Where have we seen this before? Bond yields soar above the 7 percent danger level. Check. The stock market crashes to new lows. Check. Industrial activity plummets like a rock and the economy contracts. Check. The unemployment rate skyrockets to more than 20 percent. Check. The bursting of a massive real estate bubble pushes the banking system to the brink of implosion. Check. Broke local governments beg the broke national government for bailouts. Check. The international community pressures the national government to implement deep austerity measures which will slow down the economy even more and hordes of violent protesters take to the streets. Check. All of this happened in Greece, it is happening right now in Spain, and mark my words it will eventually happen in the United States. Every debt bubble eventually bursts, and right now Spain is experiencing a level of economic pain that very, very few people saw coming. The recession in Spain is rapidly becoming a full-blown economic depression, and at this point there is no hope and no light at the end of the tunnel.
The bad news for the global economy is that Spain is much larger than Greece. According to the United Nations, the Greek economy is the 32nd largest economy in the world. The Spanish economy, on the other hand, is the 4th largest economy in the eurozone and the 12th largest economy on the entire planet. It is nearly five times the size of the Greek economy.
Financial markets all over the globe are very nervous right now because if the Spanish government ends up asking for a full-blown bailout it could spell the end for the eurozone. There simply is not enough money to do the same kind of thing for Spain that is being done for Greece.
Of course European officials are going to do their best to keep the eurozone from collapsing, but what they have completely failed to do is to keep these countries from falling into depression.
As I have written about previously, Greece has already been in an economic depression for some time.
I warned that Spain, Italy, Portugal and a bunch of other European nations were going down the exact same path.
Now we are watching a virtual replay of what happened in Greece take place in Spain.
Unfortunately, the global financial system may not be able to handle a complete implosion of the Spanish economy.
The following are 12 signs that Spain is shifting gears from recession to depression….
#1 At one point on Monday, the IBEX stock market index fell to 5,905, which was the lowest level in nearly ten years. When it hit 5,905 that represented a drop of about 12 percent over just two trading days. If that happened in the United States, it would be the equivalent of the Dow falling by about 1500 points in 48 hours.
#2 So far this year, the Spanish stock market is down more than 25 percent. Back in 2008, the IBEX 35 was well over 15,000. Today it is sitting just above 6,000.
#3 Spain has banned many forms of short selling for 3 months.
#4 The yield on 10 year Spanish bonds is now well above the 7 percent “danger level”.
#5 Thanks to the problems in Spain, the euro continues to fall like a rock. On Monday it hit a new two year low against the U.S. dollar, and it is near a twelve year low against the Japanese yen.
#6 During the first quarter of 2012, the Spanish economy contracted by 0.3 percent. During the second quarter of 2012, the Spanish economy contracted by 0.4 percent.
#7 Local governments all over Spain are flat broke and need to be bailed out by the broke national government. The following is from a recent CNBC article….
Adding to Madrid’s woes, media reports suggested another half a dozen of Spain’s 17 regional authorities, facing an undeclared funding crisis, were ready to follow Valencia in seeking aid from the central government.
#8 The percentage of bad loans on the books of Spanish banks has reached an 18 year high. European officials have already promised a 100 billion euro bailout for Spain’s troubled banking system, but most analysts agree that 100 billion euros will not be nearly enough.
#10 The unemployment rate in Spain is up to an astounding 24.6 percent. The unemployment rate in Spain is already higher than it was in the United States at the peak of the Great Depression of the 1930s.
#11 The youth unemployment rate in Spain is now over 52 percent.
#12 The Spanish government has just announced a whole bunch of new tax increases and spending cuts which will cause the Spanish economy to slow down even more. In response to these austerity measures, people are taking to the streets all over Spain. Last week, 100,000 demonstrators poured into the streets to protest in Madrid alone.
Sadly, the nightmare in Spain is just beginning.
If the yield on 10 year Spanish bonds stays above 7 percent, that is going to be a really bad sign. According to the Wall Street Journal, the 7 percent level is key as far as investor confidence is concerned….
Monday’s dramatic market moves suggest Spain may be stuck in a spiral that culminates in a bailout from other euro-zone countries.
“The rise in the 10-year yield well beyond 7% carries a very distinct reminder of events in Greece in April 2010, Ireland in October 2010 and Portugal in February 2011,” said analysts at Bank of New York Mellon. “In each case, a decisive move beyond 7% signaled the start of a collapse in investor confidence that, in each case, led to a bailout within weeks,” they added.
So keep an eye on that number in the weeks ahead.
Meanwhile, the Spanish economy continues to get worse with each passing month.
So just how bad are things in Spain right now?
Just check out this excerpt from a recent article by Mark Grant….
Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.
That may make you laugh, but for those in Europe going through these horrific economic conditions it is no laughing matter.
On Sunday, Greek Prime Minister Antonis Samaras actually told former U.S. president Bill Clinton that Greece is already in a “Great Depression“.
Like Spain, the unemployment rate in Greece is well above 20 percent and the youth unemployment rate is above 50 percent.
The only reason the Greek financial system has not totally collapsed is because of outside assistance, but now there are indications that the assistance may soon be cut off.
At this point there are persistent rumors that the IMF does not plan to give any more aid money to Greece unless Greece “shapes up”.
Just like Greece and Spain, we are also rapidly traveling down the road to economic oblivion, and depression-like conditions will arrive in this country soon enough.
So enjoy these last months of economic prosperity while you still can.
The cracks in the ice are getting bigger. At this point it is really hard to have much confidence in the global financial system at all. They told us that MF Global was an isolated incident. Well, the horrific financial scandal over at PFGBest is essentially MF Global all over again. They told us that we would not see a huge wave of municipal bankruptcies in the United States. Well, three California cities have declared bankruptcy in less than a month. They told us that we could have faith in the integrity of the global financial system. Well, now we are finding out that global interest rates have been fixed by insiders for years. They told us that Greece was an isolated problem and that none of the larger European nations would experience anything remotely similar. Well, what is happening in Spain right now looks like an instant replay of exactly what happened in Greece. So who are we supposed to believe? Why does it seem like nearly everything that “the authorities” tell us turns out to be a lie? What else haven’t they been telling us?
The following are four reasons to be even less optimistic about the global financial system than you were last month….
#1 PFGBest Is MF Global All Over Again
Do you remember that whole MF Global thing?
Do you remember how hundreds of millions of dollars of customer funds were “missing” due to “accounting irregularities”?
Well, it is happening again.
PFGBest is a brokerage firm in Cedar Falls, Iowa that mostly handles agricultural futures.
All hell broke loose when the National Futures Association discovered that a bank account that was supposed to be holding 225 million dollars of customer funds was only holding about 5 million dollars instead.
So where is the other 220 million dollars?
That is a very good question.
Of course it is not a promising sign that the head of PFGBest tried to commit suicide when this news came out.
A lot of PFGBest clients are going to be absolutely devastated by this scandal. The following is from a recent Reuters article….
Farmers on Tuesday fumed at the prospect of financial losses, or at a minimum a lengthy wait for the return of frozen funds, due to alleged mismanagement at brokerage PFGBest, and some said they had been burned for the last time.
The U.S. futures industry reeled as regulators accused Iowa-based PFGBest of misappropriating more than $200 million in customer funds for more than two years, a new blow to trader trust just months after MF Global’s collapse.
Centered in the heart of farm belt, the firm handled agricultural futures accounts for a number of clients who grow corn, soybeans and cotton.
But it is not just PFGBest clients that are going to feel the pain of this scandal.
The truth is that this is going to deeply shake confidence in the entire global financial system.
Many dismissed what happened at MF Global as an “isolated incident”.
But now it is happening again.
Fool me once, shame on you.
Fool me twice, shame on me.
#2 A Third California City Goes Bankrupt In Less Than A Month
First it was Stockton.
Then it was Mammoth Lakes.
Now it is San Bernardino’s turn.
On Tuesday, the city council of San Bernardino, California voted to file for bankruptcy.
An article in the Los Angeles Times detailed the issues at the heart of San Bernardino’s financial problems….
