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…
Greece is saved? All over the planet, news headlines are boldly proclaiming that a “deal” has been reached which will give Greece the money that it needs and keep it in the eurozone. But as you will see below, this is not true at all. Yesterday, when I wrote that “there never was going to be any deal“, I was not exaggerating. This “deal” was not drafted with the intention of “saving Greece”. As I explained in my previous article, these negotiations were all about setting up Greece for eviction from the euro. You see, the truth is that Greece desperately wants to stay in the euro, but Germany (and allies such as Finland) want Greece out. Since Germany can’t simply order Greece to leave the euro, they need some sort of legal framework which will make it possible, and that is what this new “deal” provides. As I am about to explain, there are all kinds of conditions that must be satisfied and hurdles that must be crossed before Greece ever sees a single penny. If there is a single hiccup along the way, and this is what the Germans are counting on, Greece will be ejected from the eurozone. This “deal” has been designed to fail so that the Germans can get what they have wanted all along. I think that three very famous words from Admiral Ackbar sum up the situation very well: “It’s a trap!”
So why is this “Greek debt deal” really a German trap?
The following are three big reasons…
#1 The “Deal” Is Designed To Be Rejected By The Greek Parliament
If Germany really wanted to save Greece, they would have already done so. Instead, now they have forced Greek Prime Minister Alexis Tsipras to agree to much, much harsher austerity terms than Greek voters overwhelmingly rejected during the recent referendum by a vote of 61 percent to 39 percent. Tsipras has only been given until Wednesday to pass a whole bunch of new laws, and another week to make another series of major economic changes. The following comes from CNN…
Greece has to swiftly pass a series of new laws. Prime Minister Alexis Tsipras has until Wednesday to convince Parliament to pass the first few, including pension cuts and higher taxes.
Assuming that happens, Greek lawmakers have another week, until July 22, to enact another batch of economic changes. These include adopting European Union rules on how to manage banks in crisis, and do a major overhaul to make Greece’s civil courts faster and more efficient.
Can Tsipras actually get all this done in such a short amount of time?
The Germans are hoping that he can’t. And already, two of Syriza’s coalition partners have publicly declared that they have no intention of voting in favor of this “deal”. The following is from a Bloomberg report…
Discontent brewed as Tsipras arrived back in the Greek capital. Left Platform, a faction within Syriza, and his coalition partners, the Independent Greeks party, both signaled they won’t be able to support the deal. That opposition alone would wipe out Tsipras’s 12-seat majority in parliament, forcing him to rely on opposition votes to carry the day.
The terms of the “deal” are not extremely draconian because the Germans want to destroy Greek sovereignty as many are suggesting. Rather, they are designed to provoke an overwhelmingly negative reaction in Greece so that the Greeks will willingly choose to reject the deal and thus be booted out of the euro.
And this is what we are seeing. So far, the response of the Greek public toward this deal has been overwhelmingly negative…
Haralambos Rouliskos, a 60-year-old economist who was out walking in Athens, described the deal as “misery, humiliation and slavery”.
Katerina Katsaba, a 52-year-old working for a pharmaceutical company, said: “I am not in favour of this deal. I know they (the eurozone creditors) are trying to blackmail us.”
On Wednesday, the union for Greek public workers has even called a 24 hour strike to protest this “agreement”…
Greece’s public workers are being called to stage a 24-hour strike on Wednesday, the day their country’s parliament is to vote on reforms needed to unlock the bankster eurozone plan agreed to by Greek Prime Minster Alex Tsipras.
Their union, Adedy, called for the stoppage in a statement issued today, saying it was against the agreement reached with the eurozone.
The Greek government is not guaranteed any money right now.
According to Bloomberg, the Greek government must pass all of the laws being imposed upon them by the EU “before Greece can even begin negotiations with creditors to access a third international bailout in five years.”
The Germans and their allies are actually hoping that there is a huge backlash in Greece and that Tsipras fails to get this package pushed through the Greek parliament. If that happens, Greece gets ejected from the euro, and Germany doesn’t look like the bad guy.
#2 Even If The “Deal” Miraculously Gets Through The Greek Parliament, It May Not Survive Other European Parliaments
The Greek parliament is not the only legislative body that must approve this new deal. The German and Finnish parliaments (among others) must also approve it. According to USA Today, it is being projected that the German and Finnish parliaments will probably vote on this new deal on Thursday or Friday…
Thursday/Friday, July 16/17: Eurozone parliaments must also agree to the plan for Greece’s $95 billion bailout. The biggest tests may come from Finland and Germany, two nations especially critical of Greece’s handling of the crisis. Berlin has contributed the most to Greece’s loans.
Either Germany or Finland could kill the entire “deal” with a single “no” vote.
Finnish Finance Minister Alexander Stubb has already stated that Finland “cannot agree” with a new bailout for Greece, and it is highly questionable whether or not the German parliament will give it approval.
I think that the Germans and their allies would much prefer for the Greeks to reject the deal and walk away, but it may come down to one of these parliaments drawing a line in the sand.
#3 The Deal Makes Implementation Extraordinarily Difficult
If Greece fails to live up to each and every one of the extremely draconian measures demanded in the “deal”, they will be booted from the eurozone.
And if you take a look at what is being demanded of them, it is extremely unrealistic. Here is just one example…
For instance, the Greek government agreed to transfer up to 50 billion euros worth of Greek assets to an independent fund that will raise money from privatization.
According to the document, 25 billion euros from this fund will be poured into the banks, 12.5 billion will be used to pay off debt, and the remaining 12.5 billion to boost the economy through investment.
