Money is being pulled out of Greek banks at an alarming rate, and if something dramatic is not done quickly Greek banks are going to start dropping like flies. As I detailed yesterday, people do not want to be stuck with euros in Greek banks when Greece leaves the euro and converts back to the drachma. The fear is that all existing euros in Greek banks would be converted over to drachmas which would then rapidly lose value after the transition. So right now euros are being pulled out of Greek banks at a staggering pace. According to MSNBC, Greeks withdrew $894 million from Greek banks on Monday alone and a similar amount was withdrawn on Tuesday. But this is just an acceleration of a trend that has been going on for a couple of years. It has been reported that approximately a third of all Greek bank deposits were withdrawn between January 2010 and March 2012. So where has all of the cash for these withdrawals been coming from? Well, the European Central Bank has been providing liquidity for Greek banks, but now it has been reported that the ECB is going to stop providing liquidity to some Greek banks. It was not announced which Greek banks are being cut off. For now, the Greek Central Bank will continue to provide euros to those banks, but the Greek Central Bank will not be able to funnel euros into insolvent banks indefinitely.
This is a major move by the European Central Bank, and it is going to shake confidence in the Greek banking system even more.
There are already rumors that the Greek government is considering placing limits on bank withdrawals, and many Greeks will be tempted to go grab their money while they still can.
Once strict currency controls are put in place, the population is likely to respond very angrily. If people can’t get their money there is no telling what they might do.
We are reaching a critical moment. Many fear that a full-blown “bank panic” could happen at any time. The following is from a recent Forbes article….
The pressing problem isn’t a splintered legislature that may balk at delivering the reforms that the IMF and European Community are demanding in exchange for the next tranche of bailout money. It’s a disastrous, old-fashioned run-on-the bank. “For a year, Greeks have been sending their savings from Greek banks to foreign banks,” says Robert Aliber, retired professor of international economics from the University of Chicago. “Now, the flood has reached a crescendo.” Indeed on Monday alone, outflows from the Greek banks reached almost $900 million.
These banks would have collapsed already if not for the support of the European Central Bank and the Greek Central Bank. This was described in a recent blog post by Paul Krugman of the New York Times….
But where are the euros coming from? Basically, banks are borrowing them from the Greek central bank, which in turn must borrow them from the European Central Bank. The question then becomes how far the ECB is willing to go here; is it willing, in effect, to lend enough money to buy up the entire balance sheet of the Greek banking sector, given the likelihood that this sector will be left insolvent by Greek default?
Yet if the ECB says no more, Greek banks stop operating — and it’s hard to see how they can be restored to operation except by ditching the euro and using something else.
That is why the announcement that the ECB is cutting off funding was so dramatic. The ECB is starting to pull back and that is a very bad sign for the Greek banking system.
For the moment, the Greek Central Bank is continuing to support the Greek banks that the European Central Bank is no longer providing liquidity for. A Reuters article explained how this works….
The ECB only conducts its refinancing operations with solvent banks. Banks which fail to meet strict ECB rules but are deemed solvent by the national central bank (NCB) concerned can nonetheless go to their NCB for emergency liquidity assistance (ELA).
But this emergency liquidity assistance is not intended to be a long-term solution as a recent Wall Street Journal article noted….
The ECB’s emergency-lending facility isn’t intended as a long-term fix. National central banks must get approval each month that they want to let their banks access the facility from the ECB’s governing council, which can veto use of the program.
If Greece installs an antibailout government that reneges on its austerity promises, it would almost certainly be cut off from ECB funding.
The truth is that we are heading for a financial tragedy in Greece. If the flow of money out of Greek banks intensifies, the Greek banking system might not even be able to make it to the next election in June. This point was underscored in an article that was authored by renowned financial journalist Ambrose Evans-Pritchard….
Steen Jakobsen from Danske Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.
“This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion,” he said.
So what should we expect to see next?
Well, James Carney of CNBC says that he believes that it is inevitable that Greece is going to have to implement currency controls in order to slow the bleeding….
It looks increasingly likely that Greece will have to implement controls to prevent capital flight and a banking collapse. To my mind, the only real question is when this will occur.
The widespread talk about Greece possibly leaving the euro zone is likely to trigger withdrawal of bank deposits and other financial assets, by those who fear they might be redenominated into a drachma that would be worth far less than the euro.
The Greek government may soon announce a limit on the amount of money that can be withdrawn on a single day.
The Greek government may also soon announce a limit on the amount of money that can be moved out of the country.
Those would be dramatic steps to take, but if nothing is done we are likely to watch the Greek banking system die right in front of our eyes.
A Greek exit from the euro seems more likely with each passing day. Such an exit would have a devastating impact on the Greek economy, but it would also dramatically affect the rest of the globe as well. The following is from a recent article by Louise Armitstead….
The Institute of International Finance has estimated that the global cost of a Greek exit could hit €1trillion. When Argentina defaulted in 2001, foreign debtors lost around 70pc of their investments.
That is a big hit for such a little country.
So what would it cost the globe if Spain or Italy left the eurozone?
That is something to think about.
Meanwhile, the United States continues to steamroll down the same road that Greece has gone. According to the Republican Senate Budget Committee, the U.S. government is currently spending more money per person than Greece, Portugal, Italy or Spain does.
Unfortunately, most Americans are totally oblivious to all of this.
Instead of getting educated about the horrific financial crisis heading our way, most Americans would rather read about why Jennifer Lopez is leaving American Idol.
But those that are listening to the warnings will be prepared when the storm hits.
The bank runs that we are watching right now in Greece are shocking, but they are only just the beginning. Since May 6th, nearly one billion dollars has been withdrawn from Greek banks. For a small nation like Greece, that is an absolutely catastrophic number. At this point, the entire Greek banking system is in danger of collapsing. If you had money in a Greek bank, why wouldn’t you pull it out? If Greece leaves the euro, all euros in Greek banks will likely be converted to drachmas, and the value of those drachmas will almost certainly decline dramatically. In fact, it has been estimated that Greek citizens could see the value of their bank accounts decline by up to 50 percent if Greece leaves the euro. So if you had money in a Greek bank, it would only make sense to withdraw it and move it to another country as quickly as possible. And as the eurozone begins to unravel, this is a scenario that we are going to see play out in country after country. As member nations leave the eurozone, you would be a fool to have your euros in Italian banks or Spanish banks when you could have them in German banks instead. So the bank runs that are happening in Greece right now are only a preview of things to come. Before this crisis is over we are going to see bank runs happening all over Europe.