The city’s fiscal crisis has been years in the making, compounded by the nation’s crushing recession and exacerbated by escalating pension costs, lucrative labor agreements, Sacramento’s raid on redevelopment funds and a city reserve that is tapped out, officials said.
While it would be easy to dump on the state of California (and that is something I have done quite often), the truth is that we are seeing municipal debt problems erupting all over the United States.
For example, the city of Scranton, Pennsylvania has such severe financial problems that the mayor of Scranton has ordered that all city employees be paid minimum wage until a solution to the crisis is found.
If this was television, Dwight Schrute would find a way to save the day for Scranton.
Unfortunately, this is real life and Dwight Schrute does not exist in real life.
#3 The Liborgate Scandal Keeps Getting Worse
We have been taught that we should all have faith in the integrity of the global financial system.
What a bunch of baloney that turned out to be.
It turns out that banksters have been colluding to fix global interest rates for years.
British banking giant Barclays has already admitted that they were involved in manipulating Libor.
Barclays has already agreed to pay $453 million in fines to British and U.S. authorities.
But the truth is that it would have been totally impossible for Barclays to have manipulated Libor by themselves.
So who else was involved?
That was a question that was discussed in a recent article in The Economist….
Over the past week damning evidence has emerged, in documents detailing a settlement between Barclays and regulators in America and Britain, that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. And worse is likely to emerge. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars. “This is the banking industry’s tobacco moment,” says the chief executive of a multinational bank, referring to the lawsuits and settlements that cost America’s tobacco industry more than $200 billion in 1998. “It’s that big,” he says.
As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them.
So what does all of this mean?
The Wall Street Journal says that the credibility of the entire global financial system is at stake….
At stake is both the integrity of the world’s financial system and the credibility of the U.K. authorities to police it. Long before the current scandal, many European policy makers had concluded that London during the boom was the Wild West, whose loose standards are a threat to European financial stability. The Libor scandal suggests U.S. regulators have reached similar conclusions. The Commodities Futures Trading Commission, the U.S. regulatory body that first started investigating rate-fixing, left little doubt how seriously it regards the abuses it uncovered.
Once faith is shattered, it is incredibly difficult to rebuild.
And right now it is really hard to come up with a decent argument why anyone should trust their money to such a corrupt system.
#4 Spain Is Turning Into Greece
A central government drowning in debt?
Check.
A banking system on the verge of collapse?
Check.
Politicians pushing a forced austerity program that includes much higher taxes, much lower government spending and greatly reduced pay for government workers?
Check.
Wild rioting in the streets by protesters?
Check.
Let’s see….where have we seen this before?
Can anyone still possibly deny that Spain is going down the exact same road that Greece has gone?
Spanish Prime Minister Mariano Rajoy is proposing a huge slate of tough austerity measures including a 3 point increase in the Value Added Tax on goods and services. If that 3 point hike is implemented, the Value Added Tax will rise to 21 percent.
Could you imagine going to the store and paying a 21 percent sales tax?
Ouch.
Rajoy is promising that these measures will get Spain back on the right track.
Of course we have already seen how well such austerity measures have worked in Greece.
The unemployment rate in Spain is already up to 24.4 percent, and now these austerity measures will slow the economy down even more.
No wonder there is rioting in the streets. You can see high quality footage of the rioting that has been going on in Spain this week right here. At one point police were seen firing rubber bullets at the protesters.
But of course the citizens of Spain could not live way above their means forever. At some point every debt bubble ends, and when that happens the results are often incredibly painful.
This is a lesson that the United States has not learned either. When we stop racking up more than a trillion dollars of additional government debt every year our “adjustment” will be exceedingly painful as well.
That includes the decay that is happening in society. A few days ago I made a list of 25 signs that society is falling apart, but then another story came along after I had finished my article that topped all of the examples in my list. The following is how one man in West Virginia has been treating his wife….
During the conversation, according to the criminal complaint, Lizon’s wife told the woman that her husband had kept her chained up with metal padlocks and chains for about 10 years. The woman noticed scar tissue on the victim’s hands and ankles. Lizon’s wife told the woman that the scars were from the chains tearing into her skin.
Lizon’s wife told the woman that she and her husband were originally from Czechoslovakia, and that they live in Leroy, W.Va.
According to the complaint, the woman told investigators that the feet of Lizon’s wife were “mutilated and swollen,” one of which was missing a considerable amount of skin. Lizon’s wife told the woman that her husband smashed her foot with a bucket or scoop attachment of a farm tractor.
Lizon’s wife also told the woman Lizon called her his “slave,” and that whenever her husband entered the room she had to kneel down before him, according to the complaint.
Can you imagine anyone doing that?
Can you imagine any husband chaining his wife up for 10 years?
That is so sick that it is beyond words to describe it.
Unfortunately, that is not just one isolated incident of depravity in a world filled with goodness.
The truth is that the entire world system is saturated with depravity and corruption.
If anyone is willing to stand up for “the integrity of the global financial system”, I challenge you to leave a comment below explaining to the rest of us why we should still have blind faith in the system after everything that has happened.
I don’t imagine that too many people will even attempt to take me up on that challenge.
When the economy of a nation collapses, almost everything changes. Unfortunately, most people have never been through anything like that, so it can be difficult to know how to prepare. For those that are busy preparing for the coming global financial collapse, there is a lot to be learned from the economic depression that is happening right now in Greece. Essentially, what Greece is experiencing is a low level economic collapse. Unemployment is absolutely rampant and poverty is rapidly spreading, but the good news for Greece is that the global financial system is still operating somewhat normally and they are getting some financial assistance from the outside. Things in Greece could be a whole lot worse, and they will probably get a whole lot worse before it is all said and done. But already things have gotten bad enough in Greece that it gives us an idea of what a full-blown economic collapse in the 21st century may look like. There are reports of food and medicine shortages in Greece, crime and suicides are on the rise and people have been rapidly pulling their money out of the banks. Hopefully this article will give you some ideas that you can use as you prepare for the economic chaos that will soon be unfolding all over the globe.
The following are 10 things that we can learn about shortages and preparation from the economic collapse in Greece….
#1 Food Shortages Can Actually Happen
Most people assume that they will always be able to run out to their local supermarket or to Wal-Mart and get all of the supplies they need.
Unfortunately, that is a false assumption. The truth is that our food distribution system is extremely vulnerable.
In Greece, many people are starting to totally run out of food. Even some government institutions (such as prisons) are now reporting food shortages. The following was originally from a Greek news source….
The financing for many prisons has decreased to a minimum for some months now, resulting in hundreds of detainees being malnourished and surviving on the charity of local communities.
The latest example is the prison in Corinth where after the supply stoppage from the nearby military camp, the prisoners are at the mercy of God because, as reported by prison staff, not even one grain of rice has been left in their warehouses. When a few days earlier the commander of the camp announced to the prison management the transportation stoppage, citing lack of food supplies even for the soldiers, he shut down the last source of supply for 84 prisoners. The response of some Corinth citizens was immediate as they took it upon themselves to support the prisoners, since all protests to the Justice ministry were fruitless.
#2 Medicine Is One Of The First Things That Becomes Scarce During An Economic Collapse
If you are dependent on medicine in order to survive, you might want to figure out how you are going to get by if your supply of medicine is totally cut off someday.
In Greece, medicine shortages have become a massive problem. The following is from a recent Bloomberg article….
Mina Mavrou, who runs a pharmacy in a middle-class Athens suburb, spends hours each day pleading with drugmakers, wholesalers and colleagues to hunt down medicines for clients. Life-saving drugs such as Sanofi (SAN)’s blood-thinner Clexane and GlaxoSmithKline Plc (GSK)’s asthma inhaler Flixotide often appear as lines of crimson data on pharmacists’ computer screens, meaning the products aren’t in stock or that pharmacists can’t order as many units as they need.
“When we see red, we want to cry,” Mavrou said. “The situation is worsening day by day.”
