great many pension providers actually hold massive portfolios of commercial property as an investment – although the reason why is beyond me. The Slog interviewed Full Circle guru John Robson over the weekend, and he commented as follows:

“The Government bond market as we’ve known it over the decades is over, and the outlook for asset prices is truly terrible. If one takes into account the dearth of credit at the moment, and then look at 1971 salary-to-mortgage relativities versus today, you’re looking at a house-price correction of well over 30%. As for the commercial property market, the sheer size of the problem is yet to be understood”.

The Titanic took just under three hours to sink – but from first rising out of the water to submersion was six minutes. It’s end was inevitable the second it hit the iceberg laterally: the engineers informed the captain of its fate after just forty minutes. With just ten minutes to go, however, most passengers remained convinced it couldn’t sink.

The Germans sighted SS Eurozone’s iceberg the day France demanded a single currency without EU-wide, consistent and obligatory fiscal surveillance. The Union hit the iceberg when corrupt horse-trading let nations like Portugal and Greece get on board. For added certainty, the ECB fired torpedoes at it by offering cheap loans at standardised prices to all eurozone States, as did Goldman Sachs by persuading the Greeks to hide their degree of indebtedness.

Like everyone else, I have no idea when the SS Eurozone’s stern will start to rise ominously. But that it will sink is no longer a matter for debate. And the salvage operation will be more expensive than raising a million Titanics.