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.
Broke nations are bailing out other broke nations with borrowed money. Round and round we go – where we stop nobody knows. As of April, 41 different countries had active financial “arrangements” with the IMF. Sometimes they are called “bailouts” and sometimes they are called other things, but in every single case they involve loans. And most of the time, these loans come with very stringent conditions. It is a form of “global governance” that most people don’t even know about. For decades, the IMF has been able to use money as a way to force developing nations to do what it wants them to do. But up until fairly recently, this had mostly only been done with poor nations. But now an increasing number of wealthy nations are turning to the IMF for help. We have already seen Greece, Portugal, Ireland and Cyprus receive bailouts which were partly funded by the IMF, Spain has received a bailout for its banking sector, and as I noted yesterday, it is being projected that Italy will need a major bailout within six months. How long can this go on before the entire system collapses?
Well, that would depend on how much money the lender has.
And so where does the IMF get their money?
The IMF gets their money from a bunch of nations that are absolutely drowning in debt themselves.
The IMF is funded by “wealthy” nations that dominate the global economy. The following is how Wikipedia describes the IMF’s quota system…
The IMF’s quota system was created to raise funds for loans. Each IMF member country is assigned a quota, or contribution, that reflects the country’s relative size in the global economy. Each member’s quota also determines its relative voting power. Thus, financial contributions from member governments are linked to voting power in the organization.
These are the five largest contributors to IMF funding…
United States – 16.75%
Japan – 6.23%
Germany – 5.81%
France – 4.29%
UK – 4.29%
But those countries are in trouble themselves. The U.S. has a debt to GDP ratio of over 100%. Japan has a debt to GDP ratio of over 200%.
The truth is that these countries are funding the IMF with borrowed money.
So what happens when the contributors run out of money and can’t contribute anymore?
All over the globe, an increasing number of countries are reaching out to the IMF for help. For example, on Thursday we learned that Pakistan is getting a new bailout from the IMF…
Pakistan and the International Monetary Fund have reached an initial agreement on a bailout of at least $5.3 billion.
Pakistani Finance Minister Muhammad Ishaq Dar and IMF mission chief Jeffrey Franks announced the agreement at a press conference Thursday.
And the new government in Egypt is hoping that the revolution that just occurred will not stop the flow of IMF funds…
In recent months, a handful of neighboring countries such as Qatar have been keeping Egypt’s economy afloat by loaning the country’s central bank cash. That has bought Morsi government time to delay implementing the politically-sensitive measures the IMF has sought as a precondition before it gives Cairo a $4.8 billion credit line. In particular, the IMF had said that Egypt must raise taxes and begin phasing out fuel subsidies.
It’s not the only cash at stake. Other international donors have vowed another $9.7 billion for the country once the IMF program is in place. Roughly $1.55 billion in bilateral aid from Washington could also be held up: under U.S. law, the administration can’t loan money to countries where the military is involved in an unconstitutional change in government.
But what often happens with these bailouts is that the “conditions” that are imposed prove extremely difficult to meet. For example, Greece has not implemented all of the “reforms” that they were ordered to implement, and so the flow of future funds may be threatened…
As Greece looks set to miss a key reform deadline set by international lenders, which could jeopardize further financial aid, a Greek government minister said it wasn’t Greece’s fault that it couldn’t live up to the demands of a flawed bailout program.
“There are failures [by Greece],but you assume that the program that has been effectively imposed on us is perfect, which is far from the case,” Nikos Dendias, minister of Public Order and Citizen Protection, told CNBC on Thursday.
His comments come after Greek finance ministry officials said on Wednesday that Greece would not meet targets on reforming its public sector by the deadline set by international lenders, putting further financial aid in jeopardy.
Once a nation gets hooked on bailout money from the IMF or from other international sources, it can be very hard to get off of it. But that is what these globalist organizations like – they want to be able to use money as a form of control.
As we saw with Greece, sometimes a nation will need bailout after bailout. And it appears that is also going to be the case with Portugal. The Portuguese government is on the verge of collapsing and their financial situation is being described as “very fragile”…
Portugal had been held up as an example of a bailout country doing all the right things to get its economy back in shape. That reputation is now harder to sustain and even before this latest crisis, the International Monetary Fund reported last month that Lisbon’s debt position was “very fragile”.
Coming soon after the near-collapse of the Greek government, which has been given until Monday to show it can meet the demands of its own EU-IMF bailout, the euro zone may be on the brink of falling back into full-on crisis.
