20 Signs Of Imminent Financial Collapse In Europe...>>>...So why is Greece 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....???>>>...And all indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively. I’ve complained a lot about the “fiscalization” of economic discourse here in America, the way in which a premature focus on budget deficits turned Washington’s attention away from the ongoing jobs disaster. But we’re not unique in that respect, and in fact the Europeans have been much, much worse.......

20 Signs Of Imminent Financial Collapse In Europe

Posted by Wealth Wire - Tuesday, September 13th, 2011
http://www.wealthwire.com/news/global/1841

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 euroscombined.

#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.

*Post courtesy of The Economic Collapse Blog.

OP-ED COLUMNIST

An Impeccable Disaster

By PAUL KRUGMAN

Published: September 11, 2011

http://www.nytimes.com/2011/09/12/opinion/an-impeccable-disaster.html

On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. — Europe’s equivalent to Ben Bernanke — lost his sang-froid. In response to a question about whether the E.C.B. is becoming a “bad bank” thanks to its purchases of troubled nations’ debt, Mr. Trichet, his voice rising, insisted that his institution has performed “impeccably, impeccably!” as a guardian of price stability.

Fred R. Conrad/The New York Times

Paul Krugman

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Blog: The Conscience of a Liberal

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• Times Topic: European Sovereign Debt Crisis (2009- )

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Fred R. Conrad/The New York Times

Paul Krugman

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Blog: The Conscience of a Liberal

·                                  

Indeed it has. And that’s why the euro is now at risk of collapse.

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.

And all indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively.

I’ve complained a lot about the “fiscalization” of economic discourse here in America, the way in which a premature focus on budget deficits turned Washington’s attention away from the ongoing jobs disaster. But we’re not unique in that respect, and in fact the Europeans have been much, much worse.

Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.

Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. And while it was hit hard by the collapse of its housing boom, it’s still a relatively low-debt country, and it’s hard to make the case that the underlying fiscal condition of Spain’s government is worse than that of, say, Britain’s government.

So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.

Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.

Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.

Which brings us back to the impeccable E.C.B.

What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.

Adding to the problem is the E.C.B.’s obsession with maintaining its “impeccable” record on price stability: at a time when Europe desperately needs a strong recovery, and modest inflation would actually be helpful, the bank has instead been tightening money, trying to head off inflation risks that exist only in its imagination.

And now it’s all coming to a head. We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer.

So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.

A version of this op-ed appeared in print on September 12, 2011, on page A27 of the New York edition with the headline: An Impeccable Disaster.

6 of 400 Readers' Comments

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BV

Boston, MA

September 12th, 2011

7:12 am

To take just one of your examples, the government of Spain DID, in fact, borrow too much. They have had much the same problem with respect to poor real estate borrowings and loans as we have had. The same overbuilding, especially in areas like the Costa del Sol. And, even worse, chronic, long-term under- or unemployment issues face Spain now and through the immediate future. Spain is financially totally overextended, and to a great extent that IS because they (and by that I mean both the government and private institutions including banks and borrowers), gambled the house on unworthy, insecure loans. And they will, mark my words, lose.

There is a widespread problem of fiscal irresponsibility in Europe, and to deny it is to deny reality. When Greece defaults, which in my view is the most likely scenario, there truly is likely to be a domino effect. I do not see the ECB as capable of buying back enough debt to stanch the flow. It's just not big enough. No institution is.

I live half in Germany, half in the States. I can only sympathize with my German friends who are outraged at the way that this crisis has precipitated Europe to the brink. And now the Germans -- who kept their financial house in order by not borrowing and borrowing to support massively expensive public programs, without a thought to how they would pay it off -- are going to have to assume the debt of these reprobate countries, all in the name of EU harmony. I do not blame them one bit for their frustration. Moral hazard doesn't even begin to describe the extent of the story. The real description is more like fiscal irresponsibility on a breathtaking scale.

Let's not be an apologist for poor decision-making. Whether it happens in other countries or ours, let us call it out for what it is. And then see it as an object lesson and learn from it as best we can.

The worst is, in my view, yet to come.

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5.

John Jazwiec

Chicago and Old Naples

September 12th, 2011

7:21 am

The ECB was an overambitious undertaking, for independent countries, just 65 years after finally establishing national boundaries and peaceful existence. It's demise is not a matter of if, but when. And the U.S,. has had a hand in it.

While little noticed and little reported on, the 2008 U.S. banking crisis, resulted in a shortage of dollars for international trade. Since international trade is done on currency pairs, and most are in dollar denominated pairs, the federal reserve, needed an aggressive monetary expansion policy, not just for U.S. bank liquidity, but for international trade liquidity.

With a need for financing debt, the fall of the Euro, has been a godsend for the treasury market. Even with the "deficit crisis" mishandling, and little systemic austerity even being promised, the demand for 10-Year Treasury bonds, has lowered yields by over a 100 basis points or 33% since July. One can't help but notice, the correlation of the Euro crisis to historical low yields, as opposed to no correlation between U.S.'s poor fundamentals.

When the only place to park wealth, is in 10-Year Treasures, paying interest less than inflation, the world is no longer focused on the returns of capital, as much as it is focused on the certainty capital will be returned.

The classical liquidity trap. 

Again little noticed, is that productivity, is the engine behind economic growth and one of the main drivers of productivity was world trade. But a funny thing has happened since 2000. Sovereign country international trade has been stuck at 30% of eleven years. 

All of this suggests, that the flat world is going to get rounder and soon. Not only is the U.S. looking inward, but so is Europe and the rest of the world. The Euro is not sustainable. The blowback will be historic. Instead of the increases in productivity by more world trade, protectionism will lower productivity. 

Lower productivity, will result in economic contraction; and the breakdown of national order.

Roger Strassburg

Oberpframmern, Germany

September 12th, 2011

7:21 am

The problem in Europe is Germany and the inability of German leaders and economists to grasp the fact that national economies don't work like individual family budgets. They don't seem to understand basic principles of accounting, such as the fact that someone has to spend money in order for someone else to earn it. They don't get the fact that competitiveness is relative, that if one country becomes more competitive, then some other country has to have become less competitive. They can't seem to get their minds around the obvious fact that not everybody can have trade surpluses, since one country's surpluses are somebody else's deficits.

Instead, they think that everyone can run surpluses, everybody can sell more than they buy, everybody can loan money without anyone else borrowing it. They think that all countries should produce more and buy less, without bothering to think about the obvious question: If everybody buys less, who's going to buy what we produce?

But German leaders and German economists don't see a need to answer that question, since the textbooks say that there will always be demand for whatever gets produced - even if everybody is being morally correct and reduces their spending. And anyone who doubts that is just being insubordinate. That's how it works here.

So don't expect things to get any better. Germany will insist on punishing those who were foolish enough to buy up Germany's trade surpluses by borrowing money from German banks. Germany will continue to insist that everyone follow the German example and run surpluses. Everybody should be above average.

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Talbot

New York

September 12th, 2011

7:36 am