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The bankers have decided to play casino games with derivatives instead of investing in capital projects.




20 Signs Of Imminent Financial Collapse In Europe
September 12, 2011


Source: ECBlog - MIchael Snyder




Are we on the verge of a massive financial collapse in Europe? Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money. Without more bailout funds it is absolutely certain that Greece will soon default on their debts. But German officials are threatening to hold up more bailout payments until the Greeks "do what they agreed to do". The attitude in Germany is that the Greeks must now pay the price for going into so much debt. Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks. As the economy shrinks, so do tax payments and the budget deficit gets even larger. Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets. If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well. Needless to say, all hell would break loose at that point.

So why is Greece so important?

Well, there are two reasons why Greece is so important.

Number one, major banks all over Europe are heavily invested in Greek debt. Since many of those banks are also very highly leveraged, if they are forced to take huge losses on Greek debt it could wipe many of them out.

Secondly, if Greece defaults, it tells the markets that Portugal, Italy and Spain would likely not be rescued either. It would suddenly become much, much more expensive for those countries to borrow money, which would make their already huge debt problems far worse.

If Italy or Spain were to go down, it would wipe out major banks all over the globe.

Recently, Paul Krugman of the New York Times summarized the scale of the problem the world financial system is now facing,


Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.

Most Americans don't spend a lot of time thinking about the financial condition of Europe.

But they should.

Right now, the U.S. economy is really struggling to stay out of another recession. If Europe has a financial meltdown, there is no way that the United States is going to be able to avoid another huge economic downturn.

If you think that things are bad now, just wait. After the next major financial crisis what we are going through right now is going to look like a Sunday picnic.

The following are 20 signs of imminent financial collapse in Europe,

#1 The yield on 2 year Greek bonds is now over 60 percent. The yield on 1 year Greek bonds is now over 110 percent. Basically, world financial markets now fully expect that Greece will default.

#2 European bank stocks are getting absolutely killed once again today. We have seen this happen time after time in the last few weeks. What we are now witnessing is a clear trend. Just like back in 2008, major banking stocks are leading the way down the financial toilet.

#3 The German government is now making preparations to bail out major German banks when Greece defaults. Reportedly, the German government is telling banks and financial institutions to be prepared for a 50 percent "haircut" on Greek debt obligations.

#4 With thousands upon thousands of angry citizens protesting in the streets, the Greek government seems hesitant to fully implement the austerity measures that are being required of them. But if Greece does not do what they are being told to do, Germany may withhold further aid. German Finance Minister Wolfgang Schaeuble says that Greece is now "on a knife’s edge".

#5 Germany is increasingly taking a hard line with Greece, and the Greeks are feeling very pushed around by the Germans at this point. Ambrose Evans-Pritchard made this point very eloquently in a recent article for the Telegraph,


Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been "Unconditional Capitulation", and "Terrorization of Greeks", and even “Fourth Reich”.

#6 Everyone knows that Greece simply cannot last much longer without continued bailouts. John Mauldin explained why this is so in a recent article,


It is elementary school arithmetic. The Greek debt-to-GDP is currently at 140%. It will be close to 180% by year’s end (assuming someone gives them the money). The deficit is north of 15%. They simply cannot afford to make the interest payments. True market (not Eurozone-subsidized) interest rates on Greek short-term debt are close to 100%, as I read the press. Their long-term debt simply cannot be refinanced without Eurozone bailouts.

#7 The austerity measures that have already been implemented are causing the Greek economy to shrink rapidly. Greek Finance Minister Evangelos Venizelos has announced that the Greek government is now projecting that the economy will shrink by 5.3% in 2011.

#8 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.

#9 Major banks in the U.S., in Japan and in Europe have a tremendous amount of exposure to Greek debt. If they are forced to take major losses on Greek debt, quite a few major banks that are very highly leveraged could suddenly be in danger of being wiped out.

#10 If Greece goes down, Portugal could very well be next. Ambrose Evans-Pritchard of the Telegraph explains it this way,


Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany's austerity dictates in the long run. From there the chain-reaction into EMU's soft-core would be fast and furious.

#11 The yield on 2 year Portuguese bonds is now over 15 percent. A year ago the yield on those bonds was about 4 percent.

#12 Portugal, Ireland and Italy now also have debt to GDP ratios that are well above 100%.

