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Hardly a week
goes by, without a major summit between German Chancellor Angela Merkel and
French President Nicolas Sarkozy, trying to devise another clever scheme to
save the Euro. Yet after 1-½ years of trying to contain the wildfire,
- the Euro-zone's debt crisis is more dangerous than ever. The collapse of
Greece's €360-billion bond market, now trading at 26% of face value,
has triggered contagion sales from periphery of the Euro-zone - Greece,
Ireland and Portugal, and into the next upper tier of the Euro-zone, namely,
the bond markets of Spain and Italy, which together owe €3-trillion of
debt.
Even after
Spain's right-wing Popular Party routed the social democrats in a national
election and assumed power, pledging even more severe austerity measures, -
Spain's borrowing costs continued to ratchet higher. The yield on Spain's
ten-year bonds approached 7% last week, a level considered prohibitively high
enough to topple the Euro-zone's fourth largest economy into a depression in
2012. Despite assurances from Italy's new Prime Minister Mario Monti of new austerity measures, Italy's 10-year yield
hit 7.50% last week, a 15-year high.
The newly
installed governments of Greece, Italy and Spain are promising to imposed
deeper spending cuts, further layoffs of public workers, and raising taxes, -
all measures that can push their economies into a deep recession. However, as
the Wall Street Journal noted on Nov 21st, "Whether the ECB decides to
boost its bond-buying or not, investors seem to be coming to the conclusion
that any true solution to the European debt crisis will be a years-long
process in which governments will be asking electorates to accept enormous
sacrifices, in the form of entitlement cuts and tax increases, as well as
weak growth and high unemployment."
The origins
of the Euro-zone debt crisis began in the Greek bond market. Traders began to
realize that Greece's small workforce of 6-million wage earners couldn't
possibly payback €360-billion ($478-billion) of debt that was
accumulated by the crooked politicians in Athens. Last year, Greece's total
debt increased to 142% of gross domestic product (GDP). This year, it's
expected to reach 160-percent. Yet it's nearly impossible for a government to
run a budget surplus when its economy is shrinking, and tax revenues are falling.
In 2010,
Greece's economic output fell by -4.5% and roughly 65,000 private companies
declared bankruptcy. More than 200,000 people lost their jobs. The situation
has gotten much worse this year. Greece's jobless rate hit a record high of
18.4% in August. The country is suffering from painful austerity measures
demanded by foreign lenders. The jobless rate for workers in the 15-24-year
category reached 43.5%, twice its level three years ago, and is a tinderbox
that could explode at any moment. Greece's economy is now seen shrinking for
a fourth consecutive year in 2011, at an annual pace of -5.5-percent.
At the same
time, foreign lenders refuse to lend money to Greece. The rating agencies
have downgraded the country so low that Athens must pay 152% for two-year bonds.If the EU and IMF hadn't agreed to cover Greece's
€110-billion borrowing needs thru 2013, Athens would've already
declared state bankruptcy. This would've resulted in massive losses for the
European banking Oligarchs and Euro-zone governments that hold the toxic
debt.
Under the
guidance of Berlin and Paris, a large portion of Greece's toxic debt has
already been clandestinely shifted from the portfolios of the banking
Oligarchs, and dumped into the hands of the Euro-zone taxpayers. In 2009,
private banks held 100% of Greek public debt. However, through backdoor
bailouts arranged by the IMF, the Euro-zone's Financial Stability fund and
the ECB, much of the toxic debt is being transferred from the books of the
banking Oligarchs to public hands. Bankers will probably still hold about
€180-billion of Greek debt by the end of 2013, compared to just under
€300-billion in 2009.
It's highly
doubtful that Greece's downtrodden workers would agree to remain slaves to
Europe's Oligarchic bankers for long. Athens is now demanding that its
lenders write-off three-quarters of the debt owed, in a new restructuring
deal. The alternative is for Greece to abandon the European monetary system
and reintroduce the drachma as its national currency. That would bankrupt the
Greek banks and pension funds that have loaned the Greek state
€75-billion. The export sector would see little benefit from
devaluation, as exports contribute only 7% of GDP. Most likely, the
introduction of the drachma would result in hyper
inflation, and decimate the living conditions of broad layers of the
population. For Greece, there are no good choices to choose from in Dante's
Inferno.
Up until now,
the Franco-German strategy for dealing with the sharp decline in the
Euro-zone bond markets has been the same prescription employed by the IMF
when lending to foreign governments. The EU has demanded brutal austerity
measures that make the working class pay the heavy price for bailout money,
that goes into the coffers of the banking Oligarchs, and not into the local
economies of the impoverished workers. The result is higher unemployment
among broad layers of the population amid a deepening economic slump, a sharp
fall in tax revenues, and a worsening of the debt crisis.Berlin
and Paris now aim to force Athens into selling off the country's crown jewels
at fire-sale prices, in return for the bailout loans.