Right now, Portuguese bond yields are absolutely soaring and the Portuguese economy is rapidly heading into depression.
Portugal is going to desperately need the assistance of the IMF.
But what happens when the nations that primarily fund the IMF start failing themselves?
The U.S. is a complete and total financial disaster and so is Japan. Much of Europe is already experiencing a full-blown economic depression and even China is showing signs of trouble.
So if the “wealthy” nations fail, who is going to be there to help the “poor” nations?
Why are so many politicians around the world declaring that the debt crisis is “over” when debt to GDP ratios all over the planet continue to skyrocket? The global economy has never seen anything like the sovereign debt bubble that we are experiencing today. The United States, Japan, and nearly every major nation in Europe are absolutely drowning in debt. We have heard a lot about “austerity” over in Europe in recent years, but debt to GDP ratios continue to rise in Greece, Spain, Italy, Ireland and Portugal. In general, most economists consider a debt to GDP ratio of 100% to be a “danger level”, and most of the economies of the western world have either already surpassed that level or are rapidly approaching it. Of course the biggest debt offender of all in many ways is the United States. The U.S. debt to GDP ratio has risen from 66.6 percent to 103 percent since 2007, and the U.S. government accumulated more new debt during Barack Obama’s first term than it did under the first 42 U.S. presidents combined. This insane sovereign debt bubble will continue to expand until a day of reckoning arrives and the system implodes. Nobody knows exactly when that moment will be reached, but without a doubt it is coming.
But if you listen to the mainstream media in the United States, you would be tempted to think that this giant bubble of debt is not much of a concern at all. For example, in a recent article in the Washington Post entitled “The case for deficit optimism“, Ezra Klein wrote the following…
“Here’s a secret: For all the sound and fury, Washington’s actually making real progress on debt.”
How many times have we heard that before?
About a decade ago, government officials were projecting that we would be swimming in gigantic government surpluses by now.
Instead, we are running trillion dollar deficits.
But right now there is a lot of optimism about the economy. The stock market recently hit a 5 year high and the business community is loving all of the false prosperity that all of this debt is buying us.
Even Warren Buffett does not really seem concerned about the exploding U.S. government debt. He recently made the following statement…
“It is not a good thing to have it going up in relation to GDP. That should be stabilized. But the debt itself is not a problem.”
A debt of 16 trillion dollars “is not a problem”?
Perhaps we should all run our finances that way.
Why don’t we all go out and open up 20 different credit cards, run them all up to the max, and then tell the credit card companies that we can’t pay them back but that it “is not a problem”.
Of course real life does not work that way.
The truth is that government debt is becoming a monstrous problem all over the globe. Just check out how debt to GDP ratios all over the planet have grown over the past five years…
Debt to GDP ratio in 2007: 66.6 percent
Debt to GDP ratio in 2012: 103 percent
Debt to GDP ratio in 2007: 43.4 percent
Debt to GDP ratio in 2012: 85.0 percent
Debt to GDP ratio in 2007: 63.7 percent
Debt to GDP ratio in 2012: 86 percent
Debt to GDP ratio in 2007: 67.6 percent
Debt to GDP ratio in 2012: 80.5 percent
Debt to GDP ratio in 2007: 39.6 percent
Debt to GDP ratio in 2012: 69.3 percent
Debt to GDP ratio in 2007: 24.8 percent
Debt to GDP ratio in 2012: 106.4 percent
Debt to GDP ratio in 2007: 63.9 percent
Debt to GDP ratio in 2012: 108.1 percent
Debt to GDP ratio in 2007: 106.6 percent
Debt to GDP ratio in 2012: 120.7 percent
Debt to GDP ratio in 2007: 106.1 percent
Debt to GDP ratio in 2012: 170.6 percent
The Eurozone As A Whole
Debt to GDP ratio in 2007: 68.4 percent
Debt to GDP ratio in 2012: 87.3 percent
Debt to GDP ratio in 2007: 172.1 percent
Debt to GDP ratio in 2012: 211.7 percent
So how does all of this end?
