Financially Troubled

Is Germany Actually Preparing To Leave The Euro?

For a long time, most analysts have believed that if someone was going to leave the euro, it would be a weak nation such as Greece or Portugal.  But the truth is that financially troubled nations such as Greece and Portugal don’t want to leave the euro.  The leaders of those nations understand that if they leave the euro their economies will totally collapse and nobody will be there to bail them out.  And at this point there really is not a formal mechanism which would enable other members of the eurozone to kick financially troubled nations such as Greece or Portugal out of the euro.  But there is one possibility that is becoming increasingly likely that could actually cause the break up of the euro.  Germany could leave the euro.  Yes, it might actually happen.  Germany is faced with a very difficult problem right now.  It is looking at a future where it will be essentially forced to bail out most of the rest of the nations in the eurozone for many years to come, and those bailouts will be extremely expensive.  Meanwhile, the mood in much of the rest of Europe is becoming decidedly anti-German.  In Greece, Angela Merkel and the German government are being openly portrayed as Nazis.  Financially troubled nations such as Greece want German bailout money, but they are getting sick and tired of the requirements that Germany is imposing upon them in order to get that money.  Increasingly, other nations in Europe are simply ignoring what Germany is asking them to do or are openly defying Germany.  In the end, Germany will need to decide whether it is worth it to continue to pour billions upon billions of euros into countries that don’t appreciate it and that are not doing what Germany has asked them to do.

German Chancellor Angela Merkel’s Christian Democratic Union party recently approved a resolution that would allow a country to leave the euro without leaving the European Union.

Many thought that the resolution was aimed at countries like Greece or Portugal, but the truth is that this resolution may be setting the stage for a German exit from the euro.

The following is an excerpt from that resolution….

“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”

So was that paragraph written for Greece?

Or was it written for Germany?

That is a very interesting question.

What is clear is that the status quo cannot last much longer.

Voters in Germany are definitely not in the mood to give any more bailout money to other nations in Europe, but if Germany is going to continue to stay in the eurozone many more bailouts will be required in the coming years.

Meanwhile, Germany is rapidly losing control over the rest of the eurozone….

*Greece has implemented some of the austerity measures that have been required of it, but many others have not been implemented.  In a few weeks there will be a national election, and parties that are opposed to the austerity measures are surging in the polls.  It is likely that the new government will be much less friendly toward Germany.

*The Spanish government is already defying the budgetary requirements that the EU is trying to impose upon it.  Spain is definitely going to miss the debt targets mandated by the EU, and the Spanish government has absolutely no plans of making more reductions to government spending.

*The upcoming election in France could be absolutely crucial.  Nicolas Sarkozy is not doing well in the polls and the new French government could totally wreck the recent fiscal agreement that the members of the eurozone recently agreed to.

The following is how Graham Summers recently summarized the current situation in France….

We should also take Schäuble’s statements in the context of Angela Merkel’s recent backing of Nicolas Sarkozy’s re-election campaign in France against hardened socialist François Hollande, who wants to engage in a rampant socialist mission to lower France’s retirement age, cut tax breaks to the wealthy, and break the recent new EU fiscal requirements Germany convinced 17 members of the EU to agree to.

Obviously Germany has been trying very hard to keep the eurozone together.  But the German government also believes that if it is going to be bailing everyone out that it should also be able to set the rules.

So what happens if the rest of Europe tells Germany to stick their rules where the sun doesn’t shine?

Well, Germany would be forced to make a very difficult decision, and Germany appears to making plans for that eventuality.

For example, Germany recently reinstated its Special Financial Market Stabilization Funds.  This money would be used to bail out German banks in the event of a break up of the euro.  The following is from a recent article by Graham Summers….

In short, Germany has given the SoFFIN:

  1. €400 billion to be used as guarantees for German banks.
  2. €80 billion to be used for the recapitalization of German banks
  3. Legislation that would permit German banks to dump their euro-zone government bonds if needed.

That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.

In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.

