Eurozone defaults edge closer as US stocks fall for a third week
Posted on 22 May 2011 with 15 comments from readers
The cracks are appearing again in the global financial system as the sticking plasters applied over the past few years begin to fail. The patient risks a serious relapse with inevitable defaults in Greece, Portugal and Ireland threatening a new systemic crisis.
For once Wall Street is paying attention to something happening outside the borders of the USA, remembering that financial contagion can be very nasty and even fatal to some. Can anything be done about the debt crisis in the eurozone countries?
Madame Lagarde
It is not clear that the political will exists to solve this, only to delay the matter as long as possible and even for that there is no consensus. Perhaps the arrival of Christine Lagarde as the head of the IMF will help but it is not evident that one woman will make any difference. There is another more powerful in the shape of Angela Merkel in her way.
Those persons or nations massively indebt reach a point where they can only go bankrupt to cleanse the system, as the debt can only grow bigger as interest goes unpaid. That is why the majority of analysts think defaults are now inevitable for Greece, Portugal and Ireland.
By extention that will lead to a banking crisis in the lender states, principally Germany, France and the UK. Then again the bigger nations with the largest debts will also face additional pressure from the inevitably higher interest rates that will follow, namely the UK, Italy and especially Spain.
Small wonder then that Wall Street is finally paying attention to the crisis developing on the otherside of the Atlantic. That it is unfolding slowly only makes it more impossible to undo and greater in its impact.
1929 parallel
Students of the 1929 Wall Street Crash can see a parallel with the 1931 collapse of the Credit Anstaldt Bank in Austria which triggered the thousands of US bank failures that brought about the Great Depression. Then as now a crisis in Europe dealt a blow to the heart of the US financial system. How would it happen this time?
The transmission mechanism surely has to be the global bond markets. They will come down as interest rates go up in Europe. That will force up interest rates in the US where low rates are all that has been driving a weak economic recovery, and that would bring down equity and real estate markets.
US equity holders selling out now after a very long rally are therefore behaving logically from the standpoint of wealth preservation, but not if they are buying bonds. Besides even the optimists can see that there is little upside and much potential downside in the present situation for US stocks.
Cash, precious metals and short positions seem the only place to hide from this gathering storm.
15 Comments posted by readers:
I highly rec the lecture by William Black; this covers some of the background that our leaders believed themselves immune; http://www.capitalismwithoutfailure.com/2011/05/you-cannot-have-capitalism-without.html?source=patrick.net#navbar-iframe
I agree with you that a “storm” is coming. But I’m curious on your thoughts on how this will kick off.
Greece seems to be the obvious candidate for a formal default, but it appears European politicians will do anything to prevent the “Greece restructures” headline since they know well the risks you describe.
Is it possible for Greece to default, while it is being denied publicly? At what point is the line crossed?
Ed Note: Have a look at this timeline from a top economist, this seems frighteningly plausible: http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/
Very well written and clear, Ed. There is a point, as you say, where they can only go bankrupt to cleanse the system. “Cleanse” is a well chosen word, methinks!
The UK business secretary, Vince Cable, has opined that the British public just don’t know how bad the economy is nor do they realise the pain that is to come. This fits with an economic and political “storm”.
Will this storm go on into the hurricane of war as part of cleansing the system and starting afresh? The 1931 Credit Anstaldt crash brought about the Depression in Germany as well as in the US, but Germany “cleansed” itself by invoking a racial politics, which then led to the hurricane of war. The Depression in Germany was really, really bad and full of human suffering so that to belong to the German race gave those, who had nothing else, a self-esteem to help them through.
Ed Note: Have a look at this piece from the DT on what happens when Greece defaults: http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/
On April 29th the IMF predicted that in five years the Chinese economy will become the world’s fastest growing economy meaning will over take the US in 5 years. Three weeks later, the IMF CEO is in chains, in a Manhattan jail, busted, degraded, ruined. This is a guy that called back to the scene of the crime for his cell phone. These guys are playing hard ball, whoever they are.
Meanwhile China has just issued an ultimatum, touch them, and you touch us. This is serious stuff. This is not the Bay of Pigs scenario. Its worse. We are the aggressor and it seems like psychopaths might be in control this time. (just guessing)
I’m not sure why people are buying bonds, but i understand why others are shorting them. They are going to print and they are going to war. I give it 8 to 16 months, but then its a day-by-day forecast.
I’m getting a backup plan in case this becomes serious fast. I’d like to hear opinions from those one generation above mine, who are watching this drama unfold. Anyone here born in the ’30’s or ’20’s? How is this going to play out do you think.
Ed Note: ‘going to war’? You forget Iraq and Afghanistan – they are already are at war. It could easily spread, the Middle East is full of unrest and instability now – but it takes two to make a really big war and the US just does not have an equal that comes close. China has no history of aggression outside its borders and is the world’s biggest exporter so has little to gain by trashing its markets. The US military is bigger than all the rest of the world put together – but true that does leave it plenty of room to push others around. Why do they want DSK out of the way?
Ed., I was impressed by Lilico’s article in the DT when I read it for the first and second times. I read it again via the link you have given, and I have to confess that I’m not so sure about what he’s written.
His timeline about what will happen to Greece if it defaults is clear and logical, but it is his basic premiss in his first paragraph that I’m now having doubts about.
