Global Economic Crisis

French President Sarkozy and German Chancellor Merkel had barely popped open the champagne bottles when their supposedly final, permanent fix to the Greek debt crisis got thrown for an unexpected loop. There is a word of Greek origin called “democracy” which has been totally lacking in all the machinations of the policymakers and their financial lobbying friends since the eruption of the global economic crisis. Now, in a surprise move, Greek Prime Minister George Papandreou announced plans for a popular referendum on the latest Eurozone bailout package. Knowing that the public of Greece is overwhelmingly opposed to the bailout crafted in Brussels, the European politicians and the markets castigated the Greek prime minister. This morning, the consensus was that Papandreou would certainly resign and cancel the referendum. Based on these reports from supposedly reliable sources, the stock markets  launched a major rally.

When Papandreou addressed the Greek parliament, however, he did not offer his resignation. He also did not cancel the referendum. Instead, he invited opposition New Democracy leader Antonis Samaras to join him in a national consensus supporting the Eurozone bailout package, with the carrot being that if this occurs, he would then find the referendum unnecessary. Samaras has responded by calling on Papandreou to resign, and for new Greek elections to be held within 6 weeks.

Instead of resolving the Greek debt crisis, the latest effort from the clowns in Brussels has sparked more political instability in Greece, while in the meantime the other PIIGS insolvent Eurozone members, in particular Italy, are headed for their own debt catastrophes, unhindered by the supposed definitive solution to the sovereign debt crisis in Europe that is now up in the air.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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The politicians are at it again; another insolvent bank is “rescued,” courtesy of the already indebted European taxpayers. This time it is Dexia that has been deemed  “too big to fail.”  The component of the bank that conducts retail transactions in Belgium will be nationalized, with a payment from public funds of 4 billion euros to the parent. Furthermore, Dexia will receive a 90 billion euro guarantee from the European politicians as a backstop against any further liquidity problems.

More bailouts for insolvent banks, and from French president Sarkozy and German chancellor Merkel more assurances that the “brilliant” eurozone politicians won’t let Greece go under, or the European monetary union, for that matter. Of course, Dexia is not the only European bank in deep distress. That is what the Greek debt crisis is really all about; how to avoid an implosion of much of Europe’s banking system due to bad Greek debt corroding the balance sheets of the  continent’s banks. Stay tuned; more examples of incompetent European politicians charging to the rescue are on the way.

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Countless times since the emergence of the Greek sovereign debt crisis, followed in quick succession by the debt crises of other unfortunate members of the PIIGS fraternity on the periphery of the Eurozone, the European politicians have boasted that they have come up with a solution and have licked the problem. Not so long ago, French president Nicolas Sarkozy boasted about how the bond vigilantes should never bet against the euro. And yet, after having “solved” the Greek debt disaster, these same bumbling politicians are soon back in the limelight, again promising that this time they have cobbled up a solution that will really work.

We are now at it again. As Greece stands on the verge of default on her public debt, the Eurozone politicos and the IMF technocrats are supposedly in deep conversation about a really big solution to the Greek debt crisis which will really work this time. Based not on hard fact, but simply on rumors and a heavy dose of hope and prayer, stock markets across the globe are again rallying. As the markets soar, it is clear that this exuberance is based solely on metaphysics, and not on even a shred of hard, objective analysis. Even the rumors point in that direction, as the suggestion that the Eurozone, which is fundamentally insolvent, can borrow the equivalent of two trillion euros, nearly four times the size of America’s TARP of 2008, to bail out the banks that will be hurt by a 50 percent write-off of Greek public debts, is both sublime and ridiculous. The Greek debt crisis is also Greek tragedy, with a heavy complement of comedy added, courtesy of Europe’s inept political leaders.

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In a move that is no longer a surprise, one of the leading credit rating agencies, Moody’s, did the downgrade routine. This time it was two leading French Banks; Societe Generale and Credit Agricole. The cause was their significant exposure to sovereign debt from crisis-ravaged and virtually insolvent Greece. Moody’s made clear that these two French banks may be due for future ratings downgrading.

