Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Fundamentals for Uranium look great; is the Uranium Market ready to soar? - 29th Aug 16
3 Ways to Profit from the Stressed-Out American Consumer - 29th Aug 16
Have The Markets Become Too Big to Fail? - 29th Aug 16
Pakistan Booming House Prices Housing Market Mania Kabza Mafia Warning! - 29th Aug 16
Post Yellen = Market Confusion - 28th Aug 16
Theresa May Instructs Police, NHS Gp's, Public Sector To Stop Racial Discrimination in Service Delivery - 28th Aug 16
Ignore Yellen and Buy the Dip in Precious Metals - 27th Aug 16
SPX Downtrend Should be Underway - 27th Aug 16
Unraveling the Secular Economic Stagnation Story - 27th Aug 16
The Precious Metals Sector and the Fed. . . - 27th Aug 16
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy - 3 Secret Charts

Debt Crisis New Phase Striking Now! Despite Bailouts!

Interest-Rates / Global Debt Crisis Nov 29, 2010 - 10:44 AM GMT

By: Martin_D_Weiss

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleSadly, though, even while most Americans were enjoying the holiday or hitting the malls, much of Europe was sinking deeper into a new, more severe phase of its sovereign debt crisis.

This crisis is unfolding despite Herculean rescues by the European Union, the International Monetary Fund and the U.S. Federal Reserve.


It’s striking right now.

And it’s threatening to spread to all of the world’s big debtor nations, including the biggest of all — the United States.

Hard Evidence from Global Markets

This conclusion is not merely my analysis or forecast.

It’s the collective opinion of global investors who, at this very moment, are scrambling to buy insurance against bond defaults by major governments.

Think of it like life insurance:

  • When the premiums are cheap, it’s because the country has a clean bill of health.
  • When the premiums start rising, it means there’s growing evidence of fiscal disease.
  • And when premiums skyrocket to obscenely high levels, you can be darn certain the country’s Treasury is on its death bed, threatening to take down the government … sabotage its economy … and, inevitably, impoverish its people.

That’s precisely the situation the Irish find themselves in today. Their economy is sinking fast. Their two largest banks — the equivalent of our Bank of America and Citigroup — have just gone under. The Prime Minister is resigning. Millions of citizens are sinking into poverty. And yesterday’s final agreement on a $113 billion European rescue package will not change that reality.

Moreover, their crisis is a stark warning for all U.S. investors. So you’d better understand exactly what’s happening and why …

The Real Trauma of The Irish Debt Crisis

Default insurance is the telltale indicator.

And right now, the cost of insuring €10 million of 5-year Irish government bonds against default has skyrocketed — to an extremely high €600,000.

That’s 55 percent more than it cost for the same insurance in the aftermath of the Lehman Brothers failure — a time when it seemed the entire world was on the brink of collapse.

It’s 50 percent more than the cost of insuring equivalent Greek debt at the peak of Greece’s first round of financial difficulties earlier this year.

It’s at least DOUBLE the cost of insuring the debts of deeply troubled lesser nations like Romania, Lebanon, Latvia, and even Iceland.

Most shocking of all, today’s €600,000 price tag for Irish default insurance is higher than it was BEFORE the European Union and IMF first announced their intent to engineer a $113 billion rescue for Ireland just eight days ago.

Earlier this year, when Europe announced a similar bailout for Greece, traders in this kind of insurance — credit default swaps — gave Greece at least a 30-day reprieve. Now, they’ve given Ireland no more than three days.

Investors obviously don’t believe promises by politicians anymore.

Clearly, the Debt Crisis Is Accelerating. Clearly, the Bailouts Are Not Working!

The European authorities had hoped that, as soon as their massive, supposedly “definitive” Irish bailout package was announced, investors would jump for joy. Instead, investors have done precisely the opposite.

The authorities had hoped that the premiums on government bond default insurance would come down dramatically. Instead, the premiums have gone higher, as I’ve just shown you.

The authorities had hoped that Irish bond yields would come down sharply, helping to avert a disastrous, additional interest burden for the government. Instead, bond investors have dumped Irish bonds with both hands, driving their prices down and yields up.

Exactly seven days ago, on the morning after the big bailout announcement, the yield on Ireland’s benchmark 10-year government bond was near 8 percent. Now, it has surged by more than a full percentage point to 9.17 percent. That extra interest cost alone threatens to eat up a big chunk of the bailout money.

The authorities had hoped — and prayed — that their earlier bailout of Greece would have been enough to contain the cancer. Instead, it has metastasized and spread — not only to Ireland, but also to Spain and Portugal.

Right now, the cost of insuring against a default on Spanish and Portuguese bonds is at new, all-time highs, far surpassing the levels reached earlier this year when the Greek debt crisis was first exploding.

Even Greece itself, which the authorities thought was largely cured, is back in the emergency room.

But this time, all life support systems are in serious doubt. And this time, investors are in open rebellion against the spin doctors.

