Are we rapidly approaching a moment of reckoning for the global financial system? August is likely to be a relatively slow month as most of Europe is on vacation, but after that we will be moving into a “danger zone” where just about anything could happen. Historically, a financial crisis has been more likely to happen in the fall than during any other time, and this fall is shaping up to be a doozy. Much of the focus of the financial world is on whether or not the euro is going to break up, but even if the authorities in Europe are able to keep the euro together we are still facing massive problems. Countries such as Greece and Spain are already experiencing depression-like conditions, and much of the rest of the globe is sliding into recession. Unemployment has already risen to record levels in some parts of Europe, major banks all over Europe are teetering on the brink of insolvency, and the flow of credit is freezing up all over the planet. If things take a really bad turn, this crisis could become much worse than the financial crisis of 2008 very quickly.
All over the world people are starting to write about the possibility of a major economic crisis starting this fall.
For example, a recent article in the International Business Times discussed how some economists around the globe are fearing the worst for the coming months….
The consensus? The world economy has entered a final countdown with three months left, and investors should pencil in a collapse in either August or September.
Citing a theory he has been espousing since 2010 that predicts “a future lack of policy flexibility from the monetary and fiscal side,” Jim Reid, a strategist at Deutsche Bank, wrote a note Tuesday that gloated “it feels like Europe has proved us right.”
“The U.S. has the ability to disprove the universal nature of our theory,” Reid wrote, but “if this U.S. cycle is of completely average length as seen using the last 158 years of history (33 cycles), then the next recession should start by the end of August.”
The global financial system is so complex and there are so many thousands of moving parts that it is always difficult to put an exact date on anything. In fact, history is littered with economists that have ended up looking rather foolish by putting a particular date on a prediction.
But without a doubt we are starting to see storm clouds gather for this fall.
The following are 11 more signs that time is quickly running out for the global financial system….
#1 A number of very important events regarding the financial future of Europe are going to happen in the month of September. The following is from a recent Reuters article that detailed many of the key things that are currently slated to occur during that month….
In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.
On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy – or what do if one or both were to topple.
#2 Reuters is reporting that Spanish Economy Minister Luis de Guindos has suggested that Spain may need a 300 billion euro bailout.
#3 Spain continues to slide deeper into recession. The Spanish economy contracted 0.4 percent during the second quarter of 2012 after contracting 0.3 percent during the first quarter.
#4 The unemployment rate in Spain is now up to 24.6 percent.
#5 According to the Wall Street Journal, a new 30 billion euro hole has been discovered in the financial rescue plan for Greece.
#6 Morgan Stanley is projecting that the unemployment rate in Greece will exceed 25 percent in 2013.
#7 It is now being projected that the Greek economy will shrink by a total of 7 percent during 2012.
#8 German Finance Minister Wolfgang Schäuble says that the rest of Europe will not be making any more concessions for Greece.
#9 The UK economy has now plunged into a deep recession. During the second quarter of 2012 alone, the UK economy contracted by 0.7 percent.
#10 The Dallas Fed index of general business activity fell dramatically to -13.2 in July. This was a huge surprise and it is yet another indication that the U.S. economy is rapidly heading into a recession.
#11 As I have written about previously, a banking crisis is more likely to happen in the fall than at any other time during the year. The global financial system will enter a “danger zone” starting in September, and none of us need to be reminded that the crashes of 1929, 1987 and 2008 all happened during the second half of the year.
So is there any hope on the horizon?
European leaders have tried short-term solution after short-term solution and none of them have worked.
Now countries all over Europe are sliding into depression and the authorities in Europe seem to be all out of answers. The following is what one eurozone diplomat said recently….
“For two years we’ve been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak,” the diplomat said. “But now the leak has got so big that we can’t pump air into the raft quickly enough to keep it afloat.”
The boat is filling up with water faster than they can bail it out.
So what is the solution?
Well, some of the top names in economics on both sides of the Atlantic are urging authorities to keep the debt bubble pumped up by printing lots and lots more money.
Needless to say, I will be advocating 1933 monetary stimulus à l’outrance, or trillions of asset purchases through old fashioned open-market operations through the quantity of money effect (NOT INTEREST RATE ‘CREDITISM’) to avert deflation – and continue doing so until nominal GDP is restored to its trend line, at which point the stimulus can be withdrawn again.
But is more money and more debt really the solution to anything?
In the United States, M2 recent surpassed the 10 trillion dollar mark for the first time ever. It has increased in size by more than 5 times over the past 30 years.
Unfortunately, our debt has been growing much faster than GDP has over that time period.
Our problem is not that there is not enough money floating around.
Our problem is that there is way, way too much debt.
But this is how things always go with fiat currencies.
There is always the temptation to print more.
That is one of the big reasons why every single fiat currency in history has eventually collapsed.
Printing more money will not solve our problems. It will just cause our problems to take a different form.
In the end, nothing that the authorities can do will be able to avert the crisis that is coming.
A lot of people are starting to realize this, and that is one reason why we are seeing so much economic pessimism right now.
For example, according to a new Rasmussen poll only 14 percent of all Americans believe that children in America today will be “better off” than their parents.
That is an absolutely stunning figure, but it just shows us where we are at.
Our economy has been in decline for a long time, and now we are rapidly approaching another major downturn.
You better buckle up, because this downturn is not going to be pleasant at all.
Where have we seen this before? Bond yields soar above the 7 percent danger level. Check. The stock market crashes to new lows. Check. Industrial activity plummets like a rock and the economy contracts. Check. The unemployment rate skyrockets to more than 20 percent. Check. The bursting of a massive real estate bubble pushes the banking system to the brink of implosion. Check. Broke local governments beg the broke national government for bailouts. Check. The international community pressures the national government to implement deep austerity measures which will slow down the economy even more and hordes of violent protesters take to the streets. Check. All of this happened in Greece, it is happening right now in Spain, and mark my words it will eventually happen in the United States. Every debt bubble eventually bursts, and right now Spain is experiencing a level of economic pain that very, very few people saw coming. The recession in Spain is rapidly becoming a full-blown economic depression, and at this point there is no hope and no light at the end of the tunnel.
The bad news for the global economy is that Spain is much larger than Greece. According to the United Nations, the Greek economy is the 32nd largest economy in the world. The Spanish economy, on the other hand, is the 4th largest economy in the eurozone and the 12th largest economy on the entire planet. It is nearly five times the size of the Greek economy.
Financial markets all over the globe are very nervous right now because if the Spanish government ends up asking for a full-blown bailout it could spell the end for the eurozone. There simply is not enough money to do the same kind of thing for Spain that is being done for Greece.
Of course European officials are going to do their best to keep the eurozone from collapsing, but what they have completely failed to do is to keep these countries from falling into depression.
As I have written about previously, Greece has already been in an economic depression for some time.
I warned that Spain, Italy, Portugal and a bunch of other European nations were going down the exact same path.
Now we are watching a virtual replay of what happened in Greece take place in Spain.
Unfortunately, the global financial system may not be able to handle a complete implosion of the Spanish economy.
The following are 12 signs that Spain is shifting gears from recession to depression….
#1 At one point on Monday, the IBEX stock market index fell to 5,905, which was the lowest level in nearly ten years. When it hit 5,905 that represented a drop of about 12 percent over just two trading days. If that happened in the United States, it would be the equivalent of the Dow falling by about 1500 points in 48 hours.
#2 So far this year, the Spanish stock market is down more than 25 percent. Back in 2008, the IBEX 35 was well over 15,000. Today it is sitting just above 6,000.
#3 Spain has banned many forms of short selling for 3 months.
#4 The yield on 10 year Spanish bonds is now well above the 7 percent “danger level”.
#5 Thanks to the problems in Spain, the euro continues to fall like a rock. On Monday it hit a new two year low against the U.S. dollar, and it is near a twelve year low against the Japanese yen.
#6 During the first quarter of 2012, the Spanish economy contracted by 0.3 percent. During the second quarter of 2012, the Spanish economy contracted by 0.4 percent.
