When it comes to geopolitics, there are often wheels working within wheels that are working within wheels. Once in a while we get a peek behind the scenes, but for the most part the machinations of the global elite remain shrouded in mystery most of the time. And sometimes the global elite appear to be doing things that, on the surface, do not seem to make much sense at all. What is going on in Europe is a perfect example of this. If everyone was negotiating honestly, I believe that a Greek debt deal would have been reached by now. As this endless crisis has stretched on month after month, it has become increasingly apparent that more is going on here than meets the eye. In particular, the IMF has been standing in the way of a deal time after time. So what do IMF officials want? Are they looking for the “unconditional surrender” of this new Greek government in order to send a message to other governments that would potentially defy them? Or could it be possible that the IMF actually wants a Greek debt default for some other insidious reason?
When the latest Greek proposal was embraced with enthusiasm by EU officials, many hoped that this meant that the crisis would soon be resolved. But it turns out that there is still one very important player that is not happy, and that is the IMF. The following comes from the Wall Street Journal…
But the IMF is still unhappy with key aspects of Greece’s new economic proposals and German officials were irritated by the speed with which the commission welcomed them, warning that much work needs to be done.
Greece’s plan calls for reducing the deficits in its pension system and government budget by relying heavily on raising taxes and social-security contributions, whereas the IMF wanted bigger spending cuts.
The Washington-based IMF has said Greece’s economy is already too heavily taxed and that too many additional tax increases would hurt economic growth, making it harder to pay down Greece’s debt.
“It is still short of everything that should be expected,” IMF Managing Director Christine Lagarde said Monday, suggesting Greece will have to modify its proposals significantly to win the IMF’s backing.
So what would make the IMF “happy”?
Would anything short of total capitulation by the Greek government suffice?
Meanwhile, members of Syriza are expressing a high level of frustration with the compromises that Greek Prime Minister Alexis Tsipras has already agreed to. At this point, there is even doubt whether the current Greek proposal could get through the Greek parliament. The following comes from Bloomberg…
Greek Prime Minister Alexis Tsipras is facing the first signs of dissent within his own party over his latest plan to end a five-month standoff with creditors.
Some of Syriza’s more radical and populist lawmakers expressed opposition Tuesday to the proposal as the deal’s backers called on members to see the bigger picture.
“Personally, I cannot support such an agreement that is contrary to our election promises,” Dimitris Kodelas, a Syriza lawmaker associated with former Maoists, said in an interview. “I do not care about the consequences of my decision.”
Despite all of the optimism that we have seen this week, the odds of a Greek debt deal getting pushed through are looking slimmer by the day.
And even if a deal somehow miraculously happens, all it would really mean is that the can has been kicked down the road for a few more months…
Assuming Tsipras can force the deal through the Greek parliament, and that key creditors such as the IMF and Germany accept it too, it will do little more than buy time for negotiations on yet another rescue.
The final tranche of cash from the existing bailout should be enough to meet repayments due to the IMF and European Central Bank through the end of August. But the Greek government will then have to find more than two billion euros for both institutions in September and October.
“If this week concludes with agreement between Greece and its creditors, it won’t be long before the next chapter in this drama,” said Angus Campbell, senior analyst at FxPro.
And no matter what happens by the end of this month, it is a virtual certainty that the economic depression in Greece will just continue to deepen.
At this point, normal economic activity in the nation has pretty much ground to a halt. Just consider the following excerpt from a recent Zero Hedge article…
“Business-to-business payments have almost been paused,” one Athens businessman says. “They are just rolling over postdated cheques.”
For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties
“There’s a real issue of moral hazard . . . Around 70 percent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.
For a long time, I have been warning that the next major economic crisis would begin in Europe before spreading across the entire globe.
Greece has a relatively small economy, but Italy, Spain and France are going down the exact same road that Greece has gone.
And what IMF officials are doing right now is that they are setting a precedent for future debt negotiations that they know are almost certainly coming with other countries in the future.
