Greece Says That It Will Default On June 5th, And Moody’s Warns Of A ‘Deposit Freeze’

Greece Euro - Public DomainThe 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.

If The U.S. Government Loses Its AAA Rating It Could Potentially Unleash Financial Hell Across The United States

For decades, the U.S. government has had a AAA rating.  On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get.  Moody’s scale actually uses lettering that is a little different from the other two big agencies (“Aaa” instead of  “AAA”), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating.  The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out.   The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back.  In fact, we are rapidly approaching the point when this debt will no longer be serviceable.  If the credit rating of the U.S. government is not slashed right now, it will be soon enough.  In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago.  But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.

As I have written about previously, government debt becomes more painful the higher that interest rates go.  When the big credit agencies downgrade the credit rating of a government, that is a signal to investors that they should ask for higher interest rates on debt issued by that government.

This does not always play out in practice (just look at Japan), but nations such as Greece, Portugal and Ireland sure are going through financial hell right now as they deal with reduced credit ratings and soaring interest rates.

Right now, the U.S. government is able to borrow gigantic quantities of money at ridiculously low interest rates. This is the primary reason why the debt disaster predicted by so many in the past has not arrived yet.

If the credit rating of the U.S. government is downgraded, it could finally get investors all over the world to realize that the game is over and that they should be demanding much higher returns on debt issued by the U.S. government.  The truth, as U.S. Representative Ron Paul put it recently, is that the U.S. government is already “insolvent” and at some point we are all going to have to face reality….

“Ultimately, the fundamentals show this country is bankrupt.”

So whether or not it happens right now, the truth is that at some point the credit rating of the U.S. government is going to go down and interest rates are going to go up.

Unfortunately, it appears that this might happen sooner rather than later.

Earlier this week, Moody’s Investors Service publicly announced that it would be reviewing our Aaa bond rating for a possible downgrade.

On Thursday, S&P actually went so far as to announce that there is a “50 percent chance” that it will downgrade the credit rating of the U.S. government within the next three months.

S&P has been warning of trouble for some time now.  Back on April 18th, Standard & Poor’s altered its outlook on U.S. government debt from “stable” to “negative” and warned that a downgrade was likely at some point soon if nothing changed.

If the credit rating of the U.S. government gets slashed and if that results in higher interest costs on the national debt, that is going to make it much harder to balance the budget.

The U.S. government will take in somewhere around 2.2 or 2.3 trillion dollars this year.  It will spend somewhere in the neighborhood of 3.5 or 3.6 trillion dollars this year.

Included in that spending is about 400 billion dollars that goes for interest on the national debt.

As I explained in a previous article, if our interest costs double or triple it is going to make it basically impossible to balance the budget under our current system.

If interest rates on U.S. government debt were to rise to moderate levels, we could soon be easily paying a trillion dollars a year just in interest on the national debt.

If interest rates on U.S. government debt were to rise to the levels that Greece, Portugal and Ireland are now facing, it would be beyond catastrophic.

But a reduced credit rating and higher interest rates would not just hurt the finances of the U.S. government.

Any financial institution that is linked to the U.S. government in any way would also probably be downgraded.

This fact was noted in the announcement put out by Moody’s this week….

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.

We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the government or the affected financial institutions.

Just think of the financial carnage that would cause.

Also, check out what one Bloomberg article had to say about the potential cascading effects of a credit rating downgrade for the U.S. government….

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.

But the nightmare would not end there.  The truth is that the credit ratings of large numbers of state and local governments from coast to coast would likely be reviewed and downgraded as well.  Right now, many state and local governments are scratching and clawing in a desperate attempt to survive financially, and a significant rise in interest costs would be enough to wipe many of them out.

The ripple effects of a U.S. government credit downgrade would be endless.

A lot of people argue that if the federal government ran a balanced budget from now on none of this would matter.

Unfortunately, that is not true.

At this point, a very high percentage of U.S. government debt is short-term debt.  That means that gigantic amounts of debt must be “rolled over” each year in addition to any new debt that we take on.  So even if interest rates rise significantly on just the existing debt that we have it is going to be a total nightmare.

And make no mistake, whether it happens now or later a collapse of U.S. government finances is coming.

David Murrin, the chief investment officer at Emergent Asset Management, recently told CNBC the following….

“It’s inevitable that the U.S. will default—it’s essentially an empire which is overextended and in decline—and that its financial system will go with it”

Right now it is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course.  We are on a runaway train that is heading straight for a brick wall.

Europe is also a complete financial wreck.  The sovereign debt crisis over in the EU continues to grow worse by the day and there is no end in sight.

If the U.S. collapses, Europe is not strong enough to save it.  If Europe collapses, the U.S. is not strong enough to save it.

We really are entering an unprecedented time in world history.   We are on the verge of the first truly global financial disaster.

It is going to be interesting to see which major currency crashes and burns first.  Some think that it will be the euro.  Others think that it will be the dollar.

In any event, the reality is that the current global financial system is not sustainable.  The folks that are in charge can try to keep things together for as long as possible, but at some point the dominoes are going to start to fall and the house of cards is going to crash.

We have entered a time when there is going to be financial crisis after financial crisis.  Even if the EU and the U.S. government can somehow fix things for the moment, more problems are going to be just around the corner.

The world has become incredibly unstable and the entire globe is going to be shaken.  Most people cannot even conceive of the kind of financial hell that is coming our way as a nation.

Yes, it can be a bit sad to think about what is happening, but it is much better to be armed with the truth than to be totally clueless and totally unprepared.

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