Debt Crisis

The Stock Market Crash Of 2011?

How far does the stock market have to go down before we officially call it a crash?  The Dow is now down more than 2,000 points in just the last 14 trading days.  So can we now call this “The Stock Market Crash of 2011”?  Today the Dow was down 519 points.  Yesterday, an announcement by the Federal Reserve indicating that the Fed would keep interest rates near zero until mid-2013 helped the Dow surge more than 400 points, but all of those gains were wiped out today.  It turns out that the Federal Reserve was only able to stabilize the financial markets for a single day.  Fears about the European sovereign debt crisis and the crumbling U.S. economy continue to dominate the marketplace.  With each passing day, things are looking more and more like 2008 all over again.  So what is going to happen if “The Stock Market Crash of 2011” pushes the U.S. economy into “The Recession of 2012”?

Just like in 2008, bank stocks are being hit the hardest.  That was true once again today.  Bank of America was down more than 10 percent, Citigroup was down more than 10 percent, Morgan Stanley was down more than 9 percent and JPMorgan Chase was down more than 5 percent.

Bank of America stock is down almost 50 percent so far this year.  Overall, the S&P financial sector is down more than 23 percent in 2011 so far.

How soon will it be before we start hearing of the need for more bailouts?  After all, the “too big to fail” banks are even bigger now than they were in 2008.

All of this panic is causing the price of gold to reach unprecedented heights.  Today, gold was over $1800 at one point.  If the current panic continues for an extended period of time, there is no telling how high the price of gold may go.

In the United States, much of the focus has been on the fact that the U.S. government has lost its AAA credit rating, but the truth is that the European sovereign debt crisis is probably the biggest cause of the instability in world financial markets right now.

The European Central Bank has decided to start purchasing Italian and Spanish debt, and there have been rumors that French debt could be hit with a downgrade.  Europe is a total financial basket case right now and unless dramatic action is taken things are going to get progressively worse.

Of course the U.S. is also certainly contributing greatly to this crisis.  The federal government is on track to have a budget deficit that is over a trillion dollars for the third year in a row.  The U.S national debt is a horrific nightmare, but our politicians keep putting off budget cuts.

The debt ceiling deal that was just reached basically does next to nothing to cut the budget before the next election.  Unless the “Super Congress” does something dramatic, the only “budget cuts” we will see before the 2012 election will be 25 billion dollars in “savings” from spending increases that will be cancelled.

The modest spending cuts scheduled to go into effect beginning in 2013 will probably never materialize.  Whenever the time comes to actually significantly cut the budget, our politicians always want to put it off for another time.

But in the end, debt is always going to have its day.  Our politicians can try to kick the can down the road all they want, but eventually a day of reckoning is going to come.

In fact, if the U.S. and Europe had not piled up so much debt, we would not be facing all of the problems we are dealing with now.

Things could have been so much different.

But here we are.

The truth is that this debt crisis is just beginning.  There is no magic potion that is going to make all of this debt suddenly disappear.

Most Americans have no idea how much financial pain is coming.  We have been living way beyond our means for decades, and now we are going to start paying for it.

Now that long-term U.S. government debt has been downgraded, huge numbers of other securities are also going to be affected.  In fact, according to a recent Bloomberg article, S&P has already been very busy slashing the ratings on hordes of municipal bonds….

Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.

That is the thing about financial markets – once the dominoes start to fall, the ripple effects can be felt for a long, long time.

So if this stock market crash gets even worse, will the Federal Reserve respond with even stronger measures?

They have already basically promised to keep interest rates near zero for the next two years.  So what else can the Fed do?

Well, many now believe that there is a very good chance that we could see another round of quantitative easing.

Not that more quantitative easing is going to help much of anything.  Rather than helping the economy, the last round of quantitative easing just pushed commodity prices through the roof.  But the Fed is unlikely to just sit there and do nothing while financial markets struggle.

But it is not just the financial markets that are having a difficult time right now.  Bad news is coming in from all over the economy.  The possibility that we could soon slip into another major recession is growing by the day.

Unfortunately, our economy is so weak already that a new recession would probably hurt even more than the last recession did.

Mark Zandi, the chief economist at Moody’s Analytics, says that if we have another recession it “won’t feel like a new recession. It would likely feel like a depression.”

But the American people are in no mood for more economic pain.  Every recent poll shows that Americans are already fed up.

For example, a brand new Reuters/Ipsos poll found that 73 percent of the American people believe that the country is “on the wrong track”.

So let’s certainly hope that the current stock market crash does not set off another major global recession.  We certainly do not need things to get significantly worse than they are right now.

But whether it hits now or later, the truth is that a whole lot of economic pain is on the way.  The U.S. and Europe have been making really, really bad decisions for decades, and we are not going to be able to escape the consequences of those decisions.

The global financial system is one huge mountain of leverage, risk and debt.  A collapse is inevitable.

When you build a house of cards on a foundation of sand, you should not be surprised when it comes crashing down.

The next wave of the economic collapse is coming, and those that are wise will get prepared.