Sadly, most of my readers (being Americans) don’t really grasp the importance of what is going on over in Europe. We are watching a horrific train wreck unfold in slow-motion, and what is going to happen over the next few weeks is going to have massive implications for the entire planet.
As we move toward the second half of 2015, signs of financial turmoil are appearing all over the globe. In Greece, a full blown bank run is happening right now. Approximately 2 billion euros were pulled out of Greek banks in just the past three days, Barclays says that capital controls are “imminent” unless a debt deal is struck, and there are reports that preparations are being made for a “bank holiday” in Greece. Meanwhile, Chinese stocks are absolutely crashing. The Shanghai Composite Index was down more than 13 percent this week alone. That was the largest one week decline since the collapse of Lehman Brothers. In the U.S., stocks aren’t crashing yet, but we just witnessed one of the largest one week outflows of capital from the bond markets that we have ever witnessed. Slowly but surely, we are starting to see the smart money head for the exits. As one Swedish fund manager put it recently, everyone wants “to avoid being caught on the wrong side of markets once the herd realizes stocks are over-valued“.
I don’t think that most people understand how serious things have gotten already. In Greece, so much money has been pulled out of the banks that the European Central Bank admits that Greek banks may not be able to open on Monday…
The European Central Bank told a meeting of euro zone finance ministers on Thursday that it was not sure if Greek banks, which have been suffering large daily deposit outflows, would be able to open on Monday, officials with knowledge of the talks said.
Greek savers have withdrawn about 2 billion euros from banks over the past three days, with outflows accelerating rapidly since talks between the government and its creditors collapsed at the weekend, banking sources told Reuters.
All over social media, people are sharing photos of long lines at Greek ATMs as ordinary citizens rush to get their cash out of the troubled banks. Here is one example…
And if there is no debt deal by the end of this month, the Greek debt crisis is going to totally spin out of control and financial chaos will begin to erupt all over Europe. But instead of trying to be reasonable, EU president Donald Tusk “has delivered an ultimatum to Greece”, and it almost appears as if EU officials are more concerned about winning a power struggle than they are about averting financial catastrophe…
EU president Donald Tusk has delivered an ultimatum to Greece, claiming the country must ‘accept an offer or default’ at an emergency summit set for Monday – in a last-ditch effort to stop the debt-stricken nation crashing out of the euro.
‘We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default,’ Mr Tusk said today.
His comments come as Greek Prime Minister Alexis Tsipras warned that his country’s exit from the eurozone would trigger the collapse of the single currency.
‘The famous Grexit cannot be an option either for the Greeks or the European Union,’ he said in an Austrian newspaper interview.
‘This would be an irreversible step, it would be the beginning of the end of the eurozone.’
While all of this has been going on, the obscene stock market bubble in China has started to implode. Just check out the following numbers from Zero Hedge…
As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week – the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%).
Under normal circumstances, numbers like these would be reason for a full-blown financial panic over in Asia. But these are not normal times. Even with these losses, stock prices in China are still massively overinflated. For example, USA Today is reporting that the median stock over in China is “trading at 95 times earnings”…
Margin debt in China has soared to a record $363 billion, according to Bloomberg, and the median stock in mainland China is now trading at 95 times earnings, which even tops the price-to-earnings multiple of 68 back at the 2007 peak.
That is absolutely ridiculous. When a stock is trading at 25 or 30 times earnings it is overpriced. So these numbers that are coming out of China are beyond crazy, and what this means is that Chinese stocks have much, much farther to fall before they get back to any semblance of reality.
Meanwhile, in the U.S. money is flowing out of bonds at a staggering pace. The following quote originally comes from Bank of America…
“High grade credit funds suffered their biggest outflow this year, and double the previous week (and also the biggest since June 2013). High yield outflows also jumped to $1.1bn, the biggest since the start of the year. However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”
What this means is that big trouble is brewing in the bond markets. This is something that I warned about in my previous article entitled “Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode“.