If the rest of Europe continues to defy Germany, then at some point Germany may decide to simply pick up the ball and go home.

Germany is the strongest economy in the eurozone by far, and if Germany were to pull out the euro would absolutely collapse.  Whatever currency Germany decided to issue would be extremely valuable.  Such an event would actually have some tremendous side benefits for Germany.

Right now, the German national debt is denominated in euros.

If Germany left the euro, the value of euros would plummet and would likely keep declining as the rest of the eurozone fell apart financially and Germany would be able to pay back its debt in rapidly appreciating “marks” or whatever other currency it decided to issue.

All other debts in Germany would also be denominated in euros and would also be repaid with a much stronger currency.

Are you starting to get the picture?

Yes, Germany would likely have to bail out German banks if it left the euro, but leaving the euro could also prove to be a tremendous windfall for Germany.

If Germany chooses to say in the euro, it is going to be faced with extremely expensive bailouts of other countries for as far as the eye can see.

How expensive?

The following is from a New York Times article….

Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.

That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.

If Germany leaves the euro, that does not mean that the dream of a single currency is dead.  Germany could just let the rest of the eurozone collapse and then invite them to join the new German currency eventually after all the carnage is over.

At that point, Germany would have all the leverage and Germany would be able to dictate all the rules.

What is clear is that the status quo in Europe is becoming extremely unacceptable in Germany.  The Germans do not intend to give endless bailouts to other nations that do not appreciate them and that do not intend to follow the rules.

At some point Germany may actually decide to walk, and there are lots of whispers that Germany has been steadily preparing for that day.

For example, there are persistent rumors that Germany has ordered printing plates for the printing of new German marks.  Philippa Malmgren, a former economic adviser to President George W. Bush, says that she believes that this is already happening….

“I think they have already got the printing machines going and are bringing out the old deutschmarks they have left over from when the euro was introduced.”

Increasingly, it really is looking as if Germany is actually preparing to leave the euro.

If Germany did leave the euro, the consequences for the rest of Europe would be catastrophic.

The euro would rapidly drop to all-time lows.

The global financial system would be thrown in chaos.

Countries such as Greece would lose their major source of bailout money and would be forced to default.

The recession in Europe would likely deepen into a devastating economic depression.

So there would be a lot of downside.

But Germany would fare much better than most of the rest of Europe, and in the end Germany would be left holding most of the cards.

Keep a close eye on the upcoming European elections and the evolving political situation in Europe.

If things don’t go well for Germany, at some point Germany may just get fed up and walk away from the euro.

Stranger things have happened.

Bam! Bam! Bam! Huge Financial Bombs Just Got Dropped All Over Europe

The European debt crisis has just gone to an entirely new level.  Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe.  Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations.  This included both France and Austria losing their cherished AAA credit ratings.  When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation.  Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters.  Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge.    Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did.  Standard & Poor’s unleashed a barrage of credit downgrades on Friday….

-France was downgraded from AAA to AA+

-Austria was downgraded from AAA to AA+

-Italy was downgraded two more levels from A to BBB+

-Spain was downgraded two more levels

-Portugal was downgraded two more levels

-Cyprus was downgraded two more levels

-Malta was downgraded one level

-Slovakia was downgraded one level

-Slovenia was downgraded one level

This is really bad news for anyone that was hoping that things in Europe would start to get better.  Borrowing costs for many of these financially troubled nations are going to go even higher.

In addition, there was another really, really troubling piece of news that came out of Europe on Friday.

It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.

The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a “voluntary haircut” that is supposed to be a key component of the “rescue plan” for Greece.

Greece desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Without some sort of an agreement, the finances of the Greek government will collapse very quickly.

For now, negotiations have failed.  There is hope that negotiations will resume soon, but Greece is rapidly running out of time.

The Institute of International Finance issued a statement on Friday which said the following….

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt”

The IIF says that negotiations are “paused for reflection” right now, but they are hoping that they will be able to resume before too long….

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach”

Something needs to be done, because Greece is experiencing a complete and total financial meltdown.

Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent.  Today, the yield on one year Greek bonds is up to an astounding 396 percent.

That is how fast these things can move when confidence disappears.

Those living in the United States should keep that in mind.

Unfortunately, Greece is not the only European nation that is completely falling apart financially.

We aren’t hearing much about it in the U.S. media, but Hungary is a total basket case right now.  The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.

In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary.  The following is from an article in the Daily Mail….

The European Union has stepped up pressure on Hungary over the country’s refusal to implement austerity policies and threatened legal action over its new constitution.

The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.

Over the past months, the country’s credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.

But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.

Slovenia is a total mess right now as well.  The following comes from a recent article posted on EUObserver.com….

Slovenia’s borrowing costs have reached ‘bail-out territory’ after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia’s capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country’s president set to re-cast his name or propose someone new within two weeks.

Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.

Well, things are certainly starting to shape up that way.

Europe is heading for some really hard times.  What is about to happen in Europe is going to shake the entire global financial system.

Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.

Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.

In addition, the U.S. debt problem is bigger than it has ever been before.

For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama’s first term in office?

That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.

For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.

Just ask Greece.

Already there are indications that foreigners are starting to dump large amounts of U.S. debt.  If this trickle becomes a flood things could become very bad for the United States very quickly.

We are on the verge of some very bad things.  The kinds of “financial bombs” that we saw dropped today are going to become much more frequent.  As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.

Things are not going to be “normal” again for a really, really long time.

Hold on tight, because 2012 is going to be a very interesting year.

22 Reasons Why We Could See An Economic Collapse In Europe In 2012

Will 2012 be the year that we see an economic collapse in Europe?  Before you dismiss the title of this article as “alarmist”, read the facts listed in the rest of this article first.  Over the past several months, there has been an astonishing loss of confidence in the European financial system.  Right now, virtually nobody wants to loan money to financially troubled nations in the EU and virtually nobody wants to lend money to major European banks.  Remember, one of the primary reasons for the financial crisis of 2008 was a major credit crunch that happened here in the United States.  This burgeoning credit crunch in Europe is just one element of a “perfect storm” that is rapidly coming together as we get ready to go into 2012.  The signs of trouble are everywhere.  All over Europe, governments are implementing austerity measures and dramatically cutting back on spending.  European banks are substantially cutting back on lending as they seek to meet new capital requirements that are being imposed upon them.  Meanwhile, bond yields are going through the roof all over Europe as investors lose confidence and demand much higher returns for investing in European debt.  It has become clear that without a miracle happening, quite a few European nations and a significant number of European banks are not going to be able to get the funding that they need from the market in 2012.  The only thing that is going to avert a complete and total financial meltdown in Europe is dramatic action, but right now European leaders are so busy squabbling with each other that a bold plan seems out of the question.

The following are 22 reasons why we could see an economic collapse in Europe in 2012….

#1 Germany could rescue the rest of Europe, but that would take an unprecedented financial commitment, and the German people do not have the stomach for that.  It has been estimated that it would cost Germany 7 percent of GDP over several years in order to sufficiently bail out the other financially troubled EU nations.  Such an amount would far surpass the incredibly oppressive reparations that Germany was forced to pay out in the aftermath of World War I.

A host of recent surveys has shown that the German people are steadfastly against bailing out the rest of Europe.  For example, according to one recent poll 57 percent of the German people are against the creation of eurobonds.

At this point, German politicians are firmly opposed to any measure that would place an inordinate burden on German taxpayers, so unless this changes that means that Europe is not going to be saved from within.

#2 The United States could rescue Europe, but the Obama administration knows that it would be really tough to sell that to the American people during an election season.  The following is what White House Press Secretary Jay Carney said today about the potential for a bailout of Europe by the United States….

“This is something they need to solve and they have the capacity to solve, both financial capacity and political will”

Carney also said that the Obama administration does not plan to commit any “additional resources” to rescuing Europe….

“We do not in any way believe that additional resources are required from the United States and from American taxpayers.”

