Why A Greek Exit From The Euro Would Mean The End Of The Eurozone

What was considered unthinkable a few months ago has now become probable.  All over the globe there are headlines proclaiming that a Greek exit from the euro is now a real possibility.  In fact, some of those headlines make it sound like it is practically inevitable.  For example, Der Spiegel ran a front page story the other day with the following startling headline: “Acropolis, Adieu! Why Greece must leave the euro”.  Many are saying that the euro will be stronger without Greece.  They are saying things such as “a chain is only as strong as its weakest link” and they are claiming that financial markets are now far more prepared for a “Grexit” than they would have been two years ago.  But the truth is that it really is naive to think that a Greek exit from the euro can be “managed” and that business will go on as usual afterwards.  If Greece leaves the euro it will set a very dangerous precedent.  The moment Greece exits the euro, investors all over the globe will be asking the following question: “Who is next?”  Portugal, Italy and Spain would all see bond yields soar and they would all likely experience runs on their banks.  It would only be a matter of time before more eurozone members would leave.  In the end, the whole monetary union experiment would crumble.

As I have written about previously, New York Times economist Paul Krugman is wrong about a whole lot of things, but in a blog post the other day he absolutely nailed what is likely to soon unfold in Greece….

1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro.

By itself, Greece cannot crash the eurozone.  But the precedent that Greece is about to set could set forth a chain of events that may very well bring about the end of the eurozone.

If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well.  This is the kind of uncertainty that drives financial markets crazy.

When the euro was initially created, monetary union was intended to be irreversible.  There are no provisions for what happens if a member nation wants to leave the euro.  It simply was not even conceived of at the time.

So we are really moving into uncharted territory.  A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality….

A Greek departure from the euro could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area’s economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.

In fact, yields on Spanish debt and Italian debt are already rising rapidly thanks to the bad news out of Greece in recent days.

What makes things worse is that a new government has still not formed in Greece.  It looks like new elections may have to be held in June.

Meanwhile, the Greek government is rapidly running out of money.  The following is from a Bank of America report that was released a few days ago….

“If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable”

In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains.  And opinion polls suggest that they will make even larger gains if another round of elections is held.

The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections.  Current polling shows that Syriza is likely to come in first if new elections are held.

The leader of Syriza, Alexis Tsipras, is passionately against the bailout agreements.  He says that Greece can reject austerity because the rest of Europe will never kick Greece out of the eurozone.  Tsipras believes that the rest of Europe must bail out Greece because the consequences of allowing Greece to go bankrupt and fall out of the eurozone would be far too high for the rest of Europe.

A spokesman for Syriza, Yiannis Bournos, recently told the Telegraph the following….

“Mr Schaeuble [Germany’s finance minister] is pretending to be the fearless cowboy on the radio, saying the euro is secure [against a Greek exit]. But there’s no way they will kick us out”

So Greece and Germany are playing a game of chicken.

Who will blink first?

Will either of them blink first?

Syriza is trying to convince the Greek people that they can reject austerity and stay in the euro.  Syriza insists that the rest of Europe will provide the money that they need to pay their bills.

And most Greeks do actually want to stay in the euro.  One recent poll found that 78.1 percent of all Greeks want Greece to remain in the eurozone.

But a majority of Greeks also do not want anymore austerity.

Unfortunately, it is not realistic for them to assume that they can have their cake and eat it too.  If Greece does not continue to move toward a balanced budget, they will lose their aid money.

And if Greece loses that aid money, the consequences will be dramatic.

Outgoing deputy prime minister of Greece Theodoros Pangalos recently had the following to say about what would happen if Greece doesn’t get the bailout money that it needs….

“We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.”

If Greece gets cut off and runs out of money, it will almost certainly be forced to go back to using the drachma.  If that happens there will likely be a “bank holiday”, the borders will be secured to limit capital flight and new currency will be rapidly printed up.  It would be a giant mess.

In fact, there are rumblings that the European financial system is already making preparations for all this.  For example, a recent Reuters article had the following shock headline: “Banks prepare for the return of the drachma

But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described….

Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone’s savings and spelling catastrophe for those on fixed incomes, like pensioners.

A Greek economy that is already experiencing a depression would get even worse.  The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent.  It is hard to imagine what Greece is going to look like if things continue to fall apart.

But the consequences for the rest of Europe (and for the rest of the globe) would be dramatic as well.  A Greek exit from the euro could be the next “Lehman Brothers moment” and could plunge the entire global financial system into another major crisis.

Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.

Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.

So there is a lot of pessimism in the financial world right now.  Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed….

After staying quiet at the start of the year, the bears have come roaring back with a vengeance.

Short interest — a bet on stocks turning lower — topped 13 billion shares on the New York Stock Exchange at the end of last month. That’s up 4% from March and marks the highest level of the year.

If the eurozone is going to survive, Greece must stay a part of it.

Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.

Confidence is a funny thing.  It can take decades to build but it can be lost in a single moment.

If Greece leaves the euro, investor confidence in the eurozone will be permanently damaged.  And when investors get spooked they don’t behave rationally.

A common currency in Europe is not dead by any means, but this current manifestation is now operating on borrowed time.

As the eurozone crumbles, it is likely that Germany will simply pull the plug at some point and decide to start over.

So what do you think?

Do you think that I am right or do you think that I am wrong?

Please feel free to post a comment with your thoughts below….

