Summer vacation is over and things are about to get very interesting in Europe. Most Americans don’t realize this, but much of Europe shuts down for the entire month of August. I wish we had something similar in the United States. But now millions of Europeans are returning from their extended family vacations and the fun is about to begin. During August economic conditions continued to degenerate in Europe, but I figured that it wouldn’t be until after August that the European debt crisis would take center stage once again. And as I wrote about last week, if there is going to be a financial panic, it typically happens in the fall. The stock market has seen quite a nice rally over the summer, and many investors are nervous that we could see a significant “correction” very soon. The month of September has been the absolute worst month for stock performanceover the past 50 years, and it has also been the absolute worst month for stock performance over the past 100 years as well. Of course that does not guarantee that anything is going to happen this year. But things in Europe continue to get worse. Unemployment rates are spiking, manufacturing activity is slowing down, housing prices are crashing and major financial institutions are failing. What is happening in Europe right now appears to be an even worse version of what happened to the United States back in 2008.
But most Americans aren’t too concerned about what is happening in Europe.
In fact, most Americans don’t believe that a European financial collapse would be much of a problem for us.
Well, just remember what happened back in 2008. When the U.S. financial system started coming apart at the seams it sparked a devastating worldwide recession which was felt in every corner of the globe.
If the European financial system implodes, the consequences could be even worse.
Europe has a larger population than the United States does.
Europe has a larger economy than the United States does.
Europe has a much, much larger banking system than the United States does.
If Europe experiences a financial collapse, the entire globe will feel the pain.
And considering how weak the U.S. economy already is, it would not take much to push us over the edge.
What is going on in Europe right now is a very, very big deal and people need to pay attention.
The following are 18 indications that Europe has become an economic black hole which is going to suck the life out of the global economy….
British people with homes in France were today warned that the property market is in ‘free fall’.
A combination of factors including the election of a tax-and-spend Socialist government means that prices are tumbling.
It means an end to the boom years, when thousands of Britons poured money into rental or retirement investments across the Channel.
#5 A slow-motion bank run is happening in Spain. The amount of money being pulled out of the Spanish banking system is absolutely unprecedented. The following is from a recent Zero Hedge article….
The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not.
If this pace keeps up, more than 600 billion dollars will be pulled out of Spanish banks by the end of the year.
Keep in mind that the GDP of Spain for all of 2011 was just 1.49 trillion dollars.
So by the end of this year we could see the equivalent of more than 40 percent of Spanish GDP pulled out of Spanish banks and sent out of the country.
In case you were wondering, yes, that is a nightmare scenario.
#7 The yield on 10 year Spanish bonds is up to 6.85 percent. This is an unsustainable level, and if rates don’t come down on Spanish debt soon it is inevitable that Spain will end up just like Greece.
#8 On Monday it was announced that Spanish banking giant Bankia will be getting an emergency “cash injection” of between 4 and 5 billion euros. Apparently “cash injection” sounds better to the politicians than “a bailout” does.
#9 The housing crash in Spain just continues to get worse. It is being reported that some homes in Spain are being sold at a 70% discountfrom where they were at the peak of the market back in 2006. At this point there are approximately 2 million unsold homes in Spain.
#10 There are persistent rumors that the government of Spain will soon be forced to officially ask for a bailout from the rest of Europe. But who is going to bail them out? Most of the other governments of the eurozone are on the verge of bankruptcy themselves.
#11 Manufacturing activity in Europe has contracted for 13 months in a row. The following is from a recent Reuters report….
The downturn that began in the smaller periphery members of the 17-nation bloc is now sweeping through Germany and France and the situation remained dire in the region’s third and fourth biggest economies of Italy and Spain.
“Larger nations like France and Germany remain in reverse gear… the (manufacturing) sector is on course to act as a drag on gross domestic product in the third quarter,” said Rob Dobson, senior economist at data collator Markit.
Markit’s final Purchasing Managers’ Index (PMI) for the manufacturing sector fell from an earlier flash reading of 45.3 to 45.1, above July’s three-year low of 44.0, but notching its 13th month below the 50 mark separating growth from contraction.
#12 Chinese exports to the EU declined by 16.2 percent in July. U.S. exports to Europe have been steadily falling as well.
#13 Slovenia and Cyprus are two other eurozone members that are in desperate need of bailout money. The dominoes just keep falling and nobody seems to be able to come up with a plan to “fix” Europe.
#14 Even the “strong” economies in Europe are being dragged down now. For example, unemployment in Germany has risen for five months in a row.
#15 According to one recent poll, only about one-fourth of all Germans want Greece to remain a part of the eurozone. The odds of a breakup of the euro seem to rise with each passing day.
#16 It is now estimated that bad loans make up approximately 20 percent of all domestic loans in the Greek banking system at this point.
#17 The suicide rate in Greece is more than 30 percent higher than it was last year. People are becoming very desperate in Greece and there is no end in sight to the economic depression that they are going through.
#18 Large U.S. companies have been rapidly getting prepared for a Greek exit from the eurozone. The following is from a recent New York Times article….
Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.
Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency.
Every time European leaders get together they declare that they have “a plan” that will solve the problems that Europe is experiencing, but as we have seen things in Europe just continue to get worse with no end in sight.