The 12,000 pharmacies that dot almost every street corner in Greek cities are the damaged capillaries of a complex system for getting treatment to patients. The Panhellenic Association of Pharmacists reports shortages of almost half the country’s 500 most-used medicines. Even when drugs are available, pharmacists often must foot the bill up front, or patients simply do without.
#3 When An Economy Collapses, So Might The Power Grid
Try this some time – turn off all power to your home for 24 hours and try to live normally.
Sadly, most people simply do not understand just how dependent we are on the power grid. Without power, all of our lives would change dramatically.
In Greece, authorities are warning of an impending “collapse” of the power grid. If it goes down for an extended period of time in Greece, the consequences would be catastrophic….
Greece’s power regulator RAE told Reuters on Friday it was calling an emergency meeting next week to avert a collapse of the debt-stricken country’s electricity and natural gas system.
“RAE is taking crisis initiatives throughout next week to avert the collapse of the natural gas and electricity system,” the regulator’s chief Nikos Vasilakos told Reuters.
RAE took the decision after receiving a letter from Greece’s natural gas company DEPA, which threatened to cut supplies to electricity producers if they failed to settle their arrears with the company.
#4 During An Economic Collapse You Cannot Even Take Water For Granted
If the power grid goes down, you will soon no longer have clean water coming out of your faucets. That is one of the reasons why it is absolutely imperative that the power grid stay operable in Greece.
Sadly, most people don’t understand just how vulnerable our water system is. In a previous article, I quoted from a report that discussed how rapidly our water supply would be in jeopardy in the event of a major transportation disruption….
According to the American Water Works Association, Americans drink more than one billion glasses of tap water per day. For safety and security reasons, most water supply plants maintain a larger inventory of supplies than the typical business. However, the amount of chemical storage varies significantly and is site specific. According to the Chlorine Institute, most water treatment facilities receive chlorine in cylinders (150 pounds and one ton cylinders) that are delivered by motor carriers. On average, trucks deliver purification chemicals to water supply plants every seven to 14 days. Without these chemicals, water cannot be purified and made safe for drinking. Without truck deliveries of purification chemicals, water supply plants will run out of drinkable water in 14 to 28 days. Once the water supply is drained, water will be deemed safe for drinking only when boiled. Lack of clean drinking water will lead to increased gastrointestinal and other illnesses, further taxing an already weakened healthcare system.
What will you do when clean water stops coming out of your faucets?
You might want to start thinking about that.
#5 During An Economic Crisis Your Credit Cards And Debit Cards May Stop Working
Most people have become very accustomed to using either debit cards or credit cards for almost everything.
But what would happen if the financial system locked up for a period of time and you were not able to use them?
This is something that the citizens of Greece are potentially facing in the coming months, and this is something that all of us need to start thinking about.
#6 Crime, Rioting And Looting Become Commonplace During An Economic Collapse
Big corporations are already making extensive plans for how to protect their stores in the event that Greece switches from the euro to the drachma.
British electrical retailer Dixons has spent the last few weeks stockpiling security shutters to protect its nearly 100 stores across Greece in case of riot.
The planning, says Dixons chief Sebastian James, may look alarmist but it’s good to be prepared.
Company bosses around Europe agree. As the financial crisis in Greece worsens, companies are getting ready for everything from social unrest to a complete meltdown of the financial system.
#7 During A Financial Meltdown Many Average Citizens Will Start Bartering
During this economic depression, alternative currencies have already been popping up in Greece.
When things fall apart on a global scale, will you have things to barter for the things that you need?
#8 Suicides Spike During An Economic Collapse
When you think of the Great Depression of the 1930s, what do you think of?
Many people think of images of people jumping out of buildings.
Well, something similar has been happening in Greece. Suicide statistics in Greece have been absolutely soaring during the last couple of years.
Once prosperity disappears, many people feel as though life is not worth living anymore.
#9 Your Currency May Rapidly Lose Value During An Economic Crisis
Just remember what happened in Germany during the Weimar Republic and what has happened recently in places like Zimbabwe.
The truth is that it can happen anywhere.
Right now, Greeks are pulling their money out of the banks because they are worried that their euros will be turned into drachmas which would rapidly lose value.
If I was living in Greece I would definitely be concerned about that. The return of the drachma seems to get closer with each passing day. Just check out these screenshots.
#10 When Things Hit The Fan The Government Will Not Save You
Has the government of Greece come to the rescue of all of those that are deeply suffering right now?
Of course not. The truth is that the Greek government can barely take care of itself at the moment.
History has shown us that governments simply cannot be counted on when things hit the fan.
Just remember what happened during the aftermath of Hurricane Katrina.
In the end, the only one that can be counted on to take care of you and your family is you.
Preparation is going to look different for every family. No two situations are exactly the same.
But there are some practical steps that nearly all of us can take to better position ourselves for what is coming. Now is the time to get educated and now is the time to take action.
Or you could be like all of those that laughed at Noah while he was building that big boat.
In the end, things did not work out too well for those folks.
Would you pool your debt with a bunch of debt addicts that have no intention of reducing their wild spending habits? Of course you wouldn’t. But that is exactly what Germany is being asked to do. Increasingly, “eurobonds” are being touted as the best long-term solution to the financial crisis in Europe. These eurobonds would represent jointly issued debt by all 17 members of the eurozone. This debt would also be guaranteed by all 17 members of the eurozone. This would allow all countries in the eurozone to enjoy the same credit rating that Germany does, and borrowing costs for nations such as Greece, Portugal, Italy and Spain would plummet. But borrowing costs for Germany would rise substantially. In fact, it is being estimated that Germany could be facing an extra 50 billion euros a year in interest expenses. So over ten years that would come to about 500 billion euros. Needless to say, Germany is not thrilled about this idea. But new French President Francois Hollande is pushing eurobonds very hard, and he has the support of the OECD, the IMF and many top Italian politicians. In the end, this could be the key to the future of the eurozone. If the Germans give in and decide that they are willing to deeply subsidize their profligate neighbors indefinitely, then the euro could potentially be saved. If not, then this issue could end up shattering Europe.
It is easy to try to portray the Germans as the “bad guys” in all this, but try to step into their shoes for a minute.
If you had some relatives that were spending wildly and that had already run up $100,000 in credit card debt, would you be a co-signer on their next credit card application?
Of course not.
The recent elections in France and Greece made it abundantly clear that the populations of those two countries are rejecting austerity.
Instead, they want a return to the debt-fueled prosperity that they have always enjoyed in the past.
Unfortunately, they need German help to be able to do that.
That is why new French President Francois Hollande is pushing so hard for eurobonds. He wants the rest of the eurozone to be able to “piggyback” on Germany’s sterling credit rating so that everyone can return to the days of wild borrowing and spending.
But Germans greatly fear what a co-mingling of eurozone debt could eventually mean. Not only would Germany’s borrowing costs rise dramatically, but there is also a concern that the rest of the eurozone could eventually pull Germany down with them.
Austria, Finland and the Netherlands are also against eurobonds, but the key is Germany.
For now, Germany is not budging on the issue of eurobonds at all. The following is a statement that German Chancellor Angela Merkel made during a recent speech in Berlin….
“It’s just about not spending more than you collect. It’s astonishing that this simple fact leads to such debates”
And she is right.
Why is it so controversial to insist that people not spend more than they bring in?
But this is the problem that is created when you create a false lifestyle fueled by debt that goes on for decades. People become accustomed to that false standard of living and they throw hissy fits when that false standard of living begins to disappear.
The Germans don’t want to make great sacrifices just so the Greeks, the French and the Italians can go back to borrowing and spending wildly.
Why would the Germans want to do that?
And as a recent CNN article noted, German politicians believe that eurobonds are explicitly banned under existing EU treaties anyway….
“There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them,” one senior German official said, adding Berlin would not drop its opposition in the foreseeable future. “That’s a firm conviction which will not change in June.”
But politicians such as Hollande are complaining that austerity could seriously damage living standards throughout Europe.
And Hollande is right about that.
When you inflate your standard of living with borrowed money for many years, eventually there comes a time when you must pay a great price.
Anyone that has ever been in trouble with credit card debt knows how painful that can be.
It is shameful for the rest of Europe to be pleading and begging Germany to help them.
They should take care of themselves.
As I wrote about the other day, Greece would be much better off in the long run if it left the euro and created a new financial system based on sound financial principles.
But in the financial press all over the world there are calls for someone to come up with a “plan” to “rescue” Europe. For example, the following is from a recent Wall Street Journal article….
There have been two main responses to the crisis: austerity, and kicking cans down roads. Austerity, in case you haven’t noticed, is so last year. It’s out. Which means that unless something else is found, some other comprehensive plan, the other main response, can kicking, is going to run out of road.
Just about everybody backed the idea of eurobonds, except for the Germans, and since they’re the ones with all the money, they’re kind of the only ones whose vote counts anyway. So, it’s time to go to plan B. Only there’s no Plan B, and there’s no time, either.
If Germany does not agree to subsidize the rest of the eurozone, will that ultimately mean that the eurozone will be forced to break up?
Probably.
And that would cause a huge amount of pain in the short-term.
But the euro never was a good idea in the first place. It was foolish to expect a monetary union to work smoothly in the absence of fiscal and political union.
And to be honest, the entire world would be a better place with less European integration. The EU has become a horrifying bureaucratic nightmare and it would be wonderful if the entire thing broke up.
But for now, the only thing that is in danger is the euro.
Increasingly, it is looking like Greece may be the first country to exit the euro.
This week, former Greek Prime Minister Lucas Papademos admitted that the Greek government is considering making preparations for Greece to leave the euro.
Not only that, Reuters is reporting that top officials in the eurozone are now working on “contingency plans” for a Greek exit from the euro….
Each euro zone country will have to prepare a contingency plan for the eventuality of Greece leaving the single currency, euro zone sources said on Wednesday.
Officials reached the consensus on Monday afternoon during an hour-long teleconference of the Eurogroup Working Group (EWG).
As well as confirmation from three euro zone officials, Reuters has seen a memo drawn up by one member state detailing some of the elements that euro zone countries should consider.
So obviously a Greek exit from the euro has become a very real possibility.
A recent Bloomberg article detailed how a Greek exit from the euro could play out during the 46 hours that global financial markets are closed over the weekend….
Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.
That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.
Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.
At this point, everyone is afraid of what is going to happen if Greece is forced to start issuing drachmas again. As CNBC is reporting, some big European corporations are already beginning to implement their own “contingency plans”….
Big tourism operators like TUI of Germany and Kuoni of Britain are demanding the addition of so-called drachma clauses to contracts with Greek hoteliers should the euro no longer be in use here. British newspapers are filled with advice columns for travelers worried about the wisdom of planning a vacation in Greece, or even Portugal and Spain, should the euro crisis worsen. Large multinational companies like Vodafone Group, Reckitt Benckiser and Diageo have taken to sweeping cash every day from euro accounts back to Britain to limit their exposure.
Sadly, this is probably only a small taste of the financial anarchy that is coming.
France is likely to keep pushing hard for the creation of eurobonds.
Germany is likely to keep fiercely resisting this.
At some point, a moment of crisis will arrive and a call will have to be made.
Will Germany give in or will political turmoil end up shattering Europe?
It will be interesting to see how all of this plays out.
During an appearance on Meet The Press on Sunday, Jim Cramer of CNBC boldly predicted that “financial anarchy” is coming to Europe and that there will be “bank runs” in Spain and Italy in the next few weeks. This is very strong language for the most famous personality on the most watched financial news channel in the United States to be using. In fact, if Cramer is not careful, people will start accusing him of sounding just like The Economic Collapse Blog. It may not happen in “the next few weeks”, but the truth is that the European banking system is in a massive amount of trouble and if Greece does leave the euro it is going to cause a tremendous loss of confidence in banks in countries such as Spain, Italy and Portugal. There are already rumors that the “smart money” is pulling out of Spanish and Italian banks. So could we see some of these banks collapse? Would they get bailed out if they do collapse? It is so hard to predict exactly how “financial anarchy” will play out, but it is becoming increasingly clear that the European financial system is heading for a massive amount of pain.
Posted below is a clip of Jim Cramer making his bold predictions during his appearance on Meet The Press. He is obviously very, very disturbed about the direction that Europe is heading in….
But what is Europe supposed to do? Even though “austerity measures” have been implemented in many eurozone nations, the truth is that they are all still running up more debt. Are European nations just supposed to run up massive amounts of debt indefinitely and pretend that there will never been any consequences?
That is apparently what Barack Obama wants. During the G-8 summit that just concluded, Obama urged European leaders to pursue a “pro-growth” path.
Of course to Obama a “pro-growth” economic plan includes spending trillions of dollars that you do not have without any regard for what you are doing to future generations.
Germany has been trying to get the rest of the eurozone to move much closer to living within their means, but as the recent elections in France and Greece demonstrated, much of the rest of the eurozone is not too thrilled with the end of debt-fueled prosperity.
In Greece, the recent elections failed to produce a new government, so new elections will be held on June 17th.
Many EU politicians are trying to turn these upcoming elections into a referendum on whether Greece stays in the eurozone or not. If the next Greek government is willing to honor the austerity agreements that have been previously agreed to, then Greece will probably stay in the eurozone for a while longer. If the next Greek government is not willing to honor the austerity agreements that have been previously agreed to, then Greece will probably be forced out of the eurozone.
The following is what John Praveen, the chief investment strategist at Prudential International Investments Advisers, had to say about the political situation in Greece recently….
“If the pro-euro major parties fail to muster enough support to form a coalition and the radical left Syriza party and other anti-euro, anti-austerity parties secure a majority, the risk of a disorderly Greek exit from the Euro increases and could roil markets”
Right now, polls show the leading anti-austerity party, Syriza, doing very well. The leader of Syriza, Alexis Tsipras, has declared that he plans “to stop the experiment” with austerity and that what the rest of the eurozone has tried to do in Greece is a “crime against the Greek people“.
But the Germans do not see it that way. The Germans just want the Greeks to stop spending far more money than they bring in.
The Germans do not want to endlessly bail out the Greeks if the Greeks are not willing to show some financial discipline.
As we approach the June 17th elections, the financial markets are likely to be quite nervous. According to Art Hogan of Lazard Capital Partners, many investors are deeply concerned about how “sloppy” a great exit from the euro could be….
“Next week is only one of the four weeks we have to wait until the Greek election. Every utterance out of Greece makes us think about their [possible] exit and how sloppy that could be”
Most Greek citizens want to remain in the eurozone and most European politicians want Greece to remain in the eurozone, but it is looking increasingly likely as if that may not happen.
In fact, there are reports that preparations are rapidly being made for a Greek exit. According to Reuters, “contingency plans” for the printing of Greek drachmas have already been drawn up….
De La Rue (DLAR.L) has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source told Reuters on Friday.
And even EU officials are now acknowledging that plans for a Greek exit from the euro are being developed. The following is what EU Trade Commissioner Karel De Gucht said during one recent interview….
“A year and a half ago, there may have been the danger of a domino effect,” he said, “but today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn’t make it.”
When these kinds of things start to become public, that is a sign that officials really do not expect Greece to remain a part of the euro.
And Greece is rapidly beginning to run out of money. According to a recent Ekathimerini article, the Greek government is likely to run out of money at the end of June….
The public coffers are seen running dry at the end of June, but this will depend on two key factors. First, revenue collection: In the first 10 days of May, inflows were about 15 percent lower than projected but there are fears that the slide may reach 50 percent. The GAO will have a picture for the first 20 days on May 23, while the last three days of the month are considered crucial, when 1.5 billion euros of the month’s budgeted total of 3.6 billion are expected to flow in.
Second, whether the IMF and EFSF installments are disbursed: This is not certain, as the decision will be purely political for both providers and evidently partly linked to political developments. Earlier this month the eurozone approved a disbursement 1 billion short of the 5 billion euros that were expected.