Well, it is going to be messy, but it is very difficult to say exactly when the system will collapse under the weight of too much debt. Some nations, such as Japan, are able to handle very high debt loads because they have a very high level of domestic saving. Up to this point, an astounding 95 percent of all Japanese government bonds have been purchased domestically. But other nations collapse under the weight of government debt even before they reach a debt to GDP ratio of 100%. The following is an excerpt from a recent Congressional Research Service report…
It is hard to predict at what point bond holders would deem it to be unsustainable. A few other advanced economies have debt-to-GDP ratios higher than that of the United States. Some of those countries in Europe have recently seen their financing costs rise to the point that they are unable to finance their deficits solely through private markets. But Japan has the highest debt-to-GDP ratio of any advanced economy, and it has continued to be able to finance its debt at extremely low costs.
When a government runs up massive amounts of debt, it is playing with fire. You can pile up mountains of government debt for a while, but eventually it catches up with you.
Over the past 10 years, the U.S. national debt has grown by an average of 9.3 percent per year, but the overall U.S. economy has only grown by an average of just 1.8 percent per year. That is unsustainable by definition.
There is going to be a tremendous price to pay for the debt binge that the U.S. government has indulged in over the past decade. During Barack Obama’s first term, the amount of new debt accumulated by the federal government breaks down to about $50,521 for every single household in the United States. That is utter insanity.
If you can believe it, we have accumulated more new government debt under Obama than we did from the inauguration of George Washington to the end of the Clinton administration.
And most Americans realize that something is seriously wrong. One recent poll found that only 34 percent of all Americans believe that the country is heading in the right direction, and 60 percent of all Americans believe that the country is heading in the wrong direction.
If we keep piling up so much debt, at some point a moment of great crisis will arrive. When that moment arrives, we could see havoc throughout the entire global financial system. For instance, most people don’t really understand the key role that U.S. Treasuries play in the derivatives market. The following is from a recent article posted on Zero Hedge…
This time around, things will be far worse if nothing is solved. If the US loses another AAA rating, then the financial markets could face systemic risk. The reason for this is that US Treasuries are one of the senior most forms of collateral used by the banks to backstop the $600+ trillion derivatives market.
As any trader who trades on margin can tell you, when the value of your collateral is called into question, those on the other side of the trade come looking for you to put up more capital on your trades. This can result in assets being sold en masse (similar to what happened after Lehman failed) and things can get very ugly very fast.
For much more on the danger that derivatives pose to our financial system, please see this article: “The Coming Derivatives Panic That Will Destroy Global Financial Markets“.
Once again, nobody knows exactly when the sovereign debt bubble will burst, but if we continue down the path that we are currently on, it will inevitably happen at some point.
And according to Professor Carmen Reinhart, when this bubble does burst things could unravel very rapidly…
“These processes are not linear,” warns Prof. Reinhart. “You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.”
At some point the global financial system will hit the wall that Professor Reinhart has warned about.
Are you ready?
The global economy is heading for a massive amount of trouble in the months ahead. Right now we are seeing the beginning of a credit crunch that is shaping up to be very reminiscent of what we saw back in 2008. Investors and big corporations are pulling huge amounts of money out of European banks and nobody wants to lend to those banks right now. We could potentially see dozens of “Lehman Brothers moments” in Europe in 2012. Meanwhile, bond yields on sovereign debt are jumping through the roof all over Europe. That means that European nations that are already drowning in debt are going to find it much more expensive to continue funding that debt. It would be a huge understatement to say that there is “financial chaos” in Europe right now. The European financial system is in so much trouble that it is hard to describe. The instant that they stop receiving bailout money, Greece is going to default. Portugal, Italy, Ireland, Spain and quite a few other European nations are also on the verge of massive financial problems. When the financial dominoes start to fall, the U.S. financial system is going to be dramatically affected as well, because U.S. banks have a huge amount of exposure to European debt. The other day, I noted that investor Jim Rogers is saying that the coming global financial collapse “is going to be worse” than 2008. Sadly, it looks like he is right on the money. We are in a lot of trouble my friends, and things are going to get really, really ugly.
The sad thing is that we never have recovered from the last major financial crisis. Right now, the U.S. economy is far weaker than it was back in 2007. So what is going to happen if we get hit with another financial tsunami? The following is what PIMCO CEO Mohamed El-Erian said recently….
“What’s most terrifying, we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero.”
Can things really get much worse than they are now?
Unfortunately, yes they can.
Not that things are not really, really bad right now.
In Los Angeles earlier this week, approximately 10,000 people lined up for free turkey dinners.
So how many people will be lining up for free food when the unemployment rate in the U.S. soars into double digits?
