The wait will soon be over. Greece submitted a final compromise plan to its eurozone creditors on Thursday, European finance ministers will meet on Saturday to discuss the proposal, and an emergency summit of all 28 EU nations on Sunday will make a final decision on what to do. The summit on Sunday is being billed as a “final deadline” and a “last chance” by EU officials. In essence, Greece is being given one more opportunity to embrace the austerity measures that are being demanded of them by their creditors. So has Greece gone far enough with this new proposal? We shall find out on Sunday.
For months, the entire planet has been following this seemingly endless Greek debt saga. Global financial markets have gyrated with every twist and turn of this ongoing drama, and many people have wondered if it would ever come to an end. But now European leaders are promising us that the uncertainty is finally going to be over this weekend…
This time, the leaders’ summit called for Sunday is being billed by all concerned as the definitive moment that will determine Greece’s future in the euro. It’s “really and truly the final wake-up call for Greece, but also for us — our last chance,” EU President Donald Tusk said on Wednesday, the day after the most recent emergency session.
So what is the general mood of European leaders as they head into this summit?
Overall, it does not appear to be overly optimistic.
For example, just consider what the head of the Bundesbank is saying…
Bundesbank Chief Jens Weidmann, meanwhile, said that central banks have no mandate to safeguard the solvency of banks or governments, and stressed that emergency liquidity to Greece should not be increased.
And even normally upbeat leaders such as ECB President Mario Draghi are sounding quite sullen…
Just how uncertain the coming days are was highlighted when ECB President Mario Draghi voiced highly unusual doubts about the chances of rescuing Greece.
Italian daily Il Sole 24 Ore quoted the ECB chief, under growing fire in Germany for keeping Greek banks afloat, as saying he was not sure a solution would be found for Greece and he did not believe Russia would come to Athens’ rescue.
Asked if a deal to save Greece could be wrapped up, Draghi said: “I don’t know, this time it’s really difficult.“
That certainly does not sound promising.
It isn’t as if the Greeks are not trying to find a compromise. Their latest offer reportedly contains some very painful austerity measures…
Greece is seeking another bailout totaling at least 50 billion euros ($55 billion) from its European creditors and offering to make painful spending cuts and tax increases as it races to avert a financial meltdown, according to government sources.
Under a 10-page blueprint completed late Thursday, the country said it would undertake austerity measures worth between 12 billion and 13 billion euros ($13 billion to $14 billion), including raising taxes on cafes, bars and restaurants.
But once again, it appears that pensions may be a major sticking point. The following comes from a Zero Hedge report about the latest Greek proposal…
The biggest surprise is once again in the biggest hurdle: pensions. Recall that as we accurately predicted two weeks ago, it was the government’s unwillingness to directly cut pensions that led to the IMF refusing to even negotiate the Greek proposal.
As a further reminder, this is what IMF’s chief economist Olivier Blanchard said almost a month ago on the topic:
Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners
Fast forward to today when MNI reports that “there are no pension cuts in the draft of the proposal.”
And if recent experience is indicative, this likely means that the Troika will once again refuse to move on with the draft.
We shall see what happens on Sunday.
I have a feeling that it is all going to come down to what Germany wants to do. At this point, the Greeks owe the Germans approximately 86.7 billion euros. The German people are overwhelmingly against pouring more money down a financial black hole, and German leaders have taken a very hard line with Greece in recent days.
If Germany does not like this new Greek proposal, it will almost certainly fail. And if there is no deal, Greek government finances will totally freeze up, the Greek banking system will utterly collapse, and the Greeks will probably be forced to switch back to the drachma.
Speaking of the drachma, check out what Bloomberg is reporting…
Between June 28 and July 4 at a Hilton hotel in Athens, transactions on a Bloomberg reporter’s Visa credit card issued by Citigroup Inc. were posted as being carried out in “Drachma EQ.”
The inexplicable notation — bear in mind, the euro remains Greece’s official currency — flummoxed two very polite customer service representatives and spokesmen for the companies involved. It depicts a currency changeover that the Greek government and European officials have been working for over six months to avoid.
Banks around the world are bracing for the increasingly real possibility that Greece may be forced to abandon the euro, a currency it shares with 18 other European countries.
Could plans to roll out the drachma already be in motion behind the scenes?
The next few days promise to be extremely interesting.
Meanwhile, there are all sorts of other indications that big economic trouble is ahead for the entire planet. For instance, global commodity prices have been plunging big time…
While market commentators worry whether an economic collapse in Greece could trigger turmoil in financial markets, a slump in commodity markets may be signaling the world is already in a deep recession.
The slump in the Chinese stock market and concern over the Greek debt crisis sent commodities towards multiyear lows. The S&P GSCI—an index which represents a diversified basket of commodities—has been down nearly 40% over the past year and had slumped by more than six percent as of Wednesday, July 8th.
We witnessed a similar pattern just prior to the financial crisis of 2008.
And in addition to the problems that have erupted in China, Greece and Puerto Rico, CNN is reporting that every major economy in Latin America “is slowing down or shrinking”…
Every major Latin American economy is slowing down or shrinking. The World Bank predicts this will be Latin America’s worst year of growth since the financial crisis. As if that’s not dire enough, the world’s two worst performing stock markets are in the region as well.
Very few people are talking about Latin America right now, but the truth is that the region is in the midst of a slow-motion economic implosion. Here is more from CNN…
Venezuela is arguably the world’s worst economy with sky-high inflation. Next door, Colombia has the world’s worst stock market this year. Its index is down 13% so far this year. The second worst is Peru, down 12.5%.