11 Quotes That Show How Worried The Financial World Is About Europe Right Now

The recent elections in France and in Greece have thrown the global financial system into an uproar.  Fear and worry are everywhere and nobody is quite sure what is going to happen next.  All of the financial deals that Greece has made over the past few years may be null and void.  Nobody is going to know for sure until a new government is formed, and at this point it looks like that is not going to happen and that there will need to be new elections in June.  All of the financial deals that France has made over the past few years may be null and void as well.  New French President Francois Hollande seems determined to take France on a path away from austerity.  But can France really afford to keep spending money that it does not have?  France has already lost its AAA credit rating and French bond yields have started to move up toward dangerous territory.  And Greek politicians are delusional if they think they have any other choice other than austerity.  Without European bailout money (which they won’t get if they don’t honor their current agreements), nobody is going to want to lend Greece a dime.

And all of this talk about “austerity” is kind of silly anyway.  It isn’t as if either France or Greece was going to have a balanced budget any time soon.  Both nations were still running up huge amounts of debt even under the “austerity” budgets.

But the citizens of both nations have sent a clear message that they are not going to tolerate even a slowdown in government spending.  They want to go back to the debt-fueled prosperity of the last several decades, even if it makes their long-term financial problems a lot worse.

Unfortunately, as I mentioned earlier, Greece does not have that option.  Without the bailout money that they are scheduled to get, Greece does not have a prayer of avoiding a disorderly default.  Private investors would have to be insane to lend Greece money if the bailout deal falls apart.  Greece desperately needs the help of the EU, the ECB and the IMF and the only way they are going to get it is if they abide by the terms of the agreements that have already been reached.

The only way that Greece can avoid austerity at this point would be to leave the euro.  Nobody would want to lend money to Greece under that scenario either, but Greece could choose to print huge amounts of their own national currency if they wanted to.

The situation is different in France.  Investors are still willing to lend to France at reasonable interest rates, but if France chooses to run up huge amounts of additional debt at some point they will end up just like Greece.

What is even more important in the short-term is the crumbling of the French/German alliance on European fiscal matters.  Angela Merkel and Nicolas Sarkozy were a united front, but now Merkel and Hollande are likely to have conflict after conflict.

Instead of moving in one clear direction, the eurozone is now fractured and tensions are rising.

So what comes next?

Well, investors are not certain what comes next and that has many of them deeply concerned.

The following are 11 quotes that show how worried the financial world is about Europe right now….

#1 Tres Knippa of Kenai Capital Management: “What is going on in Europe is an absolute disaster…the risk-on trade is not the place to be. I want to be out of equities and very, very defensive because the situation in Europe just got worse after those elections.”

#2 Mark McCormick, currency strategist at Brown Brothers Harriman: “We’re going to have higher tensions, more uncertainty and most likely a weaker euro.”

#3 Nick Stamenkovic, investment strategist at RIA Capital Markets in Edinburgh: “Investors are questioning whether Greece will be a part of the single currency at the end of this year.”

#4 Jörg Asmussen, a European Central Bank executive board member: “Greece needs to be aware that there is no alternative to the agreed reform program if it wants to remain a member of the eurozone”

#5 Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment: “A Greek eurozone exit is on the cards although the probability and timing of such an event is uncertain.”

#6 Art Cashin: “Here’s the outlook on Greece from Wall Street watering holes. If a coalition government is formed or looks to be formed, global markets may rally. Any coalition is unlikely to make progress on goals, since austerity is political suicide. There will likely be another election around June 10/17. A workable majority/plurality remains unlikely, so back to square one. Therefore, Greece will be unable to attain goals by the deadline (June 30). Lacking aid funds, pensions are suspended and government workers are laid off. Protestors take to the streets and government is forced to revert to drachma to avoid social chaos. Pass the peanuts, please.”

#7 John Noonan, Senior Forex Analyst with Thomson Reuters in Sydney: “Sentiment is very bearish, The euro is under a lot of pressure right now. I get the feeling that it’s going to be a nasty move lower for the euro finally”

#8 Kenneth S. Rogoff, a professor of economics at Harvard: “A Greek exit would underscore that there’s no realistic long-term plan for Europe, and it would lead to a chaotic endgame for the rest of the euro zone.”

#9 Chris Tinker of Libra Investment Services: “It’s a binary decision. If Greece gets itself to the point where the European administration says, ‘We can’t play this game anymore,’ that starts a domino effect”

#10 Nicolas Véron, a senior fellow at Bruegel: “France has very limited fiscal space and actually has to engage in fiscal consolidation”

#11 80-year-old Greek citizen Panagiota Makri: “I’m confused. I feel numb and confused. Only God can save us now”

All of this comes at a time when much of Europe is already descending into a new recession.  Economies all over Europe are contracting and unemployment rates are skyrocketing.  Until things start improving, there is going to continue to be a lot of civil unrest across Europe.

Meanwhile, things are not so great in the United States either.

JPMorgan Chase CEO Jamie Dimon claims that the U.S. economy is holding a “royal straight flush“, but the only part of that he got right was the “flush” part.

There are 100 million working age Americans that do not have jobs, the middle class continues to shrink, the rising cost of food and the rising cost of gas are severely stretching the budgets of millions of American families and the federal government continues to run up gigantic amounts of debt.

When Europe descends into financial chaos, the United States is not going to escape it.  The financial crisis of 2008 deeply affected the entire globe, and so will the next great financial crisis.

Let us hope that we still have a little bit more time before the next great financial crisis strikes, but things in Europe are rapidly unraveling and at some point the dominoes are going to begin to fall.