#7 Local governments all over Spain are flat broke and need to be bailed out by the broke national government. The following is from a recent CNBC article….
Adding to Madrid’s woes, media reports suggested another half a dozen of Spain’s 17 regional authorities, facing an undeclared funding crisis, were ready to follow Valencia in seeking aid from the central government.
#8 The percentage of bad loans on the books of Spanish banks has reached an 18 year high. European officials have already promised a 100 billion euro bailout for Spain’s troubled banking system, but most analysts agree that 100 billion euros will not be nearly enough.
#10 The unemployment rate in Spain is up to an astounding 24.6 percent. The unemployment rate in Spain is already higher than it was in the United States at the peak of the Great Depression of the 1930s.
#11 The youth unemployment rate in Spain is now over 52 percent.
#12 The Spanish government has just announced a whole bunch of new tax increases and spending cuts which will cause the Spanish economy to slow down even more. In response to these austerity measures, people are taking to the streets all over Spain. Last week, 100,000 demonstrators poured into the streets to protest in Madrid alone.
Sadly, the nightmare in Spain is just beginning.
If the yield on 10 year Spanish bonds stays above 7 percent, that is going to be a really bad sign. According to the Wall Street Journal, the 7 percent level is key as far as investor confidence is concerned….
Monday’s dramatic market moves suggest Spain may be stuck in a spiral that culminates in a bailout from other euro-zone countries.
“The rise in the 10-year yield well beyond 7% carries a very distinct reminder of events in Greece in April 2010, Ireland in October 2010 and Portugal in February 2011,” said analysts at Bank of New York Mellon. “In each case, a decisive move beyond 7% signaled the start of a collapse in investor confidence that, in each case, led to a bailout within weeks,” they added.
So keep an eye on that number in the weeks ahead.
Meanwhile, the Spanish economy continues to get worse with each passing month.
So just how bad are things in Spain right now?
Just check out this excerpt from a recent article by Mark Grant….
Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.
That may make you laugh, but for those in Europe going through these horrific economic conditions it is no laughing matter.
On Sunday, Greek Prime Minister Antonis Samaras actually told former U.S. president Bill Clinton that Greece is already in a “Great Depression“.
Like Spain, the unemployment rate in Greece is well above 20 percent and the youth unemployment rate is above 50 percent.
The only reason the Greek financial system has not totally collapsed is because of outside assistance, but now there are indications that the assistance may soon be cut off.
At this point there are persistent rumors that the IMF does not plan to give any more aid money to Greece unless Greece “shapes up”.
Just like Greece and Spain, we are also rapidly traveling down the road to economic oblivion, and depression-like conditions will arrive in this country soon enough.
So enjoy these last months of economic prosperity while you still can.
Has Europe finally been saved this time? Has this latest “breakthrough” solved the European debt crisis? Of course not, and you should know better by now. European leaders have held 18 summits since the beginning of the debt crisis. After most of the preceding summits, global financial markets responded with joy because European leaders had reached “a deal” which would supposedly solve the crisis. But a few weeks after each summit it would become clear that nothing had been solved and that the financial crisis had actually gotten even worse than before. How many times do they expect us to fall for the same sorry routine? Nothing in Europe has been solved. You can’t solve a debt problem with more debt. European leaders are just kicking the can down the road. More debt will relieve some of the short-term pressure, but in a few weeks it will be apparent that the underlying problems in Europe continue to grow. Unfortunately, there is not an unlimited amount of EU bailout money, so once all of these “financial bullets” have been fired European leaders are going to find that kicking the can down the road will not be so easy anymore. The truth is that the financial crisis in Europe has not been cancelled – it has just been put off for a few weeks or a few months.
Do you solve the problems of a credit card addict by giving that person another credit card? Of course not. You may delay the short-term financial problems of the credit card addict by giving that person another credit card, but in the process you make the long-term problems even worse.
Well, that is essentially what is happening in Europe. European governments and the European financial system have become ridiculously dependent on debt. By giving European debt junkies another “hit” or two it may relieve a bit of short-term suffering but it doesn’t solve anything.
Just think about it.
Did the first bailout package solve the problems in Greece?
No.
Did the second bailout package solve the problems in Greece?
No.
Today, the Greek financial system is a complete and total mess, and Greek politicians are saying that a third bailout package may be necessary.
Many are claiming that Italy and Spain have been “saved” by this new deal, but that is a joke.
Yes, the ability to inject bailout funds directly into troubled banks is going to keep some of them going for a little while. But the deal also calls for a new governing body to be established that will supervise those banks. Will that governing body be established in time to even provide the short-term help that is needed?
Yes, spending bailout funds to buy up Spanish debt and Italian debt will artificially suppress bond yields for a time.
We have seen this before.
But what happened?
After the bond buying program was over, bond yields started spiking again.
So do the Europeans plan to suppress bond yields forever?
Of course not. There is not enough bailout money to do that.
Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions
Have any of those elements been removed?
No.
Bond yields will be suppressed for a period of time, but that will not last forever, and all of the other underlying issues are still there.
Meanwhile, the rest of Europe continues to follow the Greek economy into economic depression.
The Spanish economy shrunk again in the second quarter of 2012, and austerity in that nation has barely even begun.
As a recent CNBC article detailed, the big spending cuts are still coming….
The conservatives, who inherited from the outgoing Socialists one of the euro zone’s highest public deficits, at 8.9 percent of GDP in 2011, have said they will shrink the shortfall to 5.3 percent this year and 3 percent in 2013.
Austerity has absolutely shredded the Greek economy, and we are starting to see that same pattern be repeated all over Europe.
When you spend far more money than you bring in for decades, eventually you have to go through a very painful adjustment. What is going on in Greece should be a lesson for all of us. Debt allows you to live above your means, but the consequences of going into way too much debt can be absolutely horrific.
More debt can delay the consequences of a debt problem but it cannot solve a debt problem. The following is what Jim Rogers told CNBC on Friday….
“Just because now you have a way to get them (the banks) to borrow even more money, this is not solving the problem, this is making the problem worse,” Rogers said on Friday.
“People need to stop spending money they don’t have. The solution to too much debt is not more debt. All this little agreement does is give them (banks) a chance to have even more debt for a while longer,” he added.
But if you just went by the headlines in most of the newspapers around the world you would think that European leaders had discovered the cure for cancer or something.
Sadly, the truth is that they are simply choosing to fire off a few of the “financial bullets” that they still have left as a recent Washington Post article described….
The European bailout funds don’t have unlimited resources. If they throw $125 billion at Spain’s banks and another couple hundred billion toward Italy, pretty soon they’ll be running low. The only entity with unlimited euros is the European Central Bank. And right now, there’s no talk of using the ECB to provide bailouts. Which means that this latest move might have just forestalled the crisis, rather than ending it permanently.
So what comes next?
Bruce Krasting believes that the “half-life of this bailout will be measured in weeks”. The following is his summary of what he sees coming next in Europe….
If I’m right, after a few weeks things turn south again in the capital markets. Then what?
– More LTRO. No – there is no more collateral. All of the swill loans have already been hocked.
– Cut ECB % rate. Doesn’t matter. It won’t change conditions in Italian or Spanish funding markets one bit.
– A spending plan of <1% of GDP. That won’t put a dent in the recession that is building.
– Brussels buys more sovereign bonds to avoid a catastrophe of Italian 10-year exceeding 7% (capitulation). Sorry. There are “wise men” in Germany who will simply not allow this to happen in the scale that is required.
– The ECB goes Defcon 1 and launches a E2T QE program. No – same answer as above.
– Merkel does a 180 and embraces Euro bonds. No chance in hell.
–The US or China are going to start buying EU bonds? Lunacy – not happening.
-The IMF will come to the rescue? No way – the IMF does not have the resources to solve anyone’s problems.
In other words, kicking the can down the road is going to get quite a bit harder after the current “sugar high” wears off.
Europe is still headed for the greatest financial crisis since the Great Depression (at least) and European leaders seem powerless to stop it.
