If you think the Greek debt crisis is the cause of Europe’s major ills, think again. It’s just a symptom of the far deeper problems I’ve been telling you about all along.
As I’ll explain in this issue, the European Central Bank (ECB) is loaded with toxic assets; the entire concept of the euro is flawed; and now it’s finally coming unglued, just as I have been warning week after week, month after month.
Consider the dramatic events of the past week …
On Wednesday, a haymaker was thrown at European Union officials, the IMF and the ECB … all parties that have been trying desperately to keep the crisis in Europe from reaching an impact point.
- S&P downgraded four Greek banks,
- And Moody’s warned of downgrades on Portuguese banks and most importantly, FRENCH banks.
These are all institutions that will take huge losses, if not fail, should Greece ultimately default or restructure its debt, and a contagion of sovereign defaults take hold.
This outcome has a chance to be delayed, again, only if the Greek government is willing to accept even more intense austerity measures — and soon. But other events of the day made it clear that the likelihood of that happening was dwindling …
- When Greek Prime Minister Papandreou couldn’t get parliament to agree on more, tougher austerity measures to satisfy the EU/IMF requirements for more financial aid, making a July default more threatening. Ultimately he “re-shuffled” his cabinet in attempt to ram it through.
- Then rioters hit the streets in violent protests against austerity. And it was widely covered by global media.
Once again, Greece is the word.
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| They’re rioting again in the streets of Greece. |
It’s the word used to describe the plunge in the U.S. stock market. It’s Greece that’s attributed to a sharp slide in the price of crude oil this week. And it’s the uncertain outcome in Greece that is the subject of greatest concern for global policy makers.
But most casual market followers still don’t understand why Greece doesn’t really matter.
With all of the focus that has been given to the irresponsible spending and social welfare programs that have driven Greece to insolvency, the real problem isn’t Greece at all.
You see …
Greece Is Only a Symptom
of the Real Problem
The problem is European banks, the European Central Bank and a flawed single currency concept — the euro.
In May 2010, we got a clear message from Europe on just how desperate the situation was there. That’s when the powers of Europe gathered to determine a game-plan for dealing with Greece. The European Union, the IMF and the ECB could have backed away and let the country pull-out of the monetary union and go on with its business of mending itself through currency and debt devaluation.
But they didn’t do that!
Instead, in perhaps the most shocking development in the entire global financial crisis, they vowed to rip up the rulebook that the European monetary union was built upon, by using taxpayer money of the stronger countries to support the fiscally irresponsible weaker countries … to the tune of 750 billion euros worth of promised aid.
Moreover, the European Central Bank, built upon the idea of fierce independence, tossed its rulebook out and vowed to be the buyer of last resort of the toxic sovereign debt of the failing euro-zone peripheral countries. AND they continued accepting the toxic collateral from these countries in exchange for short-term liquidity.
They didn’t go to such extreme measures because they really cared about saving the likes of Greece, Portugal and Ireland (and even Spain). They did so because they had to!
When the global financial crisis was at peak severity, much of the world focus was on U.S. bailouts. Meanwhile Europe and the ECB were naively admired as the example of conservatism and rationale.
But throughout the financial crisis, the ECB was offering unlimited funds to its European banks for a paltry 1 percent interest. The stated purpose was to keep credit flowing in its economy. However, the banks weren’t lending to consumers and businesses; they were lending to the PIGS (Portugal, Ireland, Greece and Spain) to keep them alive.
The struggling countries were happy. They were able to borrow at reasonable rates, even though they were maintaining massive budget deficits and burgeoning debt loads …
The banks were happy. They were borrowing at 1 percent and lending at juicy yields …
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| The ECB was happy to handout euros left and right, but now its strategy has backfired. |
And the ECB was happy, because it was aiding the struggling countries through the “back-door” … maintaining adherence to its guiding principles and keeping its appearance as staunchly independent.
But finally, market participants took notice and went on attack, selling the government bonds of the weak euro members. Consequently sending borrowing rates for these countries soaring, exposing their spiraling deficits and the flaws of the greater European monetary union.
So when the decision had to be made by European officials and the IMF, back in May 2010, to let Greece go or go “all-in” … the choice was obvious. They had to go all-in, because the European banks were loaded with Greek debt. If Greece had fallen, the other weak countries would have fallen, putting $2 trillion worth of European bank exposure to the PIGS countries on course for massive write downs — and triggering another financial crisis.
