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<blockquote data-quote="Hypno" data-source="post: 1150083" data-attributes="member: 12416">Here is something that is not well understood about the finances in the EU.Each country has their own banks.&nbsp; Banks in Europe, like anywhere else, are highly leveraged.&nbsp; Historically banking rules had fixed percentages of leverage that were allowed.&nbsp; Shortly after the beginning of this century, banking in North America and Europe switched to risk-based leverage rules, under something called the Basel accord.&nbsp; What this means is that every asset on a bank's balance sheet is ranked according to risk.&nbsp; If all they have is cash and government bonds, they can be more leveraged than say holding real estate loans.Here's where it gets interested.&nbsp; Risk based leverage makes sense in theory, but in practice politics intrudes and it goes all facaca.&nbsp; So lets say you have a bank that holds mostly government bonds.&nbsp; The leverage allowed is very high.&nbsp; However, in the EU government bonds are issued by individual countries, Germany, Italy, etc.&nbsp; You can buy the bonds of the weaker countries, like Italy, a little cheaper, so your rate is better, and that is what a lot of French banks did.&nbsp; However, the Italians and Greeks are no longer benefitting from being in the EU and want to leave so they can have their own currency back.&nbsp; If they leave, they will devalue their currency (lira and drachma) relative to the Euro, and when they do those French banks are going to have huge losses, so huge that they may fail.So as the economic imbalances mount, there is considerable local pressure for the Southern Europeans to leave and start their own currencies, and among some Northern Europeans like France to keep them locked in.These forces have been apparrent since 2008, but they have kicked the can down the road.&nbsp; I'm not saying this situation is immiment, only inevitable.</blockquote>

[QUOTE="Hypno, post: 1150083, member: 12416"] Here is something that is not well understood about the finances in the EU. Each country has their own banks. Banks in Europe, like anywhere else, are highly leveraged. Historically banking rules had fixed percentages of leverage that were allowed. Shortly after the beginning of this century, banking in North America and Europe switched to risk-based leverage rules, under something called the Basel accord. What this means is that every asset on a bank's balance sheet is ranked according to risk. If all they have is cash and government bonds, they can be more leveraged than say holding real estate loans. Here's where it gets interested. Risk based leverage makes sense in theory, but in practice politics intrudes and it goes all facaca. So lets say you have a bank that holds mostly government bonds. The leverage allowed is very high. However, in the EU government bonds are issued by individual countries, Germany, Italy, etc. You can buy the bonds of the weaker countries, like Italy, a little cheaper, so your rate is better, and that is what a lot of French banks did. However, the Italians and Greeks are no longer benefitting from being in the EU and want to leave so they can have their own currency back. If they leave, they will devalue their currency (lira and drachma) relative to the Euro, and when they do those French banks are going to have huge losses, so huge that they may fail. So as the economic imbalances mount, there is considerable local pressure for the Southern Europeans to leave and start their own currencies, and among some Northern Europeans like France to keep them locked in. These forces have been apparrent since 2008, but they have kicked the can down the road. I'm not saying this situation is immiment, only inevitable. [/QUOTE]

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