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.
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.
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.