The Eurozone politicians, especially in France and Germany, are in a panic over Greece and its insoluble debt crisis. They are currently doing what they have done repeatedly since the crisis erupted; reassuring the markets that the brilliant, highly competent politicians in Europe have the situation under control, and Greece will not default. At this point, no one with an iota of common sense believes them. Furthermore, the markets are increasingly aware of-and frightened by- the near certainty of a Greek debt default, perhaps followed by Portugal, Ireland, and in a worst case scenario, Spain and Italy. What this means is that the major banks in Europe, in particular France and Germany, are sitting on a mountain of worthless assets. This crisis is far from over, and the ratings agencies are far from done with the downgrading.

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What savvy observers have long predicted, a default by Greece on her massive public debt, has  until recently  been refuted by Eurozone politicians as even a possibility. These policymakers have already gone through two massive bailouts, funded by European taxpayers, involving more than 200 billion euros, to keep Greece from tottering over the edge. However, the marketplace, and even below the radar some European politicians, especially in Germany, have now been conceding what is so obvious to almost every other knowledgeable observer. Athens will default on her debt. With an imploding economy, in which ironically the austerity measures imposed on Greece as the price of the bailouts have worsened her public debt to GDP ratio, and no possibility of inflating her way out of default by currency devaluation (the trap of being in a common currency-the euro), mathematical certitude cannot be overcome. Greece is in an unsustainable sovereign debt trajectory.

Two year Greek government bond yields have soared above the 50 percent range. Such yields only exist in a universe where the marketplace prices in the certainty of a sovereign debt default.  And this is only the beginning. There is not only Portugal and Ireland next in line; there is also Italy and Spain. Then there are the French and German banks, highly exposed to a Greek sovereign debt default. In other words, Lehman Brothers on steroids. The doomsday debt crisis scenario I predicted in my book (Global Economic Forecast 2010-2015: Recession Into Depression) is being increasingly vindicated by a fiscal architecture that is unraveling with surreal velocity.

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The ratings agencies, which facilitated the 2008 financial disaster by rating subprime securities as grade A investments, have not been known for being out in front on warning of looming catastrophes. Now, however, with the Greek debt crisis raging, the ratings agencies are outdoing each other in releasing their downgrades. Moody’s is back with a downgrade on Greece, lowering it three levels to CA, just slight above an actual debt default.

What Moody’s and others are saying is that they have no faith in the second massive EU and IMF bailout plan, with it being funded by borrowing by other sovereigns that are also in difficulty, and involving bizarre formulae for debt exchanges which may or may not involve the private sector. As Moody’s puts it,  “the announced EU program… implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100 percent.”

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French President Nicolas Sarkozy and German Chancellor Angela Merkel have hashed out an agreement for a second bailout for debt-ridden Greece. They now have to convince their Eurozone partners to sign onto the agreement. An initial draft from the Eurozone summit in Brussels was vague and opaque, making no mention of numbers. But earlier reports hinted that the second bailout package would match in size the first one, which was in the range of approximately $150 billion in U.S. currency.

Already, stock markets are rising on news of this second Greek bailout package, and the wonderful clique of European politicians who boast that they finally, for certain this time, have the answer that will prevent the contagion from the Greek debt crisis from spreading.

With ambiguity surrounding the final version 2 of the Greek bailout package, there has been speculation as to whether or not private banks holding Greek sovereign debt will be asked to take a haircut. The massive exposure that German and French banks have regarding Greek debt suggests that anything involving  a loss by private investors will risk an implosion of the European banking system. However, as public taxpayers in Europe take on an ever increasing load of debt to, in effect, bailout the private banks holding Greek, Irish and Portuguese debt, that in itself risks a further spread of what is now a virulent European debt crisis.