 

 

A Bad Mood Has Descended On World Financial Markets

Have you noticed that a really bad mood seems to have descended on world financial markets?  Fear and pessimism are everywhere.  The global economy never truly recovered from the financial crisis of 2008, and right now everyone is keeping their eyes open for the next “Lehman Brothers moment” that will send world financial markets into another tailspin.  Investors have been very nervous for quite some time now, but this week things seem to be going to a whole new level.  Fears about the spread of the debt crisis in Europe and about the failure of debt ceiling talks in the United States have really hammered global financial markets.  On Monday, the Dow Jones Industrial Average dropped 151 points.  Italian stocks fared even worse.  The stock market in Italy fell more than 3 percent on Monday.  The stock markets in Germany and France fell more than 2 percent each.  On top of everything else, the fact that protesters have stormed the U.S. embassy in Syria is causing tensions to rise significantly in the Middle East.  Everywhere you turn there seems to be more bad news and large numbers of investors are getting closer to hitting the panic button.  Hopefully things will cool down soon, because if not we could soon have another full-blown financial crisis on our hands.

Even many of those that have always tried to reassure us suddenly seem to be in a really bad mood.

For example, U.S. Treasury Secretary Timothy Geithner admitted to “Meet the Press” that the U.S. economy is really struggling and that for many Americans “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”

Does Geithner know something that we don’t?

To say that what Americans are facing will be “harder than anything they’ve experienced in their lifetime now, for a long time to come” is very, very strong language.

It almost sounds like Timothy Geithner could be writing for The Economic Collapse blog.

It certainly is not helping things that the Democrats and the Republicans still have not agreed on a deal to raise the debt ceiling.  It is mid-July and Barack Obama and John Boehner continue to point fingers at each other.

Of course if they do reach a “deal” it will likely be a complete and total joke just like their last “deal” was.

But for now they are playing politics and trying to position themselves well for the 2012 election season.

Meanwhile, world financial markets are starting to get a little nervous about this situation.  The newly elected head of the IMF, Christine Lagarde, has stated that she “can’t imagine for a second” that we are going to see the U.S. default on any debt.  Most investors seem to agree with Lagarde for now, but if we get to August 2nd without a deal being reached things could change very quickly.

But it isn’t just the debt ceiling crisis that is causing apprehension in the United States.  The truth is that there are a host of indications that the U.S. economy is continuing to struggle.

Even big Wall Street banks are laying people off.  A recent Reuters article described the bad mood that has descended on Wall Street right now….

Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and some other large U.S. investment banks are not just laying off weak performers and back-office employees. They are also cutting the pay of those they are keeping, scrutinizing expense reports and expecting even the most profitable workers to bring in more business for the same amount of compensation.

That is not a good sign for the U.S. economy.

If the corrupt Wall Street banks are even struggling, what does that mean for the rest of us?

But the big trouble recently has been in Europe.  The sovereign debt crisis continues to get worse and worse.

As I wrote about yesterday, the emerging financial crisis in Italy has EU officials in a bit of a tizzy.  If Italy requires a bailout it is going to be an unmitigated disaster.

One of the most respected financial journalists in Europe, Ambrose Evans Pritchard, says that financial tensions in the EU are rising to dangerous levels….

If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.

Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.

Last year it was just small countries like Greece and Ireland that were causing all the trouble.

Now Italy (the fourth largest economy in the EU) and Spain (the fifth largest economy in the EU) are making headlines.

Up to this point, the EU has had all kinds of nightmares just trying to bail countries like Greece out.

What is going to happen if Italy or Spain goes under?

At this point things with Greece have gone so badly that some EU officials are actually suggesting that Greece should just default on some of the debt.

Yes, you read the correctly.

There are news reports coming out of Europe that say that EU leaders are actually considering allowing the Greek government to default on some of their bonds.  According to The Telegraph, “the move would be part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.”

All of this chaos is causing bond yields in Europe to go soaring.

Earlier today, The Calculated Risk blog detailed some of the stunning bond yields that we are now seeing in Europe….

The Greek 2 year yield is up to a record 31.1%.

The Portuguese 2 year yield is up to a record 18.3%.

The Irish 2 year yield is up to a record 18.1%.

And the big jump … the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising.

Could you imagine paying 31.1% interest on your credit cards?

Well, imagine what officials in the Greek government must be feeling right about now.

If these bond yields do not go down, we are going to have a full-blown financial crisis on our hands in Europe.  If these bond yields keep rising, we are going to have a complete and total financial nightmare in Europe.

The only way that any of these nations that are drowning in debt can keep going is if they can borrow more money at low interest rates.  There are very few nations on earth that would be able to survive very high interest rates on government debt for an extended period of time.

Pay attention to what is happening in Europe, because it will eventually happen in the United States.  Right now we are only paying a little more than $400 billion in interest on the national debt each year because of the super low interest rates we are able to get.

When that changes, our interest costs are going to absolutely skyrocket.

Not that the United States needs any more economic problems.

Right now Americans are more pessimistic about the economy than they have been in ages.

In a recent article entitled “16 Reasons To Feel Really Depressed About The Direction That The Economy Is Headed” I noted a number of the recent surveys that seem to indicate that the American people are in a real bad mood about the economy right now….

*One of the key measures of consumer confidence in the United States has hit a seven-month low.

*According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.

*According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.

*Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.

The American people are in a really bad mood and investors around the world are in a really bad mood.  More bad financial news seems to come out every single day now.  Everyone seems to be waiting for that one “moment” that is going to set off another financial panic.