The fund will be based in Greece and run by the Greeks, but with supervision from European authorities.
Where in the world is the Greek government going to find 50 billion euros worth of assets at this point? The Greek government is flat broke and the banks are insolvent.
But if they don’t find 50 billion euros worth of assets, they have violated the agreement and they get booted.
This whole thing is about setting up Greece for failure so that there is a legal excuse to boot them out of the euro.
And it actually almost happened very early on Monday morning. The following comes from Business Insider…
As the FT tells it, German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras rose from their chairs at 6 a.m. on Monday and headed for the door, resigned to a Greek exit from the euro.
“Sorry, but there is no way you are leaving this room,” European Council president Donald Tusk reportedly said.
And so a Grexit was avoided.
For the moment, Greece has supposedly been “saved”.
But anyone that believes that this crisis is “over” is just being delusional.
The Germans and their allies have successfully lured the Greek government into a trap. Thanks to Tsipras, they have been handed a legal framework for getting rid of Greece.
All they have to do now is wait for just the right moment to spring the trap, and it might just happen a lot sooner than a lot of people may think.
There never was going to be any deal. All along, Germany has been seeking to establish conditions that would never be met so that they could force Greece out of the eurozone. But the Germans had to do this subtly so that they would end up looking “reasonable” and would not turn the rest of the eurozone against them. So why does Germany want to get rid of Greece? Well, to be honest, it is because the Germans are sick and tired of paying for Greek mistakes. In Germany, there is an obsession with having a balanced budget. They even have a term for it – “the black zero“. So it absolutely infuriates the Germans that the Greeks can never seem to get their act together and that German citizens have to keep paying for it. At this point, the amount of money that Germany has already poured into Greece breaks down to more than 700 euros per citizen, and now Greece is going to need a new bailout of somewhere between 82 billion and 86 billion euros over the next three years. Needless to say, the Germans are fed up with pouring money down a financial black hole, and they know that if they keep bailing Greece out that it is only a matter of time before they will have to bail out Italy, Spain, Portugal, France, etc.
So, no, it hasn’t been the Greeks holding up a deal all this time.
It has been the Germans.
And now that we have reached the endgame, the Germans are pushing for what they have always wanted from the very beginning…
The German government has begun preparations for Greece to be ejected from the eurozone, as the European Union faces 24 hours to rescue the single currency project from the brink of collapse.
Finance ministers failed to break the deadlock with Greece over a new bail-out package, after nine hours of acrimonious talks as creditors accused Athens of destroying their trust…
Should no deal be forthcoming, the German government has made preparations to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid while it makes the transition….
The Germans are sick and tired of having the Greeks be so financially dependent on them. So the Germans would really like to cut them off and have them go fend for themselves.
So that is why the EU laid out such draconian conditions for the Greeks over the weekend. The following is how Zero Hedge summarized where things currently stand…
For those who missed today’s festivities in Brussels, here is the 30,000 foot summary: Europe has given Greece a “choice”: hand over sovereignty to Europe or undergo a 5 year Grexit “time out”, which is a polite euphemism for get the hell out.
As noted earlier, here are the 12 conditions laid out as a result of the latest Eurogroup meeting, which are far more draconian than anything presented to Greece yet and which effectively require that Greece cede sovereignty to Europe, this time even without the implementation of a technocratic government.
- Streamlining VAT
- Broadening the tax base
- Sustainability of pension system
- Adopt a code of civil procedure
- Safeguarding of legal independence for Greece ELSTAT – the statistics office
- Full implementation of autmatic spending cuts
- Meet bank recovery and resolution directive
- Privatize electricity transmission grid
- Take decisive action on non-performing loans
- Ensure independence of privatization body TAIPED
- De-Politicize the Greek administration
- Return of the Troika to Athens (the paper calls them the institutions… for now)
Greece has been given until Wednesday to pass all of the legislation necessary to implement all of those conditions.
And if Greece does somehow get all that done, it still won’t get them a deal. All it will do is allow them to come back and restart negotiations.
Needless to say, the Greeks are steaming mad at this point. This new “deal” is being called “very bad” and “insulting” by Greek politicians.
But what they may not understand is that Germany does not actually want any deal to happen. Instead, they are working very, very hard to get the Greeks booted out of the euro. The following comes from the Washington Post…
The simple story is that Germany and the other hardline countries don’t trust Greece’s anti-austerity Syriza party to actually implement, well, austerity. And so rather than coughing up another 60 or 70 or 80 billion euros, they seem to want to push to kick Greece out of the common currency instead. That, at least, was the plan that leaked on Saturday. And now it’s part of the actual plan on Sunday. Indeed, it’s tentatively been included in the European finance ministers’ latest joint statement. This isn’t just what Germany is considering. It’s what Germany is trying to get the rest of Europe to go along with.
If anyone still doubts what the Germans are trying to do, here it is in black and white…
And this is not an idea that is new. In fact, some hardliners in Germany have been pushing for a “temporary Greek exit” since at least 2012…
This weekend’s events in Europe have clarified who is really running the show across the ‘union’. Hans-Werner Sinn, Chairman of the Ifo Institute for Economic Research, vehemnt euroskeptic, and head of the so-called ‘five wise men’ advising the German government and specifically Angela Merkel, confirmed his call from 2012 for a “temporary grexit from the euro.” The right wing economist previously explained “Greece and Portugal have to become 30-40% less expensive to be competitive again. This is being attempted through excessive austerity measures within the euro zone, but it won’t work. It will drive these countries to the brink of civil war before it succeeds. Temporary exits would very quickly stabilize these countries, create new jobs and free the population from the yoke of the euro.”
