-- Posted Wednesday, 16 November 2011 | | Disqus
The following are some snippets from the most recent issue of the International Forecaster. For the full 37 page issue, please see subscription information below.
US MARKETS
It wasn’t all that long ago that industry estimates were that the issuance of credit default swaps in Europe, CDS, were about $18 billion. At the same time on the street it was estimated that the exposure was $75 billion. We estimate $150 billion - this represented insurance on the holders of bonds issued by Greece, Portugal, Ireland, Spain and Italy. The Bank for International Settlements says that figure is now $518 billion. As we have noted before the big problem is counterparty risk. When CDS, credit default swaps, are triggered to default will the counterparties pay up? Even if writers are buying from one another someone has to get caught holding the bag and loose money. That is where the risk comes in.
We are seeing a change in tactics by Europe’s politicians as they head toward allowing euro zone members to leave the arrangement. The realization is that no matter what, the five weak nations cannot compete with the stronger euro zone countries. They want legislation for their exit and to allow them to remain in the European Union. They obviously know that if they all or in part leave the euro they’ll probably default as well, in whole or in part. The derivative writers contend if the owners of bonds agree to take a 50% loss on bonds then the insurance doesn’t take effect. Fitch, the rating service says yes it is a payable default. We will see who is correct. We agree with Fitch.
At least for the moment bond yields in Europe seem to be finding balance and the euro seems to want to do the same. Pressure is still being applied and yields will probably move up over the next six weeks and we could see the euro at $1.30. the French and Germans are exposing a smaller euro zone finally facing reality, although the euro was all they cared about in the first place. Excepting Germany, most bonds were lower.
At the beginning every sovereign was going to be bailed out if necessary. Germany believed 2 years ago it would cost $1 trillion, we said $4 trillion. When Germany admitted to $3.5 trillion two months ago they knew then they and the other solvent countries couldn’t carry the burden without going under themselves. That was very short sighted of Germany. If they had made these decisions earlier they wouldn’t have had to make them now in a crisis where the problems are spiraling out of control. What poor preparation and planning. This should have been over last summer, but no they had to have their summer vacations. These people live in la la land. This corrupt socialist model does not work as many socialist countries have discovered.
The future of the euro zone is sealed. There will be six less participants a year from now. The European economy will have 1% negative growth next year and lower growth the following year. In Europe several more members will be forced to phase out the euro and return to their own currencies. We see this as the best option Europe’s one-worlders can hope for. What we are seeing is not a liquidity issue. These five countries are broke and all the saviors can do is throw good money after bad.
We hear morbid stories of the terrible results of changing currencies, some of which are true. You know what the problems are. You just avoid them. Everything has to be done ahead of time. You simply trade in each euro for ½ drachma or lira and seven days later there are no more exchanges. There is a 50% devaluation and a total default on debt. The government in question has to either bail out the banks or lets them go under. Either way a new banking system has to be put in place. In order to prepare for such events you simple exchange euros for gold and silver coins and bullion. Only keep enough euros to survive.
The troubles in Europe are not going to go away anytime soon. Expect two years or less before the euro is history. This will cause a rising dollar temporarily, but do not be deceived, it won’t last long.
Just to show you how rapid the deterioration has become, Italian banks borrowed $152 billion at the end of October, up from $144 billion in September. Italy’s $2 trillion plus in liabilities exceeds the four other countries in trouble. The banks holding these bonds as collateral are seeing their value erode, which means they cannot lend as much money as they would like to lend. In addition, banks have also purchased these bonds and as they fall in value it reduces their capital base. They cannot lend as much and may have to raise additional capital. That is in addition to raising funds to meet the BIS requirement of 9% reserves.
Italy’s PM Silvio Berlusconi as of this writing has not stepped down and as a result the yield on the Italian 10-year notes rose. These are killer rates, because Italy has to sell $204.2 billion in notes in 2011 and $231.9 billion in 2012. Italy, like all the other sovereigns that are in austerity programs, has already slipped into recession in addition to a natural slow down in the European Union. That will make all these nations have a difficult time increasing revenues.
