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. [Let me explain.] Words: 1075
So says Michael Snyder (www.endoftheamericandream.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Snyder goes on to say, in part:
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 and 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? There are two reasons:
- major banks all over Europe are heavily invested in Greece’s [public sector, non-domestic] debt [of 31B euros of which German banks holds 32% (10B euros) and French banks 29% (9B euros) as of Sept. 13, 2011. Source: RBC Europe Limited]. 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.
- if Greece defaults, it tells the markets that Portugal [24B euros in public sector, non-domestic debt of which each of Germany and France hold 25%] , Italy [199B euros of which Germany holds 18% and France 37% ] and Spain [76B euros of which Germany holds 28% and France 30%] 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…
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.
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Quite a few politicians in Europe are touting a “United States of Europe” [see article here (1)] 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 – and that would not be a good thing.
What we are stuck with right now is the status quo but the current state of affairs cannot last much longer…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.
Title and Link to Article Referenced Above:
Are we about to see a huge push for a “United States of Europe”? As the sovereign debt crisis in Europe continues to spiral out of control, suddenly this term is popping up in the New York Times and in major newspapers all over Europe. Is this by accident? Surely not. The truth is that there is an overwhelming consensus among the political and financial elite of Europe that a “United States of Europe” is what would be best for the eurozone. However, they are likely going to need a massive financial crisis in order to reach their goal. [Let me explain.] Words: 1612