The Germans absolutely hate having to open up their wallets for someone else’s mess. And they know that if they endlessly bail out Greece that it won’t end there. Eventually, much of the rest of the continent will come to them for bailouts too. I think that Nigel Farage nailed it when he summed up what Germany is thinking this way…
“The German thinking is: ‘Let’s get rid of this mess,'” Farage said. Expressing what he thought Germany was thinking about other troubled peripheral euro zone economies, he added: “‘let’s send a message to Italy, France, Spain and Portugal that actually, if you’re members of this club, you got to abide by our rules.'”
But I believe that Germany is greatly, greatly underestimating the damage that a “Grexit” is going to do to Greece and to the rest of the members of the EU.
In Greece, the banking system is already on the verge of total collapse. We are being told that capital controls will remain in place “for at least six months”, and now Greek politicians are even talking about “a possible forced ‘bail-in’ of depositors”…
Capital controls will stay in place at Greek banks for at least six months, senior officials in Athens warned yesterday, as the government fights to keep lenders afloat.
Leaders of the four main banks and finance ministry officials will meet tomorrow to discuss how to save the banking system from collapse after a run on deposits.
Options under consideration include a consolidation of four main banks down to two, creation of a “bad bank” to house toxic loans, and a possible forced “bail-in” of depositors.
Hmmm – I seem to recall someone warning about this exact scenario nearly two months ago: “Are They About To Confiscate Money From Bank Accounts In Greece Just Like They Did In Cyprus?”
The economic depression in Greece is about to accelerate. But things are also going to get hairy for the rest of the continent as well. As I have warned about so many times, the euro is going to plunge like a rock, European stocks are going to crater, European bond yields are going to soar, and eventually we are actually going to see “too big to fail” banks all over Europe start to fail.
This is the big flaw in the German plan. They truly believe that they can remove the “cancer” of Greece without causing any lasting damage to the rest of the eurozone.
Sadly, they are dead wrong.
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.
Is this the beginning of the end for the eurozone? For years, European officials have been trying to “fix Greece”, but nothing has worked. Now a worst case scenario is rapidly unfolding, and a “Grexit” has become more likely than not. On Sunday, the European Central Bank announced that it was not going to provide any more emergency support for Greek banks. But that was the only thing keeping them alive. In order to prevent total chaos, Greek banks have been shut down for at least a week. ATMs are still open, but it is being reported that daily withdrawals will be limited to 60 euros. Of course nobody knows for sure if or when the banks will reopen after this “bank holiday” is over, so needless to say average Greek citizens are pretty freaked out right about now. In addition, the stock market in Greece is not going to open on Monday either. This is what a national financial meltdown looks like, and the nightmare that has been unleashed in Greece will soon start spreading to much of the rest of Europe.
This reminds me so much of what happened in Cyprus. Up until the very last minute, politicians were promising everyone that their money was perfectly safe, and then the hammer was brought down.
The exact same pattern is playing out in Greece. For example, just check out what one very prominent Greek politician said on television on Saturday…
“Citizens should not be scared, there is no blackmail,” Panos Kammenos, head of the government’s coalition ally, told local television. “The banks won’t shut, the ATMs will (have cash). All this is exaggeration,” he said.
One day later, the banks did get shut down and ATMs all over the country started running out of cash. The following comes from CNBC…
Despite a tweet from Greek Finance Minister Yanis Varoufakis that his government “opposed the very concept” of any controls, Greek Prime Minister Alexis Tsipras said later Sunday that he had forced the country’s central bank to recommend a bank holiday and capital controls.
The Athens stock exchange will also be closed as the government tries to manage the financial fallout of the disagreement with the European Union and the International Monetary Fund. Greece’s banks, kept afloat by emergency funding from the European Central Bank, are on the front line as Athens moves towards defaulting on a 1.6 billion euros payment due to the International Monetary Fund on Tuesday.
So what is the moral of this story?
Never trust politicians – especially when a major financial crisis is looming.
All over Greece, people are taking photos of very long lines at the ATMs that actually do still have some cash. Here are just a couple of examples…
Of course those that were smart enough to see this coming took their money out of the banks long ago. And even as late as last week, people were pulling more than a billion euros out of the banks every single day. Without direct intervention by the European Central Bank, most Greek banks would have totally collapsed by now…
Customers have been withdrawing money in vast quantities ever since Syriza came to power, fearing that if Greece is thrown out of the single currency their euro savings will be converted into drachma – likely to be worth far less.
In the last week, the sums being taken out have risen to well over one billion euros a day, moved either to foreign banks or stashed in notes under mattresses.
It has been a slow and steady run on Greece’s banks which is now speeding up – for the finish line may well be in sight. Until now, the country’s banks have been kept afloat by €88 billion in loans from the European Central Bank.
So now that the banks are shut down, what happens next?
Needless to say, economic activity in Greece is going to come to a grinding halt. In addition, very few foreigners are going to want to travel to Greece or deal with Greece financially until this crisis is resolved somehow…
An extended bank shutdown and tough capital controls will likely wreak further havoc on the Greek economy by scaring away tourists and chilling commercial activity.
And with Greece unable to borrow from financial markets, and apparently unwilling to strike a deal with the only institutions prepared to lend it money, it will find itself sliding rapidly towards exit from the euro.
When the Greek banks finally do reopen, which of them will still be solvent?
Will some of them need “bail-ins”?
Will account holders be forced to take “haircuts” like we saw in Cyprus?
