Crisis mode is now, crisis is later

From a stock company news article.  I have been going on about this for some time, so I thought a third party's take would help, as it agrees with me.  Send this around, especially to anyone in Congress. The White House is useless.  They want a collapse, as you must see by now. The current debt "negotiation" is a joke.  See the pig below.  More than that, the Democrats want a failure so they can say Republicans are "do nothing" and want to starve children.  The country?  Oh, please.  Grow up, we are talking about politics, not the real world.
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Europe Still Headed For An Epic Financial Collapse

28 comments |  November 10, 2011  |  includes: DRR, ERO, EU, EUO, FXE, ULE, URR

   

Oh, how the mighty have fallen. In just a matter of days, two of Europe's most venerable leaders have been toppled. George Papandreou was the third member of the Papandreou dynasty to be prime minister of Greece. Silvio Berlusconi had dominated Italian politics for nearly two decades. But now they are both heading out the door and the international media have been reporting on their resignations with the kind of enthusiasm that is normally reserved for sporting events. "Down goes Papandreou! Down goes Berlusconi!" If you didn't know better, you would almost be tempted to think that some of the recent news reports were describing a boxing match.

But this is what happens when debt problems spiral out of control. It is the leaders who take the fall. So will the resignations of Papandreou and Berlusconi help anything? Of course not. Europe is still headed for a financial collapse of epic proportions...

The yield on 10 year Italian bonds (probably the most important financial number in the world at the moment) is now up to 6.95% [after going over 7%- Ed.]. Never before in the euro era has the yield on Italian bonds been as high as we have seen this week. So why is this important? Well, the reality is that Italy simply cannot afford to service its massive national debt when yields are this high.

We are officially in the danger zone. Carl Weinberg, the chief economist at High Frequency Economics, recently said the following about what would happen if Italian bond yields go up into the 8% to 10% range: If it has to pay those yields to finance itself, Italy is dead, and the sovereign crisis just blew up.

So watch that number very carefully over the next few months. Italy is being called "too big to fail, too big to save". There is no way that Europe can afford to let Italy crash, but there is also no way that the rest of Europe can put together enough money for a full scale bailout of Italy...

Many believe that the departure of Berlusconi is going to pave the way for brutal austerity measures to be imposed on the Italian people.

Suddenly, it very much feels like we are watching a replay of what has happened in Greece over the past couple of years. Just check out the following excerpt from a recent article in the London Evening Standard:

The Italians feel they've been humiliated by having to accept that monitors from the IMF will be arriving in the country this week to oversee a rise in pension ages, a sell-off of state assets and new rules to make jobs less secure.

...The Italians are definitely going to agree to some pretty significant budget cuts. But if bond yields keep rising, they are going to wipe out all of the savings from the budget cuts and then some. This is why I keep preaching about the horror of the U.S. national debt over and over and over. If you don't deal with it when you can, eventually interest rates rise to unbearable levels and a horror show quickly unfolds.

Anyway, right now Italy has a debt to GDP ratio of 118%. If it keeps expanding that debt it is going to result in a financial nightmare, but if they try to implement strict austerity measures it is also going to result in a financial nightmare. They are damned if they do and they are damned if they don't.

...Greece is a financial basket case, and unless someone gives them gigantic piles of money for free that is going to continue to be the case. A year ago, the yield on 2 year Greek bonds was a bit above 10%. Today, the yield on 2 year Greek bonds is over 100%. If you want to see what a financial meltdown looks like, just check out what is happening in Greece.

The rest of Europe is in panic mode too. For example, France is desperate to keep its AAA credit rating. In an article for the Telegraph, Ambrose Evans-Pritchard described the austerity measures that France is implementing in an attempt to head off a debt crisis of their own:

The belt-tightening plan -- the second package since August, taking total cuts to €112bn -- include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone.

In the end, all of this is too little, too late. Europe is heading for a date with destiny. They have spent themselves into oblivion and now they are going to pay the price. Some members of the financial community fear that a full-blown crisis could erupt at any moment. For example, according to Business Insider, Colin Tan of Deutsche Bank recently said that he believes that it is possible that "we could be in full crisis mode" by the time the week ends...The situation with Italy feels increasingly like one that has little chance of materially improving until some extreme pressure is put on someone to act. It may not come to a head this week but the signs are not good that we can avoid an extreme situation emerging soon.

For those of you that are freaking out about now, don't worry too much. A full-blown crisis is not going to happen this week. But time is running out. And when Europe comes apart, it is going to have a dramatic impact on the United States as well.

According to an article in the Financial Post, the Federal Reserve made the following statement in a report about a survey that it just released:

About one-half of domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries

Big U.S. banks have a lot of exposure to European debt and to European banks. When the financial dominoes start to fall, a lot of those dominoes are going to be in the United States. One of the biggest dangers to be concerned about are all of the credit default swap contracts that U.S. banks have written on European debt. Just check out what a recent article posted on the website of MSNBC had to say about that:

U.S. banks have written about $400 billion in CDS contracts on European sovereign debt, according to the Bank for International Settlements. Those payouts would be triggered if Greece or Italy defaults. Because financial institutions are not required to report their CDS holdings, little is known about which banks or investment firms are on the hook, and for how much.

As I have written about previously, there is a very good chance that the world could be facing a massive derivatives crisis at some point in the next five to ten years. If you hear the news talk about a "problem with derivatives" or a "derivatives crisis" then you will want to pay very close attention. Over the past 30 years, the global financial system has constructed a gigantic mountain of debt, risk and leverage unlike anything the world has ever seen before. At some point the whole thing is going to come crashing down. When it does, it is going to affect the entire globe. A huge storm is coming. Get prepared while you can.

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You may as well make some money with this knowledge.  Even in a "mode" currencies will spike and dip.  When things turn ugly, the stock market will be like remind us of musical chairs.