If Greece leaves the euro, the consequences are likely to be quite messy. Those that are promoting the idea that a “Grexit” can be done in an orderly fashion are not being particularly honest. The following is from a recent article in the Independent….
“Whoever tells you a Greek exit would be no big deal is an idiot, lying or disingenuous,” said Sony Kapoor of the European think-tank Re-Define. Economists fear that a disorderly exit would prompt a huge run by investors on Spanish and Italian debt, forcing those countries to seek support from an EU bailout fund, which, with a capacity of just €500bn, is widely regarded as too small to cope with those pressures.
A Greek exit from the euro would not only result in a run on Spanish and Italian bonds, but it would also likely result in a run on Spanish and Italian banks.
If Greece is allowed to leave the euro, that will be a signal that other countries will eventually be allowed to leave as well. Nobody in their right mind would want their euros stuck in Spanish or Italian banks if those countries end up converting back to national currencies.
Fear is a powerful motivator. If Greece converts their euros back to drachmas, that will be a clear signal that all euros are not created equally. The race to move money into German banks will accelerate dramatically.
And a Greek exit from the euro is looking more likely with each passing day. Even the IMF is now admitting that it is a very real possibility….
Christine Lagarde, head of the IMF, warned she was “technically prepared for anything” and said the utmost effort must be made to ensure any Greek exit was orderly. The effect was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider,” she said.
Meanwhile, banks in other troubled European nations are already on shaky ground. The Spanish banking system is an absolute disaster zone at this point and on Monday night Moody’s downgraded the credit ratings of 26 Italian banks.
The situation in Italy is especially worth keeping a close eye on. As Ambrose Evans-Pritchard recently noted, things are not looking good for Italy at all….
Italy’s former premier Romano Prodi said the EU risks instant contagion to Spain, Italy, and France if Greece leaves. “The whole house of cards will come down”, he said
Angelo Drusiani from Banca Albertini said the only way to avert catstrophe is to convert the European Central Bank into a lender of last resort. Otherwise Italy faces “massive devaluation, three to five years of hyperinflation, and unbearable unemployment.”
So what can be done about any of this?
Well, there is actually a lot that could be done if politicians in Europe were willing to think outside of the established global financial paradigm.
The truth is that Greece could solve their current financial problems in four easy steps. They would have to be willing to stick it to the rest of Europe and to risk being blackballed by the international community, but it could be done.
The following is my prescription for Greece….
1) Default on all debts.
2) Leave the euro.
3) Issue drachmas that are debt-free and that do not come from a central bank. Instead, have the Greek government create them and spend them directly into circulation.
4) Enjoy a return to prosperity.
In such a scenario, the Greek national debt would no longer be a problem, the Greek government would never have to borrow any more money and austerity would no longer be needed.
Yes, inflation would be an issue with the new currency, but a bit of inflation would be a walk in the park compared to the horrible economic depression that Greece is experiencing right now.
And once the Greek economy was growing again, it would certainly be possible for them to make the transition to “hard money” if they wanted to.
It is imperative that we all understand that just because the global financial system works a certain way today does not mean that it must always work that way.
If you have a few minutes, I want you to watch an incredible speech by a 12-year-old Canadian girl named Victoria Grant. In this 6 minute speech, she details how the bankers are defrauding the people of Canada and how the Canadian government does not actually need to borrow a single penny from the bankers….
If a 12-year-old girl can figure this out, then why can’t the rest of us?
Sadly, the financial world still seems enamored with the corrupt central banking system that has gotten us into this mess. In fact, one recent poll found that Federal Reserve Chairman Ben Bernanke has a 75 percent approval rating from global investors.
Right now, America is going down the same path as Greece, Spain and Italy have gone. Eventually we will hit a wall and our financial system will fall apart.
We need the American people to understand that the Federal Reserve system is a perpetual debt machine. The U.S. national debt is now more than 5000 times larger than it was when the Fed was first created. It is at the very core of our national financial problems.
When will people wake up and realize that central banking is the problem and not the solution?
When will people wake up and realize that national governments do not have to go into debt to anyone if they do not want to?
In our world today, there is far more debt than there is money.
It is a system that will inevitably crash.
But there are other alternatives.
Unfortunately, politicians all over the globe continue to want to be married to our current debt-based financial system.
As a result, we will suffer the consequences of that system.
What was considered unthinkable a few months ago has now become probable. All over the globe there are headlines proclaiming that a Greek exit from the euro is now a real possibility. In fact, some of those headlines make it sound like it is practically inevitable. For example, Der Spiegel ran a front page story the other day with the following startling headline: “Acropolis, Adieu! Why Greece must leave the euro”. Many are saying that the euro will be stronger without Greece. They are saying things such as “a chain is only as strong as its weakest link” and they are claiming that financial markets are now far more prepared for a “Grexit” than they would have been two years ago. But the truth is that it really is naive to think that a Greek exit from the euro can be “managed” and that business will go on as usual afterwards. If Greece leaves the euro it will set a very dangerous precedent. The moment Greece exits the euro, investors all over the globe will be asking the following question: “Who is next?” Portugal, Italy and Spain would all see bond yields soar and they would all likely experience runs on their banks. It would only be a matter of time before more eurozone members would leave. In the end, the whole monetary union experiment would crumble.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
By itself, Greece cannot crash the eurozone. But the precedent that Greece is about to set could set forth a chain of events that may very well bring about the end of the eurozone.
If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well. This is the kind of uncertainty that drives financial markets crazy.
When the euro was initially created, monetary union was intended to be irreversible. There are no provisions for what happens if a member nation wants to leave the euro. It simply was not even conceived of at the time.
So we are really moving into uncharted territory. A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality….
A Greek departure from the euro could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area’s economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.
In fact, yields on Spanish debt and Italian debt are already rising rapidly thanks to the bad news out of Greece in recent days.
What makes things worse is that a new government has still not formed in Greece. It looks like new elections may have to be held in June.
Meanwhile, the Greek government is rapidly running out of money. The following is from a Bank of America report that was released a few days ago….
“If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable”
In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains. And opinion polls suggest that they will make even larger gains if another round of elections is held.
The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections. Current polling shows that Syriza is likely to come in first if new elections are held.