Right now there is so much economic pain in America that it is hard to describe. According to a recent report from one nonprofit group, 45 percent of all people living in the United States “do not have enough money to cover housing, food, healthcare and other basic expenses”.
If this is where we are at now, how much trouble will we be in as a nation if a financial crisis worse than 2008 hits us in 2012?
The primary cause of the coming financial crisis will almost certainly be the financial meltdown that we are seeing unfold in Europe.
The economic downturn that began in 2008 caused the debt levels of quite a few European nations to soar to unprecedented heights. It has gotten to the point where the debts of many of those nations are no longer sustainable.
So investors are starting to demand much higher returns for the much greater risk associated with investing in the bonds of those countries.
But that makes it much more expensive for those troubled nations to fund their debts, and that means that their financial troubles get even worse.
Over the past 12 months, what we have seen happen to bond yields over in Europe has been nothing short of amazing.
Just check out this chart of what has been happening to the yield on 2 year Italian bonds over the past 12 months.
And keep in mind that these bond yields have been spiking even while the European Central Bank has been buying up unprecedented mountains of bonds in an attempt to keep bond yields low.
There has been a fundamental loss of faith in the financial system, and it is not just happening in Europe.
Just check out this chart. As that chart shows, credit default swap spreads all over the globe are absolutely skyrocketing and are now higher than we have seen at any point since the great financial crisis that shook the world during 2008 and 2009.
Panic and fear are everywhere – especially in Europe. In fact, it looks like a run on the banks has already begun in Europe.
The following comes from a recent article in The Economist….
“We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an analyst at Citi Group wrote in a recent report. “This is a worrying development.”
Nobody wants to lend money to European banks right now. There is a feeling that they are all vulnerable and could fail at any time, and this lack of confidence actually makes that possibility even more likely.
The following is a short excerpt from a recent CNBC article….
Money-market funds in the United States have quite dramatically slammed shut their lending windows to European banks. According to the Economist, Fitch estimates U.S. money market funds have withdrawn 42 percent of their money from European banks in general.
And for France that number is even higher — 69 percent. European money-market funds are also getting in on the act.
So what can be done?
Well, in a different CNBC article, Mitchell Goldberg was quoted as saying that even “a bazooka” is not going to be good enough to fix this situation….
“It’s too late for a bazooka,” said Mitchell Goldberg, president of ClientFirst Strategy. “Now we need inter-continental ballistic missiles. This is getting worse very quickly.”
This is kind of like watching a horrific car wreck happen in very slow motion.
The financial system of Europe is dying and everybody can see what is happening but nobody can seem to find a way to fix it.
Not that we are solving our own problems here in the United States.
The vaunted “supercommittee” that was supposed to get a handle on our debt problem was a complete and utter failure.
Barack Obama has shown that he has no clue what to do when it comes to the economy, and Ben Bernanke has been preoccupied with roaming around the country trying to get people to feel more “warm and fuzzy” about the Federal Reserve.
The Federal Reserve actually has more power over our economy than anyone else. But instead of fixing things they only keep making things even worse.
The only people that the Fed seems to be helping are the banksters.
What you are about to read should really, really upset you. According to a recent article in the Wall Street Journal, the Federal Reserve has actually been tipping off their upcoming moves to top financial professionals. In turn, these financial professionals have been using that information to make a lot of money for themselves and for their clients….
Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist.
The news pointed to a boom in long-term bonds.
It was a good call. Over the next five weeks, prices on 10-year Treasury bonds soared, offering double-digit returns in an otherwise dismal year.
By the time the Fed announced its $400 billion Operation Twist on Sept. 21, the window for quick profits had all but slammed shut.
Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches.
You just can’t make stuff like this up. The corruption at the Federal Reserve is totally out of control. After nearly 100 years of total failure, it is time to shut down the Federal Reserve.
Not that Barack Obama should get a free pass for the role that he has played in this economic downturn. He inherited a complete mess from Bush and has made it even worse.
Today, millions of business owners are so frustrated with Washington D.C. that they don’t know what to do.
For example, one business owner down in Georgia has posted signs with the following message on all of his company’s trucks….
“New Company Policy: We are not hiring until Obama is gone.”
The business environment in this country becomes more toxic with each passing year, and the federal government has already strangled millions of small businesses out of existence.