Of course the United States is also facing a crisis of too much debt and a great day of reckoning is on the way for this country as well.
So yes, the global economy is still heading for collapse and there is still a multitude of reasons to be extremely concerned about the second half of 2012.
What is your opinion about all of this?
Do you think that European leaders will be able to keep kicking the can down the road?
Please feel free to post a comment with your opinion below….
What is the second half of 2012 going to bring? Are things going to get even worse than they are right now? Unfortunately, that appears more likely with each passing day. I will admit that I am extremely concerned about the second half of 2012. Historically, a financial crisis is much more likely to begin in the fall than during any other season of the year. Just think about it. The stock market crash of 1929 happened in the fall. “Black Monday” happened on October 19th, 1987. The financial crisis of 2008 started in the fall. There just seems to be something about the fall that brings out the worst in the financial markets. But of course there is not a stock market crash every year. So are there specific reasons why we should be extremely concerned about what is coming this year? Yes, there are. The ingredients for a “perfect storm” are slowly coming together, and in the months ahead we could very well see the next wave of the economic collapse strike. Sadly, we have never even come close to recovering from the last recession, and this next crisis might end up being even more painful than the last one.
The following are 17 reasons to be extremely concerned about the second half of 2012….
#1 Historical Trends
A recent IMF research paper by Luc Laeven and Fabián Valencia showed that a banking crisis is far more likely to start in September than in any other month. The following chart is from their report….
So what will this September bring?
#2 JP Morgan
Do you remember back in May when JP Morgan announced that it would be taking a 2 billion dollar trading loss on some derivatives trades gone bad? Well, the New York Times is now reporting that the real figure could reach 9 billion dollars, but nobody really knows for sure. At some point is JP Morgan going to need a bailout? If so, what is that going to do to the U.S. financial system?
#3 Derivatives
Last week, Moody’s downgraded the credit ratings of 15 major global banks. As a result, a number of them have been required to post billions of dollars in additional collateral against derivatives exposures….
Citigroup’s two-notch long-term rating downgrade from A3 to Baa2 could have led to US$500m in additional liquidity and funding demands due to derivative triggers and exchange margin requirements, according to the bank’s 10Q regulatory filing at the end of the first quarter.
Morgan Stanley – which Moody’s downgraded from A2 to Baa1 – said a two-notch downgrade from both Moody’s and Standard and Poor’s could spur an additional US$6.8bn of collateral requirements in its latest 10Q. The bank did not break down its potential collateral calls under a scenario where only Moody’s downgraded the bank below the Single A threshold.
Royal Bank of Scotland estimated it may have to post £9bn of collateral as a result of the one-notch Moody’s downgrade to Baa1 in a statement on June 21, but did not detail how much of this additional requirement was driven by margin for swaps exposures.
The worldwide derivatives market is starting to show some cracks, and at some point this is going to become a major disaster.
Remember, the 9 largest U.S. banks have a total of more than 200 trillion dollars of exposure to derivatives. When this bubble completely bursts it is going to be impossible to fix.
#4 LEAP/E2020 Warning
LEAP/E2020 has issued a red alert for the global financial system for this fall. They are warning that the “second half of 2012″ will represent a “major inflection point” for the global economic system….
The shock of the autumn 2008 will seem like a small summer storm compared to what will affect planet in several months.
In fact LEAP/E2020 has never seen the chronological convergence of such a series of explosive and so fundamental factors (economy, finances, geopolitical…) since 2006, the start of its work on the global systemic crisis. Logically, in our modest attempt to regularly publish a “crisis weather forecast”, we must therefore give our readers a “Red Alert” because the upcoming events which are readying themselves to shake the world system next September/ October belong to this category.
#5 Increasing Pessimism
One recent survey of corporate executives found that only 20 percent of them expect the global economy to improve over the next 12 months and 48 percent of them expect the global economy to get worse over the next 12 months.
#6 Spain
The Spanish financial system is basically a total nightmare at this point. Moody’s recently downgraded Spanish debt to one level above junk status, and earlier this week Moody’s downgraded the credit ratings of 28 major Spanish banks.
According to CNBC, Spain’s short-term borrowing costs are now about three times higher than they were just one month ago….
Spain’s short-term borrowing costs nearly tripled at auction on Tuesday, underlining the country’s precarious finances as it struggles against recession and juggles with a debt crisis among its newly downgraded banks.
The yield paid on a 3-month bill was 2.362 percent, up from just 0.846 percent a month ago. For six-month paper, it leapt to 3.237 percent from 1.737 percent in May.
Needless to say, this is very, very bad news.
#7 Italy
The situation in Italy continues to deteriorate and many analysts believe that it could be one of the next dominoes to fall. The following is from a recent Businessweek article….
The euro zone’s third-biggest economy is seen as the next domino at risk of toppling after the European Union’s June 9 deal to lend Spain $125 billion in bank bailout funds. Yields on Italy’s 10-year government bonds reached 6.2 percent on June 13, up from just 4.8 percent in March. By pushing up Italy’s borrowing costs out of fear of default, investors are making a default more likely.
A recent Fortune article detailed some of the economic fundamentals that have so many economists deeply concerned about the Italian economy right now….
The main glaring risk threats that could propel Italy down the path to become Europe’s next domino is the size of country’s outstanding debt (at €1.9 trillion or 120% of GDP); the mountain of debt it has to roll over in the next 12 months (nearly €400 billion); and the market’s cracking credibility around Prime Minister Mario Monti’s ability to reduce the country’s fiscal footprint and spur growth.
Further, fear around Italy’s creditworthiness, which has recently been expressed by near cycle highs in sovereign CDS spreads and government yields on the 10-year bond, follow some rather glaring negative fundamentals over recent quarters and years: declining GDP over the last three consecutive quarters; a rising unemployment rate (especially among its youth); deterioration in labor market competitiveness; and increased competition for export goods to its key trading partners.
#8 Greece
I have written extensively about the financial nightmare that is unfolding in Greece. Unemployment has soared past the 20 percent mark, youth unemployment is above 50 percent, the Greek economy has contracted by close to 25 percent over the past four years and now Greek politicians are saying that a third bailout package may be necessary.
#9 Cyprus
The tiny island nation of Cyprus has become the fifth member of the eurozone to formally request a bailout. This is yet another sign that the eurozone is rapidly falling apart.
#10 Germany
German Chancellor Angela Merkel continues to promote an austerity path for Europe and she continues to maintain her very firm position against any kind of eurozone debt sharing….
Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.
“It’s not a bold prediction to say that in Brussels most eyes — all eyes — will be on Germany yet again,” Merkel said. “I say quite openly: when I think of the summit on Thursday I’m concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures.”
In fact, Merkel says that there will be no eurobonds “as long as I live“. This means that there will be no “quick fix” for the problems that are unfolding in Europe.
#11 Bank Runs
Every single day, hundreds of millions of dollars is being pulled out of banks in southern Europe. Much of that money is being transferred to banks in northern Europe.
In a previous article I included an extremely alarming quote from a CNBC article about the unfolding banking crisis in Europe….
Financial advisers and private bankers whose clients have accounts too large to be covered by a Europe-wide guarantee on deposits up to 100,000 euros ($125,000), are reporting a “bank run by wire transfer” that has picked up during May.
Much of this money has headed north to banks in London, Frankfurt and Geneva, financial advisers say.
“It’s been an ongoing process but it certainly picked up pace a couple of weeks ago We believe there is a continuous 2-3 year bank run by wire transfer,” said Lorne Baring, managing director at B Capital, a Geneva-based pan European wealth management firm.
How long can these bank runs continue before banking systems start to collapse?
#12 Preparations For The Collapse Of The Eurozone
As I have written about previously, the smart money has already written off southern Europe. All over the continent major financial institutions are preparing for the worst. For example, just check out what Visa Europe is doing….
Visa Europe is holding weekly meetings to discuss scenarios in the event the euro zone collapses, joining other companies that are preparing for a potential breakup of the currency bloc.
