Alisdair MacLeod on the Euro crisis

Alasdair Macleod: All Roads In Europe Lead To Gold

Zero Hedge,

19 May, 2012

This week we bring back Alasdair Macleod, publisher of Finance and economics.org, because, as he puts it "every horror that we discussed last time we spoke is coming about". Especially scary since our previous conversation with him was less than three weeks ago...

Today's interview continues building on his excellent synopsis from last month that detailed the origins of the Eurozone crisis. The fundamental shortcomings warned of at the Euro's creation in 1997, combined with the excessive sovereign debts run up since then, have finally expressed themselves at a scale too large to be contained any longer.

Today, Alasdair details in-depth the huge and serious challenges facing Greece and the major Eurozone countries, and the likely impacts of the fast-dwindling options left remaining.

He sees no happy ending to this story, no outcome in which serious pain and permanent behavior change can be avoided. And for those looking for shelter from the unfolding economic storm, he sees few options besides the precious metals (which he believes are severely under priced at the moment): 

Greece

The Greek situation is entirely predictable: when you force enormous pressures on an economy and try and raise taxes from the private sector -- a private sector which isn’t used to paying taxes because usually they find away around it -- you start cutting pensions, you start cutting this, cutting that, and the people revolt. They haven’t a clue what they are doing, but we get the revolt nonetheless. It looks like nobody there can form a government; and it looks like there will be another election probably in June. That won’t resolve anything unless by some miracle, some sense gets knocked into people’s heads.

The other thing, which nobody has mentioned, is that there are about 90 billion dollars in derivative contracts involved in the Greek economy. This is not just government, but also local governments and towns and cities and all the rest of it. The counterparties to this $90 billion must be getting a bit worried about that, I would think because that looks as if it will default.

The people who have been most active in getting these derivative contracts going over time have been people like Deutsche Bank, Goldman Sachs and I suppose JP Morgan -- so you can see the problems aren’t just limited to the government and some unfortunate Greek citizens who are caught in the middle of this.

We are looking at potentially up to ninety billion dollars worth of derivatives which one side of those transactions is going to default. One side: it is not a balanced figure is it? I don’t know that it is necessarily as bad as that, but it is a problem that needs to be dealt with, addressed and contained. I think what they have to do as much as possible, is to try to work for a sensible outcome in this, which probably will involve Greece leaving the Eurozone, but maybe obtaining help from the ECB to set up a currency board. The reason I say that is that I think for Greece to return to the drachma would be complete destruction. You would have a situation where people who owe money in Euros would still owe money in Euros. If the Greek government tried to change that by law, for starts, that could only apply to loans taken out in Euros in Greece; whereas a lot of these have been taken out in Euros elsewhere in the European Union. In any event, I think if they tried to do a law on this, it would be a retroactive, which would be open to legal challenge.

Meanwhile, if you have deposits in a Greek bank, you can be sure the Greek government would say we are going to re-designate those into New Drachmas, which would impoverish the depositors. When it comes to trade, I think everybody would just stay well clear. To go back to a New Drachma, I think is the most destructive path Greece can have. Now, they could do that on the basis that, if the European Union wanted to make an example of Greece, then this is a way in which they could just let them go hang. The importance of that would be that the situation for Greece should be so bad that no other member of the Eurozone would contemplate leaving the Eurozone. That is a possibility. But I think that is less likely than coming to terms in such a way to give Greece an exit. But if they do get an exit, again, they’ve got to have an exit in such a way that it hurts enough and anybody else who wants to take that exit would see, well it is actually probably more painful than staying where we are. It is a very difficult balance to achieve.

The people who will do this, I don’t believe are the politicians. It would have to be the sensible people in the ECB and perhaps some of the more backroom boys who could put together some sort of face-saving mechanism without this becoming too much of a political hot potato. It is very, very tricky, it really is, and quite honestly, the way political governance has been going in Europe, the chances of them getting some sort of orderly withdraw in the interest of continuing relationships, et cetera, I think are actually probably slim. That is what we are up against: this is not easy. There is no precedence for this at all and I know that lots and lots of people are saying it has got to return to the Drachma; I just think that a New Drachma would collapse almost immediately. I think that a currency board in the Euro is actually a more sensible result given where we are.  

