As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.
Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.
The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.
A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.
“It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.
Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.
Greece has seen several outbreaks of civil disorder as its government struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses.
Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash.
Fuelling the fears of financial markets for the euro, reports in Madrid yesterday suggested that the new Popular Party government could seek a bail-out from either the European Union rescue fund or the International Monetary Fund.
There are also growing fears for Italy, whose new government was forced to pay record interest rates on new bonds issued yesterday.
The yield on new six-month loans was 6.5 per cent, nearly double last month’s rate. And the yield on outstanding two-year loans was 7.8 per cent, well above the level considered unsustainable.
Italy’s new government will have to sell more than EURO 30 billion of new bonds by the end of January to refinance its debts. Analysts say there is no guarantee that investors will buy all of those bonds, which could force Italy to default.
The Italian government yesterday said that in talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Prime Minister Mario Monti had agreed that an Italian collapse “would inevitably be the end of the euro.”
The EU treaties that created the euro and set its membership rules contain no provision for members to leave, meaning any break-up would be disorderly and potentially chaotic.
If eurozone governments defaulted on their debts, the European banks that hold many of their bonds would risk collapse.
Some analysts say the shock waves of such an event would risk the collapse of the entire financial system, leaving banks unable to return money to retail depositors and destroying companies dependent on bank credit.
The Financial Services Authority this week issued a public warning to British banks to bolster their contingency plans for the break-up of the single currency.
Some economists believe that at worst, the outright collapse of the euro could reduce GDP in its member-states by up to half and trigger mass unemployment.
Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder.
“When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” UBS said...
Paul Craig Roberts
November 26, 2011
On November 25, two days after a failed German government bond auction in which Germany was unable to sell 35% of its offerings of 10-year bonds, the German finance minister, Wolfgang Schaeuble said that Germany might retreat from its demands that the private banks that hold the troubled sovereign debt from Greece, Italy, and Spain must accept part of the cost of their bailout by writing off some of the debt.
The private banks want to avoid any losses either by forcing the Greek, Italian, and Spanish governments to make good on the bonds by imposing extreme austerity on their citizens, or by having the European Central Bank print euros with which to buy the sovereign debt from the private banks. Printing money to make good on debt is contrary to the ECB’s charter and especially frightens Germans, because of the Weimar experience with hyperinflation.
Obviously, the German government got the message from the orchestrated failed bond auction. As I wrote at the time, there is no reason for Germany, with its relatively low debt to GDP ratio compared to the troubled countries, not to be able to sell its bonds.
If Germany’s creditworthiness is in doubt, how can Germany be expected to bail out other countries? Evidence that Germany’s failed bond auction was orchestrated is provided by troubled Italy’s successful bond auction two days later.
Strange, isn’t it. Italy, the largest EU country that requires a bailout of its debt, can still sell its bonds, but Germany, which requires no bailout and which is expected to bear a disproportionate cost of Italy’s, Greece’s and Spain’s bailout, could not sell its bonds.
In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt.
My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits.
If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued. Therefore, the failure of European sovereign debt would renew the financial crisis in the US, requiring a new round of bailouts and/or a new round of Federal Reserve “quantitative easing,” that is, the printing of money in order to make good on irresponsible financial instruments, the issue of which enriched a tiny number of executives.
Certainly, President Obama does not want to go into an election year facing this prospect of high profile US financial failure. So, without any doubt, the US Treasury wants Germany out of the way of a European bailout.
The private French, German, and Dutch banks, which appear to hold most of the troubled sovereign debt, don’t want any losses. Either their balance sheets, already ruined by Wall Street’s fraudulent derivatives, cannot stand further losses or they fear the drop in their share prices from lowered earnings due to write-downs of bad sovereign debts. In other words, for these banks big money is involved, which provides an enormous incentive to get the German government out of the way of their profit statements.
The European Central Bank does not like being a lesser entity than the US Federal Reserve and the UK’s Bank of England. The ECB wants the power to be able to undertake “quantitative easing” on its own. The ECB is frustrated by the restrictions put on its powers by the conditions that Germany required in order to give up its own currency and the German central bank’s control over the country’s money supply. The EU authorities want more “unity,” by which is meant less sovereignty of the member countries of the EU. Germany, being the most powerful member of the EU, is in the way of the power that the EU authorities desire to wield.
Thus, the Germans bond auction failure, an orchestrated event to punish Germany and to warn the German government not to obstruct “unity” or loss of individual country sovereignty.
Germany, which has been browbeat since its defeat in World War II, has been made constitutionally incapable of strong leadership. Any sign of German leadership is quickly quelled by dredging up remembrances of the Third Reich. As a consequence, Germany has been pushed into an European Union that intends to destroy the political sovereignty of the member governments, just as Abe Lincoln destroyed the sovereignty of the American states.