For the moment, U.S. stocks are doing fine. But just about everyone can see that we in a massive financial bubble that could burst at any time. Presidential candidate Donald Trump says that what we are witnessing is a “big fat economic and financial bubble like you’ve never seen before”…
Yesterday during an interview on MSNBC, presidential candidate Donald Trump said he has some big names in mind for the Treasury secretary if he wins the White House. “I’d like guys like Jack Welch. I like guys like Henry Kravis. I’d love to bring my friend Carl Icahn.” He also opined on the economy and the stock market, admitting that the Fed has benefited people like him but that the economy and is in a “big fat economic and financial bubble like you’ve never seen before.“
Ron Paul also believes that this financial bubble is going to end very badly. Just check out what he told CNBC earlier this week…
Despite record highs in the market, former Rep. Ron Paul says the Fed’s easy money policies have left stocks and bonds are on the verge of a massive collapse.
“I am utterly amazed at how the Federal Reserve can play havoc with the market,” Paul said on CNBC’s “Futures Now” referring to Thursday’s surge in stocks. The S&P 500 closed less than 1 percent off its all-time high. “I look at it as being very unstable.”
In Paul’s eyes, “the fallacy of economic planning” has created such a “horrendous bubble” in the bond market that it’s only a matter of time before the bottom falls out. And when it does, it will lead to “stock market chaos.”
Yes, this financial bubble has persisted far longer than many believed possible, but all irrational bubbles eventually burst.
And you know what they say – the bigger they come the harder they fall.
When this gigantic financial bubble finally implodes, it is going to be absolutely horrifying, and the entire planet is going to be shocked by the carnage.
The Greek financial system is in the process of totally imploding, and the rest of Europe will soon follow. Neither the Greeks nor the Germans are willing to give in, and that means that there is very little chance that a debt deal is going to happen by the end of June. So that means that we will likely see a major Greek debt default and potentially even a Greek exit from the eurozone. At this point, credit default swaps on Greek debt have risen 456 percent in price since the beginning of this year, and the market has priced in a 75 percent chance that a Greek debt default will happen. Over the past month, the yield on two year Greek bonds has skyrocketed from 20 percent to more than 30 percent, and the Greek stock market has fallen by a total of 13 percent during the last three trading days alone. This is what a financial collapse looks like, and if Greece does leave the euro, we are going to see this kind of carnage happen all over Europe.
Officials over in Europe are now openly speaking of the need to prepare for a “state of emergency” now that negotiations have totally collapsed. At one time, it would have been unthinkable for Greece to leave the euro, but now it appears that this is precisely what will happen unless a miracle happens…
Greece is heading for a state of emergency and an exit from the euro following the collapse of talks to agree a bailout deal, senior EU officials warned last night.
Europe must be prepared to step in otherwise Greek society would face an unprecedented crisis with power blackouts, medicine shortages and no money to pay for police, they said.
In the past, the Greeks have always buckled under pressure. But this new Greek government was elected with a mandate to end austerity, and so far they have shown a remarkable amount of resolve. In order for a debt deal to happen, one side is going to have to blink, and at this point it does not look like it will be the Greeks…
The world’s financial markets are facing up to the possibility that Greece could soon become the first country to crash out of Europe’s single currency. Talks between Athens and its eurozone creditors have collapsed in acrimony just days before a final deadline for Greece to unlock the €7.2bn (£5.2bn) in bailout funds it needs to avoid a catastrophic debt default.
The Greek Prime Minister, Alexis Tsipras, accused the creditor powers of hidden “political motives” in their demands that Greece make further cuts to public pension payments in return for the financial aid. “We are shouldering the dignity of our people, as well as the hopes of the people of Europe,” Mr Tsipras said in a defiant statement. “We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy.”
As we approach the point of no return, both sides are preparing for the endgame.
In Greece, members of parliament have been studying what happened in Iceland a few years ago. Many of them believe that a Greek debt default combined with a nationalization of Greek banks and a Greek exit from the euro could set the nation back on the path to prosperity fairly rapidly. The following comes from the Telegraph…
The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers.
Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.
The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.
Meanwhile, in a desperate attempt to get the Greeks to give in at the last moment, Greek’s creditors are preparing to pull out all the stops in order to put as much financial pressure on Greece as possible…
Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
For a long time, most in the financial world assumed that a debt deal would eventually happen. But now reality is setting in. As I mentioned at the top of this article, the cost to insure Greek debt has risen by an astounding 456 percent since the beginning of this year…
Given these dramatic stakes, the risk of a Greek default has gone way up. One way to measure that risk is by looking at the skyrocketing price of insurance policies that would pay out if Greek bonds go bust. The cost to insure Greek debt for one year against the risk of default has skyrocketed 456% since the start of the 2015, according to FactSet data.
These insurance-like contracts, known as credit default swaps, imply there is a 75% to 80% probability of Greece defaulting on its debt, according to Jigar Patel, a credit strategist at Barclays.
The probability of a Greek default soars to a whopping 95% for five-year CDS, Patel said.
“Default is looking more and more likely,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a note to clients on Tuesday.
And in recent days, we have also seen Greek stocks and Greek bonds totally crash. The following comes from CNN…
The Greek stock market has plummeted 13% over the past three trading days, including a 3% drop on Tuesday alone.
In the bond market, the yield on Greek two-year debt has skyrocketed to 30.2%. A month ago, the yield was only 20%. Yields rise as bond prices fall.
Of course if there is a Greek debt default and Greece does leave the euro, it won’t just be Greece that pays the price.
As I have written about previously, there are tens of trillions of dollars in derivatives that are directly tied to currency exchange rates and 505 trillion dollars in derivatives that are directly tied to interest rates. A “Grexit” would cause the euro to drop like a rock and interest rates all over the continent would start to go crazy. The financial chaos that a “Grexit” would cause should not be underestimated.
And there are signs that some of Europe’s biggest banks are already on the verge of collapse. For example, just consider what has been going on at the biggest bank in Germany. Both of the co-CEOs at Deutsche Bank recently resigned, and it is increasingly looking as if it could soon become Europe’s version of Lehman Brothers. The following summary of the recent troubles at Deutsche Bank comes from an article that was posted on NotQuant…
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
- In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
- June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
And that’s where we are now. How bad is it? We don’t know because we won’t be permitted to know. But these are not the moves of a healthy company.
For a very long time, I have been warning that a major financial crisis was coming to Europe, and for a very long time the authorities in Europe have been able to successfully kick the can down the road.
But now it looks like we have reached the end of the road, and a day of reckoning is finally here.
Nobody is quite sure what is going to happen next, but almost everyone agrees that it isn’t going to be pretty.
So you better buckle up, because it looks like we are all in for a wild ride as we enter the second half of this year.
The global financial system is not a game of checkers. It is a game of chess. All over the world today, news headlines are proclaiming that this new Greek debt deal has completely eliminated the possibility of a chaotic Greek debt default. Unfortunately, that is simply not the case. Rather, the truth is that this new deal actually “sets the table” for a Greek debt default. When I was studying and working in the legal arena, I learned that sometimes you make an agreement so that you can get the other side to break it. That may sound very strange to the average person on the street, but this is how the game is played at the highest levels. It is all about strategy. And in this case, the new debt deal imposes such strict conditions on Greece that it is almost inevitable that Greece will fail to meet some of them. When Greece does fail, Germany and the other northern European nations may try to claim that they “did everything that they could” but that Greece just did not “live up to its obligations”. So does this mean that we will definitely see a chaotic Greek debt default? No. What this does mean is that the chess pieces are being moved into position for one.
The following are 8 reasons why the Greek debt deal may not stop a chaotic Greek debt default….
#1 Greece Is Being Set Up To Fail
The terms of this new debt deal impose some incredibly harsh austerity measures on Greece and from now on the Greek government will be subject to “permanent monitoring” by EU officials.
In other words, they will be under a microscope.