A key date is coming up in the middle of this month. On September 12th, Germany’s Constitutional Court will determine the fate of the recent fiscal pact and the ESM. According to UniCredit global chief economist Erik Nielsen, if the court rules against the fiscal pact and the ESM the fallout will be catastrophic….
“If they were to surprise us by striking down Germany’s participation, I would think it’d be an utter bloodbath in markets”
But that is not the only thing that could set off a full-blown panic in the financial markets.
The truth is that Europe is teetering on the edge.
One wrong move and it is going to be 1929 all over again.
As I have maintained all along, the next wave of the economic collapse is rapidly approaching, and this time the epicenter for the crisis is going to be in Europe.
But that does not mean that things are going to be easier for the United States than last time. We have never even come close to recovering from the last recession. Most Americans families are just barely getting by. In fact, 77 percent of them are living paycheck to paycheck at least part of the time.
Right now there are millions of Americans that have lost their jobs and their homes in recent years and that feel forsaken by society.
After this next wave hits us there will be tens of millions of Americans feeling the pain of economic desperation.
The last wave of the economic collapse hurt us.
This next wave is going to absolutely devastate us.
Watch what is happening in Europe very carefully. What Greece, Spain, Italy and France are experiencing right now is going to hit us soon enough.
September 4, 2012 – EUROPE - A growing number of global and European health bodies are warning that the introduction and intensification of austerity measures has led to a sharp rise in mental health problems with suicide rates, alcohol abuse and requests for anti-depressants increasing as people struggle with the psychological cost of living through a European-wide recession. “No one should be surprised that factors such as unemployment, debt and relationship breakdowns can cause bouts of mental illness and may push people who are already vulnerable to take their own lives,” Richard Colwill, of the British mental health charity Sane, told CNBC. “There does appear to be a connection between unemployment rates and suicide for example,” he said, referring to a recent study in the British Medical Journal that stated that more than 1,000 people in the U.K. may have killed themselves because of the impacts of the recession. “This research reflects other work showing similar rises in suicides across Europe.” According to Josée Van Remoortel, advisor to the European organization Mental Health Europe (MHE), the financial crisis is affecting “all areas of life,” not just economies, and its impact on mental health is creating a “deep chasm in our society.” “The credit crunch [has] had one unexpected consequence and one that reflects a deep chasm in our society – a sharp rise in mental health problems, largely caused by uncertainty and fear for the future,” he writes in a paper entitled “The Sane Approach.” A recent survey of general practitioners (family doctors) in Britain by the Insight Research Group seems to support Van Remoortel’s view. The data showed that out of 300 family doctors surveyed, the majority reported that austerity was damaging their patients’ health. Seventy six percent said their patients were unhealthier due to the economic climate and 77 percent said more patients were seeking treatment for anxiety. The doctors surveyed relayed an increase in the incidence of alcohol abuse, anxiety, depression and requests for abortions due to economic reasons, anecdotal evidence borne out by statistics for anti-depressant requests in the U.K., which have risen 28 percent from 34 million prescriptions in 2007 to 43.4 million in 2011. Wolfgang Münchau told the Financial Times in July, the debt crisis in the Eurozone could likely last 20 years. -CNBC
Syria‘s army tank (AFP Photo / STR)
The West will retaliate harshly if the Syrian army deploys chemical weapons, France’s foreign minister said Monday. Damascus vowed not to use its chemical arsenal against its own people, but left the option open in the event of a foreign invasion.
The Syrian army is believed to possess stockpiles of nerve agents and mustard gas, and the Scud missiles capable of delivering them.
If Damascus chose to use their biological or chemical weapons, “our response … would be massive and blistering,” French Foreign Minister Laurent Fabius said on Monday during an interview with RMC radio.
Western countries are monitoring the movement of chemical weapons in Syria and are prepared to “step in” immediately, Fabius said: “We are discussing this notably with our American and English partners.”
In August, US President Barack Obama said that if Syrian President Bashar Al-Assad used or transported chemical weapons, it would be “a red line” for Washington. This position was widely echoed by the UK and France, with French and British politicians urging the UN to investigate Syria’s chemical strike threats.
France has intensified its hawkish rhetoric since Washington’s declaration. “What’s at stake goes beyond Syria. It concerns the security of the Middle East and especially Lebanon,” French President Francois Hollande said a week ago.
Fabius declined to comment on Friday over whether Paris or Washington would intervene first if Syria were discovered to have moved its arsenal. “I shall keep it secret,” he told radio station Europe-1.
The possibility of the Assad regime using chemical weapons has stirred international concerns, even among nations that have taken a moderate stance the Syrian conflict. Russia held several urgent negotiations with Damascus requesting assurance that the country’s chemical and biological stockpiles are properly guarded, and will not be moved or deployed.
On Monday, EU foreign policy chief Catherine Ashton declared that “the risk of a chemical weapons deployment today remains high.” Though the remarks were supposedly a statement about the use of the weapons worldwide, she was referencing the ongoing Syrian crisis.
Following numerous unsuccessful negotiations between the country’s warring factions, Moscow reiterated its noninterventionist stance concerning the Syrian conflict: “We hope nobody would resort to any kind of foolishness,” Russia’s Foreign Ministry said, adding that military intervention is unacceptable.
France said its soldiers have been deployed to ‘help refugees’ in the border area.
