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“According to some analysts, the austerity measures demanded Greeks rival the measures Germany faced in 1930-31, which helped open the door to Adolf Hitler. The irony is that as these measures have not been adequate, Brussels has resorted to Plan B. The middle class of the strong northern European economies, led by Germany, is being asked to backstop the European sovereign debt fiasco. To recapitalize the banks, the middle class will either be the major contributors to a giant bailout fund, or they will become the debt’s ultimate guarantor through the issuance of so-called euro bonds. Translation: higher interest rates and less prosperity. Talk about a recipe for political instability.”
                                                David Smick

Commentary & Analysis
“It’s a banking crisis too…”

It appears the European Central Bank is going to hike interest rates this week. Of course inflation is the reason, or should I say, inflation inside Germany is the reason. All proving once again what the euro experiment is all about…

What is interesting is that most analysts only refer to the sovereign debt side of this equation…but there is more; there is a major banking crisis in the works, seemingly stealth in nature to currency traders and some global macro seers.

So, put into mathematical terms, the euro equation looks something like this:

Sovereign Debt Crisis + Banking Crisis = Stronger Euro

Does math always make sense? I always had trouble with calculus. This must be some form of calculus. Damn! No wonder I missed it.

We noticed this excellent summary of the banking troubles facing the eurozone; it comes from Klause Engelen, and it appeared in the winter 2011 edition of The International Economy, “Angela Merkel’s Nightmare”*our emphasis+:

…But after ten months of crisis and two country bail-outs, eurozone governments and EU authorities are still not telling the truth to their voters and taxpayers: sovereign debt troubles of the eurozone cannot be solved without also tackling Europe’s still smoldering banking crisis in both the core and periphery.

…Here are some numbers. According to JPMorgan, the four big core countries—Germany, France, Belgium, and the Netherlands—have peripheral country exposure equal to around 125 percent of their banks’ capital, so a hypothetical 25 percent depreciation in peripheral country assets will cause them to lose around one-third of their capital. Thus, a sovereign debt restructuring would be highly disruptive for the core banking systems, potentially leading to shortages of bank capital.

Gulp! Do you think the four big core countries’ taxpayers will (can) be put on the hook for this? Hmmm…that’s a whole lot of collective love.

“From each according to his ability, to each according to his needs.”

No, that isn’t President Obama—its good old Karl Marx; likely still a dear friend of many of our political elites who are still trying desperately to make that heaven on earth thing work out.

The euro is running on empty…fumes of yield differential enthusiasm are the only thing in that tank. These lyrics from Jackson Browne’s, “Running on Empty” are prophetically appropriate I think:

I don’t know where I’m running now, I’m just running on
Running on-running on empty
Running on-running blind
Running on-running into the sun
But I’m running behind
Gotta do what you can just to keep your love alive
Trying not to confuse it with what you do to survive

Soon we think the euro will be sucking wind, and we want to be there when that starts…we impatiently wait!