If Greece runs out of money and if the rest of Europe cuts off the flow of euros, Greece would essentially be forced to leave the euro.
So the last half of June looks like it could potentially be a key moment for Greece.
Meanwhile, the Greek banking system is struggling to survive as hundreds of millions of euros get pulled out of it. The following is from a recent CNN article….
The Greek financial system is straining hard for cash.
Consumers and businesses are making massive withdrawals from Greece’s banks — leading to concern the beleaguered nation could be forced out of the eurozone by a banking crisis even before its government runs out of cash.
Deposits are the lifeblood of any bank, and Greeks pulled 800 million euros out of the banking system on Tuesday alone, the most recent day for which figures are available.
If Greece does leave the euro and the Greek banking system does collapse, that is going to be a clear signal that a similar scenario will be allowed to play out in other eurozone nations.
That is why Jim Cramer, myself and many others are warning that there could soon be bank runs all over the eurozone.
For example, the Telegraph has reported that wealthy individuals are starting to pull money out of Spanish banking giant Santander….
Customers with large deposits have started withdrawing cash from Santander, the bank has admitted, as it tried to reassure concerned members of the public that their money is safe.
Round and round we go. Where all this will stop nobody knows.
If Greece does end up leaving the euro, that could set off a chain of cascading events that could potentially be absolutely catastrophic.
And if the “house of cards” does come down in Europe, that is going to greatly destabilize the global derivatives market.
You see, the truth is that the global derivatives market is very delicately balanced. The assumption most firms make is that things are not going to deviate too much from what is considered “normal”.
If we do end up seeing “financial anarchy” in Europe, that is going to greatly destabilize the system and we could rapidly have a huge derivatives crisis on our hands.
And as we saw with JP Morgan recently, losses from derivatives can add up really fast.
Originally, we were told that the derivatives losses that JP Morgan experienced recently came to a total of only about 2 billion dollars.
Now, we are told that it could be a whole lot more than that. According to the Wall Street Journal, JP Morgan could end up losing about 5 billion dollars (or more) before it is all said and done….
J.P. Morgan Chase & Co. is struggling to extricate itself from disastrous wagers by traders such as the “London whale,” in a sign that the size of its bets could bog down the bank’s unwinding of the trades and deepen its losses by billions of dollars.
The nation’s largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion.
And if Europe experiences a financial collapse, the losses experienced by U.S. firms could make that 5 billion dollars look like pocket change. The following is from a recent article by Graham Summers….
According to Reuters once you include Spain and Italy as well as Credit Default Swaps and indirect exposure to Europe, US banks have roughly $4 TRILLION in potential exposure to the EU.
To put that number in perspective, the entire US banking system is $12 trillion in size.
Interesting days are ahead my friends.
Let us hope for the best, but let us also prepare for the worst.
What was considered unthinkable a few months ago has now become probable. All over the globe there are headlines proclaiming that a Greek exit from the euro is now a real possibility. In fact, some of those headlines make it sound like it is practically inevitable. For example, Der Spiegel ran a front page story the other day with the following startling headline: “Acropolis, Adieu! Why Greece must leave the euro”. Many are saying that the euro will be stronger without Greece. They are saying things such as “a chain is only as strong as its weakest link” and they are claiming that financial markets are now far more prepared for a “Grexit” than they would have been two years ago. But the truth is that it really is naive to think that a Greek exit from the euro can be “managed” and that business will go on as usual afterwards. If Greece leaves the euro it will set a very dangerous precedent. The moment Greece exits the euro, investors all over the globe will be asking the following question: “Who is next?” Portugal, Italy and Spain would all see bond yields soar and they would all likely experience runs on their banks. It would only be a matter of time before more eurozone members would leave. In the end, the whole monetary union experiment would crumble.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
By itself, Greece cannot crash the eurozone. But the precedent that Greece is about to set could set forth a chain of events that may very well bring about the end of the eurozone.
If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well. This is the kind of uncertainty that drives financial markets crazy.
When the euro was initially created, monetary union was intended to be irreversible. There are no provisions for what happens if a member nation wants to leave the euro. It simply was not even conceived of at the time.
So we are really moving into uncharted territory. A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality….
A Greek departure from the euro could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area’s economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.
In fact, yields on Spanish debt and Italian debt are already rising rapidly thanks to the bad news out of Greece in recent days.
What makes things worse is that a new government has still not formed in Greece. It looks like new elections may have to be held in June.
Meanwhile, the Greek government is rapidly running out of money. The following is from a Bank of America report that was released a few days ago….
“If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable”
In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains. And opinion polls suggest that they will make even larger gains if another round of elections is held.
The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections. Current polling shows that Syriza is likely to come in first if new elections are held.
The leader of Syriza, Alexis Tsipras, is passionately against the bailout agreements. He says that Greece can reject austerity because the rest of Europe will never kick Greece out of the eurozone. Tsipras believes that the rest of Europe must bail out Greece because the consequences of allowing Greece to go bankrupt and fall out of the eurozone would be far too high for the rest of Europe.
“Mr Schaeuble [Germany’s finance minister] is pretending to be the fearless cowboy on the radio, saying the euro is secure [against a Greek exit]. But there’s no way they will kick us out”
So Greece and Germany are playing a game of chicken.
Who will blink first?
Will either of them blink first?
Syriza is trying to convince the Greek people that they can reject austerity and stay in the euro. Syriza insists that the rest of Europe will provide the money that they need to pay their bills.
And most Greeks do actually want to stay in the euro. One recent poll found that 78.1 percent of all Greeks want Greece to remain in the eurozone.
But a majority of Greeks also do not want anymore austerity.
Unfortunately, it is not realistic for them to assume that they can have their cake and eat it too. If Greece does not continue to move toward a balanced budget, they will lose their aid money.
And if Greece loses that aid money, the consequences will be dramatic.
Outgoing deputy prime minister of Greece Theodoros Pangalos recently had the following to say about what would happen if Greece doesn’t get the bailout money that it needs….
“We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.”
If Greece gets cut off and runs out of money, it will almost certainly be forced to go back to using the drachma. If that happens there will likely be a “bank holiday”, the borders will be secured to limit capital flight and new currency will be rapidly printed up. It would be a giant mess.
In fact, there are rumblings that the European financial system is already making preparations for all this. For example, a recent Reuters article had the following shock headline: “Banks prepare for the return of the drachma”
But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described….
Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone’s savings and spelling catastrophe for those on fixed incomes, like pensioners.
A Greek economy that is already experiencing a depression would get even worse. The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent. It is hard to imagine what Greece is going to look like if things continue to fall apart.
But the consequences for the rest of Europe (and for the rest of the globe) would be dramatic as well. A Greek exit from the euro could be the next “Lehman Brothers moment” and could plunge the entire global financial system into another major crisis.
Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.
Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.
So there is a lot of pessimism in the financial world right now. Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed….
After staying quiet at the start of the year, the bears have come roaring back with a vengeance.
Short interest — a bet on stocks turning lower — topped 13 billion shares on the New York Stock Exchange at the end of last month. That’s up 4% from March and marks the highest level of the year.
If the eurozone is going to survive, Greece must stay a part of it.
Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.
Confidence is a funny thing. It can take decades to build but it can be lost in a single moment.
If Greece leaves the euro, investor confidence in the eurozone will be permanently damaged. And when investors get spooked they don’t behave rationally.
A common currency in Europe is not dead by any means, but this current manifestation is now operating on borrowed time.
As the eurozone crumbles, it is likely that Germany will simply pull the plug at some point and decide to start over.
So what do you think?
Do you think that I am right or do you think that I am wrong?
Please feel free to post a comment with your thoughts below….
