The European Union’s failure to solved Greeks and now Italy’s debt crisis is sending shockwaves through the financial, currencies, equities and derivatives markets.
Europe needs to increase its bailout fund in the EFSF to more than €1 trillion by next year when waves of Eurozone debts matures. Among them are Italy €307 billion (19.3% of GDP, Germany €273 billion (10.6% of GDP), France €240 billion (12% of GDP) and Spain €132 billion (12.2% of GDP). This is excluding new debts to be issued to fund its deficits spending and bank bailouts. Europe is now in between a rock and a hard place because it can start printing money but the ECB treaty prevented it from doing so.
To add salt to injury, in a recent capital raising exercise the EFSF failed to raise the required €3 billion and had to resort to buying up a few hundred million euros of its own bonds. In other words there are not enough interested parties out there.
In addition, European banks are also quietly dumping €300 billion in Italian debts. IFR reports that ‘European banks are planning to dump more than the €300 billion they own in Italian government debts as they seek to pre-empt a worsening of the region’s debt crisis and avoid crippling write downs – a move that could scupper the European Central bank’s effort to bring down soaring yields’
Karma at work?
Last week, a European delegation was in Beijing trying to secure loans for their bailout, returned empty handed mainly because they cannot concede to the Chinese list of demands. Chinese Premier Wen Jiabao, in his speech at the opening of the World Economic Forum in Dalian on September, said that “China is willing to extend its help to Europe but at a price.”
Among the Chinese demands include:
- EU support for China in the World Trade Organization.
- Removal of the arms embargo that the EU imposed after the Tiananmen Square
- More favorable trading terms like subsidies, import tax, duties and etc .
- Greater influence at the IMF, through inclusion of the yuan in the IMF’s currency basket that underlies the Special Drawing Rights (SDR).
- Fire sale of European assets in sensitive industries like defense and high technologies.
Unfortunately, Europe will not be able to resist for too long, as time is running out for them to rollover their debts due next year. The Chinese on the other side have all the time it needed to wait for the Europeans to concede to its demand. Eventually the Europeans will have to give in, when the next stage of the crisis takes hold where now France and Hungary are facing possible downgrade from Rating agencies as soon as before year end. France is expected to be downgraded by one notch from AAA, while Hungary to Junk status. When the downgrade begins, yields will soar and it will be difficult to raise capital in the international markets.
Probably this is what most viewed as the Revenge or Vengeance for the Boxer protocol or Unequal Treaties signed during 1901 after China failed in its intervention of the Boxer Rebellion. In Karma sense, the Chinese are back to collect its dues.
The Ching Dynasty signed the treaty with notably eight nations namely Austria-Hungary, France, Germany, Italy, United Kingdom, Japan, Russia and the United States.
In the Treaty, China is required to pay a total of 450 million taels of silver as indemnity over a course of 39 years to the above eight nations. The 450 million taels of silver which is worth about £67 million at that time and it is equivalent to today’s value of more than US$ 7 billions.
The distributed amounts in percentage are as follows :
Russia - 28.97 %
Germany - 20.25 %
France - 15.75 %
United Kingdom - 11.25 %
Japan - 7.73 %
United States - 7.32 %
Italy - 7.32 %
Austria-Hungary - 0.89 %
On top of that a total of 17 local provinces are required to pay an additional 16.88 million taels. By 1938, a total of 652.37 million taels was paid which included an interest rate of 4% per annum.
S & P after applying its stress test with scenario 1 (being in a double dip recession) and scenario 2 (being in a double dip recession and an interest rate shock) issued the following projections for Eurozone.
· Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios.
· Speculative-grade corporate defaults would likely increase to between 9% and 13% .
· Covered bond programs in Italy, Portugal, and Spain could be lowered by several notches under our criteria, reflecting the potential downgrades of issuing banks.