For the moment, what we do know is that the banks will all be shut down until at least July 6th. Greek Prime Minister Alexis Tsipras has called for a national referendum to be held on July 5th. The Greek people will get a chance to vote on whether or not the latest creditor proposals should be accepted. But the funny thing is that Tsipras and the rest of Syriza are already encouraging the Greek people to vote no…
Greece’s parliament has voted in favor of Prime Minister Alexis Tsipras’ motion to hold a referendum on the country’s creditor proposals for reforms in exchange for loans, the Associated Press reported. Tsipras and his coalition government have urged people to vote against the deal, throwing into question the country’s financial future.
The vote is to be held next Sunday, July 5. It has raised the question of whether Greece can remain in Europe’s joint currency, the euro.
So why hold a referendum if you just want everyone to vote no?
It is because Tsipras does not want to solely shoulder the blame for what comes next. A “no vote” would essentially be a vote to leave the euro and go back to the drachma. The following comes from the Daily Mail…
Should Greeks vote against the new bailout, most economists believe Greece will be forced to quit the single currency and return to the drachma. The country could even eventually be forced out of the EU, though Greek politicians have long argued a Grexit would not be the automatic result of default.
However, next week’s referendum is likely to be billed as, in effect, an in-out vote on the euro.
If Greece does default and ends up leaving the euro, the short-term economic consequences for Greece will be catastrophic.
But the rest of Europe will feel a tremendous amount of pain as well. In fact, we are already getting a sneak peek at coming attractions. As we approach Monday morning in Europe, Asian stocks are crashing big time, and European futures are absolutely cratering. It should be very interesting to see how Monday plays out.
In addition, the euro is already way down in early trading. If Greece does ultimately leave the euro, the value of the euro is going to plunge like a rock. As I have warned repeatedly, the euro is heading for parity with the U.S. dollar, and at some point it will drop below parity.
And once Greece is out, everyone is going to be speculating who the “next Greece” will be. Expect bond yields for Italy, Spain, Portugal and France to go skyrocketing.
Just a couple of days ago, I issued a red alert for the second half of 2016. We are entering a period of time when the global financial system is beginning to unravel. Most people still have a tremendous amount of faith in the system and assume that those running it are fully capable of keeping it from collapsing. In fact, many have accused me of being crazy for suggesting that the global financial system is in imminent danger of imploding.
A very wise man once said that “pride goeth before destruction”. Our arrogance and our blind faith in the fundamentally flawed systems that we have established will contribute greatly to our undoing.
Events are starting to accelerate greatly now, and it is just a matter of time before we see who was right and who was wrong.
According to the Wall Street Journal, Greece staying in the eurozone is no longer “the base case” for European officials, and one even told the Journal that “literally nothing has been achieved” in negotiations with the new Greek government since the Greek election almost three months ago. In other words, you can take all of that stuff you heard about how the Greek crisis was fixed and throw it out the window. Over the next few months, a big chunk of Greek government bonds held by the IMF and the European Central Bank will mature. Unless negotiations produce a load of new cash for Greece, there will be a default, and right now there is very little optimism that we will see an agreement any time soon. In fact, as I wrote about the other day, behind the scenes banks all over Europe are quietly preparing for a Grexit. European news sources are reporting that the Greek banking system is on the verge of collapse, and over the past couple of weeks Greek bond yields have shot through the roof. Most of the things that we would expect to see in the lead up to a Greek exit from the eurozone are happening, and now we will wait and see if the Greeks actually have the guts to pull the trigger when push comes to shove.
At this point, many top European officials are quietly admitting that it is more likely than not that Greece will leave the euro by the end of this year. The following is an excerpt from the Wall Street Journal article that I mentioned above…
It’s still possible that Greece can remain in the eurozone—though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much, worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of eurozone finance ministers in Riga—originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.
But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then.
The two sides are no closer to an agreement than when the Greek government took office almost three months ago. “Nothing, literally nothing has been achieved,” says an official.
Literally nothing has been achieved?
That is not what the mainstream media has been telling us over the past few months.
They kept telling us that agreements were in place and that everything had been fixed.
I guess not.
The Germans believe that the risks of a “Grexit” have already been priced in by the financial markets and that a Greek exit from the euro can be “managed” without any serious risk of contagion.
So they are playing hardball with the Greeks.
On the other hand, the Greeks believe that the risk of contagion will eventually force the Germans to back down…
Greece’s Finance Minister Yanis Varoufakis said in an interview broadcast on Sunday that if Greece were to leave the euro zone, there would be an inevitable contagion effect.
“Anyone who toys with the idea of cutting off bits of the euro zone hoping the rest will survive is playing with fire,” he told La Sexta, a Spanish TV channel, in an interview recorded 10 days ago.
“Some claim that the rest of Europe has been ring-fenced from Greece and that the ECB has tools at its disposal to amputate Greece, if need be, cauterize the wound and allow the rest of euro zone to carry on.”
In this case, I believe that the Greeks are right about what a Grexit would mean for the rest of Europe and the Germans are wrong.
Once one country leaves the euro, that tells the entire world that membership in the euro is only temporary. Immediately everyone would be looking for the “next Greece”, and there are lots of candidates – Italy, Spain, Portugal, etc.
There is a very good chance that a Grexit would set off a full-blown European financial panic. And once a financial panic starts, it is very hard to stop. The danger that a Grexit poses is so obvious that even the Obama administration can see it…
A Greek exit from the euro zone would carry significant risks for the global economy and no one should be under the impression that financial markets have fully priced in such an event, the chairman of the White House Council of Economic Advisers said.