The leader of Syriza, Alexis Tsipras, is passionately against the bailout agreements. He says that Greece can reject austerity because the rest of Europe will never kick Greece out of the eurozone. Tsipras believes that the rest of Europe must bail out Greece because the consequences of allowing Greece to go bankrupt and fall out of the eurozone would be far too high for the rest of Europe.
“Mr Schaeuble [Germany’s finance minister] is pretending to be the fearless cowboy on the radio, saying the euro is secure [against a Greek exit]. But there’s no way they will kick us out”
So Greece and Germany are playing a game of chicken.
Who will blink first?
Will either of them blink first?
Syriza is trying to convince the Greek people that they can reject austerity and stay in the euro. Syriza insists that the rest of Europe will provide the money that they need to pay their bills.
And most Greeks do actually want to stay in the euro. One recent poll found that 78.1 percent of all Greeks want Greece to remain in the eurozone.
But a majority of Greeks also do not want anymore austerity.
Unfortunately, it is not realistic for them to assume that they can have their cake and eat it too. If Greece does not continue to move toward a balanced budget, they will lose their aid money.
And if Greece loses that aid money, the consequences will be dramatic.
Outgoing deputy prime minister of Greece Theodoros Pangalos recently had the following to say about what would happen if Greece doesn’t get the bailout money that it needs….
“We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.”
If Greece gets cut off and runs out of money, it will almost certainly be forced to go back to using the drachma. If that happens there will likely be a “bank holiday”, the borders will be secured to limit capital flight and new currency will be rapidly printed up. It would be a giant mess.
In fact, there are rumblings that the European financial system is already making preparations for all this. For example, a recent Reuters article had the following shock headline: “Banks prepare for the return of the drachma”
But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described….
Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone’s savings and spelling catastrophe for those on fixed incomes, like pensioners.
A Greek economy that is already experiencing a depression would get even worse. The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent. It is hard to imagine what Greece is going to look like if things continue to fall apart.
But the consequences for the rest of Europe (and for the rest of the globe) would be dramatic as well. A Greek exit from the euro could be the next “Lehman Brothers moment” and could plunge the entire global financial system into another major crisis.
Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.
Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.
So there is a lot of pessimism in the financial world right now. Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed….
After staying quiet at the start of the year, the bears have come roaring back with a vengeance.
Short interest — a bet on stocks turning lower — topped 13 billion shares on the New York Stock Exchange at the end of last month. That’s up 4% from March and marks the highest level of the year.
If the eurozone is going to survive, Greece must stay a part of it.
Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.
Confidence is a funny thing. It can take decades to build but it can be lost in a single moment.
If Greece leaves the euro, investor confidence in the eurozone will be permanently damaged. And when investors get spooked they don’t behave rationally.
A common currency in Europe is not dead by any means, but this current manifestation is now operating on borrowed time.
As the eurozone crumbles, it is likely that Germany will simply pull the plug at some point and decide to start over.
So what do you think?
Do you think that I am right or do you think that I am wrong?
Please feel free to post a comment with your thoughts below….
The recent elections in France and in Greece have thrown the global financial system into an uproar. Fear and worry are everywhere and nobody is quite sure what is going to happen next. All of the financial deals that Greece has made over the past few years may be null and void. Nobody is going to know for sure until a new government is formed, and at this point it looks like that is not going to happen and that there will need to be new elections in June. All of the financial deals that France has made over the past few years may be null and void as well. New French President Francois Hollande seems determined to take France on a path away from austerity. But can France really afford to keep spending money that it does not have? France has already lost its AAA credit rating and French bond yields have started to move up toward dangerous territory. And Greek politicians are delusional if they think they have any other choice other than austerity. Without European bailout money (which they won’t get if they don’t honor their current agreements), nobody is going to want to lend Greece a dime.
And all of this talk about “austerity” is kind of silly anyway. It isn’t as if either France or Greece was going to have a balanced budget any time soon. Both nations were still running up huge amounts of debt even under the “austerity” budgets.
But the citizens of both nations have sent a clear message that they are not going to tolerate even a slowdown in government spending. They want to go back to the debt-fueled prosperity of the last several decades, even if it makes their long-term financial problems a lot worse.
Unfortunately, as I mentioned earlier, Greece does not have that option. Without the bailout money that they are scheduled to get, Greece does not have a prayer of avoiding a disorderly default. Private investors would have to be insane to lend Greece money if the bailout deal falls apart. Greece desperately needs the help of the EU, the ECB and the IMF and the only way they are going to get it is if they abide by the terms of the agreements that have already been reached.
The only way that Greece can avoid austerity at this point would be to leave the euro. Nobody would want to lend money to Greece under that scenario either, but Greece could choose to print huge amounts of their own national currency if they wanted to.
The situation is different in France. Investors are still willing to lend to France at reasonable interest rates, but if France chooses to run up huge amounts of additional debt at some point they will end up just like Greece.
What is even more important in the short-term is the crumbling of the French/German alliance on European fiscal matters. Angela Merkel and Nicolas Sarkozy were a united front, but now Merkel and Hollande are likely to have conflict after conflict.
Instead of moving in one clear direction, the eurozone is now fractured and tensions are rising.
So what comes next?
Well, investors are not certain what comes next and that has many of them deeply concerned.
The following are 11 quotes that show how worried the financial world is about Europe right now….
#1Tres Knippa of Kenai Capital Management: “What is going on in Europe is an absolute disaster…the risk-on trade is not the place to be. I want to be out of equities and very, very defensive because the situation in Europe just got worse after those elections.”
#2Mark McCormick, currency strategist at Brown Brothers Harriman: “We’re going to have higher tensions, more uncertainty and most likely a weaker euro.”
#3Nick Stamenkovic, investment strategist at RIA Capital Markets in Edinburgh: “Investors are questioning whether Greece will be a part of the single currency at the end of this year.”
#4Jörg Asmussen, a European Central Bank executive board member: “Greece needs to be aware that there is no alternative to the agreed reform program if it wants to remain a member of the eurozone”
#5Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment: “A Greek eurozone exit is on the cards although the probability and timing of such an event is uncertain.”
#6Art Cashin: “Here’s the outlook on Greece from Wall Street watering holes. If a coalition government is formed or looks to be formed, global markets may rally. Any coalition is unlikely to make progress on goals, since austerity is political suicide. There will likely be another election around June 10/17. A workable majority/plurality remains unlikely, so back to square one. Therefore, Greece will be unable to attain goals by the deadline (June 30). Lacking aid funds, pensions are suspended and government workers are laid off. Protestors take to the streets and government is forced to revert to drachma to avoid social chaos. Pass the peanuts, please.”