· The deterioration of collateral securing structured finance transactions in Italy, Portugal, and Spain could contribute to a downgrade rate of at least 25%-30%
· Rated insurers in Italy, Spain, and Portugal, or with significant operations in or exposures to these countries, or large U.S. equity portfolios in their life operations, potentially could see rating actions limited to between one and two notches on average.
Chinese Dagong Global Ratings Agency, last Friday, November 11th, is warning that it will not hesitate to downgrade the US Sovereign debt rating again because of its failure to tackle the federal budget deficit. The head of the Agency said ‘The measure available to them cannot be effective so they have another way out which is to depreciate the UD dollar, to print more money’. This has negatively affecting their credit prospects so their overall ability to pay back continue to go down.
The Chinese Agency concludes that more “devastating credit rating cuts and global economic turmoil” will be around the corner, if Washington do not live within its means,
In also cautioned that “the good old days where the US is able to borrow its way out of the messes is finally over.”
Greece has erupted into a full scale disaster with violent protests and riots daily and this could lead to a total SHUTDOWN of its government. The only thing that have maintained investor confidence is that there is always the Central Bank to bailout and intervene in the financial system. However due to the bailouts by Central Banks the actual problem of the Debt crisis is never solved. They are just kicking the can down the road since 2008 and never took the hit that are needed in 2008. Total bets on global derivatives of more than US $ 600 trillion are still open in the financial markets. What Central banks did was print more money and lends it to the insolvent big banks. In other words the Central Banks assume all the risk of the private sector and transfer it to the public sector. No wonder the Fed’s balance sheet is over US $ 2 trillion.
So what can we derive from here? When the next crisis strikes, this time not only banks and the private sector is going down but entire countries are going under as we are seeing it in Greece and Italy. Once the bailout bandwagon stops in Greece, the collapse will spread like wildfire because Greece is the Bear Stearns of Sovereign Debt Default. Given the leverage and interconnectivity of the global financial system it won’t be long this crisis will reach our shores and the latest by next year.
So what are the social implications of the collapse?
- Rising crime, when people devoid of jobs and are unable to support their families they will turn to crime out of desperation
- Corruption, High and low level government officials will look to supplement their income from kickbacks and bribery.
- Police state conditions, government will send police out to show the people on who’s really in charge and they will use unnecessary force to disperse crowds.
- Censorship, government medias will be censored and they will create events to distract the people from the real problems of the economy.
- Lower standard of living due to the effects of inflation. People will be more hard squeezed and desperate.
- There will be more protest and riots due to the dissatisfaction of the population with the ruling government. Expect more bloody street protests.
- Global financial markets meltdown. There will be blood on the streets.
- Massive unemployment in the economy will force countries to use ‘beggar thy neighbor’ policy (already happening now) through devaluation of their currencies. Every country will try to outsell each other in order to sustain their employment level.
So how bad things can it be when economies starting to disintegrate? As a rule of thumb on economic collapse, the larger the economic distortion the harder the collapse! Massive distortions in economies around the world are happening because governments are printing massive amount of money in order to prop up (stimuli) their economies.
IMF’s Painful Pill Menu
Just to give you a rundown of what EXTRA conditions the IMF put on Greece in June, when it failed to fulfill all the conditions on their previous austerity measures.
The plan involve cutting 14.32 billion euros in public spending while at the same time raising 14.09 billion euros from various taxation over the next five years. For those who are interested to know how tough IMF austerity measures are, the following are some of the latest measures being planned. Courtesy of BBC.
Various Taxation Increased
- Taxes will increase by 2.32bn euros this year, with additional taxes of 3.38bn euros in 2012, 152m euros in 2013 and 699m euros in 2014.
- A solidarity levy of between 1% and 5% of income will be levied on households to raise 1.38bn euros.
- The tax-free threshold for income tax will be lowered from 12,000 to 8,000 euros.
- There will be higher property taxes
- VAT rates are to rise: the 19% rate will increase to 23%, 11% becomes 13%, and 5.5% will increase to 6.5%.
- The VAT rate for restaurants and bars will rise to 23% from 13%.
- Luxury levies will be introduced on yachts, pools and cars.
