(2 pm. – promoted by ek hornbeck)
It’s taken a very long time, but the easily predictable implosion to Europe’s sovereign debt crisis is finally approaching.
The same day that thousands of protestors against austerity measures returned to the streets in Athens, the Greek bailout talks also collapsed.
“I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”
Europe’s financial leaders want Greece to cut its budget further in order to make up for the gap that has been caused by the deepening recession. Of course the cuts are making the fiscal gap worse by slowing the economy further.
Meanwhile, yields on 1-year Greek bonds have hit 70%, a level so far above affordable that a Greek default is already priced into.
Another monkey-wrench in the endless round of bailouts, is Finland’s insistence on collateral before a new loan.
Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland’s contribution.
It’s hard not to talk about the coming Greek default without mentioning its impact on the Euro in general.
Christian Lindner, general secretary of the Free Democrats, (FDP) junior coalition partners in Chancellor Angela Merkel’s center-right government, said Athens was endangering European solidarity.
“The breakdown of talks between the Troika and Greece is a blow to the stability of the euro,” he said at a news conference in Berlin…
Separately, senior FDP official Hermann Otto Solms, a vice-president of the Bundestag and an economy committee member in parliament said since Greece could not handle its debt problem and it should consider leaving the euro.
There is no mechanism for countries to exit the Euro, or to default. Yet one or both of those things are going to happen, probably in an unpredictable way, very soon.
But even before that happens, we’re going to see a crisis with Europe’s bank.
Europe’s financial institutions are fleeing the continent and going to America.
A key warning signal of global financial stress has shot above the extreme levels seen at the height of the Lehman crisis in 2008.
Central banks and official bodies have parked record sums of dollars at the US Federal Reserve for safe-keeping, indicating a clear loss of trust in commercial banks. Data from the St Louis Fed shows that reserve funds from “official foreign accounts” have doubled since the start of the year, with a dramatic surge since the end of July when the eurozone debt crisis spread to Italy and Spain.
If you were wondering who would lose faith in Europe’s banking system first, the answer is Europe’s banks. It’s the equivalent of a modern-day bank run…that the banks are doing. And bankers aren’t the only ones running – the wealthy of Greece are also fleeing. These are the same wealthy Greeks that have been avoiding paying taxes for years.
With Treasury yields near zero and Wall Street holding up somewhat well, you might think that things weren’t so bad. Instead what you are seeing is the massive inflows of cash from Europe fleeing to a perceived safehaven.
Why are they running? Because they have to.
European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium’s Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany’s Commerzbank, it’s about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.
Europe’s banks are over-leveraged. The more vulnerable banks simply don’t have the capital to weather a Greek default. More importantly, we all saw how financial contagion works in 2008, that a bank going under can force other financial institutions into bankruptcy too.
So now you know what this unavoidable financial catastrophe means to the financial markets, but what does it mean to actual people? What does the face of austerity (something that Americans will soon be seeing) look like?
Let’s look at Greece first.
What future for political and social stability among the newly enslaved once it is realised the price that has to be paid is loss of fiscal sovereignty together with years of externally imposed austerity;
The austerity plan that the rest of Europe is trying to force Greece to accept would amount to a reduction in public salaries and social programs of 10% of GDP. How can an economy absorb such a dramatic shock? It would effectively gut the social safety net, and that doesn’t even mention the auctioning off of public assets to foreign investors.
Greece will be sacrificed at the alter of Europe’s insolvent banking system unless the Greek people do something about it.
Ireland’s massive deficit was caused almost exclusively by the government’s decision to bail out the insolvent banking system. This is what austerity looks like there.
The current budget for Ireland includes spending cuts and tax increases, valued at about $8B, over the next year alone, or 4% of GDP. Most of the reduction in spending will come from cuts to welfare programs and public sector salaries/benefits.
The Irish government may also sell “non-strategic” public assets valued up to $3B over time, on recommendations of the “McCarthy Group”.
Meanwhile, the corporate tax rate will continue to be held at 12.5% (the lowest rate in OECD countries), which effectively serves to deflect the austerity burden from corporations generating massive profits within the country.
Are you starting to see a pattern here? The large corporations and wealthy are being spared, while the working class pays for huge financial losses that he/she never benefited from in the first place.
Now let’s look at Spain.
Their unemployment rate is north of 20%, and the unemployment rate for young adults is 44%. Meanwhile their banking system is practically insolvent due to a bursting housing bubble. Unlike the youth of Ireland, the young people of Spain aren’t taking this lying down.
“Justin: As I’ve been walking around the streets of Granada, Spain over the last few days I’m seeing the protests grow every day even though police are trying their best to quiet things among the students here. People were marching with megaphones today and handing out flyers tell all of us to gather in the town square. Much of the pressure here is in anticipation of the election that’s coming soon but all the candidates are still thinking within the mainstream paradigm. In the very near future, Spain will have to deal with its debt and that likely means a bailout from the EU with the restructuring required, now that the youth are becoming more and more organized after frustration with low wages and 40%+ unemployment, Spain has everything in place to become the first European nation to experience a full scale revolution.”
The fact is that in Greece and Spain, the Socialist Party is the one imposing austerity and following the will of the bankers. The opposition party is the conservative party, which is even more strident in their intention to follow the policies of austerity. It’s a campaign of which Corporate Party will win.
Does this sound somewhat familiar to America?
It’s time that we stopped thinking about reforming the system in terms of tax rates, and started thinking about a complete restructuring of the system.
Raising taxes on the rich is like trying to bail out a boat with a big hole in it. Sure it might help a little, but it won’t fix anything, and the moment you stop bailing the boat will sink.
“This element of monopoly, of appropriation and spoilation will, when we come to analyze them, be found largely to account for all great fortunes.”
– Henry George
Cartoon – 1931