#7John Noonan, Senior Forex Analyst with Thomson Reuters in Sydney: “Sentiment is very bearish, The euro is under a lot of pressure right now. I get the feeling that it’s going to be a nasty move lower for the euro finally”
#8Kenneth S. Rogoff, a professor of economics at Harvard: “A Greek exit would underscore that there’s no realistic long-term plan for Europe, and it would lead to a chaotic endgame for the rest of the euro zone.”
#9Chris Tinker of Libra Investment Services: “It’s a binary decision. If Greece gets itself to the point where the European administration says, ‘We can’t play this game anymore,’ that starts a domino effect”
#10Nicolas Véron, a senior fellow at Bruegel: “France has very limited fiscal space and actually has to engage in fiscal consolidation”
#11 80-year-old Greek citizen Panagiota Makri: “I’m confused. I feel numb and confused. Only God can save us now”
All of this comes at a time when much of Europe is already descending into a new recession. Economies all over Europe are contracting and unemployment rates are skyrocketing. Until things start improving, there is going to continue to be a lot of civil unrest across Europe.
Meanwhile, things are not so great in the United States either.
JPMorgan Chase CEO Jamie Dimon claims that the U.S. economy is holding a “royal straight flush“, but the only part of that he got right was the “flush” part.
There are 100 million working age Americans that do not have jobs, the middle class continues to shrink, the rising cost of food and the rising cost of gas are severely stretching the budgets of millions of American families and the federal government continues to run up gigantic amounts of debt.
When Europe descends into financial chaos, the United States is not going to escape it. The financial crisis of 2008 deeply affected the entire globe, and so will the next great financial crisis.
Let us hope that we still have a little bit more time before the next great financial crisis strikes, but things in Europe are rapidly unraveling and at some point the dominoes are going to begin to fall.
The results of the elections in France and Greece have made it abundantly clear that there is a tremendous backlash against the austerity approach that Germany has been pushing. All over Europe, prominent politicians and incumbent political parties are being voted out. In fact, Nicolas Sarkozy has become the 11th leader of a European nation to be defeated in an election since 2008. We have seen governments fall in the Netherlands, the UK, Spain, Ireland, Italy, Portugal and Greece. Whenever they get a chance, the citizens of Europe are using the ballot box to send a message that they do not like what is going on. It turns out that austerity is extremely unpopular. But if newly elected politicians all over Europe begin rejecting austerity, this puts Germany in a very difficult position. Should Germany be expected to indefinitely bail out all of the members of the eurozone that choose to live way beyond their means? If Germany pulled out of the euro tomorrow, the euro would absolutely collapse, bond yields for the rest of the eurozone would skyrocket to unprecedented heights, and without German bailout money troubled nations such as Greece would be headed directly for default. The rest of the eurozone is absolutely and completely dependent on Germany at this point. But as we have seen, much of the rest of the eurozone is sick and tired of taking orders from Germany and is rejecting austerity. A lot of politicians in Europe apparently believe that they should be able to run up gigantic amounts of debt indefinitely and that the Germans should be expected to always be there to bail them out whenever they need it. Will the Germans be willing to tolerate such a situation, or will they simply pick up their ball and go home at some point?
Over the past several years, German Chancellor Angela Merkel and French President Nicolas Sarkozy have made a formidable team. They worked together to push the eurozone on to the path of austerity, but now Sarkozy is out.
Francois Hollande, the new French president, has declared that the financial world is his “greatest enemy“.
He may regret making that statement.
One of the primary reasons why Hollande was elected was because he clearly rejected the austerity approach favored by the Germans. Shortly after winning the election in France, he made the following statement….
“Europe is watching us, austerity can no longer be the only option”
Hollande says that he wants to “renegotiate” the fiscal pact that European leaders agreed to under the leadership of Merkel and Sarkozy.
But Merkel says that is not going to happen. The following Merkel quotes are from a recent CNBC article….
“We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries,” Merkel told a news conference.
“We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin — progress is only achievable via solid finances plus growth,” she added.
So instead of being on the same page, Germany and France are now headed in opposite directions.
But if the French do not get their debt under control, they could be facing a huge crisis of their own very quickly. The following is from a recent article by Ambrose Evans-Pritchard….
“They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.
Without German help, France is not going to be able to handle its own financial problems – much less bail out the rest of Europe.
Germany is holding all of the cards, but much of the rest of the eurozone does not seem afraid to defy Germany at this point.
In Greece, anti-bailout parties scored huge gains in the recent election.
None of the political parties in Greece were able to reach 20 percent of the vote, and there is a tremendous amount of doubt about what comes next.
New Democracy (the “conservatives”) won about 19 percent of the vote, but they have already announced that they have failed to form a new government.
So now it will be up to the second place finishers, the Syriza party (the radical left coalition), to try to form a new government.
Alexis Tsipras, the leader of the Syriza party, is very anti-austerity. He made the following statement the other night….
“The people of Europe can no longer be reconciled with the bailouts of barbarism.”
But at this point, it seems very doubtful that Syriza will be able to form a new government either.
PASOK, the socialists that have been pushing through all of the recent austerity measures, only ended up with about 13 percent of the vote. In the 2009 election, PASOK got 44 percent of the vote. Obviously their support of the austerity measures cost them dearly.
So what happens if none of the parties are able to form a new government?
It means that new elections will be held.
Meanwhile, Greece must somehow approve more than 11 billion euros in additional budget cuts by the end of June in order to receive the next round of bailout money.
Greece is currently in its 6th year of economic contraction, and there is very little appetite for more austerity in Greece at this point.
Citibank analysts are saying that there is now a 50 to 75 percent chance that Greece is going to be forced to leave the euro….
Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme. Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme. If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%. However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. We continue to expect that in reaction to Greece leaving the euro area, more far-reaching measures from governments and the ECB would be put in place.
But if Greece rejects austerity that does not mean that it has to leave the eurozone.
There is no provision that allows for the other nations to kick them out.
Greece could say no to austerity and dare Germany and the rest of the eurozone to keep the bailout money from them.
If Greece defaulted, it would severely damage the euro and bond yields all over the eurozone would likely skyrocket – especially for troubled countries like Spain and Italy.
