The Bank Runs In Greece Will Soon Be Followed By Bank Runs In Other European Nations

The bank runs that we are watching right now in Greece are shocking, but they are only just the beginning.  Since May 6th, nearly one billion dollars has been withdrawn from Greek banks.  For a small nation like Greece, that is an absolutely catastrophic number.  At this point, the entire Greek banking system is in danger of collapsing.  If you had money in a Greek bank, why wouldn’t you pull it out?  If Greece leaves the euro, all euros in Greek banks will likely be converted to drachmas, and the value of those drachmas will almost certainly decline dramatically.  In fact, it has been estimated that Greek citizens could see the value of their bank accounts decline by up to 50 percent if Greece leaves the euro.  So if you had money in a Greek bank, it would only make sense to withdraw it and move it to another country as quickly as possible.  And as the eurozone begins to unravel, this is a scenario that we are going to see play out in country after country.  As member nations leave the eurozone, you would be a fool to have your euros in Italian banks or Spanish banks when you could have them in German banks instead.  So the bank runs that are happening in Greece right now are only a preview of things to come.  Before this crisis is over we are going to see bank runs happening all over Europe.

If Greece leaves the euro, the consequences are likely to be quite messy.  Those that are promoting the idea that a “Grexit” can be done in an orderly fashion are not being particularly honest.  The following is from a recent article in the Independent….

“Whoever tells you a Greek exit would be no big deal is an idiot, lying or disingenuous,” said Sony Kapoor of the European think-tank Re-Define. Economists fear that a disorderly exit would prompt a huge run by investors on Spanish and Italian debt, forcing those countries to seek support from an EU bailout fund, which, with a capacity of just €500bn, is widely regarded as too small to cope with those pressures.

A Greek exit from the euro would not only result in a run on Spanish and Italian bonds, but it would also likely result in a run on Spanish and Italian banks.

If Greece is allowed to leave the euro, that will be a signal that other countries will eventually be allowed to leave as well.  Nobody in their right mind would want their euros stuck in Spanish or Italian banks if those countries end up converting back to national currencies.

Fear is a powerful motivator.  If Greece converts their euros back to drachmas, that will be a clear signal that all euros are not created equally.  The race to move money into German banks will accelerate dramatically.

And a Greek exit from the euro is looking more likely with each passing day.  Even the IMF is now admitting that it is a very real possibility….

Christine Lagarde, head of the IMF, warned she was “technically prepared for anything” and said the utmost effort must be made to ensure any Greek exit was orderly. The effect was likely to be “quite messy” with risks to growth, trade and financial markets. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider,” she said.

Meanwhile, banks in other troubled European nations are already on shaky ground.  The Spanish banking system is an absolute disaster zone at this point and on Monday night Moody’s downgraded the credit ratings of 26 Italian banks.

The situation in Italy is especially worth keeping a close eye on.  As Ambrose Evans-Pritchard recently noted, things are not looking good for Italy at all….

Italy’s former premier Romano Prodi said the EU risks instant contagion to Spain, Italy, and France if Greece leaves. “The whole house of cards will come down”, he said

Angelo Drusiani from Banca Albertini said the only way to avert catstrophe is to convert the European Central Bank into a lender of last resort. Otherwise Italy faces “massive devaluation, three to five years of hyperinflation, and unbearable unemployment.”

So what can be done about any of this?

Well, there is actually a lot that could be done if politicians in Europe were willing to think outside of the established global financial paradigm.

The truth is that Greece could solve their current financial problems in four easy steps.  They would have to be willing to stick it to the rest of Europe and to risk being blackballed by the international community, but it could be done.

The following is my prescription for Greece….

1) Default on all debts.

2) Leave the euro.

3) Issue drachmas that are debt-free and that do not come from a central bank.  Instead, have the Greek government create them and spend them directly into circulation.

4) Enjoy a return to prosperity.

In such a scenario, the Greek national debt would no longer be a problem, the Greek government would never have to borrow any more money and austerity would no longer be needed.

Yes, inflation would be an issue with the new currency, but a bit of inflation would be a walk in the park compared to the horrible economic depression that Greece is experiencing right now.

And once the Greek economy was growing again, it would certainly be possible for them to make the transition to “hard money” if they wanted to.

It is imperative that we all understand that just because the global financial system works a certain way today does not mean that it must always work that way.

If you have a few minutes, I want you to watch an incredible speech by a 12-year-old Canadian girl named Victoria Grant.  In this 6 minute speech, she details how the bankers are defrauding the people of Canada and how the Canadian government does not actually need to borrow a single penny from the bankers….

If a 12-year-old girl can figure this out, then why can’t the rest of us?

Sadly, the financial world still seems enamored with the corrupt central banking system that has gotten us into this mess.  In fact, one recent poll found that Federal Reserve Chairman Ben Bernanke has a 75 percent approval rating from global investors.

