Sovereign bond crisis in US & Euro the beginning of total collapse

Salam ala man itba’a al huda

Peace on those that follow the guidance

AA assalaam alaikum

Watch the bond markets this week  NOV 28, 2011, and December 2011 and Jan 2012
since if they collapse in Europe and US, then the whole house of cards by debt  financed fiat currencies by federal national reserve banks ( actually private banks making huge amounts of  money for their PRIVATE elitist owners by the interest payments ) are going to start inflating deflating conflating and going every which way, like madness, causing the downward spiral that everybody who knows about these issues has been talking about for years
One sign they have been buying up their own bonds and debt because no one else really wants it
See some information below …..
Also see

Hedge Hogs; Gold Man’s Sacks; “financial terrorist attacks;” and the Obama sellout: > HERE

SUPER COMMITTEE BIG BANK ROBBERY and “this sucker” going down > HERE

Terrorism by Economic Collapse, debt bondage, money as debt on interest, etc > HERE

Derivatives ‘Mother of All Bubbles’ exploding > HERE

Super rich 1% vs 99 %; Terrorism Cycle: Guillotines: Occupy “ALL” streets  > HERE

and so many more on those websites (under development with limited resources)


Sovereign credit default swap prices of selected European countries from June 2010 till September 2011. The left axis is in basis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.

The government surplus or deficit of Belgium, Greece, France, Hungary, Iceland, Italy, Portugal, Spain and the UK against the Eurozone and the United States (2001-2011).

Long-term interest rates of selected European countries (secondary market yields of government bonds with maturities of close to ten years).[46] Note that weak non-eurozone countries (Hungary, Romania) lack the sharp rise in interest rates characteristic of weak eurozone countries. A yield of 6 % or more indicates that financial markets have serious doubts about credit-worthiness.[47]

related news

The European debt crisis in eight graphs

Posted by  and  at 02:51 PM ET, 12/01/2011
The European debt crisis can easily feel like an unwieldy, unmanageable mess of complex jargon and financial terms. Here’s Wonkblog’s explanation of what’s happening across the Atlantic Ocean with the help of eight key graphs:

The place to start with the European debt crisis is, well, with European debt. Put simply, the crisis in the euro zone is that the market doesn’t trust that Greece, Italy, Spain, Ireland and Portugal can pay back their debts, and so they don’t want to lend them more money except at exorbitant rates.

But to understand how Europe got into this mess, how countries like Greece managed to borrow so much money that they couldn’t pay it all back, you need to see this graph from the Organization for Economic Development and Cooperation (OECD). On the right side, you’re seeing the story everyone already knows: The market is charging Southern European countries a lot to borrow. But look at the left side. As recently as 2008, the market was lending to Greece and Germany at pretty much the exact same price. The assumption was that the euro could never break up, and thus everyone in it was as safe a bet as the safest, biggest economy on the euro: Germany.

This allowed some countries to rack up a whole lot of debt. Greece, for instance, now holds more in debt than its entire economy produces. This graph, drawn from European Central Bank data, shows how much more debt European countries are carrying than they did a decade ago. The green bars show countries’ debt-to-GDP ratios in 2000; the blue lines are 2010:

That’s the debtor side of the story. But that debt came from somewhere, and the payments on it are going to someone — or, if they stop, someone’s balance sheet is falling apart. Which brings up to the other side of this crisis. The creditor side.

This is where the easy morality tale — Germany and France were responsible, Greece and Italy weren’t — falls apart. A lot of the debt powering, say, Greece, came from German and French banks, and one of their interests in this whole mess is to make sure that a lot of that debt gets paid back. Otherwise, their banks are insolvent and they’re in a financial crisis.

There’s also the issue of currency appreciation. Germany has had, in certain ways, a very good, and very unusual, decade. Unlike almost every other advanced economy on Earth, it has seen its manufacturing sector boom. Typically, as a developed country becomes more productive and its exports become more popular, its currency appreciates, which makes its exports more expensive, and less popular. Conversely, when weaker countries see their economies fall apart, their currency depreciates, and that makes their exports cheaper and helps them recover.

But Germany’s currency hasn’t appreciated very much, because it’s tied to the euro, which is dragged down by the weak economies in southern Europe. And the southern European countries haven’t seen their currency depreciate very much, because they’re tied to the euro, which is propped up by stronger economies like Germany. The net result has been a big, artificial boost for Germany’s export sector, and a big obstacle to recover for much of the rest of Europe.

As Floyd Norris wrote at the New York Times, “German competitiveness against the rest of the world was probably helped by the fact that the relatively poor performance of other members of the euro zone held down the appreciation of the euro against other currencies.” And vice versa, of course. Here’s the graph Norris drew up:

But whoever is at fault, the bottom line is that the euro is in deep, deep trouble. And the worse it gets, the worse it will be for us. As Brad wrote on Tuesday, the European and American economies’ fates have become increasingly intertwined for a number of reasons. When one tanks, so does the other:

So what can be done? There are basically two components to any solution. One is that the European Central Bank acts as the so-called “lender of last resort.” That is to say, it basically buys as many European government bonds as the system needs it to buy in order to keep bond yields stable. This is, in essence, what the Federal Reserve did for the financial system in 2008. Ben Bernanke lent out as much money as the system needed in order to get through the crisis.

This chart from Bloomberg News shows what that looked like in the case of one bank: Morgan Stanley. The black line is Morgan Stanley’s market capitalization. The orange line is what it owes the Fed on any given day. And the red line is the ratio of the two. As you can see, there was a day in October 2008 when Morgan Stanley owed the Fed more than 750 percent what it was worth. That’s what lender of last resort looks like. That’s what the ECB isn’t doing.

Without that sort of intervention, the euro zone simply won’t survive. And so far, the ECB has said that sort of intervention isn’t in its job description. They’ve said it isn’t even legal for them to undertake it. But they have strongly hinted that they would forget about all that if the euro zone would create a new agreement, a so-called fiscal union in which there are strict controls on the deficits individual countries can run and real enforcement mechanisms that can be used to punish countries that don’t abide by the rules.

That’s a tough lift. Another option is that some of the weak euro zone countries, like Greece and Portugal, leave. Or maybe some of the strong countries, like France and Germany, form a super euro. Or maybe the whole thing collapses. Gavyn Davies has a flow chart of the various options, and it’s our final graph:


Nov 30 2011:

EU monetary chief sees 10 days to rescue euro zo

Related Topics

(L to R) European Monetary Affairs Commissioner Olli Rehn, Spain's Economy Minister Elena Salgado, Italy's Prime Minister and Finance Minister Mario Monti and Luxembourg's Prime Minister and Eurogroup chairman, Jean-Claude Juncker attend a Eurogroup meeting at the European Union council headquarters in Brussels, November 29, 2011.REUTERS/Yves Herman

By Robin Emmott and Kirsten Donovan

BRUSSELS/LONDON | Wed Nov 30, 2011 8:14am EST

(Reuters) – Europe faces a crucial 10 days to save the euro zone after agreeing to ramp up the firepower of its bailout fund but acknowledging it may have to turn to the International Monetary Fund for more help to avert financial disaster.

