European Banks Are Leveraged 60-to-1?!

By Chuck Butler, editor

I have to apologize right here, right now, that I contradicted something I said and my friend John Mauldin said yesterday. (I didn’t mean to and it shows what happens when you write pre-5 a.m.)

I thought that the U.S. losses were larger than those in Europe (overall, both East and West)... But upon further review, I see that is NOT the case…

This all goes back to lending ratios, which people don't pay attention to in good times. But in bad times, they begin to be as self-evident as a hatchet in one's forehead. U.S. Banks have a loan ratio of around 26-to-1. And European Banks have one that is around 60-to-1... Uh-oh!

My long-time friend, Ed Bonawitz, sent me a note yesterday showing the rot on Europe’s vine. This stuff isn't for anyone under 13 to view, folks, it's nasty...

"Ireland's external debt, at US$1.8 trillion, equals 900% of the country's US$200 billion GDP. The United Kingdom's external debt of US$10.5 trillion equals 456% of its US$2.3 trillion GDP. Switzerland's external debt of US$1.3 trillion equals 433% of its US$300 billion GDP."

Now that the credit markets are locked tight, renegotiating the terms of these loans is virtually impossible. The IMF will need to step in Big Time, and as badly as I don't want to even say this, but have to, the Bundesbank, Germany's Central Bank, will have to step in also.

There's news this morning that Germany will take over Hypo Real Estate Holding, Inc. thus paving the way for the first German Bank nationalization since the 1930's.

Here's the deal folks, the way I see it...

These European countries are dealing with their own problems, and soon they will move to protectionism measures to keep trade at home. This will happen all over the world, and for my money, it will be akin to pushing trade over the cliff. No way is trade able to recover from a blow like global protectionism, until it ends...

So, again, there's "uncertainty." And the uncertainty hedge is here to help! Yesterday, I watched gold move higher all day to the tune of US$28. That brought the price of gold up to US$970!

This morning, there has to be a ton of profit taking, as gold has backed off by US$6. I'll say this again for anyone who missed class on two different occasions last week. It appears that the large investors are moving to hard assets, like gold and not to fiat currencies.

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