Right now, America is going down the same path as Greece, Spain and Italy have gone.  Eventually we will hit a wall and our financial system will fall apart.

We need the American people to understand that the Federal Reserve system is a perpetual debt machine.  The U.S. national debt is now more than 5000 times larger than it was when the Fed was first created.  It is at the very core of our national financial problems.

When will people wake up and realize that central banking is the problem and not the solution?

When will people wake up and realize that national governments do not have to go into debt to anyone if they do not want to?

In our world today, there is far more debt than there is money.

It is a system that will inevitably crash.

But there are other alternatives.

Unfortunately, politicians all over the globe continue to want to be married to our current debt-based financial system.

As a result, we will suffer the consequences of that system.

3, 2, 1: Global Debt Meltdown

We are steamrolling toward a massive global debt meltdown, and at this point world leaders seem to be all out of solutions.  Over the last 30 years or so, the greatest debt bubble in the history of the planet has produced unprecedented prosperity in the western world.  But now that debt bubble is starting to burst and the bills are coming due.  Many believe that “ground zero” for the coming global debt meltdown will be in Europe.  Unlike the U.S. and Japan, the nations of the EU can’t just print more money to cover their debts.  Nations such as Greece, Portugal and Italy must repay their debts in euros, and those nations are rapidly getting to the point where their debts are going to overwhelm them.  Unfortunately, major banks all over Europe are very highly leveraged and are also very heavily invested in the sovereign debt of nations such as Greece, Portugal and Italy.  If even one EU nation defaults it will start tipping over financial dominoes.  If more than one EU nation defaults it could cause a cataclysmic wave of bank failures all over Europe.

But Germany and the other more financially stable countries of the EU cannot bail out nations like Greece, Portugal and Italy indefinitely.  Pouring money into Greece is like pouring money into a black hole.  When you take money from financially stable countries and pour it into hopeless messes, you may stabilize things for a little while, but you also cause the financial condition of the financially stable nations to start deteriorating.

Right now, the yield on 2 year Greek bonds is up to 44%.  Basically, the market is screaming that these are horrible investments and that they will almost certainly default.

Greece cannot fire up the printing presses and print more money, so they are now totally dependent on others to bail them out.

Just how desperate have things become in Greece?  Just consider the following excerpt from a recent article by Puru Saxena….

In Greece, government debt now represents almost 160% of GDP and the average yield on Greek debt is around 15%. Thus, if Greece’s debt is rolled over without restructuring, its interest costs alone will amount to approximately 24% of GDP. In other words, if debt pardoning does not occur, nearly a quarter of Greece’s economic output will be gobbled up by interest repayments!

Can you imagine?

No nation on earth can afford to pay out nearly a quarter of GDP just on interest on government debt.

So just how did Greece get into this position?  Well, it turns out that big U.S. banks such as Goldman Sachs and JPMorgan Chase played a big role.  The following is an excerpt from a recent article by Andrew Gavin Marshall….

In the same way that homeowners take out a second mortgage to pay off their credit card debt, Goldman Sachs and JP Morgan Chase and other U.S. banks helped push government debt far into the future through the derivatives market. This was done in Greece, Italy, and likely several other euro-zone countries as well. In several dozen deals in Europe, “banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books.” Because the deals are not listed as loans, they are not listed as debt (liabilities), and so the true debt of Greece and other euro-zone countries was and likely to a large degree remains hidden. Greece effectively mortgaged its airports and highways to the major banks in order to get cash up-front and keep the loans off the books, classifying them as transactions.

All over the world, politicians love to “kick the can down the road”, and big Wall Street banks love to find creative ways to help them do that.

But now Greece is about to collapse, and the people that helped them get into this mess will probably never be held accountable.

If Greece does default, it is going to have dramatic consequences all over Europe.  For a chilling look at what could potentially happen when Greece defaults, just check out this article by John Mauldin.

Sadly, Greece is far from the only problem in Europe.  Portugal, Ireland and Italy also have debt to GDP ratios that are above 100%.

The biggest potential problem, at least in the near-term, is Italy.

Italy is the fourth largest economy in the EU, and lately the financial problems of the Italian government and Italian banks have been making headlines all over the globe.

Italy is a far, far larger potential problem than Greece is.

The EU can handle bailing out Greece, at least for now.

If Italy gets to the point where it needs large bailouts, that is going to bring down the whole system.  The EU simply does not have enough money to perform an extensive financial rescue of Italy.

As you can see from this chart, the exposure that European banks have to Italian debt is absolutely massive.  If Italian debt goes bad, it is going to take down a whole bunch of banks.

Not only that, but many believe that the European Central Bank itself is now in some very dangerous territory.

It is estimated that the European Central Bank is now holding somewhere in the neighborhood of 444 billion euros worth of debt from the governments of Greece, Italy, Portugal, Ireland and Spain.