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday as EU finance ministers met.

Euro zone ministers agreed on Tuesday night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.

Italian and Spanish bond yields resumed their inexorable climb towards unsustainable levels on Wednesday, as markets assessed the rescue fund boost as inadequate.

Stocks fell and the euro weakened after ratings agency Standard & Poor’s hit some of the world’s leading banks with a credit downgrade.

“It must also be remembered that the EFSF is already funding at very wide (borrowing) levels over Germany, struggled in its last auction to raise the required funds and would have its rating put under severe pressure by any rating downgrade of France,” Rabobank strategists said in a note.

“This must call into question any plans related to the EFSF. It is yesterday’s solution and the market has simply moved on.”

Two years into Europe’s sovereign debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.

“We are now looking at a true financial crisis — that is a broad-based disruption in financial markets,” Christian Noyer, France’s central bank governor and a governing council member of the European Central Bank, told a conference in Singapore.

The 17-nation Eurogroup adopted detailed plans to insure the first 20-30 percent of new bond issues for countries having funding difficulties and to create co-investment funds to attract foreign investors to buy euro zone government bonds.

Both schemes would be operational by January with about 250 billion euros from the euro zone’s EFSF bailout fund available to leverage after funding a second rescue program for Greece, Eurogroup chairman Jean-Claude Juncker said.

The aim was for the IMF to match and support the new firepower of the EFSF, Juncker told a news conference.

But with China and other major sovereign funds cautious about investing more in euro zone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts to the leveraging options in the next days or weeks, and he could not put a figure on the final size of the leveraged fund.

“It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along,” Regling said.


Most analysts agree that only more radical measures such as massive intervention by the ECB to buy government bonds directly or indirectly can staunch the crisis.

The prospects of drawing the IMF more deeply into supporting the euro zone are uncertain. Several big economies are skeptical of European calls for more resources for the global lender.

The United States, Japan and other Asian states are hesitant to chip in unless Europe commits to first use its own resources to fix the problem and peripheral euro zone states map out more concrete steps on fiscal and economic reforms.

“Nobody wants to spend money on something they doubt would work,” a G20 official said.

“That goes not only for Europe but for any other country outside Europe. The threshold for seeking IMF help is quite high. Those seeking help need to be willing to give up some of their jurisdiction on fiscal policy and willing to undergo painful reform. Mere pledges and speeches won’t do.”

New Italian Prime Minister Mario Monti outlined his plans to the euro zone ministers and was told he would have to take extra deficit cutting measures beyond an austerity plan already adopted to meet its balance budget promise in 2013.

Italian bond yields are now above the levels at which Greece, Ireland and Portugal were forced to apply for EU/IMF bailouts, and Rome has a wall of issuance due from late January to roll over maturing debt.


The Eurogroup ministers agreed to release their portion of an 8 billion euro aid payment to Greece, the sixth installment of 110 billion euros of EU/IMF loans agreed last year and necessary to help Athens stave off the immediate threat of default.

Juncker said the money would be released by mid-December, once the IMF signs off on its portion early next month.

G20 leaders promised this month to boost the agency’s warchest. However, another G20 source said policymakers had made no progress since then in efforts to boost IMF resources, which at current levels may not be sufficient to overcome the crisis.

EU sources said one option being explored is for euro system central banks to lend to the IMF so it can in turn lend to Italy and Spain while applying IMF borrowing conditions.

“We will discuss with the ECB. The ECB is an independent institution, so we will put on the table some proposals and after that it is for the ECB to take the decision,” Belgian Finance Minister Didier Reynders told reporters.

With Germany opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets and fast.

The ECB shows no sign yet of responding to widespread calls to massively increase its bond-buying although EU officials said it may have to shift, even if the EFSF was bolstered by IMF help.

“Despite the attempt to leverage the EFSF, I would agree that the IMF and European Central Bank have to be in the boat,” one euro zone source told Reuters.

A Reuters poll of economists showed a 40 percent chance of the ECB stepping up purchases with freshly printed money within six months, something it has opposed so far.

The poll forecast a 60 percent chance of an ECB rate cut to 1.0 percent next week and a big majority of economists said they expect the central bank to announce new long-term liquidity tenders to help keep banks afloat at its next meeting on Dec 8.

EU powerhouse Germany has pinned its efforts on a drive for closer fiscal integration among euro zone members with coercive powers to veto euro zone members’ budgets that breach EU rules.

Chancellor Angela Merkel told lawmakers she would not make a deal at a December 9 European Union summit to drop resistance to joint euro zone bonds in exchange for progress on strengthening fiscal rules, MPs quoted her as saying.

She told a closed-door meeting Europe was “a long way from euro bonds,” suggesting they may not be ruled out forever.

(Additional reporting by Marius Zaharia in London, Erik Kirschbaum in Berlin, Robin Emmott and John O’Donnell in Brussels, Saeed Azhar and Kevin Lim in Singapore; Writing by Paul Taylor/Mike Peacock; Editing by Neil Fullick)


What Are Bonds?

A bond is a debt security, a loan similar to an I.O.U. When you purchase a bond, you are lending money to a government, corporation, or other entity known as the “issuer.” In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it “matures,” or comes due.

After they are issued, bonds can be traded, bought and sold. Among the types of bonds you can choose from are: government securities and foreign government bonds, sub-sovereign, supranational and quasi-government bonds, corporate bonds, and collateralised securities.

NOW, here is an older piece from Dr Weiss on the coming crisis
First the background

Advance warning: Danger of bond market collapse!

Posted by NGE on Jan 06, 2010 | Leave a Comment

by Martin D. Weiss, Ph.D. 01-04-10If you think 2010 is going to bring investors a carefree, nonstop ride to glory, think again!Profit opportunities abound, and we intend to be among the first to lead you to them.But we’re also here to give you advance warnings of threats that can sneak up from behind and catch you by surprise.Case in point: The danger that Treasury bonds will fall sharply in price, drive up long-term interest rates and ultimately threaten the U.S. recovery.This is an advance warning because long-term interest rates are still very low. Even if they rise from here, their impact on the economy may not be felt right away.But if you hold medium- or long-term bonds, you need to get out NOW — before you suffer further damage.Using nearest futures contracts as the metric, the price of a 10-year Treasury note tumbled from a high of 130.09 on December 18, 2008, to a low of 114.98 on June 18, 2009.It then spent most of the year’s second half trying to recover from that debacle.But just in the last few days of December, while most traders were away or asleep, a renewed plunge in Treasury-note prices erased nearly all the gains since June … threatening new lows, paving the way for a new plunge in prices, and driving a new surge in 10-year yields.The price decline in 30-year Treasury-bond prices has been even more dramatic: An historic 27-point plunge from 142.62 on December 19, 2008, to 115.67 on June 18, 2009 … followed by a feeble recovery … and now, as with Treasury notes, a new, ominous price decline and surge in yields.The impact on consumers is unmistakable:Even while Washington seeks to flood mortgage markets with easy money, 30-year fixed-rate mortgage rates are moving sharply higher. And even as the Fed does everything in its power to get Americans to spend, U.S. banks are tightening their credit standards and slapping on new fees.The causes of the bond market troubles are equally obvious:We have …The biggest and most permanent federal budget deficits in our country’s history — $1.4 trillion of red ink in fiscal 2009 and AT LEAST another $7 trillion in deficits over the next decade.The biggest government borrowing binge of all time. Just in the last week of the year, the Treasury Department borrowed $44 billion with the sale of 2-year notes, $42 billion with 5-year notes and $32 billion in 7-year notes, for a total of $118 billion — a new record. Expect more of the same throughout 2010.The most inflationary monetary policy of all time, including a sudden, record-smashing DOUBLING of the nation’s monetary base in 2009.

And most ominous of all …

A Government Gone Wild!

This is not a matter of personal opinion or political philosophy. Regardless of your particular persuasion, you cannot deny the folly of Washington’s escapades …

  •  The U.S. Federal Reserve has tossed its traditional rulebook in the trashcan. It has opened its credit window to brokerage firms, guaranteed trillions of junk credit of the private sector and bought up over a trillion in junk mortgages.
    The U.S. Treasury has bailed out the nation’s largest and most outrageous risk-takers — not only institutions like Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, and GM … but, indirectly, also high-rollers like Goldman Sachs and JPMorgan Chase.
  • And now, adding madness to insanity, the U.S. government is opening the gauntlet to even more of the same: 
    On Christmas Eve, the Treasury Department announced it will remove the limits on any and all aid to Fannie Mae and Freddie Mac for the next three years.

The intended consequence was to allay investor concerns that these two mortgage giants will exhaust the available government bailout funds.

Treasury officials know that an estimated 3.9 MILLION U.S. homes went into foreclosure last year … and, they know that they can expect more of the same in 2010. So they’re literally pulling all stops to funnel funds into this market. But the unintended consequences are potentially greater concerns:

  • An even deeper hole in the federal budget,
  • An even larger avalanche of Treasury borrowings,
  • Still lower bond prices, and, inevitably,
  • Far higher long-term interest rates.

Most Financial Institutions Highly ExposedIf America’s financial institutions were prepared for higher interest rates, this might not be quite as serious. But as I demonstrated here two weeks ago, nothing could be further from the facts. (See “Three Government Reports Reveal New Looming Risk.”)

Specifically …

  • The Federal Deposit Insurance Corporation (FDIC) reports that many more banks are now taking on higher levels of interest-rate risk, leaving them overly exposed to rate rises at precisely the wrong time. They’re stuffing their portfolios with long-term mortgages, which invariably fall in value when interest rates rise. And they’re relying too heavily on short-term financing, which will inevitably be more expensive when rates rise.
  • The U.S. Comptroller of the Currency (OCC) reports that America’s largest banks now hold $172.5 TRILLION in derivatives that are directly linked to interest rates, the most of all time. That’s over THIRTEEN times the amount they hold in credit derivatives — a primary cause of the 2008-2009 debt crisis.
  • And the Federal Reserve reports that banks aren’t the only ones vulnerable to higher interest rates. Also exposed are credit unions, life and health insurance companies, plus property and casualty insurers.

Bottom line: Don’t march into 2010 as if the word “risk” had been stricken from investment lexicon like four-letter words in a grammar school dictionary.

It hasn’t been; it’s still there. And it mandates continuing caution — to buy excellent values … with strong fundamentals … prudent risk management … and plenty of cash in reserve.

Good luck and God bless!


This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit

And in his Ratings on banks, insurance companies and stocks, he is warning of

America’s Financial Doomsday


wherein he says …..


The moment when all hell breaks loose …

So what is the ultimate catastrophe that doomed the people of Russia and Brazil to decades of poverty and dependence?

What is the next bombshell that’s beginning to explode in Europe, destroying the people’s wealth and threatening to rob them of their personal freedoms?

What is the historic, life-changing, world-changing event that is also about to vaporize massive amounts of wealth and potentially threaten our liberties right here in the United States of America?

It’s the singular moment in time when the last investor willing to loan money to the government calls it quits.

It’s when the government can no longer borrow and simply runs out of money.

That’s the moment when all hell breaks loose.

No, I’m not talking about what would happen if Congress simply failed to raise the debt limit like it almost did in August of 2011. That was a just a sneak preview of the true big event still dead ahead.

“I have made twenty times what I paid for   the subscription. I like your style, love the profits.”
— Rick N.

I’m talking about, a sudden rejection of U.S. debt by the world’s investors — a creditors’ revolt that suddenly leaves Washington with no choice but to live within its means.

Think about that: What would happen right now if our federal government was no longer able to find more willing lenders, no longer able to borrow money?

Before you answer though, remember this: Washington has to borrow nearly half of every dollar it spends today.

It has to borrow nearly half of every dollar it spends on national defense, and homeland security.

It has to borrow nearly half of every dollar it pays in Social Security, Medicare benefits, and unemployment benefits, plus half of what it gives to U.S. veterans, government pensioners, the poor and the disabled.

And it has to borrow half of every dollar it spends to repay money it borrowed five years ago … ten years ago … even 30 years ago.

What will happen when global investors deny our application for yet another loan? When the Chinese and other foreign lenders say “No more!” to losing their shirts as Washington guts the value of the dollars they earn?

When they simply say:

“Sorry — but America’s line of credit is CANCELLED. Washington’s loan application is DENIED!”

This is not far off. The warning signs are already here …

Warning sign #1: According to Beijing officials, China, the world’s largest buyer and holder of U.S. government securities, has suffered a loss of $271.1 billion between 2003 and 2010 as a result of the dollar’s steady depreciation.

Warning sign #2: In June of 2011, China’s National Development and Reform Commission announced it could lose another $578.6 billion if it continues to hold these huge loans to the U.S.

Will they continue to suffer these losses passively?

The answer is …

Warning sign #3: Two high officials — Zhou Xiaochuan, the head of China’s central bank and Xia Bin, a member of the monetary policy committee of the central bank — are ready to bolt.

Both recently made it clear that they could easily get away with a huge reduction in the amount of U.S. treasuries they own.

I repeat: 
This is already beginning to happen!

Other nations are also shifting their reserves from U.S. Treasuries to gold and silver, plus oil, coal, and other tangible assets.

Mexico, Russia and Thailand have recently bought well over 100 tons of gold instead of U.S. treasuries.

Even Tanzania is planning to shun the dollar and shift its reserves into gold!
and on and on
just search yourself
News from this month

Global Economic Collapse 2012 Looming Threats from the Bond Market

November 18, 2011 1:34 PM EST

By Hao Li

International Business Times


The World Bank expects the real global GDP growth to be 3.2 percent in 2011. Indeed, current economic data suggests that the U.S. is on pace to grow at a modest pace and emerging market countries like China are still soaring.

