As you might have noticed, the stock market is falling like a
stone. As of 9 AM PST, the Dow Jones has dropped 172 points
while all the other indices are down sharply. German 2-year debt
(bund) has dipped below 0% this morning at auction, signalling
an acceleration in the bank run taking place in southern Europe.
Depositors in Spain, Greece, Italy, Portugal, etc would rather
take a loss on their investment, then risk not their money back
at all. The European Central Bank (ECB) does not guarantee
deposits, so people are withdrawing their money en masse and
getting out of Dodge pronto. What we're seeing is a real-time
The ostensible trigger for the
panic is known, but you won't read about it in the financial
media where the news is dumbed down to the point of incoherence.
What's really going on is that the German central bank (The
Bundesbank) has indicated that it's ready to pull the plug on
Greece which means that future bailouts will probably not be
forthcoming. That's bad. It means that Greece will run out of
money some time in June; their banking system will implode, and
the "birthplace of democracy" will be reduced to 3rd world
status overnight. Here's a blurb from the Bundesbank's
"Current developments in
Greece are extremely worrying. Greece is threatening not to
implement the reform and consolidation measures that were agreed
in return for the large-scale aid programmes.
This jeopardises the
continued provision of assistance. Greece would have to bear the
consequences of such a scenario. The challenges this would
create for the euro area and Germany would be considerable, but
manageable given prudent crisis management. By contrast, a
significant dilution of existing agreements would damage
confidence in all euro-area agreements and treaties and strongly
weaken incentives for national reform and consolidation
measures. In such circumstances the institutional status quo
comprising liability, control and individual responsibility of
member states would be fundamentally called into question.
When the Eurosystem
provided Greece with large amounts of liquidity, it trusted that
the programs would be implemented and thereby ultimately assumed
considerable risks. In the light of the current situation, it
should not significantly increase these risks. Instead, the
parliaments and governments of the member states should decide
on the manner in which any further financial assistance is
provided and therefore whether the associated risks should be
Okay. So German central
bankers don't want to wait until the June elections in Greece to
decide whether to provide more money or not. They're throwing in
the towel now. No more money. No more bailouts. No more Mr.
Niceguy. End of story. But what does that mean? Does it mean
that the whole global financial system is headed back into the
shitter again like after Lehman Brothers?
No one knows for sure, but
there's bound to be a few bumps in the road, don't you think?
Take a look at this from Bloomberg today (Wed):
“Europe’s banks, are
sitting on $1.19 trillion of debt to Spain, Portugal, Italy and
Ireland, are facing a wave of losses if Greece abandons the
euro. While lenders have increased capital buffers, written down
Greek bonds and used central-bank loans to help refinance units
in southern Europe, they remain vulnerable to the contagion that
might follow a withdrawal, investors say. Even with more than
two years of preparation, banks still are at risk of deposit
flight and rising defaults in other indebted euro nations.”
Can you really slash a
trillion bucks out of the rotting corpse of the EU banking
system and still keep things running smoothly?
Don't bet on it. Here's
more from Bloomberg:
"The ECB’s unprecedented
provision of 1.02 trillion euros in three-year cash in December
and February helped calm financial markets in the first quarter
by removing concern that banks unwilling to lend to one another
would run out of cash. Lenders in Spain and Italy also used the
funds to buy sovereign debt, reducing government borrowing
Lenders probably would
need another 800 billion-euro liquidity lifeline from the ECB to
help stem contagion from a Greek exit, Citigroup analysts
estimated in a May 17 note...." (Bloomberg)
That's right, the EU banks
were gifted over 1 trillion euros 3 months ago, and they're
still too undercapitalized to weather the storm of a Greek
default. Nice, eh? So, the whole system is just an empty gourd,
right? They're broke, so the ECB will have to print up another
800 bil just to keep the house of cards from collapsing in a
Getting worried yet?
US Treasuries are also
rallying big today. In fact, the yield on the 10-year --which
hit a record low last week--is on its way back down indicating
that investors are freaking scared-out-of-their-minds. In real
terms, investors are now socking money into 10-year Treasuries
knowing that (inflation adjusted) they'll get LESS money back
then they put in.
How do you like them
apples? That's what I call a full-blown panic! And yet, you
ain't hearing a blasted thing about it on the news, right? Why
would that be?
Here's a little icing on
the cake from Bloomberg:
"Greece may have only a
46-hour window of opportunity should it need to plot a route out
of the euro.
That’s how much time the
country’s leaders would probably have to enact any departure
from the single currency while global markets are largely
closed, from the end of trading in New York on a Friday to
Monday’s market opening ....
“I am completely convinced
they could not orchestrate an orderly exit,” said Erik Nielsen,
chief economist at UniCredit SpA in London. “This is a country
that can’t implement laws, so how in the world are they going to
secretly agree to print money, control the banks, control
capital flows and think this is going to be orderly? It’s
completely impossible.” ...
“There is no reason to
think there won’t be riots and violence,” said Lefteris
Farmakis, a strategist at Nomura International Plc in London.
“It would be a pretty disastrous situation. People have no
understanding of the consequences of a euro exit.” ("War-Gaming
Greek Euro Exit Shows Hazards in 46-Hour Weekend", Bloomberg)
Riots, street violence,
skyrocketing unemployment, grinding poverty...the whole schmeer.
And what's the most likely scenario for Greece after all that?
Well, probably another
military coup backed by President Hopium and his band of CIA
merry pranksters, right?
Okay, my bad. I don't want
to polarize all the Obama fans, but, Geez Louise, things are
looking mighty grim for the poor Greeks, don't you think?
Of course, it all could go
smoothly "without a hitch"; no credit crunch, no bank runs, no
flight to safety, no crashing stock markets, no decades of
struggle and social unrest, no splitting up of the eurozone, no
ethnic animosities, no uber-nationalism, no right wing
fanaticism, no border skirmishes or armed hostilities, no
revolutions, no depression, no rise of fascism...just a smooth
transition to a new, slimmed-down version of the EZ. After all,
that's what Germany is expecting. And they could be right.