The Collapse Of The Euro- With Germany having such a different economy than the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) the weaker economies of the Euro region had a choice- to leave the Euro or to suffer massive deflation (since prices where too high and devaluation impossible due to the fact that they didn’t have control on the currency). Massive deflation meant budget deficits north of 10% of GDP and with no monetization possible the sovereign debt market of the PIIGS started to collapse. Some countries tried to cut the budget, which brought severe civil unrest while the economy continued to deteriorate. Others refused to physically reform which resulted in further revolts in their sovereign bond markets. The first domino to fall was Greece- when the yield on the 10 year government bond reached 8% percent it was clear that without a bailout from Germany they where bust, and bust they went. Like after the collapse of Lehman Brothers, the collapse of Greece caused a general panic in the markets, with government bonds of the rest of the PIIGS collapsing since it was clear that Germany will not bail them out. European banks refused to lend to each other and the havoc was over only when the rest of the PIIGS left the currency.
The Dollar remains strong via foreign fiat currencies but loses to gold, eventually the United States and then the world goes back to a Gold Standard- First it was the collapse of the Euro, then the collapse of China, after came the crisis in the emerging world and the commodity producing nations, and finally civil unrest around the globe. In the second decade of the 21st century the world discovered that the United Stated, with all its problems and weaknesses is still the safest heaven there is. But against Gold it lost big time. Despite a weak economy, gold and other commodities continued to trend high and when the public joined the trade it demanded a Gold Standard. The President, encouraged by Wall Street large banks tried to do the Roosevelt scheme, attempting to outlaw the ownership of gold on a large scale and halting the trading and selling of the precious metal. That was enough for the angry public which thanks to the internet revolution was much more informed than in the 1930's. A new president was elected in 2016 and a Gold Standard was established.
And in The Euro Crisis and the Euro Collapse- The ECB has decided to turn the Euro into the Drachma we wrote:
We are early 2008 all over again. When the sub prime crisis hit in late 2007 the Federal Reserve started to inject liquidity in to the system and slash interest rates. The immediate response of markets was to sell the dollar and take commodity prices to the moon, with oil hitting 147 dollars a barrel. At some stage, the central planners where worried about the rising food prices and the fed stopped slashing interest rates and the ECB even raised them a bit. The lack of liquidity caused the markets to collapse in late 2008. Only when the FED resumed the money printing, this in much larger scale did markets recover with oil hitting 86 dollars a barrel. Since the 31st of March 2010 the FED stopped printing money the lack of liquidity caused the dollar to strengthen and brought a liquidity crunch in Europe. The ECB has taken the FED's place with steroids. It is now buying not only AAA paper like the FED did it is buying junk bond in Greece and across Europe. This effectively will turn the euro in to the Drachma. Today the short Euro+ stocks is reversing and the Euro is rising as a result. But that will not change the big picture- If the ECB continues to print money like crazy the Euro will crash and commodities will go throw the roof. At some stage the ECB will be forced to stop and then the Euro will fall apart.
Well, if the dollar was really strong then gold wouldn’t have been going up like it is. The dollar is weak because because it is backed by political promises of American politicians (Government bonds and Fannie and Freedie paper which are backed by the Government.) Since the Euro was backed until a few days ago by political promises of German polticians it was stronger for some time than the U.S dollar. But now, when the Euro is backed by Greek political promises the market will punish the Europeans and punish the in a very harsh matter.
The Europeans have lost trust in their government and they are running into gold, courtesy of Bloomberg:
Muenze Oesterreich AG, the Austrian mint that makes the best-selling gold coin in Europe and Japan, said sales jumped in recent weeks on concern that Greece’s fiscal crisis will hurt the euro.
Buyers have purchased 243,500 ounces of gold since April 26, compared with 205,300 ounces in the first quarter, Vienna- based Marketing Director Kerry Tattersall said by telephone today. Bullion climbed to a record $1,245.07 an ounce today and reached all-time highs in other currencies.
“We’re seeing people who want to take money from savings accounts and put it into gold, so it’s small investors who are buying, too,” Tattersall said. “In the last three to four weeks, we haven’t seen any orders out of the U.S. or Japan. It’s a purely European increase. It represents panic buying.”
The precious metal, heading for a 10th annual gain, advanced as investors questioned whether a loan package worth almost $1 trillion will prevent a repetition of Greece’s debt crisis in other European states. The euro has dropped 11 percent against the dollar this year, and bullion climbed to a record 982.6727 euros an ounce today.
“As long as confidence is under threat in Europe, gold should continue to be on the receiving end of elevated physical demand,” Edel Tully, an analyst at UBS AG in London, said today in a report.
German Demand
Stronger demand from individual investors is particularly evident in Germany, Tully said. Support for Chancellor Angela Merkel’s Christian Democrats plunged in a state election this month after lawmakers authorized as much as 22.4 billion euros ($28.3 billion) of loans for Greece that polls indicate most Germans oppose.
The Austrian mint is known for the Philharmonic gold coin, which it introduced in 1989.
“We’re facing production problems again and are producing around the clock,” Tattersall said. “Our stock is running out.”
They Europeans don’t trust their government, but they don’t trust Americans either. Central banks can restore confidence in paper money but only in the price of destroying the trust that is left in the banking system. Some very tough decisions need to be made.
If they do stop the money printing we will get a banking crisis, like we wrote in The Coming Euro Collapse- How a Greek default could cause a run on the European banking system :
The strong countries at euro region, mainly Germany have two options:
a) Let Greece and Portugal go bankrupt. In that case, much like what happened after Lehman brothers was left to under, the implicit grantee of the rest of the PIIGS will be questions and their bond will probably tumble causing a full blown physical crisis across the euro area. My guess is that under that scenario government bonds across the world will tumble, excluding the U.S, Germany and other relatively stable countries with possible serious problems in the European banking system. In that case with Israeli government bonds falling sharply the stock market will be no exception with major sell offs across the board.
b) Bailout Greece. In that case German government bonds will come in to question since they can't possibly bail everybody out.
c) Massive devaluation of the euro which seems unlikely since there needs to be probably a 50% or more devaluation in order to counter deflationary forces in the PIIGS
How a Greek defualt could cause a run on the European banking system
The big time bomb, as was the case with Lehman Brothers and AIG is the CDS counterparty risk, since Greek banks were active CDS players, and no one really knows their exposures.
French and Swiss banks had the most dealings with Greece as of the end of September according to the Bank for International Settlements. The French banks that have the largest Greek businesses are Credit Agricole, which owns Emporiki Bank of Greece SA, and Societe Generale SA, which has stakes in Geniki Bank SA and Hellas Finance. A debt crisis in Portugal and Spain will cause a larger calamity since claims of foreign banks, led by German lenders, on Spain represent 3.8 times those against Greece. German banks’ claims against Spain are $240 billion, and those of French banks are $196 billion. Credit Agricole owns about 19 percent of Madrid-based Bankinter SA
One of the reasons Greece is such a plumbing problem is because for years, banks have done enormous OTC derivatives business with them, and indeed many other sovereign and quasi-sovereign entities across Southern Europe on an un-collateralized or under-collateralized basis.
There is no way to hedge jump-to-default or jump-to-repudiation risk, apart from buying enormous amounts of short-dated credit default swaps referencing Greece. This explains why some banks have been paying 375 basis points or more for March 2010 sovereign CDS on Greece
Yesterday, short-term credit default swaps on Greece ballooned to 670 basis points, and Portugal shot out to 225 basis points.
Banks in Europe continue to reassess their OTC un-collateralized or under-collateralized OTC derivative exposure to sovereign and quasi-sovereigns in Southern Europe, beside the fact that banks continue to shuffle out any Greek sovereign collateral they may be holding and are increasing the haircuts for people looking to finance Greek and Portuguese sovereign debt.
But the problem is much larger than just the CDS swap market. Since the weak European countries don't control their own currency there is no mechanism by which to devalue the currency, get rid of real value of the debt and bring down real wages without massive unemployment, strikes, and wage and spending cuts.
If Greece was to default on its debt the banks of the country will collapse immediately. At that event their will be no way for the government to save the depositors of the banks since they will not be able to print or borrow money. The implications to the credit markets for such an event will be enormous since no bank will want to lend to any bank in Portugal, Italy, Ireland, Spain and maybe others. Since this will be the first time since the crisis began in 2007 that depositors lost money it will cause a panic and it is very likely that there will be an immediate run on the banks of Portugal, Italy, Spain and Ireland at a time when the countries themselves are unable to raise capital
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