The comments by Jason Furman in an interview with Reuters in Berlin are among the strongest by a senior U.S. official and are at odds with those of German Finance Minister Wolfgang Schaeuble, who told an audience in New York last week that contagion risks from a so-called “Grexit” were limited.
“A Greek exit would not just be bad for the Greek economy, it would be taking a very large and unnecessary risk with the global economy just when a lot of things are starting to go right,” Furman said.
Meanwhile things continue to get even worse inside Greece. If you have any money in Greek banks, you need to move it immediately. The following comes from Zero Hedge…
Things for insolvent, cashless Greece are – not unexpectedly – getting worse by the day.
Following yesterday’s shocking decree that the government will confiscate local government reserves and “sweep” them into the central bank to provide the country more funds as it approaches another month of heavy IMF repayments, earlier today Bloomberg reported that the ECB would add insult to injury and may increase haircuts for Greek banks accessing Emergency Liquidity Assistance, thus “reining in” the very critical emergency liquidity which has kept Greek banks operating in recent weeks as the bank run sweeping the domestic banking sector has gotten worse by the day.
And many Greeks don’t even have any money to put in the banks because they haven’t been paid in months…
Meanwhile, the reality is that for a majority of the Greek population, none of this really matters because as Greek Ta Nea reports, citing Labor Ministry data, about one million Greek workers see delays of up to 5 months in salaries payment by their employers. The Greek media adds that about 45% of salaried workers in Greece make no more than €751 per month, the country’s old minimum wage; which also includes part-time workers.
No matter what European officials try, things just continue to unravel in Greece and in much of the rest of Europe.
We stand on the verge of the next great global economic crisis. The lessons that we should have learned from the last crisis were never learned, and instead global debt levels have exploded much higher since then. In fact, according to Doug Casey, the total amount of global debt is 57 trillion dollars higher than it was just prior to the last crisis…
In 2008, excess debt pushed the global financial system to the brink. It was a golden opportunity for governments and banks to reform the system. But rather than deal with the problem, they papered over it by issuing more debt. Worldwide debt levels are now $57 trillion higher than in 2008.
The eurozone as it is constituted today is doomed.
That doesn’t mean that the Europeans are going to give up on social, economic and political integration. It just means that we are entering a time of transition that is going to be extremely messy.
And once the European financial system begins to fall apart, the rest of the world will quickly follow.
Get ready for another major worldwide credit crunch. Today, the entire global financial system resembles a colossal spiral of debt. Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more debt into the system. When the system started to fail back in 2008, global authorities responded by pumping this debt spiral back up and getting it to spin even faster than ever. If you can believe it, the total amount of global debt has risen by $35 trillion since the last crisis. Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is starting to happen once again. For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock“. And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the eurozone. On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States. All of these are signs that credit conditions are tightening, and once a “liquidity squeeze” begins, it can create a lot of fear.
Over the past six months, the Chinese stock market has exploded upward even as the overall Chinese economy has started to slow down. Investors have been using something called “umbrella trusts” to finance a lot of these stock purchases, and these umbrella trusts have given them the ability to have much more leverage than normal brokerage financing would allow. This works great as long as stocks go up. Once they start going down, the losses can be absolutely staggering.
That is why Chinese authorities are stepping in before this bubble gets even worse. Here is more about what has been going on in China from Bloomberg…
China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.
In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.
Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Overall, China has seen more debt growth than any other major industrialized nation since the last recession. This debt growth has been so dramatic that it has gotten the attention of authorities all over the planet…
Wolfgang Schaeuble, Germany’s finance minister says that “debt levels in the global economy continue to give cause for concern.”
Singling out China in particular, Schaeuble noted that “debt has nearly quadrupled since 2007″, adding that it’s “growth appears to be built on debt, driven by a real estate boom and shadow banks.”
According to McKinsey’s research, total outstanding debt in China increased from $US7.4 trillion in 2007 to $US28.2 trillion in 2014. That figure, expressed as a percentage of GDP, equates to 282% of total output, higher than the likes of other G20 nations such as the US, Canada, Germany, South Korea and Australia.
This credit boom in China has been one of the primary engines for “global growth” in recent years, but now conditions are changing. Eventually, the impact of what is going on in China right now is going to be felt all over the planet.
Over in Europe, the Greek debt crisis is finally coming to a breaking point. For years, authorities have continued to kick the can down the road and have continued to lend Greece even more money.
But now it appears that patience with Greece has run out.
For instance, the head of the IMF says that no delay will be allowed on the repayment of IMF loans that are due next month…
IMF Managing Director Christine Lagarde roiled currency and bond markets on Thursday as reports came out of her opening press conference saying that she had denied any payment delay to Greece on IMF loans falling due next month.
Unless Greece concludes its negotiations for a further round of bailout money from the European Union, however, it is not likely to have the money to repay the IMF.
And we are getting reports that things are happening behind the scenes in Europe to prepare for the inevitable moment when Greece will finally leave the euro and go back to their own currency.
For example, consider what Art Cashin told CNBC on Friday…
First, “there were reports in the media [saying] that the ECB and/or banking authorities suggested to banks to get rid of any sovereign Greek debt they had, which suggests that maybe the next step will be Greece exiting,” Cashin told CNBC.
Also, one of Greece’s largest newspapers is reporting that neighboring countries are forcing subsidiaries of Greek banks that operate inside their borders to reduce their risk to a Greek debt default to zero…
According to a report from Kathimerini, one of Greece’s largest newspapers, central banks in Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia have all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk — including bonds, treasury bills, deposits to Greek banks, and loans — down to zero.
