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The chief executive and co-chief investment officer of Pimco, Mohamed El-Erian,  made very scary comments and added to the pressure on the euro.

He says that the problem is far from being a  sovereign  debt issue, but is now becoming a serious bank problem that may require €300 to €500 billion in bank  recapitalization, and that French banks could tip Europe bank into a fill blown crisis.

In an article in Financial Times, El Arian provides the following alarming quotes:

To make things worse, the ratio of market capital to total assets has fallen to 1 – 1.5 per cent (compared with six to eight per cent for healthier banks).

So, 1% to 1.5% means a leverage level of 66 to 100 – far from the numbers reported by the banks. For instance, Societe Generale says its leverage is 28:1, although there are totally different calculations.

And this is the worst part that talks about the institutional bank run and that retail accounts will follow (emphasis mine):

These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy.

Ex football (soccer) player Eric Cantona pledged a bank run, that didn’t work. A real unplanned and panicked bank run will be very scary…

EUR/USD is currently holding above 1.3340. For more on the euro, see the EUR/USD forecast.

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