The facts: At the height of the last Greek debt crisis — on February 8, 2010, to be exact — the cost of insuring a €10 million 5-year Greek government bond reached a peak of €420,855.

But last week, the cost on the exact same instrument had surged above €1,000,000!

That’s like shelling out an outrageous $50,000 for a term life insurance policy that pays no more than $500,000 in death benefits.

Why so expensive? Because investors now realize that austerity, no matter how necessary, can never be a quick ticket to fiscal balance.

In fact, the more the Greek government has cut spending, the more its economy has sunk. Ditto for Ireland and other countries.

Urgent Lessons for All U.S. Investors

Even if you’ve never invested a penny in Europe — and even if you’ve never set foot outside the United States — this new phase of the debt crisis has far-reaching implications and lessons for you and your family …

Lesson #1 America Is Definitely NOT Immune to the Contagion

For 2011, the Bank for International Settlements estimates that Portugal’s and Spain’s government debts will be 99 percent and 78 percent of GDP, respectively.

But for the same year, U.S. government debts will be 91 percent of GDP.

Thus, by this measure, America’s debt burden is similar to

Portugal’s and bigger than Spain’s — two countries that are ALREADY victims of the sovereign debt crisis.

Yes, the U.S. dollar is the world’s reserve currency.

And, yes, that gives Washington the ability to print money with impunity … press other rich countries to accept its debts … and borrow huge amounts abroad to finance its deficits.

But that’s more of a curse than a blessing!

It means that, more so than any other major nation on the planet, the U.S. government is beholden to investors overseas — often the same investors who have repeatedly attacked Greece and Ireland this year.

Ultimately, that could make the U.S. even more vulnerable than Europe.

Lesson #2 Governments CANNOT End a Debt Crisis by Piling on Still MORE Debt Europe tried by announcing a Greek bailout earlier this year … and it failed miserably.

Europe tried again by expanding the Greek bailout to a $1 trillion fund for all euro-zone countries. But that effort is also failing. In fact, just one more bailout — for Spain — could wipe out the fund.

And now, even before Europe has figured out precisely how the bailout fund is to be used, there was new talk in high circles this weekend of expanding it even further — another desperate attempt to “reassure investors.”

But again, it is not working.

In fact, the more money Europe throws at the crisis, the more investors seem to recoil in horror.

Investors can now see, as plain as day, how past rescues have backfired.

They can see how the debt disasters can’t be papered over with bailouts or printed money.

And they KNOW that money printing can only gut the currency they’re investing in — be it the dollar or the euro!

In either case — bailout or no bailout — bond investors want out.

Lesson #3 Before a Government Debt Crisis Can Be Ended, It Must FIRST Get a Lot WORSE!

In order to slash deficits …

  • Governments must impose austerity — deep cutbacks in spending, tax hikes, or both …
  • The austerity inevitably drives the economy into a tailspin, and …
  • The economic tailspin always causes even LARGER deficits!

It’s only after years of fiscal discipline and collective belt-tightening that this vicious cycle is ended and balance is restored.

That’s why the cutbacks in Greece, Ireland, Portugal, and Spain are, in the near term, making the crisis even worse. And it’s also why a similar vicious cycle is now looming in the U.S., as the new Congress seeks to slash the deficit.

Lesson #4 The Great Debt Crisis Of 2008 Never Ended!

Politicians talk about the U.S. debt crisis of 2008 … the Detroit bankruptcy crisis of 2009 … the European sovereign debt crisis of early 2010 … the Greek debt tragedy … the Irish debt mess … the California budget debacle … the U.S. municipal bond collapse … and more.

Then, they talk about the urgent need to make a show of resolve to bail out the world — to stop the “contagion” from spreading from one sector or region to the next.

But these are not separate, isolated disasters. Nor is the contagion of fear the true source of the problem.

Instead, what we are experiencing is one, single, integral debt crisis that never ended.

It is one crisis that has spread from the U.S. to Europe and beyond … morphed from a private-sector banking crisis to a public-sector government debt crisis … grown in scope and power … and begun to drive the large debtor nations on a collision course beyond anyone’s control.

Lesson #5 The New Phase of the Debt Crisis Can Bring Surging Interest Rates

I showed you how the yields on Ireland’s 10-year notes have surged from 8 to 9.17 percent in just a few days. Yields in other European nations have shot up as well.

Meanwhile, I assume you’ve seen how, despite the Fed’s massive bond purchases, U.S. Treasury yields have also moved higher.

And you’ve seen even bigger jumps in U.S. municipal bond yields.

This is just the beginning.

And for the near future at least, rising interest rates could be a game-changer — for real estate, for the U.S. economy, and for many financial markets.

Investors aren’t dumb. When they see a new phase of the debt crisis, they rush from risk to safety.

So don’t be surprised if we get deeper corrections in those markets that rose in recent months — U.S. stocks, precious metals, key commodities, and several foreign currencies.

There will always be exceptions. But my recommendation is the same as last week’s: Take profits off the table. Build cash. Focus on safety.

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife