There is so much chaos going on that I don’t even know where to start. For a very long time I have been warning my readers that a major banking collapse was coming to Europe, and now it is finally unfolding. Let’s start with Deutsche Bank. The stock of the most important bank in the “strongest economy in Europe” plunged another 8 percent on Monday, and it is now hovering just above the all-time record low that was set during the last financial crisis. Overall, the stock price is now down a staggering 36 percent since 2016 began, and Deutsche Bank credit default swaps are going parabolic. Of course my readers were alerted to major problems at Deutsche Bank all the way back in September, and now the endgame is playing out. In addition to Deutsche Bank, the list of other “too big to fail” banks in Europe that appear to be in very serious trouble includes Commerzbank, Credit Suisse, HSBC and BNP Paribas. Just about every major bank in Italy could fall on that list as well, and Greek bank stocks lost close to a quarter of their value on Monday alone. Financial Armageddon has come to Europe, and the entire planet is going to feel the pain.
The collapse of the banks in Europe is dragging down stock prices all over the continent. At this point, more than one-fifth of all stock market wealth in Europe has already been wiped out since the middle of last year. That means that we only have four-fifths left. The following comes from USA Today…
The MSCI Europe index is now down 20.5% from its highest point over the past 12 months, says S&P Global Market Intelligence, placing it in the 20% decline that unofficially defines a bear market.
Europe’s stock implosion makes the U.S.’ sell-off look like child’s play. The U.S.-centric Standard & Poor’s 500 Monday fell another 1.4% – but it’s only down 13% from its high. Some individual European markets are getting hit even harder. The Milan MIB 30, Madrid Ibex 35 and MSCI United Kingdom indexes are off 29%, 23% and 20% from their 52-week highs, respectively as investors fear the worse could be headed for the Old World.
These declines are being primarily driven by the banks. According to MarketWatch, European banking stocks have fallen for six weeks in a row, and this is the longest streak that we have seen since the heart of the last financial crisis…
The region’s banking gauge, the Stoxx Europe 600 Banks Index FX7, -5.59% has logged six straight weeks of declines, its longest weekly losing stretch since 2008, when banks booked 10 weeks of losses, beginning in May, according to FactSet data.
“The current environment for European banks is very, very bad. Over a full business cycle, I think it’s very questionable whether banks on average are able to cover their cost of equity. And as a result that makes it an unattractive investment for long-term investors,” warned Peter Garnry, head of equity strategy at Saxo Bank.
Overall, Europe’s banking stocks are down 23 percent year to date and 39 percent since the peak of the market in the middle of last year.
The financial crisis that began during the second half of 2015 is picking up speed over in Europe, and it isn’t just Deutsche Bank that could implode at any moment. Credit Suisse is the most important bank in Switzerland, and they announced a fourth quarter loss of 5.8 billion dollars. The stock price has fallen 34 percent year to date, and many are now raising questions about the continued viability of the bank.
Similar scenes are being repeated all over the continent. On Monday we learned that Russia had just shut down two more major banks, and the collapse of Greek banks has pushed Greek stock prices to a 25 year low…
Greek stocks tumbled on Monday to close nearly eight percent lower, with bank shares losing almost a quarter of their market value amid concerns over the future of government reforms.
The general index on the Athens stock exchange closed down 7.9 percent at 464.23 points — a 25-year-low — while banks suffered a 24.3-percent average drop.
This is what a financial crisis looks like.
Fortunately things are not this bad here in the U.S. quite yet, but we are on the exact same path that they are.
One of the big things that is fueling the banking crisis in Europe is the fact that the too big to fail banks over there have more than 100 billion dollars of exposure to energy sector loans. This makes European banks even more sensitive to the price of oil than U.S. banks. The following comes from CNBC…
The four U.S. banks with the highest dollar amount of exposure to energy loans have a capital position 60 percent greater than European banks Deutsche Bank, UBS, Credit Suisse and HSBC, according to CLSA research using a measure called tangible common equity to tangible assets ratio. Or, as Mayo put it, “U.S. banks have more quality capital.”
Analysts at JPMorgan saw the energy loan crisis coming for Europe, and highlighted in early January where investors might get hit.
“[Standard Chartered] and [Deutsche Bank] would be the most sensitive banks to higher default rates in oil and gas,” the analysts wrote in their January report.
There is Deutsche Bank again.
It is funny how they keep coming up.
In the U.S., the collapse of the price of oil is pushing energy company after energy company into bankruptcy. This has happened 42 times in North America since the beginning of last year so far, and rumors that Chesapeake Energy is heading that direction caused their stock price to plummet a staggering 33 percent on Monday…
Energy stocks continue to tank, with Transocean (RIG) dropping 7% and Baker Hughes (BHI) down nearly 5%. But those losses pale in comparison with Chesapeake Energy (CHK), the energy giant that plummeted as much as 51% amid bankruptcy fears. Chesapeake denied it’s currently planning to file for bankruptcy, but its stock still closed down 33% on the day.
And let’s not forget about the ongoing bursting of the tech bubble that I wrote about yesterday.
On Monday the carnage continued, and this pushed the Nasdaq down to its lowest level in almost 18 months…
Technology shares with lofty valuations, including those of midcap data analytics company Tableau Software Inc and Internet giant Facebook Inc, extended their losses on Monday following a gutting selloff in the previous session.
Shares of cloud services companies such as Splunk Inc and Salesforce.com Inc had also declined sharply on Friday. They fell again on Monday, dragging down the Nasdaq Composite index 2.4 percent to its lowest in nearly 1-1/2 years.
Those that read my articles regularly know that I have been warning this would happen.
All over the world we are witnessing a financial implosion. As I write this article, the Japanese market has only been open less than an hour and it is already down 747 points.
The next great financial crisis is already here, and right now we are only in the early chapters.
Ultimately what we are facing is going to be far worse than the financial crisis of 2008/2009, and as a result of this great shaking the entire world is going to fundamentally change.
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.
Did you notice that Greece’s creditors are not rushing to offer the Greeks a new deal in the wake of the stunning referendum result on Sunday? In fact, it is being reported that the initial reaction to the “no” vote from top European politicians was “a thunderous silence“. Needless to say, the European elite were not pleased by how the Greek people voted, but they still have all of the leverage. In particular, it is the Germans that are holding all of the cards. If the Germans want to cave in and give the Greeks the kind of deal that they desire, everyone else would follow suit. And if the Germans want to maintain a hard line with Greece, they can block any deal from happening all by themselves. So in the final analysis, this is really an economic test of wills between Germany and Greece, and time is on Germany’s side. Germany doesn’t have to offer anything new. The Germans can just sit back and wait for the Greek government to default on their debts, for Greek banks to totally run out of cash and for civil unrest to erupt in Greek cities as the economy grinds to a standstill.
In ancient times, if a conquering army came up against a walled city that was quite formidable, often a decision would be made to conduct a siege. Instead of attacking a heavily defended city directly and taking heavy casualties, it was often much more cost effective to simply surround the city from a safe distance and starve the inhabitants into submission.
In a sense, that is exactly what the Germans appear to want to do to the Greeks. Without more cash, the Greek government cannot pay their bills. Without more cash, Greek banks are going to start collapsing left and right. Without more cash, the Greek economy is going to completely and utterly collapse.
So yes, the Greeks voted for change, but the Germans still hold the purse strings.
And right now the Germans do not sound like they are in any mood to compromise. The following comes from a Reuters report that was published on Monday…
German Chancellor Angela Merkel’s deputy said Athens had wrecked any hope of compromise with its euro zone partners by overwhelmingly rejecting further austerity.
Merkel and French President Francois Hollande conferred by telephone and will meet in Paris on Monday afternoon to seek a joint response. Responding to their call, European Council President Donald Tusk announced that euro zone leaders would meet in Brussels on Tuesday evening (1600 GMT).
German Vice-Chancellor Sigmar Gabriel, leader of Merkel’s centre-left Social Democratic junior coalition partner, said it was hard to conceive of fresh negotiations on lending more billions to Athens after Greeks voted against more austerity.
Leftist Prime Minister Alexis Tsipras had “torn down the last bridges on which Greece and Europe could have moved towards a compromise,” Gabriel told the Tagesspiegel daily.
In addition, Angela Merkel’s office released a statement on Monday that placed the onus on making a new proposal to end this crisis on the Greek government…
“It is up to Greece to make something of this. We are waiting to see which proposals the Greek government makes to its European partners,” the office of German Chancellor Angela Merkel, Europe’s leading austerity advocate, said in a statement.
Just because the Greek people want the Germans to give them a very favorable deal does not mean that the Germans will be inclined to do so. The Germans know that whatever they do with the Greeks will set a precedent for the rest of the financially-troubled nations all across Europe. If Greece gets a free lunch, then Italy, Spain, Portugal, Ireland and France will expect the same kind of treatment…
Angelos Chryssogelos, an expert on Greek politics at the London-based think tank Chatham House, said the strength of Sunday’s mandate handed to Tsipras means it will be almost impossible for the prime minister’s leftist Syriza party to make a deal with European creditors.
“The Europeans made it pretty clear where they stand, and they have been consistent,” Chryssogelos said, adding that the creditors also are unlikely to back down. “Right now, voters across the eurozone largely support the tough stance taken by the eurozone.”
Chryssogelos said Greek voters may have underestimated the resolve of the creditors to reach an accord on their terms. “If someone is seen getting preferential treatment, then someone else will want that treatment,” he said, referring to other eurozone debtors such as Ireland and Portugal.