If Greece wanted to play hardball, they could simply choose to play a game of “chicken” with Germany and see what happens.
Would Germany and the rest of the eurozone be willing to risk a financial disaster just to teach Greece a lesson?
But Greece is not the only one that is in trouble.
As I wrote about recently, the Spanish economy is rapidly heading into an economic depression.
Now it has come out that the Spanish government is going to bail out a major Spanish bank. The following is from a recent Bloomberg article….
Rodrigo Rato stepped down as head of the Bankia group as a government bailout loomed after Spanish Prime Minister Mariano Rajoy retreated from a pledge to avoid using public money to save lenders.
Rato, a former International Monetary Fund managing director, proposed Jose Ignacio Goirigolzarri, ex-president and chief operating officer of Banco Bilbao Vizcaya Argentaria SA (BBVA), as Bankia executive chairman, he said in a statement today in Madrid. The government plans to inject funds into the lender by buying contingent-capital securities, said an Economy Ministry official who declined to be named as the plan isn’t public.
But this is just the beginning.
Major banks all over Europe are going to need to be bailed out, and countries such as Portugal, Italy and Spain are going to need huge amounts of financial assistance.
So does Germany want to keep rescuing the rest of the eurozone over and over again during the coming years? The cost of doing this would likely be astronomical. The following is from a recent New York Times article….
Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.
That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.
At some point, Germany may decide that enough is enough.
In fact, there have been persistent rumors that Germany has been very quietly preparing to leave the euro.
A while back, German Chancellor Angela Merkel’s Christian Democratic Union party approved a resolution that would allow a nation to leave the euro without leaving the European Union.
Many believed that this resolution was aimed at countries like Greece or Portugal, but the truth is that the resolution may have been setting the stage for an eventual German exit from the euro.
The following is an excerpt from that resolution….
“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”
Most analysts will tell you that they think that it is inconceivable that Germany could leave the euro.
But stranger things have happened.
And Germany has made some very curious moves recently.
For example, Germany recently reinstated its Special Financial Market Stabilization Funds. Those funds could be utilized to bail out German banks in the event of a break up of the euro. The following is from a recent article by Graham Summers….
In short, Germany has given the SoFFIN:
€400 billion to be used as guarantees for German banks.
€80 billion to be used for the recapitalization of German banks
Legislation that would permit German banks to dump their euro-zone government bonds if needed.
That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.
In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.
So has Germany been quietly preparing a plan “B” just in case the rest of the eurozone rejected the path of austerity?
Most people have assumed that it will be a nation such as Greece or Portugal that will leave the euro first, but in the end it just might be Germany.
And the “smart money” is definitely betting on something big happening.
Right now some of the largest hedge funds in the world are betting against the eurozone as a recent Daily Finance article described….
Some of the world’s most prominent hedge fund managers are betting against the eurozone — and not just the peripheral countries everyone knows are in trouble. They’re taking positions against the core countries, economies that — until now — everyone has assumed were rock-solid.
Yes, the countdown to the break up of the euro has officially begun.
A great financial crisis is going to erupt in Europe, and it is going to shake the world to the core.
If you were frightened by what happened back in 2008, then you are going to be absolutely horrified by what is coming next.
What happens when debt-fueled false prosperity disappears? Just look at Spain. The 4th largest economy in the eurozone was riding high during the boom years, but now the Spanish economy is collapsing with no end in sight. When a debt bubble gets interrupted, the consequences can be rather chaotic. Just like we saw in Greece, austerity is causing the economy to slow down in Spain. But when the economy slows down, tax revenues fall and that makes it even more difficult to meet budget targets. So even more austerity measures are needed to keep debt under control and the cycle just keeps going. Unfortunately, even with all of the recently implemented austerity measures the Spanish government is still not even close to a balanced budget. Meanwhile, the housing market in Spain is crashing and unemployment is already above 24 percent. The Spanish banking system is a giant, unregulated mess that is on the verge of a massive implosion, and the Spanish stock market has been declining rapidly. The Spanish government is going to need a massive bailout and so will the entire Spanish banking system. But that is going to be a huge problem, because the Spanish economy is almost 5 times as large as the Greek economy. When the Spanish financial system collapses, the entire globe is going to feel the pain and there will be no easy solution.
So just how bad are things in Spain at this point?
The following are 22 signs that the collapsing Spanish economy is heading into a great depression….
#1 The unemployment rate in Spain has reached 24.4 percent – a new all-time record high. Back in April 2007, the unemployment rate in Spain was only 7.9 percent.
#2 The unemployment rate in Spain is now higher than the U.S. unemployment rate was during any point during the Great Depression of the 1930s.
#3 According to CNBC, some analysts are projecting that the unemployment rate in Spain is going to go above 30 percent.
#4 The unemployment rate for those under the age of 25 in Spain is now a whopping 52 percent.
#5 There are more than 47 million people living in Spain today. Only about 17 million of them have jobs.
#16 Spanish housing prices are now down 25 percent from the peak of the housing market and Citibank’s Willem Buiter expects the eventual decline to be somewhere around 60 percent.
#17 It is being projected the the economy of Spain will shrink by 1.7 percent this year, although there are some analysts that feel that projection is way too optimistic.
#18 The Spanish government has announced a ban on all cash transactions larger than 2,500 euros.
#19 One key Spanish stock index has already fallen by more than 19 percent so far this year.
#20 The Spanish government recently admitted that its 2011 budget deficit was much larger than originally projected and that it probably will not meet its budget targets for 2012 either.
Spain is going down the exact same road that Greece went down.
Greece is already suffering through a great depression and now Spain is joining them. The following is from a recent BBC article….
“In Spain today, a cycle similar to Greece is starting to develop,” said HSBC chief economist Stephen King.
“The recession is so deep that when you take one step forward on austerity, it takes you two steps back.”
In Spain right now there is a lot of fear and panic about the economy. In many areas, it seems like absolutely nobody is hiring right now. The following is from a recent USA Today article….
“The situation is very bad. There’s no work,” said Enrique Sebastian, a 48-year-old unemployed surgery room assistant as he left one of Madrid’s unemployment offices. “The only future I see is one with wages of €400 ($530) a month for eight-hour days. And that’s if you can find it.”
