The President of France has come up with a very creative way of solving the European debt crisis. On Sunday, a piece authored by French President Francois Hollande suggested that the ultimate solution to the problems currently plaguing Europe would be for every member of the eurozone to transfer all of their sovereignty to a newly created federal government. In other words, it would essentially be a “United States of Europe”. This federal government would have a prime minister, a parliament, a federal budget and a federal treasury. Presumably, the current national governments in Europe would continue to function much like state governments in the U.S. do. In the end, there may be some benefits to such a union – particularly for the weaker members of the eurozone. But at what cost would those benefits come?
When I first learned that French President Francois Hollande had proposed that the members of the eurozone should create their own version of a federal government, I was quite stunned. But I shouldn’t have been surprised. For the global elite, the answer to just about any problem is more centralization. The following comes from a Bloomberg article that was posted on Sunday…
French President Francois Hollande said that the 19 countries using the euro need their own government complete with a budget and parliament to cooperate better and overcome the Greek crisis.
“Circumstances are leading us to accelerate,” Hollande said in an opinion piece published by the Journal du Dimanche on Sunday. “What threatens us is not too much Europe, but a lack of it.”
So precisely what would “more Europe” look like?
Hollande envisions a central government that has both a parliament and a federal budget…
“I have proposed taking up Jacques Delors’ idea about euro government, with the addition of a specific budget and a parliament to ensure democratic control,” Hollande said.
His remarks touched on what analysts have seen as a major flaw in the euro.
Under the 1992 Treaty of Maastricht, countries which share a common currency must obey rules on borrowing and deficit spending.
But the Greek crisis saw one of the 19 eurozone members notch up successive worsening deficits and amass a mountain of debt. The problems were only addressed by bailouts from the European institutions and the International Monetary Fund (IMF).
Critics say the problem stems from a lack of centralised control over national fiscal policies, which today are jealously guarded areas of sovereignty.
In addition, this eurozone government would have its own prime minister. In essence, he would be the European version of the president of the United States. The following comes from the Independent…
There would be a eurozone government with its own prime minister, the officials said. This government would have its own budget – separate from the EU budget – to aid and invest in more fragile countries, It would try to harmonise corporation and pay-roll taxes to ensure fair competition in the eurozone.
Of course Hollande is not the only one calling for more centralization. Last month, European Central Bank President Mario Draghi, European Commission President Jean-Claude Juncker and Eurogroup President Jeroen Dijsselbloem proposed a plan that would create a shared European treasury…
Draghi called for the creation of a shared treasury within 10 years in a joint proposal with politicians including European Commission President Jean-Claude Juncker and Eurogroup President Jeroen Dijsselbloem last month.
I don’t anticipate that we will see any of these things implemented immediately.
However, what is important is the fact that this is where the European elite plan to take Europe. And when the next great European financial crisis erupts, these proposals will be offered as the “solutions” necessary to end the crisis.
During times of emergency, the elite are often able to push things through that they would never be able to accomplish under normal circumstances. At the moment, it would be extremely difficult to get everyone to agree to a full-blown “United States of Europe”. But if things were to start spinning wildly out of control and people were suddenly desperately clamoring for solutions, the environment would be quite different.
What that time arrives, the key will be to get Germany and France to agree on what a “United States of Europe” should look like. If Germany and France can agree, it is inevitable that most of the other members of the eurozone would ultimately fall in line.
One potential hurdle for the creation of this new government would be the euro. The current treaty agreements concerning the euro are quite complicated and quite restrictive. If Germany and France decided that they did want to create a “United States of Europe”, they might have to create an entirely new currency in order to accomplish that.
I know that sounds kind of crazy right now, but at one time the concept of “the euro” sounded really crazy too.
For the moment, the debt crisis in Europe just continues to get even worse. Greece, Portugal, Ireland, Italy, Spain, Belgium and France are all drowning in debt. Whether or not we see a “Grexit” in the short-term, I fully expect that European bond yields will continue to rise and European stocks will take quite a tumble in the months ahead.
I believe that we are right on the verge of a very significant European financial crisis. In particular, keep on eye on the big banks. Just like in the United States, the “too big to fail” banks in Europe are massively overleveraged and are tremendously exposed to derivatives.