Still, some analysts have not ruled out the possibility of a global economic collapse in 2012.

Michael Pento, President of Pento Portfolio Strategies, sees major risks in the sovereign bond market of the developed world.

“The truth is that Europe, and quite possibly Japan and the U.S., face a recession in 2012 due to a full-blown bond market crisis,” said Pento in a research commentary.

The Eurozone is already on the brink of toppling. The yields on the 10-year debt of Italy and Spain are near 7 percent, a level that is likely unsustainable. If this trend of rising yields continues, these two countries will go the way of Greece.

Nouriel Roubini, the chairman of Roubini Global Economics who famously predicted the 2008 global financial crisis, recently said the “the endgame for the Eurozone has begun.”

Greece’s sovereign debt crisis derailed its economy, which contracted 3.5 percent (in real terms) in 2010. If Italy and Spain suffer a similar fate as Greece, the entire interconnected economy of European Union could crash.

“Many investors continue to overlook the profound ramifications of having the largest economy [European Union] on the planet fall into a steep recession,” said Pento.

While a substantial number of analysts see a real risk of a sovereign debt crisis in Europe, not many fear one for the U.S. and Japan. For Pento, however, sovereign default is a matter of mathematics.

“History is replete with examples that indicate once a nation reaches a debt to GDP ratio of between 90-100 percent, two pernicious conditions begin to appear,” he said.

First, public debt drains capital from the private sector, which stymies economic growth.     

Second, the bond market no longer believes the country can repay its debt (partly because of the slowed economic growth). The market then charges the country higher borrowing rates, which leads it down a spiral of debt unsustainability.

At the end of the 2010, the debt to GDP ratio was 94 percent for the U.S., 220 percent for Japan, and 119 percent for Italy, according to the IMF.

Pento said eventually, these countries will either have to outright default or print their way out of their debt. Both scenarios, he said, will be deleterious to the economy. 

Not all experts, however, believe high public debt necessarily leads to a sovereign debt crisis.

For the U.S., most argue that the U.S. dollar’s reserve currency status and the U.S. role as the world superpower should protect  it from a sovereign debt crisis, even at a 94 percent debt to GDP ratio.

For Japan, some argue that its current-account surplus and loyal domestic investors can continue to sustain its enormous public debt level.

For Italy, however, it is harder to make such optimistic arguments, especially because the market has already begun to voice its displeasure.

If Pento is right about just Italy, 2012 looks to be rough year for the global economy.

International Business Times

and this important piece of the puzzle

Is This What Hyperinflation Looks Like From the Inside?

9 comments |  April 25, 2011  |  includes: GLDSLV

Gold is making new nominal highs almost daily. Silver, meanwhile is making 30-year highs. Prices at the pump are soaring, despite an oversupply of oil. The latter is only partly explained by ongoing Middle East turmoil and refinery retooling in preparation for the summer driving season. Anyone who eats has no doubt noticed that food prices are going up while the packages that food comes in are shrinking.

“Panic dollar selling is setting in,” hedge fund manager Dennis Gartman says. “This may carry farther than any of us dream of or, worse, have nightmares of.” In the race to the bottom, the dollar is ahead of the pack.

US finances are in terrible shape. The federal deficit is almost 10% of GDP, and total debt if you include Social Security, Medicare, and Medicaid is about $75 trillion, five times greater than GDP. “It is a testament to the delusion–and plain dishonesty–which surrounds America’s fiscal debate that this figure is not more widely cited,” writes Liam Halligan for The Telegraph.

In response, during a recent summit, the leaders of Brazil, Russia, India, China and South Africa (the BRICS) announced that they want to trade between themselves in their own currencies. This comes amid a growing chorus in China pushing for a limit of dollar reserves to $1.3 trillion. At present, China, whose economy the IMF says will outpace that of the US by 2016, has $3.04 trillion in dollar reserves. What’s going to happen to the dollar when China sells off $1.74 trillion? And who, besides the Federal Reserve, is going to buy our bonds?

Some have speculated that the Federal Reserve is writing (selling) puts on Treasuries to keep rates low. As Frederick Sheehan notes, “the Fed-sponsored put option is the logical next step to dampen the yield curve.”

A put is an option contract that gives its owner the right to sell the put writer an underlying asset for a set price within a certain time. If one owns the underlying asset, buying puts on that asset is like buying insurance. One can also buy puts to make a downside bet on an asset. The put writer, on the other hand, is selling insurance or betting that the underlying asset will not fall below the set price within the time frame specified in the contract.

If the Federal Reserve is selling puts on Treasuries, and there’s reason to believe that it is because it did just that during the Y2K non-crisis, it is selling insurance on US debt. This is pretty much the same thing that AIG did.

The only difference is that the Federal Reserve has a printing press and AIG did not. The Fed can’t default, but if rates go above its target strike prices, the Fed will have to print so much money that the currency will collapse.

And a collapse is due. Since the latter half of the 19th century, the world has had four monetary orders. The past three have lasted between 20 and 44 years, or 30 years on average. Our current fiat, faith based system is 40 years old. Add to this the Federal Reserve’s money printing and Washington’s “openness” to a new global reserve currency.

Maybe they are commodities in a bubble as many suggest, but gold and silver, for thousands of years regarded as money, appear to be remonetizing. Talk of a new gold- or other asset-backed monetary system is all the rage in the blogosphere, while central banks and large university endowments are taking physical delivery of the shiny metal. While it was certainly better to have begun doing so during the last 10 years, maybe regular people should start doing this too.

This article is tagged with: Macro ViewEconomyUnited States

New Strains Hit Euro, Global Markets; Common Currency Falls After Italy’s Borrowing Costs Soar; Coming Week Poses Key Test of Sentiment


NOV,26,2011 12:00 AM EST

ROME—Uncertainty in financial markets deepened as Italy’s borrowing costs soared to euro-era highs and Prime Minister Mario Monti said European leaders understood an Italian collapse would mean “the end of the euro.”

Europe’s troubles weighed on markets world-wide: Stocks in the U.S. had their worst Thanksgiving week since 1942, the year the U.S. officially set the holiday at its current date. The Dow Jones Industrial Average has shed 7.6% the past two weeks. The common currency showed its own signs of strain, ending the week down 2.1%, its lowest level in almost two months.

Monday will see a significant test of investor sentiment when Italy holds another debt auction. Belgium, Spain and France are also scheduled to sell new debt during the week. All told, five euro-zone governments are together expected to sell about €19 billion ($25.36 billion) in debt over the week, more than double the past week’s amount.

Investors have dealt with an almost daily dose of bad news out of Europe, which is in the throes of a financial crisis that many fear could spark a global contagion with the potential to be more damaging than the 2008 collapse of Lehman Brothers Holdings Inc.

The renewed rise in Italian bond yields is particularly worrisome. Italy has the world’s third-biggest bond market, and if it were to lose access to funding, the rest of the euro zone would struggle to keep the country solvent. Many economists believe Italy’s €1.9 trillion of debt is too big for even the euro-zone’s stronger economies to bail out.

