“The Fed either throws money at the situation or the system crashes.”
International Forecaster March 2012 (#1) – Gold, Silver, Economy + More
By: Bob Chapman
Sunday, 4 March 2012
There are those who believe that Greece’s problems are but a precursor to what most of the world will eventually experience. We believe such predictions are correct and cannot be avoided – perhaps the last four years were just a warm up for the future. Greece, like many other countries, keeps borrowing and their revenues cannot keep up with interest service never mind principal repayments. Those in the euro zone do not have the luxury of being able to increase money and credit such as the Fed, BoJ, BoE and the ECB. They, those in the euro zone are trapped. That means Greece is trapped and their only solution is defaulting and leaving the euro. Bondholders and lenders do not get paid, but that also means the derivative writers will have to pay off on the derivatives they sold. Such an event could cause chaos. The Fed either throws money at the situation or the system crashes.
The latest move by S&P was to cut Greece’s credit rating to selective default, because they have a distressed debt restructuring. If not enough of the private bondholders sign up for the swap it would mean a default. At the same time the ECB suspended Greek debt as collateral in its funding operation.
Germany is still reluctant about increasing the capacity of the EFSF and the ESM. We will know in March whether that changes.
There are some who are very concerned about bank dependency via the LTRO project of the ECB. They see banks becoming dependent indefinitely on such funds and that is an excellent probability. They haven’t fixed the decaying system. They have only extended again and they’ll keep doing it indefinitely until hyperinflation doesn’t allow them to do it anymore. Just to show you the plight of European banks, they still won’t lend to each other because they do not trust each other. As well, banks are de-leveraging and the expected lending is coming slowly. Borrowing costs have fallen for the likes of Italy and Spain by 1.50%, but that could well be only temporary. If banks don’t lend to businesses chances of even a slight recovery won’t occur and the downward spiral will continue.
Germany’s Constitutional Court ruled this week that a special Parliamentary committee established to approve emergency measures by the euro zone bailout fund was in large part unconstitutional. They can only deal with secondary bond markets purchased by the fund.
Bearing out lack of lending loans to businesses or other financial corporations rose only 0.7% in January y-o-y and fell from 1.1% m-o-m.
We can say with full justification that the EU situation is complex and confusing.
Germany so far says no to additional EFSF and ESM funding, yet the other 16 members are proceeding, as of yesterday, just as if Germany had said yes, which is not as yet the case. That would be loans for bailout of about an additional $670 billion. At the beginning both funds would run parallel using $1 trillion. Presently Germany is saying no and the other 16 even want to expand the bailout fund.
The lender of unlimited amounts of money and credit super Mario Draghi has for the time being stopped the bond rout. A battle won in an un-winnable war to save the world financial system.
As we mentioned with all this going on bond yields on the short end have fallen 2.50% and on the long end 1.5%, yet confidence has really not been restored. As proof of that traders are paying 9 times more to insure European government bonds than they are for Treasuries. Bond buyers’ view of the present and future is totally more pessimistic than stock buyers.
The second tranche of ECB lending, which drew 523 banks in December, drew some 800 this time around. The ECB will lend an additional $712 billion to add to the $655 billion from the first time around. That totals $1.367 trillion. Our estimate was between $1.2 and $1.6 trillion, which puts us right in the middle. Smaller banks were involved, thus the possibility of more personal and business loans is a probability.
These are Europe’s insolvent banks lining up for three-year loans at 1% interest backed by toxic waste. These terms, of course, are too good to refuse whether you need the funds or not.
If this game wasn’t big enough the 17-euro zone banks will also accept credit claims increasing the collateral pool by another 200 billion euros ($266 billion). As a result of these changes the ECB’s balance sheet has ballooned to a record 274 trillion euros or $3.65 trillion closely matching that of the Fed balance sheet.
In writing about devaluations since 1998 as Argentina phased in we came to the conclusion that sometimes devaluations and partial devaluations can ultimately be beneficial.
The CDS, credit default writers are sure real beauties. The International Swaps and Derivative Association say default insurance on Greek debt won’t be paid out. The ECB’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit default swaps. These characters do not want to pay out to anyone even in subordination. This announcement came on Thursday just prior to the bond negotiations of hedge funds and others. We reflect this as a loss of confidence and buyers had best be sure what they are insuring is going to fail completely.
