Default By Greece, Does Not Necessarily Mean That Greece Will Be Kicked Out Of The EU

Report on the Eurozone for the week ending October 6, 2011

1) … A default by Greece  is coming soon and it will be genesis for a Eurozone Economic Government; it will be one of ten regional economic governments called for by 300 elites of the Club of Rome in 1974. 
While it is true as Peter Schwarz of WSWS relates  “State bankruptcy would mean that the government had no funds to pay salaries and pensions, as well as for other public spending, the Greek government could effectively annul its existing contracts and legal arrangements. The question then would not be how many jobs would be eliminated and how far salaries were being cut, but who has a job at all”; a default by Greece, does not necessarily mean that Greece will be kicked out ot the EU.

Many write that Greece is reaching the point where defaulting and leaving the Eurozone may be preferable to remaining.  Those suggesting this course of action propose a New Drachma.

Leaving the Eurozone ignores the important fact that the European Banking System is insolvent. Mike Mish Shedlock writes, “On October 3, Dexia bank became the First Casualty of Greek Default. Now Merkel and Sarkozy are in an open feud over what to do about it. Bear in mind this is not about Dexia, the entire banking system is insolvent.

How true, the European Financials are down 30 year to date, and are loaded with sovereign debt of questionable value.

Quantitative easing exhaustion, unwinding carry trades, and capitol flight from exposure to European Banks, has caused the S&P to fall 9% this year. Bespoke Investment Blog reports materials S&P materials is down 18% and S&P financials is down 26%. A currency deflation bear market is responsible for taking basic materials lower and a credit deflation bear market is responsible for taking financials lower.

On Friday October 6, 2010, Banks, KRE, manifested bearish engulfing, and traded 5% lower.  Does this mean the end of lending?

Does the hanging man candlestick in the chart of Junk Bonds, JNK, mean an end to the seigniorage, that is the moneyness of debt?

Does the trading of America Express, AXP, at the edge of a head and shoulders pattern, portend the beginning of the end of credit?

The global tectonic plates have shifted. First, the economy is in recession. The Wall Street Journal reports ECRI Weekly Leading Index Still Drilling Downward. The Economic Cycle Research Institute, which has declared that a recession is coming , and, like the whacking of Tommy DeVito in Goodfellas, “we couldn’t do nothing about it”, offers up another piece of evidence this morning. Its weekly leading index fell again this week, and its rolling growth rate dropped to -8.1%, the lowest in at least a year . Second, stock investments turned sharply lower in July when investors sold when they became aware a debt union has formed in the Eurozone.  Third, a political coup d etat, is underway as Neoauthoritarianism is replacing the Milton Friedman Free To Choose Currency Regime.

This new regime is manifesting at the Ten Toed Kingdom of regional economic government. Angela Merkel and Nicholas are its ambassadors, as they have called for a true European economic government in the Eurozone.  The result is that Neoauthoritarianism is replacing Neoliberalism.

Credit is evaporating.  Tim Catts of Bloomberg reports: “Corporate borrowers are pulling back from markets for everything from overnight commercial paper to the longest-maturity bonds as global economic growth is threatened while Europe struggles to contain its fiscal crisis. The market for short-term IOUs in the U.S. slipped below $1 trillion for the first time since February in the week ended Oct. 5.  Bond issuance worldwide fell 47% to $21.5 billion this week.”

Liquidity is evaporating.  Shannon D. Harrington and Sarah Mulhollan of Bloomberg report: “Europe’s crisis of confidence is crippling credit-market trading as banks shrink bond inventories to the least since the depths of the last recession. Federal Reserve data show U.S. primary dealers cut their holdings of corporate debt by 33% to $63.5 billion since May, bringing stockpiles to within $4 billion of the five-year low reached in April 2009. Trading in investment-grade company bonds has dropped 27% since February. Evaporating liquidity is contributing to the biggest junk bond losses since the failure of Lehman Brothers.”