He has two reasons for saying that it is “when”, not “if”, Greece defaults. The first is that the financial markets aren’t in any doubt that Greece will default, they are merely unsure whether it’ll be tomorrow, a month’s time, a year’s time or two years’ time. Leaving aside the silly comment that “the financial markets aren’t in any doubt” since these markets are not united enough nor rational enough to come to a definite and confident conclusion about anything including whether Greece will default,
his second reason is that “given that the ECB has played the final card it employed to force a bail-out on the Irish, presumably we will now see EITHER another Greek bail-out OR default within days”. He doesn’t explain how forcing a bail out on the Irish makes a Greek default “when” not “if”. His use of “presumably”, “either” and “or” in regard to whether or not there will be a Greek default within days, is absolutely full of doubt and uncertainty in his mind and in reality.
Whilst his list of the consecutive events occurring on a Greek default are impressive, I reckon that anyone with knowledge, such as yourself, could have presented just as impressive a list of events.
I am not impressed with the arguments he gives that Greece will default, that it is “when” not “if”. Whilst emotionally I agree with him about Greece defaulting, he has left me intellectually unconvinced.
@ James M.:
I was born in the 1940s (yeah, but I still feel like “a kid”), so I may not be able to give you the perspective of one who was born in the 1930s. But the Ed. is correct, yet he’s only discussed two countries where the US is “at war” in a military sense.
Since the end of WW 2, the US has dominated other countries of the world, especially those which are rich in natural resources, in order to exploit these resources and thereby enrich the US corporations.
Economic Wars Since 1945:
I guess it all depends on your definition of “WAR.” To me, even if the US military was not involved, the US has been “at war” since WW 2, in an economic sense. If you doubt this, then I strongly recommend that you read Ed Perkins hallowed book entitled “Confessions of an Economic Hit Man”.
As I’ve stated before on this blog, that book will open your eyes very, very wide!
Back on Topic: Euro Defaults:
No doubt, US financial might, coupled with financial deceit and chicanery from the likes of JPM and GS (and their financial genius at use of derivatives products, etc.), have been spectacularly successful at postponing the inevitable in the Eurozone. Eventually, these PIIGS countries will fall hard; as soon as the first one begins to lean over, the others will follow… and then it will all come down, in spite of the futile efforts of the FED/GS/JPM etc. cartel.
The head of the Chinese military was just in Washington where he said that the Chinese people wouldn’t stand for the huge spending that the USA does on defense. He might be lying, but China needs a lot of foreign bases before it will be in a position the challenge the USA for global military supremacy. Only the USA, the Brits, and the French have blue water navies right now because only they own bases all over the globe from their former empires. What happened when the Chinese wanted to build a free radar station in East Timor to secretly watch the movement of military ships? The Timor government told the Portuguese, Australians, Japanese and USA. Then they said ‘no thanks’. And Vietnamese officers are being trained at US military bases for a reason. The only USA action that China REALLY dislikes is when the USA sells advanced weapons to Taiwan. The USA does it mostly to make money, not because it thinks that Taiwan could ever defend itself against a massive attack by the mainland. And why kill fellow Chinese? They are investing far too much technology and money on the mainland.
DSK was arrested by the New York City Police Department, and is being held by the State of New York, not the US Justice Department.
The fact the expected “storm” is a potential known event acts as a stabiliser as prepartion for it can help reduce it or mitigate against it and its negative impact.
Expect this to be a relative non event but for the beating of a butterflies wings elsewhere to cause the crash when least expected and from an unlooked for quarter.
A few thought provokers whilst folk think on Greece:
1) US $ hedgemony – perhaps DSK was working towards a basket approach with bigger emphasis for the Yuan and knocking the $ off its perch sooner than would otherwise happen? Wasn’t it Saddam Hussein and Gadaffi that both looked away from the $ for trade?
2) US fleet – think it’s about 13x the size of the Chinese and faces both major Oceans. China relatively land locked and easy to block in if push come to shove with only land routes.
3) REMEMBER the GREAT GAME to keep Russia out of the Indian Ocean. Now an arc of instability between China and North Africa and China needing more access to alternate seas – interesting development for the future – http://online.wsj.com/article/SB10001424052702303654804576339323765033308.html?mod=googlenews_wsj
Hi Ed, thanks for the note: There is a controversy raging web-wide as to why his enemies benefit from DSK being put on ice and i have nothing new to add to those arguments. In my personal opinion, the maid story is fishy enough to take a deeper look. That would be up to you, in perhaps another thread. This story is going to have long legs anyway. For example, the maid’s native tongue is French, just one more odd little twist to add to the bucket of other strange and unusual aspects.
Ed Note: This is an investment and not a political website, so the rest of your comment is deleted.
@JamesM the maid’s native tongue is French
A play on words?
The DSK Saga – is it relevant to investors?
It will provide insight into how the media can influence the truth. Figuring out what actually happened will be a real test of objectivity.
Bonfire of the Vanities in real life.
I don’t see how the DSK saga is relevant to investors.
What is relevant to investors is who will be his successor and what attitude will he or she have to Greece’s debt and deficit problems. If it’s to continue DSK’s policy of keeping the EU together by flinging money at the PIIGS, then DSK will be irrelevant as we watch his old polices take place under new leadership. If the new IMF leader discards DSK’s policies, then he will be even more irrelevant to investors.
Figuring out what really happened will be a real test of objectivity for lawyers and others, but investors will just get on trying to figure out when the stock market and bond market bubbles are going to burst.
I see that gold has just gone above £30 per gram for the first time in its existence, and silver is trending upwards from what appears to have been its nadir this time around.
@ philcu
Google the Labé region of Guinea, West Africa. French is the official language. The maid originates from there and is French speaking.
@JamesM
Keep up the great posts. And ask a friend of a less pure-minded disposition to explain my little joke (!).