Once Greece leaves the euro, that is going to create a tremendous credit crunch in Europe as fear begins to spread like wildfire. Everyone will be wondering which nation will be “the next Greece”, and investors will want to pull their money out of perceived danger zones before they get hammered.
In the past, other European nations have been willing to bend over backwards to accommodate Greece and avoid this kind of mess, but those days appear to be finished. In fact, the finance minister of France openly admits that the French “are not sympathetic to Greece”…
Greece isn’t winning much sympathy from its debt-wracked European counterparts as the country draws closer to default for failing to make bailout repayments.
“We are not sympathetic to Greece,” French Finance Minister Michael Sapin said in an interview at the International Monetary Fund-World Bank spring meetings here.
“We are demanding because Greece must comply with the European (rules) that apply to all countries,” Sapin said.
Yes, it is possible that another short-term deal could be reached which could kick the can down the road for a few more months.
But either way, things in Europe are going to continue to get worse.
Meanwhile, very disappointing earnings reports in the U.S. are starting to really rattle investors.
For example, we just learned that GE lost 13.6 billion dollars in the first quarter…
One week following the announcement that it would dismantle most of its GE Capital financing operations to instead focus on its industrial roots, General Electric reported a first quarter loss of $13.6 billion.
The results were impacted by charges relating to the conglomerate’s strategic shift. A year ago GE reported a first quarter profit of $3 billion.
That is a lot of money.
How in the world does a company lose 13.6 billion dollars in a single quarter during an “economic recovery”?
Other big firms are reporting disappointing earnings numbers too…
In earnings news, American Express Co. late Thursday said its results were hurt by the strong U.S. dollar, which reduced revenue booked in other countries. Chief Executive Kenneth Chenault reiterated the company’s forecast that 2015 earnings will be flat to modestly down year over year. Shares fell 4.6%.
Advanced Micro Devices Inc. said its first-quarter loss widened as revenue slumped. The company said it was exiting its dense server systems business, effective immediately. Revenue and the loss excluding items missed expectations, pushing shares down 13%.
And just like we saw just before the financial crisis of 2008, Americans are increasingly having difficulty meeting their financial obligations.
For instance, the delinquency rate on student loans has reached a very frightening level…
More borrowers are failing to make payments on their student loans five years after leaving college, painting a grim picture for borrowers, according to the Federal Reserve Bank of New York.
Student debt continues to increase, especially for people who took out loans years ago. Those who left school in the Great Recession, which ended in 2009, had particular difficulty with repayment, with many defaulting, becoming seriously delinquent or not being able to reduce their balances, the New York Fed said today.
Only 37 percent of borrowers are current on their loans and are actively paying them down, and 17 percent are in default or in delinquency.
At this point, the American consumer is pretty well tapped out. If you can believe it, 56 percent of all Americans have subprime credit today, and as I mentioned above, we just witnessed the biggest spike in credit application rejections ever recorded.
We have reached a point of debt saturation, and the credit crunch that is going to follow is going to be extremely painful.
Of course the biggest provider of global liquidity in recent years has been the Federal Reserve. But with the Fed pulling back on QE, this is creating some tremendous challenges all over the globe. The following is an excerpt from a recent article in the Telegraph…
The big worry is what will happen to Russia, Brazil and developing economies in Asia that borrowed most heavily in dollars when the Fed was still flooding the world with cheap liquidity. Emerging markets account to roughly half of the $9 trillion of offshore dollar debt outside US jurisdiction.
The IMF warned that a big chunk of the debt owed by companies is in the non-tradeable sector. These firms lack “natural revenue hedges” that can shield them against a double blow from rising borrowing costs and a further surge in the dollar.
So what is the bottom line to all of this?
The bottom line is that we are starting to see the early phases of a liquidity squeeze.
The flow of credit is going to begin to get tighter, and that means that global economic activity is going to slow down.
This happened during the last financial crisis, and during this next financial crisis the credit crunch is going to be even worse.
This is why it is so important to have an emergency fund. During this type of crisis, you may have to be the source of your own liquidity. At a time when it seems like nobody has any cash, those that do have some will be way ahead of the game.
Is this the beginning of the end for the eurozone? On Thursday, Germany rejected a Greek request for a six-month loan extension. The Germans insisted that the Greek proposal did not require the Greeks to adhere to the austerity restrictions which previous agreements had forced upon them. But Greek voters have already very clearly rejected the status quo, and the new Greek government has stated unequivocally that it will not be bound by the current bailout arrangement. So can Germany and Greece find some sort of compromise that will be acceptable to both of them? It certainly does not help that some Greek politicians have been comparing the current German government to the Nazis, and the Germans have fired back with some very nasty comments about the Greeks. Unfortunately for both of them, time is running out. The Greek government will run out of money in just a couple of weeks, and without a deal there is a very good chance that Greece will be forced to leave the euro. In fact, this week Commerzbank AG increased the probability of a “Grexit” to 50 percent. And if Greece does leave the eurozone, it could spark a full blown European financial crisis which would be absolutely catastrophic.
What the Greeks want right now is a six month loan extension which would give them much more economic flexibility than under the current agreement. Unfortunately for the Greeks, Germany has rejected this proposal…
Germany rejected a Greek proposal for a six-month extension to its euro zone loan agreement on Thursday, saying it was “not a substantial solution” because it did not commit Athens to stick to the conditions of its international bailout.
Berlin’s stance set the scene for tough talks at a crucial meeting of euro zone finance ministers on Friday when Greece’s new leftist-led government, racing to avoid running out of money within weeks, will face pressure to make further concessions.
As the biggest creditor and EU paymaster, Germany has the clout to block a deal and cast Greece adrift without a financial lifeline, potentially pushing it toward the euro zone exit.
