Global Economic Crisis

The financial pundits and Eurozone boosters are gloating, with fingers crossed behind their backs. The recent auction of Spanish sovereign bonds by Madrid reached its target sale in excess of two and a half billion euros. But what the cheerleaders ignore is that the bonds sold for only two reasons; a substantial increase in the yield on the 10-year bonds from 5.4 percent to 5.74 percent. The increase of 34 basis points was also helped by the perception that the European bailout fund stands ready to assist Spain and her creditors.

Despite all the recent happy talk about the global economy allegedly “turning the corner” and the Eurozone sovereign debt crisis being ameliorated, the signs are all there for those with open eyes. The crisis remains, and despite the policy of kicking the can down the road, all the indicators point to deterioration rather than amelioration.

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There is the old story about the boy who cried wolf too often. Similarly, the Eurozone clique of inept politicians continues to parade out “final” Greek bailout deals. The most recent one is a virtual carbon copy of one submitted months ago. It seems to no longer matter. Even the ratings agencies, far more of a lagging than a leading indicator, now understand that all the talk in Brussels of a real solution  to the Greek debt crisis that also ring fences the other vulnerable Eurozone economies is just fantasy.

Proof this is the decision by Fitch in response to the latest Greek debt crisis plan. It cut its rating on Greek Sovereign debt further, from CCC to C, well inside the territory of junk bonds. Fitch added the following commentary: a default by Athens on its sovereign debt “is highly likely in the near term.”

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The current Eurozone debt crisis is not only an acute economic and debt crisis. It is also political farce, with a heavy dose of irony. The motivation for the creation of the euro was noble; the European continent had ripped itself apart over centuries of internecine warfare, culminating with two world wars in the 20th century had massacred tens of millions of Europeans. What better way to unite Europeans and end this circle of bloodshed than to create a common currency, the euro. That explains how good motivation can lead to very bad ideas.

The concept that a common currency can be used by 16 nations with vastly different economic and fiscal policies  was sheer folly. The past two years have witnessed the irrationality of this concept. Yet, Eurozone politicians have so much invested in the survival of the euro, they are prepared to defend it to the last European taxpayer. This mantra inevitably means defending the euro to the last German taxpayer. And it now seems that the rulers of Germany recognize that they cannot indefinitely ransom off the financial future of their voters to subsidize the euro and expect to remain in power. Thus, after a series of “final” resolutions to the Greek debt crisis, which were supposed to prevent the sovereign debt contagion spreading to Ireland, Portugal, Spain and Italy (which has clearly not happened) German ruling circles are beginning to raise skepticism over the most recent promises of Greek politicians. This leads to the possibility that eventually the largely German subsidized loans to Athens to stave off bankruptcy may come to an end. Increasingly, there is not only talk from Greece about leaving the Eurozone. There is emerging talk within Germany’s political and financial elites that perhaps the farce of repeated Greek bailouts should end, Athens should default on its debt and be kicked out of the Eurozone.

The irony of the situation is that a project intended to end inter-European strife through a common currency has not only proven to be a fiscal and economic disaster for the continent. The crisis is now re-igniting the embers of past conflagrations and hatreds in Europe. An example was the recent front page of a Greek newspaper featuring  German Chancellor Angela Merkel wearing a Nazi armband and storm-trooper’s uniform.  The increasingly strident comparisons of Merkel with Nazis in the Greek press is a reference to World War II, when Nazi Germany conquered Greece and inflicted a painful  three and a half year military occupation of their country.  That the euro seems to be failing as a political tool as much as a monetary unit is proof once again that the path to Hell is so often paved with the best  of intentions.

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Another wave of credit downgrades has hit the Eurozone. S & P cut the credit worthiness of several European sovereigns, most conspicuously France, which saw its coveted AAA rating reduced to AA plus.  Austria also lost its AAA rating, and Italy was reduced by two notches, now being rated by Standard & Poor’s at BBB plus.