The recent elections in France and in Greece have thrown the global financial system into an uproar. Fear and worry are everywhere and nobody is quite sure what is going to happen next. All of the financial deals that Greece has made over the past few years may be null and void. Nobody is going to know for sure until a new government is formed, and at this point it looks like that is not going to happen and that there will need to be new elections in June. All of the financial deals that France has made over the past few years may be null and void as well. New French President Francois Hollande seems determined to take France on a path away from austerity. But can France really afford to keep spending money that it does not have? France has already lost its AAA credit rating and French bond yields have started to move up toward dangerous territory. And Greek politicians are delusional if they think they have any other choice other than austerity. Without European bailout money (which they won’t get if they don’t honor their current agreements), nobody is going to want to lend Greece a dime.
And all of this talk about “austerity” is kind of silly anyway. It isn’t as if either France or Greece was going to have a balanced budget any time soon. Both nations were still running up huge amounts of debt even under the “austerity” budgets.
But the citizens of both nations have sent a clear message that they are not going to tolerate even a slowdown in government spending. They want to go back to the debt-fueled prosperity of the last several decades, even if it makes their long-term financial problems a lot worse.
Unfortunately, as I mentioned earlier, Greece does not have that option. Without the bailout money that they are scheduled to get, Greece does not have a prayer of avoiding a disorderly default. Private investors would have to be insane to lend Greece money if the bailout deal falls apart. Greece desperately needs the help of the EU, the ECB and the IMF and the only way they are going to get it is if they abide by the terms of the agreements that have already been reached.
The only way that Greece can avoid austerity at this point would be to leave the euro. Nobody would want to lend money to Greece under that scenario either, but Greece could choose to print huge amounts of their own national currency if they wanted to.
The situation is different in France. Investors are still willing to lend to France at reasonable interest rates, but if France chooses to run up huge amounts of additional debt at some point they will end up just like Greece.
What is even more important in the short-term is the crumbling of the French/German alliance on European fiscal matters. Angela Merkel and Nicolas Sarkozy were a united front, but now Merkel and Hollande are likely to have conflict after conflict.
Instead of moving in one clear direction, the eurozone is now fractured and tensions are rising.
So what comes next?
Well, investors are not certain what comes next and that has many of them deeply concerned.
The following are 11 quotes that show how worried the financial world is about Europe right now….
#1Tres Knippa of Kenai Capital Management: “What is going on in Europe is an absolute disaster…the risk-on trade is not the place to be. I want to be out of equities and very, very defensive because the situation in Europe just got worse after those elections.”
#2Mark McCormick, currency strategist at Brown Brothers Harriman: “We’re going to have higher tensions, more uncertainty and most likely a weaker euro.”
#3Nick Stamenkovic, investment strategist at RIA Capital Markets in Edinburgh: “Investors are questioning whether Greece will be a part of the single currency at the end of this year.”
#4Jörg Asmussen, a European Central Bank executive board member: “Greece needs to be aware that there is no alternative to the agreed reform program if it wants to remain a member of the eurozone”
#5Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment: “A Greek eurozone exit is on the cards although the probability and timing of such an event is uncertain.”
#6Art Cashin: “Here’s the outlook on Greece from Wall Street watering holes. If a coalition government is formed or looks to be formed, global markets may rally. Any coalition is unlikely to make progress on goals, since austerity is political suicide. There will likely be another election around June 10/17. A workable majority/plurality remains unlikely, so back to square one. Therefore, Greece will be unable to attain goals by the deadline (June 30). Lacking aid funds, pensions are suspended and government workers are laid off. Protestors take to the streets and government is forced to revert to drachma to avoid social chaos. Pass the peanuts, please.”
#7John Noonan, Senior Forex Analyst with Thomson Reuters in Sydney: “Sentiment is very bearish, The euro is under a lot of pressure right now. I get the feeling that it’s going to be a nasty move lower for the euro finally”
#8Kenneth S. Rogoff, a professor of economics at Harvard: “A Greek exit would underscore that there’s no realistic long-term plan for Europe, and it would lead to a chaotic endgame for the rest of the euro zone.”
#9Chris Tinker of Libra Investment Services: “It’s a binary decision. If Greece gets itself to the point where the European administration says, ‘We can’t play this game anymore,’ that starts a domino effect”
#10Nicolas Véron, a senior fellow at Bruegel: “France has very limited fiscal space and actually has to engage in fiscal consolidation”
#11 80-year-old Greek citizen Panagiota Makri: “I’m confused. I feel numb and confused. Only God can save us now”
All of this comes at a time when much of Europe is already descending into a new recession. Economies all over Europe are contracting and unemployment rates are skyrocketing. Until things start improving, there is going to continue to be a lot of civil unrest across Europe.
Meanwhile, things are not so great in the United States either.
JPMorgan Chase CEO Jamie Dimon claims that the U.S. economy is holding a “royal straight flush“, but the only part of that he got right was the “flush” part.
There are 100 million working age Americans that do not have jobs, the middle class continues to shrink, the rising cost of food and the rising cost of gas are severely stretching the budgets of millions of American families and the federal government continues to run up gigantic amounts of debt.
When Europe descends into financial chaos, the United States is not going to escape it. The financial crisis of 2008 deeply affected the entire globe, and so will the next great financial crisis.
Let us hope that we still have a little bit more time before the next great financial crisis strikes, but things in Europe are rapidly unraveling and at some point the dominoes are going to begin to fall.
The results of the elections in France and Greece have made it abundantly clear that there is a tremendous backlash against the austerity approach that Germany has been pushing. All over Europe, prominent politicians and incumbent political parties are being voted out. In fact, Nicolas Sarkozy has become the 11th leader of a European nation to be defeated in an election since 2008. We have seen governments fall in the Netherlands, the UK, Spain, Ireland, Italy, Portugal and Greece. Whenever they get a chance, the citizens of Europe are using the ballot box to send a message that they do not like what is going on. It turns out that austerity is extremely unpopular. But if newly elected politicians all over Europe begin rejecting austerity, this puts Germany in a very difficult position. Should Germany be expected to indefinitely bail out all of the members of the eurozone that choose to live way beyond their means? If Germany pulled out of the euro tomorrow, the euro would absolutely collapse, bond yields for the rest of the eurozone would skyrocket to unprecedented heights, and without German bailout money troubled nations such as Greece would be headed directly for default. The rest of the eurozone is absolutely and completely dependent on Germany at this point. But as we have seen, much of the rest of the eurozone is sick and tired of taking orders from Germany and is rejecting austerity. A lot of politicians in Europe apparently believe that they should be able to run up gigantic amounts of debt indefinitely and that the Germans should be expected to always be there to bail them out whenever they need it. Will the Germans be willing to tolerate such a situation, or will they simply pick up their ball and go home at some point?
Over the past several years, German Chancellor Angela Merkel and French President Nicolas Sarkozy have made a formidable team. They worked together to push the eurozone on to the path of austerity, but now Sarkozy is out.
Francois Hollande, the new French president, has declared that the financial world is his “greatest enemy“.
He may regret making that statement.
One of the primary reasons why Hollande was elected was because he clearly rejected the austerity approach favored by the Germans. Shortly after winning the election in France, he made the following statement….
“Europe is watching us, austerity can no longer be the only option”
Hollande says that he wants to “renegotiate” the fiscal pact that European leaders agreed to under the leadership of Merkel and Sarkozy.
But Merkel says that is not going to happen. The following Merkel quotes are from a recent CNBC article….
“We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries,” Merkel told a news conference.
“We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin — progress is only achievable via solid finances plus growth,” she added.
So instead of being on the same page, Germany and France are now headed in opposite directions.
But if the French do not get their debt under control, they could be facing a huge crisis of their own very quickly. The following is from a recent article by Ambrose Evans-Pritchard….
“They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.
Without German help, France is not going to be able to handle its own financial problems – much less bail out the rest of Europe.
Germany is holding all of the cards, but much of the rest of the eurozone does not seem afraid to defy Germany at this point.
In Greece, anti-bailout parties scored huge gains in the recent election.
None of the political parties in Greece were able to reach 20 percent of the vote, and there is a tremendous amount of doubt about what comes next.
New Democracy (the “conservatives”) won about 19 percent of the vote, but they have already announced that they have failed to form a new government.
So now it will be up to the second place finishers, the Syriza party (the radical left coalition), to try to form a new government.