France

France is a mess. They have outstanding debt of 1.3 Trillion Euros, something like that. Their debt/GDP is around about 85-90% going on a hundred quite rapidly. That is a very liquid and nasty situation. Unemployment is running close to ten percent.

It is almost impossible to employ anyone in France because the taxes are so high. Do you know the total tax that you pay as an employer, more than doubles the salary that you pay an individual? This is absolute craziness, but it is been like that in France forever and a day. The result is an awful lot of the market is black market.

 Spain & Italy

Spain is a worse situation. Government debt alone is just under a trillion. A trillion dollars equivalent, I should say, and that is a lot of money. That is a lot of money. Italy is over two trillion dollars. That really is a very, very big one, so this contagion must not be allowed to happen. 

Germany

Their economy is performing reasonably well, but it is not performing well because they are doing well for Europe; they are doing well because they are selling the most cars, machine tools and everything else to China, to Brazil, to Russia. Africa’s a great growth area. Europe, as far as Germany is concerned is dead. Which of course brings us on another question; that is why should Germany continue to support all these bust Europeans? There is a sort of conscience if you like about the last two world wars, but there is going to come a point where that wears pretty thin I would have thought. The trouble is that it is all very well, everyone turning around and saying, Germany has to help. Actually, what they are saying is that Germany’s citizens should give up their savings, their hard won savings to rescue a project, which is obviously dead or deceased. I think Germany really should bust out as soon as possible and I am sure that there are an increasing number of businessmen and bankers in Germany who are beginning to feel that way. 

On Gold

People who have gold or silver, I think actually had a very rough ride over the last couple of months. A lot of them are wondering what on Earth is going on because every time you get good news, gold seems to rally along with equities, but every time there’s bad news and gold actually should be giving you some protection, it goes down the swanny.

I think the problem there is that the whole system is run by people who went to college and were taught keynesian economics. In my day, when I first went into the stock market and I enjoyed that first bull market in gold when it went from thirty-five bucks to eight-fifty, the traders and investment managers were all practical people. They all cut their teeth, all learned their trade the hard way. Some of them had degrees in college, but generally it would have been something like classics or history or something like that. If they got a degree in economics, they probably would have left because they never would have understood it in those days. But now it has changed. Everybody who is employed has a degree and if they are anything to do with investment strategy, or the investment business, it is all economics degrees. So they have been brainwashed in the keynesian thing. This sort of neoclassical approach where gold is yesterday’s story, paper money is the future. They really do believe it and it is the opinions of these people who drive the markets in the short term.

The result is that gold and silver have become very, very seriously mispriced. I don’t think I have seen a stretch like this as I can remember; by stretch, the difference between perhaps where it should be. We must be careful not to tell the market what the price should be, but it is so underpriced at a time of enormous systemic stress, that I think when gold and silver snap back into a more sensible, logical valuation relationship with the markets, the move actually could be very, very sharp and quite large. If gold ran up through the $2,000 level very quickly, which I think is a very strong possibility, because it is been held down so much, that could bring other problems. The central banks, who might have sold gold and not told us about it will find that they are embarrassed. I think also the bullion banks in London who operate a fractional reserve system with gold, exactly the same way as to do with any paper currency, will be hurt very, very badly on the run. Any shorts in the futures market equally could be hurt very, very badly. We have a situation, where there is a potential for a huge run in gold and I personally wouldn’t be surprised to see it.  

Nigel Farage speaks out - yet again

By Any Objective Measure, the Euro is a Failure

Mish’s Global Economic Analysis

Nigel Farage once again blasts Eurocrats in front of European Parliament, emphatically stating "By Any Objective Measure, The Euro is a Failure"

Farage also called various unelected EMU officials a "pack of hyenas".

It is an entertaining video as well as the truth. 

The lamps are going out all over Europe

Daniel Hannan, MEP for SE England

Four Main Reasons Europe is Likely to Collapse

Here is a summary of an excellent article from Financial Sense on why Europe is likely to collapse

•  The European banking system is leveraged at 25 to 1 (twice that of the U.S. e.g.) so a 4% decline in equity wipes out capital!