Italy and
Spain are trying to pare down their running debt balances through painful
austerity measures, but the results are record high unemployment of 21.5% in
Spain, and a sharp plunge in Italy's industrial output. Yet the banking
Oligarchs are still driving the borrowing costs of Italy and Spain sharply
higher, - to their highest levels in 15-years. In turn, the Euro-zone's third
and fourth largest economies are at great risk of slipping into a deepening
recession. This in part reflects the intention of the Oligarchic banks to ratchet
up the pressure on the new governments to follow their dictates. Bank traders
are jacking- up bond yields in order to create the impression of a full blown
crisis that will scare the European Central Bank (ECB) and Berlin into
dropping their opposition to full scale "quantitative easing,"
(QE), - the ECB's unlimited purchasing of the toxic debt on the secondary
markets.
To prepare
the groundwork for full scale QE, - the monetization of toxic debts, - the
political cronies in Berlin and Paris are maneuvering towards a new
arrangement that would blackmail member states of the Euro, into surrendering
their sovereignty over fiscal policy. Meeting with French president Nicolas
Sarkozy and the new Italian Prime Minister Mario Monti
on Nov 24th, Germany's Merkel presented proposals for changes in the EU
treaties within a few days. The aim is to give Brussels the means to enforce
even harsher austerity measures, - such as deeper spending cuts and higher
taxes, without giving a political voice to the working class that must endure
the austerity measures. Those who violate the Stability and Growth Pact
"must be called to account," and sanctioned, Merkel insisted.
According to
recent reports, Merkel and Sarkozy have apparently agreed that if member
states want to remain in the Euro monetary system, they must surrender their
national sovereignty over spending and tax policies. Republican presidential
candidate and former House Speaker Newt Gingrich commented on Nov 4th,
"The European system is designed to block the people from having power.
The elites in Europe work very hard at controlling the European people by
indirect means. And it's only when you get to referendums that you see how
decisively the people of Europe are unhappy with the current
governments," he said. Having already surrendered their national
currencies and decisions about interest rates to the ECB, it would be a
fateful step to surrender fiscal policy.
In return for
surrendering fiscal policy to Brussels, - Berlin and Paris, the key
paymasters of the Euro-zone, would agree to the creation of a common Eurobond
that would pool the credit ratings and collateral of all participating
Euro-zone countries into a single fixed income instrument. Chancellor Merkel
says that German borrowing costs will jump higher because of the creation of
a Eurobond, though she is prepared to consider Eurobonds, if the legal
framework is in place to ensure all countries in the zone observe the rules.
What Merkel
wants to see at the December 9th EU summit is greater harmony of fiscal
policies in the Euro-Zone, backed by legally enforceable rules of financial discipline. These would include automatic sanctions on
countries that violate the existing rules, - such as annual budget deficits
of member states cannot exceed 3% of GDP and that total public debt should be
no more than 60% of the GDP. Every Euro-zone country has breached these
rules.
However, if
big debtor nations such as Greece, Ireland, Portugal, Spain and Italy refuse
to surrender their sovereignty over fiscal policy to Brussels, - the
alternative could be the situation that Greece now finds itself - purgatory.
About 19-years ago, the governments of Italy and Spain had to pay more than
13% for borrowing funds for ten years. Since joining the Euro currency
however, 10-year bond yields for Italy and Spain averaged around 4.50%, until
contagion sales from Greece reached their borders in the summer of 2011.
Once fiscal
integration is agreed upon, Berlin is expected to agree to the creation of
Eurobonds issued by member states that could be purchased in massive
quantities (monetized) by the ECB. Countries would be liable for each others' debts, but the ECB could make much of their
debt disappear with its electronic printing press. Eurobondswould
either be financed with higher taxes on the working class, through austerity
measures, or through the inflationary effects of the ECB's money printing
machine. With French banks alone holding more of their debts than the entire
€440-billion European Financial Stabilization Fund, a default by these
countries would likely bankrupt the French financial system. Thus, Paris has
been pushing hard for the ECB to monetize debt on a massive scale.
Once the ECB
has the assurance that the Eurobonds are backed by a fiscal union, it could
be ready to go all out, and easily buy 2-3-trillion Euros worth at anytime. Still, borrowing costs for existing German bunds
would probably climb higher while interest rates for existing Italian debt
might fall. Currently, Italy's 10-year note yields +525-basis points more
than German yields, but that spread could narrow, if Italy surrenders its
fiscal sovereignty, as a way for the ECB to guarantee Italy's debts. The ECB
could promise to buy unlimited amounts of existing Italian bonds, should
yields should rise to a certain identified level. Knowing that the ECB is
ready to enforce a safety net under the Italian bond market, through massive
intervention, could calm the situation and restore stability to the Milan
stock exchange.
One of the
alternative schemes that is under discussion is for the ECB and central banks
in China, Japan, and elsewhere to lend to the International Monetary Fund,
which in turn, could use the money to lend to Euro zone countries under
market stress.This would help the ECB side-step the
legal problem of financing governments and also help impose IMF-type austerity
on the recipients of the aid -- something the ECB cannot do now. One should
never underestimate the scheming ability of Euro-zone politicians, which why
the Euro currency itself has not fallen apart, as many analysts had
predicted.