A statement issued by Mr. Monti’s office Friday said French President Nicolas Sarkozy and German Chancellor Angela Merkel had declared Italy the decisive battleground in the euro-zone crisis.

The French and German leaders “said they are aware that a collapse of Italy would inevitably lead to the end of the euro, causing the deadlock of the process of European integration and resulting in unforeseeable consequences,” the statement said.

The three European leaders met behind closed doors in Strasbourg on Thursday. Italy is the euro zone’s third-largest economy, behind Germany and France.

Mr. Monti’s statement Friday is likely to ramp up pressure on Paris and Berlin to act more decisively in combating the crisis. The comments also show how the new leader is seeking to carve out a place for Italy at the currency’s decision-making table, which has long been monopolized by leaders of France and Germany.

A spokesman for Mr. Sarkozy declined to comment on Mr. Monti’s account. A spokesman for Ms. Merkel wasn’t immediately reachable for comment.

Worries about slowing economies and rising debt levels spread beyond the euro zone. Moody’s Investors Service downgraded Hungary to “junk” status, citing uncertainty about its ability to meet its debt-reduction goals and its heavy reliance on external investors, which raises the prospect of a flight of capital out of the country.

Also on Friday, Standard & Poor’s downgraded Belgium’s credit rating and a new report put France’s consumer confidence in November at its lowest level since the last recession. And in Japan, government-bond yields rose after the International Monetary Fund warned about the country’s ballooning budget deficit. Some signs emerged that foreign investors, particularly European banks, may be withdrawing money from the country.

In the U.S., stocks dropped only slightly on Friday. The Dow Jones Industrial Average declined 25.77 to 11231.78. The euro was down 0.8% to $1.3239.

But Italy faced the heaviest pressure. Investors demanded Italy pay interest of 6.5% on six-month debt at an auction on Friday, sharply up from the 3.5% rate it paid in October. The lackluster auction fueled a broader flight from Italian debt, driving yields for short- and long-term bonds well above 7%, a level that many economists consider unsustainable.

By comparison, the U.S. pays just 0.063% to borrow for a similar time period, and less than 2% to borrow for 10 years.

“From a purely fundamental perspective, Italy can withstand higher borrowing costs and even a sustained period of lower growth, said Gustavo Bagattini, European economist at RBC Capital Markets. But “the problem is that a confidence issue cannot be solved by simple arithmetic.”

The auction followed a similarly weak sale by Spain on Tuesday, in which the country paid 5.11% on three-month debt. Spain’s 10-year debt yields about 6.67%, also close to the 7% level. It also came just days after even Germany—considered a safe-haven government-bond investment— had trouble selling government debt, underscoring how fears have moved closer to the center of the Continent.

Separately, a closely watched money-market indicator of dollar-funding costs rose Friday to its highest level in more than three years. The cost of swapping three-month euro funds into U.S. dollars rising to its highest level since October 2008, in the wake of Lehman’s collapse.

The troubles come against a backdrop of a euro-zone economy that is showing signs of stalling and perhaps sliding into recession.Figures last week from the European Union show the region’s economy barely grew in the third quarter as much of the bloc contracted.

The strains across the euro zone are adding further pressure to European leaders who have so far failed to quell investor concerns about the heavy debt loads and poor economic prospects of many nations. So far, the European Central Bank has resisted calls from investors and other political leaders and central bankers to step up purchases of bonds to help alleviate some of the stresses.

“There has to be an endgame, and the endgame is approaching,” said Alan Zafran, partner of Luminous Capital, which manages $3.8 billion of assets in Menlo Park, Calif. He said he considers the euro zone as being “on the precipice of a much more pronounced problem.”

Italy will offer up to €750 million of bonds Monday, followed a day later by up to €8 billion of debt. Spain, the bloc’s fourth-largest economy, dropped its plans to launch a new three-year bond and will instead offer three existing bonds maturing in 2015, 2016 and 2017 for an estimated €3.5 billion on Thursday.

Belgium on Monday will sell up to €2 billion of bonds. Like others, its bond yields have been jumping, sparked by difficult budget negotiations, a lack of permanent government for almost 1½ years and renewed jitters about Belgian banking stability. France plans on Thursday a sale of €3 billion to €4.5 billion of debt.

Anusha Shrivastava, Emese Bartha and Mitsuru Obe contributed to this article.

Write to Stacy Meichtry at and Jonathan Cheng

Corrections & Amplifications

The headline on an earlier version of this article incorrectly said the euro had fallen to euro-era lows.


Eurozone bail-out fund has to resort to buying its own debt

Europe’s €1 trillion (£854bn) rescue fund has been forced to buy its own debt as outside investors become increasingly concerned about the worsening eurozone sovereign debt crisis.

Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target.

By Harry Wilson and Kamal Ahmed

9:30PM GMT 12 Nov 2011


The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland.

However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds.

Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.

The revelation will be seen as a major failure and a worrying sign of future buyers strike after EFSF officials and their bankers had spent recent weeks travelling the world attempting to persuade key investors, including China’s national wealth fund and Japanese government funds, to buy its bonds.

Chinese and Japanese money was crucial to last year’s first bond sales by the EFSF, but they have since been dismayed by the eurozone’s failure to resolve the worsening debt crisis and alarmed at how fund has morphed from being a rescue facility for European banks into a potentially €1 trillion leveraged first-loss insurer for eurozone governments.

Other European Union funds are also understood to have supported the EFSF’s bond sale. The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted.

At a private breakfast organised by PI Capital last week, Mark Hoban, the Treasury minister, said: “What it doesn’t do is provide the next stage of the solution, which is how do you stop this from happening again?” he said.

The move, by the European Investment Bank, will cause more disquiet among non-eurozone EU members who have become concerned about their growing exposure to the cost of rescuing the currency bloc.


10 Signs That Confidence In U.S. Treasuries Is Dying And That Financial Armageddon May Be Approaching

Selling government debt is a gigantic confidence game.  For decades, investors all over the globe have gobbled up massive amounts of U.S. debt at incredibly low interest rates because they believed that it was a certainly that they would be paid back and be able to make a little bit of profit on top of it.  Unfortunately, things have changed.  Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon.  Why is that so?  Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them.  But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits.  That will erode confidence in U.S. Treasuries even further.  In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.

Faith in U.S. Treasury bonds is absolutely critical if the world financial system is going to continue to operate in a stable manner.  In the post-World War 2 era, U.S. Treasuries have been largely viewed as the absolutely safest investment out there.  So if there comes a point when the market for U.S. Treasuries completely collapses, it is going to cause unprecedented financial chaos.  The worldwide derivatives market, which is already highly unstable, would almost certainly implode.  Credit markets all over the globe would seize up.  Global trade would quickly grind to a standstill.

This isn’t going to happen overnight (hopefully).  Rather, the loss of confidence in U.S. Treasuries is something that is likely to take months or even years to play out.  But once that confidence is gone, it is not something that will be able to be rebuilt easily.