Credit is tightening, and debt deflation, that is currency deflation is deleveraging stocks, as yen carry trades unwind, as is seen the ongoing chart of LATM, BRF, BZF, FXM   Ben Bain of Bloomberg reports: “Foreigners are cutting holdings of the shortest-term Mexican government bills to a three-month low as the peso’s plunge erodes dollar-based returns. International investors owned 26% of the securities, known as Cetes, on Sept. 26, down from a record high of 37% in March. The peso has tumbled 14.2% in the past three months, the biggest slump among Latin American currencies after the Brazilian real. Foreigners who piled into Cetes to profit from gains in the peso earlier this year are now shunning all but the safest assets as Europe’s debt crisis fuels a global sell-off in emerging-market currencies.”

National debt sovereignty is being both challenged and compromised by investors who use Credit Default Swaps or FX currency markets against the most fragile countries, with the result that fiscal authority and capability is being diminished.  Camila Russo of Bloomberg reports: “The cost to insure Argentine debt against default is soaring relative to Venezuela, the world’s riskiest credit after Greece, on concern the country will struggle to weather a worsening global economic crisis after defaulting on $95 billion of bonds in 2001. The cost of five-year credit-default swaps on Argentine bonds has more than doubled from Aug. 1 through yesterday to 1,200 bps” …..   And Monika Rozlal and Piotr Skolimowski of Bloomberg report  “Poland, a bond-market darling in the second quarter, is leaving foreign investors with the third biggest losses worldwide as the euro region’s debt crisis slows growth in eastern Europe’s biggest economy. Polish bonds tumbled 15.7% in dollar terms during the third quarter.”

Credit is simply not available.  Jack Ewing and Stephen Castle write in NYT article In France and Germany, Divergence On How To Recapitalize Banks grave problems at the French-Belgian bank Dexia, which is on the verge of its second taxpayer-financed bailout in three years, have dashed any illusions about the health of European banks. It was only in July that Dexia breezed through an official stress test that was supposed to expose vulnerable banks. No one has provided even rough details of how to compel banks to raise money on open markets if they can, and to provide government financing if they can’t. “Our experience is that if no one is talking about the details of something, it is because they do not exist,” Carl Weinberg, chief economist of High Frequency Economics, wrote in a note to clients Friday. “Let us just agree that there is no plan.” Banks have been unable to sell bonds to raise money. The danger is that European banks will run short of cash to lend to businesses and consumers, amplifying a recession that may already be under way. And in a vicious cycle, the threat of recession is further undermining faith in banks.  The problem is not just bank capital, but first and foremost that of sovereign debt crisis intertwined with slow growth,” the Institute of International Finance, a banking industry organization, wrote in its monthly assessment of global capital markets. The report noted that shares of United States banks had begun to suffer because of perceptions that they are exposed to their European peers. On Thursday, the European Central Bank expanded its aid to banks that were having trouble raising money. It said it would allow banks to borrow as much money as they wanted for about a year at the benchmark interest rate, currently 1.5 percent. But, as Jean-Claude Trichet, the departing president, warned, the central bank can provide only temporary aid. The central bank is addressing banks’ liquidity problems, their need for cash day to day. But the E.C.B. cannot fix banks’ solvency problems, the lack of adequate reserves to absorb a big hit to their holdings of government bonds or losses from nonperforming loans. Before money market funds and other investors will start risking money on European banks again, they need to believe the banks are bulletproof.

Doug Noland in article Tuesday relates The ECB further heartened markets with its move to purchase $53bn of bank (“covered”/backed by assets) loans and to re-open long-term bank funding facilities. An analyst was quoted by the Wall Street Journal: “They’ve opened the floodgates with liquidity” With central bankers in crisis management mode and European policymakers said to be working diligently on a plan to recapitalize euro zone financial institutions, markets were in the mood to hope that there was finally sufficient resolve to contain the crisis.

From the European experience, we now appreciate that the little, almost inconsequential Greek economy is quite an impressive financial black hole. And as things have progressed, critical Credit Bubble Dynamics have been illuminated for all who want to see. The market has witnessed how the “money” from Greek Bailout One was soon vaporized. Dexia’s 2008 bailout: vaporized. Greek Bailout II, when it arrives, will be similarly vaporized. European bank capital: poof. The potential amount of “money” to be vaporized if Italy succumbs to the highly contagious path of Greece, Portugal and Ireland: Unfathomable Black Hole. Well, everyone knows this is not an option. So incredible effort will be exerted to present the European crisis in terms of some quantifiable, manageable, solvable problem – some quantifiable cost that might, with the euro at risk, be tolerable to, say, the German voter.

