It is now common knowledge that there is a potential domino effect of European and US sovereign debt contagion in roughly the following order:
Greece → Ireland → Portugal → Spain → Italy → UK==> France==> USA.........
While some people have been writing about this for well over a year, many others have joined the party late (there are now over 600,000 hits from a Google search discussing this topic.)
It is also now common knowledge that while Greece and Ireland have relatively small economies, there will be real trouble if the Spanish domino falls....
Iceland has the world's 112th biggest economy, Ireland the 38th, and Portugal the 36th. In contrast, Spain has the world's 9th biggest economy, Italy the 7th and the UK the 6th. A failure by one of the latter 3 would be devastating for the world economy.
As Nouriel Roubini wrote in February:
But the real nightmare domino is Spain. Roubini refers to the Spanish debt problems as "the elephant in the room".
"You can try to ring fence Spain. And you can essentially try to provide financing officially to Ireland, Portugal, and Greece for three years. Leave them out of the market. Maybe restructure their debt down the line."
"But if Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out."
With Spain, the first problem is the size of its public debt: €1 trillion. (Greece, by contrast, has €300 of public debt.) Spain also has €1 trillion in private foreign liabilities.
And for problems of that magnitude, there simply are not enough resources—governmental or super-sovereign—to go around....
And as I've previously pointed out, Germany and France - the world's 4th and 5th largest economies - have the greatest exposure to Portuguese and Spanish debt. For more on the interconnections between Euro economies adding to the risk of contagion, see this.
While it is tempting to assume that the Eurozone bailouts mean that creditor nations which have managed their economies well and saved huge amounts of excess reserves which they lend out, Sean Corrigon points out that the European bailouts are a Ponzi scheme:
Under the rules of this multi-trillion shell game, the sovereigns guarantee the ECB which funds the banks which buy the government debt which provides for everyone else's guarantees.
(America is no different: Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that America is running a giant Ponzi scheme as well. And both America and Europe are trying to cover up the insolvency of their banks by running faux stress tests.)
It didn't have to be like this. The European nations did not have to sacrifice themselves for the sake of their big banks.
As Roubini wrote in February:
"We have decided to socialize the private losses of the banking system.
Roubini believes that further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, "Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns."
Essentially, the super-sovereigns underwrite sovereign debt—increasing the scale and concentrating the problems.
Roubini characterizes super-sovereign intervention as merely kicking the can down the road.
He says wryly: "There's not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone."
But, despite the paper shuffling of debt at the national level—and at the level of supranational entities—reality ultimately intervenes: "So at some point you need restructuring. At some point you need the creditors of the banks to take a hit —otherwise you put all this debt on the balance sheet of government. And then you break the back of government—and then government is insolvent."
As I pointed out in December 2008:***
The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don't have, central banks have put their countries at risk from default.
But They Had No Choice ... Did They?
But nations had no choice but to bail out their banks, did they?
Well, actually, they did.
The leading monetary economist told the Wall Street Journal that this was not a liquidity crisis, but an insolvency crisis. She said that Bernanke is fighting the last war, and is taking the wrong approach (as are other central bankers).
Nobel economist Paul Krugman and leading economist James Galbraith agree. They say that the government's attempts to prop up the price of toxic assets no one wants is not helpful.
BIS slammed the easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, "the use of gimmicks and palliatives", and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts "will only make things worse".
Remember, America wasn't the only country with a housing bubble. The world's central bankers let a global housing bubble development. As I noted in December 2008:... The bubble was not confined to the U.S. There was a worldwide bubble in real estate.BIS also cautioned that bailouts could harm the economy (as did the former head of the Fed's open market operations). Indeed, the bailouts create a climate of moral hazard which encourages more risky behavior. Nobel prize winning economist George Akerlof predicted in 1993 that credit default swaps would lead to a major crash, and that future crashes were guaranteed unless the government stopped letting big financial players loot by placing bets they could never pay off when things started to go wrong, and by continuing to bail out the gamblers.
Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was "the biggest bubble in history". The Economist noted that - at that time - the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.commercial real estate is also bursting world-wide. See this.
These truths are as applicable in Europe as in America. The central bankers have done the wrong things. They haven't fixed anything, but simply transferred the cancerous toxic derivatives and other financial bombs from the giant banks to the nations themselves.
Paul Krugman wrote yesterday:
These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.Mike Whitney noted yesterday:
Punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.
Don't believe the hype about European unity or saving Ireland. My ass. This is about bailing out the banks. The bondholders get a free ride while workers get kicked to the curb.And Mish pointed out last week:
Today the Irish Government sold its citizens into debt slavery by agreeing to guarantee stupid loans made by German, British, and US banks.