Any violation of the terms of the debt deal could be used as a pretext to bring down the hammer and cut off bailout funds. Potentially, this could even happen just a few weeks from now.
It has become obvious that there are many politicians in Europe that would very much like to kick Greece out of the euro. In a recent column, the International Business Editor of The Telegraph summed up the situation this way….
It is clear that Berlin, Helsinki, and the Hague have taken the decision to eject Greece from the euro whatever the country now does. Even if Greece complies to the letter with the impossible terms of the EU-IMF Troika, it will not make any difference. A fresh pretext will be found.
#2 The Next Greek Election Could Bring An End To The Bailout Deal Overnight
The next national Greek elections are scheduled for April. Political parties opposed to the bailout have been surging in recent polls. It is becoming increasingly likely that the next Greek government will abandon this new deal entirely.
The following is what hedge fund manager Dennis Gartman told CNBC about what is likely to happen after the next elections….
“A new government is going to come to power following elections that shall take place sometime this spring, and if anyone anywhere believes that the next Greek government shall do anything other than abrogate all the agreements made with the ‘troika,’ then we have a bridge we’d like to sell them at a very high price”
With each passing day anger and frustration inside Greece continue to rise, and those that are currently holding power in Greece are becoming very unpopular.
One current member of Greek Parliament recently talked about what he thinks will happen in the aftermath of the next election….
“If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma”
#3 This Bailout Deal Is Going To Make Economic Conditions In Greece Even Worse
In a previous article, I listed some of the new austerity measures that are being imposed on Greece by this new agreement….
The EU and the IMF are demanding that Greece fire 15,000 more government workers immediately and a total of 150,000 government workers by 2015.
The EU and the IMF are demanding that wages for government workers be cut by another 20 percent.
The EU and the IMF are demanding that the minimum wage be slashed by more than 20 percent.
The EU and the IMF are also demanding significant reductions in unemployment benefits and pension benefits.
The austerity measures that have already been implemented over the past few years have already pushed Greece into an economic depression.
These new austerity measures will deepen that depression.
At the moment, the Greek national debt is sitting at about 160 percent of GDP.
We are being told that these new austerity measures will reduce that ratio to 120 percent by 2020, but already there are many in the financial world that are calling such a goal “comical“.
Even with this new deal, the Greek national debt is still completely and total unsustainable. A “confidential report” produced by analysts from the European Central Bank, the European Commission, and the International Monetary Fund says the following about what this new debt deal is likely to accomplish….
There are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis. Prolonged financial support on appropriate terms by the official sector may be necessary. Moreover, there is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term. In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.
The GDP of Greece fell by 6.8 percent during 2011.
2012 was already expected to be even worse, and all of these new austerity measures certainly are not going to help things.
And every time the Greek economy contracts that makes a chaotic debt default even more likely.
#4 The Greek Parliament Must Still Vote On This Bailout Deal
It is anticipated that the Greek Parliament will vote on this new agreement on Wednesday.
It is expected to pass.
But when it comes to Greece these days, there are no guarantees.
#5 The Greek Constitution Must Still Be Modified
Under the terms of this new agreement, Greece is being required to change its constitution.
The following is how an article in The Economist describes this requirement….
Over the next two months Greece has promised to adopt legislation “ensuring that priority is granted to debt-servicing payments”, with a view to enshrining this in the constitution “as soon as possible”. These arrangements may not amount to the budget “commissar” once threatened by some creditors, but the effect may be pretty much the same.
So will this actually get done?
We will see.
Forcing a sovereign country to modify its constitution is a very serious thing. If I was a Greek citizen, I would be highly insulted by this.
#6 Several European Parliaments Still Need To Approve This Deal
The German Parliament still must approve this new agreement. This is also the case for the Netherlands and Finland as well.
Many politicians in all three nations have been highly critical of the Greek bailouts.
It is expected that all of these parliaments will approve this deal, but you just never know.
#7 Private Investors Still Have To Agree To This New Deal
Private investors are being asked to take a massive “haircut” on Greek debt. The following is how the size of the “haircut” was described by a USA Today article….