Even though Germany is already saying no to this deal, Greece is still hoping that the Eurogroup will accept the deal that it has proposed…
“The Greek government submitted a letter to the Eurogroup asking for a six-month extension of the loan agreement. Tomorrow’s Eurogroup has only two options: either to accept or reject the Greek request,” a government official said. “It will then be clear who wants to find a solution and who doesn’t.” Earlier on Thursday, the German finance ministry rejected Athens’ request for an extension by saying it fell short of the conditions set out earlier this week by the euro zone.
At this point, the odds of a deal going through don’t look good.
But there is always next week. It is possible that something could still happen.
However, if there is no deal and Greece is forced out of the euro, the consequences for Greece and for the rest of the eurozone could be quite dramatic.
The following is how the Independent summarized what could happen to Greece…
An immediate financial crisis and a new, deep, recession. Without external financial support the country would have to default on its debts and, probably, start printing its own currency again in order to pay civil servants. Its banks would also lose access to funding from the European Central Bank.
To prevent these institutions collapsing Athens would have impose controls on the movement of money out of the country. The international value of the new Greek currency would inevitably be much lower than the euro. That would mean an instant drop in living standards for Greeks as import prices spike. And if Greeks have foreign debts which they have to pay back in euros they will also be instantly worse off. There could be a cascade of defaults.
That doesn’t sound pretty at all.
The most frightening part for those that have money in Greek banks would be the capital controls that would be imposed. People would have to deal with strict restrictions on how much money they could take out of their accounts and on how much money they could take out of the country.
In anticipation of this happening, people are already pulling money out of Greek banks at a staggering pace…
In the midst of the dramatic showdown in Brussels between the new Greek government and its European creditors, many Greek depositors—spooked by the prospect of a Greek default or, worse, an exit from the euro zone and a possible return to the drachma—have been pulling euros out of the nation’s banks in record amounts over the last few days.
The Bank of Greece and the European Central Bank won’t report official cash outflows for January until the end of the month. But sources in the Greek banking sector have told Greek newspapers that as much as 25 billion euros (US $28.4 billion) have left Greek banks since the end of December. According to the same sources, an estimated 900 million euros flowed out of Greek banks on Tuesday alone, the day after the talks broke up in Brussels, sparking fears that measures will be taken to stem the outflow. On Thursday, by mid-afternoon, deposits had shrunk by about 680 million euros (US $77.3 million).
“If outflows reach 1 billion euros, capital controls might need to be imposed,” said Thanasis Koukakis, a financial editor for Estia a conservative daily, and To Vima, an influential Sunday newspaper.
And if we do indeed witness a “Grexit”, the rest of Europe would be deeply affected as well.
The following is how the Independent summarized what could happen to the rest of the continent…
There would probably be some financial contagion as financial investors wake up to the fact that euro membership is not irreversible. There could a “flight to safety” as depositors pull euros out of other potentially vulnerable eurozone members such as Portugal, Spain or Italy to avoid taking a hit. European company share prices could also fall sharply if investors panic and divert their cash into the government bonds of states such as Germany and Finland.
The question is how severe this contagion would be. The continent’s politicians and regulators seem to think the impact would be relatively small, saying that Europe’s banks have reduced their cross-border exposure to Greece and that general confidence in the future of the eurozone is much stronger than it was a few years ago. But others think this is too complacent. The truth is that no one knows for sure.
To be honest, I think that the rest of the eurozone is being far too complacent about what Greece leaving would mean.
There are all kinds of implications that most people are not even discussing yet.
For example, just consider what a “Grexit” would mean for the European interbank payment system known as Target2. The following comes from an article by Ambrose Evans-Pritchard…
In normal times, Target2 adjustments are routine and self-correcting. They occur automatically as money is shifted around the currency bloc. The US Federal Reserve has a similar internal system to square books across regions. They turn nuclear if monetary union breaks up.
The Target2 “debts” owed by Greece’s central bank to the ECB jumped to €49bn in December as capital flight accelerated on fears of a Syriza victory. They may have reached €65bn or €70bn by now.
A Greek default – unavoidable in a Grexit scenario – would crystallize these losses. The German people would discover instantly that a large sum of money committed without their knowledge and without a vote in the Bundestag had vanished.
And in a previous article, I discussed some of the other things that are at stake…
If there is no deal, we could see a Greek debt default, Greece could be forced to leave the eurozone and go back to the drachma, the euro could collapse to all time lows, all the banks all over Europe that are exposed to Greek government debt could be faced with absolutely massive losses, and the 26 trillion dollars in derivatives that are directly tied to the value of the euro could start to unravel. In essence, if things go badly this could be enough to push us into a global financial crisis.
At the end of the day, there are essentially only two choices for Europe…
#1) Find a way to make a deal, which would maybe keep the current financial house of cards together for another six months.
#2) A horrifying European financial crisis starting almost immediately.
In the long-term, nothing is going to stop the economic horror which is coming to Europe, and once it starts it is going to drag down the entire planet.
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.
Are we on the verge of a major worldwide economic downturn? Well, if recent warnings from prominent bankers all over the world are to be believed, that may be precisely what we are facing in the months ahead. As you will read about below, the big banks are warning that the price of oil could soon drop as low as 20 dollars a barrel, that a Greek exit from the eurozone could push the EUR/USD down to 0.90, and that the global economy could shrink by more than 2 trillion dollars in 2015. Most of the time, very few people ever actually read the things that the big banks write for their clients. But in recent months, a lot of these bankers are issuing such ominous warnings that you would think that they have started to write for The Economic Collapse Blog. Of course we have seen this happen before. Just before the financial crisis of 2008, a lot of people at the big banks started to get spooked, and now we are beginning to see an atmosphere of fear spread on Wall Street once again. Nobody is quite sure what is going to happen next, but an increasing number of experts are starting to agree that it won’t be good.