#3 Right now, banks all over Europe are in deleveraging mode as they attempt to meet new capital-adequacy requirements by next June.

According to renowned financial journalist Ambrose Evans-Pritchard, European banks need to reduce the amount of lending on their books by about 7 trillion dollars in order to get down to safe levels….

Europe’s banks face a $7 trillion lending contraction to bring their balance sheets in line with the US and Japan, threatening to trap the region in a credit crunch and chronic depression for a decade.

So what does that mean?

It means that European banks are going to be getting really, really stingy with loans.

That means that it is going to become really hard to buy a home or expand a business in Europe, and that means that the economy of Europe is going to slow down substantially.

#4 European banks are overloaded with “toxic assets” that they are desperate to get rid of.  Just like we saw with U.S. banks back in 2008, major European banks are busy trying to unload mountains of worthless assets that have a book value of trillions of euros, but virtually nobody wants to buy them.

#5 Government austerity programs are now being implemented all over Europe.  But government austerity programs can have very negative economic effects.  For example, we have already seen what government austerity has done to Greece. 100,000 businesses have closed and a third of the population is now living in poverty.

But now governments all over Europe have decided that austerity is the way to go.  The following comes from a recent article in the Economist….

France’s budget plans are close to being agreed on; further cuts are likely but will be delayed until after the elections in spring. Italy has yet to vote through a much-revised package of cuts. Spain’s incoming government has promised further spending cuts, especially in regional outlays, in order to meet deficit targets agreed with Brussels.

#6 The amount of debt owed by some of these European nations is so large that it is difficult to comprehend.  For example, Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

So what will massive government austerity do to troubled nations such as Spain, Portugal, Ireland and Italy?  Ambrose Evans-Pritchard is very concerned about what even more joblessness will mean for many of those countries….

Even today, the jobless rate for youth is near 10pc in Japan. It is already 46pc in Spain, 43pc in Greece, 32pc in Ireland, and 27pc in Italy. We will discover over time what yet more debt deleveraging will do to these societies.

#7 Europe was able to bail out Greece and Ireland, but there is no way that Italy will be able to be rescued if they require a full-blown bailout.

Unfortunately, Italy is in the midst of a massive financial meltdown as you read this.  The yield on two year Italian bonds is now about double what it was for most of the summer.  There is no way that is sustainable.

It would be hard to overstate how much of a crisis Italy represents.  The following is how former hedge fund manager Bruce Krasting recently described the current situation….

At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this. I repeat, there is a zero chance for a market solution for Italy.

Krasting believes that either Italy gets a gigantic mountain of cash from somewhere or they will default within six months and that will mean the start of a global depression….

I think the Italian story is make or break. Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of.

#8 An Italian default may be closer than most people think.  As the Telegraph recently reported, just to refinance existing debt, the Italian government must sell more than 30 billion euros worth of new bonds by the end of January….

Italy’s new government will have to sell more than EURO 30 billion of new bonds by the end of January to refinance its debts. Analysts say there is no guarantee that investors will buy all of those bonds, which could force Italy to default.

The Italian government yesterday said that in talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Prime Minister Mario Monti had agreed that an Italian collapse “would inevitably be the end of the euro.”

#9 European nations other than just the “PIIGS” are getting into an increasing amount of trouble.  For example, S&P recently slashed the credit rating of Belgium to AA.

#10 Credit downgrades are coming fast and furious all over Europe now.  At this point it seems like we see a new downgrade almost every single week.  Some nations have been downgraded several times.  For instance, Fitch has downgraded the credit rating of Portugal again.  At this point it is being projected that Portuguese GDP will shrink by about 3 percent in 2012.

#11 The financial collapse of Hungary didn’t make many headlines in the United States, but it should have.  Moody’s has cut the credit rating of Hungarian debt to junk status, and Hungary has now submitted a formal request to the EU and the IMF for a bailout.

#12 Even faith in German debt seems to be wavering. Last week, Germany had “one of its worst bond auctions ever“.

