European Banks – The Repeat of History
By the time this article is being read by you the European deal makers will be meeting another obstacle in reducing the debt pains of Euro. In the last meeting it was agreed that the banks of Europe having exposure to the ballooning debt of Euro nations will be required to cut of 21% of its debts from the Balance sheet of the banks. But the real fact was kept hidden that the hole in the pocket was beyond 21% and even 70% cut consumed by the banks from its internal sources will not be sufficient.
Banks in France, Greece, Belgium and Germany are the most exposed to Greek sovereign debt. If Greece suddenly defaults on its debt, investors will demand their deposits from major European banks all at once. Since many of these banks are undercapitalized, they could run out of cash and declare bankruptcy — prompting investors to cash their deposits at other banks at the same time, causing borrowing rates to spike and spurring more bank bankruptcies. Hence the conclusion is this that Euro banks are on the verge of bankruptcies and Lehman Brothers is on the way of repeating its history.
Europe accounts for about one-fifth of global economic output hence the world economy is just poised for the biggest recession phase to come up. Moreover the already passed austerity measures have created ripple affects for not only Europe but for also for the world economy. In response to budget cuts, the Greek unemployment rate has spiked to 16.5%, and Greece’s deficit has grown 15% as a deeper-than-expected recession.
The biggest fall is about to begin:
Moreover it has fewer avenues for revenue collection and balances the payment structures and its economic growth wheel. Moreover many of the banks of Europe are undercapitalized and any further cut of debt around 60% to 70% will force many banks to open the gates of bankruptcies. After the Greek banks, the hardest hit would be those from France and the 11 German banks with stakes in the Europe. The below list will make you very clear that the type of crisis Europe will face the dept of banking crisis waiting in the sidelines to propel up. The list clear depicts the original stories much ahead of what is being cooked and presented to the world financial forums.
Without new development, without new jobs, without growth, the Greek economy will keep going down. All is needed to focus on new areas of growth rather than cutting and slashing budget and debts figures. Revenue earning should be one of the prime focus. Tax evasion needs to looped since its Greece alone loses as much as $30 billion per year to tax evasion. Just imagine what will be the figure the entire European economy in tax evasion.The biggest threat is the fall of the European banks and how they will be saved so that dooms day doesnt becomes real day.
Regard
Indraneel Sen Gupta
Financial, Economic Writer and Research Analyst.
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This is a highly exaggerated depiction of chain of financial events because of following reasons:
a. Banks have a short term lending systems with ECB. So, a sudden withdrawal can be easily met only with increase in interest rates.
b. No one runs to withdraw their deposits just because their bank suffered losses. Sudden rise in withdrawal is not rationally explained.
c. Even if, all banks run out of cash EU will print more cash and give it to them. In other words, some countries will account it as a deficit while free cash will result into inflation and devaluation of EURO. But, not recession.
A. Sudden devaluation of EURO and USD. USD sitting on similar circumstances, will stop the consumption furnace of global economy. Which was surviving on cheap money and strong market valuation of EURO & Petro $. When these factors vanish so will the consumption.
B. Less consumption will lead to less manufacturing by China and reduction in services consumed from India.
C. Though some may argue china is concentrating on domestic consumption. Lack of purchasing power of common man in china will push its economy in a slowdown. Taking with it the Aust economy.
D. India has only power of high purchasing power parity of large middle class. However, the huge corrupt politicians looting India would keep India making any significant progress. Hope you are right in saying no recession but a depression can not be ruled out at this stage.
E. We have consumed resources of our future generation, basis cheap money and fast consumption.