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Europe Is Not a Matter of Opinion… It’s a Matter of Math

from gpc1981, Gains Pains & Capital:

It’s a simply question of math.

I realize my views on Europe are much in the minority. The entire world continues to believe that somehow Mario Draghi or Ben Bernanke have a magical button they can hit that will solve the EU Crisis.

Most people believe that magical button is the “print” button. But this completely overlooks the fact that Europe is facing a solvency crisis, not a liquidity crisis. It’s a key difference. In a liquidity crisis, financial firms needs easy money to meet short-term funding needs because interbank lending has dried up.

In a solvency crisis, a bank has far too many assets relative to its equity/ capital base. In this scenario the issue is NOT one of too little liquidity, but one of TOO MUCH Debt relative to actual capital/equity (neither of which can be increased by lending more money to the firm).

Put it this way… Europe’s banks in general are leveraged at 26 to 1. This means that for every €1 they have in equity/ capital, they have €26 in assets (which are in fact loans they’ve made to EU governments, EU businesses, etc.).

Read More @ GainsPainsCapital.com

1 comment to Europe Is Not a Matter of Opinion… It’s a Matter of Math

  • JOHN IN PHILADELPHIA

    Critical error here. An insolvent entity has TWO FEW assets in relation to its equity, not TOO MANY as the article states. ASSETS MINUS LIABILITIES EQUALS NET WORTH.

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