Hopefully we can get through the rest of this summer without world financial markets falling apart.  But the truth is that the global economy is even more vulnerable today than it was back in 2008.  None of the things that caused the financial crash of 2008 have been fixed.

We will eventually have a repeat of 2008.  In fact, next time things could be even worse.

The entire world financial system is a house of cards sitting on a foundation of sand.  Eventually another storm is going to come and the crash is going to be great.

Uh Oh – Italy Is Coming Apart Like A 20 Dollar Suit

Did anyone really think that Italy would be able to get through this thing without needing a bailout?  Just when you thought that things in Europe could get back to normal for a little while, here comes Italy.  On Friday, there was a bit of a “mini-panic” as investors started dumping Italian financial assets.  European officials are concerned that the sovereign debt crisis that has ravaged Greece, Ireland and Portugal will now put the Italian economy through the wringer.  European Council President Herman Van Rompuy has called an emergency meeting for Monday morning.  He is denying that the meeting is about Italy, but everyone knows that Italy is going to be discussed.  European Central Bank President Jean-Claude Trichet and European Commission President Jose Manuel Barroso along with a host of other top officials will also be at this meeting.  If it does turn out that Italy needs a bailout, it is going to change the entire game in Europe.

What is going on in Italy right now is potentially far more serious than what has been going on in Greece.  Italy is the fourth largest economy in the European Union.  If Italy requires a bailout, the rest of Europe might not be able to handle it.

An anonymous European Central Bank source told one German newspaper the following on Sunday….

“The existing rescue fund in Europe is not sufficient to provide a credible defensive wall for Italy”

The source also added that the current bailout fund “was never designed for that“.

Italy has already implemented austerity measures.

This was not supposed to happen.

But it is happening.

This latest crisis was precipitated by a substantial sell-off of Italian financial assets on Friday.  An article posted by Bloomberg described the pounding that the two largest Italian banks took….

UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s biggest banks, fell to the lowest in more than two years in Milan yesterday as contagion from Europe’s debt crisis threatened to spread to the region’s third-largest economy.

UniCredit plunged 7.9 percent, the biggest decline since March 30, 2009, while Intesa dropped 4.6 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.

Unfortunately, this is just the continuation of a trend that has been going on for a while.

When you look at them as a group, the stocks of the five largest Italian banks have lost 27% since the beginning of 2011.

That is not a good sign.

Also, investors are starting to dump Italian government debt.  Reuters says that the yield on 10 year Italian bonds is approaching the danger zone….

The spread of the Italian 10-year government bond yield over benchmark German Bunds hit euro lifetime highs around 2.45 percentage points on Friday, raising the Italian yield to 5.28 percent, close to the 5.5-5.7 percent area which some bankers think could start putting heavy pressure on Italy’s finances.

The Italian national debt is now up to about 120 percent of GDP.  The Italian government would be able to manage it if interest rates were very, very low.  But unfortunately they are rising fast and if they get too much higher they are going to become suffocating.

As I have written about previously, government debt becomes very painful once you take low interest rates out of the equation.  For example, if Greece could borrow all of the money that it wanted to borrow at zero percent interest, it would not have a debt problem.  But now the yield on 2 year Greek bonds is over 30 percent, and there is not a government on the face of the earth that can afford to pay interest that high for long.

Unfortunately for Italy, this could just be the beginning of rising interest rates.  Just recently, Moody’s warned that it may be forced to downgrade Italy’s Aa2 debt rating at some point within the next couple of months.

If things continue to unravel in Italy, all of the credit agencies may downgrade Italy sooner rather than later.

The frightening thing about Italy is that a financial crisis has a way of exposing corruption, and there are very few countries that can match the kind of corruption that goes on in Italy.

As a child, I had the chance to live in Italy.  I love Italy.  The people are friendly, the weather is great, the architecture is amazing and the food is spectacular.  I will always have great affection for Italy and I will always cheer for the Italian national team when the World Cup rolls around.

However, I also know that corruption is deeply ingrained into Italian culture.  It is simply a way of life.

Just check out the prime minister of Italy.  Silvio Berlusconi is the consummate Italian politician.  He is greatly loved by many, but it would take days to detail all of the scandals that he has been linked to.

At this point, Berlusconi has become a parody of himself.  Each new sex scandal or financial scandal just adds to his legend.  Italy is one of the only nations in Europe where such a corrupt politician could have stayed in office for so long.

Not that the U.S. government is much better.  Our government becomes more corrupt with each passing year.

But the point is that if a financial collapse happens in Italy and people start “turning over rocks” it could turn up all sorts of icky stuff.

So what is Europe going to do if Italy needs a bailout?

Well, they are probably going to have to fire up the printing presses because it would probably take a whole lot more euros than they have right now.

The truth is that the EU has now entered a permanent financial crisis.  You have a whole bunch of nations that have accumulated unsustainable debts and that cannot print their own currencies.  The financial system of the EU as it is currently constructed simply does not work.

Some believe that the sovereign debt crisis will eventually cause the breakup of the EU.  Others believe that this crisis will cause it to be reformed and become much more integrated.

In any event, what just about everyone can agree on is that the financial problems of Europe are not going away any time soon.  For now, EU officials are keeping all of the balls in the air, but if at some point the juggling act falters, the rest of the world better look out.

A financial crash in Europe would be felt in every nation on earth and it would be absolutely devastating.  Let’s hope that we still have some more time before it happens.