#13 Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

#14 Major banks in the "healthy" areas of Europe could soon see their credit ratings downgraded. For example, there are persistent rumors that Moody's is about to downgrade the credit ratings of several major French banks.

#15 Most major European banks are leveraged to the hilt and are massively exposed to sovereign debt. Before it fell in 2008, Lehman Brothers was leveraged 31 to 1. Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

#16 The ECB is not going to be able to buy up debt from troubled eurozone members indefinitely. The European Central Bank is already holding somewhere in the neighborhood of 444 billion euros of debt from the governments of Greece, Italy, Portugal, Ireland and Spain. On Friday, Jurgen Stark of Germany resigned from the European Central Bank in protest over these reckless bond purchases.

#17 According to London-based think tank Open Europe, the European Central Bank is now massively overleveraged,


"Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out."

#18 The recent decision issued by the German Constitutional Court seems to have ruled out the establishment of any "permanent" bailout mechanism for the eurozone. Just consider the following language from the decision,


"No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences"

#19 Economist Nouriel Roubini is warning that without "massive stimulus" by the governments of the western world we are going to see a major financial collapse and we will find ourselves plunging into a depression,


“In the short term, we need to do massive stimulus; otherwise, there's going to be another Great Depression”

#20 German Economy Minister Philipp Roesler is warning that "an orderly default" for Greece is not "off the table",


''To stabilize the euro, we must not take anything off the table in the short run. That includes, as a worst-case scenario, an orderly default for Greece if the necessary instruments for it are available.''

Right now, Greece is caught in a death spiral. The more austerity measures they implement, the more their economy slows down. The more their economy slows down, the more their tax revenues go down. The more their tax revenues go down, the worse their debt problems become.

Greece could end up leaving the euro, but that would make their economic problems far, far worse and it would be very damaging to the rest of the eurozone as well.

Quite a few politicians in Europe are touting a "United States of Europe" as the ultimate solution to these problems, but right now the citizens of the eurozone are overwhelming against deeper economic integration.

Plus, giving the EU even more power would mean an even greater loss of national sovereignty for the people of Europe.

That would not be a good thing.

So what we are stuck with right now is the status quo. But the current state of affairs cannot last much longer. Germany is getting sick and tired of giving out bailouts and nations such as Greece are getting sick and tired of the austerity measures that are being forced upon them.

At some point, something is going to snap. When that happens, world financial markets are going to respond with a mixture of panic and fear. Credit markets will freeze up because nobody will be able to tell who is stable and who is about to collapse. Dominoes will start to fall and quite a few major financial institutions will be wiped out. Governments around the world will have to figure out who they want to bail out and who they don't want to bail out.

It will be a giant mess.

For decades, the governments of the western world have been warned that they were getting into way too much debt.

For decades, the major banks and the big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks.

Well, nobody listened.

So now we get to watch a global financial nightmare play out in slow motion.

Grab some popcorn and get ready. It is going to be quite a show.[/b]

[b][b]Heard first here ,


Wary Investors Start to Shun European Banks
By NELSON D. SCHWARTZ and GRAHAM BOWLEY
When a $225 million loan to BNP Paribas comes due Thursday at Legg Mason’s Western Asset management unit, managers at its money market funds will be exercising caution. Instead of renewing the loan as they would have as recently as two months ago, they are looking to park investors’ money elsewhere, avoiding BNP and other Continental banks in favor of institutions in Scandinavia, Canada and Britain.

Even as European investors race to abandon shares in French banks, on this side of the Atlantic, banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.

In August, American money funds and other suppliers of short-term credit chose not to refinance roughly $50 billion of debt issued by European banks, a drop of 14 percent, according to JPMorgan research. Traders are so worried that they are forcing French banks like Société Générale and BNP Paribas to pay more to borrow dollars — and they often can do so only for a week or less.

“Money market managers in the U.S. continue to prune risk,” said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. “The issue is headline risk; fund managers may be comfortable with the banks’ credit, but many are hearing from shareholders worried by what they have read about French banks.”

Unlike their American counterparts, France’s biggest banks are more dependent on short-term funding. Money market funds in the United States have been among the biggest lenders, lending $161 billion to French banks in August, although that is down 39 percent from a month earlier.