- Some tax exemptions will be scrapped
- Excise taxes on fuel, cigarettes and alcohol will rise by one third.
- Special levies on profitable firms, high-value properties and people with high incomes will be introduced.
Public Sector Cuts
- The public sector wage bill will be cut by 770m euros in 2011, 600m euros in 2012, 448m euros in 2013, 300m euros in 2014 and 71m euros in 2015.
- Nominal public sector wages will be cut by 15%.
- Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses.
- All temporary contracts for public sector workers will be terminated.
- Only one in 10 civil servants retiring this year will be replaced and only one in 5 in coming years.
- Defense spending will be cut by 200m euros in 2012, and by 333m euros each year from 2013 to 2015.
- Health spending will be cut by 310m euros this year and a further 1.81bn euros in 2012-2015, mainly by lowering regulated prices for drugs.
- Public investment will be cut by 850m euros this year.
- Subsidies for local government will be reduced.
- Education spending will be cut by closing or merging 1,976 schools.
- Social security will be cut by 1.09bn euros this year, 1.28bn euros in 2012, 1.03bn euros in 2013, 1.01bn euros in 2014 and 700m euros in 2015.
- There will be more means-testing and some benefits will be cut.
- The government hopes to collect more social security contributions by cracking down on evasion and undeclared work.
- The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions.
Public Sector Privatizations
- The government aims to raise 50bn euros from privatizations by 2015, including:
- Selling stakes this year in the betting monopoly OPAP, the lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water.
- It has agreed to sell 10% of Hellenic Telecom to Deutsche Telekom for about 400m euros.
- Next year, the government plans to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATE bank as well as ports, airports, motorway concessions, state land and mining rights.
- It plans further sales to raise 7bn euros in 2013, 13bn euros in 2014 and 15bn euros in 2015.
As you can see from the above measures, if implemented it will reduce the standard of living of ordinary Greeks by at least 30% given the various increase in taxes and wage cuts .In addition, the approval of the plan means more fire sale of Public Assets to other European (especially German Banks) and American Bankers will be on the way.
Another measure not mentioned is that the EuroStat monitoring will be shortened from 3 months to monthly. Compliance will be as strict as the first austerity package. Failure to comply will result in even stricter austerity measures. Some of these measures are
going to squeeze the Greek economy even more, for example VAT rates will be increase to 23% from 13% in restaurants and bars which means you can say goodbye to Greek tourism and this sector contributes the most to the economy.
In the olden days, you need a standing army to take over a country, nowadays all you need to do is to enslave the country with debts and you will be able to get it on the cheap. With the above austerity measures, just wonder how the ordinary Greeks be able to withstand the hardship.
One of the better solution to the current crisis will be for Europe to “do an Iceland on Europe” and basically this means defaulting. Forget about IMF, forget about Rating Agencies and forget about all those austerity measures. Just look at Iceland, they have been saying no to bankers, no to austerity, no to pressure from UK government to reimburse more than 600,000 depositors of the failed Internet IceBank, no to bailout from EFSF and etc.
Conceding to them means they will be harming innocent taxpayers while protecting the bankers (bond holders) from taking a haircut.
Changing of puppets will yield to nothing for Greece and Italy. It is just the same old game of ponzi musical chairs with different players. They need to get to the core of the problem which is the bankers, corporate fraudsters and corrupt politicians.
Another piece of advise for investors is to avoid anything that that has connection with ‘EURO’. Euro tunnel, Euro Zone, Euro Disney and what you get at the end is Euro Trouble.
But why Main Street is dislocating from Wall Street? Despite continuous outflow of bad news from Europe and elsewhere, why are global stock markets still maintaining its level or continue going up? The market might be sending a message that something big is brewing over the horizon. Are the markets already discounting the fact that the Americans and Europeans are about to MASSIVELY print their way out of this mess again? Hyperinflation down the road.
by Sam Chee Kong
© 2011 Copyright Sam Chee Kong - All Rights Reserved
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