And remember, there is a very important Spanish election coming up in December.
If Syriza comes out as the big winner in this crisis, it will empower similar movements in Spain and all over the rest of the continent.
So look for Greece’s creditors to tighten the screws over the coming days. In fact, we already saw a bit of screw tightening on Monday when the ECB announced that Greek banks would not be receiving additional emergency assistance…
In a move sure to increase pressure on Greece’s flailing banks, the European Central Bank on Monday decided not to expand an emergency assistance program, raising fears that Greece could soon go completely bankrupt.
The move put a swift crimp on Greek leaders’ jubilation after winning a landslide endorsement from their citizens to reject Europe’s austerity demands and seek a new bailout bargain. Now they must seek a bargain before the money runs out within days, which would likely force them off the euro.
Basically we are watching a very high stakes game of chicken play out. And as the cash dwindles, economic activity in Greece is slowly grinding to a halt. The following comes from the Washington Post…
The dwindling cash is sucking the life out of everything from coffee shops to taxis, as anxious Greeks economize amid fears for the future. Greek leaders also banned transfers of money abroad, meaning that very little can now be imported into the country.
Printing plants are warning that they may run out of paper to print newspapers by the end of the week. Butchers say that stocks of imported meat are dwindling.
Some are even projecting that we could see civil unrest erupt in Greece in about “48 hours” once the ATM machines run out of cash…
Greek Prime Minister Alexis Tsipras probably has 48 hours to resolve a standoff with creditors before civil unrest breaks out and ATMs run out of cash, hedge fund Balyasny Asset Management said.
Yes, the Greek people exhibited great resolve in voting against the demands of the creditors on Sunday.
But how long can they endure this economic siege?
It is inevitable that a breaking point will come. Either the Greek government will give in, or the Greeks will leave the euro and start to transition back to the drachma.
If we do see a “Grexit”, and many analysts believe that one is coming, it could set off a chain of events that could cause immense financial pain all over the planet. There are tens of trillions of dollars of derivatives that are tied to European bond yields, European interest rates, etc. The following is an excerpt from a piece authored by Phoenix Capital Research that explains what kind of jeopardy we could potentially be facing…
The global derivatives market is roughly $700 trillion in size. That’s over TEN TIMES the world’s GDP. And sovereign bonds… including even bonds from bankrupt countries such as Greece… are one of, if not the primary collateral underlying all of these trades.
Greece is not the real issue for Europe. The entire Greek debt market is about €345 billion in size. So we’re not talking about a massive amount of collateral… though the turmoil this country has caused in the last three years gives a sense of the importance of the issue.
Spain, by comparison has over €1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut on them would trigger systemic failure in Europe.
If Greece gets a “haircut” on their debt, other European nations would want the same and that would cause massive chaos in the derivatives markets.
But if Greece does not get a deal and ends up leaving the eurozone, that will cause bond yields to go crazy all over Europe and that would also cause tremendous chaos in the derivatives markets.
So much depends on keeping this system of legalized gambling that we call “derivatives trading” stable. We have allowed the global derivatives bubble to become many times larger than the GDP of the entire planet, and in the end we will pay a great price for this foolishness.
Every pyramid scheme eventually collapses, and this one will too.
But the difference with this pyramid scheme is that it is going to take the entire global financial system down with it.
When it comes to geopolitics, there are often wheels working within wheels that are working within wheels. Once in a while we get a peek behind the scenes, but for the most part the machinations of the global elite remain shrouded in mystery most of the time. And sometimes the global elite appear to be doing things that, on the surface, do not seem to make much sense at all. What is going on in Europe is a perfect example of this. If everyone was negotiating honestly, I believe that a Greek debt deal would have been reached by now. As this endless crisis has stretched on month after month, it has become increasingly apparent that more is going on here than meets the eye. In particular, the IMF has been standing in the way of a deal time after time. So what do IMF officials want? Are they looking for the “unconditional surrender” of this new Greek government in order to send a message to other governments that would potentially defy them? Or could it be possible that the IMF actually wants a Greek debt default for some other insidious reason?
When the latest Greek proposal was embraced with enthusiasm by EU officials, many hoped that this meant that the crisis would soon be resolved. But it turns out that there is still one very important player that is not happy, and that is the IMF. The following comes from the Wall Street Journal…
But the IMF is still unhappy with key aspects of Greece’s new economic proposals and German officials were irritated by the speed with which the commission welcomed them, warning that much work needs to be done.
Greece’s plan calls for reducing the deficits in its pension system and government budget by relying heavily on raising taxes and social-security contributions, whereas the IMF wanted bigger spending cuts.
The Washington-based IMF has said Greece’s economy is already too heavily taxed and that too many additional tax increases would hurt economic growth, making it harder to pay down Greece’s debt.