The Sovereign Debt Crisis Is Never Going To End Until There Is A Major Global Financial Collapse

In the past, there certainly have been governments that have gotten into trouble with debt, but what we are experiencing now is the first truly global sovereign debt crisis.  There has never been a time in recorded history when virtually all of the governments of the world were drowning in debt all at the same time.  This sovereign debt crisis is never going to end until there is a major global financial collapse.  There simply is no way to unwind the colossal web of debt that we have constructed in an orderly fashion.  Right now the EU and the IMF have been making “emergency loans” to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months.  Giving more loans to nations that are already drowning in red ink may “kick the can down the road” for a little while but it isn’t going to solve anything.  Meanwhile, dozens more nations all over the globe are rapidly approaching a day of reckoning.

All of the bailouts that you are hearing about right now are simply delaying the pain.  The reality is that when the “emergency loans” for Greece stop, Greece is going to default.  Greece is toast.  The game is over for them.  You can stick a fork in Greece because it is done.

One of the big problems for Greece is that since it is part of the euro it can’t independently print more money.  If Greece cannot raise enough euros internally Greece must turn to outside assistance.

Unfortunately, at this point Greece has accumulated such a mammoth debt that it cannot possibly sustain it.  By the end of the year, it is projected that the national debt of Greece will soar to approximately 166% of GDP.

The financial collapse of Greece is inevitable.  If they keep using the euro they will collapse.  If they quit using the euro they will collapse.  When the rest of Europe decides that it is tired of propping Greece up the game will be over.

At this point very few people are interested in lending Greece more money.

As I wrote about yesterday, many of the nations around the world are only able to keep going because they are able to borrow huge amounts of money at low interest rates.

Well, nobody wants to lend money to Greece at a low rate of interest anymore.

Today, the yield on 2 year Greek bonds is back over 28 percent.

Fortunately for the rest of the world, Greece is just a very, very small part of the global economy, but when interest rates start spiking like that on U.S. debt or Japanese debt the entire world financial system will be thrown into chaos.

So why is there so much of a focus on Greece right now?

Well, there is a real danger that the panic will start to spread.

The other day, Moody’s Investors Service slashed the credit rating on Portuguese government debt by four notches.

Portuguese debt is now considered to be “junk”.

But even more alarming is that Moody’s stated that what is going on in Greece played a role in reducing the credit rating of Portugal.

The following is a portion of what Moody’s had to say when they cut the credit rating of Portugal by four notches….

Although Portugal’s Ba2 rating indicates a much lower risk of
restructuring than Greece’s Caa1 rating, the EU’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

Do you understand what is being said there?

Basically, Moody’s is saying that the terms of the Greek bailout make Portuguese debt less attractive because Portugal will likely be forced into a similar bailout at some point.

If the EU is not going to fully guarantee the debt of the member nations, then that debt becomes less attractive to investors.

The downgrade of Portugal is having all kinds of consequences.  The cost of insuring Portuguese government debt set a new record high on Wednesday, and yields on Portuguese bonds have gone haywire.

If you want to get an idea of just how badly Portuguese bonds have been crashing, just check out this chart.

But it is not just Portugal that is having problems.

Just recently, Moody’s warned that it may downgrade Italy’s Aa2 debt rating at some point within the next few months.

Spain is also on the verge of major problems and Ireland may need another bailout soon.

Things don’t look good.

Unfortunately, if the dominoes start to fall the entire EU is going to go down.

Big banks all over Europe are highly exposed to sovereign debt and they are leveraged to the hilt.

It is almost as if we are looking at a replay of 2008 in many ways.

When Lehman Brothers finally collapsed, it was leveraged 31 to 1.

Today, major German banks are leveraged 32 to 1, and major German banks are currently holding a tremendous amount of Greek debt.

Anyone with half a brain can see that this is going to end badly.

So how is the European Central Bank responding to this crisis?

They are raising interest rates once again.

That certainly is not going to help the PIIGS much.

But Europe is not the only one facing a horrific debt crunch.

In Japan, the national debt is now up to about 226 percent of GDP.  So far the Japanese government has been able to handle a debt load this massive because the citizens of Japan have been willing to lend the government gigantic mountains of money at interest rates so low that they are hard to believe.

When that paradigm changes, and it will, Japan is going to be in a massive amount of trouble.  In fact, an article in Forbes has warned that even a very modest increase in interest rates would cause interest payments on Japanese government debt to exceed total government revenue by the year 2019.

Of course the biggest pile of debt sitting out there is the national debt of the United States.  The U.S. is so enslaved to debt that there is literally no way out under the current system.  To say that America is in big trouble would be a massive understatement.

In fact, the whole world is headed for trouble.

Right now government debt around the globe continues to soar at an exponential pace.  At some point a wall is going to be hit.

The Wall Street Journal recently quoted Professor Carmen Reinhart as saying the following about what we are facing….

“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.”

That is the nature of debt bubbles – they keep expanding and expanding until the day that they inevitably burst.

Governments around the world will issue somewhere in the neighborhood of 5 trillion dollars more debt this year alone.  Debt to GDP ratios all over the globe continue to rise at a frightening pace.

Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet.  If even one domino is toppled there is no telling where things may end.

The combination of huge amounts of debt and huge amounts of leverage is incredibly toxic, and that is what we have all over the globe today.  Almost every major nation is drowning in a sea of red ink and almost all of our major financial institutions are leveraged to the hilt.

There is only one way that the sovereign debt crisis can end.

Very, very badly.

I hope you are ready for what is coming.

The Financial Collapse Of Greece: The Canary In The Coal Mine For The Global Economy?

The rest of the world needs to sit up and take notice of what is going on in Greece right now.  This is what can happen when you allow government debt to spiral out of control.  Once it becomes clear that you can’t pay your debts, a financial collapse can happen very suddenly and you start losing your sovereignty to those that you must turn to for financial help.  So is the financial collapse of Greece the “canary in the coal mine” for the global economy?  EU finance ministers have given the Greek government two weeks from Monday to approve another round of brutal austerity measures.  If the austerity measures are not approved, Greece will not receive the next bailout installment of 12 billion euros.  If that happens, the whole globe better buckle up because it is going to get crazy.

July 3rd is the deadline.  Basically the EU has put a gun to the head of the Greek government.  Without this bailout money, Greece will default and economic hell will break loose all across the country.

It is important to keep in mind that this is just the first Greek bailout that we are talking about.  Last year, the EU and the IMF agreed to provide the Greek government with a 110 billion euro bailout. The current 12 billion euro installment is part of that package.

Sadly, it has become apparent that the first bailout is not going to be nearly enough for Greece.  A second bailout, which will be the same size or even larger, is already being discussed.  This is going to put the Greek people even more under the heel of the money powers in Europe.

Keep in mind that all of these “bailouts” are just more loans.  There is no way that the Greeks are ever going to be able to repay all of this money.

But this is what happens when a nation lets debt get out of control.  For years and years it can seem like all of that debt does not have any consequences, but then the day of reckoning comes and it is a complete and total nightmare.

In order to get the next installment of 12 billion euros, European finance ministers are insisting that the Greek Parliament approves a package of austerity measures that will be worth approximately 28 billion euros.

At this point, it is uncertain whether those austerity measures will pass.

However, the pressure on the Greek government to get them pushed through is immense.

These austerity measures include tax increases, budget cuts and a “large-scale privatization program”.

This is often what happens to third world nations that cannot pay their debts.  Organizations such as the IMF or the World Bank will come in and insist that they tax their people more, cut back on their spending and sell some of their public assets to big corporations.

As we can see from the wild protests that have been taking place in Greece, a significant percentage of the Greek population is not happy with all of these austerity measures.

Unfortunately, the EU and the IMF are able to put a lot more pressure on the Greek government than the Greek people are.

Greek Prime Minister George Papandreou recently gave the following warning to the Greek people about what could happen if this debt crisis ends badly….

The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks, and the country’s credibility.

Not only would a Greek default be a total disaster for Greece, it would potentially be a total disaster for the entire global financial system.

Sung Won Sohn, an economics professor at California State University, recently made the following statement about the seriousness of the debt crisis in Europe….

“The European debt crisis has the potential to have as big an impact as the subprime mortgage crisis did in the United States”

So will these bailouts solve the problem?

No, giving Greece more loans is only going to kick the can down the road for a little while longer.

The truth is that Greece is bankrupt.  Unless huge amounts of Greek debt are forgiven, Greece is going to default sooner or later.

When confidence in the finances of a nation is lost, borrowing costs can go up very quickly.  Today, the yield on two year Greek bonds is up to 28.6%.

Anyone that has ever been late on paying their credit cards knows how painful an interest rate like that can be.

So why doesn’t Greece just slash government spending to the bone and get their financial house in order?

Well, it is not that easy.  Harsh austerity measures have already been implemented.  As a result, unemployment is rampant and there is rioting in the streets.

The truth is that, as an article in The Guardian recently explained, austerity has taken a brutal toll on the Greek economy….

A year of wage and pension cuts, benefit losses and tax increases has taken its toll: almost a quarter of the population now live below the poverty line, unemployment is at a record 16% and, as the economy contracts for a third year, economists estimate that about 100,000 businesses have closed.

As the economy crumbles, Greece has descended into an almost permanent state of civil unrest.

The fact that the EU and the IMF want even more austerity measures has sparked some wild rioting In Greece in recent days.  You can see video of the stunning violence going on in Greece right here.

Not all protesters are being violent.  Some of them are showing their displeasure in non-violent ways.  For example, workers for Greece’s state-owned electric utility are staging 48 hours of rolling strikes that are designed to create blackouts over large areas.

The frightening thing is that Greece is not alone.  Ireland has already received a bailout and they are probably going to need another one at some point.

Portugal is a financial basket case and they are probably next in line for a bailout.

The employment situation in Spain is absolutely nightmarish.  Spain will probably be able to squeak by without a bailout if the global economy stays stable, but if the dominoes start to fall Spain could be in a massive amount of trouble very quickly.

Not that many people are talking about Italy, but the truth is that Italy has a huge debt problem.  On Friday, Moody’s warned that it may downgrade Italy’s Aa2 debt rating at some point within the next 90 days.

Belgium and France also have very substantial debt problems.  They probably would not be the first dominoes to fall, but if the “contagion” starts to spread they could certainly have massive problems.