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Any doubt that the Eurozone debt crisis is no longer contained, but has now metastasized into a full-blown global calamity, is rapidly being erased by fast-moving events.   With the second bailout of insolvent Greece in the works, followed by a ratings downgrade to junk by Standard & Poor’s, Moody’s has now weighed in with a double whammy. Ireland’s sovereign debt has been downgraded to junk status, with a clear signal that the marketplace expects the Irish Republic to require a second bailout package, as was the case with Greece.  Moody’s has now followed up on its action regarding Ireland with a warning that for the first time in its history, the AAA rating on U.S. government debt is under review for a possible downgrade. This inauspicious development is in connection with the political dysfunctionality that has afflicted Washington policymakers in both the executive and legislative branches over extending the national debt limit.

With ratings collapsing and bond spreads widening throughout the developed world, it now appears that another member of the infamous PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) is descending into fiscal anarchy. Italy is on the verge of requiring a  bailout of its own, one which would exceed what has already been allocated to Greece, Ireland and Portugal. In desperation, the Italian senate has voted in favor of austerity measures. Based on the failure of the austerity measures in Greece to prevent a second bailout being required, the desperate action by Italian decision makers is unlikely to work, and has the look of panic rather than thoughtfulness.

Like a tsunami wave that can travel thousands of miles from the epicenter of a major seismic event,  the cascading sovereign debt crisis, which had its origins in policy responses to the global financial implosion of 2008 and Greek debt crisis of 2010, is now ravaging public finances on both sides of the Atlantic. A point may soon be reached where private investors, Eurozone taxpayers and the IMF can no longer cobble together ever-larger “rescue packages,” all of which, with perverse logic, require even larger levels of public debt to construct. A dark truth may soon permeate this ballooning crisis; the policymakers have no real solutions, and have just about run out of gimmicks and short-term fixes. The global economic crisis that began with the financial collapse of 2008, far from being resolved or a clear path to recovery being underway, is entering a more dangerous phase, in which sovereign debt reaches the level of unsustainability. The result could very well be paralyzing insolvency among the advanced economies, which could destroy the economic future of an entire generation.

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S&P has weighed in on a bizarre scheme by the Eurozone crisis managers and French banks on supposedly enabling debt-stricken Greece to finance its insufferable fiscal burden. In the view of Standard & Poor’s, the French plan for banks to, in effect, roll-over private debt connected with the crisis will be seen by the ratings agency as an actual default.

With virtually every sane economist and observer believing that Greece is already insolvent and will inevitably default on its sovereign debt, it appears that the ratings agencies are now joining the choir. All that are left are the EU and IMF spin-masters preaching the falsehood that the debt crisis in Greece will be resolved without a default. What is tragic is that massive amounts of European taxpayers’ money is being poured down a rat-hole for no good purpose.

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In a piece for Al Jazeera entitled “black swan events and the global economy,” NYU economics professor Nouriel Roubini, the “doctor of doom,” has presented a new dark perspective on the current state of global economics. Roubini integrates a number of negative economic metrics and phenomena, including “black swan” events such as the Japanese earthquake and more mundane though far from rosy economic data that challenges the views of economists who are eternally optimistic. While the optimists believe the current negative economic factors are merely hiccups, and equity growth can resume in full force, Roubini warns that the dangers confronting the global economy are chronic, and may lead to a double-dip recession.

On the current Greek debt crisis, Roubini writes, “Global risk-aversion has also increased, as the option of further ‘extend and pretend’ or ‘delay and pray’ on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely.”

One of the points Nouriel Roubini makes in his article is that  new financial and economic disasters on the scale of 2008 and would leave policymakers empty-handed, as the massive growth in public debt since 2008 leaves them without ammunition in the event of a new series of catastrophes. As Roubini puts it:

“This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. Another round of so-called ‘quantitative easing’ by monetary authorities may not occur as inflation is rising - albeit slowly - in most advanced economies.”

In essence, Roubini offers a portrayal of the current state of the global economy that is laden with doom and gloom.

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