The Countdown To The Break Up Of The Euro Has Officially Begun

The results of the elections in France and Greece have made it abundantly clear that there is a tremendous backlash against the austerity approach that Germany has been pushing.  All over Europe, prominent politicians and incumbent political parties are being voted out.  In fact, Nicolas Sarkozy has become the 11th leader of a European nation to be defeated in an election since 2008.  We have seen governments fall in the Netherlands, the UK, Spain, Ireland, Italy, Portugal and Greece.  Whenever they get a chance, the citizens of Europe are using the ballot box to send a message that they do not like what is going on.  It turns out that austerity is extremely unpopular.  But if newly elected politicians all over Europe begin rejecting austerity, this puts Germany in a very difficult position.  Should Germany be expected to indefinitely bail out all of the members of the eurozone that choose to live way beyond their means?  If Germany pulled out of the euro tomorrow, the euro would absolutely collapse, bond yields for the rest of the eurozone would skyrocket to unprecedented heights, and without German bailout money troubled nations such as Greece would be headed directly for default.  The rest of the eurozone is absolutely and completely dependent on Germany at this point.  But as we have seen, much of the rest of the eurozone is sick and tired of taking orders from Germany and is rejecting austerity.  A lot of politicians in Europe apparently believe that they should be able to run up gigantic amounts of debt indefinitely and that the Germans should be expected to always be there to bail them out whenever they need it.  Will the Germans be willing to tolerate such a situation, or will they simply pick up their ball and go home at some point?

Over the past several years, German Chancellor Angela Merkel and French President Nicolas Sarkozy have made a formidable team.  They worked together to push the eurozone on to the path of austerity, but now Sarkozy is out.

Francois Hollande, the new French president, has declared that the financial world is his “greatest enemy“.

He may regret making that statement.

One of the primary reasons why Hollande was elected was because he clearly rejected the austerity approach favored by the Germans.  Shortly after winning the election in France, he made the following statement….

“Europe is watching us, austerity can no longer be the only option”

Hollande says that he wants to “renegotiate” the fiscal pact that European leaders agreed to under the leadership of Merkel and Sarkozy.

But Merkel says that is not going to happen.  The following Merkel quotes are from a recent CNBC article….

“We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries,” Merkel told a news conference.

“We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin — progress is only achievable via solid finances plus growth,” she added.

So instead of being on the same page, Germany and France are now headed in opposite directions.

But if the French do not get their debt under control, they could be facing a huge crisis of their own very quickly.  The following is from a recent article by Ambrose Evans-Pritchard….

“They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.

Without German help, France is not going to be able to handle its own financial problems – much less bail out the rest of Europe.

Germany is holding all of the cards, but much of the rest of the eurozone does not seem afraid to defy Germany at this point.

In Greece, anti-bailout parties scored huge gains in the recent election.

None of the political parties in Greece were able to reach 20 percent of the vote, and there is a tremendous amount of doubt about what comes next.

New Democracy (the “conservatives”) won about 19 percent of the vote, but they have already announced that they have failed to form a new government.

So now it will be up to the second place finishers, the Syriza party (the radical left coalition), to try to form a new government.

Alexis Tsipras, the leader of the Syriza party, is very anti-austerity.  He made the following statement the other night….

“The people of Europe can no longer be reconciled with the bailouts of barbarism.”

But at this point, it seems very doubtful that Syriza will be able to form a new government either.

PASOK, the socialists that have been pushing through all of the recent austerity measures, only ended up with about 13 percent of the vote.  In the 2009 election, PASOK got 44 percent of the vote.  Obviously their support of the austerity measures cost them dearly.

So what happens if none of the parties are able to form a new government?

It means that new elections will be held.

Meanwhile, Greece must somehow approve more than 11 billion euros in additional budget cuts by the end of June in order to receive the next round of bailout money.

Greece is currently in its 6th year of economic contraction, and there is very little appetite for more austerity in Greece at this point.

Citibank analysts are saying that there is now a 50 to 75 percent chance that Greece is going to be forced to leave the euro….

Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme. Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme. If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%. However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. We continue to expect that in reaction to Greece leaving the euro area, more far-reaching measures from governments and the ECB would be put in place.

But if Greece rejects austerity that does not mean that it has to leave the eurozone.

There is no provision that allows for the other nations to kick them out.

Greece could say no to austerity and dare Germany and the rest of the eurozone to keep the bailout money from them.

If Greece defaulted, it would severely damage the euro and bond yields all over the eurozone would likely skyrocket – especially for troubled countries like Spain and Italy.

If Greece wanted to play hardball, they could simply choose to play a game of “chicken” with Germany and see what happens.

Would Germany and the rest of the eurozone be willing to risk a financial disaster just to teach Greece a lesson?

But Greece is not the only one that is in trouble.

As I wrote about recently, the Spanish economy is rapidly heading into an economic depression.

Now it has come out that the Spanish government is going to bail out a major Spanish bank.  The following is from a recent Bloomberg article….

Rodrigo Rato stepped down as head of the Bankia group as a government bailout loomed after Spanish Prime Minister Mariano Rajoy retreated from a pledge to avoid using public money to save lenders.

Rato, a former International Monetary Fund managing director, proposed Jose Ignacio Goirigolzarri, ex-president and chief operating officer of Banco Bilbao Vizcaya Argentaria SA (BBVA), as Bankia executive chairman, he said in a statement today in Madrid. The government plans to inject funds into the lender by buying contingent-capital securities, said an Economy Ministry official who declined to be named as the plan isn’t public.

But this is just the beginning.

Major banks all over Europe are going to need to be bailed out, and countries such as Portugal, Italy and Spain are going to need huge amounts of financial assistance.

So does Germany want to keep rescuing the rest of the eurozone over and over again during the coming years?  The cost of doing this would likely be astronomical.  The following is from a recent 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.

At some point, Germany may decide that enough is enough.

In fact, there have been persistent rumors that Germany has been very quietly preparing to leave the euro.