The truth is that Europe’s entire financial system is extremely vulnerable right now.  Big banks all over Europe (and especially in Germany) are leveraged to the hilt.  All it would take to topple many of them is a stiff breeze.

When Lehman Brothers collapsed, it was leveraged 31 to 1.

Today, German banks are leveraged 32 to 1.

German banks are also holding a massive amount of Greek debt.

That is why there is so much fear that the crisis in Greece could spread across the rest of Europe and start toppling dominoes.

The sovereign debt crisis in Europe did not happen overnight and it is going to be with us for a long, long time even if the global economy remains relatively stable.

At the moment, the best that officials in Europe can seem to come up with is to put off the pain for another day.  Pimco’s Mohamed El-Erian told CNBC the following on Monday….

“This problem is not going to go away. It’s going to weigh on markets here and we’re going to see the same set of headlines over and over again. We simply cannot continue to kick the can down the road, because we’re coming to the end of the road in Greece.”

So if Europe starts having major problems will the U.S. step in and help?

Yes, if the crisis in Europe gets worse, the Federal Reserve will probably step in just like they did back in 2008.

But the U.S. is rapidly approaching a day of reckoning like the one that Greece is going through.  The U.S. government has piled up the biggest mountain of debt in the history of the world and faith in the U.S. dollar is dying.

The economic crisis in the United States gets worse with each passing year.  Yes, the Federal Reserve can print up stacks of money and send it over to Europe, but that isn’t going to solve anything in the long run.  The truth is that the U.S. is not even going to be able to keep itself from drowning.

The world financial system is far more vulnerable today than it was back in 2008.  The next wave of the financial collapse is going to hit at some point, and when it does it is going to probably be even more painful than the last wave.

Our world is becoming an incredibly unstable place.

You better get ready.

Stock Prices Have Fallen For Six Weeks In A Row

Well, it’s official.  U.S. stock prices have fallen for six weeks in a row.  So will next week make it seven?  The last time stocks declined for seven weeks in a row was back in May 2001 when the “dot-com” bubble was bursting.  At this point, the Dow has declined by approximately 5 percent since the beginning of June.  Things don’t look good.  So exactly what is going on here?  Well, it is undeniable that the recent mini-bubble in stocks has been too good to be true.  The S&P 500 had surged nearly 30 percent since last September.  Much of this has been fueled by the Federal Reserve’s latest round of quantitative easing, but now that is coming to an end in a few weeks and investors are a bit spooked.  Meanwhile, wars and revolutions are sweeping the Middle East, Japan is dealing with the damage caused by the tsunami and by Fukushima, Europe is trying to figure out how to bail out Greece again and the U.S. debt crisis is continually getting worse.  In addition, wave after wave of bad economic news is certainly not helping the mood on Wall Street.  In many ways, a “perfect storm” is developing and many are now extremely concerned about what the rest of 2011 is going to bring for Wall Street.

QE2 is slated to conclude at the end of June, and many investors are deeply disappointed that it does not appear that we are not going to see QE3 right away.  Many fear that the end of quantitative easing will pop the current mini-bubble in stocks and commodities.  At the moment, financial markets are more jittery than they have been in a long time.

Frank Davis, director of sales and trading with LEK Securities, says that there is a lot of pessimism on Wall Street right now….

“There’s a lot of emotion in this market at the moment, and the conversations among traders are nearly all leaning toward the bear side”

So what are some of the signs that this downturn on Wall Street may turn into a full-blown crash?

Well, according to the Wall Street Journal, junk bonds are being sold off at an alarming rate right now.  Does the following quote from the Journal remind anyone of 2008 at least a little bit?….

A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.

Also, many of the big Wall Street banks are already laying off workers.  In a previous article I wrote about the potential for Wall Street to go into “panic mode“, I noted that Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all laying people off or are considering staff cuts.

The truth is that the big banks on Wall Street are not nearly as stable as most people think that they are.  Moody’s recently warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

Another major story on Wall Street right now is oil.  OPEC recently announced that oil production levels will not be raised, even though the price of oil has been hovering around $100 a barrel.

World oil supplies are very tight right now.  In fact, the globe actually consumed 5 million barrels per day more oil than it produced during 2010.  This was possible because the difference was apparently made up by drawing down reserves.

But if oil supplies are this tight already, what is going to happen if a major war (as opposed to all of the minor wars that are already happening) erupts in the Middle East?

The world is sitting on the edge of a financial disaster.

It is important to keep in mind that Europe is also in far worse financial condition than it was just prior to the financial collapse of 2008.

It is being reported that German finance minister Wolfgang Schaeuble is convinced that a “full-blown” financial meltdown by Greece is a very real possibility. The cost of insuring Greek debt has soared to a brand new record high, and officials all over Europe are in panic mode.

But financial problems are not just happening in Greece.  The largest bank in France has just cut in half the amount of cash that customers can withdraw from ATMs each week.

Most Americans don’t spend much time thinking about the financial condition of Europe, but the truth is that what happens in Europe is going to play a major role in the months and years ahead.

Of course most Americans already know that the U.S. government is a financial mess.

As the “debt ceiling deadline” of August 2nd draws closer, the U.S. government has been raiding retirement funds in order to stay under the debt limit.

Many investors are quite nervous about what may happen if the U.S. government actually does start defaulting on debt on August 2nd.

Others claim that the U.S. government is already in default.