Predictably, French Finance Minister Francois Baroin said “It’s not good news, but it’s not a catastrophe.” A statement of self-contradicting spin that will be unlikely to arouse confidence among sovereign wealth funds and private investors. But perhaps most alarmingly, with Germany now the only Eurozone economy retaining a AAA credit rating, and the German economy having contracted in Q4 of 2011, all these downgrades and somber economic trends undermine the supposed savior of the insolvent Eurozone countries, the so-called European Financial Stability Facility. How will the EFSB sell its bonds to generate capital lend to the fiscally most vulnerable members of the Eurozone? Things are looking increasingly gloomy in Europe, with no resolution for the sovereign debt crisis or economic downturn in sight. And yet, the politicos are still banking on the European Central Bank and its printing press as the savior of last result. What a thin reed to base hope of an economic miracle on.

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All signs point to 2012 witnessing an acceleration of the negative economic and fiscal metrics that plagued advanced and major emerging economies in 2011. In particular, the Eurozone debt crisis, which dramatically worsened in 2011, shows no sign of abating in 2012. A clear indication of this is that Eurozone cheerleaders President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany, in New Year’s messages, warned that things with respect to the Eurozone crisis will be even more dire in 2012.

A sign of how  bad things look in Europe is the latest PMI data on European manufacturing, which was continuing to contract towards the tail end of 2011. This all points to a recession. In fact, there is now a clear consensus among economists that the Eurozone will enter a double-dip recession in 2012, if it in fact has not already done so. Clearly, nations such as Greece, Ireland and Portugal are currently in a recession so deep, it meets the definition of a full-blown economic depression.

And what about the United States? With 2012 a presidential election year in America, expect the Obama administration to spin economic data seven ways to Sunday in an effort to make things look more rosy. Thus, an unprecedented reduction in the total size of the American work force is twisted into a lowering of the unemployment rate.  But such gimmicks will probably become totally inoperative, once the impact of the looming Eurozone recession and banking crisis migrates to American shores.

In 2009, in my book , “Global Economic Forecast 2010-2015: Recession Into Depression,” I forecasted that the massive transfer of private debt into public debt by sovereigns as a synchronized response to the global financial and economic crisis unleashed in 2008 by the collapse of Lehman Brothers would fail to resolve the crisis, and would lay the seeds for an even more virulent global economic crisis by 2012. With a global sovereign debt crisis now an established reality, and the Eurozone teetering while America has had its previous AAA credit rating downgraded by at least one major ratings agency, neither a continuation of failed policies  nor gimmickry by politicians and central banks will bring an end to the global economic crisis in 2012. Instead of a return to economic growth, the most optimistic forecast one could make is stagnation which, at a time of structural mega-deficits and ballooning national debts, is a guarantee  of further long-term economic misery for a great many of the planet’s inhabitants.

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The Eurozone’s latest Greek debt bailout plan, following previous Greek, as well as Portuguese and Irish bailouts, was supposed to ring-fence the largest PIIGS nations; Spain and Italy. The Spanish economy is highly vulnerable to a raging economic recession and massive unemployment. However, it is Italy, with a two trillion euro public debt and stagnant economic growth, that is now the greatest danger to the Eurozone. The supposed ring-fencing of Italy that was the prime motivation for the Greek debt write-off and bailout is clearly a failure. Only days after the latest Eurozone debt crisis plan, spreads on Italian government bonds are soaring.

The latest yield on ten year bonds issued by Italy is now in excess of 6.6 percent. Should  these yields pass seven percent, it becomes mathematically impossible for Rome to finance its deficits and debt repayments. That would mean that the Italian government would require being bailed out. The problem, however, is that there is not enough resources available in the Eurozone to bail out Italy. The only hope left, and it is a feeble one at best, is that Italian Prime Minister Silvio Berlusconi will resign, and thereby restore some level of market confidence. However, the problems with Italy’s finances go beyond one single bumbling politician. The issues are structural, not personality-based, and so far no real viable solutions have emerged.

A full-fledged Italian sovereign debt crisis will probably be the kiss of death to the Eurozone, at least in its present form.

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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Over the weekend the highest ranking cadre of inept European Union politicians were gathered in solemn deliberations, as they once again promise the world that the growing sovereign debt crisis in the Eurozone will be permanently “solved.” But the issue is no longer only the debt crisis in Greece, or the other PIIGS countries-Portugal, Italy , Ireland and Spain. The unsustainability of the public debts throughout the Eurozone  now have the banking system of Europe on the precipice of disaster. It is likely that many if not most major European banks would fail a real stress tests, not the phony stress tests recently administered.