Alexis Tsipras, the leader of the Syriza party, is very anti-austerity. He made the following statement the other night….
“The people of Europe can no longer be reconciled with the bailouts of barbarism.”
But at this point, it seems very doubtful that Syriza will be able to form a new government either.
PASOK, the socialists that have been pushing through all of the recent austerity measures, only ended up with about 13 percent of the vote. In the 2009 election, PASOK got 44 percent of the vote. Obviously their support of the austerity measures cost them dearly.
So what happens if none of the parties are able to form a new government?
It means that new elections will be held.
Meanwhile, Greece must somehow approve more than 11 billion euros in additional budget cuts by the end of June in order to receive the next round of bailout money.
Greece is currently in its 6th year of economic contraction, and there is very little appetite for more austerity in Greece at this point.
Citibank analysts are saying that there is now a 50 to 75 percent chance that Greece is going to be forced to leave the euro….
Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme. Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme. If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%. However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. We continue to expect that in reaction to Greece leaving the euro area, more far-reaching measures from governments and the ECB would be put in place.
But if Greece rejects austerity that does not mean that it has to leave the eurozone.
There is no provision that allows for the other nations to kick them out.
Greece could say no to austerity and dare Germany and the rest of the eurozone to keep the bailout money from them.
If Greece defaulted, it would severely damage the euro and bond yields all over the eurozone would likely skyrocket – especially for troubled countries like Spain and Italy.
If Greece wanted to play hardball, they could simply choose to play a game of “chicken” with Germany and see what happens.
Would Germany and the rest of the eurozone be willing to risk a financial disaster just to teach Greece a lesson?
But Greece is not the only one that is in trouble.
As I wrote about recently, the Spanish economy is rapidly heading into an economic depression.
Now it has come out that the Spanish government is going to bail out a major Spanish bank. The following is from a recent Bloomberg article….
Rodrigo Rato stepped down as head of the Bankia group as a government bailout loomed after Spanish Prime Minister Mariano Rajoy retreated from a pledge to avoid using public money to save lenders.
Rato, a former International Monetary Fund managing director, proposed Jose Ignacio Goirigolzarri, ex-president and chief operating officer of Banco Bilbao Vizcaya Argentaria SA (BBVA), as Bankia executive chairman, he said in a statement today in Madrid. The government plans to inject funds into the lender by buying contingent-capital securities, said an Economy Ministry official who declined to be named as the plan isn’t public.
But this is just the beginning.
Major banks all over Europe are going to need to be bailed out, and countries such as Portugal, Italy and Spain are going to need huge amounts of financial assistance.
So does Germany want to keep rescuing the rest of the eurozone over and over again during the coming years? The cost of doing this would likely be astronomical. The following is from a recent New York Times article….
Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.
That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.
At some point, Germany may decide that enough is enough.
In fact, there have been persistent rumors that Germany has been very quietly preparing to leave the euro.
A while back, German Chancellor Angela Merkel’s Christian Democratic Union party approved a resolution that would allow a nation to leave the euro without leaving the European Union.
Many believed that this resolution was aimed at countries like Greece or Portugal, but the truth is that the resolution may have been setting the stage for an eventual German exit from the euro.
The following is an excerpt from that resolution….
“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”
Most analysts will tell you that they think that it is inconceivable that Germany could leave the euro.
But stranger things have happened.
And Germany has made some very curious moves recently.
For example, Germany recently reinstated its Special Financial Market Stabilization Funds. Those funds could be utilized to bail out German banks in the event of a break up of the euro. The following is from a recent article by Graham Summers….
In short, Germany has given the SoFFIN:
€400 billion to be used as guarantees for German banks.
€80 billion to be used for the recapitalization of German banks
Legislation that would permit German banks to dump their euro-zone government bonds if needed.
That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.
In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.
So has Germany been quietly preparing a plan “B” just in case the rest of the eurozone rejected the path of austerity?
Most people have assumed that it will be a nation such as Greece or Portugal that will leave the euro first, but in the end it just might be Germany.
And the “smart money” is definitely betting on something big happening.
Right now some of the largest hedge funds in the world are betting against the eurozone as a recent Daily Finance article described….
Some of the world’s most prominent hedge fund managers are betting against the eurozone — and not just the peripheral countries everyone knows are in trouble. They’re taking positions against the core countries, economies that — until now — everyone has assumed were rock-solid.
Yes, the countdown to the break up of the euro has officially begun.
A great financial crisis is going to erupt in Europe, and it is going to shake the world to the core.
If you were frightened by what happened back in 2008, then you are going to be absolutely horrified by what is coming next.
For a long time, most analysts have believed that if someone was going to leave the euro, it would be a weak nation such as Greece or Portugal. But the truth is that financially troubled nations such as Greece and Portugal don’t want to leave the euro. The leaders of those nations understand that if they leave the euro their economies will totally collapse and nobody will be there to bail them out. And at this point there really is not a formal mechanism which would enable other members of the eurozone to kick financially troubled nations such as Greece or Portugal out of the euro. But there is one possibility that is becoming increasingly likely that could actually cause the break up of the euro. Germany could leave the euro. Yes, it might actually happen. Germany is faced with a very difficult problem right now. It is looking at a future where it will be essentially forced to bail out most of the rest of the nations in the eurozone for many years to come, and those bailouts will be extremely expensive. Meanwhile, the mood in much of the rest of Europe is becoming decidedly anti-German. In Greece, Angela Merkel and the German government are being openly portrayed as Nazis. Financially troubled nations such as Greece want German bailout money, but they are getting sick and tired of the requirements that Germany is imposing upon them in order to get that money. Increasingly, other nations in Europe are simply ignoring what Germany is asking them to do or are openly defying Germany. In the end, Germany will need to decide whether it is worth it to continue to pour billions upon billions of euros into countries that don’t appreciate it and that are not doing what Germany has asked them to do.
German Chancellor Angela Merkel’s Christian Democratic Union party recently approved a resolution that would allow a country to leave the euro without leaving the European Union.
Many thought that the resolution was aimed at countries like Greece or Portugal, but the truth is that this resolution may be setting the stage for a German exit from the euro.
The following is an excerpt from that resolution….
“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”
So was that paragraph written for Greece?
Or was it written for Germany?
That is a very interesting question.
What is clear is that the status quo cannot last much longer.
Voters in Germany are definitely not in the mood to give any more bailout money to other nations in Europe, but if Germany is going to continue to stay in the eurozone many more bailouts will be required in the coming years.
Meanwhile, Germany is rapidly losing control over the rest of the eurozone….
*Greece has implemented some of the austerity measures that have been required of it, but many others have not been implemented. In a few weeks there will be a national election, and parties that are opposed to the austerity measures are surging in the polls. It is likely that the new government will be much less friendly toward Germany.
*The Spanish government is already defying the budgetary requirements that the EU is trying to impose upon it. Spain is definitely going to miss the debt targets mandated by the EU, and the Spanish government has absolutely no plans of making more reductions to government spending.
*The upcoming election in France could be absolutely crucial. Nicolas Sarkozy is not doing well in the polls and the new French government could totally wreck the recent fiscal agreement that the members of the eurozone recently agreed to.
The following is how Graham Summers recently summarized the current situation in France….
We should also take Schäuble’s statements in the context of Angela Merkel’s recent backing of Nicolas Sarkozy’s re-election campaign in France against hardened socialist François Hollande, who wants to engage in a rampant socialist mission to lower France’s retirement age, cut tax breaks to the wealthy, and break the recent new EU fiscal requirements Germany convinced 17 members of the EU to agree to.
Obviously Germany has been trying very hard to keep the eurozone together. But the German government also believes that if it is going to be bailing everyone out that it should also be able to set the rules.
So what happens if the rest of Europe tells Germany to stick their rules where the sun doesn’t shine?
Well, Germany would be forced to make a very difficult decision, and Germany appears to making plans for that eventuality.
For example, Germany recently reinstated its Special Financial Market Stabilization Funds. This money would be used to bail out German banks in the event of a break up of the euro. The following is from a recent article by Graham Summers….
