DURHAM, N.C. ( TheStreet) -- The debt crisis in Europe is a known unknown. It is obvious there is a crisis, but no one knows how bad it will get. An unanswered question is whether the aftershocks will be strong enough to derail the U.S.'s fragile economy.There are four facts that are important to understand:
- Most European banks are insolvent.
- The European Central Bank is massively monetizing to keep the system operational.
- Germany is doing a backdoor bailout of peripheral countries by racking up huge IOUs issued by the ECB.
- The eurozone is now an official "Transfer Union."
1. Zombie BanksWe all know that the so-called stress tests aren't really testing a stressed scenario. The latest round of European stress tests showed a short-fall of 115 billion euros.
- European banks don't want to do business with one another because they don't trust one another's solvency.
- The ECB has had to take extraordinary measures, which include three-year loans at very cheap rates
- The ECB has had to allow European banks to pledge lower-quality collateral (because the higher-quality collateral is running out -- or has run out)
- Investors are wary of these banks and are shifting business to non-eurozone banks they perceive to be safer.
- Policy makers have imposed and extended short-sale bans on eurozone banks