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.

I was not alone in being skeptical as the first European/IMF bailout package was cobbled together last year when the Greek sovereign debt crisis first exploded. At that time, the European politicians assured their constituents that the 110 billion euro bailout for Greece would absolutely stabilize the situation for Athens, and prevent a sovereign debt contagion metastasizing throughout the rest of Europe, especially to the so-called PIIGS nations on the southern periphery  of Europe (Italy, Spain Portugal as well as Greece) and Ireland. Now, after Portugal and Ireland have joined Greece in begging for a bailout from European taxpayers and the IMF, Greece is back with its cup in hand.

After a year of crippling austerity measures that have thrown the Greek economy into recession,  Prime Minister Papandreou has told the Greek parliament that even more severe stringent cutbacks and tax increases are required. The reason; last year’s bailout was insufficient to enable Greece to continue to pay creditors for her massive (and until the crisis surfaced, largely hidden) public debt. The news from Papandreou is dire; another massive injection of European and IMF loans are needed, equaling  the already staggering previous bailout package of 110 billion euros  (approximately $150 billion in U.S. currency), or else Athens will default on its sovereign debt. It must be pointed out that the second bailout  package, as with the first, will necessitate other European nations themselves going further into debt to provide Greece with the bailout, including countries such as Spain and Italy which are considered only slightly less vulnerable to a sovereign debt implosion than  Greece, Ireland and Portugal.

Anyone who though that the global economic and financial crisis that began in 2008 ended due to the “brilliant” expansion of public debt engineered by the policymakers is now getting their wakeup call. As I predicted in my book, “Global Economic Forecast 2010-2015:Recession Into Depression,” a global sovereign debt crisis will precipitate a worsening of the global economic crisis. Furthermore, solving a debt crisis with more debt, tied to fiscal policies that retard economic growth, is not a solution but rather an exhibition of economic and financial insanity.

 With policymaking of this “quality,” it bewilders the human intellect  that anyone still  thinks an economic recovery is just around the corner. There is in fact something just ahead for the global economy, but it won’t be pretty.

No matter how the EU and IMF policymakers try to spin truth, the reality is that Greece (and not only Greece) is functionally insolvent. The spread on Greek debt is a clear sign as any can be that markets have thumbed their noses at Greek sovereign debt. The European/IMF bailout, at the price of severe austerity by Athens, is life support for what is already a fiscal corpse. Now that Standard & Poor’s has cut its ratings on four of the largest Greek banks to CCC, the politicians in Athens and throughout the Eurozone are even more desperate.

How bad things are in Athens can be observed by the latest machinations by Greek politicians. George Papandreou, the current Prime Minister of Greece, is supposedly offering to step down as the price to pay for a broad-based coalition government. It is said only a coalition government can adopt the severe austerity measures the IMF is demanding for more of the loans that alone keep Greece afloat. In the meantime, there are riots on the streets of Greek cities, as the population rebels against paying the price for sins it did not commit.

I think the smart money is on Greece defaulting on its sovereign debt, either outright or stealthily through restructuring. Of course, Greece will not be the last casualty of the rapidly evolving global sovereign debt crisis. In looking at Greece today, perhaps followed soon by Ireland and Portugal, we are also catching a glimpse of what is in store for the greatest sovereign debtor of them all; the United States of America.

If you thought the revised Greek government fiscal deficit projection for 2009 was disastrous at 12.3% of GDP, fasten your seat belt and hold onto your hat. As awful as that  figure was when Prime Minster George Papandreou revealed that the previous government in Athens had deliberately lied about the deficit so that Greece would be admitted into the Eurozone, in retrospect the powers that be in Brussels, joined by the IMF, wish to God that 12.3% was the number. Now, we learn, the actual deficit figures are even worse, though nobody can be certain at this point how bad they really are.

Eurostat, the statistical department of the EU, has released its own evaluation of Greece’s fiscal reality, and has concluded that, at a minimum, the actual deficit to GDP accrued by Athens in 2009 was 13.6% and might even be as high as 14.1%. Due to deliberate bookkeeping chicanery by previous Greek governments, apparently facilitated at least in some measure by the unique financial engineering of Goldman Sachs, the true state of Greek fiscal reality is hidden by a thick layer of artfully contrived opacity.

In the light of this latest revelation, courtesy of Eurostat, yields on Greek government bonds continue their upward climb. For example, yields on ten year Greek bonds now exceed 9%, nearly six hundred basis points higher than the equivalent bonds being offered by Germany. Clearly, the sovereign debt market is far from reassured by the latest version of the ever-changing Greek bailout package, which in its latest manifestation was cobbled together by the Euzozone countries and the IMF.

In response to the ever-worsening truth now emerging about how dire the Greek debt crisis really is, the ratings agencies are again weighing in with a downgrade of Greek sovereign debt. Moody’s has lowered its rating on Greece by  another notch, and likely the other ratings agencies will soon weigh in. This will inevitably further expand the spread in bond yields, and only add to the complication of even a short-term bailout.

When Lehman Brothers collapsed in September of 2008, there was an immediate freeze in the global credit market, reflecting acute distrust by counterparties spooked by misleading financial representations by major investment firms, especially with regard to mortgage backed securities. The latest revelations concerning the Greek fiscal crisis point to a similar phenomenon that is increasingly likely. As the sovereign debt crisis currently afflicting Greece not only worsens but spreads to other countries with large deficit to GDP correlations, the risk of a Lehman Brothers type scenario with respect to the sovereign debt market becomes increasingly probable, with one important difference.

When Lehman Bothers collapsed and credit markets froze, sovereigns borrowed massively and bailed out their financial systems. However, if this time sovereigns  are the actors frozen out of the credit market, who bails them out? Answer than one, Ben Bernanke and Timothy Geithner.