“It is still short of everything that should be expected,” IMF Managing Director Christine Lagarde said Monday, suggesting Greece will have to modify its proposals significantly to win the IMF’s backing.
So what would make the IMF “happy”?
Would anything short of total capitulation by the Greek government suffice?
Meanwhile, members of Syriza are expressing a high level of frustration with the compromises that Greek Prime Minister Alexis Tsipras has already agreed to. At this point, there is even doubt whether the current Greek proposal could get through the Greek parliament. The following comes from Bloomberg…
Greek Prime Minister Alexis Tsipras is facing the first signs of dissent within his own party over his latest plan to end a five-month standoff with creditors.
Some of Syriza’s more radical and populist lawmakers expressed opposition Tuesday to the proposal as the deal’s backers called on members to see the bigger picture.
“Personally, I cannot support such an agreement that is contrary to our election promises,” Dimitris Kodelas, a Syriza lawmaker associated with former Maoists, said in an interview. “I do not care about the consequences of my decision.”
Despite all of the optimism that we have seen this week, the odds of a Greek debt deal getting pushed through are looking slimmer by the day.
And even if a deal somehow miraculously happens, all it would really mean is that the can has been kicked down the road for a few more months…
Assuming Tsipras can force the deal through the Greek parliament, and that key creditors such as the IMF and Germany accept it too, it will do little more than buy time for negotiations on yet another rescue.
The final tranche of cash from the existing bailout should be enough to meet repayments due to the IMF and European Central Bank through the end of August. But the Greek government will then have to find more than two billion euros for both institutions in September and October.
“If this week concludes with agreement between Greece and its creditors, it won’t be long before the next chapter in this drama,” said Angus Campbell, senior analyst at FxPro.
And no matter what happens by the end of this month, it is a virtual certainty that the economic depression in Greece will just continue to deepen.
At this point, normal economic activity in the nation has pretty much ground to a halt. Just consider the following excerpt from a recent Zero Hedge article…
“Business-to-business payments have almost been paused,” one Athens businessman says. “They are just rolling over postdated cheques.”
For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties
“There’s a real issue of moral hazard . . . Around 70 percent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.
For a long time, I have been warning that the next major economic crisis would begin in Europe before spreading across the entire globe.
Greece has a relatively small economy, but Italy, Spain and France are going down the exact same road that Greece has gone.
And what IMF officials are doing right now is that they are setting a precedent for future debt negotiations that they know are almost certainly coming with other countries in the future.
Sadly, most of my readers (being Americans) don’t really grasp the importance of what is going on over in Europe. We are watching a horrific train wreck unfold in slow-motion, and what is going to happen over the next few weeks is going to have massive implications for the entire planet.
As Greece plunges even deeper into economic chaos, Greek Prime Minister Alexis Tsipras says that his government is prepared to respond to the demands of the EU and the IMF with “the great no” and that his party will accept responsibility for whatever consequences follow. Despite years of intervention from the rest of Europe, Greece is a bigger economic mess today than ever. Greek GDP has shrunk by 26 percent since 2008, the national debt to GDP ratio in Greece is up to a staggering 175 percent, and the unemployment rate is up above 25 percent. Greek stocks are crashing and Greek bond yields are shooting into the stratosphere. Meanwhile, the banking system is essentially on life support at this point. 400 million euros were pulled out of Greek banks on Monday alone. No matter what happens in the coming days, many believe that it is now only a matter of time before capital controls like we saw in Cyprus are imposed.
Over the past several months, there have been endless high level meetings over in Europe regarding this Greek crisis, but none of them have fixed anything. And even Jeroen Dijsselbloem admits that the odds of anything being accomplished during the meeting of eurozone finance ministers on Thursday is “very small”…
Some officials believe Thursday’s meeting of eurozone finance ministers will be perhaps the last chance to stop Greece sliding into default and towards leaving the euro.
However the president of the so-called Eurogroup, Jeroen Dijsselbloem, said the chance of an accord was “very small”.
And it is certainly not just Dijsselbloem that feels this way. At this point pretty much everyone is resigned to the fact that there is not going to be a deal any time soon. The following comes from Reuters…
“People are getting anxious on both sides. Athens expects Brussels to move. And Brussels expects Athens to move. And it’s stuck,” said a senior EU diplomat, who declined to be named.
“It’s very dangerous, and we may have an accident.”
EU officials insist that it is Greece that needs to back down, but the Greeks have no intention of backing down. Just consider the words of Greek Prime Minister Alexis Tsipras. He says that he is not afraid to deliver “the great no” to the rest of Europe…
Greek Prime Minister Alexis Tsipras said he’s ready to assume responsibility for the consequences of rejecting an unfair deal with creditors.
In a sign that he’s being taken at his word, officials from the Netherlands, Portugal and Germany said they were bracing for a breakdown in talks that could roil the currency bloc.