DEBKAfile Exclusive Report July 11, 2012, 11:44 AM (GMT+02:00)
NATO, which proclaims non-involvement in the Syrian conflict, and Russia, which vows to block foreign military action against the Assad regime, are both moving large naval forces into the eastern Mediterranean opposite Syrian shores.
A flotilla of at least 11 Russian warships has been detached from Black Sea, North Sea and Baltic fleet bases and is on its way to the Syrian coast for a maneuver; NATO has consigned its rapid response Maritime Group 2 to the same stretch of sea – where also five Israeli warships are deployed. The Western alliance has also increased surveillance flights over the Mediterranean from the Geilenkirchen air base in Germany.
This rush of military movements is explained officially by the big air-and-sea exercise launched by Syria Sunday, July 8, to simulate outside aggression. It follows Iran’s practice of continuous military drills for repelling mock Western or Israel attacks.
The exercise began with a barrage of dozens of surface-to-sea missiles simulating naval and shore defense against approaching enemy craft and landing forces.
At about the same time, Iran embarked on a big air-cum-missile defense exercise in the south to fight off potential aggression from the direction of the Gulf of Oman and the Gulf of Aden, where US air force units are clustered.
DEBKAfile’s military sources report that this is the first simultaneous, coordinated Syrian-Iranian military maneuver for drilling action against an advancing enemy. It is synchronized from a joint headquarters established for the purpose in Damascus.
While these coordinated maneuvers are being presented as designed to fend off foreign intervention in the Syrian conflict, our sources report that they are in fact preparing for a potential US attack on Iran’s nuclear program, which is now expected in Gulf and European military quarters to take place in October, three months hence.
High-ranking Saudi princes associated with their national military and intelligence agencies frankly confided to Arab and Western officials on recent visits to Riyadh that the US and, possibly Israel too, are on the verge of war on Iran. “It is already decided,” they say. The only question still open is the date, which could be before or after the US presidential election on November 6.
In line with this prediction, France is reported in Paris to be massing a large naval force in the United Arab Emirates. The French nuclear aircraft carrier Charles de Gaulle-R91 is expected to dock soon at the French naval base in Port Zayid on Abu Dhabi’s northeastern coast opposite the strategic Strait of Hormuz. The French are also boosting their air units at Al Dhafra Air Base, stationing them alongside a large American air force presence.
July 9, 2012 – EUROZONE – France joined a handful of euro-zone countries Monday in selling short-term debt at negative interest rates as investors seek alternatives to expensive German and Dutch debt. Earlier in the day, Germany’s six-month borrowing costs again turned negative at an auction, after the European Central Bank slashed its key policy and deposit rates to unprecedented levels last week. The negative yield at Monday’s German auction, the lowest on record in this maturity segment, means that investors effectively pay the German state for the privilege of holding its debt. The Dutch State Treasury Agency had already sold Treasury Certificates, or short-term debt, at negative yields. Now the French government is doing so as well. Germany sold 3.290 billion euros ($4.041 billion) of six-month Treasury bills, known as Bubills, at an average yield of -0.0344%. This is not only below the 0.0070% reached at the previous auction June 11 but also lower than the -0.0122% seen at an auction Jan. 9. France sold EUR3.917 billion of 13-week Treasury bills at an average yield of -0.005%, down from 0.048% a week ago, and it sold EUR1.993 billion of 24-week Treasury bills at an average yield of -0.006%, down from 0.096% last week. Yields on France’s 50-week Treasury bills also came very close to zero, being allocated at an average yield of 0.013%, down from 0.163% a week ago. The German Finance Agency’s EUR4 billion offer attracted EUR5.480 billion in bids. The solid demand signals that many investors are still willing to forego returns in exchange for safety. While German yields have turned negative several times in the secondary market, this is the second time so far this year that borrowing costs were negative at a German debt auction. -WSJ
Posted by truther
It wasn’t long ago that Mario Draghi was spreading confidence and good cheer. “The worst is over,” the head of the European Central Bank (ECB) told Germany’s Bild newspaper only a few weeks ago. The situation in the euro zone had “stabilized,” Draghi said, and “investor confidence was returning.” And because everything seemed to be on track, Draghi even accepted a Prussian spiked helmet from the reporters. Hurrah.
Last week, however, Europe’s chief monetary watchdog wasn’t looking nearly as happy in photos taken in front of a circle of blue-and-yellow stars inside the Euro Tower, the ECB’s Frankfurt headquarters, where he was congratulating the winners of an international student contest. He smiled, shook hands and handed out certificates. But what he had to tell his listeners no longer sounded optimistic. Instead, Draghi sounded deeply concerned and even displayed a touch of resignation. “You are the first generation that has grown up with the euro and is no longer familiar with the old currencies,” he said. “I hope we won’t experience them again.”
The fact that Europe’s top central banker is no longer willing to rule out a return to the old national currencies shows how serious the situation is. Until recently, it was seen as a sign of political correctness to not even consider the possibility of a euro collapse. But now that the currency dispute has escalated in Europe, the inconceivable is becoming conceivable, at all levels of politics and the economy.
Collapse of Currency a ‘Very Likely Scenario’
Investment experts at Deutsche Bank now feel that a collapse of the common currency is “a very likely scenario.” German companies are preparing themselves for the possibility that their business contacts in Madrid and Barcelona could soon be paying with pesetas again. And in Italy, former Prime Minister Silvio Berlusconi is thinking of running a new election campaign, possibly this year, on a return-to-the-lira platform.
Nothing seems impossible anymore, not even a scenario in which all members of the currency zone dust off their old coins and bills — bidding farewell to the euro, and instead welcoming back the guilder, deutsche mark and drachma.
It would be a dream for nationalist politicians, and a nightmare for the economy. Everything that has grown together in two decades of euro history would have to be painstakingly torn apart. Millions of contracts, business relationships and partnerships would have to be reassessed, while thousands of companies would need protection from bankruptcy. All of Europe would plunge into a deep recession. Governments, which would be forced to borrow additional billions to meet their needs, would face the choice between two unattractive options: either to drastically increase taxes or to impose significant financial burdens on their citizens in the form of higher inflation.
A horrific scenario would become a reality, a prospect so frightening that it ought to convince every European leader to seek a consensus as quickly as possible. But there can be no talk of consensus today. On the contrary, as the economic crisis worsens in southern Europe, the fronts between governments are only becoming more rigid.
The Italians and Spaniards want Germany to issue stronger guarantees for their debts. But the Germans are only willing to do so if all euro countries transfer more power to Brussels — steps the southern member states, for their part, don’t want to take.
The Patient Is Getting Worse
The discussion has been going in circles for months, which is why the continent’s debtor countries continue to squander confidence, among both the international financial markets and their citizens. No matter what medicine European politicians prescribe, the patient isn’t getting any better. In fact, it’s only getting worse.
For weeks, investors and experts demanded a solution to the Spanish banking crisis, preferably in the form of a cash infusion from the two Luxembourg-based European bailout funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). When Madrid finally decided to request what could ultimately amount to almost €100 billion ($125 billion), the experts realized that this would suddenly send Spain’s government debt shooting up from 70 to 80 percent. As a result, interest rates started rising instead of falling.
The experience of the last few days describes the entire dilemma faced by European politicians trying to rescue the euro: A step that was intended to provide relief only exacerbated the problem.
The same thing happened with the next proposal, which made the rounds last week. Italian Prime Minister Mario Monti wanted the European bailout funds to intervene on behalf of Spain and Italy to bring down their borrowing costs.
But that would have required the affected countries to submit to a program of reforms, a path Monti and his Spanish counterpart, Mariano Rajoy, want to avoid. They would prefer to have the money without conditions. But the German government is unwilling to accept this, which puts Europe at its next impasse. Furthermore, the rescue strategists’ resources are limited. Although the Luxembourg bailout funds still have more than €600 billion in uncommitted resources, it is already clear that the money would be used up quickly if what many experts now believe is unavoidable came to pass, namely that not just the Spanish banking industry but in fact the entire country required a bailout. The bailout funds would be completely overtaxed if Italy also needed help.
Even ECB Has Largely Exhausted Resources
Until now, the defenders of the euro have been able to resort to the massive funds of the ECB, if necessary. If things got tight, the monetary watchdogs could inject new money into the market.
But now even the ECB has largely exhausted its resources. It has already bought up so much of the sovereign debt of ailing countries that any additional shopping spree threatens to backfire, causing interest rates to explode instead of fall. At the same time, the conflict between Northern and Southern Europe in the ECB Governing Council is heating up. Last week, the head of Spain’s central bank managed to convince the ECB to ease its rules to allow Spanish banks to use even weaker collateral than before in exchange for borrowing money from the ECB. This could set off a tiff with the central bankers from the donor countries, who are loath to look on as the risks in the central bank’s balance sheet continue to grow.
Indeed, the European leaders seeking to save the euro are in a race against the clock. The question is whether the economy in Southern Europe will recover before the euro rescuers’ tools are exhausted, or whether it will be too late by the time the recovery arrives. It’s a question of growth and the economy, but also of character. How willing are the Spaniards and Italians to accept reforms and hardship, and how willing, on the other hand, are the donor countries of the north to provide assistance and make sacrifices?
Not willing enough, say many experts. As a result, the world is imagining the unthinkable: the withdrawal of several Southern European countries from the monetary union, or possibly even the general collapse of the euro zone. It isn’t easy to predict how such a tornado would affect the global economy, but it’s clear that the damage would be immense.
It’s also clear, says Hamburg economist Dirk Meyer, that the timetable for a euro exit in the affected countries would begin on a Monday, or “Day X.” Over the weekend, the governments would have issued the surprising announcement that banks would remain closed on Monday. The bank holiday would be needed to include all savings and checking accounts in the operation.
On Tuesday, the banks and savings banks would begin stamping their customers’ bank notes with forgery-proof ink. Capital transactions would be monitored. Black market prices would quickly develop in what the scenario defines as an “unofficial, virtual currency market.” Another bank holiday would be needed to convert accounts and balances to the new currency. But at least another year would pass before new bank notes could be printed and distributed. The stamped euro banknotes would remain legal tender in the meantime.
But these are merely the technical consequences of a monetary reform. The economic consequences, which many German companies are now assessing, would be more serious. What happens if, in addition to Greece, other countries have to leave the euro zone? What will be the consequences if Spain, Portugal or Italy reintroduce their own currencies? Experts in the finance departments of some companies are already envisioning the possible scenarios.