In fact, the bank with the most exposure to derivatives on the entire planet is Deutsche Bank. It has been reported that Deutsche Bank has a whopping 75 trillion dollars worth of exposure to derivatives, their co-CEOs were recently forced to resign, and there are all sorts of rumblings about troubles going on behind the scenes at the bank.
What do you think would happen if the biggest and most important bank in Germany suddenly became the next Lehman Brothers?
That is something to think about.
Meanwhile, the euro continues to fall. For a long time, I have been repeating my prediction that the euro would fall to parity with the U.S. dollar.
One year ago, the EUR/USD was sitting at 1.35.
Today, it has come all the way down to 1.08.
There will be more ups and downs, but we are almost there.
A time of great chaos is coming to Europe, and the eurozone will be deeply shaken.
But whether or not there is a break up of the eurozone in the short-term, in the long-term the goal of the European elite is even more integration and even more centralization.
So even though there will be significant bumps in the road, I fully expect to see the “United States of Europe” that French President Francois Hollande has proposed.
Do you agree?
What do you think the future holds for Europe?
Please feel free to join the discussion by posting a comment below…
There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment. As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one. Right now, the debt to GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books. That breaks down to about $28,000 of debt for every man, woman and child on the entire planet. And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid. The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.
As we are seeing in Greece, you can eventually accumulate so much debt that there is literally no way out. The other European nations are attempting to find a way to give Greece a third bailout, but that is like paying one credit card with another credit card because virtually everyone in Europe is absolutely drowning in debt.
Even if some “permanent solution” could be crafted for Greece, that would only solve a very small fraction of the overall problem that we are facing. The nations of the world have never been in this much debt before, and it gets worse with each passing day.
According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis…
■ Costa Rica
■ Dominican Republic
■ El Salvador
■ The Gambia
■ Marshall Islands
■ Sri Lanka
■ St Vincent and the Grenadines
And there are another 14 nations that are right on the verge of one…
■ Cape Verde
■ Sao Tome e Principe
So what should be done about this?
Should we have the “wealthy” countries bail all of them out?
Well, the truth is that the “wealthy” countries are some of the biggest debt offenders of all. Just consider the United States. Our national debt has more than doubled since 2007, and at this point it has gotten so large that it is mathematically impossible to pay it off.
Europe is in similar shape. Members of the eurozone are trying to cobble together a “bailout package” for Greece, but the truth is that most of them will soon need bailouts too…
All of those countries will come knocking asking for help at some point. The fact is that their Debt to GDP levels have soared since the EU nearly collapsed in 2012.
Spain’s Debt to GDP has risen from 69% to 98%. Italy’s Debt to GDP has risen from 116% to 132%. France’s has risen from 85% to 95%.
In addition to Spain, Italy and France, let us not forget Belgium (106 percent debt to GDP), Ireland (109 debt to GDP) and Portugal (130 debt to GDP).
Once all of these dominoes start falling, the consequences for our massively overleveraged global financial system will be absolutely catastrophic…
Spain has over $1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut or debt forgiveness for them would trigger systemic failure in Europe.
EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%.
Things in Asia look quite ominous as well.
According to Bloomberg, debt levels in China have risen to levels never recorded before…
While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.
Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.
And remember, that doesn’t even include government debt. When you throw all forms of debt into the mix, the overall debt to GDP number for China is rapidly approaching 300 percent.
In Japan, things are even worse. The government debt to GDP ratio in Japan is now up to an astounding 230 percent. That number has gotten so high that it is hard to believe that it could possibly be true. At some point an implosion is coming in Japan which is going to shock the world.
Of course the same thing could be said about the entire planet. Yes, national governments and central banks have been attempting to kick the can down the road for as long as possible, but everyone knows that this is not going to end well.
And when things do really start falling apart, it will be unlike anything that we have ever seen before. Just consider what Egon von Greyerz recently told King World News…
Eric, there are now more problem areas in the world, rather than stable situations. No major nation in the West can repay its debts. The same is true for Japan and most of the emerging markets. Europe is a failed experiment for socialism and deficit spending. China is a massive bubble, in terms of its stock markets, property markets and shadow banking system. Japan is also a basket case and the U.S. is the most indebted country in the world and has lived above its means for over 50 years.