One of the issues being debated by the European politicians is having the banks accept some degree of loss on their outstanding loans to Greece. The problem is that such a loss would mean transferring the insolvency of Greece to those very banks. The politicians in Europe know that, so they are already discussing how to recapitalize their banks. But with what? The European nations are themselves all heavily indebted. Germany is resisting the call by France to employ the ECB (European Central  Bank) as a printing machine to “lend” euros conjured out of thin air to the European Financial Stability Facility; the EFFS would in turn provide the money to the banks requiring recapitalizing.

While the frenzied talk rages on in Europe, the continent’s banking system is headed for a crisis that may rival the impact that the Lehman Brothers debacle had on the global economy in 2008.

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 architects of globalization never imagined this scenario. A Wall Street banking crisis in the United States creates a global financial crisis, compelling sovereigns across the world to enact a peculiar and paradoxical policy measure; preserve profligate historical profits of masters of the private banking system, while socializing their losses. This policy of saving the banks by moving their losses onto the balance sheets of nation-states creates a global banking crisis, especially in the Eurozone, due to those banks holding loans from countries that went into deep debt to bail out those same banks. Ireland, to take an example, went from budget surplus to catastrophic fiscal deficits solely due to a decision by Dublin’s politicians to guarantee all the liabilities of their formerly privately-owned and relatively unregulated banks.

The latest policy measure is austerity, forcing the taxpayers to cover the costs of the mounting global economic crisis with higher taxes and cutbacks in social services. The paradox is that these measures negate economic growth, ensuring that the public debt cannot be repaid. All these measures are exacerbating the current and worsening global economic crisis.

The Occupy Wall Street movement, which has now gone global with a rising tide of protests throughout the world, reflects a populace that has seen its economic future being dispossessed. Deprived of hope, and with no confidence in the policymakers in government and oligarchs that largely fund and control political parties in most advanced economies, a growing number of desperate people, especially the younger and emerging generation, see protest as their only option.  All these developments feed into each other, leading to a cascading effect of political instability, growing public indebtedness and economic stagnation and contraction. If nothing else, the anti-Wall Street protests are a barometer of an economic and political system in disarray. And perhaps, they are a harbinger of a new age of political unrest and economic misery of prolonged duration.

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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More developments on the Eurozone sovereign debt credit ratings front. Fitch, one of the big three credit ratings agencies, lowered its rating on Spanish government debt by two notches, from AA plus to AA minus. As recently as 2010, Fitch rating Madrid’s debt at AAA.  This credit rating cut follows on the heels of the decision by Moody’s to drop Italy’s credit rating two levels.

With the sovereign debt crisis in Europe cascading out of control, and a severe Eurozone banking crisis now developing, one has to be obtuse to believe that the global financial and economic crisis that began in 2008 has been “resolved.” Sovereign credit ratings are dropping with monotonous regularity, and a growing cadre of economists are suggesting that the Eurozone, U.K. and U.S. are already in the midst of a double-dip recession.

With negative economic growth and growing public debt to GDP ratios, how are these  nations going to resolve their sovereign debt crisis?

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As the Eurozone sovereign debt crisis worsens (joined by the U.S.A. and U.K.), the ratings agencies are at it again, with their lagging indicator of choice; the credit worthiness downgrade. This time, Italy got hammered. Moody’s cut the Italian credit rating by three levels, from A2 to Aa2. That is a lower rating than Moody’s rates the credit worthiness of the Baltic republic of Estonia.

According to Moody’s, “the negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets.”

The downgrade of Italy’s public debt will translate into widening spreads on Rome’s government bonds, making it even harder to service the multi-trillion dollar public debt accumulated by successive Italian governments. This all happens as the inept European politicians still clamor over another ill-fated effort to “ring-fence” the Greek debt crisis, pretending that is has not yet spread to other PIIGS countries, including Italy. The Moody’s downgrade is more concrete evidence that policymakers in Europe are totally disconnected from economic, financial and fiscal reality.

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