Update: Euro Banks and Eurodollars Will Destroy the World

This is an update of a 2020 post called European Banks and the Euro Will Destroy the World, which was actually a portion of my post Rising Risk of Financial & Economic Chaos, Part 2.

Today, news is out that Credit Suisse Bank in Zurich is experiencing a slow-motion (for now) “bank run” and news of these depositor outflows is sending the stock down 15% this morning.

 

It's not that long ago that Deutsche Bank was plumbing the zero line in stock prices, but it received a German government bailout some time ago to buy some time. At one time, the IMF labeled Deutsche Bank as the world's most dangerous systemically important bank.  I wonder what they said about Credit Suisse?

It seems as if Europe has been trying to destroy it’s banking and financial system for a long time. The bad part of the story starts with the GFC of 2007/2008. In that crisis, some 157 banks failed in the US and many mergers were arranged during that credit crisis. But nothing was allowed to fail in Europe. No bad debt was eliminated. That left Euro banks with significant bad debts on their books. This effect is shown in the charts of Credit Suisse and Deutsche Bank and most of the other big banks in the EU.

Zero and negative interest rates was the next total fiasco that has unwound at this time. Erasing negative rates to +2 or +3% has left 100s of Billions of Euro-bonds with steep losses including at the Central Bank. Most of these bonds are at Euro banks. At one point, there was about $17 Trillion of debt in the EU that had negative yields and it created one of the biggest bubbles in the world. Now ALL of these bonds have collapsed in price and these losses are concentrated on the biggest banks in Europe.

It’s not just negative interest rates that hurt and crippled the profitability of banks but also profit-killing regulations by the EU. The craziest regulation of the EU banking system is the requirement of bank “bail-ins,” using depositor money, should there be a bank failure. Why would you want to scare away an important source of bank capital???   It's literally insane.  It's the total inverse of our FDIC deposit safety net! But the morons in Brussels did this.

My biggest fear for years was a dissolution of the EU causing the failure of a single country’s debt and triggering a EU-wide crisis. More recently, I’m more concerned about a failure of one of the counter-parties in the huge Eurodollar and Derivative markets. If one counter-party fails, then the fall-out (or the fear thereof) could trigger systemic disruptions in the world’s financial system.

The "Eurodollar" has developed in past decades as unregulated liquidity that exists on (and mostly off) the large bank balance sheets in Europe and other financial capitals. It's really a sort of a "trick" designed to allow banks to skirt regulator's capital requirements.

Chris MacIntosh explains more at Captialist Exploits and he goes on to say:

“What’s important to understand is that the Eurodollar system is THE biggest source of global funding…bar none. Nobody knows for sure how large it is as it’s basically a large unregulated financing system with thousands of participants globally. But we do know that the Eurodollar futures market on the CME is larger than S&P futures, larger than oil futures, larger in fact than the 10yr bond futures. It’s estimated over 90% of international trade is financed through the eurodollar market.”

And then there are the huge and widely used derivatives markets. Parentheses around "derivatives markets" means it's the aggregate of credit default swaps, interest rate swaps, currency forwards/swaps, repos/reverse repos and other derivatives used mainly to facilitate global and financial trade. Like"Eurodollars," are only backed by "balance sheet capacity" of the European (and other) banks.

But there are nearly no dollars backing these instruments. It's nearly pure leverage and very unstable in times of crisis -- as we found out in 2008. It's like "internet money" or even Crypto. Nothing is backing it.

The Rise and Troubling Fall of the Eurodollar Standard: Read the “Financial Cushions at the Bottom

 

It's pure leverage with no real "backing" except faith in the money center banking system of Europe, the EU and other financial capitals like Japan and Singapore. But I’m again questioning the “faith” in Euro Banks. So are investors.

It’s an accident waiting to happen.

One thing that I’ve learned is that it takes a LONG TIME for collapse to unfold: slowly at first, then suddenly.