Running Out Of Money

Are we on the verge of a massive financial collapse in Europe?  Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money.  Without more bailout funds it is absolutely certain that Greece will soon default on their debts.  But German officials are threatening to hold up more bailout payments until the Greeks “do what they agreed to do”.  The attitude in Germany is that the Greeks must now pay the price for going into so much debt.  Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks.  As the economy shrinks, so do tax payments and the budget deficit gets even larger.  Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets.  If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well.  Needless to say, all hell would break loose at that point.

So why is Greece so important?

Well, there are two reasons why Greece is so important.

Number one, major banks all over Europe are heavily invested in Greek debt.  Since many of those banks are also very highly leveraged, if they are forced to take huge losses on Greek debt it could wipe many of them out.

Secondly, if Greece defaults, it tells the markets that Portugal, Italy and Spain would likely not be rescued either.  It would suddenly become much, much more expensive for those countries to borrow money, which would make their already huge debt problems far worse.

If Italy or Spain were to go down, it would wipe out major banks all over the globe.

Recently, Paul Krugman of the New York Times summarized the scale of the problem the world financial system is now facing….

Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.

Most Americans don’t spend a lot of time thinking about the financial condition of Europe.

But they should.

Right now, the U.S. economy is really struggling to stay out of another recession.  If Europe has a financial meltdown, there is no way that the United States is going to be able to avoid another huge economic downturn.

If you think that things are bad now, just wait.  After the next major financial crisis what we are going through right now is going to look like a Sunday picnic.

The following are 20 signs of imminent financial collapse in Europe….

#1 The yield on 2 year Greek bonds is now over 60 percent.  The yield on 1 year Greek bonds is now over 110 percent.  Basically, world financial markets now fully expect that Greece will default.

#2 European bank stocks are getting absolutely killed once again today.  We have seen this happen time after time in the last few weeks.  What we are now witnessing is a clear trend.  Just like back in 2008, major banking stocks are leading the way down the financial toilet.

#3 The German government is now making preparations to bail out major German banks when Greece defaults.  Reportedly, the German government is telling banks and financial institutions to be prepared for a 50 percent “haircut” on Greek debt obligations.

#4 With thousands upon thousands of angry citizens protesting in the streets, the Greek government seems hesitant to fully implement the austerity measures that are being required of them.  But if Greece does not do what they are being told to do, Germany may withhold further aid.  German Finance Minister Wolfgang Schaeuble says that Greece is now “on a knife’s edge“.

#5 Germany is increasingly taking a hard line with Greece, and the Greeks are feeling very pushed around by the Germans at this point.  Ambrose Evans-Pritchard made this point very eloquently in a recent article for the Telegraph….

Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been “Unconditional Capitulation”, and “Terrorization of Greeks”, and even “Fourth Reich”.

#6 Everyone knows that Greece simply cannot last much longer without continued bailouts.  John Mauldin explained why this is so in a recent article….

It is elementary school arithmetic. The Greek debt-to-GDP is currently at 140%. It will be close to 180% by year’s end (assuming someone gives them the money). The deficit is north of 15%. They simply cannot afford to make the interest payments. True market (not Eurozone-subsidized) interest rates on Greek short-term debt are close to 100%, as I read the press. Their long-term debt simply cannot be refinanced without Eurozone bailouts.

#7 The austerity measures that have already been implemented are causing the Greek economy to shrink rapidly.  Greek Finance Minister Evangelos Venizelos has announced that the Greek government is now projecting that the economy will shrink by 5.3% in 2011.

#8 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.

#9 Major banks in the U.S., in Japan and in Europe have a tremendous amount of exposure to Greek debt.  If they are forced to take major losses on Greek debt, quite a few major banks that are very highly leveraged could suddenly be in danger of being wiped out.

#10 If Greece goes down, Portugal could very well be next.  Ambrose Evans-Pritchard of the Telegraph explains it this way….

Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.

#11 The yield on 2 year Portuguese bonds is now over 15 percent.  A year ago the yield on those bonds was about 4 percent.

#12 Portugal, Ireland and Italy now also have debt to GDP ratios that are well above 100%.

#13 Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

#14 Major banks in the “healthy” areas of Europe could soon see their credit ratings downgraded.  For example, there are persistent rumors that Moody’s is about to downgrade the credit ratings of several major French banks.

#15 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.

#16 The ECB is not going to be able to buy up debt from troubled eurozone members indefinitely.  The European Central Bank is already holding somewhere in the neighborhood of 444 billion euros of debt from the governments of Greece, Italy, Portugal, Ireland and Spain.  On Friday, Jurgen Stark of Germany resigned from the European Central Bank in protest over these reckless bond purchases.

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

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

#18 The recent decision issued by the German Constitutional Court seems to have ruled out the establishment of any “permanent” bailout mechanism for the eurozone.  Just consider the following language from the decision….

“No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences”

#19 Economist Nouriel Roubini is warning that without “massive stimulus” by the governments of the western world we are going to see a major financial collapse and we will find ourselves plunging into a depression….

“In the short term, we need to do massive stimulus; otherwise, there’s going to be another Great Depression”

#20 German Economy Minister Philipp Roesler is warning that “an orderly default” for Greece is not “off the table“….

”To stabilize the euro, we must not take anything off the table in the short run. That includes, as a worst-case scenario, an orderly default for Greece if the necessary instruments for it are available.”

Right now, Greece is caught in a death spiral.  The more austerity measures they implement, the more their economy slows down.  The more their economy slows down, the more their tax revenues go down.  The more their tax revenues go down, the worse their debt problems become.

Greece could end up leaving the euro, but that would make their economic problems far, far worse and it would be very damaging to the rest of the eurozone as well.

Quite a few politicians in Europe are touting a “United States of Europe” as the ultimate solution to these problems, but right now the citizens of the eurozone are overwhelming against deeper economic integration.

Plus, giving the EU even more power would mean an even greater loss of national sovereignty for the people of Europe.

That would not be a good thing.

So what we are stuck with right now is the status quo.  But the current state of affairs cannot last much longer.  Germany is getting sick and tired of giving out bailouts and nations such as Greece are getting sick and tired of the austerity measures that are being forced upon them.

At some point, something is going to snap.  When that happens, world financial markets are going to respond with a mixture of panic and fear.  Credit markets will freeze up because nobody will be able to tell who is stable and who is about to collapse.  Dominoes will start to fall and quite a few major financial institutions will be wiped out.  Governments around the world will have to figure out who they want to bail out and who they don’t want to bail out.

It will be a giant mess.

For decades, the governments of the western world have been warned that they were getting into way too much debt.

For decades, the major banks and the big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks.

Well, nobody listened.

So now we get to watch a global financial nightmare play out in slow motion.

Grab some popcorn and get ready.  It is going to be quite a show.