Italy is now the key not Greece, and the very fact that France’s Sarkozy and Germany’s Merkel are pushing for legislation to allow sovereigns to exit the euro zone but stay in the EU is very telling. European and US stock markets sold off on the news, but the US’s Working Group on Financial Markets brought the markets right back up. In case you hadn’t noticed there are no longer free markets. Most everyone in the investment community knows the markets are being manipulated but no one says anything. That is because all they have to do is watch what the US is doing and follow suit. These actions, of course, make it much more difficult for the nations to sell their bonds and notes and the yields they must pay go higher. There is now no question the euro zone will change. The weak six countries will soon leave and eventually we see an end to this unnatural union. The healthy nations will concentrate on bailing out their banks, which will cost taxpayers a fortune. The bankrupt nations will have to nationalize banks. Depositors will lose 50% to 90% of their deposits. Those subscribers in Europe get out of those banks now. Take those funds and buy gold and silver shares, coins and bullion. In the healthier countries do the same thing, because we do not know how big the losses will be? No one knows how bad this will get.
We wonder if the $518 billion allocated will ever be used under the circumstances. The lenders know if these bankrupts are going to default what is the sense in giving them more money. They should just cut them loose. We see little chance of leveraged loans being used if they are ever made at all. Even those in favor are talking about 3 to 4 to one. Besides the first EFSF offering was under scribed and cancelled. At this time the negative pressure is greater than ever. The new governments in Greece and Italy will not change anything. Their conditions are what they are. The only question in our minds is how far can the new governments go with austerity before revolution begins?
Economies worldwide are slowing down, so Europe’s escalating debt crisis will cancel any possible recovery and the world could end up in hyperinflation and deflationary depression. Whatever, these fundamentals are terrible. Over the next 10 days a Greek default and a run on Italian banks has a 65% chance of taking place. What is astounding to us is the professionals, politicians and the public does not understand the gravity of the situation. If this happens will others come to the rescue. Overall we do not think so. They have too many problems of their own. We could have Portugal and Ireland collapse as well. Banks will be bailed out or nationalized. We are dead against that happening, because all it does is put the same corrupt system back into action. It also avoids a purging of the system, which has to take place in order to put a better system in place.
During this time frame French debt could also be downgraded and there is a strong chance of that happening. That would short circuit lending in a big way.
Riots could soon be the order of the day in all the countries implementing more austerity. Insolvency would bring the same results and perhaps revolution.
Then running the show we have the same old elitist retreads. The latest pair being Lucas Papademos in Greece. There are so many Bilderbergs involved we’d need several pages to list them.
Germany and France know they are facing recession with millions more unemployed. This is why they are making contingency plans. They have given up trying to rescue anyone. At the same time they audaciously try to create a new smaller euro zone and include taking over the fiscal reins of all member governments. All decisions would be made by a centralized bureaucracy. This is what Hitler and Mussolini wanted and were not able to accomplish. In order to lead to this we have seen propaganda, which threatened civil war and martial law. This time it won’t work; Europeans now know what they are up too.
Since its inception the Europeans made many mistakes in forming the euro zone. One of the biggest, which is never mentioned, is the incompetence of its bureaucrats and their outrageous salaries. In addition, if the thinking is not communist, or socialist it is just plain fascist.
The members of the elite are hard on us peons, but even harder on their own. When Mr. Papandreou went to Cannes, Mr. Sarkozy asked him what on earth were you thinking of when you allowed a referendum? After explanation Sorkozy told Papandreou, do that again and you will have a hole in your head. They do occasionally kill their own.
Now, Lucas Papademos, former governor of the Greek National Bank, ECB V.P., formerly of Goldman Sachs, a Bilderberg and a member for many years of the Trilateral Commission, will induce structural reforms, which will run Greece into the ground and set it up for asset stripping and privatization. This dislocation has been going on for 3 years and it is going to get worse. The unsuccessful Illuminist George Papandreou will work against the people as always. These stalwarts of bureaucratic European culture know no political party or democratic legitimacy.