Chief Commercial Officer Steve Perry said Tuesday that management at the U.K.-based credit-card company meets weekly to explore various possible outcomes, including a total collapse of the euro zone.
#13 Global Lending Is Slowing Down
All over the globe the flow of credit is beginning to freeze up. In fact, the Bank for International Settlements says that worldwide lending is contracting at the fastest pace since the financial crisis of 2008.
#14 Sophisticated Cyber Attacks On Banks
It is being reported that “very sophisticated” hackers have successfully raided dozens of banks in Europe. So far, it is being estimated that they have stolen 60 million euros….
Sixty million euro has been stolen from bank accounts in a massive cyber bank raid after fraudsters raided dozens of financial institutions around the world.
According to a joint report by software security firm McAfee and Guardian Analytics, more than 60 firms have suffered from what it has called an “insider level of understanding”.
What happens someday if we wake up and all the money in the banks is gone?
#15 U.S. Municipal Bankruptcies
All over the United States there are cities and towns on the verge of financial disaster. This week Stockton, California became the largest U.S. city to ever declare bankruptcy, but the reality is that this is only just the beginning of the municipal debt crisis….
Stockton, California, said it will file for bankruptcy after talks with bondholders and labor unions failed, making the agricultural center the biggest U.S. city to seek court protection from creditors.
“The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection,” Stockton said in a statement released yesterday after its council voted 6-1 to adopt a spending plan for operating under bankruptcy protection.
#16 The Obamacare Decision
The U.S. economy is already a complete and total mess, and now the Obamacare decision is going to throw a huge wet blanket on it. All over America, small business owners are saying that they are going to have to let some workers go because they cannot afford to keep them all under Obamacare. It would be hard to imagine a more job killing law than Obamacare, and now that the Supreme Court decision has finally been announced we are going to see many businesses making some really hard decisions.
#17 The U.S. Election
It is being reported that Barack Obama is putting together an army of “thousands of lawyers” to deal with any disputes that arise over voting procedures or results. It certainly looks like this upcoming election is going to be extremely close, and there is the potential that we could end up facing another Bush v. Gore scenario where the fate of the presidency is determined in court. This campaign season is likely to be exceptionally nasty, and I fear what may happen if there is not a decisive winner on election day. The possibility of significant civil unrest is certainly there.
We definitely live in “interesting” times.
Personally, I am deeply concerned about the September, October, November time frame.
“It’s A Depression For Millions And Millions Of Americans”
And what Biden said was right for once. Millions of Americans are out of work right now and millions of Americans have fallen out of the middle class in recent years. If you have lost everything, it does feel like you are living through a depression.
When people lose everything, they tend to get desperate. And desperate people do desperate things – especially when they are angry.
A whole host of recent opinion polls have shown that anger and frustration in the United States are rising to unprecedented levels. The ingredients are certainly there for an explosion. Someone just needs to come along and light the fuse. We truly do live in frightening times.
Let us hope for the best, but let us also prepare for the worst.
The election results from Greece are in and the pro-bailout forces have won, but just barely. It is being projected that the pro-bailout New Democracy party will have about 130 seats in the 300 seat parliament, and Pasok (another pro-bailout party) will have about 33 seats. Those two parties have alternated ruling Greece for decades, and it looks like they are going to form a coalition government which will keep Greece in the euro. On Monday we are likely to see financial markets across the globe in celebration mode. But the truth is that nothing has really changed. Greece is still in a depression. The Greek economy has contracted by close to 25 percent over the past four years, and now they are going to stay on the exact same path that they were before. Austerity is going to continue to grind away at what remains of the Greek economy and money is going to continue to fly out of the country at a very rapid pace. Greece is still drowning in debt and completely dependent on outside aid to avoid bankruptcy. Meanwhile, things in Spain and Italy are rapidly getting worse. So where in that equation is room for optimism?
Right now the ingredients for a “perfect storm” are developing in Europe. Government spending is being slashed all across the continent, ECB monetary policy is very tight, new regulations and deteriorating economic conditions are causing major banks to cut back on lending and there is panic in the air.
Unless something dramatic changes, things are going to continue to get worse.
Yes, the Greek election results mean that Greece will stay in the euro – at least for now.
But is that really a reason for Greeks to celebrate?
Right now, the unemployment rate in Greece is about 22 percent. Businesses continue to shut down at a staggering rate and suicides are spiking.
So far this month, about 500 million euros a day has been pulled out of Greek banks. The entire Greek banking system is on the verge of collapse.
Meanwhile, the Greek government is still running up more debt. It is being projected that the Greek budget deficit will be about 7 percent of GDP this year.
The Greeks went to the polls and they voted for more of the same.
Are they crazy?
Someone once said that the definition of insanity is doing the same thing over and over again and expecting different results.
Unfortunately, it looks like things are going to continue to get worse in Greece for quite some time.
And the rest of Europe is heading into a very bleak economic future as well.
At the moment, unemployment in the eurozone is at a record high.
Most analysts expect it to go even higher.
To say that Spain has an unemployment problem would be a massive understatement. The unemployment rate in Spain is even higher than the unemployment rate in Greece is. In fact, unemployment in Spain is the highest that it has ever been since the introduction of the euro.
The Spanish banking system is a complete and total disaster at this point. The Spanish government has already asked for a 100 billion euro bailout for its banks.
But that might not be nearly enough.
Spain is facing a housing collapse similar to what the United States went through back in 2008 and 2009. Right now, home prices in Spain are absolutely collapsing….
Fresh data yesterday shows how desperate the crisis is becoming in Spain. The property crash is accelerating. House prices fell at a 12.6pc rate in the first quarter of this year, compared to 11.2pc the quarter before, and 7.4pc in the quarter before that. Prices have fallen 26pc from their peak.
“Fundamentals point to a further 25pc decline,” said Standard & Poor’s in a report on Thursday. It may take another four years to clear a glut of one million homes left from the building boom.
Meanwhile, money is being pulled out of banks in Spain at a very alarming rate. As panic spreads we are seeing slow motion bank runs all over Europe. Over the past few months massive amounts of money have been moved from troubled nations to “safe havens” such as Switzerland and Germany.
Investors are getting very nervous and yields on Italian and Spanish debt are spiking again.
Last week yields on Spanish debt hit their highest levels since the introduction of the euro. Without massive ECB intervention the yield on 10 year Spanish bonds will almost certainly blow well past the 7 percent danger mark.
The credit rating agencies are indicating that there is danger ahead. Moody’s recently downgraded Spanish debt to just one notch above junk status. Spain is heading down the exact same road that Greece has gone.
The situation in Europe is very grim.
Greece is going to need bailouts for as far as the eye can see.
Spain is almost certainly going to need a huge bailout.
Italy is almost certainly going to need a huge bailout.
Ireland and Portugal look like they are going to need more money.
France is increasingly looking vulnerable, and Francois Hollande appears to have no real solutions up his sleeve.
As I have said so many times before, watch Europe.
Every few weeks there are headlines that declare that “Europe has been saved” but things just keep getting worse.
The governor of the Bank of England, Mervyn King, said the following a few weeks ago….
“Our biggest trading partner is tearing itself apart with no obvious solution.”
And that is the truth. There is no obvious solution to the problems in Europe. The politicians could kick the can down the road for a while longer, but in the end there will be no avoiding the pain that is coming.
Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions
We are watching a slow-motion financial train wreck that is absolutely unprecedented happen right in front of our eyes and our politicians are powerless to stop it.
It is going to be a long, hot summer for the European financial system.
On election day in Greece, the mood was incredibly somber. Instead of celebrating, most Greeks seemed resigned to a very hard future. As an article in the Telegraph described, the entire nation seems to be grinding to a halt….
This is the election that is supposed to decide whether Greece stays in the euro. Yet as it, and Europe, face what could be their Katrina moment, the dominant sense here is not of panic, or fear, or even hope – but of a country in suspended animation, grinding to a halt.