So we will see twin $200 trillion debt and $1.5 quadrillion derivatives implosions. That will lead to the most historic wealth destruction ever in global stock, with bond and property markets declining at least 75 – 95 percent. World trade will also contract dramatically and we will see massive hardship across the globe.
So what do you think is coming, and how bad will things ultimately get once this global debt crisis finally spins totally out of control?
Please feel free to add to the discussion by posting a comment below…
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 debt crisis in Puerto Rico could potentially cost financial institutions in the United States tens of billions of dollars in losses. This week, Puerto Rico Governor Alejandro Garcia Padilla publicly announced that Puerto Rico’s 73 billion dollar debt is “not payable,” and a special adviser that was recently appointed to help straighten out the island’s finances said that it is “insolvent” and will totally run out of cash very shortly. At this point, Puerto Rico’s debt is approximately 15 times larger than the per capita median debt of the 50 U.S. states. Yes, the Greek debt crisis is larger, as Greece currently owes about $350 billion to the rest of the planet. But only about $14 billion of that total is owed to U.S. financial institutions. But with Puerto Rico, things are very different. Just about the entire 73 billion dollar debt is owed to U.S. financial institutions, and this could potentially cause massive problems for some extremely leveraged Wall Street firms.
There is a reason why Puerto Rico is called “America’s Greece”. In Puerto Rico today, more than 40 percent of the population is living in poverty, the unemployment rate is over 12 percent, and the economy of the small island nation has continually been in recession since 2006.
Yet all this time Puerto Rico has continued to pile up even more debt. Finally, it has gotten to the point where all of this debt is simply unpayable
Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.
Puerto Rico “urgently needs our help,” Rhodes said. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he added.
This is why I hammer on the danger of U.S. government debt so often. As we see with the examples of Greece and Puerto Rico, eventually a day of reckoning always arrives. And when the day of reckoning arrives, power shifts into the hands of those that you owe the money too.
It would be hard to understate just how severe the debt crisis in Puerto Rico has become. Former IMF economist Anne Krueger has gone so far as to say that it is “really dire”…
“The situation is dire, and I mean really dire,” said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. “The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico.”
So who is going to get left holding the bag?
As I mentioned at the top of this article, major U.S. financial institutions are very heavily exposed. Income from Puerto Rican bonds is exempt from state and federal taxation, and so that made them very attractive to many U.S. investors. According to USA Today, there are 180 mutual funds that have “at least 5% of their portfolios in Puerto Rican bonds”…
The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors. Morningstar, an investment research firm based in Chicago, estimated in 2013 that 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.
It is important to keep in mind that many of these financial institutions are very highly leveraged. So just a “couple of percentage points” could mean the different between life and death for some of these firms.
And unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”. In fact, the largest holder of Puerto Rican debt has already stated that it is very much against any kind of restructuring…
U.S. fund manager OppenheimerFunds, the largest holder of Puerto Rico debt among U.S. municipal bond funds, warned the island it stands ready to defend the terms of bonds it holds, a day after the governor said he wanted to restructure debt and postpone bond payments.
What Oppenheimer is essentially saying is that it does not plan to give Puerto Rico any slack at all. Here is more from the article that I just quoted above…
OppenheimerFunds, with about $4.5 billion exposure to Puerto Rico according to Morningstar, said it believed the island could repay bondholders while providing essential services to citizens and growing the economy. It said it stood ready “to defend the previously agreed to terms in each and every bond indenture.”
“We are disheartened that Governor Padilla, in a public forum, has called for negotiations with other creditors, representing and including the millions of individual Americans that hold Puerto Rico municipal bonds,” a spokesman for Oppenheimer said in a statement.
But Puerto Rico simply does not have the money to meet all of their debt obligations.
So somebody is not going to get paid at some point.
When that happens, those that insure Puerto Rican bonds are also going to take tremendous losses. The following comes from a recent piece by Stephen Flood…
Now, bondholders are at risk as are the funds which hold Puerto Rican bonds and, more importantly, those who insure them in the derivatives market.
Dave Kranzler, from Investment Research Dynamics has warned that there are signs that the Puerto Rico situation may not remain a local crisis for much longer.