Right now, trouble signs are emerging all over the planet. That is why we shouldn’t just focus on Greece. Yes, if Greece is kicked out of the euro that is going to greatly accelerate things. But no matter what happens with Greece, the truth is that we are steamrolling toward another major worldwide financial crisis. Perhaps you didn’t notice, but I purposely did not use the word “Greece” once in my recent article entitled “The Economic Collapse Blog Has Issued A RED ALERT For The Last Six Months Of 2015“.
Yes, I am taking what is happening over in Europe very seriously. I believe that we are about to see some things happen over there that we have never seen before.
But the Greek crisis is only part of the picture. Everywhere on the globe that you look, red flags are going up.
Sadly, just like in 2008, most people have chosen to be willingly blind to what is happening right in front of their eyes.
The result of the referendum in Greece is a great victory for freedom, but it is also threatens to unleash unprecedented economic chaos all across Europe. With almost all of the votes counted, it is being reported that approximately 61 percent of Greeks have voted “no” and only about 39 percent of Greeks have voted “yes”. This is a much larger margin of victory for the “no” side than almost everyone was anticipating, and it represents a stunning rejection of European austerity. Massive celebrations have erupted on the streets of Athens and other major Greek cities, but the euphoria may not last long. Greek Prime Minister Alexis Tsipras is promising that Greece will be able to stay in the euro, but that gives EU bureaucrats and the IMF a tremendous amount of power, because at this point the Greek government is flat broke. Without more money from the EU and the IMF, the Greek government will not be able to pay its bills and virtually all Greek banks will inevitably collapse. Meanwhile, the rest of Europe is about to experience a tremendous amount of pain as financial markets respond to the results of this referendum. The euro is already plummeting, and most analysts expect European bond yields to soar and European stocks to drop substantially when trading opens on Monday morning.
Personally, I love the fact that the Greek people decided not to buckle under the pressure being imposed on them by the EU and the IMF. But amidst all of the celebration, the cold, hard reality of the matter is that your options are extremely limited when you are out of money.
How is the Greek government going to pay its bills without any money?
How are the insolvent Greek banks going to operate without any money?
How is the Greek economy going to function without any money?
Now that the Greek people have overwhelmingly rejected the demands of the creditors, it will be very interesting to see what the EU and the IMF do. Prior to the referendum, European leaders were insisting that a “no” vote would put an end to negotiations and would force Greece to leave the euro.
Now that the results are in, are they going to change their tune? Because the ball is definitely in their court…
“This does two things: it legitimises the stance of the Greek government and it leaves the ball in Europe’s court,” ANZ Bank analysts said in a note.
“Europe either folds or Greece goes bankrupt; over to you Merkel.”
So would they actually let Greece go bankrupt?
It is going to be fascinating to watch what happens over the next few days. Right now, Greek banks are on life support. If the European Central Bank decides to pull the plug, they would essentially destroy the entire Greek banking system. The only thing that can keep Greek banks alive and kicking is more intervention from the ECB. The following comes from the New York Times…
Now that Greek voters have said no to the economic demands of its international creditors, the fate of the country’s struggling banks is in the hands of the European Central Bank.
Greece’s banks, closed since last Monday because they are perilously low on cash, have been kept alive in recent weeks by emergency loans from the European Central Bank. On Monday, the central bank’s policy makers plan to convene to determine how much longer they are willing to prop up the Greek banks, now that the country has essentially said no to the unpopular dictates of the other eurozone countries.
Of much greater concern to the rest of the world is how financial markets are going to respond to all of this. As I write this article, things already appear to be unraveling. The following comes from CNBC…
Germany’s Dax is indicated sharply lower from Friday’s close at around 4 percent, while the euro was down 2 percent against the yen as the news emerged. U.S. stocks are expected to open around 1 percent lower Monday, according to recent stock futures data.
What could be most important for those worried about contagion from the Greek crisis is how Portuguese, Spanish and Italian government bonds perform in Monday morning trade.
If these peripheral euro zone countries, often lumped in with Greece, suffer a sharp spike in yields, this could cause alarm about whether Greece leaving the currency might cause further contagion to other weaker euro zone economies.
This could potentially become a “trigger event” that unleashes a wave of financial panic all over Europe. And once financial panic begins, it is very difficult to end.
If the EU and the IMF want to avoid a crisis, they could just give in to the new Greek government. But that would be politically risky for certain high profile European leaders. For instance, Angela Merkel would face a huge backlash back home if she conceded to the new Greek government now. And other German leaders are already calling the referendum result a “disaster”…
German politicians branded the result a ‘disaster’, with the country’s economy minister Sigmar Gabriel Sigmar accusing Tsipras of ‘tearing down the last bridges on which Greece and Europe could have moved towards a compromise’.
He added: ‘Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness.’
And the president of the European Parliament, a German, told a German radio station over the weekend that a “no” vote would almost certainly mean that the Greeks will be forced out of the euro…
“If after the referendum, the majority is a ‘no,’ they will have to introduce another currency because the euro will no longer be available for a means of payment,” Martin Schulz, European Parliament president, said on German radio.
That is pretty strong language, eh?
Here is yet another quote from Schulz…
“Without new money, salaries won’t be paid, the health system will stop functioning, the power network and public transport will break down, and they won’t be able to import vital goods because nobody can pay,” he said.
So at this point it is all up to the EU and the IMF, and in particular the focus will be on the Germans.
What will they decide to do?
Will they give in, or will they force the Greeks to leave the euro?
If the Greeks do transition from the euro to a new currency, it will be a process that takes months (if not longer). You just can’t change ATMs, computer systems, cash registers, etc. overnight. So a move to the drachma would not be as simple as many are suggesting…
British firms like De La Rue, which prints 150 currencies worldwide, are believed to have been contacted with a view to providing such services.