•  European financial corporations operate with debt of 148% of total EU GDP!

•  Euroland banks have to roll over from 15% to 50% (depending on the bank) of their total debt by 2012.

•  Many Euro nations have massive unfunded liabilities. The typical Euro nation would require 400% of its GDP to be banked earning interest to cover these… not possible.

For the full article GO HERE

Turmoil Spreads in Europe

Bond Market Selloff Hits Nations Seen as Healthy, Raising Specter of Contagion

Wall Street Journal,

16 November, 2011

Europe's debt troubles on Tuesday spilled over to top-rated nations that had been largely untouched by the crisis—including Austria, the Netherlands, Finland and France—in an ominous sign for European policy makers.

Bond yields across the Continent jumped as prices dropped, in a sign of investors' faltering confidence in officials' ability to keep the debt crisis contained in the euro zone's troubled peripheral countries. Tuesday's selloff came amid news that the euro zone's economy scarcely grew in the third quarter.

Trading of anything but German bunds—seen as safe securities akin to U.S. Treasurys—became difficult. Investors sold bonds issued by triple-A rated France and Austria. Even prices of bonds issued by fiscally upright Northern European triple-A nations such as Finland and the Netherlands fell. Among the cash-strapped periphery, Italian bonds again rose above 7% and Spanish yields surged to 6.358%, according to Tradeweb.

For months, a worst-case scenario of European policy makers has been that the crisis, born in heavily indebted countries, would infect otherwise healthy countries at the heart of the monetary union. Tuesday's trading suggests that could now be happening. If investors go on a buyers strike of European debt, that could raise borrowing costs, and eventually threaten the solvency of much of the euro zone. That could destabilize the global financial system and damage world-wide economic growth.

U.S. Treasury Secretary Timothy Geithner on Tuesday said Europe still hasn't done what is necessary to get beyond the crisis. "They have to figure out a way to get enough political support for what has to happen to try to do it as quickly as possible, so they don't continually fall behind the curve of the market," Mr. Geithner said, speaking at The Wall Street Journal CEO Council in Washington.

Mr. Geithner, choosing his words carefully, suggested the European Central Bank should be doing more. "There are lots of ways for the central bank to play a more effective supportive role…It's not rocket science." He said it was "very hard to get things to work" unless the ECB and European governments work in concert. Mr. Geithner reiterated that the Europeans "will do everything that they need to do" to hold the euro together.

Tuesday's plunge began in Asia and the Middle East, where there was heavy selling of European bonds, market participants said. Of note also, they said, was that much of that was coming from long-term investors such as pension funds and mutual funds, rather than hedge funds.

Then came a weak auction of Spanish treasury bills. As well, the European Union statistics agency Eurostat said gross domestic product in the 17-nation euro zone grew 0.6% at an annualized rate during the third quarter, the weakest expansion since the region came out of a recession more than two years ago.

The dour report showed fewer economies expanding. While Germany and France recovered, Austria barely grew and the Dutch economy contracted.

"I think today is a particularly troubling day for bond markets and the monetary union," said Scott Thiel, head of European and non-U.S. fixed income for BlackRock in London. "I would say we're going through a proper liquidity crisis."

The difference in yields between France and Germany hit 1.89 percentage points Tuesday according to Tradeweb data—near the levels that prevailed in the late 1980s before the creation of the euro. Yields on bonds of the Netherlands rose 0.09 percentage point on Tuesday, rising to 0.626 percentage point above bunds. Finland jumped 0.107 percentage point to 0.707 percentage point above bunds and Austria rose to a spread of 1.80 percentage points.

The growing bond-market jitters come at a time when euro-zone policy makers appear to be running out of options for tackling the currency bloc's crisis. At international summits in late October and early November, European leaders explored ways to beef up their bailout fund for stricken euro members. But they have struggled to find credible ways to do so.

Europe has, for now, put the onus for repairing investor confidence on Italy and Greece, which are installing new, technocrat-led administrations intended to push through unpopular economic reforms. But such moves can take years to bear fruit, and bond markets are increasingly unwilling to fund euro-zone nations with high debts and low economic growth.