He points out that share prices of MBIA, the bond insurers, have been plummeting. MBIA are valued at $3.9 billion whereas their exposure to Puerto Rican debt is around $4.5 billion. Kranzler reckons their exposure could even be multiples of that figure. A default could wipe them out.
He also points out that the firm’s largest shareholders are Warburg Pincus, the firm to which Timothy Geithner went after his stint as Treasury Secretary, when he helped paper over the chasms opening up in the financial system.
Did you notice the word “derivatives” in that quote?
Hmmm – who has been writing endless articles warning about the danger of derivatives for years?
Who has been warning that “this gigantic time bomb is going to go off and absolutely cripple the entire global financial system“?
When Puerto Rico defaults, bond insurers are going to be expected to step up and make huge debt service payments to investors.
But this just might bankrupt some of these big bond insurers. In fact, we have already started to see the stock prices of some of these bond insurers begin to plummet. The following comes from the Wall Street Journal…
Bond insurers MBIA Inc. and Ambac Financial Group Inc. are down again Tuesday as concerns over Puerto Rico’s ability to repay its debt multiply.
Investors fear that both firms face the potential for steep losses on their promises to backstop billions of Puerto Rico’s $72 billion of debt.
MBIA’s stock closed down 23% Monday, and fell more than 10% before rebounding Tuesday. By late afternoon, the stock was down 6%. Ambac’s stock fell 12% Monday and was off 14% Tuesday.
Of course Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere, just like Greece is just the tip of the iceberg of the coming debt crisis in Europe.
So stay tuned, because the second half of 2015 has now begun, and the remainder of this calendar year promises to be extremely “interesting”.
Europe is on the verge of a horrifying financial meltdown, and there are only a few short weeks left to avert total disaster. On Monday, talks that were supposed to bring about yet another temporary “resolution” to the Greek debt crisis completely fell apart. The new Greek government has entirely rejected the idea of a six month extension of the current bailout. The Greeks want a new deal which would enable them to implement the promises that have been made to the voters. But that is not going to fly with the Germans, among others. They expect the Greeks to fulfill the obligations that were agreed to previously. The two sides are not even in the same ballpark at this point, and things are starting to get very personal. It is no secret that the new Greek government does not like the Germans, and the Germans are not particularly fond of the Greeks at this point. But unless they can find a way to work out a deal, things could get quite messy very rapidly. The Greek government has about three weeks of cash left, and any changes to the current bailout arrangement would have to be approved by parliaments all over Europe by March 1st. And the stakes are incredibly high. 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.
On Monday, eurozone officials tried to get the Greeks to extend the current bailout package for six months with the current austerity provisions in place. Greek government officials responded by saying that “those who bring this back are wasting their time” and that those negotiating on behalf of the eurozone are being “unreasonable”…
A Greek government official said that a draft text presented to eurozone finance ministers meeting in Brussels on Monday spoke of Greece extending its current bailout package and as such was “unreasonable” and would not be accepted.
Without specifying who put forward the text to the meeting chaired by Dutch Finance Minister Jeroen Dijsselbloem, the official said: “Some people’s insistence on the Greek government implementing the bailout is unreasonable and cannot be accepted.”
Most observers have speculated that the new Greek government would give in to the demands of the rest of the eurozone when push came to shove.
But these new Greek politicians are a different breed. They are not establishment lackeys. Rather, they are very principled radicals, and they are not about to be pushed around. I certainly do not agree with their politics, but I admire the fact that they are willing to stand up for what they believe. That is a very rare thing these days.
On Monday, Greek finance minister Yanis Varoufakis shared the following in the New York Times…
I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed.
Does that sound like a man that is going to back down to you?
Meanwhile, the other side continues to dig in as well.
Just consider the words of the German finance minister…
Wolfgang Schaeuble, the German finance minister, accused the Greek government of “behaving irresponsibly” by threatening to tear up agreements made with the eurozone in return for access to the loans which are all that stand between Greece and financial collapse.
“It seems like we have no results so far. I’m quite skeptical. The Greek government has not moved, apparently,” he said.
“As long as the Greek government doesn’t want a program, I don’t have to think about options.”
Global financial markets are still acting as if they fully expect a deal to get done eventually.