Think of it this way – once you drive a car off a cliff, is it easy to reconstruct it?

Of course not.

Well, that is where we are headed with U.S. Treasuries.

The Federal Reserve is flooding the system with new dollars, Barack Obama and the U.S. Congress seem poised to pass a new tax deal which does not include corresponding spending cuts which will cause U.S. government budget deficits to become even more bloated, and there is a tremendous lack of faith both in U.S. political leaders and in the Federal Reserve at this point.

The rest of the world is losing faith that the U.S. government is going to be able to handle all of the debt that it has accumulated.  We may be approaching a “tipping point” soon.

The following are 10 signs that confidence in U.S. Treasuries is dying….

#1 The financial community is extremely concerned that the tax deal that Barack Obama is pushing is going to dramatically increase U.S. government budget deficits over the next two years.  On Monday, Moody’s warned that if Barack Obama’s tax deal with the Republicans becomes law, it will increase the likelihood that Moody’s could soon be forced to slash the rating of U.S. government debt.

#2 Already there are signs that some bond investors are looking for the exits.  Last week, U.S. Treasuries suffered their largest  two day sell-off since the collapse of Lehman Brothers back in September 2008.

#3 The yield on 10-year Treasury bonds set a six-month high on Mondaybefore pulling back a bit.  Most analysts believe that Treasury yields are going to push significantly higher in coming weeks.

#4 This trend of rising yields has been going on for a while.  In fact, yields on 10-year Treasury bonds have been steadily rising since October 7th.

#5 Even before the recent tax deal was announced there were already troubling signs regarding the growth of U.S. government debt.  The U.S. government budget deficit rose to $150.4 billion in November, which was the largest November budget deficit ever recorded.

#6 It is not just the new tax deal that has investors around the globe spooked.  The truth is that the rest of the globe reacted very negatively to the new round of quantitative easing that the Federal Reserve announced back in November.  The Federal Reserve is flooding the system with liquidity and the rest of the world is not amused.

#7 The American people have less faith in the Federal Reserve and in the financial system than at any other point in recent memory.  For example, a new Bloomberg National Poll has found that a majority of Americans now want the Federal Reserve to either be held more accountable or to be abolished entirely.

#8 Investors all over the globe are starting to wake up and realize that America’s debt problem is unsolvable.  David Bloom, the currency chief at HSBC, raised eyebrows when he recently stated that “if yields are rising because people think America’s fiscal situation is unsustainable, then its Armaggedon.”

#9 There is also a growing feeling among investors that the Federal Reserve simply does not care about the danger of inflation, and this is making bondholders very nervous.  Stephen Lewis of Monument Securities recently put it this way….

“There is a feeling that the Fed doesn’t care about inflation – in fact, wants more of it – and that is certainly not in the interest of bondholders.

#10 Over the next 12 months, the U.S. government is going to be rolling over trillions of dollars in debt along with all of the new borrowing that it is going to be doing. In fact, the U.S. government is somehow going to have to find a way to finance debt that is equivalent to 27.8 percent of GDP in 2011.

For years our politicians have told us that “deficits don’t matter”, but the truth is that they do matter.  The national debt of the United States is now the biggest debt in the history of the world by far, and yet most Americans do not seem to grasp the absolute financial horror that we are facing as a nation.

In the end, debt is always painful.  It can be a lot of fun to run out and buy a beautiful new house, a couple of brand new cars and to run your credit cards up to the max, but eventually it catches up with you.  Well, the same thing is now happening to us on a national level.

We are getting to the point where eventually we are not even going to be able to service the debt that we have already piled up.  Once that happens we can either declare national bankruptcy or we can try to hyperinflate our way out of trouble.

Meanwhile, the once great U.S. economic machine is dying as well.  The only reason we have been able to survive with all of this debt as long as we have is because of how powerful our economy has been.

But over the past couple of decades, the big global corporations that now dominate our economy have shipped thousands of factories and millions of jobs overseas.

The mighty economic machine which is supposed to provide funds to pay off all of this debt is being dismantled right in front of our eyes.

There was no way in the world that U.S. government debt was going to be sustainable even if our economy remained vibrant and healthy.  The sad truth is that U.S. government debt is approximately 13 times larger than it was just 30 years ago.

But now that the “real economy” is dying a savage death there is simply no hope that this thing is ever going to turn around.  The only thing left to do is to take bets on when the implosion is going to happen.

All of this “great tax cut debate” nonsense going on in Washington D.C. right now is just a bunch of incompetent politicians running around rearranging the deck chairs on the Titanic.  Perhaps these tax cuts will provide enough of a short-term economic boost to get many of them re-elected in 2012.  Meanwhile, our long-term economic problems continue to get a lot worse.

It has become quite obvious that Barack Obama is completely clueless about the economy, and what is even sadder is that the “highly educated” Chairman of the Federal Reserve, Ben Bernanke, seems almost equally as clueless.

Unfortunately, Americans have become so dumbed-down that they don’t even realize that their leaders are incompetent.  In fact, as sad as it is to say, most Americans you will meet on the street probably cannot even tell you what U.S. Treasuries are.

Let us hope and pray that investors around the globe continue to have at least some confidence in U.S. Treasuries for at least a little while longer.  When “financial Armageddon” finally does happen, it isn’t going to be pleasant for any of us.

So enjoy these happy economic times while you still have them, because at some point things are going to get a whole lot worse.

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Towards Economic Collapse: Europe’s Debt Crisis has Spiraled out of Control
by Bob Chapman
Global Research, November 12, 2011
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As Chancellor Merkel and PM Sarkozy search for a solution that doesn’t exist they continue to lose credibility. Nothing of substance has been agreed upon that is legal and can be implemented. At the IMF Christina LeGarde is frantically waving her arms like a cheerleader telling anyone that will listen that if the six sovereigns in financial trouble are not aided the euro will fail and peace in Europe will disappear. The elitists are frantic because they cannot find a solution. LeGarde says without help there will be ten years of depression. She obviously hasn’t done her homework. Try 30 or more years. Sarkozy, Merkel and Jans Weidmann council member of the ECB has said the ECB cannot bail out governments by printing money. He is also head of the Bundesbank and said a key lesson of what is being proposed is the hyperinflation in Weimer Republic, which followed WWI. Over in Italy PM Berlusconi, who looks and acts like Benito Mussolini has been unseated and as a result the Italian bond market is on the edge of collapse. There is big pressure downward in stock and bond markets as a result and the US Treasury again attacks gold and silver hoping they can keep gold from breaking about $1,800. The PPT’s ability to achieve this is more than questionable.