Banks, pension funds and other private investors are being asked to forgive some €107 billion ($142 billion) of the total €206 billion ($273 billion) in devalued Greek government bonds they hold.
There is absolutely no guarantee that a solid majority of private investors will agree to this.
In the end, probably the only thing that is guaranteed is that litigation regarding this “haircut” is likely to stretch on for many years to come.
#8 The Global Financial Community Still Expects Greece To Default
Almost all of the analysts that were projecting a chaotic Greek debt default are still projecting one today. Yes, many of them believe that “the can has been kicked down the road” for a few months, but most of them are still convinced that a default by Greece is inevitable.
The following comes from a Bloomberg article that was released after the Greek debt deal was announced….
“The danger of Greece saving itself into economic depression and having to default and exit the common currency zone remains substantial,” said Christian Schulz, an economist at Berenberg Bank in London. Jennifer McKeown of Capital Economics Ltd. repeated her forecast that Greece will quit the euro by the end of the year.
The odds that this agreement will survive for very long are not great.
It will be nearly impossible for Greece to meet all of the conditions being imposed upon it by this new deal. All of the politicians in northern Europe that are just itching to cut off aid to Greece will soon have the excuse that they need for doing so.
And the Greek people could decide to bring all of this to an end very quickly. If they elect a new government in April that does not support this bailout agreement, the game will be over.
So don’t be fooled by all the headlines.
A chaotic Greek debt default has not been averted.
The truth is that a chaotic Greek debt default is now closer than ever.
Once the euphoria of the initial announcement faded and as people have begun to closely examine the details of the European debt deal, they have started to realize that this “debt deal” is really just a “managed” Greek debt default. Let’s be honest – this deal is not going to solve anything. All it does is buy Greece a few months. Meanwhile, it is going to make the financial collapse of other nations in Europe even more likely. Anyone that believes that the financial situation in Europe is better now than it was last week simply does not understand what is going on. Bond yields are going to go through the roof and investors are going to start to panic. The European Central Bank is going to have an extremely difficult time trying to keep a lid on this thing. Instead of being a solution, the European debt deal has brought us several steps closer to a complete financial meltdown in Europe.
The big message that Europe is sending to investors is that when individual nations get into debt trouble they will be allowed to default and investors will be forced to take huge haircuts.
As this reality starts to dawn on investors, they are going to start demanding much higher returns on European bonds.
In fact, we are already starting to see this happen.
The yield on two year Spanish bonds increased by more than 6 percent today.
The yield on two year Italian bonds increased by more than 7 percent today.
So what are nations such as Italy, Spain, Portugal and Ireland going to do when it costs them much more to borrow money?
The finances of those nations could go from bad to worse very, very quickly.
When that happens, who will be the next to come asking for a haircut?
After all, if Greece was able to get a 50% haircut out of private investors, then why shouldn’t Italy or Spain or Portugal ask for one as well?
According to Reuters, German Chancellor Angela Merkel is already trying to warn other members of the EU not to ask for a haircut….
Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings.
“In Europe it must be prevented that others come seeking a haircut,” she said.
But investors are not stupid. Greece was allowed to default. If Italy or Spain or Portugal gets into serious trouble it is likely that they will be allowed to default too.
Investors like to feel safe. They want to feel as though their investments are secure. This Greek debt deal is a huge red flag which signals to global financial markets that there is no longer safety in European bonds.
So what is coming next?
Hold on to your seatbelts, because things are about to get interesting.
Around the globe, a lot of analysts are realizing that this European debt deal was not good news at all. The following is a sampling of comments from prominent voices in the financial community….
*Economist Sony Kapoor: “The fact that a deal has been agreed, any deal, impresses people. Until they start de-constructing it and parts start unravelling.”