Let’s start with oil. Over the past couple of weeks, we have seen a nice rally for the price of oil. It has bounced back into the low 50s, which is still a catastrophically low level, but it has many hoping for a rebound to a range that will be healthy for the global economy.
Unfortunately, many of the experts at the big banks are now anticipating that the exact opposite will happen instead. For example, Citibank says that we could see the price of oil go as low as 20 dollars this year…
The recent rally in crude prices looks more like a head-fake than a sustainable turning point — The drop in US rig count, continuing cuts in upstream capex, the reading of technical charts, and investor short position-covering sustained the end-January 8.1% jump in Brent and 5.8% jump in WTI into the first week of February.
Short-term market factors are more bearish, pointing to more price pressure for the next couple of months and beyond — Not only is the market oversupplied, but the consequent inventory build looks likely to continue toward storage tank tops. As on-land storage fills and covers the carry of the monthly spreads at ~$0.75/bbl, the forward curve has to steepen to accommodate a monthly carry closer to $1.20, putting downward pressure on prompt prices. As floating storage reaches its limits, there should be downward price pressure to shut in production.
The oil market should bottom sometime between the end of Q1 and beginning of Q2 at a significantly lower price level in the $40 range — after which markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws. It’s impossible to call a bottom point, which could, as a result of oversupply and the economics of storage, fall well below $40 a barrel for WTI, perhaps as low as the $20 range for a while.
Even though rigs are shutting down at a pace that we have not seen since the last recession, overall global supply still significantly exceeds overall global demand. Barclays analyst Michael Cohen recently told CNBC that at this point the total amount of excess supply is still in the neighborhood of a million barrels per day…
“What we saw in the last couple weeks is rig count falling pretty precipitously by about 80 or 90 rigs per week, but we think there are more important things to be focused on and that rig count doesn’t tell the whole story.”
He expects to see some weakness going into the shoulder season for demand. In addition, there is an excess supply of about a million barrels of oil a day, he said.
And the truth is that many firms simply cannot afford to shut down their rigs. Many are leveraged to the hilt and are really struggling just to service their debt payments. They have to keep pumping so that they can have revenue to meet their financial obligations. The following comes directly from the Bank for International Settlements…
“Against this background of high debt, a fall in the price of oil weakens the balance sheets of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil assets, for example, more production is sold forward,” BIS said.
“Second, in flow terms, a lower price of oil reduces cash flows and increases the risk of liquidity shortfalls in which firms are unable to meet interest payments. Debt service requirements may induce continued physical production of oil to maintain cash flows, delaying the reduction in supply in the market.”
In the end, a lot of these energy companies are going to go belly up if the price of oil does not rise significantly this year. And any financial institutions that are exposed to the debt of these companies or to energy derivatives will likely be in a great deal of distress as well.
Meanwhile, the overall global economy continues to slow down.
On Monday, we learned that the Baltic Dry Index has dropped to the lowest level ever. Not even during the darkest depths of the last recession did it drop this low.
And there are some at the big banks that are warning that this might just be the beginning. For instance, David Kostin of Goldman Sachs is projecting that sales growth for S&P 500 companies will be zero percent for all of 2015…
“Consensus now forecasts 0% S&P 500 sales growth in 2015 following a 5% cut in revenue forecasts since October. Low oil prices along with FX headwinds and pension charges have weighed on 4Q EPS results and expectations for 2015.”
Others are even more pessimistic than that. According to Bank of America, the global economy will actually shrink by 2.3 trillion dollars in 2015.
One thing that could greatly accelerate our economic problems is the crisis in Greece. If there is no compromise and a new Greek debt deal is not reached, there is a very real possibility that Greece could leave the eurozone.
If Greece does leave the eurozone, the continued existence of the monetary union will be thrown into doubt and the euro will utterly collapse.
Of course I am not the only one saying these things. Analysts at Morgan Stanley are even projecting that the EUR/USD could plummet to 0.90 if there is a “Grexit”…
The Greek Prime Minister has reaffirmed his government’s rejection of the country’s international bailout programme two days before an emergency meeting with the euro area’s finance ministers on Wednesday. His declaration suggested increasing minimum wages, restoring the income tax-free threshold and halting infrastructure privatisations. Should Greece stay firm on its current anti-bailout course and with the ECB not accepting Greek T-bills as collateral, the position of ex-Fed Chairman Greenspan will gain increasing credibility. He forecast the eurozone to break as private investors will withdraw from providing short-term funding to Greece. Greece leaving the currency union would convert the union into a club of fixed exchange rates, a type of ERM III, leading to further fragmentation. Greek Fin Min Varoufakis said the euro will collapse if Greece exits, calling Italian debt unsustainable. Markets may gain the impression that Greece may not opt for a compromise, instead opting for an all or nothing approach when negotiating on Wednesday. It seems the risk premium of Greece leaving EMU is rising. Our scenario analysis suggests a Greek exit taking EURUSD down to 0.90.
If that happens, we could see a massive implosion of the 26 trillion dollars in derivatives that are directly tied to the value of the euro.
We are moving into a time of great peril for global financial markets, and there are a whole host of signs that we are slowly heading into another major global economic crisis.
So don’t be fooled by all of the happy talk in the mainstream media. They did not see the last crisis coming either.