What people do not understand is there are many inconsistencies in Europe, especially from an inflationary viewpoint. These are the imbalances we do not hear about from country to country. As an example, there is little inflation in Germany, but in France it is a problem. You can eat in a German restaurant for 25% less than you can in France and get more food and it is of superior quality. That means Germany has to inflate or France has to deflate. Italy and Spain and the remainder of the euro zone have the same general problems. That debt crisis has a long way to go in Europe and inflation alone will continue to deteriorate all of their economies.
It is interesting that in the research that we do we seldom come across socialism as one of the prime reasons Europe has the problems it has. Greece is a perfect example of how socialism undermines countries’ economies by borrowing to maintain a standard of living, which the recipients do not deserve. This is how socialism plunges countries into unpayable debt and half or more of the workers end up on government payments. These policies in the UK, EU and US retard investment and creativity, which expedites the fall to the bottom. This in part is where Europe finds itself today, and until that changes nothing is going to change for the better.
We get the same duplicitous lying from European bureaucrats, politicians and bankers, that we receive from the Fed and the US government. Just review the video under US links in this issue. Ron Paul tells Mr. Bernanke he is a liar.
In France the polls tell us that extreme socialist Francois Hollande has a growing lead going into April’s primaries. In spite of the dreadful Sarkozy years, Hollande is going to be worse. Even though the financial sector and governments have been bailed out by the Fed, French and euro decisions will be dictated by politics. Hollande as a winner will display his Communist tendencies by adding a couple of hundred thousand jobs. He wants to increase spending by $30 billion by increasing taxes. He wants the EU fiscal agreements changed, wants out of the euro and perhaps the EU as well. This, of course, will give Germany the opening to leave the euro and the EU as well. Hollande will definitely bring Europe to a halt and he will try to change direction radically. He will be assisted by Marine LePen on the issues of the end the euro and the euro zone.
The EU commission has not as yet been successful in implementing a European Commission Task Force to be sure Greece implements the austerity and reform measures mandated in the bailout.
Healthcare cuts for Greece have been approved, which means many Greeks will die needlessly.
Ireland is banging at the EU’s front door, but no one is listening. They want the EU to restructure a promissory note for $41 billion. This debt is the result of the bailout of the Anglo Irish Bank owned by Europe’s Royal Illuminists.
Over at the ECB, chairman Mario Draghi is throwing money at everything and lying about it. The risks taken on by the ECB are outrageous and growing just like at the Fed. What disturbs fellow Europeans is he lies to their faces about it when they all know what he is up too. He is just taking orders from London and Wall Street. Politically little changes in Europe, their masters call all the shots and everyone reacts and plays their part.
Goldman Sachs Group Inc., the fifth- biggest U.S. bank by assets, disclosed for the first time the gross value of credit-default swaps the firm purchased and sold relating to Greece, Ireland, Italy, Portugal and Spain.
At the end of 2011, Goldman Sachs had sold $142.4 billion of single-name swaps, contracts that pay out in the event of a default, on the five countries, the firm said yesterday in an annual filing with the U.S. Securities and Exchange Commission. The company also had purchased contracts with a gross notional value of $147.3 billion on the nations’ debt, the filing shows.
Regulators and investors have encouraged Wall Street banks to improve disclosure of potential losses from the five countries at the center of Europe’s debt crisis. New York-based Goldman Sachs previously had reported only its so-called funded exposure to the debt of those nations, excluding commitments or contingent payments such as credit-default swaps.
Goldman Sachs also said that “legally enforceable netting agreements” would reduce the amount of credit-default swaps purchased on the five countries to $21.1 billion and the amount sold to $16.2 billion. Those so-called notional amounts exclude collateral as well as derivatives from outside those nations that could mitigate the risk, according to the filing.
The bank’s total credit exposure to the five countries was $2.93 billion as of Dec. 31, according to the filing. The firm’s “market exposure,” which includes positions in bonds, stocks, credit derivatives and other securities, was $580 million.