It’s done in great secrecy to prevent currency speculation. The other big problem is the logistical challenges of switching a currency. All ATMs, computers and other machinery of commerce that bears the euro symbol will have to be adjusted. It could, and would, take months.
And if Greece does leave, it will be a massive shock for global financial markets. Faith in the European project will be shattered, the euro will drop like a rock, bond yields all over the continent will rise to unsustainable levels and major banks all over Europe will fail.
I think that the following quote from Romano Prodi sums things up quite well…
Romano Prodi, former chief of the European Commission and Italy’s ex-premier, said it is the EU’s own survival that is now at stake as the botched handling of the Greek crisis escalates into a catastrophe. “If the EU cannot resolve a small problem the size of Greece, what is the point of Europe?“
Meanwhile, we should all keep in mind that a financial crisis has already erupted over in Asia as well. Chinese stocks have lost 30 percent of their value in just the last three weeks. In fact, the amount of “paper wealth” wiped out in China over the past three weeks is approximately equivalent to “10 times Greece’s gross domestic product”…
A dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value — equivalent to about 10 times Greece’s gross domestic product last year.
The great financial collapse of 2015 is well underway, and it should be a very interesting week for global markets.
But no matter what happens this week, we all need to keep in mind that this is just the tip of the iceberg.
A “perfect storm” is on the way, and we all need to get prepared for it while we still can.
Do you remember what happened when Cyprus decided to defy the EU? In the end, the entire banking system of the nation collapsed and money was confiscated from private bank accounts. Well, the nation of Greece is now approaching a similar endgame. At this point, the Greek government has not received any money from the EU or the IMF since August 2014. As you can imagine, that means that Greek government accounts are just about bone dry. The new Greek government continues to insist that it will never “violate its anti-austerity mandate”, but the screws are tightening. Right now the unemployment rate in Greece is over 25 percent and the banking system is on the verge of collapse. It isn’t going to take much to set off a panic, and when it does happen there are already rumors that the EU plans to confiscate money from private bank accounts just like they did in Cyprus.
Throughout this entire multi-year crisis, things have never been this dire for the Greek government. In fact, Greece came thisclose to defaulting on a loan payment to the IMF back on May 12th. And with essentially no money remaining at all, the Greek government is supposed to make several large payments in the weeks ahead…
Athens barely made its latest payment (May 12) to the International Monetary Fund (IMF), and it managed to do so only when the government discovered that it could use a reserve account it wasn’t aware of, according to the Greek media.
Kathimerini, a Greek daily newspaper, reports that Prime Minister Alexis Tsipras wrote to the IMF’s Christine Lagarde warning that Greece would not be able to make that May payment, worth €762 million ($871 million, £554.2 million).
Pension and civil-servant pay packets are due at the end of the month, and based on this news Athens may struggle to pay them. Even if it does manage that, on June 5 the country owes another €305 million to the IMF.
In the two weeks following June 5 there are another three payments, bringing the June total to the IMF to over €1.5 billion.
The Germans and the other financial hawks in the EU are counting on these looming payment deadlines to force Greece into a deal.
Meanwhile, Greek banks also find themselves in very hot water. Many of them are almost totally out of collateral, and without outside intervention some of them could start collapsing within weeks. The following comes from Bloomberg…
Greek banks are running short on the collateral they need to stay alive, a crisis that could help force Prime Minister Alexis Tsipras’s hand after weeks of brinkmanship with creditors.
As deposits flee the financial system, lenders use collateral parked at the Greek central bank to tap more and more emergency liquidity every week. In a worst-case scenario, that lifeline will be maxed out within three weeks, pushing banks toward insolvency, some economists say.
“The point where collateral is exhausted is likely to be near,” JPMorgan Chase Bank analysts Malcolm Barr and David Mackie wrote in a note to clients May 15. “Pressures on central government cash flow, pressures on the banking system, and the political timetable are all converging on late May-early June.”
If no agreement is reached, by this time next month Greece could be plunging into a Cyprus-style crisis or worse.
And if that does happen, there are already rumblings that a “Cyprus-style solution” will be imposed. Just consider what James Turk recently told King World News…
The troika of the EU, ECB and IMF have not yet pulled the plug on the Greek banks, but the following quote in the Financial Times from this weekend should be a warning to anyone who still has money on deposit in that country: “The idea of a “Cyprus-like” presentation to Greek authorities has gained traction among some eurozone finance ministers, according to one official involved in the talks.”
The ECB is up to its eyeballs swimming in unpayable Greek debt that it holds. The ECB is not going to take a loss on this Greek paper on its books. Because Greece does not have the financial capacity to repay what is now about €112 billion of credit exposure to Greece on the ECB’s books, the ECB has only two alternatives.
It can push the €112 billion of Greek debt it holds to the national central banks of the Eurozone and on to the backs of the taxpayers in those countries, which it politically untenable. Or it can confiscate depositor money in Greek banks, like it did in Cyprus and as the FT has now reported.
Needless to say, such a move would be likely to set off financial panic all over Europe.
Could we actually see such a thing?
Well, let’s recall that back in April we already saw the Greek government forcibly grab “idle” cash from the bank accounts of regional governments and pension funds. The following is from a Bloomberg report about that event…
Running out of other options, Greek Prime Minister Alexis Tsipras ordered local governments and central government entities to move their cash balances to the central bank for investment in short-term state debt.
The decree to confiscate reserves held in commercial banks and transfer them to the Bank of Greece could raise as much as 2 billion euros ($2.15 billion), according to two people familiar with the decision. The money is needed to pay salaries and pensions at the end of the month, the people said.
“It is a politically and institutionally unacceptable decision,” Giorgos Patoulis, mayor of the city of Marousi and president of the Central Union of Municipalities and Communities of Greece, said in a statement on Monday.“No government to date has dared to touch the money of municipalities.”