“It hasn’t been a wholesale pullback,” Mr. Roever said. In 2008, after the collapse of Lehman Brothers — when a key money market fund sustained huge losses on Lehman debt and investors started pulling their money out of the funds — he said, “everybody shut off at once. It was like a cliff. This time the pullback has been more gradual.”

It’s not just money market funds that are getting cold feet.

On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said. The two French giants are major international players in the derivatives arena, so a pullback would hurt egos and the bottom line of both companies. Derivatives are investment instruments whose value is tied to another underlying security.

And since last month, according to several bankers who insisted on anonymity, hedge funds and other firms have also withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks. Prime brokers hold assets for hedge funds and other investors, while providing loans for increased leverage on their bets.

While still small, this kind of transfer echoes the larger move hedge funds made as Lehman teetered in 2008, when a tidal wave of withdrawals helped sink the bank.

Not everyone is anxious. Some money market giants like Fidelity and Federated Investors are sticking with French banks despite the increased anxiety. At Federated, which has $114 billion under management in prime money market funds, about 13 to 17 percent of assets remain invested in French bank debt, according to Deborah Cunningham, a senior portfolio manager at Federated.

“We’re always rethinking it and assessing it, but we’ve not come up with a different answer,” she said. “We don’t feel there’s any jeopardy with regard to repayment.”

At Fidelity, which manages a total of $428 billion, Adam Banker, a spokesman, said, “We’re very comfortable with our money market funds’ European bank holdings, including French bank holdings.” As capital becomes more costly or scarce for European banks, the resulting rise in their borrowing costs risks impairing their own ability to lend, economists warn. That threatens to undermine the general economic growth prospects of already-weakened nations like Italy and France, which in turn would make the banks’ position worse.

“There is a paucity of capital in the European banking system,” said Eric Green, an economist at TD Securities. “There is crisis fatigue in Paris and Berlin. Now there is some question about how much they are prepared to go to the mat to save Greece from default.”

In another sign of the strain, Société Générale put out an unusual announcement on Monday morning revealing it had more than halved its unsecured dollar funding to $33 billion euros, from $72 billion euros in early July. That has forced the bank to look elsewhere for dollars to finance its operations, including the foreign exchange markets.

With French and other European banks chasing dollars, the cost of swapping euros for dollars three months from now has spiked. The so-called foreign exchange basis swap is where European banks are increasingly being forced to turn as other forms of dollar funding dry up. It has risen to about 112 basis points, or 1.12 percent. It had stood at 28 basis points in late July.

That is painfully high, but still far below the 200 basis points, or 2 percent, it reached in the aftermath of the 2008 financial crisis. And that’s after a number of emergency support measures undertaken by the Federal Reserve and other central banks to ensure that global financial institutions do not run short on dollars.

Another indicator of heightened concern is the increasing cost of insuring European bank debt through credit-default swaps, which rose to records, said Otis C. Casey, director of credit research at Markit.

The Markit iTraxx senior financial Index linked to senior debt of 25 banks and insurers rose to about 3.15 percent after being at about 1.77 percent at the end of July. That means it now costs $315,000 a year to insure $10 million in bank debt for five years; at the end of July, the cost was $177,000.

For French banks, the cost is even greater. Credit-default swaps on Crédit Agricole reached a record of 3.25 percent Monday, up from 1.11 percent in April. Similar instruments to insure debt of Société Générale stood at 4.5 percent, compared with 1.07 percent in April.

The cost of insuring European sovereign debt now stands at its highest level since September 2009. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments increased to around 3.57 percent — it had stood at 1.57 percent in April, according to Mr. Casey.

At the epicenter of the problem — Greece — the cost of insuring $10 million worth of Greek debt now equals $5.7 million, a new high, underscoring how the market is already factoring in the likelihood of a Greek default.

For now, the market is signaling that the risks are likely to loom larger for European institutions than banks in the United States. Still, the longer the uncertainty persists, the more investors on both sides of the Atlantic will feel jittery. What’s more, regulators do not fully know just how much of a risk derivatives tied to European banks pose for American firms.

“Because of the uncertainty with the Germans, the European Union and the International Monetary Fund, you’re not going to see an easy, quick resolution,” said Mr. Roever of JPMorgan. “This is a problem that isn’t going away soon.”

Eric Dash and Julie Creswell contributed reporting.[/b][/b]