For instance, they are examining whether the “euro” is explicitly defined as the agreement currency in contracts with customers from problem countries, so that they don’t suddenly find themselves being paid in drachmas or escudos for their products. They are also looking into whether the costs incurred by a possible currency crash would be tax-deductible. And they are examining the potential need for write-offs if claims against business partners from southern countries are suddenly denominated in new currencies on their balance sheets. “The demand for consulting services has risen considerably in recent months,” says Gunnar Schuster, an attorney with the law firm Freshfields Bruckhaus Deringer.
Germany Would Be Hard Hit
Germany, the great exporting nation, would be especially hard hit by monetary reforms in the southern countries. Exports to Italy and Spain alone are valued at about €100 billion a year. Although sales of cars, machinery, electronics and optical devices would not be eliminated altogether in the event of a euro collapse, there would be sharp declines, because customers in Southern Europe could no longer afford German products.
As soon as lira or pesetas were in circulation once again, the currencies would be devalued against the euro. Some expect their value to decline by 20 to 25 percent, while others believe that as much as 40 percent is likely. German goods would automatically become more expensive and would hardly be competitive anymore.
When BMW CEO Norbert Reithofer warns that a collapse of the euro “would be a catastrophe,” and says that he “doesn’t even want to imagine” the possible consequences, he isn’t just thinking about declining exports. Reithofer fears that regionalism could return to Europe, and that countries could reintroduce customs barriers to protect domestic industry. And the current uniform environment protection rules would be replaced by a large number of national regulations. All of this would plunge the German export economy into a crisis.
The consequences would be extensive for companies that don’t just sell products to Southern Europe, but also maintain branches there or hold partnerships in local companies. The German industrial conglomerate ThyssenKrupp, for example, earns about €1.6 billion in revenues in Spain, where it also employs 5,500 people, mostly in elevator production. Even more important to the company is Italy, where it makes €2.3 billion a year, mostly with the production of stainless steel.
ThyssenKrupp’s business in Italy and Spain makes up 9 percent of total sales, which illustrates the importance of the two countries in terms of profits. If a reintroduced lira and peseta were devalued against the euro, the amount of money that the subsidiaries transferred to the parent company in the western German city of Essen would shrink.
A look at the statistics of Germany’s central bank, the Bundesbank, illustrates the amounts of money at stake for the economy. They show that in 2010, German companies achieved sales of about €218 billion in Italy, Spain, Portugal, Greece, Ireland and Cyprus, with Italian subsidiaries alone accounting for €96 billion. The value of foreign direct investment in these countries is about €90 billion.
German companies would also benefit from a euro crash, because labor costs would decline in their Portuguese or Spanish factories, but on balance the consequences would be negative. After the last appreciation of the currency in Germany, when the deutsche mark was flying high in the mid-1990s, the export economy suffered the consequences for years.
Massive Shock for Banking Sector
The effects of a euro crash on the financial sector would be hardly less devastating. If Southern European countries left the euro zone, customers would raid their accounts in those countries, says Christopher Kaserer, an expert on capital markets at the Technical University of Munich. This could lead to “a bank run that Spanish and Italian banks would not survive.” And because financial companies in these countries are closely intertwined with the rest of the euro zone, customers would also be lining up in front of German banks. “Without capital controls, this sort of a situation could spin out of control,” says Michael Kemmer, head of the Association of German Banks. Economists anticipate that German banks would also have to be closed.
But even if there were no major bank run, the withdrawal of several countries from the euro zone would shake the European banking system to its very foundations, analysts with the major Swiss bank Credit Suisse have calculated in a study.
According to the study, if Ireland, Portugal, Spain and Italy joined Greece in leaving the euro, 29 largeEuropean banks would see a total capital shortfall of about €410 billion. “If the peripheral countries withdraw from the euro zone, a few of the large, publicly traded banks would come to a standstill,” reads the analysts’ sobering conclusion. In their predictions, the experts did not even take into account the likelihood that France would come under pressure if Italy withdrew from the euro.
Banks in the crisis-ridden countries would be especially hard-hit, but so would investment banks likeDeutsche Bank. According to Credit Suisse, the market leader in Europe’s largest economy, which prides itself in having survived the financial crisis without government assistance, would face such heavy loses that it would suffer a capital shortfall of €35 billion.
Whereas Greece is now almost irrelevant for Deutsche Bank, Italy and Spain account for a tenth of its European private and corporate banking business. The bank estimates the credit risks in these countries at about €18 billion (Italy) and €12 billion (Spain).
Large insurance companies are also active in Spain and Italy. Allianz, for example, holds Italian government bonds with a book value of €31 billion, which could create losses for the German insurance giant if Italy withdrew from the euro and had trouble paying its debts. Allianz also holds direct investments in banks in debt-ridden Southern European countries.
Companies, sensing the potential risks, are already doing as much as they can today to prepare for a European monetary storm. For instance, they are financing deals in the peripheral countries locally, so as to avoid currency risk. Investment bankers report that companies are receiving loans almost exclusively from banks in their own countries. Where cross-border transactions are unavoidable, banks are engaging in hedge transactions. IT systems are being prepared for a Europe with multiple currencies. And whenever they can, banks are establishing liquidity reserves or depositing money with the ECB.
