Daily Market Commentary (1/3/2013): Greece and Spain’s Banking Systems Flash “Danger”

While the US continues to digest the details of the US Fiscal Cliff Deal (the only important item is that it does nothing to address our debt or deficit problems), the EU continues to proclaim the worst to be over… while its financial system crumbles from within.

The latest EU official to sound the all clear is German Finance Minister Wolfgang Schauble. On Friday he told German newspaper Spiegel Online that he believes “we have the worst behind us” in the Euro Crisis.

It’s an odd statement given that in just October Schauble wasn’t sure that the worst was past. What’s changed since then? Not much aside from Greece finally getting another €57 billion that it’s been waiting for since June.

Indeed, Spain’s second largest bank, Bankia, (the bank which received nearly €24 billion in bailout funds in mid-2012) just announced that it needed another €18 billion on Friday. This came after Spain’s own Fund for Orderly Bank Restructuring announced that Bankia had a negative value of over €4 billion.

Again, the bank already received €24 billion in bailouts… and it’s worth negative €4.15 billion today. Given that this is the same bank that revised its 2011 €309 million profit to a €3 billion loss what are the odds that even this awful assessment is a bit too rosy?

Lest we think Bankia is a special case, consider that the entire Spanish banking system is on life support from the ECB, drawing over €300 billion (for a banking system with a total market cap of a little over €100 billion this is extraordinary).

Then of course there’s Greece where the four largest banks announced that they need another €27.4 billion (the entire banking system needs €50 billion). To give this number some perspective, the entire capital base of the Greek banking system is only €22 billion. Keep that €22 billion in mind when you consider that Greek banks are sitting on €46.8 billion in bad loans.

With this in mind, and considering that Wolfgang Schauble has historically been one of the more negative voices in the EU political sphere, I take his “the worst is over” proclamation to be extremely worrisome.

Indeed, when you consider that France’s Francois Hollande recently claimed that the EU Crisis is “over” you have to wonder just what exactly is going on behind the scenes that these folks feel the need to state everything is great?

My view is that they know the entire move in the equity and bond markets since June 2012 has been based on verbal intervention from the ECB (despite promising unlimited bond buying, it has yet to actually do anything) and are trying to milk this thing for all it’s worth.

After all, it’s clear at this point that the entire EU financial system is essentially held together via duct tape by the ECB. And with Spain and Greece’s banking systems once again in dire need of capital I’m very concerned that the next round of the EU Crisis is fast approaching and EU leaders are trying to start the damage control in advance.

On that note, we recently outlined a number of targeted trades to help our Private Wealth Advisory newsletter subscribers profit from the next round of the EU Crisis negotiations. These are the same  “back door” investments our clients have used multiple times to pocket gains whenever the EU starts to crumble.

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Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 

 

 

 

 

 

 

 

 

 

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