The financial consequences of a default by one or more of those nations could potentially be catastrophic.

According to London-based think tank Open Europe, the European Central Bank is massively overleveraged….

“Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out.”

That doesn’t sound good.

Surely the European Central Bank would be recapitalized somehow, but this is just another example that shows just how dangerous huge amounts of leverage can be.

As I wrote about in a recent article about the sovereign debt crisis, if the dominoes begin to tumble in Europe it is going to take everybody down.

The big banks in Europe are leveraged to the hilt, and they are massively exposed to government debt.

If you don’t think that this is a problem, just remember what happened back in 2008.

Back then, Lehman Brothers was leveraged 31 to 1.  When things turned bad, Lehman was wiped out very rapidly.

Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

Yes, things could become really nightmarish if the dominoes start to fall.

Already we are seeing huge signs of trouble at major banks all over Europe.

Major European banks UBS, Barclays, Credit Suisse, RBS, and HSBC have all announced layoffs recently.  In fact, when you add them all up, the total number of layoffs announced by these banks just this month is over 40,000.  Overall, the grand total of layoffs by European banks so far this year is now up to 67,000.

The mood in the financial sector over in Europe is very dark right now.  Just consider the following excerpt from a recent Bloomberg article….

“It’s a bloodbath, and I expect things to get worse before they get better,” said Jonathan Evans, chairman of executive- search firm Sammons Associates in London. “I cannot see a lot of those who have lost their jobs getting re-employed. Regardless of how good someone is, no one wants to talk about hiring. Life will be very difficult for two or three years.”

Just like back in 2008 with U.S. banks, we are seeing European banks getting absolutely pummeled right now.  A recent article in The Sydney Morning Herald documented some of the carnage….

The 46-member Bloomberg Europe Banks and Financial Services Index has fallen 31 per cent this year. RBS tumbled 49 per cent, Barclays 44 per cent and France’s Societe Generale 48 per cent.

Credit Suisse and UBS both reported a 71 per cent drop in investment-banking earnings in the second quarter. Revenue at Edinburgh-based RBS’s securities unit dropped 35 per cent in the period, while London-based Barclays Capital posted a 27 per cent decline in pretax profit.

Things in Europe continue to get worse and worse and worse.

Do not take your eyes off of Europe.  This crisis is just getting started.

Not that there aren’t huge debt problems around the rest of the globe as well.

Japan has a national debt that is now over 200 percent of GDP, and they are really struggling to recover from the recent disasters that devastated that nation.

Moody’s has just downgraded Japanese government debt one notch to Aa3, and more downgrades could be coming.  For now Japan is still able to borrow huge piles of money very, very cheaply but if that changes Japan could be wiped out very quickly.

Of course the nation with the biggest debt of all is the United States.

At the moment, the U.S. national debt is sitting at a grand total of $14,649,289,670,347.85.

Fortunately, the U.S. is also able to borrow massive amounts of money very, very cheaply right now.  But when that changes it is going to be absolutely cataclysmic for our economy.

Sadly, our politicians continue to act as if this debt binge can go on forever.

According to the Congressional Budget Office, the budget deficit for the federal government will be about 1.28 trillion dollars this year.  This will be the third year in a row that we have had a budget deficit of over a trillion dollars.

To put that in perspective, from George Washington to Ronald Reagan the U.S. government racked up a grand total of about one trillion dollars of debt.  But this year alone we will go 1.28 trillion dollars more into debt.

At the moment, the U.S. national debt is expanding by about 2 and a half million dollars every single minute.  It is hard to put into words how absolutely foolish that is.

As I wrote about yesterday, someone needs to wake up America.  Our debt is exploding and our economy is dying.

We haven’t even solved the problems caused by the last financial crisis.  The real estate market is still a gigantic mess.  Purchases of both new and previously existing homes in the United States continue to fall.

But there will never be a housing recovery until there is a jobs recovery, and our politicians continue to stand by and watch as millions of our jobs are shipped overseas.

Unemployment is rampant, and even many of those that do have jobs are barely able to survive.

Back in 1980, less than 30% of all jobs in the United States were low income jobs.  Today, more than 40% of all jobs in the United States are low income jobs.

That is not a good trend.

Sadly, it looks like things are not going to get much better any time soon.

Right now, the Congressional Budget Office is projecting that unemployment in the U.S. will remain above 8% until 2014.

That should really scare you, because government numbers are almost always way too optimistic.  The folks in the federal government hardly ever project that unemployment will actually go up.

So if they are saying that unemployment will remain above 8 percent until 2014, the truth is that things will probably be worse than that.

We have entered very frightening times.  We are on the verge of a massive global debt meltdown, and nobody is sure what is going to happen next.

Let us hope for the best, but let us also prepare for the worst.

The Economic Collapse