The World Sovereign Financial Mess

I found a blog called Economic Collapse today when I was browsing through the Stansberry Research site, The Daily Crux. The blog article I read is called “20 Signs Of Imminent Financial Collapse In Europe.” The authors ask readers to send it to Facebook and other social networking sites so that people will understand what is going on in the Eurozone and how it will, or could, affect the rest of the world.

You can find the article yourselves, but I want to summarize it, because for some time now I’ve been telling you, dear readers, that the Eurozone and the European Union are in major trouble and that neither will be able to survive in its present form. I’m not using quotation marks below, but what you will read comes from the blog, with my editing and personal observations.

Are we on the verge of a massive financial collapse in Europe?  Rumors of an imminent default by Greece are rampant and Greek government officials openly admit that they are running out of money.  Without more bailout funds it is certain that Greece will soon default on its debts.  But German officials are threatening to hold up more bailout payments until the Greeks "do what they agreed to do", the German attitude being that the Greeks must now pay the price for going into so much debt. 

Greek government officials 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, which is the only country in the Eurozone big enough to save Greece, allows it to default, it will 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. 

Why is Greece so important? First, 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. Second, if Greece defaults, it tells the financial markets that Portugal, Italy and Spain would likely not be rescued either, making it much more expensive for those countries to borrow money, which would make their already huge debt problems far worse. And, if Italy or Spain were to go down, it would wipe out major banks all over the globe, including some in America.

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 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.

The following are signs of imminent financial collapse in Europe:

#1 The interest payment cost for Greece to borrow money for 2 years by selling bonds is now over 60%.  One-year Greek bond costs are at 110%.  Basically, world financial markets now fully expect that Greece will default.

#2 European bank stocks are getting killed once again this week.  This has happened time after time in the last few weeks. In what has become a clear trend, as in 2008, major banking stocks are leading the way down.

#3 The German government is now making preparations to bail out major German banks when Greece defaults, reportedly telling them to be prepared for a50% "haircut" on Greek debt obligations.

#4 With thousands of angry citizens protesting daily, the Greek government is hesitant to fully implement the austerity measures that are being required of them.  The austerity measures already implemented are causing the Greek economy to shrink rapidly, with the Greek Finance Minister now projecting that the economy will shrinkby 5.3% in 2011. But if Greece does not do what they are being told to do, Germany may withhold further aid. 

#5 Greece cannot last much longer than the end of October, according to Greek Financial Ministry estimates, without continued bailouts.  The Greek debt-to-GDP ratio is now at 140% and will be at 180% by year’s end, that is, if Greece can find anyone willing to lend it more money. 

#6 If Greece goes down, Portugal could very well be next. The yield on 2- year Portuguese bonds is nowover 15%. A year ago the yield on those bonds was about 4 percent.

#7 Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about3 trillion euros combined, more than the Eurozone or Germany could possibly repay, even if they wanted to.

#8 Most major European banks areleveraged 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.

#9 The ECB is not going to be able to buy up debt from troubled Eurozone members indefinitely.  The European Central Bank is already holding approximately 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 bond purchases which many experts consider illegal under European Union and Eurozone governing documents.

So, 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 drop.  The more their tax revenues go down, the worse their debt problems become.

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.

So what we are stuck with right now is the status quo.  But the current state of affairs cannot last much longer. Germany is tired of giving out bailouts and nations such as Greece are getting tired of the austerity measures that are being forced upon them. Default and leaving the Eurozone are real possibilities but they carry with them severe financial ramifications for the rest of the Eurozone and for the EU’s continued existence.

At some point, something is going to snap, perhaps from a totally unrelated disaster that spooks the world’s financial institutions.  When that happens, world financial markets could respond with a mixture of panic and fear, with credit markets freezing up because nobody will be able to tell who is stable and who is about to collapse. Governments around the world will have to figure out who they want to bail out and who they don't want to bail out. Remember Lehman Brothers vs Bear Stearns?

For decades, the governments of the western world have been warned that they were getting into far too much debt and major banks and big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks.

Nobody listened. So now we may have to watch a global financial nightmare play out.

Dear readers in America and Europe, please read these comments carefully. There is not much individuals can do to influence events, but you can, for example, demand that your elected governments begin to rein in debt. You can vote for candidates who call for more conservative fiscal and budgetary policies, but without spooking economic development. You can get your own financial houses in order. There is a lot of advice about financial planning in today’s world on the Internet. This is not a “scare” message, but rather one meant to help you better understand and deal with what is now happening in the financial world, both private and sovereign, because we are a long way from solving these massive problems.