Grabbing cash from the bank accounts of private citizens is just one step farther.
And what happened in Cyprus just a couple of years ago is still fresh in the minds of most Greeks. That is why so many of them have been pulling money out of the banks in recent weeks. The following comes from Wolf Richter…
Greeks remember very well what happened in Cyprus in 2013, when local banks were given a big thumbs-up from Europe to help themselves to their depositors’ accounts. Cyprus and Greece are very closely tied, and many Greeks consider the island a “sister-nation.”
What little trust remained in banks in Greece died that day. People have been nervously looking for signs something similar may happen again in their home country. And they resolved to act at the first sign of danger: banks cannot confiscate money you have under your mattress. Cash can be hidden away.
Let’s certainly hope that what happened in Cyprus does not happen in Greece.
But right now, both sides are counting on the other side to fold.
The Germans believe that at some point the economic and financial pain will become so immense that it will force the new Greek government to give in to their demands.
The Greeks believe that the threat of a full blown European financial crisis will cause the Germans to back down at the last moment.
So what if they are both wrong?
What if both sides are fully prepared to stand their ground and take us over the cliff and into disaster?
For a long time I have been warning that a great financial crisis is coming to Europe.
This could be the spark that sets it off.
Is this the beginning of the end for the eurozone? On Thursday, Germany rejected a Greek request for a six-month loan extension. The Germans insisted that the Greek proposal did not require the Greeks to adhere to the austerity restrictions which previous agreements had forced upon them. But Greek voters have already very clearly rejected the status quo, and the new Greek government has stated unequivocally that it will not be bound by the current bailout arrangement. So can Germany and Greece find some sort of compromise that will be acceptable to both of them? It certainly does not help that some Greek politicians have been comparing the current German government to the Nazis, and the Germans have fired back with some very nasty comments about the Greeks. Unfortunately for both of them, time is running out. The Greek government will run out of money in just a couple of weeks, and without a deal there is a very good chance that Greece will be forced to leave the euro. In fact, this week Commerzbank AG increased the probability of a “Grexit” to 50 percent. And if Greece does leave the eurozone, it could spark a full blown European financial crisis which would be absolutely catastrophic.
What the Greeks want right now is a six month loan extension which would give them much more economic flexibility than under the current agreement. Unfortunately for the Greeks, Germany has rejected this proposal…
Germany rejected a Greek proposal for a six-month extension to its euro zone loan agreement on Thursday, saying it was “not a substantial solution” because it did not commit Athens to stick to the conditions of its international bailout.
Berlin’s stance set the scene for tough talks at a crucial meeting of euro zone finance ministers on Friday when Greece’s new leftist-led government, racing to avoid running out of money within weeks, will face pressure to make further concessions.
As the biggest creditor and EU paymaster, Germany has the clout to block a deal and cast Greece adrift without a financial lifeline, potentially pushing it toward the euro zone exit.
Even though Germany is already saying no to this deal, Greece is still hoping that the Eurogroup will accept the deal that it has proposed…
“The Greek government submitted a letter to the Eurogroup asking for a six-month extension of the loan agreement. Tomorrow’s Eurogroup has only two options: either to accept or reject the Greek request,” a government official said. “It will then be clear who wants to find a solution and who doesn’t.” Earlier on Thursday, the German finance ministry rejected Athens’ request for an extension by saying it fell short of the conditions set out earlier this week by the euro zone.
At this point, the odds of a deal going through don’t look good.
But there is always next week. It is possible that something could still happen.
However, if there is no deal and Greece is forced out of the euro, the consequences for Greece and for the rest of the eurozone could be quite dramatic.
The following is how the Independent summarized what could happen to Greece…
An immediate financial crisis and a new, deep, recession. Without external financial support the country would have to default on its debts and, probably, start printing its own currency again in order to pay civil servants. Its banks would also lose access to funding from the European Central Bank.
To prevent these institutions collapsing Athens would have impose controls on the movement of money out of the country. The international value of the new Greek currency would inevitably be much lower than the euro. That would mean an instant drop in living standards for Greeks as import prices spike. And if Greeks have foreign debts which they have to pay back in euros they will also be instantly worse off. There could be a cascade of defaults.
That doesn’t sound pretty at all.
The most frightening part for those that have money in Greek banks would be the capital controls that would be imposed. People would have to deal with strict restrictions on how much money they could take out of their accounts and on how much money they could take out of the country.
In anticipation of this happening, people are already pulling money out of Greek banks at a staggering pace…
In the midst of the dramatic showdown in Brussels between the new Greek government and its European creditors, many Greek depositors—spooked by the prospect of a Greek default or, worse, an exit from the euro zone and a possible return to the drachma—have been pulling euros out of the nation’s banks in record amounts over the last few days.
The Bank of Greece and the European Central Bank won’t report official cash outflows for January until the end of the month. But sources in the Greek banking sector have told Greek newspapers that as much as 25 billion euros (US $28.4 billion) have left Greek banks since the end of December. According to the same sources, an estimated 900 million euros flowed out of Greek banks on Tuesday alone, the day after the talks broke up in Brussels, sparking fears that measures will be taken to stem the outflow. On Thursday, by mid-afternoon, deposits had shrunk by about 680 million euros (US $77.3 million).
“If outflows reach 1 billion euros, capital controls might need to be imposed,” said Thanasis Koukakis, a financial editor for Estia a conservative daily, and To Vima, an influential Sunday newspaper.
And if we do indeed witness a “Grexit”, the rest of Europe would be deeply affected as well.