I am not so sure.
And without a doubt, time is running short. As I mentioned above, something has got to be finalized by March 1st. The following comes from the Wall Street Journal…
Any changes to the content or expiration date of Greece’s existing €240 billion ($273 billion) bailout have to be decided by Friday, to give national parliaments in Germany, Finland and the Netherlands enough time to approve them before the end of the month. Without such a deal, Greece will be on its own on March 1, cut loose from the rescue loans from the eurozone and the International Monetary Fund that have sustained it for almost five years.
So what happens if there is no deal and Greece is forced to leave the eurozone?
Below, I have shared an excerpt from an article that details what Capital Economics believes would happen in the event of a “Grexit”…
- The drachma would be back. The euro would be effectively abandoned, and Greece would return to the drachma, its previous currency (it might take a new name). The drachma would likely tumble in value against the euro as soon as it was issued, and how much the government could print quickly would be a big issue.
- It would have to be fast, with capital controls. There would be people trying to pull their money out of Greece’s banks en masse. The Greek government would have to make that illegal pretty quickly. The European Central Bank drew up Grexit plans in 2012, and might be dusting them off now.
- European life support for Greek banks would be withdrawn. Greek banks can currently access emergency liquidity assistance from the ECB, which would be removed if Greece left the euro.
- Likely unrest and disorder. Barclays expects that this sudden economic collapse would “aggravate social unrest”, and notes that historically similar moves have caused a 45-85% devaluation of the currency. Capital Economics suggests that the drop could be more mild, closer to 20%, and Oxford Economics says 30%.
- Greece would resume economic policymaking. Greece’s central bank would probably start doing its own QE programme, and the government would likely return to running deficits, no longer restrained by bailout rules (though investors would probably want large returns, given the risk of another default).
- Inflation would spike immediately, but both Capital Economics and Oxford Economics say that should be temporary. It might look a bit like Russia this year — with the new currency in freefall until it finds its level against the euro, prices inside Greece would rise at dramatic speed. The inflation might be temporary, however, because with unemployment above 20%, Greece has plenty of spare labour slack to produce more.
That certainly does not sound good.
And once Greece leaves, everyone would be wondering who is next, because there are quite a few other deeply financially troubled nations in the eurozone.
David Stockman believes that Spain is a prime candidate…
In spite of the “recovery” in Spain, close to 24% are still unemployed. That statistic explains Pessimism in the Streets.
The crisis is here to stay according to significant majority of Spaniards. The general perception is that the current situation in which the country is negative and far from getting better, can only stay stagnant or even worse.
A Metroscopia poll published in El País makes it clear that the Spanish are unhappy with the current state of the country. Five out of six (83%) see the economic situation as “bad”, while more than half of the remaining perceive “regular”.
Right now, Europe is already teetering on the brink of an economic depression.
If this Greek debt crisis is not resolved, it could set in motion a chain of events which could start collapsing financial institutions all over Europe.
Yes, we have been here before and a deal has always emerged in the end.
But this time is different. This time very idealistic radicals are running things in Greece, and the “old guard” in Europe has no intention of giving in to them.
So let’s watch and see how this game of “chicken” plays out.
I have a feeling that it is not going to end well.
Over the past decade, there has been only one other time when the value of the U.S. dollar has increased by so much in such a short period of time. That was in mid-2008 – just before the greatest financial crash since the Great Depression. A surging U.S. dollar also greatly contributed to the Latin American debt crisis of the early 1980s and the Asian financial crisis of 1997. Today, the globe is more interconnected than ever. Most global trade is conducted in U.S. dollars, and much of the borrowing done by emerging markets all over the planet is denominated in U.S. dollars. When the U.S. dollar goes up dramatically, this can put a tremendous amount of financial stress on economies all around the world. It also has the potential to greatly threaten the stability of the 65 trillion dollars in derivatives that are directly tied to the value of the U.S. dollar. The global financial system is more vulnerable to currency movements than ever before, and history tells us that when the U.S. dollar soars the global economy tends to experience a contraction. So the fact that the U.S. dollar has been skyrocketing lately is a very, very bad sign.
Most of the people that write about the coming economic collapse love to talk about the coming collapse of the U.S. dollar as well.
