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Tuesday, March 03, 2009


europe on the ropes

ed harrison forwards the analysis of neils jensen of absolute return partners.

The following is not pretty reading. I have rarely, if ever, felt this apprehensive about the outlook. So, if the crisis has made you depressed already, don’t read any further. What is about to come, will make your heart sink.

here's what jensen means.

On the 11th February the Daily Telegraph’s Brussels correspondent Bruno Waterfield wrote an article under the header: “European banks may need £16.3 trillion bail out, EC document warns.” In the article, the reporter revealed that he has seen a secret document produced by the EU Commission which briefed the union’s finance ministers on the true extent of the banking crisis. Less than 24 hours later, the article’s header was changed to “European bank bail-out could push EU into crisis” and two paragraphs had mysteriously disappeared. Here they are:

“European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.

In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.”

Do yourself a favour - read those two paragraphs again. Newspaper editors do not change content light-heartedly. Did the Telegraph editor receive a call from Downing Street? Or Brussels? Did he have second thoughts about the avalanche that he could possibly instigate? I don’t know and I probably never will. But one thing is certain. If the EU Commission’s estimate of £16.3 trillion of impaired assets is correct, then the crisis is far worse than any of us could ever imagine. Not only would we have to get used to the prospects of a systemic meltdown of our banking system, but entire nations may go down as well.

as jensen notes, even if losses realized are just a fraction of this, the crisis will be very severe. this is what is meant when it is suggested that major banks have likely lost whole number multiples of their capital.

UPDATE: via ft alphaville -- no suicides, please! i had a right good laugh at being labeled a "conspiracy nut"; the blog title invites it, certainly. to be clear, the conspiratorial aspect of the telegraph article is, apologies to jensen, unlikely to be true. there's enough damage around without the cloak-and-dagger to dramatize and exaggerate what's happening. jensen's actual analysis is more than scary enough.

as to the blog title -- it's far more to do with toynbee and spengler than bear stearns and AIG. i'll leave it to the reader to infer any connection between the two. :)

UPDATE: alphaville's paul murphy links to what may be the EC draft document originally cited by the telegraph, as john mauldin vouches for jensen.

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I CC: your post at TickerForum.
You don't have The Market Ticker on your list of links.

Hope you don't take offense to that.

Great blog.

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I agree that there is a lot of bad assets on banks balance sheets. However, just adding up "held for trading" and "available for sale" positions is a very very questionable way to quantify bad assets.
"held for trading" and "available for sale" are normal IFRS accounting categories and do not say anything about the quality of assets booked under these categories. Regarding "Financial Instruments" - German Government Bonds are also "Financial Instruments", but at least in my understanding a save haven rather than junk. Govie trading desks will hold their Government Bonds on a trading book as well, Icelandic ones as well as Bunds or Treasuries.

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it is, anon, and considering the lack of understanding that's been evident in some government actions it's even possible that 1) there actually is a mysterious EU document out there, which 2) wildly overstates the problem. even more likely, the telegraph messed up and ended up quietly (but not quietly enough in this environment) retracting.

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