With a viable solution “the Greek government recently elected by the Greek people will bear the cost of carrying through,” Tsipras told reporters in Athens on Wednesday. Without one, “we will assume the responsibility to say ‘the great no’ to a continuation of the catastrophic policies.”
To me, that sounds like a man that is not going to back down. And to call it “the great no” is not an exaggeration at all. I think that he realizes that this “great no” will unleash financial chaos all over Europe.
For Greece, the consequences would likely be catastrophic. At least that is what the Bank of Greece thinks…
Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.
All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.
And no matter how confident the Germans appear to be right now, the truth is that a Greek debt default would be a complete and total nightmare for the rest of Europe as well. The euro would drop like a rock, stocks would crash all over Europe and bond yields would go crazy. And that is just for starters.
So we desperately need to see a deal. But with each passing day that seems less and less likely.
In fact, a Greek parliament committee on public debt just released a new report containing their preliminary findings. This report is not legally binding, but it does show the mood of the Greek parliament, and what this report says is absolutely stunning. It concluded that the Greek government is under absolutely no obligation to repay its debts. Just check out the following excerpt from the report…
All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.
In other words, what this report is saying is that the Greek government should never pay back any of this debt. That certainly is not going to sit well with the officials from the EU and the IMF.
And what happens if other financially troubled nations in the eurozone decide that their debts are “illegal” and “odious” as well?
Globally, there are more than 76 trillion dollars worth of bonds floating around out there, and the yields on those bonds are based on the assumption that they will always be paid off. If nations such as Greece start defaulting, that will throw the entire global financial system into a state of tremendous chaos.
Of course the Greek financial system is already in a state of tremendous chaos. At this point, many believe that it is just a matter of time before capital controls are imposed. This is something that I have warned about in the past. The following description of what capital controls in Greece may look like comes from Bloomberg…
No one knows the specifics for Greece, but here’s what happened in Cyprus: ATM withdrawals were capped at 300 euros a person per day. Transfers of more than 5,000 euros abroad were subject to approval by a special committee. Companies needed documents for each payment order, with approvals for over 200,000 euros determined by available liquidity. Parents couldn’t send children that were studying abroad more than 5,000 euros a quarter. Cypriots traveling abroad could carry no more than 1,000 euros with them. Termination of fixed-term deposits was prohibited, while payments with credit and debit cards were capped at 5,000 euros. Checks couldn’t be cashed.
Since most Greeks do not want to have their money trapped in the banks, they have been pulling out cash and hiding it at home at a record breaking pace. This is precisely what we would expect to see when a nation is on the verge of total financial collapse…
“Everybody’s doing it,” said Joanna Christofosaki, in front of a Eurobank cash dispenser in the leafy Athens neighbourhood of Kolonaki. “Our friends have all done it. Nobody wants their money to be worthless tomorrow. Nobody wants to be unable to get at it.”
A researcher in the archaeology department at the Academy of Athens, Christofosaki said she knew plenty of people who had “€10,000 somewhere at home” and plenty of others who chose to keep their stash at the office. Was she among them? “If I was, I certainly wouldn’t tell you.”
As I wrote about yesterday, I believe that this is the beginning of the next great European financial crisis.
Eventually, it will spread all over the planet.
Unfortunately, even though global debt levels have never been higher and the signs of the coming financial implosion are all around us, most people have been lulled into a false sense of security.
Most people just assume that everything is going to turn out okay somehow.
The second half of this year is going to be much different from the first half, but most people will not be convinced until everything starts completely falling apart.
By then, it may be far too late to do anything about it.
The Greek financial system is in the process of totally imploding, and the rest of Europe will soon follow. Neither the Greeks nor the Germans are willing to give in, and that means that there is very little chance that a debt deal is going to happen by the end of June. So that means that we will likely see a major Greek debt default and potentially even a Greek exit from the eurozone. At this point, credit default swaps on Greek debt have risen 456 percent in price since the beginning of this year, and the market has priced in a 75 percent chance that a Greek debt default will happen. Over the past month, the yield on two year Greek bonds has skyrocketed from 20 percent to more than 30 percent, and the Greek stock market has fallen by a total of 13 percent during the last three trading days alone. This is what a financial collapse looks like, and if Greece does leave the euro, we are going to see this kind of carnage happen all over Europe.
Officials over in Europe are now openly speaking of the need to prepare for a “state of emergency” now that negotiations have totally collapsed. At one time, it would have been unthinkable for Greece to leave the euro, but now it appears that this is precisely what will happen unless a miracle happens…
Greece is heading for a state of emergency and an exit from the euro following the collapse of talks to agree a bailout deal, senior EU officials warned last night.
Europe must be prepared to step in otherwise Greek society would face an unprecedented crisis with power blackouts, medicine shortages and no money to pay for police, they said.
