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Sovereign Government Debt Defaults Come Full Circle

Economics / Global Debt Crisis Dec 15, 2009 - 10:58 AM GMT

By: Jim_Willie_CB


Diamond Rated - Best Financial Markets Analysis ArticleThe continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality).

The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).


Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux.

The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.

One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible.

They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.


Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.

The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.

The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.


The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.

Spain's Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant.

Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.


Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt.

The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.


At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.


Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.

The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.

The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner.

Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.


No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD.

It does not. Rather it owns clear ledger items called 'Deep Storage Gold' that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.

Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true.

1) They did not foresee the insolvency of the US banking system.

2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime.

3) They did not foresee the severe whacking to the British Pound.

4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae.

5) They did not foresee the downturn and endless US housing bear market decline.

6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales.

7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.


The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted).

Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.

Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.

Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100's of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.

The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the 'lender of last resort', the USFed has on its own expanded its mandate to become the 'buyer of last resort.' The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.

Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!

Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent.  My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.

One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!


That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.

During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability.

As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.


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Hamid Varzi
16 Dec 09, 12:17
Hollywood Armageddon screenplay?

Is the writer serious or simply drumming up a great Hollywood Armageddon screenplay? We all know the U.S. is bankrupt and that the Dollar will collapse sooner or later, but the prospect of domino-style European collapses is so far-fetched as to be irresponsible. Germany and other stable European economies will not permit their neighbours to collapse, or establish a 'core-euro' currency, because Germany is the main beneficiary of inter-European trade based on a stable Euro (It's biggest trading partner is France!). Germany, France, Spain and other core European nations have spent decades creating the United States of Europe and won't give up the concept because of the current mess. Even Europe's citizens appreciate easy cross-border travel and elimination of the need to carry multiple currencies, while businesses throughout Europe have decreased costs as a rsult of the Euro.

Europe will simply tighten financial rules and strengthen regulatory bodies, something which U.S. lobbies and Wall Street won't allow, which is precisely why Europe will feed off future U.S. weakness and continue gaining the global legitimacy that the U.S. has wasted.

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