In the real economy, companies are also doing what they can to prepare for a worst-case scenario. If possible, they are only doing business in the crisis-ridden countries that they can finance locally. Investments in Southern Europe are being scaled back, and instead companies are trying “to accelerate growth outside the euro zone, such as in the emerging economies of Asia and Latin America,” says one investment banker. This explains why mergers and acquisitions have virtually ground to a halt in Europe.
It’s understandable that companies want to protect themselves from a euro crash. But if things get serious, all of these efforts could be worthless, because the consequences of a monetary disaster would spread across the entire economy like a tidal wave.
Economists with the Dutch bank ING have calculated that in the first two years following a collapse, the countries in the euro zone would lose 12 percent of their economic output. This corresponds to the loss of more than €1 trillion. It would make the recession that followed the bankruptcy of investment bank Lehmann Brothers seem like a minor industrial accident by comparison. Even after five years, say the ING experts, economic output in the euro zone would still be significantly lower than normal.
The consequences would also be catastrophic in Germany, as the German Finance Ministry concluded in a study commissioned by Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union (CDU). The recovery and economic miracle would abruptly come to an end, and instead banks and companies would start collapsing like dominoes, after having to write off receivables and investments.
The German Finance Ministry’s prognosis is even grimmer than that of the ING experts. According to their scenarios, in the first year following a euro collapse, the German economy would shrink by up to 10 percent and the ranks of the unemployed would swell to more than 5 million people. The officials were so horrified by their conclusions that they kept all of their analyses confidential, for fear that the costs of rescuing the euro could spin out of control. “Compared to such scenarios, a rescue, no matter how expensive it is, seems to be the lesser evil,” says one Finance Ministry official.
Costs of Crash for Germany Could Be More than €500 Billion
The dream of balanced budgets would be dead for years. Government debt would rise sharply as tax revenues declined and government spending, on everything from bank bailouts to unemployment insurance, increased. Hundreds of thousands of jobs could be outsourced to other countries, and thousands of companies could go under.
According to a scenario by the major Swiss bank UBS, if the financial risks resulting from the decline in exports, the necessary bank bailouts and the company bankruptcies are added together, the total cost to the German economy could amount to a quarter of Germany’s gross domestic product — well over €500 billion.
And this doesn’t even reflect the biggest financial risk, which remains hidden. In the last two years, the ECB has bought up more than €200 billion in sovereign debt from crisis-ridden countries. It would have to write off some of that debt in the event of a euro crash, which would also spell losses for the ECB’s largest shareholder, Germany’s Bundesbank central bank.
The so-called Target2 balances pose another threat. Through this internal payment system in the euro zone, the Bundesbank has accumulated about €700 billion in claims against the central banks of countries like Greece, Spain and Italy. This is more than five times the Bundesbank’s own capital.
“If the monetary union collapsed, these claims would turn into thin air,” says Hans-Werner Sinn, head of the Munich-based Ifo Institute for Economic Research. “Then the Bundesbank would have to write off this amount.” Given that central banks are not normal enterprises, though, Sinn’s conclusion is debatable. This is because central banks have different accounting options. It is conceivable, for example, that the Bundesbank could replace the Target2 asset on its balance sheet with an equalization claim against the German national budget. This would balance the equation on paper.
As long ago as 1948, the Bank Deutscher Länder (Bank of the German States, the forerunner of the Bundesbank) resorted to this accounting trick when, for example, it gave every German citizen 40 deutsche marks following monetary reform. Some of these claims have been on the central bank’s books for decades.
But this time the amounts in question are different. It will likely trigger skepticism among international trading partners if the central bank simply conjures the claims from the Target2 system out of its books. It would jeopardize the reputation of the bank’s executive board members as stability oriented monetary watchdogs, and possibly even the image of the new currency.
A Conundrum for Investors
Not surprisingly, German depositors and investors are worried. What happens to their assets once the dust has settled and the euro zone has been replaced with a multitude of currencies in Europe once again?
In the short term, the prices of almost all even slightly risky securities would plunge, predicts Andrew Bosomworth. He runs the German portfolio management division of Allianz subsidiary PIMCO, one of the world’s largest asset management firms. Should the euro collapse, which Bosomworth still considers unlikely, he expects investors to suffer losses for several reasons. “First, they would suffer currency losses with almost all securities that were converted back to national currencies following a euro withdrawal,” says Bosomworth. “Second, they would have to expect countries and companies to default more frequently on their bonds.”
Asset managers see only two ways to protect themselves against a crash of the euro zone: to invest the money in tangible assets or to get it out of Europe. “Investors should nationalize their investments, with a focus on emerging economies,” advises Bosomworth.
German citizens haven’t recognized yet what an abyss they are facing. If the euro collapses, not only will many people lose their livelihoods, but German retirement pensions will also be threatened. The economic success of the last few years would be destroyed, and Germany would fall back into the crisis status of the 1990s.
On the other hand, if the German government gave in to the Southern Europeans’ pressure to communitize debt, the risks could even be greater. Instead of an uncontrolled euro crash, Germany could be confronted with an uncontrolled transfer union. Year after year, the Germans would have to transfer sums in the double-digit billions to Southern European countries.
Time Remains to Save Euro
The worst can still be prevented, and Europeans still have the ability to save their common currency without overtaxing the solidarity of the donor countries.