The chorus of economists and investors calling for Europe's central bank to intervene much more decisively in bond markets is growing. They say the ECB should adopt the role of lender-of-last-resort to euro-zone governments in order to convince investors it's safe to buy government bonds. But the ECB insists that its mandate is limited to fighting inflation.

Some suggest the ECB could be staying on the sidelines to keep up pressure on politicians, specifically in Italy, to make their economies more competitive and cut their debt loads.

Germany's central bank, the Bundesbank, and the country's economic and political mainstream are vehemently opposed to a more activist ECB, arguing that large-scale bond-buying would fuel inflation and turn the central bank into a plaything of spendthrift Southern European politicians.

The more the crisis of investor confidence spreads into Europe's core economies, however, the less euro-zone governments can do to solve it. Already, France's government is wary of any policy measures that could call its vulnerable triple-A credit rating into question and drive up its borrowing costs.

If the capital flight from bond markets continues, the ECB will increasingly become the only institution in Europe that is capable of stabilizing the situation. A change in thinking in Germany would likely be needed before the ECB embraced a bigger firefighting role, however.

Just last week, European bond markets were rallying on the prospect of new governments in Italy and Greece. News from Italy that Prime Minister Silvio Berlusconi was stepping down was greeted especially warmly by the markets. As the euro zone's third-largest economy, Italy's borrowing needs are considered too big for other European countries to pay for.

But as Mr. Berlusconi's designated successor, former European Commissioner Mario Monti, works to form a government, the market continued its assault on Italian bonds Tuesday, driving yields on 10-year notes up to 7.042%, according to Tradeweb data.

Investors are also paying more for protection against debt defaults. The five-year credit-default swaps of Italy, Spain, France and Belgium all hit records, while the levels for Austria and the Netherlands pushed wider as well. Italian default swaps briefly pierced 600 basis points for the first time.

Few private investors appear willing to step in. As a result, many market participants believe the ECB will ultimately beef up its buying of sovereign debt to support the market and give governments the time to put in place overhauls needed to boost growth and cut debt.

EUROPAC: We Have Entered The First Of Four Phases That Will Destroy Fiat Money

John Browne,

Europac

Business Insider,

11 November, 2011

Last week, the G-20 meetings did not produce an expanded bailout fund for the eurozone. While this may bode well for the long-term solvency of the member-states (moral hazard and all), it has also triggered a market reaction that I expect to help destabilize the common currency. Wednesday's market moves suggested that this development is good for the dollar and bad for gold. Allow me to step back from the stampeding herd to evaluate whether they are, in fact, moving in the right direction.

The argument for the dollar and against gold is simplistic, and I will evaluate it against the four-stage collapse I see ahead for the Western currencies.

Arguing that gold is a hedge only against inflation, and taking current inflation figures at face value, mainstream analysts have concluded that gold is grossly overvalued – that it may, in fact, be the latest asset bubble to arise. However, these analysts fail to account for why gold is a hedge against inflation: it is ultimately an insurance policy against runaway currency collapse. In other words, it's intended as a longer-term, wealth-preserving purchase. Yes, some pit traders may be trying to make a quick buck shorting gold and going long on dollars, but for individual investors, following suit would leave them vulnerable to what may prove to be ahead. That is, a phased destabilization of the euro, leading to a possible collapse of the US dollar. In such circumstances, even today’s volatile prices for gold and silver would look attractive.

Phase One of the threatened catastrophe is sovereign debt crisis, which is effectively camouflaging a currency crisis. The Greek default is significant as the first crack in the dam. But Greece is a relatively small problem. The bigger threat is Italy, with its $2.4 trillion of debt and a 10-year bond yield having just surpassed the critical 7 percent level. This is the ruinous milestone at which the cost of new debt money surpasses the economic growth rate plus inflation. Italy faces massive debt refunding, falling buyer interest, and no hope of a bailout. If Italy were to default, it could threaten rapid contagion to Portugal, Ireland, Spain, and other larger eurozone countries, including perhaps France. In such an event, most international banks and institutional investors, including those in the US, could suffer severe, possibly total, losses on their holding of certain sovereign bonds. MFGlobal is but one speculative example of a looming secular trend. Worse still, the writers of credit default swap (CDS) derivatives, including many German Landesbanks (state-level banks) and major US banks, could suffer crippling losses.