Why the average Irish citizen should have to bail out foreign bondholders is beyond me, but I do note that the same happened in the US with taxpayers footing an enormous bill for Fannie Mae, Freddie Mac, and AIG/CIA.....
It's not just the "peripheral" European countries which are in trouble.
As Ambrose Evans-Pritchard reported yesterday:
The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union.
Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.
"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."
The refrain was picked up this week by German finance minister Wolfgang Schäuble. "We're not swimming in money, we're drowning in debts," he told the Bundestag.
While Germany's public and private debt is not extreme, it is very high for a country on the cusp of an acute ageing crisis. Adjusted for demographics, Germany is already one of the most indebted nations in the world.
As I wrote in May:
As the following Reuters chart shows (based on information provided by BIS), France and Germany are the largest holder of Greek debt:
As The Street notes, France and Germany are also greatly exposed to Portugal and Spain:And as Tyler Durden points out, France Germany and the UK are getting hit with wider credit default swap spreads:
France's banking sector has the second-largest exposure to Portugal and Spain debt loads, after Germany, according to the BIS.
European banks have more at-risk assets in Portugal and Spain than in Greece. European lenders are holding Portugal debt issues of $240.5 billion -- including $47.4 billion by German banks and $44.9 billion by French firms, according to BIS figures from the end of 2009 quoted in a Bloomberg report.
With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names...Given that central bankers have - for several years - focused on credit default swaps as the most important economic indicator (see this and this), widening spreads are a bad sign, indeed.
Zero Hedge's outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe's core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.
As the Washington Post points out today, the U.S. is not immune:
U.S. banks hold about $133 billion in debt from Ireland, Spain, Portugal and Greece ....
A full-blown debt crisis in Europe could ... also send the euro plunging against the dollar, making the greenback stronger on world markets and undermining the efforts of the Obama administration to boost U.S. exports overseas.
"For now, the U.S. is kind of insulated," said Simon White, a partner at the London-based research firm Variant Perception. But whether it stays that way, he said, "depends on how deep the crisis goes."
Americans will not be spared if there's a recession in Europe, even if U.S. bank exposure to European government debt is relatively limited.
The European Union is the second largest market for U.S. exports, behind only Canada. The EU bought about $175 billion in U.S. goods in the first three quarters of this year. That's up about 8% from a year ago.So worsening problems in Europe will clearly be a drag on the U.S. as well.
But the question of what country the "contagion" might spread to next is really the wrong question altogether.
The real question is whether the wealth of the people around the world will continue to be shoveled into the bottomless pit of debts held by the big banks, or whether the people will prevail and the giant banks and bondholders will be forced to take a haircut. See this, this and this.
For what I read in the BIS quarterly report, the country most exposed by far to Portuguese debt is Spain. Greek and Portuguese liabilities are relatively small, while the Irish one is enormous compared to its size, almost as big as the Spanish one - Britain and Germany being the most exposed ones.
As for Spain, the debt is some 25% larger than the Irish one (only) but has greater implications for the real economy because its companies and market are much larger (actually Spain would merit to be in the G7, as it ranks above Canada and even Russia, but for historical reasons it is not a member). France, Germany, the USA, Britain and the other EU countries group (that includes the Netherlands, Belgium, etc.) are quite similarly exposed to the Spanish debt (almost 1/5 each).
But why has debt skyrocketed. At least partly, and this seems very clear and extreme in the Irish case, because states have attempted to save banks from their own mad gluttony, trying to prevent a private financial sector domino effect... to no avail. Today the private debt has been nationalized (instead of nationalizing bank management after due bankruptcy), what is absurd and has no run.
Core countries like Germany or France have tried to prevent this peripheral, mostly private, financial problems from spreading to them, by forcing peripheral states to bailout and cut budgets, making the peoples the ultimate payers of a debt they never contracted.
However, now it seems all this is failing anyhow, and core Europe will also suffer the strike. Germany, France and the Benelux are between a rock and a hard place and it's also their fault anyhow (their leaders', their banks') - so it's not that unfair. They cannot bailout anymore but they cannot either afford to suffer the unavoidable bankruptcies that will come.
So the best is to make a jubilee and start all over, maybe even trying some other formula than brute force capitalism. The invisible hand either has never existed or is like the Black Death (violent spurts of radical destruction), so we better consider that liberal economics is wrong and start reorganizing on other basis before we destroy all the productive fabric, that is still there to serve our needs.EU, Un lien :
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