A while back, German Chancellor Angela Merkel’s Christian Democratic Union party approved a resolution that would allow a nation to leave the euro without leaving the European Union.

Many believed that this resolution was aimed at countries like Greece or Portugal, but the truth is that the resolution may have been setting the stage for an eventual 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.”

Most analysts will tell you that they think that it is inconceivable that Germany could leave the euro.

But stranger things have happened.

And Germany has made some very curious moves recently.

For example, Germany recently reinstated its Special Financial Market Stabilization Funds.  Those funds could be utilized 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.

So has Germany been quietly preparing a plan “B” just in case the rest of the eurozone rejected the path of austerity?

Most people have assumed that it will be a nation such as Greece or Portugal that will leave the euro first, but in the end it just might be Germany.

And the “smart money” is definitely betting on something big happening.

Right now some of the largest hedge funds in the world are betting against the eurozone as a recent Daily Finance article described….

Some of the world’s most prominent hedge fund managers are betting against the eurozone — and not just the peripheral countries everyone knows are in trouble. They’re taking positions against the core countries, economies that — until now — everyone has assumed were rock-solid.

Yes, the countdown to the break up of the euro has officially begun.

A great financial crisis is going to erupt in Europe, and it is going to shake the world to the core.

If you were frightened by what happened back in 2008, then you are going to be absolutely horrified by what is coming next.

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.

Greece Has Defaulted – Which Country In Europe Is Next?

Well, it is official.  The restructuring deal between Greece and private investors has been pushed through and the International Swaps and Derivatives Association has ruled that this is a credit event which will trigger credit-default swap contracts.  The ISDA is saying that there are approximately $3.2 billion in credit-default swap contracts on Greek debt outstanding, and most analysts expect that the global financial system will be able to absorb these losses.  But still, 3.2 billion dollars is nothing to scoff at, and some of these financial institutions that wrote a lot of these contracts on Greek debt are going to be hurting.  This deal with private investors may have “rescued” Greece for the moment, but the consequences of this deal are going to be felt for years to come.  For example, now that Greece has gotten a sweet “haircut” from private investors, politicians in Portugal, Italy, Spain and other European nations are going to wonder why they shouldn’t get some “debt forgiveness” too.  Also, private investors are almost certainly going to be less likely to want to loan money to European nations from now on.  If they will be required to take a massive haircuts at some point, then why in the world would they want to lend huge amounts of money to European governments at super low interest rates?  It simply does not make sense.  Now that Greece has defaulted, the whole game is going to change.  This is just the beginning.

The “restructuring deal” was approved by approximately 84 percent of all Greek bondholders, but the key to triggering the payouts on the credit-default swaps was the fact that Greece decided to activate the “collective action clauses” which had been retroactively inserted into these bonds.  These collective action clauses force most of the rest of the bondholders to go along with this restructuring deal.

A recent article by Ambrose Evans-Pritchard explained why so many people were upset about these “collective action clauses”….

The Greek parliament’s retroactive law last month to insert collective action clauses (CACs) into its bonds to coerce creditor hold-outs has added a fresh twist. These CAC’s are likely to be activated over coming days. Use of retroactive laws to change contracts is anathema in credit markets.

If a government can go in and retroactively change the terms of a bond just before it is ready to default, then why should private investors invest in them?

That is a very good question.

But for now the buck has been passed on to those that issued the credit-default swaps.  As mentioned above, the ISDA says that there are approximately $3.2 billion in Greek credit-default swaps that will need to be paid out.

However, that number assumes that a lot of hedges and offsetting swaps cancel each other out.  When you just look at the raw total of swaps outstanding, the number is much, much higher.  The following is from a recent article in The Huffington Post….

If you remove all hedges and offsetting swaps, there’s about $70 billion in default-insurance exposure to Greece out there, which is a little bit bigger pill for the banking system to swallow. Is it possible that some banks won’t be able to pay on their default policies? We’ll find out.

Yes, indeed.  We will find out very soon.

If some counterparties are unable to pay we could soon see some big problems cascade through the financial system.

But even with this new restructuring deal with private investors, Greece is still in really bad shape.

German Finance Minister Wolfgang Schaeuble told reporters recently that it “would be a big mistake to think we are out of the woods”.

Even with this new deal, Greek debt is still projected to be only reduced to 120 percent of GDP by the year 2020.  And that number relies on projections that are almost unbelievably optimistic.

In addition, there are still a whole host of very strict conditions that the Greek government must meet in order to continue getting bailout money.

Also, the upcoming Greek elections in just a few weeks could bring this entire process to an end in just a single day.

So the crisis in Greece is a long way from over.

The Greek economy has been in recession for five years in a row and it continues to shrink at a frightening pace.  Greek GDP was 7.5 percent smaller during the 4th quarter of 2011 than it was during the 4th quarter of 2010.

Unemployment in Greece also continues to get worse.

The average unemployment rate in Greece in 2010 was 12.5 percent.  During 2011, the average unemployment rate was 17.3 percent, and in December the unemployment rate in Greece was 21.0 percent.

Young people are getting hit the hardest.  The youth unemployment rate in Greece is up to an all-time record of 51.1 percent.

The suicide rate in Greece is also at an all-time record high.

Unfortunately, there is no light at the end of the tunnel for Greece at this point.  The latest round of austerity measures that are now being implemented will slow the economy down even more.

Sadly, several other countries in Europe are going down the exact same road that Greece has gone.

Investors all over the globe are wondering which one will be the “next Greece”.

Some believe that it will be Portugal.  The following is from a recent article in The Telegraph….

“The rule of law has been treated with contempt,” said Marc Ostwald from Monument Securities. “This will lead to litigation for the next ten years. It has become a massive impediment for long-term investors, and people will now be very wary about Portugal.”

Right now, the combination of all public and private debt in Portugal comes to a grand total of 360 percent of GDP.

In Greece, the combined total of all public and private debt is about 100 percentage points less than that.

So yes, Portugal is heading for a world of hurt.  The following is more about Portugal from the recent Telegraph article mentioned above….

Citigroup expects the economy to contract by 5.7pc this year, warning that bondholders may face a 50pc haircut by the end of the year. Portugal’s €78bn loan package from the EU-IMF Troika is already large enough to crowd out private creditors, reducing them to ever more junior status.

So why should anyone invest in Portuguese debt at this point?

Or Italian debt?

Or Spanish debt?

Or any European debt at all?

The truth is that the European financial system is a house of cards that could come crashing down at any time.

German economist Hans-Werner Sinn is even convinced that the European Central Bank itself could collapse.

There is a Der Spiegel article that everyone out there should read.  It is entitled “Euro-Zone Central Bank System Massively Imbalanced“. It is quite technical, but if this German economist is correct, the implications are staggering.

The following is from the first paragraph of the article….

More than a year ago, German economist Hans-Werner Sinn discovered a gigantic risk on the balance sheets of Germany’s central bank. Were the euro zone to collapse, Bundesbank losses could be half a trillion euros — more than one-and-a-half times the size of the country’s annual budget.

So no, the European debt crisis is not over.

It is just getting warmed up.

Get ready for a wild ride.

Ack! They Are Actually Going To Let Greece Default!

I wish that I had an “aha moment” to share with you today, but instead all I have is an “ack moment” to share.  As I was analyzing all of the info coming out of Europe in recent days, I came to the following realization: “Ack! They are actually going to let Greece default!”  The only question is whether it is going to be an orderly default or a disorderly default.  Of course the EU (led by Germany) could save Greece financially if it wanted to.  But Germany has decided against that course of action.  Many in the German government are sick and tired of pouring bailouts into Greece and then watching Greek politicians fail to fully implement the austerity measures that were agreed upon.  At this point a lot of German politicians are talking as if a Greek default is a foregone conclusion.   For example, Michael Fuchs, the deputy leader of Angela Merkel’s political party, recently made the following statement: “I don’t think that Greece, in its current condition, can be saved.”  But that is not entirely accurate.  Greece could be saved, but the Germans don’t want to make the deep financial sacrifices necessary to save Greece.  So instead they are going to let Greece default.

Many prominent voices in the financial world that have been watching all of this play out are now openly declaring the Greece is about to default.  Moritz Kraemer, the head of S&P’s European sovereign ratings unit, made the following statement on Bloomberg Television on Monday: “Greece will default very shortly. Whether there will be a solution at the end of the current rocky negotiations I cannot say.”

You might want to go back and read that again.

One of the top officials at one of the top credit rating agencies in the world publicly declared on television that “Greece will default very shortly.”

That should chill you to your bones.

If the EU allows Greece to default, that would be a signal to investors that the EU would allow Italy, Spain and Portugal to all default someday too.

Confidence in the bonds of those countries would disintegrate and bond yields would go through the roof.

Right now, confidence in government debt is one of the things holding up the fragile global financial system.  Governments must be able to borrow gigantic piles of very cheap money for the system to keep going, and once confidence is gone it is going to be incredibly difficult to rebuild it.

That is why a Greek default (whether orderly or disorderly) is so dangerous.  Investors all over the world would be wondering who is next.

At the end of last week, negotiations between the Greek government and private holders of Greek debt broke down.  Negotiations are scheduled to resume Wednesday, and there is a lot riding on them.

The Greek government desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Not that such a “haircut” will enable the Greek government to avoid a default.  It would just enable them to kick the can down the road a little farther.

But if Greece is able to get a 50% haircut from private investors, then why shouldn’t Italy, Spain, Portugal and Ireland all get one?

Once you start playing the haircut game, it is hard to stop it and it rapidly erodes confidence in the financial system.

This point was beautifully made in a recent article by John Mauldin….

So our problem country goes to its lenders and says, “We think you should share our pain. We are only going to pay you back 50% of what we owe you, and you must let us pay a 4% interest rate and pay you over a longer period. We think we can do that. Oh, and give us some more money in the meantime. And if you refuse, we won’t pay you anything and you will all have a banking crisis. Thanks for everything.”

The difficult is that if our problem country A gets to cut its debt by 50%, what about problem countries B, C, and D? Do they get the same deal? Why would voters in one country expect any less, if you agree to such terms for the first country?

But if Greece is able to negotiate an “orderly default” with private bondholders, that would be a lot better than a “disorderly default”.  A disorderly default would cause mass panic throughout the entire global financial system.

One key moment is coming up in March.  In March, 14 billion euros of Greek debt is scheduled to come due.  If Greece does not receive the next scheduled bailout payment, Greece would default at that time.

But the EU, the ECB and the IMF are not sure they want to give Greece any more money.  There are a whole host of austerity measures that the Greek government agreed to that they have not implemented.

Since the Greeks have not fully honored their side of the deal, the “troika” is considering cutting off financial aid.  The following comes from the New York Times….

Officials from the so-called troika of foreign lenders to Greece — the European Central Bank, European Union and International Monetary Fund — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March.

But the austerity measures that Greece has implemented so far have pushed the Greek economy into a full-blown depression.  Greece is experiencing a complete and total economic collapse at this point.  The following comes from the New York Times….

Greece’s dire economic condition can hardly be overstated. After two years of tax increases and wage cuts, Greek civil servants have seen their income shrink by 40 percent since 2010, and private-sector workers have suffered as well. More than $75 billion has left the country as people move their savings abroad. Some 68,000 businesses closed in 2010, and another 53,000 — out of 300,000 still active — are said to be close to bankruptcy, according to a report issued in the fall by the Greek Co-Federation of Chambers of Commerce.

“It’s an implosion — it’s an endless sequence of implosions from bad to worse, to worse, to worse,” said Yanis Varoufakis, an economics professor at the University of Athens and commentator on the Greek economy. “There’s nothing to stop the Greek economy losing 60 percent of its G.D.P., given the path it is at.”

But Greece is not the only one in Europe with major economic problems.  The unemployment rate for those under the age of 25 in the EU is an astounding 22.7%.  And as I have written about previously, there are a whole host of signs that Europe is on the verge of a major recession.

Greece is just the canary in the coal mine.  The truth is that the entire European financial system is in danger of collapsing.

Today, it was announced that S&P has downgraded the European Financial Stability Facility.  It is pretty sad when even the European bailout fund is getting downgraded.

Of course most of you know what happened on Friday by now.  Very shortly after U.S. financial markets closed, S&P downgraded the credit ratings of nine different European nations.

Only four eurozone nations (Germany, Luxembourg, Finland, and the Netherlands) still have a AAA credit rating from S&P.

But even more importantly, the nightmarish decline of the euro is showing no signs of stopping.

Right now, the EUR/USD is down to 1.2650.  It is hard to believe how fast the EUR/USD has fallen, but if a major financial crisis erupts in Europe it is probably going to go down a whole lot more.

So what happens next?

Well, if there is a Greek default all hell will break loose in Europe.

But even if Greece does not default, the coming recession in Europe is going to put an incredible amount of strain on the eurozone.

Many have been speculating that Greece or Italy could be the first to leave the euro, but actually it may be the strongest members that exit first.

The number of prominent voices inside Germany that are calling for Germany to leave the euro continues to increase.

In addition, public opinion in Germany is rapidly turning against the euro.  One recent poll found that only 47 percent of Germans were glad that Germany joined the euro, and only 36 percent of Germans want “a more federal Europe”.

As this crisis continues to unfold, there will probably be even more “ack moments”.  European leaders have mismanaged this crisis very badly from the start, and there is no reason to believe that they are suddenly going to become much wiser.

Once again, it is important to emphasize the role that confidence plays in our financial system.  The entire global financial system runs on credit.  Banks and investors lend out money because they have confidence that they will be paid back.  When you take that confidence away, the system does not work.

Let us hope that the folks over in Europe understand this, because right now we are steamrolling toward a credit crunch that could potentially make 2008 look tame by comparison.

***Epilogue***

Now another of the three major credit rating agencies, Fitch, is publicly saying that Greece will default….

“It is going to happen. Greece is insolvent so it will default,” Edward Parker, Managing Director for Fitch’s Sovereign and Supranational Group in Europe, the Middle East and Africa told Reuters on the sidelines of a conference in the Swedish capital. “So in that sense it shouldn’t be a surprise to anyone.”

Is The End Of The Euro In Sight?

The future of the euro is hanging by a thread at the moment.  The massive debt problems of nations such as Greece, Italy and Portugal are dragging down the rest of the Europe, and the political will in northern Europe to continue to bail out these debt-ridden countries is rapidly failing.  Could the end of the euro actually be in sight?  The euro was really a very interesting experiment.  Never before had we seen a situation where monetary union was tried without political and fiscal union along with it on such a large scale.  The euro worked fairly well for a while as long as everyone was paying their debts.  But now Greece has collapsed financially, and several other countries in the eurozone (including Italy) are on the way.  Right now the only thing holding back a complete financial disaster in Europe are the massive bailouts that the wealthier nations such as Germany have been financing.  But now a wave of anti-bailout sentiment is sweeping Germany and the future of any European bailouts is in doubt.  So what does that mean for the euro?  It appears that there are two choices.  Either we will see much deeper fiscal and political integration in Europe (which does not seem likely at this point), or we will see the end of the euro.

That status quo cannot last much longer.  The citizens of wealthy nations such as Germany are becoming very resentful that gigantic piles of their money are being poured into financial black holes such as Greece.  In fact, it is rapidly getting to the point where we could actually see rioting in the streets of German cities over all of this.

All of this instability is creating a tremendous amount of fear in world financial markets.  Nobody is sure if Greece is going to default or not.

Without more bailout money, Greece will most certainly default.  If anyone does not think that one domino cannot set off a massive chain reaction, just remember what happened back in 2008.

Bear Stearns and Lehman Brothers set off a chain reaction that was felt in every corner of the globe.  All of a sudden credit markets froze up because nobody was sure who had significant exposure to bad mortgages.

Today, the entire world financial system runs on debt, so when there is a credit crunch it can have absolutely devastating economic consequences.  The financial crisis of 2008 helped plunge the world into the greatest recession that the globe had seen since the 1930s.

In the old days, nations such as Greece that got into too much debt would just fire up the printing presses and cover over their problems with devalued currency.

Well, those nations that are using the euro simply cannot do that.  The government of Greece cannot simply zap a whole bunch of euros into existence in order to solve their problems.

Right now, major European banks are holding massive amounts of debt from various European governments on their balance sheets.  Most of these European banks are also very highly leveraged.  Even a moderate drop in the value of those debt holdings could wipe out a number of these banks.

The head of the IMF, Christine Lagarde, recently told Der Spiegel the following….

“There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken”

Unfortunately, what Lagarde said was right.  You see, the financial system in Europe is a “confidence game” and a “crisis of confidence” is all that it would take to bring it down because it does not have a solid foundation.

Just like the U.S. financial system, the financial system in Europe is a mountain of debt, leverage and risk.  If the winds start blowing the wrong direction, the entire thing could very easily come tumbling down.

Over the past couple of weeks, the outlook in Europe has become decidedly negative.  For example, one senior IMF economist is now actually projecting that Greece will experience a “hard default” at some point in the coming months….

I expect a hard default definitely before March, maybe this year

If Greece defaults, that would mean that the bailouts have failed.  That would also mean that several other nations in Europe would be in danger of defaulting soon as well.

The consequences of a wave of defaults in Europe would be absolutely staggering.  As mentioned above, major banks in Europe are deeply exposed to sovereign debt.

Regarding this issue, Deutsche Bank Chief Executive Josef Ackermann recently made the following stunning admission….

“It’s stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

Yes, you read that correctly.

There are quite a few major European banks that are in imminent danger of collapse.

Even though there hasn’t been any sovereign defaults yet, we are already starting to see massive financial devastation in Europe.  Just check out some of the financial carnage from Monday….

*The stock market in Germany was down more than 5%.

*The stock markets in France and Italy were down more than 4%.

*Royal Bank of Scotland was down more than 12%.

*Deutsche Bank was down more than 6%.

*Societe Generale was down more than 8%.

*Italy’s UniCredit was down more than 7%.

*Barclays was down more than 6%

*Credit Suisse was down more than 4%.

*The yield on 2 year Greek bonds was up to 50.38%.

*The yield on 1 year Greek bonds was up to 82.14%.  A year ago it was under 10%.

Just like in 2008, banking stocks are leading the decline.  We have another major financial crisis on our hands and there is no solution in sight.

As the financial world becomes increasingly unstable, investors are flocking to gold.  In case you have not noticed, gold is up over $1900 an ounce again.

So what comes next?

Well, on Wednesday Germany’s constitutional court is scheduled to announce its verdict on the legality of the latest bailout package for Greece.  The court is expected to rule that the bailout package is legal, but if they don’t that would be really bad news for the euro.

However, whatever the court rules, the reality is that the turbulent political atmosphere inside Germany is probably a much bigger issue as far as the future of the euro is concerned.

Right now, Germans are overwhelmingly opposed to more bailouts.  German Chancellor Angela Merkel’s political party just suffered a resounding defeat in local elections in Germany, and many within her own coalition are withdrawing support for any more bailouts.

This is going to make it very difficult to save the euro.  At this point, Germans have very little faith in the currency.

Just check out what Bob Chapman of the International Forecaster recently wrote about the current atmosphere in Germany….

76% of Germans say they have little or no faith in the euro, up from 71% two months ago. This is what we have been stating for ten years. Long-term 69% to 71% have never wanted the euro. The poll is not at all surprising. The Germany people are saying we have put up with the euro and euro zone for long enough – we want out now.

Germans are also very much against even deeper European economic integration.  For example, recent polling found that German voters are against the introduction of “Eurobonds” by about a 5 to 1 margin.

But Germans are not the only ones that are tired of the euro.  The countries of southern Europe have come to view the euro as a “straightjacket” that keeps them from having the financial flexibility that they need to deal with their debts.

Many people living in southern Europe consider the euro to be a financial instrument that allows nations such as Germany to have way too much power over them.  Just check out what Professor Giacomo Vaciago of Milan’s Catholic University recently had to say….

“It’s clear that the euro has virtually failed over the last ten years, even if you are not supposed to say that. We pretended to be Germans, but it was an illusion”

But if the bailouts fall apart and the euro collapses, we are going to see nations such as Greece fall into total financial collapse.

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!

Without help, there is no way that Greece is going to be able to avoid a default.

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

As mentioned earlier, this is a massive problem for the financial system of Europe, because nearly all of the major European banks 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.

Overall, the entire global banking system has a total of 2 trillion dollars of exposure to Greek, Irish, Portuguese, Spanish and Italian debt.

If European countries start defaulting, the dominoes are going to start falling and things will get really messy really quickly.

There are two things that could keep defaults from happening.

Number one, Germany and the other wealthy nations in the eurozone could just suck it up and decide to pour endless bailouts into nations such as Greece and Italy.

Number two, the nations of the eurozone could opt for much deeper economic and political integration.  That would mean a massive loss of sovereignty, but it would save the euro, at least for a little while.

Right now, the political will for either of those two choices is simply not there.  That does not mean that the political elite of Europe will not try to ram through some sort of a plan, but the reality is that Germans are already so upset about what has been going on that they are about ready to riot in the streets.

Yes, the end of the euro is a real possibility.

If the euro does collapse, it would likely cause a financial panic that would make 2008 look like a Sunday picnic.

So what do all of you think about the future of the euro?  Please feel free to leave a comment with your thoughts below….

 

Could The Financial Crisis Erupting In Ireland, Portugal, Greece And Spain Lead To The End Of The Euro And The Break Up Of The European Union?

The Irish banking system is melting down right in front of our eyes.  Ireland, Portugal, Greece and Spain are all drowning in debt.  It is becoming extremely expensive for all of those nations to issue new debt.  Officials all over Europe are begging Ireland to accept a bailout.  Portugal has already indicated that they will probably be next in line.  Most economists are now acknowledging that without a new round of bailouts the dominoes could start to fall and we could see a wave of debt defaults by European governments.  All of this is pushing the monetary union in Europe to its limits.  In fact, some of Europe’s top politicians are now publicly warning that this crisis may not only mean the end of the euro, but also the end of the European Union itself.

Yes, things really are that serious in Europe right now.  In order for the euro and the European Union to hold together, two things have got to happen.  Number one, Germany and the other European nations that are in good financial condition have got to agree to keep bailing out nations such as Ireland, Portugal and Greece that are complete economic basket cases.  Number two, the European nations receiving these bailouts have got to convince their citizens to comply with the very harsh austerity measures being imposed upon them by the EU and the IMF.

Those two things should not be taken for granted.  In Germany, many taxpayers are already sick and tired of pouring hundreds of billions of euros into a black hole.  The truth is that the Germans are not going to accept carrying weak sisters like Greece and Portugal on their backs indefinitely.

In addition, we have already seen the kinds of riots that have erupted in Greece over the austerity measures being implemented there.  If there is an overwhelming backlash against austerity in some parts of Europe will some nations actually attempt to leave the EU?

Right now the focus is on Ireland.  The Irish banking system is a basket case at the moment and the Irish government is drowning in red ink.  European Union officials are urging Ireland to request a bailout, but so far Irish Prime Minister Brian Cowen is not taking the bait.  The Irish government does not seem too keen on having even more austerity measures imposed upon it by the EU and the IMF.

According to Nadeem Walayat, the harsh austerity measures that Ireland has endured during this past year have only made Ireland’s financial problems even worse….

The people of Ireland having endured over a year of austerity on the promise that it was all necessary to suffer pain today by cutting public spending so as to reduce the annual budget deficit to sustainable level for economic gains tomorrow. Instead the exact opposite is taking place as the Irish economy contracts due to economic austerity whilst its bankrupt banks are sending the countries debt and liabilities soaring, thus resulting in a far worse budgetary position than where Ireland was before the austerity measures were implemented as the bond markets are waking up to evitable debt default which is sending interest rates demanded to hold Irish debt soaring to new credit crisis highs.

But the big Irish banks are bleeding cash fast.  For example, the Bank of Ireland recently reported “a 10 billion euro outflow of deposits from early August until the end of September.”  Irish banks and the Irish government need help whether they are willing to admit it or not.

But Ireland is not the only one in trouble.  Portugal became the latest European nation to push the panic button when Portuguese Finance Minister Fernando Teixeira dos Santos announced that his country was in such bad financial shape that it might have to seek a bailout package.

Things are so bleak in Portugal right now that Foreign Affairs Minister Luis Amado says that his nation “faces a scenario of exit from the euro zone” if a solution is not found for this financial mess.

On top of all this, word is coming out that Greece is in even worse financial condition than initially believed.  The statistics agency for the EU, Eurostat, revealed on Tuesday that Greece’s deficit for 2009 was actually 15.4% of GDP rather than 13.6% of GDP as originally thought.

The Greek national debt is now well over 120 percent of GDP.  It seems inevitable at this point that Greece will need more bailouts if they are to remain part of the EU.

Spain is also starting to feel the heat.  Spain’s short-term debt financing costs jumped sharply on Tuesday, and officials in Spain are begging the Irish government to accept the bailout they are being offered so that the “contagion” does not spread.

But could a few mid-size countries in Europe really cause the next great global financial crisis?

Yes.

In the UK, veteran Conservative MP Peter Tapsell is warning that a total collapse in Ireland “could pose as great a threat to the world economy as did Lehman Brothers, AIG and Goldman Sachs in September 2008”.

Already we are seeing world financial markets getting rattled by all this news.

Fears regarding what is happening in Ireland, Greece, Spain and Portugal helped push the Dow Jones industrial average down nearly 200 points on Tuesday.

But the real story is that this financial crisis in Europe could potentially cause the break up of the euro and of the European Union.

The truth is that the euro and the European Union are inseparably linked at this point.  In fact, EU President Herman Van Rompuy is warning that if some of the weaker countries in Europe are forced to abandon the euro it will likely cause the total destruction of the European Union….

“We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union.”

German Chancellor Angela Merkel is also warning that a failure of the euro could bring down the entire European Union….

“If the euro fails, then Europe fails.”

But officials in Europe are not going to let the dream of a united Europe slip away easily.  Right now they are working really hard to keep Europe together, and that means some “tough love” has to be imposed on the “weak sisters”.  As these weaker European economies collapse, they are being forced to accept harsh EU mandates in exchange for bailouts.  As Ambrose Evans Pritchard recently pointed out, “forced austerity” is quite similar to serfdom….

Greece is now under an EU protectorate, or the “Memorandum” as they call it. This has prompted pin-prick terrorist attacks against anybody associated with EU rule. Ireland and Portugal are further behind on this road to serfdom, but they are already facing policy dictates from Brussels, but will soon be under formal protectorates as well in any case. Spain has more or less been forced to cut public wages by 5pc to comply with EU demands made in May. All are having to knuckle down to Europe’s agenda of austerity, without the offsetting relief of devaluation and looser monetary policy.

In the end, Europe is going to move in one of two directions.  Either this financial crisis will finally be the thing that breaks up the euro and the European Union, or it will result in a Europe that is ruled even more strongly by EU bureaucrats.

As this crisis unfolds over the next couple of years, the EU is going to try to grab more power and more control.  They are going to ask national governments to give up substantial amounts of power and sovereignty in exchange for bailouts.  So far it is working.

But at some point will one nation say that enough is enough?

Perhaps that one nation could be Ireland.  The citizens of Ireland actually voted “no” on the EU Constitution, but then the EU forced them to vote a second time so that they could “get it right”.

Wouldn’t it be ironic if it is Ireland that ends up lighting the fuse that breaks up the euro and the European Union?  The Irish are a fiercely independent people, and they have a history of resisting tyranny.

In any event, this is going to be an extremely interesting winter across the EU.  If things go badly, the entire global financial system could be plunged into mayhem.  Let us hope that does not happen.

The Economic Collapse