But now, more than a year later, the PIGS remain on the path of default, European banks are still highly exposed, and all of these desperate actions to stave off the ultimate impact day has left the …
ECB Loaded with
Toxic Assets!
As I warned in my Money and Markets May 14 column, the sovereign debt crisis in Europe could make the Lehman Brothers failure pale in comparison.
It’s not just European banks, but the European Central Bank is at risk of failing.
A European think-tank, Open Europe, says the ECB has taken on nearly 400 billion euros of exposure to the four most troubled European countries — selling off its good assets to take on bad assets. And they estimate the ECB is 23 to 24 times leveraged. When Lehman failed it was 30 times leveraged.
They estimate that Greece would have to restructure half of its debt to bring it down to sustainable levels. With that scenario, it would “effectively leave the ECB insolvent.”
If that happens expect another wave of global financial crisis, bigger than the first, where markets trade in two tiers: Risky and safe.
All of this is good news for currency investors, because the BIGGER THE CRISIS, the GREATER the movement of capital within global currencies. And the BIGGER the profit opportunities!
Regards,
Bryan
P.S. My World Currency Trader is specifically designed to protect and grow your wealth during the wild swings in currencies like we’re about to see. Check out my latest presentation.
{ 2 comments… read them below or add one }
Yes, Greece will default but only when Germany says it can default and not a moment sooner. But who will really end of paying the bill? The ECB? No. The various EU banks? No again. It will be the Americans. Why, because the Europeans insured the loans with American banks. So when Greece and the others go belly up, so will the US. The EU banks will come out smelling like roses.
http://www.thetrumpet.com/?q=8360.7051.0.0
Excerpt:
Guess who is the major insurer of Greek loans? You guessed it: American banks. Those same “too big to fail” banks bailed out by taxpayers three years ago.
Here is how it happened. French and German banks lent Greece money. Normally, if Greece stopped paying, the French and German banks would take the loss. Case closed.
However, over the past few decades, American banks pioneered the use of new financial products called derivatives. One type of derivative is known as a credit default swap. You can think of it as insurance. American banks sold tens of billions of dollars’ worth of default insurance to those lending money to Greece (and to Ireland, Portugal, Spain, Italy and so on).
Consequently, if Greece does stop paying its bills, American banks are going to have to cough up billions—and because of the 2008 economic collapse, they just don’t have that kind of money.
The “too big to fail” are back.
According to Mansori, if Greece defaults, American banks will be responsible for reimbursing German, French and other lenders $41.4 billion. If Portugal collapses, American banks would be forced to pay up an additional $46.5 billion. And if Ireland goes bad, they would need to find a further $105 billion.
Wow Bryan, did you know that? Shame on those Europeans for insuring themselves against the possibility of a Greek default and with American banks! Are so so sure now that you want the euro to collapse? It seems to me the Germans and French know what they are doing and the haughty Americans are in deep doo-doo.
If Standards & Poor and Moodys were reputable they would be downgrading all of the American banks who insured the euro loans. Maybe its time for you to start realizing it isn’t the euro that is in trouble but the dollar and it isn’t the ECB that has oodles of toxic assets, it is the American banking system who was foolish enough to secure the the Greek (and other’s) loans.
It is never too late to mend your ways.
http://finance.yahoo.com/news/Merkel-warns-against-Greek-apf-2594870427.html?x=0&sec=topStories&pos=8&asset=&ccode=
Merkel herself has confirmed that the Greek loans were insured via credit default swaps and even implied that those who insured the loans have more to lose. Even if Merkel doesn’t know who the insurers are, we all know it is the American banks.
For sure if Greece were to default, the American economy would collapse, no doubt about it.
Excerpt:
Imposing a so-called haircut on Greek debt — reducing the amount to be repaid — would endanger not only banks and other creditors who hold Greek bonds, but also institutions that sold insurance policies against a default, Merkel said.
Those credit default swaps have a “significantly higher” face value than the debt itself, and the consequences of them being called on can’t be foreseen, she said.
“Nobody around the globe knows exactly who holds those papers and what it means if they come due,” Merkel told a meeting of the German parliament’s European affairs committee.