But Spain is just at the beginning of a downward spiral. Just wait until they have been through a few years of economic depression. Once that happens, millions of people begin to lose all hope. A recent Reuters article discussed the epidemic of suicides that is happening in Greece right now….
On Monday, a 38-year-old geology lecturer hanged himself from a lamp post in Athens and on the same day a 35-year-old priest jumped to his death off his balcony in northern Greece. On Wednesday, a 23-year-old student shot himself in the head.
In a country that has had one of the lowest suicide rates in the world, a surge in the number of suicides in the wake of an economic crisis has shocked and gripped the Mediterranean nation – and its media – before a May 6 election.
And you know what?
The nightmares that we are seeing unfold in Spain and Greece right now are just a preview of what is coming to most of the rest of the world.
The next wave of the economic crisis will soon envelop the United States, Japan and the rest of Europe.
When it strikes, the pain will be immense.
But it won’t be the end – it will only be just the beginning.
The global financial system is starting to crumble.
The economic crisis in Europe continues to get worse and eventually it is going to unravel into a complete economic nightmare. All over Europe, national governments have piled up debts that are completely unsustainable. But whenever they start significantly cutting government spending it results in an economic slowdown. So politicians in Europe are really caught between a rock and a hard place. They can’t keep racking up these unsustainable debts, but if they continue to cut government spending it is going to push their economies into deep recession and their populations will riot. Greece is a perfect example of this. Greece has been going down the austerity road for several years now and they are experiencing a full-blown economic depression, riots have become a way of life in that country and their national budget is still not anywhere close to balanced. Americans should pay close attention to what is going on in Europe, because this is what it looks like when a debt party ends. Most of the nations in the eurozone have just started implementing austerity, and yet unemployment in the eurozone is already the highest it has been since the euro was introduced. It has risen for 10 months in a row and is now up to 10.8 percent. Sadly, it is going to go even higher. As economies across Europe slide into recession, that is going to put even more pressure on the European financial system. Most Americans do not realize this, but the European banking system is absolutely enormous. It is nearly four times the size that the U.S. banking system is. When the European banking system crashes (and it will) it is going to reverberate around the globe. The epicenter of the next great financial crisis is going to be in Europe, and it is getting closer with each passing day.
The following are 27 statistics about the European economic crisis that are almost too crazy to believe….
#2 The average unemployment rate in Greece in 2010 was 12.5 percent. During 2011, the average unemployment rate was 17.3 percent, and now the unemployment rate in Greece is up to 21.8 percent.
#3 The youth unemployment rate in Greece is now over 50 percent.
#4 The unemployment rate in the port town is Perama is about 60 percent.
#5 In Greece, 20 percent of all retail stores have closed down during the economic crisis.
#7 Some of the austerity measures that have been implemented in Greece have been absolutely brutal. For example, Greek civil servants have had their incomes slashed by about 40 percent since 2010.
#8 Despite all of the austerity measures, it is being projected that Greece will still have a budget deficit equivalent to 7 percent of GDP in 2012.
#10 In the midst of all the poverty in Greece, several serious diseases are making a major comeback. The following comes from a recent article in the Guardian….
The incidence of HIV/Aids among intravenous drug users in central Athens soared by 1,250% in the first 10 months of 2011 compared with the same period the previous year, according to the head of Médecins sans Frontières Greece, while malaria is becoming endemic in the south for the first time since the rule of the colonels, which ended in the 1970s.
Spain
#11 The unemployment rate in Spain is now up to 23.6 percent.
#12 The youth unemployment rate in Spain is now over 50 percent.
#13 The total value of all toxic loans in Spain is equivalent to approximately 13 percent of Spanish GDP.
#14 The GDP of Spain is about 1.4 trillion dollars. The three largest Spanish banks have approximately 2.7 trillion dollars in assets and they are all on the verge of failing.
#16 The number of property repossessions in Spain rose by 32 percent during 2011.
#17 The ratio of government debt to GDP in Spain will rise by more than 11 percent during 2012.
#18 On top of everything else, Spain is dealing with the worst drought it has seen in 70 years.
Portugal
#19 The unemployment rate in Portugal is up to 15 percent.
#20 The youth unemployment rate in Portugal is now over 35 percent.
#21 Banks in Portugal borrowed a record 56.3 billion euros from the European Central Bank in March.
#22 It is being projected that the Portuguese economy will shrink by 5.7 percent during 2012.
#23 When you add up all forms of debt in Portugal (government, business and consumer) the total is equivalent to approximately 360 percent of GDP.
Italy
#24 Youth unemployment in Italy is up to 31.9 percent – the highest level ever.
#25 Italy’s national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.
#26 If you add the maturing debt that the Italian government must roll over in 2012 to the projected budget deficit, it comes to approximately 23.1 percent of Italy’s GDP.
Well, the powers that be are pulling out all their tricks.
For example, the European Central Bank decided to start loaning gigantic mountains of money to European banks. That accomplished two things….
1) It kept those European banks from collapsing.
2) European banks used that money to buy up sovereign bonds and that kept interest rates down.
Unfortunately, all of this game playing has also put the European Central Bank in a very vulnerable position.
The balance sheet of the European Central Bank has expanded by more than 1 trillion dollars over the past nine months. The balance sheet of the European Central Bank is now larger than the entire GDP of Germany and the ECB is now leveraged 36 to 1.
So just how far can you stretch the rubberband before it snaps?
Perhaps we are about to find out.
The European financial system is leveraged like crazy right now. Even banking systems in countries that you think of as “stable” are leveraged to extremes.
For example, major German banks are leveraged 32 to 1, and those banks are holding a massive amount of European sovereign debt.
When Lehman Brothers finally collapsed, it was only leveraged 30 to 1.
You can’t solve a debt crisis with more debt. But the European Central Bank has been able to use more debt to kick the can down the road a few more months.
At some point the sovereign debt bubble is going to burst.
All financial bubbles eventually burst.
What goes up must come down.
Right now, the major industrialized nations of the world are approximately 55 trillion dollars in debt.
It has been a fun ride, but this fraudulent pyramid of risk, debt and leverage is going to come crashing down at some point.
It is only a matter of time.
Already, there are a whole bunch of signs that some very serious economic trouble is on the horizon.
Hopefully we still have a few more months until it hits.
But in this day and age nothing is guaranteed.
What does seem abundantly clear is that the current global financial system is inevitably going to fail.
When it does, what “solutions” will our leaders try to impose upon us?