The Athens Heart shopping centre, in the southern suburbs, is polished, full of big brands, and almost totally empty of customers. “We’ve had five sales all day,” says Steryiani Vlachakou, the assistant in the Champion sportswear store. “It’s been getting a lot, lot worse.”
Sadly, it is not only Greece that is doomed.
The truth is that all of Europe is doomed, and when Europe falls the entire globe is going to feel it.
So get ready for the hard times that are coming. The pain is going to be immense and most people are not even going to see it coming.
When it comes to the financial world, it is important to listen to what the “smart money” is saying, but it is much more important to watch what the “smart money” is actually doing. The ultra-wealthy and those that run the biggest financial institutions on the planet are far more “connected” to what is really going on in financial circles behind the scenes than you and I could ever hope to be. But if we watch their behavior we can get clues as to what they think is about to happen. As is the case with so many other things, if you want to figure out what is really going on in Europe, just follow the money. And right now, money is rapidly flowing out of southern Europe and into northern Europe. In fact, some large corporations are now pulling the money that they make in Greece during the day out of the country every single night. It is becoming increasingly clear that the upper crust of the financial world considers a Greek exit from the euro to be “inevitable” and that it also considers much of the rest of southern Europe to be a lost cause. Unfortunately, a financial collapse across southern Europe is also likely to trigger another devastating global recession.
Even though all the warning signs were there, very few people actually expected to see the kind of financial crisis that we saw back in 2008.
But it happened.
Now very few people actually expect another “Lehman Brothers moment” to happen in Europe although the warning signs are all around us.
Sadly, most people never want to believe the truth until it is too late.
The following are 25 signs that the smart money has completely written off southern Europe….
#1 Lloyd’s of London is publicly admitting that it is rapidly making preparations for a collapse of the eurozone.
#2 According to the New York Times, top global law firms are advising their clients to withdraw all cash and all other liquid assets from Greece….
So their advice is blunt: Remove cash and other liquid assets from Greece and prepare to take a short-term hit on any other investments.
“My personal view is that it is irrational for anyone, whether a corporation or an individual, to be leaving money in Greek financial institutions, so long as there is a credible prospect of a euro zone exit,” said Ian M. Clark, a partner in London for White & Case, a global law firm that has a team of 10 lawyers focusing on the issue.
#3 According to CNBC, large numbers of wealthy Europeans have been moving their money from banks in southern Europe to banks in northern Europe….
Financial advisers and private bankers whose clients have accounts too large to be covered by a Europe-wide guarantee on deposits up to 100,000 euros ($125,000), are reporting a “bank run by wire transfer” that has picked up during May.
Much of this money has headed north to banks in London, Frankfurt and Geneva, financial advisers say.
“It’s been an ongoing process but it certainly picked up pace a couple of weeks ago We believe there is a continuous 2-3 year bank run by wire transfer,” said Lorne Baring, managing director at B Capital, a Geneva-based pan European wealth management firm.
#4 The President of the Federal Reserve Bank of Philadelphia, Charles Plosser, says that the Federal Reserve is advising money market funds to reduce their exposure to Europe….
The Fed and regulators have tried to stress to money market funds, for example, to reduce their exposure to European financial institutions.
#5 The yield on 10-year Spanish bonds is rapidly moving toward the very important 7 percent level.
#6 Many multinational corporations that operate in Greece are now pulling their funds out of the country on a nightly basis.
#7 Juergen Fitschen, the co-CEO of Deutsche Bank, has publicly proclaimed that Greece is a “failed state“.
#8 The head of the Swiss central bank has admitted that Switzerland is developing an “action plan” for how it will handle the collapse of the eurozone.
#9 The European Commission has urged all member states to develop contingency plans for a Greek exit from the euro….
Last week, the European Commission said that it has asked member states to make plans to deal with a potential Greek exit, ahead of a second round of Greek elections on 17 June.
#10 PIMCO CEO Mohamed El-Erian says that a Greek exit from the euro “is probably inevitable“.
#12 The percentage of bad loans on the books of Spanish banks has reached an 18 year high.
#13 Late on Friday, the Spanish government announced that banking giant Bankia is going to need a 19 billion euro bailout.
#14 Standard & Poor’s downgraded the credit ratings of five more Spanish banks to junk status on Friday.
#15 Moody’s downgraded the credit ratings of 16 Spanish banks back on May 17th.
#16 According to the Telegraph, “struggling European banks could be seized and controlled by Brussels as part of secret plans being drawn up”.
#17 The head of equity strategy at Societe Generale, Claudia Panseri, is warning that European stocks could fall by as much as 50 percent if Greece leaves the euro.
#18 Economist Marc Faber is warning that there is now a “100% chance” that there will be another global recession.
#19 There seems to be an increasing attempt to pin the problems that Greece is now experiencing on the behavior of Greek citizens. The following are some of the shocking things that the head of the IMF, Christine Lagarde, said in a recent interview….
“Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax.”
Even more than she thinks about all those now struggling to survive without jobs or public services? “I think of them equally. And I think they should also help themselves collectively.” How? “By all paying their tax. Yeah.”
It sounds as if she’s essentially saying to the Greeks and others in Europe, you’ve had a nice time and now it’s payback time.
“That’s right.” She nods calmly. “Yeah.”
And what about their children, who can’t conceivably be held responsible? “Well, hey, parents are responsible, right? So parents have to pay their tax.”
#20 According to the Telegraph, an unidentified member of Angela Merkel’s cabinet has stated that Germany simply will not “pour money into a bottomless pit”.
#21 This week the Bank of England is holding a “secret summit” of global central bankers to address the European financial crisis….
The summit will be dominated by central bankers including the host, Sir Mervyn King, Governor of the Bank of England. Mario Draghi, president of the European Central Bank, and Zhou Xiaochuan, governor of the People’s Bank of China, have been invited.
#22 According to Zero Hedge, a major German newspaper is reporting that a Greek exit from the eurozone is a “done deal”….
“The Greece-exit is a done deal: According to the German economic news from financial circles EU and the ECB have abandoned the motherland of democracy as a euro member. The reason is, interestingly, not in the upcoming elections – these are basically become irrelevant. The EU has finally realized that the Greeks have not met any agreements and will not continue not to meet them. A banker: “We helped with the Toika. The help of the troika was tied to conditions. Greece has fulfilled none of the conditions, and has been for months now.”
#23 According to CNBC, preparations are quietly being made to print up and distribute new drachmas should the need arise….
British banknote printer De La Rue is drawing up plans to print new drachma notes in the event of a Greek euro exit, according to an industry source with knowledge of the matter.
The world’s biggest security firm G4S expects to be involved in distributing notes around the country.
#24 Citibank’s chief economist Willem Buiter is warning that any new currency issued by the Greek government could “immediately fall by 60 percent“.
#25 Reuters is reporting that a planning memo exists that suggests that Greece could receive as much as 50 billion euros to “ease its path” out of the eurozone.
If Greece does leave the eurozone, the cost to the rest of Europe is going to be astronomical. The following is from a recent article by John Mauldin….
The debate among very knowledgeable individuals and institutions as to the future of Europe is intense. There are those who argue that the cost of breaking up the eurozone, even allowing Greece to leave, is so high that it will not be permitted to happen. Estimates abound of a cost of €1 trillion to European banks, governments, and businesses, just for the exit of Greece. And that does not include the cost of contagion as the markets wonder who is next. Keeping Spanish and Italian interest-rate costs at levels that can be sustained will cost even more trillions, as not just government debt but the entire banking system is at stake. Not to mention the pension and insurance funds. If the cost of Greece leaving is €1 trillion, then who can guess the cost of Spain or Italy?
As I have written about previously, a Greek exit from the euro would cause the “bank jogs” that are already happening in Spain and Italy to accelerate.
The problem in Europe is not just government debt. The truth is that the entire European financial system is in danger of melting down.
Unfortunately, there are no more grand solutions on the horizon and so things are going to continue to get worse for Europe.