But it is a massive task. Europe’s politicians must surrender power to Brussels to supplement their common currency with the political union that’s been missing until now. At the same time, the Italians and the Spaniards would have to prove that they could successfully reform and modernize their economies.
So far, it has seemed as if the quarreling nations of the old continent would prove equal to the challenge, as has so often been the case in their postwar history. As experienced Brussels observers know, solutions are only reached in Europe when the continent has run out of options.
But apparently the euro crisis is now so dire that it could even sweep away the oldest European certainties. Even die-hard European politicians now believe that it is no longer inconceivable that the monetary union could soon have fewer members than before. “To push Europe forward, we have to reform the euro,” says Luxembourg Finance Minister Luc Frieden. “This doesn’t just apply to the management of the monetary union, but, if necessary, to its geographic composition, as well.”
Reported by SVEN BÖLL, DIETMAR HAWRANEK, MARTIN HESSE, ALEXANDER JUNG, ALEXANDER NEUBACHER, CHRISTIAN REIERMANN, MICHAEL SAUGA, CHRISTOPH SCHULT AND ANNE SEITH
The world is on now on the brink of a global credit crisis that could be far worse than the tumultuous events of 2008. The ongoing sovereign debt crisis in the southern reaches of the Eurozone indicate that bank runs in the region will continue, and that more bank closure “holidays” will be declared. Under a bank holiday, virtually all deposits could be frozen and irredeemable for days, weeks, or even months. The key question is: Will this crisis spread to the rest of Europe and then even to the United States? I urge SurvivalBlog readers–particularly those in Europe–to be proactive, to stay “ahead of the power curve.” While the Generally Dumb Public (GDP) wakes up some morning to hear news of a bank holiday, you will have long hence prepared yourself.
Digits Lost in the Ether–Redeemable Mañana?
Most people don’t realize that printed U.S. currency and minted coins amount to less than $800 billion, worldwide. That is just a small portion of the aggregate Money Zero Maturity (MZM) money supply that now exceeds $7 Trillion. So what is in your bank account is just electronic money, and there is absolutely no waythat even a fraction of depositors could get physical cash to redeem the digits in their accounts. If there is a bank holiday declared, there will undoubtedly be severe restrictions on cash withdrawals when banks re-open. Given the precedent of the limits on withdrawals of a few institutions during the Savings and Loan crisisof the 1980s and 1990s, I predict that withdrawal restrictions could go on for many months.
Here are 20 Reasons why America’s next bank holiday will be a nightmare:
- A bank holiday will create a virtual blackout of information on not just checking and saving accounts, but also automated mortgage payments, CDs, and more. Our presently quite transparent banking system will suddenly become opaque. Your bank balance will become invisible. Your handy-dandy online banking web page will be replaced by a “Service Temporarily Unavailable” notice. The willingness to accept checks will evaporate in less than a day. The FUD factor (Fear, Uncertainty and Doubt) will be overwhelming.
- Most businesses will no longer honor personal checks, corporate checks, or bank money orders. Showing a merchant your most recent bank statement isn’t likely to sway him. Again, the FUD factor will rule.
- All checks in the U.S. are cleared through the automated clearinghouse (ACH) network. Most of this network is inside of banking system firewalls. Many Federal, State, and local tax payments are also handled through ACH. (A similar network exists for European banks–the Pan-European Automated Clearing House (PE-ACH), under the Single Euro Payments Area (SEPA) system).
- Credit cards might not be accepted. The FUD factor will dictate that anything even peripherally related to the banking system will be suspect. (Even though the credit card companies have their own credit clearing mechanisms that are only attached to the banking milieu.)
- Except for a few grandfathered recipients, Social Security payments are now made exclusively via bank direct deposit.
- Military monthly pay, housing allowances, and ration payments are now made exclusively via bank direct deposit, in CONUS. That is true virtually across the board (Active component, Reserve, and National Guard.) Ditto for monthly military retirement payments.
- Many State and Federal employees no longer get physical paychecks. They too, are trapped in the “direct deposit only” world.
- Many Americans are now very dependent on bank debit cards (also known as a bank cards or check cards.) In fact, many people don’t even carry more than a few dollars in their wallets. If our world suddenly goes “cash only” most people will suddenly be out of cash.
- ATMs, debit card transactions, and online banking can be shut down in minutes. This huge vulnerability of banking customers has already been evidenced by a few minor glitches.
- Online payment systems like PayPal will be sharply degraded, because they rely on their ability to move funds to and from banks. More importantly, online payments are inextricably tied to credit card processing. If credit card processing is suspended, then online payments will be “dead in the water.”
- Many regular monthly payments such as mortgages, insurance premiums, and some utilities areautomatically debited from checking accounts. These will all come to a screeching halt.
- SWIFT wire transfers will probably be suspended, freezing a good portion of global commerce. Similarly, International ACH transactions (IATs) will also be shut down, since they access the U.S. ACH network.
- The ability to process credit card payments will be dubious, at best. Many merchants will wisely “just say no” to credit cards, even if their countertop POP terminals are still functioning and show available credit. And the fact that many credit cards are now just debit cards in disguise will only add to the reluctance of merchants to take any credit cards.
- Point of purchase (POP) processing of credit and debit cards at gas stations has become ubiquitous. Nearly everyone now uses the “pay at the pump” option. Gas and diesel could become “cash only” transactions.