At Cannes PM Sarkozy and President Obama discuss what a liar Israel’s PM Netanyahu is. Their candor was accidentally picked up by a supposedly muted speaker. What is now realized is that euro zone government bonds contain unexpected credit risks. All the European politicians and bureaucrats want to save the euro, but their promises and solutions are not worth the paper they are written on. They are so believable that China won’t lend them money. These characters have been kicking the can down the road since last spring with little or no long-term solutions, and no solutions to affect a recovery and create jobs. Austerity has replaced growth and that is expediting a failing economy, even in Germany. If economies don’t grow tax receipts fall and the ability to service debt is impaired. Big euro zone banks are broke just as their counterparts in NYC are. As this proceeds we ask how long can the ECB buy Italian and Spanish bonds?

In Greece a coalition has been made and Mr. Samaras has shown his true colors by backing Trilateral-Bilderberg Lucas Papademos, as interim PM. We hope Greek citizens realize that Papademos will sell them out. It is only a matter of when. The debt deal will probably be ratified, but at what price? Will it bring revolution or a coup? Who knows, but under the circumstances anything goes. 60% to 65% of Greeks oppose the bailout, but 71% want to stay in the euro, which is impossible.

If further austerity measures are taken in Italy there will be demonstrations and violence. In the meantime bond market yields climb; Italy’s access to the bond market lessens and as a result stock markets fall. There is no coordination between the ECB and its members. The French banks and others are selling bonds, which the ECB is being forced to buy. All of these factors lend to political, financial and economic uncertainty. This is a major full-blown crisis and the US realizes that. Why else would they be strongly trying to suppress gold and silver prices? Europe is in disarray and Germany has to come to terms with cutting loose the six loser countries. That means leaving the euro and perhaps the EU. We see no other choice in this unnatural association.

Europe’s banks are leveraged 26 to 1, whereas 9 to 1 is normal. A 4% fall in asset prices will wipe out equity. Debt to equity for corporations is 145% in Portugal, 135% in Italy; 113% in Ireland, Greece 218%, Spain 152% and 89% in the UK. In Germany it is 105% and in France 76%. EU financial problems are endemic not just in the six countries in trouble. Europe is an accident waiting to happen, which we have pointed out for some time. We are now seeing failed bond auctions even in Germany. The sale of EFSF bonds had to be put off due to lack of interest. If it hadn’t been for the ECB buying the bonds of Italy, Spain and Portugal the bond market would have already collapsed. Europe is the catalyst and eventually it probably will take the financial system down. The ECB probably has already bought close to $300 billion in just these countries alone.

European banks are howling that they have to increase capital reserves to 9% by June 30, 2012. In the wings we see $610 billion allocated to bailout by sovereigns, which they believe will be stretched to $1.4 trillion via the use of derivatives. That may never happen if the German Federal Court disallows it. On the other hand more savings would allow further business expansion but are we going to see that in a falling economy?

This last recovery as an example in Germany was caused in great part by an increase in government debt from 74% in 2009 to 83% in 2010, in France 79% to 82% and in Greece and Italy 130% to 160% versus 116%. Thus, it is fair to assume that the recent recovery came from an extension of money and credit. This leveraging now leads to de-leveraging, which may bring balance, but is not good for growing an economy. It diminishes the ability of the economy to generate capital. That means the economies statuses are going to worsen. This results in lower manufacturing activity, which we already see falling. Year-on-year the PMI has already fallen from 54.6 to 47.3 in Germany. The service index is 47.2. Both have been and will continue to fall in tandem. At the same time the ECB has monetized $300 billion by purchasing bonds and that is inflationary. Worse yet the ECB has lifted monetary growth from 9.5% in June to 23% in October. Loose monetary policies cause these problems, but debt is so onerous that they have to continue or they will fall into a deflationary depression. In the meantime inflation grows. There can be no real healthy growth until de-leveraging has ended. The banks and the governments won’t do that for fear of losing control. That means more debt and higher inflation and perhaps even hyperinflation.

In Italy Silvio Berlusconi is off again, on again, as to whether to resign as PM. His closest coalition ally Umberto Bossi of the Northern League, has told him he should resign.

There is no question that Europe’s debt crisis has spiraled out of control. That is something we predicted would happen long ago. Finally, Germany and France are discussing a breakup of the euro zone to allow the six weak countries to exit the euro, but stay in the EU. Italy and Spain show signs of serious trouble and they are simply too big to rescue, because that would bankrupt the solvent countries.

Italy’s 10-year T-notes traded as high as 7.5% and are now back below 7%, but the ECB and other countries, plus perhaps the Fed, were buyers.

We have to laugh as all these bureaucrats and politicians try to save six countries, as their own countries are in serious trouble. Mrs. Merkel, German Chancellor, says it is all so unpleasant. Lady, it is a lot worse than unpleasant. Europe is in a defining moment as they face collapse.

As the world economy slows the EU is focusing on growth, because if it doesn’t it will fall behind in a very competitive world. Europe, England and the US, as well as others are facing inflationary depression and then deflationary depression.

There is not from our viewpoint at this time, enough time to make treaty changes. All efforts have to be pointed toward immediate financial solutions and to allow those six nations to exit the euro zone, but allow them to stay in the EU. Recession is fast closing in on the world, just not Europe. If they have to increase money and credit on the short term so be it.

Bob Chapman is a frequent contributor to Global Research.  Global Research Articles by Bob Chapman

German 10-Year Bond Auction A ‘Disaster’ As Debt Fears Grow

Germany Bond Auction

First Posted: 11/23/11 09:15 AM ET Updated: 11/23/11 09:15 AM ET


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LONDON (Reuters) – A “disastrous” sale of German benchmark bonds sparked fears on Wednesday the debt crisis was beginning to threaten even Berlin, with the Bundesbank forced to dig deep into its pockets to ensure the auction did not fail.

In one of the least successful debt sales by Europe’s powerhouse economy since the launch of the single currency, the low returns offered — just 2 percent annually over 10 years — deterred investors made uneasy by the escalating cost of the crisis to Germany.

That meant the central bank had to pick up 39 percent of the 6 billion euros ($8 billion) of debt Germany had hoped to sell after commercial banks bought just 3.644 billion euros of the issue.

“It is a complete and utter disaster,” said Marc Ostwald, strategist at Monument Securities in London.

“This does not bode well, it is the worst of uncovered auctions that we’ve had this year and little wonder that the Bund sold off on the back of it.”

The country’s debt agency said the shortfall in the sale reflected worsening market nerves, that it would sell back the retained amount to investors on secondary debt markets and that Germany would not face a funding bottleneck.

Bund futures, the euro and European stocks fell after the auction, with Germany’s 10-year debt costs rising above equivalent U.S. yields for the first time since early October.


For a graphic on German 10-year bond yields minus inflation, click on


The results compared with an average retention rate by the Bundesbank of 17.83 percent at 10-year bond auctions in 2011. Data from IFR, a Thomson Reuters service, showed this to be the highest Bundesbank retention since at least July 1999.


German yields have been forced down to record lows by demand from investors seeking shelter from the debt crisis that has ensnared Italy and Spain and now threatens to drag down other, higher-rated countries such as France and Belgium.

The new bond promised to pay out a 2.0 percent interest rate — the lowest ever on an issue of German 10-year Bunds. The average yield at the auction was 1.98 percent, down from 2.09 percent at the last sale of the previous benchmark in October.

