El-Erian just screamed ‘shut their ass down‘ from New York to Paris.French banks have 1% capital. No polemic is needed. This is a solvency and liquidty crisis.Notice below the bold quote from the CEO of the world’s largest bond fund. Not to overstate the obvious, but 1% capital ratios imply leverage of 100:1.Calling Helicopter Ben…Sarkozy would like you at the launch pad, immediately.—Meanwhile, high-profile warnings over the state of Europe’s banks, particularly in France, came from a variety of sources.Mohammed El-Erian, chief executive of bond fund giant Pimco, warned in an op-ed in the Financial Times published Thursday that French banks could tip Europe back into recession.Private institutions around the world have sharply reduced short-term lending to French banks, while a plunge in bank shares since August has left bank equity trading at a 50% discount to tangible book value on average, he wrote.At the same time, El-Erian noted that the ratio of market capital to total assets for the sector has fallen to 1% to 1.5% — far short of the range of 6% to 8% typically seen for healthier banks.“These are all signs of an institutional run on French banks,” he wrote. “If it persists, the banks would have no choice but to de-lever their balance sheets in a very drastic and disorderly fashion.”
To be clear, the run on the banks and the collapse it will cause is already underway and “If it persists” the French Banks will have “no choice but to de-lever their balance sheets in a very drastic and disorderly fashion” which means forget about the plans of propping up or bailing out Greece, Ireland, Portugal, Italy and Spain.
In fact, such an event in happening in “very drastic and disorderly fashion” would trigger a Lehman style collapse wiping out any hope of those nations being able to pay off their debt.
The resulting financial turmoil drag down Germany and the entire Euro-zone resulting in sovereign debtdefaults in many of those nations as well.
From there the counter-party risk turns to contagion and drags down banks in Great Britain, China and even the U.S , resulting in the greatest economic crash in the history of man kind.
The question is will officials fess of to reality or continue to pretend the patient is not sick until he reaches the point where his vitality can no longer be preserved.
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