And it all seems to boil down to this: Credit cannot be stable within a backdrop of such extraordinary uncertainty. And, I would argue, no amount of central bank liquidity (“money”) and bank capital is going to engender sufficient certainty to stabilize Global Credit, financial flows and asset markets. Not with the large number of dangerously maladjusted economies; not with such well-entrenched global economic and financial imbalances; and not with today’s unbelievable Credit, derivatives, and speculative leverage overhang. The issue is certainly not a lack of “money” – but rather a lack of confidence and trust – the bedrock of Credit.

I relate that out of Gotterdammerung, that is a clash of the gods, those being the rating agencies and the national leaders, a Credit Bust and Global Economic Collapse, will ensue. An example of this ongoing war is the Howard Mustoe and Michelle E. Frazer Bloomberg report: “Moody’s cut the senior debt and deposit ratings of 12 British lenders including Royal Bank of Scotland, RBS, and Lloyds Banking Group, LYG, saying the government would be less likely to provide support in the event of failure.”

Though this investment flameout, and credit collapse, a new economic and monetary paradigm, construct and matrix will arise to replace Neoliberalism, that being Neoauthoritarianism. It will be characterized by Leaders announcing framework agreements, which waive national sovereignty and establish regional economic government. A Chancellor, that is a Soveign, and a Banker, that is a Sovereign, meaning top dog banker who takes a cut, will establish fiscal sovereignty, as well as a new seigniorage, that is a new credit and a new moneyness.  Business leaders and government ministers will promote the interests of state corporatism.

Greeks are not Germans, yet they will soon be one. Greeks, are of the Olive State, which is characterized by a way of entitlement. Germans are of Industrious State, which is characterized by meritocracy. Greeks exemplify Socialism, and promote a Club Med mentality.  Germans exemplify Free Enterprise, and promote a hard work mentality.  Since the Greeks and Germans cannot speak with one voice to a common debt plight, out of sovereign and bank crisis, one will rise to speak to them and for them.

The word, will and way of the Sovereigns will rule. Thus the rule of the Sovereigns will replace constitutional and historic rule of law and enforce austerity measures and debt servitude. As foretold, in bible prophecy of Revelation 13:3-4, the people will be amazed, and follow after it, and give their allegiance to it; with banks gone, people will place their faith in Diktat.

2) … In today’s news
Open Europe relates that EUobserver quotes EU Regional Policy Commissioner Johannes Hahn saying, “The recently passed six pack [of EU economic governance legislation] raises the possibility of fining eurozone countries if they don’t stick to deficit rules

John Redwood writes UK policy towards Euroland should not be based on some idea that we have a duty to help bail it out, or that is in our interest to spend our money on trying to shield them from the consequences of their ill gotten scheme. Instead our policy should be motivated by two main concerns. The first is everything this government does should be to to curb the UK deficit. We do not have money to spare for a single currency in search of a sovereign, with wayward members who borrow too much. The second is to limit the UK’s risk to the likely losses and dangers now emanating from the continent.

To cut our risks the Uk should
1. Rule out a tax on UK financial institutions to help pay for Euro mistakes, whatever the attempted legal base, argument and what others might want to do
2. Get rid of all at risk Euro area sovereign bonds held by government owned banks and olther direct holdings using public money. The ECB is buying them so let them increase their collection.
3. Manage Euroland banking risk cautiously. UK taxpayers cannot afford losses through our government owned parts of the banking system in banks that get into difficulties, or through banking bond haircuts
4.Refuse any more money into Euro bail out schemes, whatever the legal base or route
5.Urge the IMF to regard financing members of the Euro zone as a Euro area matter, not as suitable candidates for IMF money
The Chancellor rightly says you cannot cure a debt crisis by borrowing more. This should underpin UK policy towards the Euro area. The UK is going to have to live with a slow growth Euroland at best, and something worse if they do not soon come up with a serious fix of their problems. The UK needs to turn its goods exporters eastwards, to emerging economies with money to spend


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