In addition, politicians from both parties continue to stand aside as tens of thousands of businesses, millions of jobs and hundreds of billions of dollars of our wealth get shipped out of the country.
During 2010, an average of 23 manufacturing facilities a day were shut down in the United States. We are committing national economic suicide, and the top politicians in both political parties keep cheering for more.
Well, millions of ordinary Americans can see what is happening and they are preparing for the worst.
The following report comes from an article that was recently posted on the website of the local CBS affiliate in St. Louis….
A chain of three stores that sells survival food and gear reports a jump in sales to people who are getting prepared for the “possible collapse” of society.
“We had to order fifty cases of the meals ready to eat to keep up with the demand in the past three months,” said manager Steve Dorsey at Uncle Sam’s Safari Outfitters Inc. in Webster Groves. “That’s not normal. Usually we sell 20 to 30 cases in a whole year.”
So are you prepared for the coming collapse?
If you still have a great job and things are still going well for you, then you should definitely be thankful. Compared to the rest of the world, most of us are incredibly blessed.
But let there be no doubt, the U.S. economy is going to get a lot worse in the years ahead.
Just because you have a job today does not mean that you will have one tomorrow.
Just because you have a nice car and a big home today does not mean that you will have them tomorrow.
We all need to try to become a lot less dependent on “the system”, because “the system” is failing.
A whole lot of trouble is coming.
You better get ready.
What we are all watching unfold right now is a complete and total financial nightmare for Italy. Italian bond yields are soaring to incredibly dangerous levels, and now the yield curve for Italian bonds is turning upside down. So what does that mean? Normally, government debt securities that have a longer maturity pay a higher interest rate. There is typically more risk when you hold a bond for an extended period of time, so investors normally demand a higher return for holding debt over longer time periods. But when investors feel as though a major economic downturn or a substantial financial crisis is coming, the yield on short-term bonds will often rise above the yield for long-term bonds. This happened to Greece, to Ireland and to Portugal and all three of them ended up needing bailouts. Now it is happening to Italy and Spain may follow shortly, but the EU cannot afford to bail out either of them. An inverted yield curve is a major red flag. Unfortunately, there does not seem to be much hope that there is going to be a solution to this European debt crisis any time soon.
We are witnessing a crisis of confidence in the European financial system. All over Europe bond yields went soaring today. When I finished my article about the financial crisis in Italy on Tuesday night, the yield on 10 year Italian bonds was at 6.7 percent. I awoke today to learn that it had risen to 7.2 percent.
But even more importantly, the yield on 5 year Italian bonds is now sitting at about 7.5 percent, and the yield on 2 year Italian bonds is about 7.2 percent.
The yield curve for Italian bonds is in the process of turning upside down.
If you want to see a frightening chart, just look at this chart that shows what has happened to 2 year Italian bonds recently.
Do phrases like “heading straight up” and “going through the roof” come to mind?
This comes despite rampant Italian bond buying by the European Central Bank. CNBC is reporting that the European Central Bank was aggressively buying up 2 year Italian bonds and 10 year Italian bonds on Wednesday.
So what does it say when even open market manipulation by the European Central Bank is not working?
Of course some in the financial community are saying that the European Central Bank is not going far enough. Some prominent financial professionals are even calling on the European Central Bank to buy up a trillion euros worth of European bonds in order to soothe the markets.
Part of the reason why Italian bond yields rose so much on Wednesday was that London clearing house LCH Clearnet raised margin requirements on Italian government bonds.
But that doesn’t explain why bond yields all over Europe were soaring.
The reality is that bond yields for Spain, Belgium, Austria and France also skyrocketed on Wednesday.
This is a crisis that is rapidly engulfing all of Europe.
But at this point, bond yields in Europe are still way too low. European leaders shattered confidence when they announced that they were going to ask private Greek bondholders to take a 50% haircut. So now rational investors have got to be asking themselves why they would want to hold any sovereign European debt at all.
There is no way in the world that any rational investor should invest in European bonds at these levels.
Are you kidding me?
If there is a very good chance that private bondholders will be forced to take huge haircuts on these bonds at some point in the future then they should be demanding much, much higher returns than this.
But if bond yields continue to go up in Europe, we are going to quickly come to a moment of very great crisis.
The following is what Rod Smyth of Riverfront Investment Group recently told his clients about the situation that is unfolding in Italy….
“In our view, 7% is a ‘tipping point’ for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance”
Other analysts are speaking of a “point of no return”. For example, check out what a report that was just released by Barclays Capital had to say….