The ECB should have bought more Italian bonds and this would not have happened. Trichet left those purchases to Mario Draghi, another graduate of the Goldman Sachs crime school – another chief fraudster is put in charge.
If anything these European escapades for the past two years and particularly the last nine months has really taken the heat off of the US and Wall Street. It has been almost as good as another war.
As we enter the week we are starting to see new estimates of the debt that would have to be cleaned up by Europe’s solvent nations for the insolvent ones. We had projected $4 trillion two years ago and two months ago $4 to $6 trillion. That $6 trillion would be $8.25 trillion euro. The latest figure is 6 trillion euros or $8.1 trillion. After two years Europe’s bureaucrats and politicians, as well as their bankers are finally getting it. Italy and Spain alone would bankrupt al of the solvent states, as we said from the very beginning. Many think they planned it this way – well we don’t. They are finding out they are not the masters of the universe, and extending the problem does not solve it.
If you can’t save all six, why save any of these failing nations? Let them all go under and use the funds to bail out the banks, or better yet, via the Fed, let US taxpayers bail out the banks, as they have been for the past three years.
Writing off 50% of debt by banks and individuals covers 30% of the debt, because the remainder is being held by the IMF, ECB and other central banks. All of these entities cannot escape. It all must be written off. Once it happens the UK and US will follow. Those efforts will probably be followed by a meeting of all nations to value, revalue, devalue and default together. Then the purge will have been completed. In the absence of wars the depression will last in 5 to 10 years. Those who believe you can grow an economy in the middle of an austerity program simply do not get it. All you do is increase the cost of debt as you shove it into the future. Yes, any nation that leaves the euro will have a depression. As time goes on all the solvent countries will go into depression as well. All and sundry have to understand depression cannot be avoided. The politicians, those on Wall Street, the City of London do not want that, because they all lose their power bases. They cannot any longer control the bases and that is what this game is all about.
The cost of depression is expensive. No one will lend these countries money for several years. The ability to pay for imports will be very limited. They could farm out oil drilling for production, but production takes 7 years and they would have to give up at least 1/3% ownership of their own oil, because they have no money to invest. Their banks will all go under and pensions would be destroyed. There will be even larger layoffs leaving unemployment at a 40% plus level. There are no good and acceptable choices. What solvent nations fear is that the failures will no longer be customers for their product and services and thus, will take their economies down as well? That is a natural extension of failure.
What will happen when Ireland finally says we are not going to pay off the banks’ debt anymore? A previous government assumed there liability and the Irish Treasury just paid out $1.37 billion to service that debt. That day must be near at hand as the country falls deeper into depression.
We can guarantee that it would cost $4 to $6 trillion to bail out the six countries. That is insurmountable and is the result of European banks being leveraged up to 450 to 1, because they thought that Europe would never default and therefore no reserves would ever be needed. As usual these masters of the universe were wrong. Irish banks owned by foreigners did the same thing by plunging into real estate. Spanish banks did the same thing to a greater degree. Northern Europe banks are buried in government bonds that will probably in great part default.
French banks will probably fail because the French government is incapable of saving them. That would end AAA status. It also prevents a bigger problem for France. They could go bankrupt as well. The coming election will be a humdinger. The main attraction would be Marine LePen versus PM Sarkozy, a battle that Miss LePen might just win.
...
THE INTERNATIONAL FORECASTER
WEDNESDAY, NOVEMEBER 16, 2011
11/16/11 (5) IF
E-MAIL ADDRESSES
For subscription and renewal; technical support, log in problems, etc.:
info@intforecaster.com
For correspondence to Bob:
bob@intforecaster.com
CHECK OUT OUR WEBSITE
http://theinternationalforecaster.com/
RADIO APPEARANCES:
To check out all of our radio appearances click on this link below:
http://theinternationalforecaster.com/Radio_Interviews
-- Posted Wednesday, 16 November 2011 | Digg This Article
| Source: GoldSeek.com