Who will rule the New Europe? Obviously, the private European banks and Goldman Sachs.
The new president of the European Central Bank is Mario Draghi. This person was Vice Chairman and Managing Director of Goldman Sachs International and a member of Goldman Sachs’ Management Committee. Draghi was also Italian Executive Director of the World Bank, Governor of the Bank of Italy, a member of the governing council of the European Central Bank, a member of the board of directors of the Bank for International Settlements, and a member of the boards of governors of the International Bank for Reconstruction and Development and the Asian Development Bank, and Chairman of the Financial Stability Board.
Obviously, Draghi is going to protect the power of bankers.
Italy’s new prime minister, who was appointed not elected, was a member of Goldman Sachs Board of International Advisers. Mario Monti was appointed to the European Commission, one of the governing organizations of the EU. Monti is European Chairman of the Trilateral Commission, a US organization that advances American hegemony over the world. Monti is a member of the Bilderberg group and a founding member of the Spinelli group, an organization created in September 2010 to facilitate integration within the EU.
Just as an unelected banker was installed as prime minister of Italy, an unelected banker was installed as prime minister of Greece. Obviously, they are intended to produce the bankers’ solution to the sovereign debt crisis.
Greece’s new appointed prime minister, Lucas Papademos, was Governor of the Bank of Greece. From 2002-2010. He was Vice President of the European Central Bank. He, also, is a member of America’s Trilateral Commission.
Jacques Delors, a founder of the European Union, promised the British Trade Union Congress in 1988 that the European Commission would require governments to introduce pro-labor legislation. Instead, we find the banker-controlled European Commission demanding that European labor bail out the private banks by accepting lower pay, fewer social services, and a later retirement.
The European Union, just like everything else, is merely another scheme to concentrate wealth in a few hands at the expense of European citizens, who are destined, like Americans, to be the serfs of the 21st century....
For the growing chorus of observers who fear that a breakup of the Zioconned euro zone might be at hand, Chancellor Angela CIA Merkel of Germany has a pointed rebuke: It’s never going to happen....LOL
But some banks are no longer so sure, especially as the sovereign debt crisis threatened to ensnare Germany itself this week, when investors began to question the nation’s stature as Europe’s main pillar of stability.
On Friday, Standard & Poor’s downgraded Belgium’s credit standing to AA from AA+, saying it might not be able to cut its towering debt load any time soon. Ratings agencies this week cautioned that France could lose its AAA rating if the crisis grew. On Thursday, agencies lowered the ratings of Portugal and Hungary to junk.
While European leaders still say there is no need to draw up a Plan B, some of the world’s biggest banks, and their supervisors, are doing just that.
“We cannot be, and are not, complacent on this front,” Andrew Bailey, a regulator at Britain’s Financial Services Authority, said this week. “We must not ignore the prospect of a disorderly departure of some countries from the euro zone,” he said.
Banks including Merrill Lynch, Barclays Capital and Nomura issued a cascade of reports this week examining the likelihood of a breakup of the euro zone. “The euro zone financial crisis has entered a far more dangerous phase,” analysts at Nomura wrote on Friday. Unless the European Central Bank steps in to help where politicians have failed, “a euro breakup now appears probable rather than possible,” the bank said.
Major British financial institutions, like the Royal Bank of Scotland, are drawing up contingency plans in case the unthinkable veers toward reality, bank supervisors said Thursday. United States regulators have been pushing American banks like Citigroup and others to reduce their exposure to the euro zone. In Asia, authorities in Hong Kong have stepped up their monitoring of the international exposure of foreign and local banks in light of the European crisis.
But banks in big euro zone countries that have only recently been infected by the crisis do not seem to be nearly as flustered.
Banks in France and Italy in particular are not creating backup plans, bankers say, for the simple reason that they have concluded it is impossible for the euro to break up. Although banks like BNP Paribas, Société Générale, UniCredit and others recently dumped tens of billions of euros worth of European sovereign debt, the thinking is that there is little reason to do more.
“While in the ZIOCONNED United States there is clearly a view that Zioconned Europe should break up just like what they are doing to MENA and EURASIA....since the Barbarian Kissinger's planning decades ago...., here, we believe Europe must not remain as it is,” said one French banker, summing up the thinking at French banks. “So no one is saying, ‘We need a fallback,’ ” said the Zioconned banker, who was not authorized to speak publicly.
When Intesa Sanpaolo, Italy’s second-largest bank, evaluated different situations in preparation for its 2011-13 strategic plan last March, none were based on the possible breakup of the euro, and “even though the situation has evolved, we haven’t revised our scenario to take that into consideration,” said Andrea Beltratti, chairman of the bank’s management board.