The following is how the Independent summarized what could happen to the rest of the continent…
There would probably be some financial contagion as financial investors wake up to the fact that euro membership is not irreversible. There could a “flight to safety” as depositors pull euros out of other potentially vulnerable eurozone members such as Portugal, Spain or Italy to avoid taking a hit. European company share prices could also fall sharply if investors panic and divert their cash into the government bonds of states such as Germany and Finland.
The question is how severe this contagion would be. The continent’s politicians and regulators seem to think the impact would be relatively small, saying that Europe’s banks have reduced their cross-border exposure to Greece and that general confidence in the future of the eurozone is much stronger than it was a few years ago. But others think this is too complacent. The truth is that no one knows for sure.
To be honest, I think that the rest of the eurozone is being far too complacent about what Greece leaving would mean.
There are all kinds of implications that most people are not even discussing yet.
For example, just consider what a “Grexit” would mean for the European interbank payment system known as Target2. The following comes from an article by Ambrose Evans-Pritchard…
In normal times, Target2 adjustments are routine and self-correcting. They occur automatically as money is shifted around the currency bloc. The US Federal Reserve has a similar internal system to square books across regions. They turn nuclear if monetary union breaks up.
The Target2 “debts” owed by Greece’s central bank to the ECB jumped to €49bn in December as capital flight accelerated on fears of a Syriza victory. They may have reached €65bn or €70bn by now.
A Greek default – unavoidable in a Grexit scenario – would crystallize these losses. The German people would discover instantly that a large sum of money committed without their knowledge and without a vote in the Bundestag had vanished.
And in a previous article, I discussed some of the other things that are at stake…
If there is no deal, we could see a Greek debt default, Greece could be forced to leave the eurozone and go back to the drachma, the euro could collapse to all time lows, all the banks all over Europe that are exposed to Greek government debt could be faced with absolutely massive losses, and the 26 trillion dollars in derivatives that are directly tied to the value of the euro could start to unravel. In essence, if things go badly this could be enough to push us into a global financial crisis.
At the end of the day, there are essentially only two choices for Europe…
#1) Find a way to make a deal, which would maybe keep the current financial house of cards together for another six months.
#2) A horrifying European financial crisis starting almost immediately.
In the long-term, nothing is going to stop the economic horror which is coming to Europe, and once it starts it is going to drag down the entire planet.
This is the month when the future of the eurozone will be decided. This week, Greek leaders will meet with European officials to discuss what comes next for Greece. The new prime minister of Greece, Alexis Tsipras, has already stated that he will not accept an extension of the current bailout. Officials from other eurozone countries have already said that they expect Greece to fully honor the terms of the current agreement. So basically we are watching a giant game of financial “chicken” play out over in Europe, and a showdown is looming. Adding to the drama is the fact that the Greek government is rapidly running out of money. According to the Wall Street Journal, Greece is “on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.” We have witnessed other moments of crisis for Greece before, but things are very different this time because the new Greek government is being run by radical leftists that based their entire campaign on ending the austerity that has been imposed on Greece by the rest of Europe. If they buckle under the demands of the European financial lords, their credibility will be gone and Syriza will essentially be finished in Greek politics. But if they don’t compromise, Greece could be forced to leave the eurozone and we could potentially be facing the equivalent of “financial armageddon” in Europe. If nobody flinches, the eurozone will fall to pieces, the euro will collapse and trillions upon trillions of dollars in derivatives will be in jeopardy.
According to the Bank for International Settlements, 26.45 trillion dollars in currency derivatives are directly tied to the value of the euro.
Let that number sink in for a moment.
To give you some perspective, keep in mind that the U.S. government spends a total of less than 4 trillion dollars a year.
The entire U.S. national debt is just a bit above 18 trillion dollars.
So 26 trillion dollars is an amount of money that is almost unimaginable. And of course those are just the derivatives that are directly tied to the euro. Overall, the total global derivatives bubble is more than 700 trillion dollars in size.
Over the past couple of decades, the global financial system has been transformed into the biggest casino in the history of the planet. And when things are stable, the computer algorithms used by the big banks work quite well and they make enormous amounts of money. But when unexpected things happen and markets go haywire, the financial institutions that gamble on derivatives can lose massive quantities of money very rapidly. We saw this in 2008, and we could be on the verge of seeing this happen again.
If no agreement can be reached and Greece does leave the eurozone, the euro is going to fall off a cliff.
When that happens, someone out there is going to lose an extraordinary amount of money.
And just like in 2008, when the big financial institutions start to fail that will plunge the entire planet into another major financial crisis.
So at the moment, it is absolutely imperative that Greece and the rest of the eurozone find some common ground.
Unfortunately, that may not happen. The new prime minister of Greece certainly does not sound like he is in a compromising mood…
Greece’s new leftist prime minister, Alexis Tsipras, said on Sunday he would not accept an extension to Greece’s current bailout, setting up a clash with EU leaders – who want him to do just that – at a summit on Thursday.
Tsipras also pledged his government would heal the “wounds” of austerity, sticking to campaign pledges of giving free food and electricity to those who had suffered, and reinstating civil servants who had been fired as part of bailout austerity conditions.
Prior to the summit on Thursday, eurozone finance ministers are going to get together on Wednesday to discuss what they should do. If these two meetings don’t go well this week, we could be looking at big trouble right around the corner. In fact, Greece is being warned that they only have until February 16th to apply for an extension of the current bailout…
Euro zone finance ministers will discuss how to proceed with financial support for Athens at a special session next Wednesday ahead of the first summit of EU leaders with the new Greek prime minister, Alexis Tsipras, the following day.
However, the chairman of the finance ministers said the following meeting of the Eurogroup on Feb. 16 would be Greece’s last chance to apply for a bailout extension because some euro zone countries would need to consult their parliaments.
“Time will become very short if they (Greece) don’t ask for an extension (by then),” said Jeroen Dijsselbloem.