The only Chinese agency that gives credit ratings on sovereign debt says that the U.S. government “has already been defaulting” and the Chinese government has been repeatedly warning that the U.S. needs to get its finances in order.

In any event, this debt ceiling drama will get resolved one way or another.

The bigger question is this….

How is the U.S. government going to respond when the next financial crash happens?

Back in 2008, the Federal Reserve and the U.S. government took unprecedented steps to prop up Wall Street.

But can they really do that again if we see another major crash in 2011 or 2012?

Many believe that things will be totally different this time around.  Just check out what Jim Rogers recently told CNBC….

“The debts that are in this country are skyrocketing,” he said. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.

“When the problems arise  next time…what are they going to do? They can’t quadruple the debt again. They cannot print that much more money. It’s gonna be worse the next time around.”

Jim Rogers is right about that.

The next time we see a collapse on the scale of 2008 it is going to be a much bigger mess.

Global financial markets are extremely vulnerable right now and there are a whole host of potential “tipping points” which could push them over the edge.

The Federal Reserve and the U.S. government more or less used up all of their ammunition on the 2008 crisis.

If we see another collapse in 2011 or 2012 there is not going to be much of a safety net available.

The entire world financial system is simply swamped with way too much debt.  The world has never seen anything even remotely close to the gigantic mountains of debt that have been accumulated around the world today.

The current global financial system is not sustainable.  More crashes are inevitable.  A lot of people are going to get steamrolled.

Hopefully you will not be one of them.

The Greek Debt Crisis Escalates: Is Greece Threatening To Leave The Euro?

Is the Greek debt crisis about to explode out of control?  According to Der Spiegel, the government of Greece is considering leaving the Euro and reestablishing its own currency.  If that happened, it would throw global financial markets into chaos and it might mean the end of the euro as a pan-European currency.  But the Greek government has to do something about all of these debts.  At this point Greece is literally drowning in debt.  The yield on 10-year Greek bonds has now reached an astounding 15.51%.  There is no way that is sustainable even for the short-term.  Greece is rapidly going bankrupt.  Even with absolutely brutal austerity measures in place, the debt just continues to explode.  There are protests against the government almost daily and Greece is in a state of chaos.  Unfortunately, because Greece is part of the euro they can’t just start printing lots of money as a way to get out of this crisis.  Now there are persistent rumors that Greece really is thinking about leaving the euro, and that could potentially mean big trouble for the world financial system.

It was a new article in Der Spiegel that brought these rumors to the forefront again.  Der Spiegel says that it possesses secret Greek government documents that discuss plans to leave the euro.  Der Spiegel also claims that a secret crisis meeting was held in Luxembourg on Friday night to discuss this crisis.

The following is a brief excerpt from the Der Spiegel article that caused the financial community in Europe to be in such an uproar today….

“The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government’s actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area’s finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.”

So was there such a meeting in Luxembourg on Friday night?

Well, it turns out that there was a meeting of a small group of European finance ministers.  But according to German government spokesman Steffen Seibert, this meeting was planned well in advance and had nothing to do with Greece leaving the euro….

“There is a meeting of some finance ministers that has long been planned. Greece exiting the Eurozone is not on the agenda of that meeting, and it has never been.”

So is Greece actually thinking about leaving the euro?  All over Europe this notion is being denied.

Perhaps the strongest denial was issued by the Greek Finance Ministry….

“The report on an imminent Greek exit from the eurozone, as well as being untrue, has been written with incomprehensible levity despite the fact that this has been repeatedly denied by the Greek government, and the governments of other EU member states.”

What was probably being discussed at this meeting of European finance ministers is a restructuring of Greek debt.  This is something that Germany has apparently wanted for quite some time according to a recent article posted on Business Insider….

For weeks, German officials have been hinting that they want a Greek restructuring to happen. German economic advisor Lars Feld recently said that the restructuring should happen “sooner than later.” He’s previously also said “restructuring is the only road to take.”

So what would a restructuring of this debt look like?  A recent article on CNBC gives us some clues….

More importantly, tonight’s finance ministers meeting might lay the groundwork for “extending the maturities” on those loans — giving Athens a little more oxygen until it probably ends up restructuring its $470 billion existing debt by either extending maturities or exchanging Greek bonds, at a discount, for EU-guaranteed bonds, Brady Bond-style from the 1980s.

What Germany does not want is for Greece to even think about leaving the euro.  According to the article on Der Spiegel, German Finance Minister Wolfgang Schäuble is ready to play hardball with the Greeks.  Der Spiegel says that a report has been prepared that would lay out for the Greeks the severe consequences of leaving the euro….

“It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro,” the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble’s staff have calculated that Greece’s national deficit would rise to 200 percent of gross domestic product after such a devaluation. “A debt restructuring would be inevitable,” his experts warn in the paper. In other words: Greece would go bankrupt.

Greece is really in a tough position.  They are going to go bankrupt if they stay with the euro and they are going to go bankrupt if they leave the euro.

Meanwhile, the anti-government protests continue.  The Greek people are not happy.  The Greek economy is coming apart like a 20 dollar suit.  Greece could end up being the spark that sets off a massive financial panic in Europe.

As I have written about previously, the European debt crisis is on the verge of spinning wildly out of control.  It is not just Greece that is facing a horrific debt crisis.  The financial problems in Europe literally span the entire continent.