- Most American families keep less than $300 in cash at home at any given time, including their kids’ piggy banks. For most families, that wouldn’t cover even one month’s rent.
- Formerly distributed as “Food Stamps”, the USDA‘s Supplemental Nutrition Assistance Program (SNAP), provides benefits to low income families through Electronic Benefit Transfer (EBT) card payments. These cards look much like credit cards. And like checks, EBT payments are all routed through the ACH network. Again, this is a network that is inside banking system firewalls. If the banking system goes into holiday mode, then it may take days or even weeks to get EBT processing back on line. If the EBT payments stop, we can expect riots in metropolitan areas in less than a week.
- Gift cards will be “iffy.” There are now two types of gift cards: “open loop” (or “network”) cards and traditional “closed loop” cards. Open loop cards are issued by banks or credit card companies and can be redeemed many places. It is likely that only closed loop cards will be honored by the issuing stores, because merchants will fear that open loop cards might have been zeroed out elsewhere. (If they can’t confirm the available balance, the card will be refused.)
- Most Internet vendors are almost entirely dependent on credit card processing. If that processing system is disrupted, then mailorder firms will either have to cease operations, or have them slow to a snail’s pace, and be restricted to only non-bank money orders.
- Reversion to U.S. Postal Service money orders (commonly called “PMOs“) will only be partially viable solution. This is because many small town and rural post offices don’t keep enough cash in their tills to be able to hand you $1,000 when you go to cash a PMO. You may be thinking, “Oh well, I’ll just ask them to write me a blank PMO, in exchange. Nope. A recent change to postal regulations designed to curtailmoney laundering banned money order-for-money order issuance. Bummer. And if you are considering using “Forever” postage stamps, hold your horses. Under a hygiene regulation published in the Domestic Mail Manual (DMM), postal clerks are not allowed to cash out (“buy back”) stamp booklets unless they are still in their sealed clear plastic master packages. So it might take decades to use up your Forever stamps, or you will be forced to liquidate them on the gray market at a slight loss.
- Bank safe deposit boxes will probably be inaccessible. Plan accordingly.
Some Observations and Mitigation Steps:
Because so many pay and retirement benefit systems are now handled via bank direct deposit only, we could easily live through a frustrating “Roach Motel” period of several months when “Dollars check in, but they don’t check out.” Be prepared to ride through that period.
If the European credit spreads to the United States, then immediately visit your company’s payroll office, and ask to be removed from their direct deposit system. This change might take a couple weeks. With a paper paycheck, you can probably cash it elsewhere, even if you own bank closes its doors–perhaps even at your local grocery store.
Keep plenty of well-hidden cash at home. Since it won’t be earning interest, some of this cash might as well be in $2 rolls of nickels. That method will also give you a hedge on inflation, and also serve as insurance against a currency reform. (Where a zero could be lopped off the Dollar, overnight.)
Be prepared for times for when anything other than greenback cash or perhaps silver coins will be eyed with suspicion, or rejected outright. Even USPS PMOs and drug store money orders may be refused. In the era of bank holidays, cash will talk.Keep plenty of it on hand. Oh, and needless to say, don’t store your cash in a bank safe deposit box. You probably won’t have access to it during a bank holiday.
Be wise and circumspect in storing cash at home. Don’t tell anyone other than your spouse about that cash. See the SurvivalBlog archives for suggestions on building secret hiding places, like this one.
A good portion of your “stash of cash” should be in the form of $1 and $5 bills. This is because during abanking crisis, many people will not be able make change for small transactions. And if your local power, water, and phone companies refuse checks, then you will need to be able to pay them the exact amount of your monthly bill. (They probably won’t have much “change”, either.)
Apply for at least one gasoline station chain charge card. In turbulent times when they won’t take your check or your VISA card, they might still take their own chain card.
If you have to pay your utility bills in in cash or by PMO, do you know where their business offices are located? And consider the sort neighborhood where those offices are located. (Unless you live in a free state for open carry or Constitutional Carry, do you have your CCW permit, and plenty of pistol practice?) For safety, it might be wise to form a neighborhood posse to go pay those bills in a group of of six people once a month.
Your local supermarket may declare “cash only.” This is yet another reason why it it is vitally important for every family to have a comprehensive food storage program. By the same token, fuel storage also makes sense, if your local fire code allows it.
At the tail end of a banking crisis–when the bank doors do re-open–the Federal Reserve will certainly have to crank up the printing presses. Even people that never had “mattress money” will want some. All this new cash will increase the velocity of money, locally. This will be inflationary, even at the same time that a the macro level, we will witness a huge dollar deflation. (This is because the multiplier effect of every dollar on depositwill work in reverse, as withdrawals are made.) These will be strange times, indeed. If you start to see any evidence of mass inflation kicking in, then be ready to spend your dollars as quickly as possible to parlay them into practical, barterable tangibles. Don’t be the last one standing in the game of Dollar Musical Chairs.
The threats of credit crunches, bank runs, and bank holidays are not new. No society is immune from them. We’ve been fortunate here in the United States to have not suffered any limits on bank withdrawals since the Savings and Loan crisis of the 1980s and 1990s. But don’t expect this stability to be permanent. We live in a dynamic world with rapidly changing threats to our lives and livelihoods. Prepare for the worst and hope for the best.