Rumors in the
media suggest that the IMF is secretly drawing up plans for a
€600-billion loan package for Italy. Spain may be offered access to an
IMF line of credit, to avoid it being "picked off" by the markets
in the coming months. Any IMF involvement in European rescue packages would
be partly underwritten by US-taxpayers. In other words, 17% of the IMF's
$800-billion bailout is being drawn from the US Treasury, equaling
$135-billion of the bailout for Europe's banks. Britain would provide 4.5% of
the IMF's funding. Some reports say the Fed might print $135-billion, and
secretly lend the dollars to the IMF.
Many experts
no longer believe that the Euro can survive in its current form. The weaker
debtor nations with less than stellar AAA credit ratings might be booted out
of the joint currency regime in the year ahead, unless they agree to
surrender their fiscal sovereignty over to Brussels. Extraordinary measures
might take place by early next year, including the issuance of
"Elite-Six" bonds, backed by six of the Euro-zone's 17 countries
that have the top AAA credit rating -- Germany, France, Austria, the
Netherlands, Luxembourg and Finland.
The sharply
higher bond yields in Greece, Portugal, Ireland, Spain, and Italy, reflects
the risk that these countries might be split-off from the Euro currency next
year, if they refuse to surrender fiscal sovereignty. Furthermore, their
governments might confront an explosive backlash from a desperate working
class that won't be able to survive under tougher austerity. Still, the
possible split-up of the Euro-zone hasn't hurt the Euro currency in a
significant way. At today's level of $1.33, the Euro is still far above last
year's low of $1.200. A Euro currency made-up of the Elite-Six, plus a few
other subordinates, might prove to be more viable, than a currency plagued by
a few bankrupt nations that are on the road to default.
The upward
spiral in Italian and Spanish interest rates has all but stopped economic
growth in the Euro-zone and in England. The stall comes just when Italy,
Spain, and Greece and other nations need growth to help them wriggle out of
the chokehold of debt. The Euro zone economy grew just +0.2% in the third
quarter as solid +0.5% growth in Germany and France was
offset by countries at the epicenter of the debt crisis. Matters are likely
to get much worse in the months to come, when Italy, Greece, Ireland,
Portugal, and Spain begin implementing austerity measures to stop the bond
market from melting down.
The European
Commission expects the Euro-zone economy to shrink -0.1% in the last three
months of the year and to stagnate in the first quarter of 2012. An outright
recession -- two quarters of shrinking output -- is now quite likely. That
would be bad news for China, which sells 35% percent of its exports to
Europe, and for US Multi-Nationals that earn 20% of their revenues from
affiliates that are stationed in the Euro-zone. Even a mild contraction in
Europe's economy, which equals 25% of global GDP, can slow growth around the
world.
The People's
Bank of China tightened its monetary policy in the first half of 2011,
lifting its key 1-year loan rate by a total of +100-bps to 6.56%. Combined
with weaker exports to Europe, Chinese factory activity fell to its lowest
level in 32-months in November, according to a preliminary purchasing
managers' survey, reviving worries that China's economy might be skidding
towards a "hard landing" and compounding global recession fears.
The sub-index for new Chinese factory orders suffered its biggest drop in
1-½-years to sink well below the 50-point mark, suggesting factories
received fewer orders on the whole in November.
With the
Chinese central bank doing much of the heavy lifting in fighting global
inflation, the Continuous Commodity Index (CCI), a basket of 17-equally
weighted commodities, tumbled -16% from its record high set on May 1st.
Weighed down by a similar -16% slide in the MSCI''s All Country Index,
measuring blue-chips companies from 43-stock markets worldwide, the year over
year change in commodities has plunged to near zero percent. That's down
sharply from as high as +46% in the first half of the year, when inflationary
pressures in emerging countries such as Brazil, China, India, and Russia were
highly elevated.
In recent
years, whenever the annualized rate of inflation in the commodities markets
has threatened to go negative, the Bernanke Fed responded with a massive
round of money printing, dubbed QE-1 and QE-2. The biggest bond dealers that
deal directly with the Fed now say the central bank is poised to start QE-3,
injecting even more high powered money into the coffers of the Wall Street
Oligarchs by purchasing about $545-billion in mortgage securities. It's an
election year, and the Fed aims to help President Obama to win re-election by
artificially inflating the value of the stock market with printed money.
That's also
good news for investors in the Gold market. Fed chief Bernanke has pumped-up
the high octane MZM money supply to a record $10.6-trillion this month, thus
helping to buoy Gold above $1,600 /oz. Dealers expect the Fed to launch QE-3
in the first quarter of 2012. And once Germany and France have established
the United States of Europe, and are ready to launch Eurobonds, - the ECB
would be expected to launch its own version of QE-1. Commodity and precious
metals markets could gyrate wildly, until it becomes crystal clear to the
majority of traders, that additional rounds of QE are forthcoming in Europe
and the US. Once the money printing schemes are announced, other central
banks would probably join the fray with their own version of competitive
currency debasement.
China's
central bank is expected to start easing its money policy in the first
quarter of 2012, which could inject added adrenalin into the Shanghai Gold
market, while lifting a broad array of commodities, including crude oil, base
metals, and agricultural goods.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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