For a long time, most analysts have believed that if someone was going to leave the euro, it would be a weak nation such as Greece or Portugal. But the truth is that financially troubled nations such as Greece and Portugal don’t want to leave the euro. The leaders of those nations understand that if they leave the euro their economies will totally collapse and nobody will be there to bail them out. And at this point there really is not a formal mechanism which would enable other members of the eurozone to kick financially troubled nations such as Greece or Portugal out of the euro. But there is one possibility that is becoming increasingly likely that could actually cause the break up of the euro. Germany could leave the euro. Yes, it might actually happen. Germany is faced with a very difficult problem right now. It is looking at a future where it will be essentially forced to bail out most of the rest of the nations in the eurozone for many years to come, and those bailouts will be extremely expensive. Meanwhile, the mood in much of the rest of Europe is becoming decidedly anti-German. In Greece, Angela Merkel and the German government are being openly portrayed as Nazis. Financially troubled nations such as Greece want German bailout money, but they are getting sick and tired of the requirements that Germany is imposing upon them in order to get that money. Increasingly, other nations in Europe are simply ignoring what Germany is asking them to do or are openly defying Germany. In the end, Germany will need to decide whether it is worth it to continue to pour billions upon billions of euros into countries that don’t appreciate it and that are not doing what Germany has asked them to do.
German Chancellor Angela Merkel’s Christian Democratic Union party recently approved a resolution that would allow a country to leave the euro without leaving the European Union.
Many thought that the resolution was aimed at countries like Greece or Portugal, but the truth is that this resolution may be setting the stage for a German exit from the euro.
The following is an excerpt from that resolution….
“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”
So was that paragraph written for Greece?
Or was it written for Germany?
That is a very interesting question.
What is clear is that the status quo cannot last much longer.
Voters in Germany are definitely not in the mood to give any more bailout money to other nations in Europe, but if Germany is going to continue to stay in the eurozone many more bailouts will be required in the coming years.
Meanwhile, Germany is rapidly losing control over the rest of the eurozone….
*Greece has implemented some of the austerity measures that have been required of it, but many others have not been implemented. In a few weeks there will be a national election, and parties that are opposed to the austerity measures are surging in the polls. It is likely that the new government will be much less friendly toward Germany.
*The Spanish government is already defying the budgetary requirements that the EU is trying to impose upon it. Spain is definitely going to miss the debt targets mandated by the EU, and the Spanish government has absolutely no plans of making more reductions to government spending.
*The upcoming election in France could be absolutely crucial. Nicolas Sarkozy is not doing well in the polls and the new French government could totally wreck the recent fiscal agreement that the members of the eurozone recently agreed to.
The following is how Graham Summers recently summarized the current situation in France….
We should also take Schäuble’s statements in the context of Angela Merkel’s recent backing of Nicolas Sarkozy’s re-election campaign in France against hardened socialist François Hollande, who wants to engage in a rampant socialist mission to lower France’s retirement age, cut tax breaks to the wealthy, and break the recent new EU fiscal requirements Germany convinced 17 members of the EU to agree to.
Obviously Germany has been trying very hard to keep the eurozone together. But the German government also believes that if it is going to be bailing everyone out that it should also be able to set the rules.
So what happens if the rest of Europe tells Germany to stick their rules where the sun doesn’t shine?
Well, Germany would be forced to make a very difficult decision, and Germany appears to making plans for that eventuality.
For example, Germany recently reinstated its Special Financial Market Stabilization Funds. This money would be used to bail out German banks in the event of a break up of the euro. The following is from a recent article by Graham Summers….
In short, Germany has given the SoFFIN:
€400 billion to be used as guarantees for German banks.
€80 billion to be used for the recapitalization of German banks
Legislation that would permit German banks to dump their euro-zone government bonds if needed.
That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.
In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.
If the rest of Europe continues to defy Germany, then at some point Germany may decide to simply pick up the ball and go home.
Germany is the strongest economy in the eurozone by far, and if Germany were to pull out the euro would absolutely collapse. Whatever currency Germany decided to issue would be extremely valuable. Such an event would actually have some tremendous side benefits for Germany.
Right now, the German national debt is denominated in euros.
If Germany left the euro, the value of euros would plummet and would likely keep declining as the rest of the eurozone fell apart financially and Germany would be able to pay back its debt in rapidly appreciating “marks” or whatever other currency it decided to issue.
All other debts in Germany would also be denominated in euros and would also be repaid with a much stronger currency.
Are you starting to get the picture?
Yes, Germany would likely have to bail out German banks if it left the euro, but leaving the euro could also prove to be a tremendous windfall for Germany.
If Germany chooses to say in the euro, it is going to be faced with extremely expensive bailouts of other countries for as far as the eye can see.
Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.
That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.
If Germany leaves the euro, that does not mean that the dream of a single currency is dead. Germany could just let the rest of the eurozone collapse and then invite them to join the new German currency eventually after all the carnage is over.
At that point, Germany would have all the leverage and Germany would be able to dictate all the rules.
What is clear is that the status quo in Europe is becoming extremely unacceptable in Germany. The Germans do not intend to give endless bailouts to other nations that do not appreciate them and that do not intend to follow the rules.
At some point Germany may actually decide to walk, and there are lots of whispers that Germany has been steadily preparing for that day.
For example, there are persistent rumors that Germany has ordered printing plates for the printing of new German marks. Philippa Malmgren, a former economic adviser to President George W. Bush, says that she believes that this is already happening….
“I think they have already got the printing machines going and are bringing out the old deutschmarks they have left over from when the euro was introduced.”
Increasingly, it really is looking as if Germany is actually preparing to leave the euro.
If Germany did leave the euro, the consequences for the rest of Europe would be catastrophic.
The euro would rapidly drop to all-time lows.
The global financial system would be thrown in chaos.
Countries such as Greece would lose their major source of bailout money and would be forced to default.
The recession in Europe would likely deepen into a devastating economic depression.
So there would be a lot of downside.
But Germany would fare much better than most of the rest of Europe, and in the end Germany would be left holding most of the cards.
Keep a close eye on the upcoming European elections and the evolving political situation in Europe.
If things don’t go well for Germany, at some point Germany may just get fed up and walk away from the euro.
