Global Economy Bursting?

[Randolph Kinney]

What gets me, is why is a toothpick economy effecting the rest of the world? It is shear speculation/manipulation to rattle the markets and media hype. We have been worrying about Greece for the past 4 years, most Americans can't even find it on a map. :new_smile-l:

Europe is going to deal with this Greek crisis. The problem is that this is the beginning of a string of crises and not the end. They do not appear, at least in public, to want to deal with the systemic problem of too much debt in all the peripheral countries.

Germany is preparing to use the money it was going to pour into Greece to shore up its own banks (which hold Greek sovereign debt).

The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalization of the banking system and collapse of international trade.

We can avoid a debt debacle in the US, but doing so will mean reducing debt every year for 5-6 years in the teeth of a slow-growth economy and high unemployment. It will require enormous political will and mean many people will be unemployed longer and companies will be lost.

The global economy is at a crossroad that demands a decision – whom will our leaders defend? One choice is to defend bondholders – existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.

 

[Randolph Kinney]

Look at the following graph from the St. Louis Fed. It is the amount of deposits at the US Fed from foreign official and international accounts, at rates that are next to nothing. It is higher now than in 2008. What do they know that you don’t?

 

[Randolph Kinney]

Eurozone blamed by US for world's economic plight

http://www.telegraph.co.uk/finance/...-blamed-by-US-for-worlds-economic-plight.html

The United States has warned that political disarray in the European Union is the "single biggest cause" of the unfolding economic crisis that threatens to plunge the world into a new recession.

Finance ministers of the G7 group of industrialized nations have gathered in the French city of Marseille this weekend to discuss how to avert a looming global economic catastrophe, as markets continue their relentless plunge and deep divisions tear apart the European Central Bank (ECB).

 

[Randolph Kinney]

German minister raises ‘orderly default’ for Greece

http://www.telegraph.co.uk/finance/...nister-raises-orderly-default-for-Greece.html

Germany has stepped up its rhetoric against Greece, warning that the debt-laden country could default on its debts in a move that highlights the growing divisions at the heart of Europe.

The warning is likely to spook financial markets further and comes despite Greece yesterday announcing a fresh €2bn (£1.7bn) of budget cuts and the introduction of a country-wide real estate tax.

Evangelos Venizelos, the finance minister, said the cuts and tax measure were necessary to allow Greece to meet obligations demanded by the European Union and IMF in exchange for bail-out funds.

 

[Randolph Kinney]

Germany and Greece flirt with mutual assured destruction

http://www.telegraph.co.uk/finance/...ce-flirt-with-mutual-assured-destruction.html

Germany is pushing Greece towards a hard default, risking the uncontrollable chain reaction so long feared by markets.

First we learn from planted leaks that Germany is activating "Plan B", telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece's return to the drachma.

Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself, and Greece has certainly been provoked.

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.

If a debtor such as Greece left, the new drachma would crash by 60pc. Its banks would collapse. Switching sovereign debt into drachma would be a default, shutting the country out of capital markets. Exit would cost 50pc of GDP in the first year.

If creditors such as Germany left, the new mark would jump 40pc to 50pc against the rump euro. Banks would face big haircuts on euro debt, and would need recapitalization. Trade would shrink by a fifth. Exit would cost 20pc to 25pc of GDP.

There is a close parallel between 1930s Gold and EMU, both in destructive effect and totemic sanctity. The Gold Standard was more than a currency system. It was the anchor of an international order and way of life.

The status quo, however, is not acceptable. EMU's debt-deflation strategy has trapped half of Europe in depression, with youth unemployment reaching 46pc in Spain and no way out for years.

Perhaps a global coalition of the G20, IMF, China, and the oil powers will combine to rescue Euroland, as some now hope. But how would that bridge the gap between EMU’s North and South? It solves nothing.

 

[Randolph Kinney]

Asia skids on Europe fears

http://www.marketwatch.com/story/asia-stocks-plunge-after-us-european-losses-2011-09-11

Stocks in Asia fall sharply as investors sell out of European-exposed firms and financials.

 

[Randolph Kinney]

Germany Readies Surrender Over Greece

http://www.bloomberg.com/news/2011-09-12/germany-readies-surrender-in-fight-to-save-greece.html

Yields on Greek two-year notes rose 1.93 percentage points to 57 percent on Sept. 9, according to data compiled by Bloomberg. Credit-default swaps to insure the country’s five- year bonds and to speculate on government securities jumped 475 basis points to a record 3,500 basis points, according to CMA. The contracts are the highest in the world and more than three times the 1,134 basis points on Portugal’s debt.

After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, German Chancellor Angela Merkel is laying the groundwork for what markets say is almost a sure thing: a Greek default.

 

[Randolph Kinney]

Europe Stress Seen in Rates on Commercial Paper

Read more: http://www.sfgate.com/cgi-bin/artic...-2C83U0UDIC9UU7HCUBKBEK49BM.DTL#ixzz1Xi30kY7m

Sept. 12 (Bloomberg) -- Societe Generale SA, BNP Paribas SA and Credit Agricole SA are being quoted higher rates than their competitors in the commercial paper market as the crisis in the euro zone spreads beyond Greece, Portugal and Italy.

Premiums on short-term loans are rising as odds of a default by Greece grows, with German Chancellor Angela Merkel preparing plans to aid her nation's financial companies. BNP, Societe Generale and Credit Agricole, France's largest banks by market value, may have their credit ratings cut by Moody's Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said.

 

[Riick]

"Preparing for a Credit Crisis": ............. www.johnmauldin.com/images/uploads/pdf/mwo090911.pdf


The math says that Greece cannot pull itself out of it's debt; they have no choice but default, or a full bailout by others.
Germany apparently has decided to use the bailout money that would otherwise be sent to support Greence, to support its own banks.

In this cycle, bond holders are no longer sacred cows -- they will now take a huge haircut.

.

 

[Randolph Kinney]

Stock futures signal heavy selling on Wall Street

Europe’s sovereign-debt crisis continues to slam stocks globally

http://www.marketwatch.com/story/stock-futures-signal-heavy-selling-on-wall-street-2011-09-12