In the past, the Greeks have always buckled under pressure. But this new Greek government was elected with a mandate to end austerity, and so far they have shown a remarkable amount of resolve. In order for a debt deal to happen, one side is going to have to blink, and at this point it does not look like it will be the Greeks…
The world’s financial markets are facing up to the possibility that Greece could soon become the first country to crash out of Europe’s single currency. Talks between Athens and its eurozone creditors have collapsed in acrimony just days before a final deadline for Greece to unlock the €7.2bn (£5.2bn) in bailout funds it needs to avoid a catastrophic debt default.
The Greek Prime Minister, Alexis Tsipras, accused the creditor powers of hidden “political motives” in their demands that Greece make further cuts to public pension payments in return for the financial aid. “We are shouldering the dignity of our people, as well as the hopes of the people of Europe,” Mr Tsipras said in a defiant statement. “We cannot ignore this responsibility. This is not a matter of ideological stubbornness. This is about democracy.”
As we approach the point of no return, both sides are preparing for the endgame.
In Greece, members of parliament have been studying what happened in Iceland a few years ago. Many of them believe that a Greek debt default combined with a nationalization of Greek banks and a Greek exit from the euro could set the nation back on the path to prosperity fairly rapidly. The following comes from the Telegraph…
The radical wing of Greece’s Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe’s creditor powers.
Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.
The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or ‘Left Platform’, as well as other hard-line groupings in Syriza’s spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.
Meanwhile, in a desperate attempt to get the Greeks to give in at the last moment, Greek’s creditors are preparing to pull out all the stops in order to put as much financial pressure on Greece as possible…
Germany’s Suddeutsche Zeitung reported that the creditors are drawing an ultimatum to the Greeks, threatening to cut off Greek access to the European payments system and forcing capital controls on the country as soon as this weekend. The plan would lead to the temporary closure of the banks, followed by a rationing of cash withdrawals.
For a long time, most in the financial world assumed that a debt deal would eventually happen. But now reality is setting in. As I mentioned at the top of this article, the cost to insure Greek debt has risen by an astounding 456 percent since the beginning of this year…
Given these dramatic stakes, the risk of a Greek default has gone way up. One way to measure that risk is by looking at the skyrocketing price of insurance policies that would pay out if Greek bonds go bust. The cost to insure Greek debt for one year against the risk of default has skyrocketed 456% since the start of the 2015, according to FactSet data.
These insurance-like contracts, known as credit default swaps, imply there is a 75% to 80% probability of Greece defaulting on its debt, according to Jigar Patel, a credit strategist at Barclays.
The probability of a Greek default soars to a whopping 95% for five-year CDS, Patel said.
“Default is looking more and more likely,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a note to clients on Tuesday.
And in recent days, we have also seen Greek stocks and Greek bonds totally crash. The following comes from CNN…
The Greek stock market has plummeted 13% over the past three trading days, including a 3% drop on Tuesday alone.
In the bond market, the yield on Greek two-year debt has skyrocketed to 30.2%. A month ago, the yield was only 20%. Yields rise as bond prices fall.
Of course if there is a Greek debt default and Greece does leave the euro, it won’t just be Greece that pays the price.
As I have written about previously, there are tens of trillions of dollars in derivatives that are directly tied to currency exchange rates and 505 trillion dollars in derivatives that are directly tied to interest rates. A “Grexit” would cause the euro to drop like a rock and interest rates all over the continent would start to go crazy. The financial chaos that a “Grexit” would cause should not be underestimated.
And there are signs that some of Europe’s biggest banks are already on the verge of collapse. For example, just consider what has been going on at the biggest bank in Germany. Both of the co-CEOs at Deutsche Bank recently resigned, and it is increasingly looking as if it could soon become Europe’s version of Lehman Brothers. The following summary of the recent troubles at Deutsche Bank comes from an article that was posted on NotQuant…
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
- In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
- June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
And that’s where we are now. How bad is it? We don’t know because we won’t be permitted to know. But these are not the moves of a healthy company.
For a very long time, I have been warning that a major financial crisis was coming to Europe, and for a very long time the authorities in Europe have been able to successfully kick the can down the road.
But now it looks like we have reached the end of the road, and a day of reckoning is finally here.
Nobody is quite sure what is going to happen next, but almost everyone agrees that it isn’t going to be pretty.
So you better buckle up, because it looks like we are all in for a wild ride as we enter the second half of this year.