The current bailout for Greece expires on Feb 28. Without it the country will not get financing or debt relief from its lenders and has little hope of financing itself in the markets.
And as I mentioned above, the Greek government is quickly running out of money.
Most analysts believe that because of the enormous stakes that one side or the other will give in at some point.
But what if that does not happen?
Personally, I believe that the eurozone is doomed in the configuration that we see it today, and that it is just a matter of time before it breaks up.
And I am far from alone. For example, just check out what former Fed chairman Alan Greenspan is saying…
Mr Greenspan, chairman of the Federal Reserve from 1987 to 2006, said: “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognizes that parting is the best strategy.
“The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”
The Greeks are using all of this to their advantage. They know that if they leave it could break apart the entire monetary union. So this gives them a tremendous amount of leverage. Greek Finance Minister Yanis Varoufakis has even gone so far as to compare the eurozone to a house of cards…
“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.
The euro zone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.
“I would warn anyone who is considering strategically amputating Greece from Europe because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”
After all this time and after so many bailouts, we have finally reached a day of reckoning.
There is a very real possibility that Greece could leave the eurozone in just a matter of months, and the elite know this.
That is why they are getting prepared for that eventuality. The following is from a recent Wall Street Journal report…
The U.K. government is stepping up contingency planning to prepare for a possible Greek exit from the eurozone and the market instability such a move would create, U.K. Treasury chief George Osborne said on Sunday.
A spokeswoman for the Treasury declined comment on the details of the contingency planning.
The U.K. government has said the standoff between Greece’s new anti-austerity government and the eurozone is increasing the risks to the global and U.K. economy.
“That’s why I’m going tomorrow to the G-20 [Group of 20] to encourage our partners to resolve this crisis. It’s why we’re stepping up the contingency planning here at home,” Mr. Osborne told the BBC in an interview. “We have got to make sure we don’t, at this critical time when Britain is also facing a critical choice, add to the instability abroad with instability at home.”
And if Greece does leave, it will cause panic throughout global financial markets as everyone wonders who is next.
Italy, Spain and Portugal are all in a similar position. Every one of them could rapidly become “the next Greece”.
But of even greater concern is what a “Grexit” would do to the euro. If the euro falls below parity with the U.S. dollar, the derivatives losses are going to be absolutely mind blowing. And coupled with the collapse of the price of oil, we could be looking at some extreme financial instability in the not too distant future.
When big banks collapse, they don’t do it overnight. But we often learn about it in a single moment.
Just remember Lehman Brothers. Their problems developed over an extended period of time, but we only learned the full extent of their difficulties on one very disturbing day in 2008, and that day changed the world.
As you read this, big financial troubles are brewing in the background. At some point, they are going to come to the surface. When they do, the entire planet is going to be shocked.
When it comes to taking a chainsaw to the future of America, nobody seems more eager than Barack Obama. Despite the fact that the U.S. national debt is on pace to approximately double during his eight years in the White House, he has just proposed a budget that would take government spending to crazy new heights. When Barack Obama took the oath of office, the U.S. national debt was 10.6 trillion dollars. Today, it has surpassed the 18 trillion dollar mark. And even though we are being told that “deficits are going down”, the truth is that the U.S. national debt increased by more than a trillion dollars in fiscal 2014. But that isn’t good enough for Obama. He says that we need to come out of this period of “mindless austerity” and steal money from our children and our grandchildren even faster. In addition, Obama wants to raise taxes again. His budget calls for 2 trillion dollars in tax increases over the next decade. He always touts these tax increases as “tax hikes on the rich”, but somehow they almost always seem to end up hitting the middle class too. But whether or not Congress ever adopts Obama’s new budget is not really the issue. The reality of the matter is that the “tax and spend Democrats” and the “tax and spend Republicans” are both responsible for getting us into this mess. Future generations of Americans are already facing the largest mountain of debt in the history of the planet, and both parties want to make this mountain of debt even higher. The only disagreement is about how fast it should happen. It is a national disgrace, but most Americans have come to accept this as “normal”. If our children and our grandchildren get the opportunity, they will curse us for what we have done to them.
All debt destroys.
All debt enslaves.
And when you are talking about an 18 trillion dollar debt, you are talking about an amount of money that is almost unimaginable.
If our national debt was reduced to a stack of one dollar bills, it would circle our planet at the equator 45 times.
How could we have done such a thing?
Thomas Jefferson once said that “the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” He correctly understood that government debt is stealing. We are financially raping our children, our grandchildren and all future generations of Americans. It is an incredibly wicked thing to do.
But instead of men like Thomas Jefferson running our country, we have men like Barack Obama running it.
And to Barack Obama, running up a trillion dollars of debt a year is “mindless austerity”…
“I want to work with Congress to replace mindless austerity with smart investments that strengthen America,” Obama said in a speech at the Department of Homeland Security. “I’m not going to accept a budget that locks in sequestration going forward. It would be bad for our security, and bad for our growth.”
Yes, if we steal money from future generations it will artificially inflate our current standard of living and make our economy look temporarily better than it should be.
But it is morally wrong to do this, and our current crop of politicians have no intentions of ever bringing the debt party to an end.
Even with the ridiculously optimistic economic assumptions that are used in Obama’s new budget, the federal budget is never projected to balance within the next decade. Instead, Obama’s budget projects that the national debt will rise from 18.1 trillion dollars right now to 26.2 trillion dollars in 2025.
Of course it would greatly help if the federal government actually spent our money wisely. But instead, the feds often waste our hard-earned tax dollars in some of the most bizarre ways imaginable. The following is just one example…
The U.S. federal government has prompted controversy after spending over $33,000 on a study to find out whether same-sex couples live closer to tobacco shops than heterosexuals.