This would lead to Phase Two of the collapse: a renewed and far larger banking crisis. This, in turn, could bring stock markets tumbling and threaten major institutional investors, including politically sensitive pension and insurance companies. In addition, banks would become extremely wary of lending to each other. Likely, the interbank market would freeze, but far more severely than in 2008. It could result in curtailed lending and even the recall of short-term corporate funding and call-loans. This could cause a dramatic spike in US bank failures. 

Unwary depositors who have failed to watch their banks closely could find their insured funds frozen, perhaps for months, as the FDIC reorganizes the problem banks – and perhaps even waits for its own bailout. This would add further downward pressure to economic growth.

Meanwhile, the cascading banking crisis would likely push Europe into a severe recession, even a depression. As the EU accounts for some 22 percent of world trade, a European depression would no doubt drag down the US even further. In response, the price of precious metals may face severe selling pressure as liquidity becomes paramount.

This would present an opportunity for long-term gold and silver investors.

Phase Three would be a restructuring or dissolution of the euro and possibly a stampede into the US dollar, sending its price and US Treasuries temporarily upwards. With a far stronger dollar, the price of most commodities, including precious metals, may fall temporarily in dollar terms. We are seeing a preview of this dynamic with today's news on Italy.

However, to reallocate one's portfolio in reaction to such a move could put an investor in jeopardy. That is because Phase Four, the most alarming, would be investors’ realization that the US dollar lies at the root of the international currency collapse and is itself vulnerable. Likely, this panic flight from the dollar would develop suddenly, and perhaps in undreamed of volumes. Doubtless, the speed and size of a stampede out of paper currencies and into precious metals will take many investors by surprise – just as the Credit Crunch in 2008 did. As the realization of currency catastrophe spreads, the price of silver may start to rise faster than even gold.

There's an old saying that “the higher you fly, the harder you fall.” The US government is, by any measure, the luckiest government in centuries. It has risen to unforeseen heights of monetary excess – and has been rewarded for doing so. But it looks like lower flying planes are starting to stall out, and one can only imagine – from this height – how fast and how far the US may fall.

My humble advice is not to try to time it, but rather to use your golden parachute before it's too late. 

The Euro 'Event' Will Cause Depression: HSBC

The headline is without any qualifiers - 'could' or 'may be'

CNBC,

Published: Monday, 7 Nov 2011 | 1:10 AM ET

With no end in sight to the euro zone debt crisis, events in Athens and Rome are likely to dominate investor sentiment over the coming days.

Whether it is Berlusconi hanging onto power or the talks over forming a new government in Greece, it will be impossible to ignore the euro zone debt crisis.

Analysts at HSBC have been looking at what they call the "risk on – risk off paradigm" which they believe has been the dominant feature of the market since the start of the financial crisis back in 2007. Their analysis does not make good reading, unless you are betting on risk off.

“The recent events in the euro zone have caused the risk on – risk off paradigm to strengthen even further. Over the last week it has almost become a caricature of itself: we saw extreme euphoria on the back of a purported bailout package followed days later by intense despair induced by the prospect of a Greek referendum," said David Bloom, Global Head of FX Strategy at HSBC in a research note.

“These dramatic shifts in sentiment led to rollercoaster moves in risk asset prices," Bloom said.

With cross-asset correlations at an all-time high according to HSBC, Bloom says market participants are comparing the current Greek crisis to Lehman Brothers and has this warning for investors: “Market stresses are currently far worse than after Lehman and the event which people are worried about has not even happened yet!"

"Despite this, perceptions about the possibility of the event are already driving markets to an unheard of level," said Bloom.

When the event, whatever it is, does actually happen it will be very bad news for the global economy according to Bloom.

“Were the event to actually occur it would lead to the great depression Mark II,” said Bloom.

Nigel Farage Tells Judge Nap the EU Will Collapse; Revolution Coming to Greece

From Fox News - never mind!