Take Note: What's Happening in Europe Could Cause MAJOR Crisis in U.S.!

 

Many people have been writing in to ask me, “why are you focusing on Europe so much? Who cares about Spain?” The short answer is that everyone should care about Spain. Spain could potentially take down the banking system in Europe, which would mean the U.S. facing a Financial Crisis at least on par with 2008. That is why Europe is a HUGE deal for everyone….We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison. [Let me explain further.] Words: 674

So says Graham Summers (www.gainspainscapital.com) in edited excerpts from his original post*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Summers goes on to say, in part:

How would this unfold?

To understand this, you need to understand how the European banking system works. By now everyone knows that many European countries have massive debt problems: Portugal, Italy, Ireland, Greece, and Spain, the infamous PIIGS.

• When these countries issue debt, it is mainly the European banks that buy it. If, for example, Spain issues €5 billion in new debt then most of that will be snatched up by Spanish banks or some other European financial entity.
• The bank(s) then park this debt on its balance sheet as a “senior asset” or an asset that has the least amount of risk (I realize this sounds insane given how bad Spain’s finances are, but this is how the banking system’s “risk models” work).
• The bank will then use this Spanish bond to backstop…pretty much every type of loan the bank might make.
• On top of this, the bank will also use this Spanish bond to backstop hundreds of billions of Euros worth of trades.

Do you see the problem with this? If Spain defaults,

• one of the most important “assets” used to backstop its loan and trade portfolio goes up in smoke. At that point the bank is essentially insolvent and would have to liquidate its loan portfolio while trying to stave off a bank run (as you’ve likely noticed, Spain is facing bank runs galore).

So what? Who cares? This is Spain’s problem, right? Wrong. This is Europe’s problem and more. 

As European banks across the board are sitting on Spanish debt…if Spain defaults, then a heck of a lot of EU banks (and some US banks for that matter) will see some of their “Senior Assets” go up in smoke, rendering them insolvent. This, in turn, could spread like wildfire throughout Europe’s banking system…

Given that such a debt implosion of Spain’s $2.2 trillion in sovereign bonds would be a major financial disaster just imagine what the effect of Europe’s $46 TRILLION banking system collapsing would be? It would be Lehman by a factor of ten, easily.

So what does all this have to do with the U.S.?

The U.S. banking system is $12 trillion in size and this backstops over $220 trillion in derivative trades. Of this $220 trillion, 85% are based on interest rates. [As such,] if Spain, or any of the other PIIGS default, and Europe’s banking system (which is $46 trillion in size by the way) crumbles.

• interest rates across Europe would spike as the EU sovereign crisis spreads.
• Treasuries would spike pushing interest rates close to ZERO in the US, if not into negative territory (this happened when Lehman went under).
• This in turn would very likely trigger an implosion of all those derivative trades based on interest rates.
• This would blow up Wall Street and likely result in bank holidays and the stock market even being closed down for a period.

Conclusion

The above is why Europe matters; why Spain could wipe out your 401(K); why European leaders are so frantic NOT to let a default occur in Greece or Spain. In simple terms Europe is a HUGE deal for everyone….We’re talking about systemic risk on a scale that would make 2008 look tiny in comparison.

That is why I keep talking about Europe so much – and it’s why I’m more concerned now than I was in early 2008. No joke. What’s coming will be truly horrific. I believe we have, at most, maybe 9-10 months to prepare for all of this (possibly less).

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*http://gainspainscapital.com/?p=2088 (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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