Egon von Greyerz (Matterhorn Asset Management out of Switzerland) gave an interesting interview on KingWorldNews regarding the state of the eurozone currently. He spoke about the massive over leveraged banks and the warning from the IMF that the euro is close to break up.
Spain has now borrowed $415 billion from the ECB, and that’s about 63% of the total ECB lending. Bad debts in the Spanish banks are going up at record levels. Bad debts over the last 3 months are now 8% of total debt. That’s massive. It also means defaults are not far away, and the banks haven’t reserved for these….
Banks are massively over leveraged and even a small write down on bad loans would have a devastating affect.
“The banking world is on the way to bankruptcy here. We’ve talked about the leverage in the banking system, but people don’t seem concerned about it. What we are going to see, one day, is when these dominos start falling, there will be panic.
Banks are supposed to come down to 20 times leverage. There is only one bank of the top twenty-five banks in the world today that is below 20 times leverage. Every other bank is above. 20 times leverage means that if they only lose 5% on their loan book, they have lost their capital.
I will bet you that virtually every bank in the world has a bad debt position which is worse than 5% of their assets. And if you look at an entity such as Deutsche Bank, do you know what their leverage is? 62 times. It means that if they have a bad debt position of 1.5%, the bank is bust. Deutsche Bank is bigger than German GDP. So, if something happens to Deutsche Bank, Germany goes under.
Credit Agricole, the largest French bank, has 63 times leverage. This is absolutely frightening. This situation is untenable. Some of these banks will not survive. Of course, central banks are aware of this, governments are aware of this, and they will print money. Will they print in time? Maybe for some banks, but some banks will not survive, I’m sure.
The two big Swiss banks combined total 7 times Swiss GDP. The banks have a leverage which is unsustainable, and in many cases are bigger than the countries themselves.
What does this mean for gold?
So, central banks, being aware of this, are going to keep accumulating more and more gold. And that trend will accelerate because central banks know that buying bank debt or government debt is a bad move. So, all of these dominos that will fall are going to accelerate the trend into gold.
Even the IMF are making noise regarding how bad things are regardless of the inability of european politicians to face up to the problem.
The IMF came out with a report yesterday saying we are very near a eurozone breakup, a disorderly one. That would create panic in the market. There would be an even greater flight of deposits out of the banking system which would make the situation even worse.
The IMF is coming out with statement after statement that should frighten the world. Today they said that European Banks will have to sell roughly $3.8 trillion in assets. In reality, it could be well over $10 trillion in the next couple of years.
We are in a mess, Eric, and the IMF recognizes this. The central banks know this as well, but for right now they are trying to tell the markets, ‘We are not going to print any more money.’ They will print money. The know they will print money.
The IMF, by making these statements, is saying central banks are going to have to print money, just to sustain the financial system. Improvements in the economy are unthinkable, things are going to get a lot worse.”