A lot of Americans are obsessed with the death of the U.S. dollar, but the truth is that there is a strong possibility that the euro could end up collapsing before the dollar does.

Keep an eye on Europe.  The European debt crisis could plunge the entire global financial system into chaos at any time.  Things are not nearly as stable as they seem.

Will Financial Problems In Portugal Cause The European Debt Crisis To Spiral Out Of Control?

Most Americans have no idea just how bad the financial problems over in Europe are right now.  The truth is that the entire European financial system is teetering on the brink of disaster.  Ireland and Greece have already received bailouts and Portugal, Spain, Italy, France and Belgium are all drowning in an ocean of unsustainable debt.  Sovereign credit ratings all over Europe have being slashed in recent months.  For example, a while back Moody’s Investors Service cut Ireland’s bond rating by five levels.  Up until now Europe has weathered all of this financial instability fairly well, but now huge new financial problems in Portugal threaten to send the European debt crisis spinning out of control.

The Prime Minister of Portugal, Jose Socrates, resigned on Wednesday after the major opposition parties banded together to vote down the austerity measures that he was requesting.  The package of budget cuts and tax increases was intended to get Portugal’s horrible debt crisis under control.  Prior to the vote, the prime minister warned that  he would no longer be able to run the country if the austerity package was not passed.

Now there are all kinds of questions about what is going to happen to Portugal.  At this point most financial authorities in Europe seem to be assuming that Portugal is going to need a bailout.

Today, Standard & Poor’s reduced the credit rating of long-term Portuguese government debt from “A-” to “BBB”.  Standard & Poor’s is also warning that the credit rating may be cut further if negotiations for a bailout do not go well.

Without a bailout, it seems almost certain that Portugal will default.

Interest rates on Portuguese government debt have risen to unsustainable levels.  The yield on 10-year Portuguese bonds hit 7.78% on Friday.  That was the highest it has been since Portugal joined the euro.

Authorities in Portugal are publicly saying that they simply cannot afford to pay that kind of interest.  Unfortunately for them, it appears that Portugal is going to be forced to issue more bonds by June at the very latest.

So how much would a bailout of Portugal cost?

Well, according to one estimate, it would probably be in the neighborhood of 70 billion euros.

That isn’t going to sink Europe.

However, the concern is that the crisis in Portugal could have a domino effect.

There is increasing worry in Europe that Portugal’s neighbor, Spain, could also need a bailout.  But a bailout of Spain would potentially be so large that it would cause a financial nightmare for Europe.

The following is how a recent article in the Wall Street Journal sized up the problem….

Portugal’s admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone’s debt crisis: Is Spain next?

The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.

The truth is that the rest of Europe simply does not have the kind of financial muscle necessary to continue putting together huge bailouts indefinitely.  If Spain does go down, it is going to put a massive amount of strain on the rest of the continent.

There are other financial problems simmering in Europe right now as well.

According to a recent Business Insider article, the financial problems in Ireland are also creating a lot of concern at the moment….

Ireland’s banks are likely to need another $39 billion in support, which would use up 80% of its current bailout funds.

Ireland is a financial basket case right about now.  Confidence in Irish debt is rapidly evaporating.  In fact, the yield on 10-year Irish bonds recently hit 10.12%.

Ouch!

But that is nothing compared to what Greece is being forced to pay.

The yield on 10-year Greek bonds recently reached an astounding 12.58%.

There are persistent rumors that Greece is going to need yet another bailout.  The truth is that Germany and the other European nations that are coming up with the cash for these bailouts are just pouring their money into financial black holes.

Nations like Greece and Ireland are just money pits at this point.

As I have written about previously, the financial collapse of Europe has basically become inevitable.  The EU can keep coming up with bailout plan after bailout plan, but they are only putting off the crash for a while.

Eventually a point will come when all of the balls simply cannot be kept up in the air anymore.

So what is going to happen once that point is reached?

Well, many believe that we could actually see the end of the euro and potentially even the break up of the European Union.

Of course top politicians in Europe will fight tooth and nail to keep that from happening, but the truth is that at some point we are going to see some incredibly challenging financial problems in Europe.  How the EU responds to the crisis is going to be extremely interesting to watch.

So many people talk about the death of the U.S. dollar, but the truth is that we could very easily see a financial collapse and a major currency crisis in Europe prior to the collapse of the dollar.  Europe is in really, really bad shape right now.

Of course it doesn’t help that the entire world is so incredibly unstable right now.  The disaster in Japan, the war in Libya, the revolutions across the Middle East and the surging price of oil all threaten to throw the global economy into turmoil.

As I discussed in a previous article, people need to start preparing for economic disaster.  The entire global financial system is coming apart.  The U.S. economy is crumbling, Europe is dealing with an unprecedented debt crisis and Japan has just been struck with the worst economic disaster that it has seen since World War 2.

Most Americans don’t pay much attention to what is going on in Portugal (or in the rest of Europe for that matter), but they should.  The world is more interconnected than ever, and if Europe experiences a financial meltdown it will have dramatic consequences for the United States as well.

The financial crash of 2008 swept the entire globe and virtually every nation on earth was deeply affected.  The next wave of the financial crisis is also going to be felt globally.

We live in one of the most interesting times in the history of the world.

Are you prepared for what is about to happen?

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