As I have talked about so many times, the next wave of the economic collapse is going to start in Europe, but it is going to deeply affect the entire globe.
During the next major economic downturn, the official unemployment rate in the United States will rise well up into the double digits.
Once that happens, perhaps many more Americans will finally figure out that they should have been paying much more attention to what was taking place in Europe.
Would you pool your debt with a bunch of debt addicts that have no intention of reducing their wild spending habits? Of course you wouldn’t. But that is exactly what Germany is being asked to do. Increasingly, “eurobonds” are being touted as the best long-term solution to the financial crisis in Europe. These eurobonds would represent jointly issued debt by all 17 members of the eurozone. This debt would also be guaranteed by all 17 members of the eurozone. This would allow all countries in the eurozone to enjoy the same credit rating that Germany does, and borrowing costs for nations such as Greece, Portugal, Italy and Spain would plummet. But borrowing costs for Germany would rise substantially. In fact, it is being estimated that Germany could be facing an extra 50 billion euros a year in interest expenses. So over ten years that would come to about 500 billion euros. Needless to say, Germany is not thrilled about this idea. But new French President Francois Hollande is pushing eurobonds very hard, and he has the support of the OECD, the IMF and many top Italian politicians. In the end, this could be the key to the future of the eurozone. If the Germans give in and decide that they are willing to deeply subsidize their profligate neighbors indefinitely, then the euro could potentially be saved. If not, then this issue could end up shattering Europe.
It is easy to try to portray the Germans as the “bad guys” in all this, but try to step into their shoes for a minute.
If you had some relatives that were spending wildly and that had already run up $100,000 in credit card debt, would you be a co-signer on their next credit card application?
Of course not.
The recent elections in France and Greece made it abundantly clear that the populations of those two countries are rejecting austerity.
Instead, they want a return to the debt-fueled prosperity that they have always enjoyed in the past.
Unfortunately, they need German help to be able to do that.
That is why new French President Francois Hollande is pushing so hard for eurobonds. He wants the rest of the eurozone to be able to “piggyback” on Germany’s sterling credit rating so that everyone can return to the days of wild borrowing and spending.
But Germans greatly fear what a co-mingling of eurozone debt could eventually mean. Not only would Germany’s borrowing costs rise dramatically, but there is also a concern that the rest of the eurozone could eventually pull Germany down with them.
Austria, Finland and the Netherlands are also against eurobonds, but the key is Germany.
For now, Germany is not budging on the issue of eurobonds at all. The following is a statement that German Chancellor Angela Merkel made during a recent speech in Berlin….
“It’s just about not spending more than you collect. It’s astonishing that this simple fact leads to such debates”
And she is right.
Why is it so controversial to insist that people not spend more than they bring in?
But this is the problem that is created when you create a false lifestyle fueled by debt that goes on for decades. People become accustomed to that false standard of living and they throw hissy fits when that false standard of living begins to disappear.
The Germans don’t want to make great sacrifices just so the Greeks, the French and the Italians can go back to borrowing and spending wildly.
Why would the Germans want to do that?
And as a recent CNN article noted, German politicians believe that eurobonds are explicitly banned under existing EU treaties anyway….
“There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them,” one senior German official said, adding Berlin would not drop its opposition in the foreseeable future. “That’s a firm conviction which will not change in June.”
But politicians such as Hollande are complaining that austerity could seriously damage living standards throughout Europe.
And Hollande is right about that.
When you inflate your standard of living with borrowed money for many years, eventually there comes a time when you must pay a great price.
Anyone that has ever been in trouble with credit card debt knows how painful that can be.
It is shameful for the rest of Europe to be pleading and begging Germany to help them.
They should take care of themselves.
As I wrote about the other day, Greece would be much better off in the long run if it left the euro and created a new financial system based on sound financial principles.
But in the financial press all over the world there are calls for someone to come up with a “plan” to “rescue” Europe. For example, the following is from a recent Wall Street Journal article….
There have been two main responses to the crisis: austerity, and kicking cans down roads. Austerity, in case you haven’t noticed, is so last year. It’s out. Which means that unless something else is found, some other comprehensive plan, the other main response, can kicking, is going to run out of road.
Just about everybody backed the idea of eurobonds, except for the Germans, and since they’re the ones with all the money, they’re kind of the only ones whose vote counts anyway. So, it’s time to go to plan B. Only there’s no Plan B, and there’s no time, either.
If Germany does not agree to subsidize the rest of the eurozone, will that ultimately mean that the eurozone will be forced to break up?
Probably.
And that would cause a huge amount of pain in the short-term.
But the euro never was a good idea in the first place. It was foolish to expect a monetary union to work smoothly in the absence of fiscal and political union.
And to be honest, the entire world would be a better place with less European integration. The EU has become a horrifying bureaucratic nightmare and it would be wonderful if the entire thing broke up.
But for now, the only thing that is in danger is the euro.
Increasingly, it is looking like Greece may be the first country to exit the euro.
This week, former Greek Prime Minister Lucas Papademos admitted that the Greek government is considering making preparations for Greece to leave the euro.
Not only that, Reuters is reporting that top officials in the eurozone are now working on “contingency plans” for a Greek exit from the euro….
Each euro zone country will have to prepare a contingency plan for the eventuality of Greece leaving the single currency, euro zone sources said on Wednesday.
Officials reached the consensus on Monday afternoon during an hour-long teleconference of the Eurogroup Working Group (EWG).
As well as confirmation from three euro zone officials, Reuters has seen a memo drawn up by one member state detailing some of the elements that euro zone countries should consider.
So obviously a Greek exit from the euro has become a very real possibility.
A recent Bloomberg article detailed how a Greek exit from the euro could play out during the 46 hours that global financial markets are closed over the weekend….
Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.
That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.
Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.
At this point, everyone is afraid of what is going to happen if Greece is forced to start issuing drachmas again. As CNBC is reporting, some big European corporations are already beginning to implement their own “contingency plans”….
Big tourism operators like TUI of Germany and Kuoni of Britain are demanding the addition of so-called drachma clauses to contracts with Greek hoteliers should the euro no longer be in use here. British newspapers are filled with advice columns for travelers worried about the wisdom of planning a vacation in Greece, or even Portugal and Spain, should the euro crisis worsen. Large multinational companies like Vodafone Group, Reckitt Benckiser and Diageo have taken to sweeping cash every day from euro accounts back to Britain to limit their exposure.
Sadly, this is probably only a small taste of the financial anarchy that is coming.
France is likely to keep pushing hard for the creation of eurobonds.
Germany is likely to keep fiercely resisting this.
At some point, a moment of crisis will arrive and a call will have to be made.
Will Germany give in or will political turmoil end up shattering Europe?
It will be interesting to see how all of this plays out.
During an appearance on Meet The Press on Sunday, Jim Cramer of CNBC boldly predicted that “financial anarchy” is coming to Europe and that there will be “bank runs” in Spain and Italy in the next few weeks. This is very strong language for the most famous personality on the most watched financial news channel in the United States to be using. In fact, if Cramer is not careful, people will start accusing him of sounding just like The Economic Collapse Blog. It may not happen in “the next few weeks”, but the truth is that the European banking system is in a massive amount of trouble and if Greece does leave the euro it is going to cause a tremendous loss of confidence in banks in countries such as Spain, Italy and Portugal. There are already rumors that the “smart money” is pulling out of Spanish and Italian banks. So could we see some of these banks collapse? Would they get bailed out if they do collapse? It is so hard to predict exactly how “financial anarchy” will play out, but it is becoming increasingly clear that the European financial system is heading for a massive amount of pain.
Posted below is a clip of Jim Cramer making his bold predictions during his appearance on Meet The Press. He is obviously very, very disturbed about the direction that Europe is heading in….
But what is Europe supposed to do? Even though “austerity measures” have been implemented in many eurozone nations, the truth is that they are all still running up more debt. Are European nations just supposed to run up massive amounts of debt indefinitely and pretend that there will never been any consequences?