#13 German banks are also starting to show signs of weakness.  The other day, Moody’s downgraded the ratings of 10 major German banks.

#14 As the Telegraph recently reported, the British government is now making plans based on the assumption that a collapse of the euro is only “just a matter of time”….

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.

Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

#15 The EFSF was supposed to help bring some stability to the situation, but the truth is that the EFSF is already a bad joke.  It has been reported that the EFSF has already been forced to buy up huge numbers of its own bonds.

#16 Unfortunately, it looks like a run on the banks has already begun in Europe.  The following comes from a recent article in The Economist….

“We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an analyst at Citi Group wrote in a recent report. “This is a worrying development.”

#17 Confidence in European banks has been absolutely shattered and virtually nobody wants to lend them money right now.

The following is a short excerpt from a recent CNBC article….

Money-market funds in the United States have quite dramatically slammed shut their lending windows to European banks. According to the Economist, Fitch estimates U.S. money market funds have withdrawn 42 percent of their money from European banks in general.

And for France that number is even higher — 69 percent. European money-market funds are also getting in on the act.

#18 There are dozens of major European banks that are in danger of failing.  The reality is that most major European banks are leveraged to the hilt and are massively exposed to sovereign debt.  Before it fell in 2008, Lehman Brothers was leveraged 31 to 1.  Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

#19 According to the New York Times, the economy of the EU is already projected to shrink slightly next year, and this doesn’t even take into account what is going to happen in the event of a total financial collapse.

#20 There are already signs that the European economy is seriously slowing down.  Industrial orders in the eurozone declined by 6.4 percent during September.  That was the largest decline that we have seen since the midst of the financial crisis in 2008.

#21 Panic and fear are everywhere in Europe right now.  The European Commission’s index of consumer confidence has declined for five months in a row.

#22 European leaders are really busy fighting with each other and a true consensus on how to solve the current problems seems way off at the moment.  The following is how the Express recently described rising tensions between German and British leaders….

The German Chancellor rejected outright Mr Cameron’s opposition to a new EU-wide financial tax that would have a devastating impact on the City of London.

And she refused to be persuaded by his call for the European Central Bank to support the euro. Money markets took a dip after their failure to agree.

Are you starting to get the picture?

The European financial system is in a massive amount of trouble, and when it melts down the entire globe is going to be shaken.

But it isn’t just me that is saying this.  As I mentioned in a previous article, there are huge numbers of respected economists all over the globe that are now saying that Europe is on the verge of collapse.

For example, just check out what Credit Suisse is saying about the situation in Europe….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

Many European leaders are promoting much deeper integration and a “European superstate” as the answer to these problems, but it would take years to implement changes that drastic, and Europe does not have that kind of time.

If Europe experiences a massive economic collapse and a prolonged depression, it may seem like “the end of the world” to some people, but things will eventually stabilize.

A lot of people out there seem to think that the global economy is going to go from its present state to “Mad Max” in a matter of weeks.  Well, that is just not going to happen.  The coming troubles in Europe will just be another “wave” in the ongoing economic collapse of the western world.  There will be other “waves” after that.

Of course this current sovereign debt crisis could be entirely averted if the countries of the western world would just shut down their central banks and start issuing debt-free money.

The truth is that there is no reason why any sovereign nation on earth ever has to go a penny into debt to anyone.  If a nation is truly sovereign, then the government has the right to issue all of the debt-free money that it wants.  Yes, inflation would always be a potential danger in such a system (just as it is under central banking), but debt-free money would mean that government debt problems would be a thing of the past.

Unfortunately, most of the countries of the world operate under a system where more government debt is created when more currency is created.  The inevitable result of such a system is what we are witnessing now.  At this point, nearly the entire western world is drowning in debt.

There are alternatives to our current system.  But nobody in the mainstream media ever talks about them.

So instead of focusing on truly creative ways to deal with our current problems, we are all going to experience the bitter pain of the coming economic collapse instead.

Things did not have to turn out this way.