In short, Germany has given the SoFFIN:
€400 billion to be used as guarantees for German banks.
€80 billion to be used for the recapitalization of German banks
Legislation that would permit German banks to dump their euro-zone government bonds if needed.
That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.
In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.
If the rest of Europe continues to defy Germany, then at some point Germany may decide to simply pick up the ball and go home.
Germany is the strongest economy in the eurozone by far, and if Germany were to pull out the euro would absolutely collapse. Whatever currency Germany decided to issue would be extremely valuable. Such an event would actually have some tremendous side benefits for Germany.
Right now, the German national debt is denominated in euros.
If Germany left the euro, the value of euros would plummet and would likely keep declining as the rest of the eurozone fell apart financially and Germany would be able to pay back its debt in rapidly appreciating “marks” or whatever other currency it decided to issue.
All other debts in Germany would also be denominated in euros and would also be repaid with a much stronger currency.
Are you starting to get the picture?
Yes, Germany would likely have to bail out German banks if it left the euro, but leaving the euro could also prove to be a tremendous windfall for Germany.
If Germany chooses to say in the euro, it is going to be faced with extremely expensive bailouts of other countries for as far as the eye can see.
Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.
That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.
If Germany leaves the euro, that does not mean that the dream of a single currency is dead. Germany could just let the rest of the eurozone collapse and then invite them to join the new German currency eventually after all the carnage is over.
At that point, Germany would have all the leverage and Germany would be able to dictate all the rules.
What is clear is that the status quo in Europe is becoming extremely unacceptable in Germany. The Germans do not intend to give endless bailouts to other nations that do not appreciate them and that do not intend to follow the rules.
At some point Germany may actually decide to walk, and there are lots of whispers that Germany has been steadily preparing for that day.
For example, there are persistent rumors that Germany has ordered printing plates for the printing of new German marks. Philippa Malmgren, a former economic adviser to President George W. Bush, says that she believes that this is already happening….
“I think they have already got the printing machines going and are bringing out the old deutschmarks they have left over from when the euro was introduced.”
Increasingly, it really is looking as if Germany is actually preparing to leave the euro.
If Germany did leave the euro, the consequences for the rest of Europe would be catastrophic.
The euro would rapidly drop to all-time lows.
The global financial system would be thrown in chaos.
Countries such as Greece would lose their major source of bailout money and would be forced to default.
The recession in Europe would likely deepen into a devastating economic depression.
So there would be a lot of downside.
But Germany would fare much better than most of the rest of Europe, and in the end Germany would be left holding most of the cards.
Keep a close eye on the upcoming European elections and the evolving political situation in Europe.
If things don’t go well for Germany, at some point Germany may just get fed up and walk away from the euro.
Where have we seen this before? Bond yields soar above the 7 percent danger level. Check. The stock market crashes to new lows. Check. Industrial activity plummets like a rock and the economy contracts. Check. The unemployment rate skyrockets to more than 20 percent. Check. The bursting of a massive real estate bubble pushes the banking system to the brink of implosion. Check. Broke local governments beg the broke national government for bailouts. Check. The international community pressures the national government to implement deep austerity measures which will slow down the economy even more and hordes of violent protesters take to the streets. Check. All of this happened in Greece, it is happening right now in Spain, and mark my words it will eventually happen in the United States. Every debt bubble eventually bursts, and right now Spain is experiencing a level of economic pain that very, very few people saw coming. The recession in Spain is rapidly becoming a full-blown economic depression, and at this point there is no hope and no light at the end of the tunnel.
10 Things That We Can Learn About Shortages And Preparation From The Economic Collapse In Greece
The following are 10 things that we can learn about shortages and preparation from the economic collapse in Greece….
#1 Food Shortages Can Actually Happen
Most people assume that they will always be able to run out to their local supermarket or to Wal-Mart and get all of the supplies they need.
Unfortunately, that is a false assumption. The truth is that our food distribution system is extremely vulnerable.
In Greece, many people are starting to totally run out of food. Even some government institutions (such as prisons) are now reporting food shortages. The following was originally from a Greek news source….
#2 Medicine Is One Of The First Things That Becomes Scarce During An Economic Collapse
If you are dependent on medicine in order to survive, you might want to figure out how you are going to get by if your supply of medicine is totally cut off someday.
In Greece, medicine shortages have become a massive problem. The following is from a recent Bloomberg article….
#3 When An Economy Collapses, So Might The Power Grid
Try this some time – turn off all power to your home for 24 hours and try to live normally.
Sadly, most people simply do not understand just how dependent we are on the power grid. Without power, all of our lives would change dramatically.
In Greece, authorities are warning of an impending “collapse” of the power grid. If it goes down for an extended period of time in Greece, the consequences would be catastrophic….
#4 During An Economic Collapse You Cannot Even Take Water For Granted
If the power grid goes down, you will soon no longer have clean water coming out of your faucets. That is one of the reasons why it is absolutely imperative that the power grid stay operable in Greece.
Sadly, most people don’t understand just how vulnerable our water system is. In a previous article, I quoted from a report that discussed how rapidly our water supply would be in jeopardy in the event of a major transportation disruption….
What will you do when clean water stops coming out of your faucets?
You might want to start thinking about that.
#5 During An Economic Crisis Your Credit Cards And Debit Cards May Stop Working
Most people have become very accustomed to using either debit cards or credit cards for almost everything.
But what would happen if the financial system locked up for a period of time and you were not able to use them?
This is something that the citizens of Greece are potentially facing in the coming months, and this is something that all of us need to start thinking about.
#6 Crime, Rioting And Looting Become Commonplace During An Economic Collapse
Big corporations are already making extensive plans for how to protect their stores in the event that Greece switches from the euro to the drachma.
The following is from a recent Reuters article….
#7 During A Financial Meltdown Many Average Citizens Will Start Bartering
During this economic depression, alternative currencies have already been popping up in Greece.
When things fall apart on a global scale, will you have things to barter for the things that you need?
#8 Suicides Spike During An Economic Collapse
When you think of the Great Depression of the 1930s, what do you think of?
Many people think of images of people jumping out of buildings.
Well, something similar has been happening in Greece. Suicide statistics in Greece have been absolutely soaring during the last couple of years.
Once prosperity disappears, many people feel as though life is not worth living anymore.
#9 Your Currency May Rapidly Lose Value During An Economic Crisis
Just remember what happened in Germany during the Weimar Republic and what has happened recently in places like Zimbabwe.
The truth is that it can happen anywhere.
Right now, Greeks are pulling their money out of the banks because they are worried that their euros will be turned into drachmas which would rapidly lose value.
If I was living in Greece I would definitely be concerned about that. The return of the drachma seems to get closer with each passing day. Just check out these screenshots.
#10 When Things Hit The Fan The Government Will Not Save You
Has the government of Greece come to the rescue of all of those that are deeply suffering right now?
Of course not. The truth is that the Greek government can barely take care of itself at the moment.
History has shown us that governments simply cannot be counted on when things hit the fan.
Just remember what happened during the aftermath of Hurricane Katrina.
In the end, the only one that can be counted on to take care of you and your family is you.
So you better start preparing.
Unfortunately, as I wrote about the other day, time is rapidly running out for the global financial system.
Even some of the top economic officials in the world are warning that another major crisis could be on the way.
Just check out what World Bank President Robert Zoellick said the other day….
He also compared a potential exit of Greece from the eurozone to the collapse of Lehman Brothers back during the last financial crisis….
So what are some things that the average person can do to get prepared?
Well, a recent article on SHTFplan.com entitled “The List: A to Z Survival for the Abysmal Times Ahead” contains hundreds of ideas for preparing for the chaotic economic environment that we are heading into.
Preparation is going to look different for every family. No two situations are exactly the same.
But there are some practical steps that nearly all of us can take to better position ourselves for what is coming. Now is the time to get educated and now is the time to take action.
Or you could be like all of those that laughed at Noah while he was building that big boat.
In the end, things did not work out too well for those folks.