But in the initial deflationary stage of the coming financial crisis, we are likely to see the U.S. dollar actually strengthen considerably.
As I have discussed so many times before, we are going to experience deflation first, and after that deflationary phase the desperate responses by the Federal Reserve and the U.S. government to that deflation will cause the inflationary panic that so many have written about.
Yes, someday the U.S. dollar will essentially be toilet paper. But that is not in our immediate future. What is in our immediate future is a “flight to safety” that will push the surging U.S. dollar even higher.
This is what we witnessed in 2008, and this is happening once again right now.
Just look at the chart that I have posted below. You can see the the U.S. dollar moved upward dramatically relative to other currencies starting in mid-2008. And toward the end of the chart you can see that the U.S. dollar is now experiencing a similar spike…
At the moment, almost every major currency in the world is falling relative to the U.S. dollar.
For example, this next chart shows what the euro is doing relative to the dollar. As you can see, the euro is in the midst of a stunning decline…
Instead of focusing on the U.S. dollar, those that are looking for a harbinger of the coming financial crisis should be watching the euro. As I discussed yesterday, analysts are telling us that if Greece leaves the eurozone the EUR/USD could fall all the way down to 0.90. If that happens, the chart above will soon resemble a waterfall.
And of course it isn’t just the euro that is plummeting. The yen has been crashing as well. The following chart was recently posted on the Crux…
Unfortunately, most Americans have absolutely no idea how important all of this is. In recent years, growing economies all over the world have borrowed gigantic piles of very cheap U.S. dollars. But now they are faced with the prospect of repaying those debts and making interest payments using much more expensive U.S. dollars.
Investors are starting to get nervous. At one time, investors couldn’t wait to pour money into emerging markets, but now this process is beginning to reverse. If this turns into a panic, we are going to have one giant financial mess on our hands.
The truth is that the value of the U.S. dollar is of great importance to every nation on the face of the Earth. The following comes from U.S. News & World Report…
In the early ’80s, a bullish U.S. dollar contributed to the Latin American debt crisis, and also impacted the Asian Tiger crisis in the late ’90s. Emerging markets typically have higher growth, but carry much higher risk to investors. When the economies are doing well, foreign investors will lend money to emerging market countries by purchasing their bonds.
They also deposit money in foreign banks, which facilitates higher lending. The reason for this is simple: Bond payments and interest rates in emerging markets are much higher than in the U.S. Why deposit cash in the U.S. and earn 0.25 percent, when you could earn 6 percent in Indonesia? With the dollar strengthening, the interest payments on any bond denominated in U.S. dollars becomes more expensive.
Additionally, the deposit in the Indonesian bank may still be earning 6 percent, but that is on Indonesian rupiahs. After converting the rupiahs to U.S. dollars, the extra interest doesn’t offset the loss from the exchange. As investors get nervous, the higher interest on emerging market debt and deposits becomes less alluring, and they flee to safety. It may start slowly, but history tells us it can quickly spiral out of control.
Over the past few months, I have been repeatedly stressing that so many of the signs that we witnessed just prior to previous financial crashes are happening again.
Now you can add the skyrocketing U.S. dollar to that list.
If you have not seen my previous articles where I have discussed these things, here are some places to get started…
“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”
“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”
The warnings signs are really starting to pile up.
When we look back at past financial crashes, there are recognizable patterns that can be identified.
Anyone with half a brain should be able to see that a large number of those patterns are unfolding once again right before our eyes.
Unfortunately, most people in this world end up believing exactly what they want to believe.
No matter how much evidence you show them, they will not accept the truth until it is too late.
Never before has the world faced such a serious debt crisis. Yes, in the past there have certainly been nations that have gotten into trouble with debt, but we have never had a situation where virtually all of the major powers around the globe were all drowning in debt at the same time. And what makes this crisis even more unprecedented is that everyone on the planet is using fiat currency that is backed up by nothing. It is all just a bunch of paper and data points that people have faith in. Right now, confidence in this system is being shaken as debt levels skyrocket to extremely dangerous levels. Many are openly wondering how much longer this can possibly go on.