Well, it is official. The restructuring deal between Greece and private investors has been pushed through and the International Swaps and Derivatives Association has ruled that this is a credit event which will trigger credit-default swap contracts. The ISDA is saying that there are approximately $3.2 billion in credit-default swap contracts on Greek debt outstanding, and most analysts expect that the global financial system will be able to absorb these losses. But still, 3.2 billion dollars is nothing to scoff at, and some of these financial institutions that wrote a lot of these contracts on Greek debt are going to be hurting. This deal with private investors may have “rescued” Greece for the moment, but the consequences of this deal are going to be felt for years to come. For example, now that Greece has gotten a sweet “haircut” from private investors, politicians in Portugal, Italy, Spain and other European nations are going to wonder why they shouldn’t get some “debt forgiveness” too. Also, private investors are almost certainly going to be less likely to want to loan money to European nations from now on. If they will be required to take a massive haircuts at some point, then why in the world would they want to lend huge amounts of money to European governments at super low interest rates? It simply does not make sense. Now that Greece has defaulted, the whole game is going to change. This is just the beginning.
The “restructuring deal” was approved by approximately 84 percent of all Greek bondholders, but the key to triggering the payouts on the credit-default swaps was the fact that Greece decided to activate the “collective action clauses” which had been retroactively inserted into these bonds. These collective action clauses force most of the rest of the bondholders to go along with this restructuring deal.
A recent article by Ambrose Evans-Pritchard explained why so many people were upset about these “collective action clauses”….
The Greek parliament’s retroactive law last month to insert collective action clauses (CACs) into its bonds to coerce creditor hold-outs has added a fresh twist. These CAC’s are likely to be activated over coming days. Use of retroactive laws to change contracts is anathema in credit markets.
If a government can go in and retroactively change the terms of a bond just before it is ready to default, then why should private investors invest in them?
That is a very good question.
But for now the buck has been passed on to those that issued the credit-default swaps. As mentioned above, the ISDA says that there are approximately $3.2 billion in Greek credit-default swaps that will need to be paid out.
However, that number assumes that a lot of hedges and offsetting swaps cancel each other out. When you just look at the raw total of swaps outstanding, the number is much, much higher. The following is from a recent article in The Huffington Post….
If you remove all hedges and offsetting swaps, there’s about $70 billion in default-insurance exposure to Greece out there, which is a little bit bigger pill for the banking system to swallow. Is it possible that some banks won’t be able to pay on their default policies? We’ll find out.
Yes, indeed. We will find out very soon.
If some counterparties are unable to pay we could soon see some big problems cascade through the financial system.
But even with this new restructuring deal with private investors, Greece is still in really bad shape.
German Finance Minister Wolfgang Schaeuble told reporters recently that it “would be a big mistake to think we are out of the woods”.
Even with this new deal, Greek debt is still projected to be only reduced to 120 percent of GDP by the year 2020. And that number relies on projections that are almost unbelievably optimistic.
In addition, there are still a whole host of very strict conditions that the Greek government must meet in order to continue getting bailout money.
Also, the upcoming Greek elections in just a few weeks could bring this entire process to an end in just a single day.
The Greek economy has been in recession for five years in a row and it continues to shrink at a frightening pace. Greek GDP was 7.5 percent smaller during the 4th quarter of 2011 than it was during the 4th quarter of 2010.
Unemployment in Greece also continues to get worse.
The average unemployment rate in Greece in 2010 was 12.5 percent. During 2011, the average unemployment rate was 17.3 percent, and in December the unemployment rate in Greece was 21.0 percent.
Young people are getting hit the hardest. The youth unemployment rate in Greece is up to an all-time record of 51.1 percent.
Unfortunately, there is no light at the end of the tunnel for Greece at this point. The latest round of austerity measures that are now being implemented will slow the economy down even more.
Sadly, several other countries in Europe are going down the exact same road that Greece has gone.
Investors all over the globe are wondering which one will be the “next Greece”.
Some believe that it will be Portugal. The following is from a recent article in The Telegraph….
“The rule of law has been treated with contempt,” said Marc Ostwald from Monument Securities. “This will lead to litigation for the next ten years. It has become a massive impediment for long-term investors, and people will now be very wary about Portugal.”
Right now, the combination of all public and private debt in Portugal comes to a grand total of 360 percent of GDP.
In Greece, the combined total of all public and private debt is about 100 percentage points less than that.
So yes, Portugal is heading for a world of hurt. The following is more about Portugal from the recent Telegraph article mentioned above….
Citigroup expects the economy to contract by 5.7pc this year, warning that bondholders may face a 50pc haircut by the end of the year. Portugal’s €78bn loan package from the EU-IMF Troika is already large enough to crowd out private creditors, reducing them to ever more junior status.
So why should anyone invest in Portuguese debt at this point?
Or Italian debt?
Or Spanish debt?
Or any European debt at all?
The truth is that the European financial system is a house of cards that could come crashing down at any time.
German economist Hans-Werner Sinn is even convinced that the European Central Bank itself could collapse.
There is a Der Spiegel article that everyone out there should read. It is entitled “Euro-Zone Central Bank System Massively Imbalanced“. It is quite technical, but if this German economist is correct, the implications are staggering.
The following is from the first paragraph of the article….
More than a year ago, German economist Hans-Werner Sinn discovered a gigantic risk on the balance sheets of Germany’s central bank. Were the euro zone to collapse, Bundesbank losses could be half a trillion euros — more than one-and-a-half times the size of the country’s annual budget.
Money is being pulled out of Greek banks at an alarming rate, and if something dramatic is not done quickly Greek banks are going to start dropping like flies. As I detailed yesterday, people do not want to be stuck with euros in Greek banks when Greece leaves the euro and converts back to the drachma. The fear is that all existing euros in Greek banks would be converted over to drachmas which would then rapidly lose value after the transition. So right now euros are being pulled out of Greek banks at a staggering pace. According to MSNBC, Greeks withdrew $894 million from Greek banks on Monday alone and a similar amount was withdrawn on Tuesday. But this is just an acceleration of a trend that has been going on for a couple of years. It has been reported that approximately a third of all Greek bank deposits were withdrawn between January 2010 and March 2012. So where has all of the cash for these withdrawals been coming from? Well, the European Central Bank has been providing liquidity for Greek banks, but now it has been reported that the ECB is going to stop providing liquidity to some Greek banks. It was not announced which Greek banks are being cut off. For now, the Greek Central Bank will continue to provide euros to those banks, but the Greek Central Bank will not be able to funnel euros into insolvent banks indefinitely.