The large sum was spent on a study by the National Institutes of Health entitled, ‘Relationship Between Tobacco Retailer Density and Sexual Minority Couples.’
Thanks to this kind of insane spending, our debt is completely and totally out of control.
While Barack Obama has been in the White House, the U.S. national debt has increased by $84,266 per full-time private sector worker. Anyone that believes that this kind of debt accumulation is sustainable is absolutely delusional.
The only reason why our house of cards has not completely collapsed already is because the rest of the world has been willing to lend us gigantic piles of money at artificially low interest rates.
In December, the average rate of interest on the government’s marketable debt was 2.013 percent. But in the past, interest rates have been much higher than that. For example, in January 2000 the average rate of interest on the government’s marketable debt was 6.620 percent. If we returned to that level today, we would be paying well over a trillion dollars a year just in interest on the national debt.
And the issue isn’t just the more than one trillion dollars in new debt that we are accumulating every 12 months.
As I have discussed previously, the U.S. government has more than seven trillion dollars of debt that must be “rolled over” each year. In other words, the federal government must issue more than seven trillion dollars of new debt just to pay off old debts that are coming due.
If something were to happen which would cause the rest of the planet to either be unwilling or unable to lend us trillions of dollars at ridiculously low interest rates all of a sudden, the game would be over.
We were handed the keys to the greatest and most prosperous economy in the history of the planet, and our greed has totally wrecked it.
We were wealthy beyond imagination, but that was never good enough for us. We always had to have more.
And now we are hurtling toward financial oblivion, and we have a man in the White House that wants us to go into debt even faster.
Radical leftists have been catapulted to power in Greece, and that means that the European financial crisis has just entered a dangerous new phase. Syriza, which is actually an acronym for “Coalition of the Radical Left” in Greek, has 36 percent of the total vote with approximately 80 percent of the polling stations reporting. The current governing party, New Democracy, only has 28 percent of the vote. Syriza leader Alexis Tsipras is promising to roll back a whole host of austerity measures that were imposed on Greece by the EU, and his primary campaign slogan was “hope is on the way”. Hmmm – that sounds a bit familiar. Clearly, the Greek population is fed up with the EU after years of austerity and depression-like conditions. At this point, the unemployment rate in Greece is sitting at 25.8 percent, and the Greek economy is approximately 25 percent smaller than it was just six years ago. The people of Greece are desperate for things to get better, and so they have turned to the radical leftists. Unfortunately, things may be about to get a whole lot worse.
Once they formally have control of the government, Syriza plans to call for a European debt conference during which they plan to demand that the repayment terms of their debts be renegotiated. But the rest of Europe appears to be highly resistant to any renegotiation – especially Germany.
Syriza says that it does not plan to unilaterally pull Greece out of the eurozone, and that it also intends for Greece to continue to use the euro.
But what happens if Germany will not budge?
Syriza’s entire campaign was based on promises to end austerity. If international creditors refuse to negotiate and continue to insist that Greece abide by the austerity measures that were previously put in place, what will Syriza do?
Will Syriza back down and lose all future credibility with Greek voters?
Since 2010, the Greek people have endured a seemingly endless parade of wage reductions, pension cuts, tax increases and government budget cutbacks.
The Greek people just want things to go back to the way that they used to be, and they are counting on Syriza to deliver.
Unfortunately for Syriza, delivering on those promises is not going to be easy. They may be faced with a choice of either submitting to the demands of their international creditors or choosing to leave the eurozone altogether.
And if Greece does leave the eurozone, the consequences for all of Europe could be catastrophic…
Syriza risks overplaying its hand, said International Capital Strategies’ Rediker. “Given that the ECB controls the liquidity of the Greek banking system, and also serves as its regulator through the SSM (Single Supervisory Mechanism), going toe-to-toe with the ECB is one battle that could end very badly for the Greek government.”
If the ECB were to stop funding the liquidity of the Greek banks, the banks could collapse—an event that could lead to Greece abandoning the euro and printing its own money once more.
Milios didn’t believe it would come to that, saying, “No one wants a collapse of banks in the euro zone. This is going to be Lehman squared or to the tenth. No one wants to jeopardize the future of the euro zone.”
Hopefully cooler heads will prevail, because one bad move could set off a meltdown of the entire European financial system.
Even before the Greek election, the euro was already falling like a rock and economic conditions all over Europe were already getting worse.
So why would the Greeks risk pushing Europe to the brink of utter disaster?
Well, it is because economic conditions in Greece have been absolutely hellish for years and they are sick and tired of it.
For example, the BBC is reporting that many married women have become so desperate to find work in Greece that they are literally begging to work in brothels…
Some who have children and are struggling to support them have turned to sex work, to put food on the table.
Further north, in Larissa, Soula Alevridou, who owns a legal brothel, says the number of married women coming to her looking for work has doubled in the last five years.
“They plead and plead but as a legal brothel we cannot employ married women,” she says. “It’s illegal. So eventually they end up as prostitutes on the streets.”
When people get this desperate, they do desperate things – like voting radical leftists into power.
But Greece might just be the beginning. Surveys show that the popularity of the EU is plummeting all over Europe. Just check out the following excerpt from a recent Telegraph article…
Europe is being swept by a wave of popular disenchantment and revolt against mainstream political parties and the European Union.
In 2007, a majority of Europeans – 52 per cent – trusted the EU. That level of trust has now fallen to a third.
Once, Britain’s Euroscepticism was the exception, and was seen as the biggest threat to the future of the EU.
Now, other countries pose a far bigger danger thanks to the political discontents unleashed by the euro.
At this point, the future of the eurozone is in serious jeopardy.