*Economist Ken Rogoff: “It feels at its root to me like more of the same, where they’ve figured how to buy a couple of months”
*Neil MacKinnon of VTB Capital: “The best we can say is that the EU have engineered a temporary reprieve”
*Graham Summers of Phoenix Capital Research:
First off, let’s call this for what it is: a default on the part of Greece. Moreover it’s a default that isn’t big enough as a 50% haircut on private debt holders only lowers Greece’s total debt level by 22% or so.
Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it’s expected to bring these levels to 120% by 2020.
And the IMF is giving Greece another $137 billion in loans.
So… Greece defaults… but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.
*Max Keiser: “There will be another bailout required within six months – I guarantee it.”
The people that are really getting messed over by this deal are the private investors in Greek debt. Not only are they being forced to take a brutal 50% haircut, they are also being told that their credit default swaps are not going to pay out since this is a “voluntary” haircut.
This is completely and totally ridiculous as an article posted on Finance Addict pointed out…
We now know that private holders of Greek bonds will be “invited” (seriously–this was the word used in the EU summit statement) to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out.
That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point?
European politicians may believe that they have “solved” something, but the truth is that what they have really done is they have pulled the rug out from under the European financial system.
Faith in European debt is going to rapidly disappear and the euro is likely to fall like a rock in the months ahead.
The financial crisis in Europe is just getting started. 2012 looks like it is going to be an extremely painful year.
Let us hope for the best, but let us also prepare for the worst.
Have you heard the good news? Financial armageddon has been averted. The economic collapse in Europe has been cancelled. Everything is going to be okay. Well, actually none of those statements is true, but news of the “debt deal” in Europe has set off a frenzy of irrational exuberance throughout the financial world anyway. Newspapers all over the globe are declaring that the financial crisis in Europe is over. Stock markets all over the world are soaring. The Dow was up nearly 3 percent today, and this recent surge is helping the S&P 500 to have its best month since 1974. Global financial markets are experiencing an explosion of optimism right now. Yes, European leaders have been able to kick the can down the road for a few months and a total Greek default is not going to happen right now. However, as you will see below, the core elements of this “debt deal” actually make a financial disaster in Europe even more likely in the future.
The two most important parts of the plan are a 50% “haircut” on Greek debt held by private investors and highly leveraging the European Financial Stability Facility (EFSF) to give it much more “firepower”.
Both of these elements are likely to cause significant problems down the road. But most investors do not seem to have figured this out yet. In fact, most investors seem to be buying into the hype that Europe’s problems have been solved.
There is a tremendous lack of critical thinking in the financial community today. Just because politicians in Europe say that the crisis has been solved does not mean that the crisis has been solved. But all over the world there are bold declarations that a great “breakthrough” has been achieved. An article posted on USA Today is an example of this irrational exuberance….
Investors — at least for now — don’t have to worry about a financial collapse like the one in 2008, after Wall Street investment bank Lehman Bros. filed for bankruptcy, sparking a global financial crisis.
“Financial Armageddon seems to have been taken off the table,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
Wow, doesn’t that sound great?
But now let’s look at the facts.
You can’t solve a debt problem with even more debt. But that is what this debt deal is trying to do.
The politicians in Europe did not want to raise more money for the EFSF the “hard way”. Voters in Germany (and other European nations) are overwhelmingly against contributing even more cash to a fund that many see as a financial black hole.
So what do you do when more money is needed but nobody wants to contribute?
You borrow it.
Essentially, this debt deal calls for the EFSF to become four or five times larger by “leveraging” the existing funds in the EFSF.
But isn’t that risky?
Of course it is.
There are some leaders in Europe that recognize this. For example, an article in The Telegraph notes the reservations that the president of the Bundesbank has about this plan….
Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.
He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds.
So who is going to fund all of this new debt?
Well, it turns out that the Europeans are counting on the same folks that the U.S. government is constantly borrowing money from.
French President Nicolas Sarkozy has already spoken directly with Chinese President Hu Jintao about funding this new bailout effort.
So is borrowing money from the Chinese to fund bailouts for Greece and other weak sisters in Europe sound policy?
Of course not.
And the sad thing is that this expanded EFSF is still not going to be enough to solve the financial problems in Europe.
