It's the Banks, Stupid

February 24, 2010 (LPAC)—As has always been clear, the so-called sovereign debt crisis is, in reality, about the bankruptcy of the Anglo-Dutch banking system. City of London mouthpiece Ambrose Evans-Pritchard reports in today's Daily Telegraph that European banks need to roll over EU1.1 trillion of debt over the next two years, at higher cost and in direct competition with sovereign states. EU560 billion matures in 2010 and EU540 billion in 2011. None of this includes the billions they have in derivatives and other luftgeld. At the same time, the countries of the European Union have to raise EU1.6 trillion this year to roll over their sovereign debt.

Evans-Pritchard quotes Graham Secker, of Morgan Stanley: "The scale of such issuance could raise a significant crowding out issue, whereby government bonds suck up the vast majority of capital. The debt burden that prompted the financial crisis has not fallen; rather, we are witnessing a dramatic transfer of private sector debt on the public sector. The most important macro-theme for the next few years will be how easily countries can service and pay down these deficits. Greece may well prove to be a taste of things to come."

Evans-Pritchard also reported that Germany's BaFin has warned that EU522 billion of German bank exposure to state bonds in Portugal, Italy, Ireland, Greece, and Spain may become systemic risk if contagion spreads. He writes that this might explain why "Berlin is warming for a EU25 billion rescue for Greece."