“At this point, Italy may be beyond the point of no return. While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.”
But unlike Greece, Ireland and Portugal, the EU simply cannot afford to bail out Italy.
Italy’s national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.
Plus, as I noted earlier, Spain is heading down the exact same road as Italy.
Europe has simply piled up way, way too much debt and now they are going to pay the price.
Global financial markets are very nervous right now. You can almost smell the panic in the air. As a CNBC article posted on Wednesday noted, one prominent think tank actually believes that there is a 65 percent chance that we will see a “banking crisis” by the end of November….
“There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks.”
Personally, I believe that particular think tank is being way too pessimistic, but this just shows how much fear is out there right now.
It seems more likely to me that the European debt crisis will really unravel once we get into 2012. And when it does, it just won’t be a few countries that feel the pain.
For example, when Italy goes down many of their neighbors will be in a massive amount of trouble as well. As you can see from this chart, France has massive exposure to Italian debt.
Just like we saw a few years ago, a financial crisis can be very much like a game of dominoes. Once the financial dominoes start tumbling, it will be hard to predict where the damage will end.
Some believe that what is coming is going to be even worse than the financial nightmare of a few years ago. For example, the following is what renowned investor Jim Rogers recently told CNBC….
“In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful”
Rogers says that the reason the next crisis is going to be so bad is because debt levels are so much higher than they were back then….
“Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse”
So what is the “endgame” for this crisis?
German Chancellor Angela Merkel is saying that fundamental changes are needed….
“It is time for a breakthrough to a new Europe”
So what kind of a “breakthrough” is she talking about? Well, Merkel says that the ultimate solution to this crisis is going to require even tighter integration for Europe….
“That will mean more Europe, not less Europe”
As I have written about previously, the political and financial elite of Europe are not going to give up on the EU because of a few bumps in the road. In fact, at some point they are likely to propose a “United States of Europe” as the ultimate solution to this crisis.
But being more like the United States is not necessarily a solution to anything.
The U.S. is 15 trillion dollars in debt and extreme poverty is spreading like wildfire in this nation.
No, the real problem is government debt and the central banks of the western world which act as perpetual debt machines.
By not objecting to central banks and demanding change, those of us living in the western world have allowed ourselves to become enslaved to gigantic mountains of debt. Unless something dramatically changes, our children and our grandchildren will suffer under the weight of this debt for as long as they live.
Don’t we owe future generations something better than this?
The Irish banking system is melting down right in front of our eyes. Ireland, Portugal, Greece and Spain are all drowning in debt. It is becoming extremely expensive for all of those nations to issue new debt. Officials all over Europe are begging Ireland to accept a bailout. Portugal has already indicated that they will probably be next in line. Most economists are now acknowledging that without a new round of bailouts the dominoes could start to fall and we could see a wave of debt defaults by European governments. All of this is pushing the monetary union in Europe to its limits. In fact, some of Europe’s top politicians are now publicly warning that this crisis may not only mean the end of the euro, but also the end of the European Union itself.
Yes, things really are that serious in Europe right now. In order for the euro and the European Union to hold together, two things have got to happen. Number one, Germany and the other European nations that are in good financial condition have got to agree to keep bailing out nations such as Ireland, Portugal and Greece that are complete economic basket cases. Number two, the European nations receiving these bailouts have got to convince their citizens to comply with the very harsh austerity measures being imposed upon them by the EU and the IMF.
Those two things should not be taken for granted. In Germany, many taxpayers are already sick and tired of pouring hundreds of billions of euros into a black hole. The truth is that the Germans are not going to accept carrying weak sisters like Greece and Portugal on their backs indefinitely.
In addition, we have already seen the kinds of riots that have erupted in Greece over the austerity measures being implemented there. If there is an overwhelming backlash against austerity in some parts of Europe will some nations actually attempt to leave the EU?
Right now the focus is on Ireland. The Irish banking system is a basket case at the moment and the Irish government is drowning in red ink. European Union officials are urging Ireland to request a bailout, but so far Irish Prime Minister Brian Cowen is not taking the bait. The Irish government does not seem too keen on having even more austerity measures imposed upon it by the EU and the IMF.
According to Nadeem Walayat, the harsh austerity measures that Ireland has endured during this past year have only made Ireland’s financial problems even worse….