That is apparently what Barack Obama wants. During the G-8 summit that just concluded, Obama urged European leaders to pursue a “pro-growth” path.
Of course to Obama a “pro-growth” economic plan includes spending trillions of dollars that you do not have without any regard for what you are doing to future generations.
Germany has been trying to get the rest of the eurozone to move much closer to living within their means, but as the recent elections in France and Greece demonstrated, much of the rest of the eurozone is not too thrilled with the end of debt-fueled prosperity.
In Greece, the recent elections failed to produce a new government, so new elections will be held on June 17th.
Many EU politicians are trying to turn these upcoming elections into a referendum on whether Greece stays in the eurozone or not. If the next Greek government is willing to honor the austerity agreements that have been previously agreed to, then Greece will probably stay in the eurozone for a while longer. If the next Greek government is not willing to honor the austerity agreements that have been previously agreed to, then Greece will probably be forced out of the eurozone.
The following is what John Praveen, the chief investment strategist at Prudential International Investments Advisers, had to say about the political situation in Greece recently….
“If the pro-euro major parties fail to muster enough support to form a coalition and the radical left Syriza party and other anti-euro, anti-austerity parties secure a majority, the risk of a disorderly Greek exit from the Euro increases and could roil markets”
Right now, polls show the leading anti-austerity party, Syriza, doing very well. The leader of Syriza, Alexis Tsipras, has declared that he plans “to stop the experiment” with austerity and that what the rest of the eurozone has tried to do in Greece is a “crime against the Greek people“.
But the Germans do not see it that way. The Germans just want the Greeks to stop spending far more money than they bring in.
The Germans do not want to endlessly bail out the Greeks if the Greeks are not willing to show some financial discipline.
As we approach the June 17th elections, the financial markets are likely to be quite nervous. According to Art Hogan of Lazard Capital Partners, many investors are deeply concerned about how “sloppy” a great exit from the euro could be….
“Next week is only one of the four weeks we have to wait until the Greek election. Every utterance out of Greece makes us think about their [possible] exit and how sloppy that could be”
Most Greek citizens want to remain in the eurozone and most European politicians want Greece to remain in the eurozone, but it is looking increasingly likely as if that may not happen.
In fact, there are reports that preparations are rapidly being made for a Greek exit. According to Reuters, “contingency plans” for the printing of Greek drachmas have already been drawn up….
De La Rue (DLAR.L) has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source told Reuters on Friday.
And even EU officials are now acknowledging that plans for a Greek exit from the euro are being developed. The following is what EU Trade Commissioner Karel De Gucht said during one recent interview….
“A year and a half ago, there may have been the danger of a domino effect,” he said, “but today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn’t make it.”
When these kinds of things start to become public, that is a sign that officials really do not expect Greece to remain a part of the euro.
And Greece is rapidly beginning to run out of money. According to a recent Ekathimerini article, the Greek government is likely to run out of money at the end of June….
The public coffers are seen running dry at the end of June, but this will depend on two key factors. First, revenue collection: In the first 10 days of May, inflows were about 15 percent lower than projected but there are fears that the slide may reach 50 percent. The GAO will have a picture for the first 20 days on May 23, while the last three days of the month are considered crucial, when 1.5 billion euros of the month’s budgeted total of 3.6 billion are expected to flow in.
Second, whether the IMF and EFSF installments are disbursed: This is not certain, as the decision will be purely political for both providers and evidently partly linked to political developments. Earlier this month the eurozone approved a disbursement 1 billion short of the 5 billion euros that were expected.
If Greece runs out of money and if the rest of Europe cuts off the flow of euros, Greece would essentially be forced to leave the euro.
So the last half of June looks like it could potentially be a key moment for Greece.
Meanwhile, the Greek banking system is struggling to survive as hundreds of millions of euros get pulled out of it. The following is from a recent CNN article….
The Greek financial system is straining hard for cash.
Consumers and businesses are making massive withdrawals from Greece’s banks — leading to concern the beleaguered nation could be forced out of the eurozone by a banking crisis even before its government runs out of cash.
Deposits are the lifeblood of any bank, and Greeks pulled 800 million euros out of the banking system on Tuesday alone, the most recent day for which figures are available.
If Greece does leave the euro and the Greek banking system does collapse, that is going to be a clear signal that a similar scenario will be allowed to play out in other eurozone nations.
That is why Jim Cramer, myself and many others are warning that there could soon be bank runs all over the eurozone.
For example, the Telegraph has reported that wealthy individuals are starting to pull money out of Spanish banking giant Santander….
Customers with large deposits have started withdrawing cash from Santander, the bank has admitted, as it tried to reassure concerned members of the public that their money is safe.
Round and round we go. Where all this will stop nobody knows.
If Greece does end up leaving the euro, that could set off a chain of cascading events that could potentially be absolutely catastrophic.
And if the “house of cards” does come down in Europe, that is going to greatly destabilize the global derivatives market.
You see, the truth is that the global derivatives market is very delicately balanced. The assumption most firms make is that things are not going to deviate too much from what is considered “normal”.
If we do end up seeing “financial anarchy” in Europe, that is going to greatly destabilize the system and we could rapidly have a huge derivatives crisis on our hands.
And as we saw with JP Morgan recently, losses from derivatives can add up really fast.
Originally, we were told that the derivatives losses that JP Morgan experienced recently came to a total of only about 2 billion dollars.
Now, we are told that it could be a whole lot more than that. According to the Wall Street Journal, JP Morgan could end up losing about 5 billion dollars (or more) before it is all said and done….
J.P. Morgan Chase & Co. is struggling to extricate itself from disastrous wagers by traders such as the “London whale,” in a sign that the size of its bets could bog down the bank’s unwinding of the trades and deepen its losses by billions of dollars.
The nation’s largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion.
And if Europe experiences a financial collapse, the losses experienced by U.S. firms could make that 5 billion dollars look like pocket change. The following is from a recent article by Graham Summers….
According to Reuters once you include Spain and Italy as well as Credit Default Swaps and indirect exposure to Europe, US banks have roughly $4 TRILLION in potential exposure to the EU.
To put that number in perspective, the entire US banking system is $12 trillion in size.
Interesting days are ahead my friends.
Let us hope for the best, but let us also prepare for the worst.
With each passing day, the banking crisis in Europe escalates. European banks are having their credit ratings downgraded in waves, bond yields are soaring and billions of euros are being pulled out of banks all across the eurozone. The situation in Europe is rapidly going from bad to worse. It is almost like watching air being let out of a balloon. The key to any financial system is confidence, and right now confidence in banks in Greece, Italy, Spain and Portugal is declining at an alarming rate. When things hit the fan in Europe, it is going to be much safer to have your money in Swiss banks or German banks than in Greek banks, Spanish banks or Italian banks. Millions of people in Europe are starting to realize that a “euro” is not necessarily always going to be a “euro” and they are starting to panic. The Greek banking system is already on the verge of total collapse, and at this rate it is only a matter of time before we see some major Spanish and Italian banks start to fail. In fact it has already been announced that the fourth largest bank in Spain, Bankia, will be getting bailed out by the Spanish government. It is only a matter of time before we hear more announcements like this. Right now, events are moving so quickly in Europe that it is hard to keep up with them all. But this is what usually happens in the financial world. When things go well, it tends to happen over an extended period of time. When things fall apart, it tends to happen very rapidly.
And at the moment, things across the pond are moving at a pace that is absolutely breathtaking.
The following are 18 signs that the banking crisis in Europe has just gone from bad to worse….
#1 Moody’s has announced that it has downgraded the credit ratings of 16 Spanish banks. Included was Banco Santander, the largest bank in the eurozone.
#2 Shares of the fourth largest bank in Spain, Bankia, dropped 14 percent on Thursday.
#3 Overall, shares of Bankia have declined by 61 percent since last July.
#4 Shares of the largest bank in Italy, Unicredit, dropped by about 6 percent on Thursday.
#5 According to CNBC, a Spanish bond auction on Thursday went very poorly….
