Last week, we saw the worst day in the history of European bond markets since its great debt crisis of 2012.
The price of Greece’s sovereign 10-year notes collapsed, driving their yields to nearly 9 percent.
Bond markets in Italy, Spain, Portugal and other countries followed.
And new fears of a European collapse spread like wildfire.
So I asked our Money and Markets team: Is their debt crisis back?
Larry Edelson was the first to answer: “No. It never really ended in the first place.”
Larry was also the first on our team to warn us of the crisis years ago — back in 1999.
That’s when he first forecast the eventual demise of the euro and the subsequent fall of the European Union.
And that’s when our entire team began scrutinizing the continent with ever greater intensity.
We rated the sovereign debt of all major European nations.
We rated the financial security of all major European banks.
And we discovered that, despite massive attempts by European authorities to turn the tide, Larry’s 1999 forecast was probably not overstated. Only the precise timing remained in doubt.
More recently, Money and Markets ETF specialist Mike Burnick gave us a 7-month advance warning of the current crisis.
In fact, in his March 6 article, “European Stocks May Face Triple Threat No Matter Ukraine’s Future,” he nailed virtually every aspect of what’s happening today, when he wrote:
“Even if [the Ukraine] conflict can be avoided, the EU faces an economic triple threat: (1) A still-unresolved sovereign debt crisis. (2) An economy that’s barely expanding due to sky-high taxes and unemployment. And (3) capital flight as investors swap European assets for better investment opportunities elsewhere.
“Recall, the EU economy slipped back into recession in 2012, the dreaded double-dip that the U.S. managed to avoid. Real economic output in the region remains three full percentage points below the peak before the 2008 recession, even as U.S. GDP advanced 1.9 percent last year.
“EU finances are in even more dismal shape than the U.S. European household debt, for example, was higher at the end of 2013 than it was before the 2008 credit crisis. And consumer spending across the EU, the lifeblood of its economy, was lower in 2012 than at the peak in 2008.
“It’s clear that deflationary pressures still have the upper hand in Europe, and the region cannot afford the added stress of a geo-political crisis. The EU financial system is already beginning to show stress cracks.”
Mike Larson, who writes our Friday column PLUS our popular daily afternoon editions, weighed in heavily in his April 18 issue.
He stressed how the euro was about to plunge, how growth in Europe remains moribund and how their policymakers are increasingly worried about the risks of deflation. And he’s been continually issuing similar warnings ever since.
How did they see this coming? And what is likely to happen next?
On a quest for answers, let me turn the clock back a couple of years and describe what we witnessed then …
The 2012 Scene
It’s 2012, and things are looking very ugly.
Everyone still thinks the sick, default-prone, bailout-hungry countries are strictly the PIGS — Portugal, Ireland, Greece and Spain.
Suddenly and without warning, they’re joined by Italy, and now the PIGS are renamed PIIGS — Portugal, Ireland, ITALY, Greece and Spain.
Global investors dump their government bonds like hot potatoes. Bond yields in some EU countries soar to as high as 30 percent.
Riots and demonstrations sweep the continent.
It is feared that the euro and all of Europe will collapse into a heap of financial, economic and social chaos.
In response, new sovereign debt bailouts are arranged in great haste, and earlier bailouts are beefed up with even greater haste.
Meanwhile, the European Central Bank embarks on a monetary expansion that, in some aspects, makes the downpour of Fed Chairman Bernanke’s helicopter money seem like a slow drizzle: They pour out loans in massive quantities.
In Germany, however, the deep memory of hyperinflation cannot be erased. And it surfaces to the collective cerebral cortex in the form of stubborn German opposition to monetary and fiscal madness.
Despite this, the ultimate consequences of the debt crisis are so frightening, German authorities in Brussels are outshouted and outvoted. The European Central Bank proceeds to push its monetary policy to new frontiers never explored before — even loans at below-zero interest rates.
On the fiscal front, however, the Germans do prevail to some degree: They insist on — and get — critical concessions from the other countries regarding budget cuts and fiscal controls.
From the melee, a so-called “crisis solution” finally emerges, and it has three elements:
- Bigger bailouts.
- Massive ECB loans.
- Some budget cutting.
The financial markets calm down. Investors return. And the crisis is said to have ended.
“But,” we ask, “is the European debt crisis really over?
“What will be the financial consequences of their unbridled money pumping and sub-zero lending?
“What will be the political consequences of budget cutting imposed on PIIGS and other countries by outside powers?”
Fast forward to today and you can begin to find the answers …
The 2014 Scene
I’ve already told you Larry’s answer to the first question: No! It was merely disguised and covered up, while it morphed into crises of different colors and shapes:
The great national debt burdens were partially restructured, not reduced. Social welfare laws of PIIGS and other nations were repurposed, not repealed. And mass dissatisfaction with high unemployment was repressed, not resolved.
Mike Burnick gives us the answer to the second question: The consequence of wild central bank money lending is $500 billion to $1 trillion of excess cash sitting in European bank accounts, earning negative real interest rates.
This money, in turn, threatens to turn into one of the largest capital outflows in the history of financial markets — money fleeing stagnant Europe in search of safer and higher-yielding havens in the U.S. and elsewhere.
And Mike Larson gives us the answer to the third question: The consequence of budget cuts imposed from the outside is mass unemployment and political upheaval.
That’s why voters in PIIGS countries are shifting their allegiance, en masse, to parties that support renegotiating, reneging and even defaulting on their bailouts.
That’s why there is a sudden, new push throughout Europe — even including some groups in Germany — for massive new fiscal spending.
And that’s why yesterday was the worst day in the financial history of European bond markets since its great debt crisis of 2012. Bond investors fear that all of the fiscal deals will be breached, that bailout agreements will be torn up, some of the PIIGS will default, and the entire EU/euro experiment will come unglued.
How will we know if that is really going to happen?
France is still considered one of the “core” euro-zone countries, and its economy is the largest after Germany’s.
But France is beginning to look more and more like a PIIGS country — big national debts, high-risk megabanks, pervasive and persistent social welfare laws, rising unemployment and malaise. Plus, in terms of policy, they are already there.
France’s leadership has already shifted from the German camp favoring fiscal repentance and restraint to the PIIGS camp favoring fiscal sin and folly.
And for the nearer term, watch Greece.
As I said, Greek government bond yields soared to nearly 9 percent on Thursday, amid growing fears that Greece’s bailout may fall apart.
Stocks in Athens plunged 9 percent on Wednesday alone, and are already down 25 percent so far this year. The Greek unemployment rate has surged to a staggering 25 percent, prompting a power struggle within the Greek government that threatens to sabotage its bailout.
Bottom line: Europe is in a confirmed bear market. But the United States is not.
Good luck and God bless!