According to an article in The Telegraph, a recent survey of economists found that most of them do not believe that this new plan is going to raise enough money….
The plan to increase the European Financial and Stability Facility to €1 trillion on paper was attacked by economists as not enough to “stave off” worsening debt problems in Italy and Spain.
In a survey of economists, 26 of 48 thought the firepower was not enough.
But the worst part of this new plan is the 50 percent “haircut” that private investors are being forced to take.
This is essentially a partial default by the Greek government. A lot of folks are going to get hit really hard by losses from this. Instead of making financial institutions in Europe stronger, these losses are going to make a lot of them even weaker.
Normally, in the event of a default, credit default swap contracts would be triggered. But apparently because this was considered to be a “voluntary” haircut, that is not going to happen in this instance.
A Bloomberg article explained this in greater detail. The following is a brief excerpt….
The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules.
That means that investors and financial institutions all over the world are just going to have to eat these losses.
Greek Prime Minister George Papandreou is already acknowledging that a number of Greek banks will have to be nationalized because of the severity of this “haircut”. A recent CNBC article detailed this….
The haircut is expected to impose big losses on the country’s banks and state-run pension funds, which are up their necks in toxic Greek government bonds of about 100 billion euros.
The government will replenish pension funds’ capital, but banks may face temporary nationalisation, Papandreou said.
“It is very likely that a large part of the banks’ shares will pass into state ownership,” Papandreou said. He pledged, however, that these stakes will be sold back to private investors after the banks’ restructuring.
So where will the Greek government get the funds to “replenish” the capital of those banks?
That is a very good question.
But we haven’t even discussed the worst part of this “debt deal” yet.
If you don’t remember any other part of this article, please remember this.
The debt deal in Europe sends a very frightening message to the market.
The truth is that Europe could have totally bailed out Greece without any sort of a “haircut” taking place.
But they didn’t.
So now investors all over the globe have got to be thinking that if they are holding Portuguese bonds, Italian bonds or Spanish bonds there is a really good chance that they will be forced to take a massive “haircut” at some point as well.
At this time last year, the yield on two year Italian bonds was about 2.5 percent. Now it is about 4.5 percent. As investors begin to price in the probability of having to take a future “haircut” on Italian debt, those bond yields are going to go much, much higher.
That means that it is going to become much more expensive for the Italian government to borrow money and that also means that it is going to become much more difficult for the Italians to get their financial house in order.
In essence, the haircut on Greek debt is a signal to investors that they should require a much higher rate of return on the debt of all of the PIIGS. This is going to make the financial collapse of all of the PIIGS much more likely.
Remember, about this time last year the yield on two year Greek bonds was about 10 percent. Today, it is over 70 percent.
As I wrote about in a previous article, the western world is in debt up to its eyeballs right now and trying to kick the can down the road is not going to solve anything.
Our leaders may succeed in delaying the pain for a while, but it most definitely is coming.
Greece, Portugal, Ireland and Italy all have debt to GDP ratios that are well over 100% right now. Spain is in a huge amount of trouble as well.
When you add up all the debt, Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.
If Italy or Spain goes down, the rest of Europe is going to be helpless to stop it. There simply is not going to be enough money to bail either one of them out.
That is why this “debt deal” is so alarming. All investors in Italian or Spanish debt will now have to factor in the probability that they will be required to accept a 50 percent haircut at some point in the future.
If the markets behave rationally (and if the ECB does not manipulate them too much), it appears inevitable that bond yields over in Europe are going to rise substantially, and that will put tremendous additional financial strain on governments all over Europe.
Basically, we have got a huge mess on our hands, and this debt deal just made it a lot worse.
Yes, a financial collapse has been averted in Greece for the moment, but the truth is that there is no real reason to be celebrating this deal.
A massive financial storm is coming to Europe, and this “debt deal” has made that all the more certain.
Once again, politicians in Europe have tried to kick the can down the road, but in the end their efforts are only going to lead to complete and total financial disaster.