Just consider what is going on over in Europe right now. Even the countries that have supposedly “tried austerity” continue to rack up debt at a mind blowing pace. New numbers that have just been released show that government debt to GDP ratios for some of the most financially troubled nations in Europe are absolutely soaring…
- Euroarea: 92.2%, up from 88.2% a year ago
- Greece: 160.5%, up from 136.5% a year ago
- Italy: 130.3%; up from 123.8% a year ago
- Portugal: 127.2%, up from 112.3% a year ago
- Ireland: 125.1%, up from 106.8% a year ago
- Spain: 88.2%, up from 73.0% a year ago
- Netherlands: 72.0%, up from 66.7% a year ago
Meanwhile, the debt to GDP ratio in Japan is now well past the 200% mark and continues to march upward with no apparent end in sight. The following is from a recent MSN article…
In Japan, the good news is that the nation’s budget for the fiscal year, which started on April 1, will see the government raise a higher percentage of spending from tax revenue than at any other time in the past four years. The bad news is that the government will still cover 46.3% of its spending from borrowing. The Organisation for Economic Cooperation and Development estimates that Japan’s budget deficit for 2013 amounted to 10.3% of gross domestic product.
In China, the big problem is the absolutely stunning growth of private domestic debt. According to a recent World Bank report, the total amount of credit in China has risen from 9 trillion dollars in 2008 to 23 trillion dollars today.
That increase is roughly equivalent to the entire U.S. commercial banking system.
According to financial journalist Ambrose Evans-Pritchard, the ratio of private domestic debt to GDP in China is now wildly out of control…
The 160pc debt ratio for China is based on a conservative measure of credit. Fitch says it is 200pc if you count all offshore vehicles, trusts, letters of credit etc.
This morning China Securities Journal – an arm of the regulators – said it may really be 221pc.
Well, what about the United States?
As I noted the other day, our ratio of federal government debt to GDP has shot up like a rocket since 2008…
At this point, the U.S. already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain. It is a giant mess, and yet our politicians continue to recklessly spend more money.
And of course state and local governments all over the nation are drowning in debt too. The bankruptcy of Detroit is forcing people to come to grips with how bad things really are. Sadly, as Meredith Whitney explained the other day, there are going to be a lot more municipal bankruptcies coming down the pipeline…
As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the US municipal market – which is what the bond-peddlers are now telling their clients. The aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.
Municipal bankruptcies have historically been rare for a number of reasons – including the states’ determination to preserve their credit ratings, their access to cheap funding and the stigma of bankruptcy. But, these days, things are very different in the world of municipal finance.
At the root of the problem is the incentive system that elected officials used to face. For decades, across the US, local leaders ran up tabs for future taxpayers; they promised pensions and other benefits for public employees that have strong legal protection. That has been a great source of patronage for elected officials: they can promise all sorts of future perks to loyal supporters (state and local workers) with very little accountability on the delivery of those promises.
And of course the overall debt level in the United States continues to grow much, much faster than our overall economy is growing.
The greatest debt bubble in the history of the planet is still expanding.
How long will it be before it bursts?
That is a very good question. For now, our “leaders” appear to just be trying to keep the party going for as long as possible. They know that if they suddenly change course hard times will hit almost immediately. For example, just check out what Federal Reserve Chairman Ben Bernanke told Congress last week…
With the economy still facing risks, especially from government spending cuts, Bernanke told a congressional panel on Wednesday the Fed is still planning to trim its quantitative easing stimulus, if growth continues at a steady pace.
But expectations that the Fed was poised to start tightening monetary policy, which have sent interest rates jumping and sparked turmoil in global markets, were unwarranted, he stressed.
“I don’t think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low,” Bernanke told the House Financial Services Committee.
“If we were to tighten policy, the economy would tank.”
Nobody wants the economy to “tank”, but the truth is that the more debt that we run up, the larger our long-term economic problems become.
And a growing percentage of Americans realize that something has seriously gone wrong. According to a recent Pew Research survey, 44% of all Americans believe that an economic recovery is still “a long way off“.
Unfortunately, the reality of the matter is that we are already living in the “economic recovery”.
This is about as good as it is going to get.
The truth is that the real storm has not even hit yet. When the debt bubble finally bursts, we are going to see economic chaos in this country unlike anything that we have ever experienced before.
I hope that you are getting ready.