Banking Crisis: Europe Banks The Next To Fail En Masse

Monday, June 14, 2010
By Paul Martin

by Taylor Cottam

European banks are in a freefall similar to what happened to US banks. We saw this coming months ago when I wrote in a blog post about the state of US, Europe and Canadian Banks. I said that of the three, I worried most about the European banks because asset prices had not fallen like they had in the states, and that the debt level of German and UK banks could precipitate another crisis. There are some very concerning things happening now in European Banks.

The market is disounting them as practically insolvent. And even worse, there is some real problems with what is happening in state insured banks like West LB which has been bailed out and is state owned. It would be the same if the markets charged Fannie Mae the subprime borrowing rates they deserve. Fannie Mae’s cost of funds is below any private bank simply because they are considered part of the treasury. In fact, because it is guaranteed, if their borrowing costs were too high, one could buy Fannie Mae bonds, sell gov’t bonds and make a risk free spread.

Well, that is exactly what is happening at West LB. “WestLB AG, the German state-owned lender bailed out during the financial crisis, is among banks paying the most to borrow for three months in euros, dollars and pounds, according to data from the British Bankers’ Association.” So one could technically buy short term debt from West LB and Sell German bonds for a risk free return. Its a no brainer… or is it?

It could be just a technical phenomenon, i.
The Rest…HERE

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