All over the planet, large banks are massively overexposed to derivatives contracts. Interest rate derivatives account for the biggest chunk of these derivatives contracts. According to the Bank for International Settlements, the notional value of all interest rate derivatives contracts outstanding around the globe is a staggering 505 trillion dollars. Considering the fact that the U.S. national debt is only 18 trillion dollars, that is an amount of money that is almost incomprehensible. When this derivatives bubble finally bursts, there won’t be enough money in the entire world to bail everyone out. The key to making sure that all of these interest rate bets do not start going bad is for interest rates to remain stable. That is why what is going on in Greece right now is so important. The Greek government has announced that it will default on a loan payment that it owes to the IMF on June 5th. If that default does indeed happen, Greek bond yields will soar into the stratosphere as panicked investors flee for the exits. But it won’t just be Greece. If Greece defaults despite years of intervention by the EU and the IMF, that will be a clear signal to the financial world that no nation in Europe is truly safe. Bond yields will start spiking in Italy, Spain, Portugal, Ireland and all over the rest of the continent. By the end of it, we could be faced with the greatest interest rate derivatives crisis that any of us have ever seen.
The number one thing that bond investors want is to get their money back. If a nation like Greece is actually allowed to default after so much time and so much effort has been expended to prop them up, that is really going to spook those that invest in bonds.
At this point, Greece has not gotten any new cash from the EU or the IMF since last August. The Greek government is essentially flat broke at this point, and once again over the weekend a Greek government official warned that the loan payment that is scheduled to be made to the IMF on June 5th simply will not happen…
Greece cannot make debt repayments to the International Monetary Fund next month unless it achieves a deal with creditors, its Interior Minister said on Sunday, the most explicit remarks yet from Athens about the likelihood of default if talks fail.
Shut out of bond markets and with bailout aid locked, cash-strapped Athens has been scraping state coffers to meet debt obligations and to pay wages and pensions. With its future as a member of the 19-nation euro zone potentially at stake, a second government minister accused its international lenders of subjecting it to slow and calculated torture.
After four months of talks with its eurozone partners and the IMF, the leftist-led government is still scrambling for a deal that could release up to 7.2 billion euros ($7.9 billion) in aid to avert bankruptcy.
And it isn’t just the payment on June 5th that won’t happen. There are three other huge payments due later in June, and without a deal the Greek government will not be making any of those payments either.
It isn’t that Greece is holding back any money. As the Greek interior minister recently explained during a television interview, the money for the payments just isn’t there…
“The money won’t be given . . . It isn’t there to be given,” Nikos Voutsis, the interior minister, told the Greek television station Mega.
This crisis can still be avoided if a deal is reached. But after months of wrangling, things are not looking promising at the moment. The following comes from CNBC…
People who have spoken to Mr Tsipras say he is in dour mood and willing to acknowledge the serious risk of an accident in coming weeks.
“The negotiations are going badly,” said one official in contact with the prime minister. “Germany is playing hard. Even Merkel isn’t as open to helping as before.”
And even if a deal is reached, various national parliaments around Europe are going to have to give it their approval. According to Business Insider, that may also be difficult…
The finance ministers that make up the Eurogroup will have to get approval from their own national parliaments for any deal, and politicians in the rest of Europe seem less inclined than ever to be lenient.
So what happens if there is no deal by June 5th?
Well, Greece will default and the fun will begin.
In the end, Greece may be forced out of the eurozone entirely and would have to go back to using the drachma. At this point, even Greek government officials are warning that such a development would be “catastrophic” for Greece…
One possible alternative if talks do not progress is that Greece would leave the common currency and return to the drachma. This would be “catastrophic”, Mr Varoufakis warned, and not just for Greece itself.
“It would be a disaster for everyone involved, it would be a disaster primarily for the Greek social economy, but it would also be the beginning of the end for the common currency project in Europe,” he said.
“Whatever some analysts are saying about firewalls, these firewalls won’t last long once you put and infuse into people’s minds, into investors’ minds, that the eurozone is not indivisible,” he added.
But the bigger story is what it would mean for the rest of Europe.
If Greece is allowed to fail, it would tell bond investors that their money is not truly safe anywhere in Europe and bond yields would start spiking like crazy. The 505 trillion dollar interest rate derivatives scam is based on the assumption that interest rates will remain fairly stable, and so if interest rates begin flying around all over the place that could rapidly create some gigantic problems in the financial world.
In addition, a Greek default would send the value of the euro absolutely plummeting. As I have warned so many times before, the euro is headed for parity with the U.S. dollar, and then it is going to go below parity. And since there are 75 trillion dollars of derivatives that are directly tied to the value of the U.S. dollar, the euro and other major global currencies, that could also create a crisis of unprecedented proportions.
Over the past six years I have written more than 2,000 articles, I have authored two books and I have produced two DVDs. One of the things that I have really tried to get across to people is that our financial system has been transformed into the largest casino in the history of the world. Big banks all over the planet have become exceedingly reckless, and it is only a matter of time until all of this gambling backfires on them in a massive way.
It isn’t going to take much to topple the current financial order. It could be a Greek debt default in June or it may be something else. But when it does collapse, it is going to usher in the greatest economic crisis that any of us have ever seen.
So keep watching Europe.
Things are about to get extremely interesting, and if I am right, this is the start of something big.
