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European Crisis Summarized II

In this report we will summarize the plight of the European Crisis as of June 12th, 2012. The status quo is as follows:

1. The biggest borrowers are over reliant on revolving credit, and they happen

to be countries in Europe. (Similar to Municipal Bonds)

2. ECB has no equivalent to the US Treasury Bonds, Notes, and Bills; however,

they have recently began discussions on the topic of a Eurobond.

3. The European Sovereign debts are funded by European banks, Sovereign

Wealth Funds (SWF), International Monetary Fund (IMF), and other Qualified

Institutional Buyers.

4. The rating agencies are currently reviewing the ratings for both the financial

institutions and the sovereign ratings.

5. VaR Value at Risk is a metric used to measure acceptable losses on

the highly volatile investments held at the largest banks and hedge funds. In an atmosphere of downgrades from the rating agencies, we are sure to experience a great deal of volatility and potential bankruptcies.

We have recently witnessed European Sovereign Debt defaults in Greece, and a number of other nations are clamoring for more liquidity. The money circulates between the individual governments and their respective banks. If there is a default in the Sovereign debt, then the individual bondholders may go bankrupt That means the banks may go bankrupt; therefore, they are being conservative by not lending money to corporate banking or private banking clients. In other words, the big losers are the customers of European banks who are not getting any credit lending.

Keep in mind that in this day and age, everybody is reliant on credit for both sales and production. In other words customers buy on credit, and manufacturers produce on credit. We anticipate that the cost of the credit is going to rise as the banks stop lending out of the fear of yet another Sovereign European Nation may default.

The bondholders and the banks are requesting money from two sources, while shunning the ISDA and the Credit Default Swaps (CDS).

1. LTRO = First source of liquidity is the European Central Bank (ECB), which

just gave the ECB Banks a little over a Trillion Euros at an interest rate of 1%. This was done in two different offerings of the LTRO.

2. International Monetary Fund (IMF) = Second source of financing of the

various European Sovereign Debts requires certain austerity measures

3. Finally the Credit Default Market and the ISDA are being shunned by a

number of European countries for a number of reasons ranging from counter party

risk to a blatant request to end speculation.


If the current trend continues, then we can not only forecast a decline in the European stock prices due to the increase in cost of capital, we can also assume there will be a subsequent macro decline in European GDP. Thus leading to a declining Euro against the dollar.

Suddenly European products and services will become relatively cheaper. The weaker currency might be the macro solution for the European Debt Crises. I would like to qualify that last statement by saying that would depend on the state of mind of the leaders of the individual companies. For example, if they are oriented towards growth and mass manufacturing, then they will benefit from the weaker currency. However if they are shortsighted and they begin cutbacks and closing manufacturing facilities, then they might miss the opportunity that the weaker Euro will present.

The problem with some European entrepreneurs is that they do not understand mass production or capturing market share. For example, Ferrari has an absolutely inefficient business model specifically in a recessionary environment. They are not oriented for mass production; therefore, they can not reap the benefits of a weaker currency. Furthermore their business model excludes them from making consistent spare part sales, which is the lifeblood of the auto industry. In an age of IMF austerity measures, their customers might be scrutinized for merely driving one of their cars.

In my humble opinion this is the quintessential issue at the crux of our analysis of the future prospects of the Euro. Will the European industry adopt a more competitive stance, or will they wither away like the old monuments in Greece. The key is about a cultural change that invites innovation and creativity. It’s about capturing the imagination of students and investors. Until we see these true signs of change, we at The KIN Consortium are advising our clients to invest in Oil and Gold.

At this juncture on June 12th, 2012, I am sad to report that a dark cloud of Anti competitive socialism is growing over the continent. It is a fluid situation, so we recommend that our readers stay vigilant and stay tuned.

Khalid I Natto Chairman & CEO The KIN Consortium Email: