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 about3 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.
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