No more tomorrows for the Euro

(4 pm. – promoted by ek hornbeck)

    Unlike the deficit ceiling standoff in Washington, Europe is experiencing a real financial crisis, and today it began to get out of control.

 The European money markets have begun to seize up as pressure mounts on the Italian and Spanish banking systems, tracking the pattern seen during the build-up towards the financial crisis in 2008.

   “Europe’s money markets are undoubtedly starting to freeze up,” said Marc Ostwald from Monument Securites.

   “It’s not as dramatic as pre-Lehman but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis.”

 Italian banks have been hit especially hard, with almost daily suspensions of their stock trading due to selling pressure. But today things went to a different level.

 Italian bank’s main stock market collapses, causing the suspension

 They called it a “technical problem” that just happened to coincide with a collapse in Italian bank stocks.

 The bond markets for Greece, Ireland, and Portugal froze up months ago. Interest rates are so high there that those countries have been completely priced out of the private debt markets.

  But those are small countries with small economies. That’s what the European Central Bank and IMF has been trying to take care, by forcing those countries to accept draconian austerity measures in exchange for bridge loans.

 The problem is Spain and Italy. They are much larger countries with much larger economies. In fact, Italy’s debt market is the 4th largest in the world. These countries are far too large for any bailout. No entity could possibly manage it without risking itself in the process.

Italian bond yields

  That’s why fear is now stalking the European debt markets.

 (UPI) — Fears mounted Thursday the system sustaining Europe’s debt crisis would collapse amid alarm Italy and Spain were sliding into debt that couldn’t be bailed out.

   Italy and Spain — the eurozone’s third- and fourth-largest economies and the world’s seventh- and 10th-largest — opened the bond markets Thursday with borrowing rates near the 7 percent threshold that triggered bailout talks with Greece, Ireland and Portugal.

 A full-blown Italian and Spanish debt crisis would hit large European banks hardest, the Post said, but could also dry up interbank lending worldwide.

  U.S. banks and investment funds are also more exposed to Italy and Spain than they are to Greece.

 You read that right. If things don’t change for the better, and soon, we are looking at something akin to a repeat of the Fannie/Freddie/Lehman collapse of 2008.

  The whole debt ceiling thing in Washington had the added benefit of distracting you away from a real crisis.

Let me repeat that, because I can’t emphasis this enough:

   Things don’t have to get worse. If the bond and money markets in Europe don’t start improving, and soon, then the banking systems of Spain and Italy will collapse. This will trigger financial contagion that will circle the globe, just like Fannie/Freddie/Lehman did in 2008.

  The word for today is contagion.

 Ever since the European debt crisis began, the risk of contagion – of problems spreading from smaller countries to bigger ones, like Italy and Spain – has worried government officials and investors.

  Now another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain.

  It’s hard to believe that we could be back in this situation again so soon, but that is what will happen when you only throw money at a problem rather than address the fraud, corruption, and systemic problems in the global financial system.

 The bond markets of Belgium, Britain, and France are already beginning to feel the effects of this contagion. The whole Eurozone is in need of a restructuring, and that won’t happen without the crisis hitting a critical phase.

 “We have a revolt taking place by foreign investors in these bond markets,” said Hans Redeker, currency chief at Morgan Stanley. “There have been hardly any purchases for several months. We are seeing net disinvestment because people fear that these countries lack the potential to grow their way out of the problem, and risk falling into a Fisherite debt trap.”

   Mr Redeker said the eurozone needs a lender-of-last resort along the lines of the US Federal Reserve to backstop the Spanish and Italan bond markets. The European Central Bank cannot easly step into the breach under its current legal mandate and treaty authority.

  “The eurozone faces a very big decision: it either creates a central fiscal authority or accepts reality and starts to think the unthinkable, which is to cut the currency union into workable pieces.”

  Simon Derrick from the BNY Mellon said the trigger for the final denouement in each of the eurozone’s bond crises so far has been when the spread over German Bunds reaches 450 basis points, prompting LCH Clearnet to impose higher margin requirements. The Spanish spread hit a record 400 on Tuesday.

 The natural thing to think at this point is, “If things were really as bad as you say, I would have heard more about it.”

  To which I would reply that in 1931 the American newspapers had simply stopped reporting food riots because of fears that it would alarm the public further. It was around this time that the Austrian bank Credit-Anstalt collapsed. This led to a banking crisis in Europe that forced Britain to devalue their currency and forced the second, more serious episode of the banking crisis in America’s Great Depression.


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    • gjohnsit on August 4, 2011 at 17:55

    Are they trying to “protect” the American public, or do people simply not understand the magnitude?

  1. has something to do with real estate speculation gone bad by northern europeans in the retirement 2nd and third home markets of Greece, Ireland, Italy, Spain. And then a corresponding drop in tax base in those countries, caused by that.

    Is that your take?

  2. euro may fall, but the USD will fall also…

  3. big time Rip Van Winkle, Ralph Cramden’s cozy little

    apartment may very well be the place many find themselves upon waking. Ouch! And the Life of Riley? Well, with manufacturing gone the only jobs left will be in prison construction. Maybe the less fortunate will be able to share cells with the prisoners for free? But whether they’ll be eligible for medical care like the prisoners is hard to tell. Although the prison budgets are expected to increase.

    And while the college graduates are drowning in debt, it’s great to know that the graduated income tax is easing up on the billionaires. And those Bankers, thank god they finally’ve got some real protection from those nasty vicissitudes of capitalism. The people? Not so much.

    But all can be fixed now as the political parties have become indistinguishable from the lobbyists and visa versa.

    It’ll make finding cadidates a lot easier for everybody.

  4. First, putting the US and other countries with their own money on the same list with countries like Greece, Italy, Spain, Portugal or Ireland is absurd. They don’t have their own money. They are like states: to deficit spend, they have to borrow.

    Second, US debt that is in government hands is like you writing “IOU $5,000” and putting it in your own pocket. Sure, you owe somebody $5,000, so bad news there … but the good news is somebody owes YOU $5,000!!!!

    US debt in private hands in July was $9.8T, and US GDP in 2011Q2 was $15T, so by inspection, so REAL US Debt to ANYBODY BUT THE US GOVERNMENT ITSELF aint nowhere near 100%.

    Different governments with different systems of “independent” government agencies with promises to really truly do things sealed with government bonds will have either next to no or massive amounts of their own debt in their own hands. What any sane person would compare is the debt that each government in private hands.

    And the only list where that amount really matters is the countries that do not have their own money.

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