The Greek government says that a “moment of truth” is coming on June 5th. Either their lenders agree to give them more money by that date, or Greece will default on a 300 million euro loan payment to the IMF. Of course it won’t technically be a “default” according to IMF rules for another 30 days after that, but without a doubt news that Greece cannot pay will send shockwaves throughout the financial world. At that point, those holding Greek bonds will start to panic as they realize that they might not get paid as well. All over Europe, there are major banks that are holding large amounts of Greek debt and derivatives that are related to the performance of Greek debt. If something is not done to avert disaster at the last moment, a default by Greece could be the spark that sets off a major European financial crisis this summer.
As I discussed the other day, neither the EU nor the IMF have given any money to Greece since August 2014. So now the Greek government is just about out of money, and without any new loans they will not be able to pay back the old loans that are coming due. In fact, things are so bad at this point that the Greek government is openly warning that it will default on June 5th…
Greece cannot make an upcoming payment to the International Monetary Fund on June 5 unless foreign lenders disburse more aid, a senior ruling party lawmaker said on Wednesday, the latest warning from Athens it is on the verge of default.
Prime Minister Alexis Tsipras’s leftist government says it hopes to reach a cash-for-reforms deal in days, although European Union and IMF lenders are more pessimistic and say talks are moving too slowly for that.
Of course this is all part of a very high stakes chess game. The Greeks believe that the Germans will back down when faced with the prospect of a full blown European financial crisis, and the Germans believe that the Greeks will eventually be feeling so much pain that they will be forced to give in to their demands.
So with each day we get closer and closer to the edge, and the Greeks are trying to do their best to let everyone know that they are not bluffing. Just today, a spokesperson for the Greek government came out and declared that unless there is a deal by June 5th, the IMF “won’t get any money”…
Greek officials now point to a race against the clock to clinch a deal before payments totaling about 1.5 billion euros ($1.7 billion) to the IMF come due next month, starting with a 300 million euro payment on June 5.
“Now is the moment that negotiations are coming to a head. Now is the moment of truth, on June 5,” Nikos Filis, spokesman for the ruling Syriza party’s lawmakers, told ANT1 television.
“If there is no deal by then that will address the current funding problem, they won’t get any money,” he said.
But the Germans know that the Greeks desperately need more money and can’t last much longer. The Greek banking system is so close to collapse that Moody’s just downgraded it again and warned that “there is a high likelihood of an imposition of capital controls and a deposit freeze” in the months ahead…
The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks’ funding and liquidity, says Moody’s Investors Service in a new report published recently. These pressures are unlikely to ease over the next 12-18 months and there is a high likelihood of an imposition of capital controls and a deposit freeze.
The new report: “Banking System Outlook: Greece”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
Moody’s notes that significant deposit outflows of more than €30 billion since December 2014 have increased banks’ dependence on central bank funding. In our view, the banks are likely to remain highly dependent on central bank funding, as ongoing uncertainty regarding Greece’s support programme continues to compromise depositors’ confidence.
Unfortunately, when things really start going crazy in Greece people might be faced with much more than just frozen bank accounts. As I wrote about just a few days ago, there is a very strong possibility that we could actually see Cyprus-style wealth confiscation implemented in Greece when the banks collapse.
In fact, the Greek government is already talking about the possibility of a special tax on banking transactions…
Athens is promoting the idea of a special levy on banking transactions at a rate of 0.1-0.2 percent, while the government’s proposal for a two-tier value-added tax – depending on whether the payment is in cash or by card – has met with strong opposition from the country’s creditors.
A senior government official told Kathimerini that among the proposals discussed with the eurozone and the International Monetary Fund is the imposition of a levy on bank transactions, whose exact rate will depend on the exemptions that would apply. The aim is to collect 300-600 million euros on a yearly basis.
Fee won’t include ATM withdrawals, transactions up to EU500; in this case Greek govt projects EU300m-EU600m annual revenue from measure.
Sadly, most people living in North America (which is most of my audience) does not really care much about what happens on the other side of the world.
But they should care.
If Greece defaults and the Greek banking system collapses, stocks and bonds will crash all over Europe. Many believe that such a crash can be “contained” to just Europe, but that is really just wishful thinking.
In addition, the euro would plummet dramatically, which would cause substantial financial problems all over the planet. As I recently explained, the euro is headed to parity with the U.S. dollar and then it is going to go below parity. Before it is all said and done, the euro is going to all-time lows.
Of course the U.S. dollar is eventually going to totally collapse as well, but that comes later and that is a story for another day.
According to the Bank for International Settlements, 74 trillion dollars in derivatives are directly tied to the value of the euro, the value of the U.S. dollar and the value of other global currencies.
So if you believe that what is happening in Greece cannot have massive ramifications for the entire global financial system, you are dead wrong.
What is happening in Greece is exceedingly important, and it is time for all of us to start paying attention.