The people of Ireland having endured over a year of austerity on the promise that it was all necessary to suffer pain today by cutting public spending so as to reduce the annual budget deficit to sustainable level for economic gains tomorrow. Instead the exact opposite is taking place as the Irish economy contracts due to economic austerity whilst its bankrupt banks are sending the countries debt and liabilities soaring, thus resulting in a far worse budgetary position than where Ireland was before the austerity measures were implemented as the bond markets are waking up to evitable debt default which is sending interest rates demanded to hold Irish debt soaring to new credit crisis highs.
But the big Irish banks are bleeding cash fast. For example, the Bank of Ireland recently reported “a 10 billion euro outflow of deposits from early August until the end of September.” Irish banks and the Irish government need help whether they are willing to admit it or not.
But Ireland is not the only one in trouble. Portugal became the latest European nation to push the panic button when Portuguese Finance Minister Fernando Teixeira dos Santos announced that his country was in such bad financial shape that it might have to seek a bailout package.
Things are so bleak in Portugal right now that Foreign Affairs Minister Luis Amado says that his nation “faces a scenario of exit from the euro zone” if a solution is not found for this financial mess.
On top of all this, word is coming out that Greece is in even worse financial condition than initially believed. The statistics agency for the EU, Eurostat, revealed on Tuesday that Greece’s deficit for 2009 was actually 15.4% of GDP rather than 13.6% of GDP as originally thought.
The Greek national debt is now well over 120 percent of GDP. It seems inevitable at this point that Greece will need more bailouts if they are to remain part of the EU.
Spain is also starting to feel the heat. Spain’s short-term debt financing costs jumped sharply on Tuesday, and officials in Spain are begging the Irish government to accept the bailout they are being offered so that the “contagion” does not spread.
But could a few mid-size countries in Europe really cause the next great global financial crisis?
In the UK, veteran Conservative MP Peter Tapsell is warning that a total collapse in Ireland “could pose as great a threat to the world economy as did Lehman Brothers, AIG and Goldman Sachs in September 2008″.
Already we are seeing world financial markets getting rattled by all this news.
Fears regarding what is happening in Ireland, Greece, Spain and Portugal helped push the Dow Jones industrial average down nearly 200 points on Tuesday.
But the real story is that this financial crisis in Europe could potentially cause the break up of the euro and of the European Union.
The truth is that the euro and the European Union are inseparably linked at this point. In fact, EU President Herman Van Rompuy is warning that if some of the weaker countries in Europe are forced to abandon the euro it will likely cause the total destruction of the European Union….
“We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union.”
German Chancellor Angela Merkel is also warning that a failure of the euro could bring down the entire European Union….
“If the euro fails, then Europe fails.”
But officials in Europe are not going to let the dream of a united Europe slip away easily. Right now they are working really hard to keep Europe together, and that means some “tough love” has to be imposed on the “weak sisters”. As these weaker European economies collapse, they are being forced to accept harsh EU mandates in exchange for bailouts. As Ambrose Evans Pritchard recently pointed out, “forced austerity” is quite similar to serfdom….
Greece is now under an EU protectorate, or the “Memorandum” as they call it. This has prompted pin-prick terrorist attacks against anybody associated with EU rule. Ireland and Portugal are further behind on this road to serfdom, but they are already facing policy dictates from Brussels, but will soon be under formal protectorates as well in any case. Spain has more or less been forced to cut public wages by 5pc to comply with EU demands made in May. All are having to knuckle down to Europe’s agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.
In the end, Europe is going to move in one of two directions. Either this financial crisis will finally be the thing that breaks up the euro and the European Union, or it will result in a Europe that is ruled even more strongly by EU bureaucrats.
As this crisis unfolds over the next couple of years, the EU is going to try to grab more power and more control. They are going to ask national governments to give up substantial amounts of power and sovereignty in exchange for bailouts. So far it is working.
But at some point will one nation say that enough is enough?
Perhaps that one nation could be Ireland. The citizens of Ireland actually voted “no” on the EU Constitution, but then the EU forced them to vote a second time so that they could “get it right”.
Wouldn’t it be ironic if it is Ireland that ends up lighting the fuse that breaks up the euro and the European Union? The Irish are a fiercely independent people, and they have a history of resisting tyranny.
In any event, this is going to be an extremely interesting winter across the EU. If things go badly, the entire global financial system could be plunged into mayhem. Let us hope that does not happen.