Mr. Beltratti said that banks would be the first bellwether of trouble in the case of growing jitters about the euro, and that Intesa Sanpaolo had been “very careful” from the point of view of liquidity and capital. In late spring, the bank raised its capital by five billion euros, one of the largest increases in Europe.
Mr. Beltratti said that Italy, like the European Union, could adopt a series of policy measures that could keep the breakup of the euro at bay. “I certainly felt more confident a few months ago, but still feel optimistic,” he said.
European leaders this week said they were more determined than ever to keep the single currency alive — especially with major elections looming in France next year and in Germany in 2013. If anything, Mrs. Merkel said she would redouble her efforts to push the union toward greater fiscal and political unity.
That task is seen as slightly easier now that the crisis has evicted weak leaders from troubled euro zone countries like Italy and Spain. But it remained an uphill battle as Mrs. Merkel continued this week to oppose the creation of bonds that would be backed by the euro zone.
Politically, even the idea of a breakaway Greece is increasingly considered anathema. Despite expectations that Greece — and the banks that lent to it — may receive European taxpayer bailouts for up to nine years, officials fear its exit could open a Pandora’s box of horrors, such as a second Lehman-like event, or even the exit of other countries from the euro union.
Europe’s common currency union was formed more than a decade ago and now includes 17 European Union members, creating a powerful economic bloc aimed at cementing stability on the Continent. It ushered in years of prosperity for its members, especially Germany, as interest rates declined and money flooded into the union — until the Lehman Brothers bankruptcy sent global credit markets into chaos three years ago and the financial crisis took on new life with the near-default of Greece last year. The creation of the euro zone meant countless interlocking contracts and assets among the countries, but no mechanism for a country to leave the union.
But as the crisis leaps to Europe’s wealthier north, banks have been increasing their preparedness for any outcome. For instance, while it would certainly be legally, financially and politically complicated for Greece to quit the euro zone, some banks are nonetheless tallying how euros would be converted to drachmas, how contracts would be executed and whether the event would cause credit markets to seize up worldwide.
The Royal Bank of Scotland is one of many banks testing its capacity to deal with a euro breakup. “We do lots of stress-test analyses of what happens if the euro breaks apart or if certain things happen, countries expelled from the euro,” said Bruce van Saun, RBS’s group finance director. But, he added: “I don’t want to make it more dramatic than it is.”
Certain businesses are taking similar precautions. The giant German tourism operator TUI recently caused a stir in Greece when it sent letters to Greek hoteliers demanding that contracts be renegotiated in drachmas to protect against losses if Greece were to exit the euro.
TUI took the action just days after Mrs. CIA Merkel and President Nicolas MOSSAD Sarkozy of France acknowledged at a meeting earlier this month of G-20 leaders in Cannes, France, that Greece could well leave the monetary union. On Thursday, Greece’s central bank warned that if the country failed to improve its finances quickly, the question would become “whether the country is to remain within the euro area.”
In a survey published Wednesday of nearly 1,000 of its clients, Zioconned Barclays Capital said nearly half expected at least one country to leave the euro zone; 35 percent expect the breakup to be limited to Greece, and one in 20 expect all countries on Europe’s periphery to exit next year.
Some banks are now looking well beyond just one country. On Friday, Merrill Lynch became the latest to issue a report exploring what would happen if countries were to exit the euro and revert to their old currencies. If Spain, Italy, Portugal and France were to start printing their old money again today, their currencies would most likely weaken against the dollar, reflecting the relative weakness of their economies, Merrill Lynch calculated.
Currencies in the stronger economies of Germany, the Netherlands and Ireland would probably rise against the dollar, according to the analysis.
In Asia, banks and regulators view the situation with growing alarm. Norman Chan, the chief executive of the Hong Kong Monetary Authority, said on Wednesday that regulators had stepped up their surveillance of banks’ exposure to Europe.
Regulators have been working with bank managers on stress tests to determine how the banks’ financial stability might be affected by an increasingly severe financial dislocation in Europe, said a Hong Kong banker who insisted on anonymity.
The main danger of a euro breakup, said Stephen Jen, managing partner at SLJ Macro Partners in London, is “re-denomination risk,” the unpredictable effect that a euro breakup would have on financial assets as newly created currencies sought their own levels in the market and the value of contracts drawn up in euros came into question.
Most people hope that will not happen. “Remember when Lehman went bankrupt — nobody could anticipate what happened next,” said the French banker who was not authorized to speak publicly. “That was a company, not a country. If a country leaves the euro — multiply the Lehman effect by 100,” he said....