The Spanish Treasury had to pay around 5 percent to attract buyers of three- and four-year bonds. The longer-dated paper sold with a yield of 5.106 percent, way above the 3.374 percent the last time it was auctioned.
#10 According to a recent German documentary, financial records at the Ministry of Finance in Athens are being stored in garbage bags and shopping carts.
#11 The euro hit a 4 month low against the U.S. dollar on Thursday.
#13 The Spanish government is becoming increasingly concerned about the bad loans that are mounting at major Spanish banks. The following is from a recent Bloomberg article….
The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.
Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.
#14 Civil unrest is rising to dangerous levels in Italy. The Italian government has assigned bodyguards to 550 individuals and has increased security at about 14,000 locations in response to recent violence related to the economic crisis.
#15 Governments all over Europe are rapidly making preparations for a Greek exit from the euro. The following is from a recent article in the Guardian….
The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.
#16 According to CNBC, the banking crisis in Europe is beginning to affect global trade….
The euro zone debt crisis is affecting trade as companies shy away from dealing with firms and banks in countries deemed at risk of contagion, a senior banker said on Thursday.
#17 Moody’s downgraded the credit ratings of 26 Italian banks on Monday.
Newspapers all over the globe are speaking breathlessly of a potential Greek exit from the euro, but it is very unlikely to happen before the next Greek election on June 17th.
The rest of Europe is going to continue to financially support Greece until a new government takes power.
If the new government is willing to accept the previous bailout agreements, then financial support for Greece will continue.
If the new government is not willing to accept the previous bailout agreements, then financial support for Greece will stop.
Are we rapidly approaching a moment of reckoning for the global financial system? August is likely to be a relatively slow month as most of Europe is on vacation, but after that we will be moving into a “danger zone” where just about anything could happen. Historically, a financial crisis has been more likely to happen in the fall than during any other time, and this fall is shaping up to be a doozy. Much of the focus of the financial world is on whether or not the euro is going to break up, but even if the authorities in Europe are able to keep the euro together we are still facing massive problems. Countries such as Greece and Spain are already experiencing depression-like conditions, and much of the rest of the globe is sliding into recession. Unemployment has already risen to record levels in some parts of Europe, major banks all over Europe are teetering on the brink of insolvency, and the flow of credit is freezing up all over the planet. If things take a really bad turn, this crisis could become much worse than the financial crisis of 2008 very quickly.
17 Reasons To Be EXTREMELY Concerned About The Second Half Of 2012
The following are 17 reasons to be extremely concerned about the second half of 2012….
#1 Historical Trends
A recent IMF research paper by Luc Laeven and Fabián Valencia showed that a banking crisis is far more likely to start in September than in any other month. The following chart is from their report….
So what will this September bring?
#2 JP Morgan
Do you remember back in May when JP Morgan announced that it would be taking a 2 billion dollar trading loss on some derivatives trades gone bad? Well, the New York Times is now reporting that the real figure could reach 9 billion dollars, but nobody really knows for sure. At some point is JP Morgan going to need a bailout? If so, what is that going to do to the U.S. financial system?
#3 Derivatives
Last week, Moody’s downgraded the credit ratings of 15 major global banks. As a result, a number of them have been required to post billions of dollars in additional collateral against derivatives exposures….
The worldwide derivatives market is starting to show some cracks, and at some point this is going to become a major disaster.
Remember, the 9 largest U.S. banks have a total of more than 200 trillion dollars of exposure to derivatives. When this bubble completely bursts it is going to be impossible to fix.
#4 LEAP/E2020 Warning
LEAP/E2020 has issued a red alert for the global financial system for this fall. They are warning that the “second half of 2012″ will represent a “major inflection point” for the global economic system….
#5 Increasing Pessimism
One recent survey of corporate executives found that only 20 percent of them expect the global economy to improve over the next 12 months and 48 percent of them expect the global economy to get worse over the next 12 months.
#6 Spain
The Spanish financial system is basically a total nightmare at this point. Moody’s recently downgraded Spanish debt to one level above junk status, and earlier this week Moody’s downgraded the credit ratings of 28 major Spanish banks.
According to CNBC, Spain’s short-term borrowing costs are now about three times higher than they were just one month ago….
Needless to say, this is very, very bad news.
#7 Italy
The situation in Italy continues to deteriorate and many analysts believe that it could be one of the next dominoes to fall. The following is from a recent Businessweek article….
A recent Fortune article detailed some of the economic fundamentals that have so many economists deeply concerned about the Italian economy right now….
#8 Greece
I have written extensively about the financial nightmare that is unfolding in Greece. Unemployment has soared past the 20 percent mark, youth unemployment is above 50 percent, the Greek economy has contracted by close to 25 percent over the past four years and now Greek politicians are saying that a third bailout package may be necessary.
#9 Cyprus
The tiny island nation of Cyprus has become the fifth member of the eurozone to formally request a bailout. This is yet another sign that the eurozone is rapidly falling apart.
#10 Germany
German Chancellor Angela Merkel continues to promote an austerity path for Europe and she continues to maintain her very firm position against any kind of eurozone debt sharing….
In fact, Merkel says that there will be no eurobonds “as long as I live“. This means that there will be no “quick fix” for the problems that are unfolding in Europe.
#11 Bank Runs
Every single day, hundreds of millions of dollars is being pulled out of banks in southern Europe. Much of that money is being transferred to banks in northern Europe.
In a previous article I included an extremely alarming quote from a CNBC article about the unfolding banking crisis in Europe….
How long can these bank runs continue before banking systems start to collapse?
#12 Preparations For The Collapse Of The Eurozone
As I have written about previously, the smart money has already written off southern Europe. All over the continent major financial institutions are preparing for the worst. For example, just check out what Visa Europe is doing….
#13 Global Lending Is Slowing Down
All over the globe the flow of credit is beginning to freeze up. In fact, the Bank for International Settlements says that worldwide lending is contracting at the fastest pace since the financial crisis of 2008.
#14 Sophisticated Cyber Attacks On Banks
It is being reported that “very sophisticated” hackers have successfully raided dozens of banks in Europe. So far, it is being estimated that they have stolen 60 million euros….
What happens someday if we wake up and all the money in the banks is gone?
#15 U.S. Municipal Bankruptcies
All over the United States there are cities and towns on the verge of financial disaster. This week Stockton, California became the largest U.S. city to ever declare bankruptcy, but the reality is that this is only just the beginning of the municipal debt crisis….
#16 The Obamacare Decision
The U.S. economy is already a complete and total mess, and now the Obamacare decision is going to throw a huge wet blanket on it. All over America, small business owners are saying that they are going to have to let some workers go because they cannot afford to keep them all under Obamacare. It would be hard to imagine a more job killing law than Obamacare, and now that the Supreme Court decision has finally been announced we are going to see many businesses making some really hard decisions.
#17 The U.S. Election
It is being reported that Barack Obama is putting together an army of “thousands of lawyers” to deal with any disputes that arise over voting procedures or results. It certainly looks like this upcoming election is going to be extremely close, and there is the potential that we could end up facing another Bush v. Gore scenario where the fate of the presidency is determined in court. This campaign season is likely to be exceptionally nasty, and I fear what may happen if there is not a decisive winner on election day. The possibility of significant civil unrest is certainly there.
We definitely live in “interesting” times.
Personally, I am deeply concerned about the September, October, November time frame.
The other day, Joe Biden delivered a speech in which he made the following statement….
“It’s A Depression For Millions And Millions Of Americans”
And what Biden said was right for once. Millions of Americans are out of work right now and millions of Americans have fallen out of the middle class in recent years. If you have lost everything, it does feel like you are living through a depression.
When people lose everything, they tend to get desperate. And desperate people do desperate things – especially when they are angry.
A whole host of recent opinion polls have shown that anger and frustration in the United States are rising to unprecedented levels. The ingredients are certainly there for an explosion. Someone just needs to come along and light the fuse. We truly do live in frightening times.
Let us hope for the best, but let us also prepare for the worst.