I have a feeling that major changes in Europe are on the way which are going to shock the planet.
Meanwhile, the rest of the globe continues to slide toward another major financial crisis as well.
So many of the things that preceded the last financial crisis are happening once again. This includes a massive crash in the price of oil. Most people have absolutely no idea how critical the price of oil is to global financial markets. I like how Gerald Celente put it during an interview the other day…
I began getting recognition as a trend forecaster in 1987. The Wall Street Journal covered my forecast. I said, ‘1987 would be the year it all collapses.’ I said, ‘There will be a stock market crash.’ One of the fundamentals I was looking at were the crashing oil prices in 1986.
Well, we see crashing oil prices today and the banks are much more concentrated and levered up in the oil patch than they were in 1987. From Goldman Sachs to Morgan Stanley banks have been involved in major debt financing, derivatives and energy transactions. But much of this debt has not been sold to investors and now we are going to start seeing some big defaults.
By itself, the Greek election would be a significant crisis.
But combined with all of the other economic and geopolitical problems that are erupting all over the planet, it looks like the conditions for a “perfect storm” are rapidly coming together.
Unfortunately, the overall global economy is in far worse shape today than it was just prior to the last major financial crisis.
This time around, the consequences might just be far more dramatic than most people would ever dare to imagine.
When you get into too much debt, really bad things start to happen. Sadly, that is exactly what is happening to Italy right now. Harsh austerity measures are causing the Italian economy to slow down even more than it was previously. And yet even with all of the austerity measures, the Italian government just continues to rack up even more debt. This is the exact same path that we watched Greece go down. Austerity causes government revenues to drop which causes deficit reduction targets to be missed which causes even more austerity measures to become necessary. But if Italy collapses economically, it is going to be a far bigger deal than what happened in Greece. Italy is the ninth largest economy on the entire planet. Actually, Italy used to be number eight, but now Russia has passed it. If Italy continues to stumble, India and Canada will soon pass it as well. It really is a tragedy to watch what is happening in Italy, because it really is a wonderful place. When I was a child, my father was in the navy, and I got the opportunity to live there for a while. It is a land of great weather, great food and great soccer. The people are friendly and the culture is absolutely fascinating. But now the nation is falling apart. The following are 11 signs that Italy is descending into a full-blown economic depression…
#1 The unemployment rate in Italy has risen to 12.2 percent. That is the highest that it has been in more than 35 years.
#2 The youth unemployment rate in Italy is sitting at 38.5 percent, and in southern Italy it recently hit the 50 percent mark.
#3 An average of 134 retail outlets are shutting down in Italy every single day. Overall, approximately 224,000 retail establishments have closed since 2008.
#4 Italy’s economy has now been contracting for seven quarters in a row.
#5 It is being projected that Italy’s GDP will shrink by 1.8 percent this year.
#6 Industrial production in Italy has declined for 15 months in a row. It has now fallen to its lowest level in about 25 years.
#7 Overall, factory output in Italy has fallen by about one-fourth since 2008.
#8 In May, automobile sales in Italy were down 8 percent compared to one year earlier.
#9 The number of people that are considered to be “seriously deprived” in Italy has doubled over the past two years.
#10 Italy now has a debt to GDP ratio of 130 percent.
#11 It is being projected that Italy will need a major EU bailout within six months.
At this point, Italy is flat broke.
And unlike the U.S. or Japan, Italy cannot run over to a central bank and have them print up oodles of new money with which to buy up government bonds. Italy is married to the euro, and so that greatly limits their options. Unfortunately, the money is rapidly running out. The following is from a recent article by Wolf Richter…
In most countries, it would be an act of mind-bending chutzpah, or perhaps a display of political insanity, but in Italy it barely made ripples: for a government official, a minister no less, to declare that the country cannot pay its long overdue bills, and not for a month or two, but for the rest of this year! Due to “technical” problems.
The Italian government is out of money. Not that the US government is in any better shape in that respect, or the Japanese government for that matter, but they have central banks that print the missing moolah with lavish abandon. Italy doesn’t. It has the ECB which is run by an Italian who promised last year to print with lavish abandon to keep countries like Italy afloat. But that promise is not the same thing as having your own central bank.
On July 4, Italy’s budget fiasco came to light once again. Wracked by the pretense of austerity, expenditures rose 1.3% in the first quarter, while revenues remained flat. So the deficit rose to 7.3% of GDP, up from 6.6% last year, bringing the national debt to 130% of GDP. Ballooning debt and deficits in a shriveling economy – Italy has been in recession since the fourth quarter of 2011 – is a toxic combination in the Eurozone.
While those numbers may sound really bad, the reality is that the people that are suffering the most are the average folks on the street. Many Italians have been completely blindsided by this economic depression, and suicides are skyrocketing…
In Italy, the tragic stories of suicides apparently linked to the deep recession are becoming all too frequent. Last month, a former factory worker hanged himself near Turin because he could not find work, his relatives said. In May, a young man committed suicide outside of Rome shortly after he lost his job. The next day, Italian President Giorgio Napolitano begged the government to deliver “the utmost attention for situations of greatest malaise and need” to help stop the wave of suicides.
That is absolutely tragic.
But you know what?
The United States is headed down the same path that Italy has gone.
In the coming years unemployment and suicide will both skyrocket here too.
Those that are sticking their heads in the sand right now will be absolutely blindsided by what is coming. But those that understand what is on the horizon and are preparing for it will have the best chance of making it through.
Italy is kind of like the Leaning Tower of Pisa. Everyone knows that it is going to fall eventually, and when it does fall it is going to be a major disaster.
When the financial system of Italy totally implodes, that will be a sign that things are really starting to accelerate. Expect dominoes to start tumbling much more rapidly in the aftermath.