The weak auction demonstrates that some are now beginning to think twice about whether such low yields are appealing given the threat that Germany has to begin diluting its credibility by underwriting the debt of the euro zone’s struggling states.

“Bunds are starting to lose their appeal because markets have to believe the euro bonds story and Germany is very close to starting, essentially, to guarantee the debt of other countries,” said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.

A possible path toward a common euro zone bond — which Germany opposes at it would raise the country’s cost of borrowing — is being laid out by the European Commission, which is unveiling proposals for tighter budget controls over euro zone countries’ budgets later on Friday.

(Graphic by Scott Barber; Editing by John Stonestreet)

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November 27, 2011 7:38 pm

The eurozone really has only days to avoid collapse

Wolfgang Munchau By Wolfgang Münchau

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.

This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.

Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges.

First, the European Central Bank must agree a backstop of some kind, either an unlimited guarantee of a maximum bond spread, a backstop to the EFSF, in addition to dramatic measures to increase short-term liquidity for the banking sector. That would take care of the immediate bankruptcy threat.

The second measure is a firm timetable for a eurozone bond. The European Commission calls it a “stability bond”, surely a candidate for euphemism of the year. There are several proposals on the table. It does not matter what you call it. What matters is that it will be a joint-and-several liability of credible size. The insanity of cross-border national guarantees must come to an end. They are not a solution to the crisis. Those guarantees are now the main crisis propagator.

The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy, and hopefully wider economic policy issues as well. The eurozone needs a treasury, properly staffed, not ad hoc co-ordination by the European Council over coffee and desert.

I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression. So even if the European Council was able to agree on such an improbably ambitious agenda, its leaders would have to continue to outdo themselves for months and years to come.

How likely is such a grand deal? With each week that passes, the political and financial cost of crisis resolution becomes higher. Even last week, Angela Merkel was still ruling out eurobonds. She was furious when the European Commission produced its owns proposals last week. She had planned to separate the discussion about the crisis from that of the future architecture of the eurozone. The economic advice she has received throughout the crisis has been appalling.

Her own very public opposition to eurobonds has now become a real obstacle to a deal. I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints. If she had been more circumspect, she could have travelled to the summit with the proposal of the German Council of Economic Advisers, who produced a clever, albeit limited and not yet fully worked-out-plan. They are a proposing a “debt redemption” bond – another candidate for this year’s top euphemism award. The idea is to have a strictly temporary eurobond, which member states would pay off over an agreed time period. At least this proposal would be in line with the more restrictive interpretation of German constitutional law.

Ms Merkel’s hostility to eurobonds certainly resonates with the public. Newspapers expressed outrage at the commission’s proposal. I thought both the proposal itself and its timing were rather clever. The Commission managed to change the nature of the debate. Ms Merkel can get her fiscal union, but in return she will now have to accept a eurobond. If both can be agreed, the problem is solved. It is the first intelligent official proposal I have seen in the entire crisis.

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Copyright The Financial Times Limited 2011. You may share using our article tools

s this really the end?

Unless Germany and the ECB move quickly, the single currency’s collapse is looming

Nov 26th 2011 | from the print edition

EVEN as the euro zone hurtles towards a crash, most people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen.

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls (see article). The euro zone could shatter into different pieces, or a large block in the north and a fragmented south. Amid the recriminations and broken treaties after the failure of the European Union’s biggest economic project, wild currency swings between those in the core and those in the periphery would almost certainly bring the single market to a shuddering halt. The survival of the EU itself would be in doubt.

Yet the threat of a disaster does not always stop it from happening. The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast.

Markets, manias and panics

Investors’ growing fears of a euro break-up have fed a run from the assets of weaker economies, a stampede that even strong actions by their governments cannot seem to stop. The latest example is Spain. Despite a sweeping election victory on November 20th for the People’s Party, committed to reform and austerity, the country’s borrowing costs have surged again. The government has just had to pay a 5.1% yield on three-month paper, more than twice as much as a month ago. Yields on ten-year bonds are above 6.5%. Italy’s new technocratic government under Mario Monti has not seen any relief either: ten-year yields remain well above 6%. Belgian and French borrowing costs are rising. And this week, an auction of German government Bunds flopped.

The panic engulfing Europe’s banks is no less alarming. Their access to wholesale funding markets has dried up, and the interbank market is increasingly stressed, as banks refuse to lend to each other. Firms are pulling deposits from peripheral countries’ banks. This backdoor run is forcing banks to sell assets and squeeze lending; the credit crunch could be deeper than the one Europe suffered after Lehman Brothers collapsed.

Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.

Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.

 Browse all The Economist’s euro crisis covers with our interactive carousel

Germany’s cautious chancellor, Angela Merkel, can be ruthlessly efficient in politics: witness the way she helped to pull the rug from under Silvio Berlusconi. A credit crunch is harder to manipulate. Along with leaders of other creditor countries, she refuses to acknowledge the extent of the markets’ panic (see article). The European Central Bank (ECB) rejects the idea of acting as a lender of last resort to embattled, but solvent, governments. The fear of creating moral hazard, under which the offer of help eases the pressure on debtor countries to embrace reform, is seemingly enough to stop all rescue plans in their tracks. Yet that only reinforces investors’ nervousness about all euro-zone bonds, even Germany’s, and makes an eventual collapse of the currency more likely.

This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.

The perils of brinkmanship

Can anything be done to avert disaster? The answer is still yes, but the scale of action needed is growing even as the time to act is running out. The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral. Even if the ECB rejects this logic for governments—wrongly, in our view—large-scale bond-buying is surely now justified by the ECB’s own narrow interpretation of prudent central banking. That is because much looser monetary policy is necessary to stave off recession and deflation in the euro zone. If the ECB is to fulfil its mandate of price stability, it must prevent prices falling. That means cutting short-term rates and embarking on “quantitative easing” (buying government bonds) on a large scale. And since conditions are tightest in the peripheral economies, the ECB will have to buy their bonds disproportionately.

Vast monetary loosening should cushion the recession and buy time. Yet reviving confidence and luring investors back into sovereign bonds now needs more than ECB support, restructuring Greece’s debt and reforming Italy and Spain—ambitious though all this is. It also means creating a debt instrument that investors can believe in. And that requires a political bargain: financial support that peripheral countries need in exchange for rule changes that Germany and others demand.

This instrument must involve some joint liability for government debts. Unlimited Eurobonds have been ruled out by Mrs Merkel; they would probably fall foul of Germany’s constitutional court. But compromises exist, as suggested this week by the European Commission (see Charlemagne). One promising idea, from Germany’s Council of Economic Experts, is to mutualise all euro-zone debt above 60% of each country’s GDP, and to set aside a tranche of tax revenue to pay it off over the next 25 years. Yet Germany, still fretful about turning a currency union into a transfer union in which it forever supports the weaker members, has dismissed the idea.

This attitude has to change, or the euro will break up. Fears of moral hazard mean less now that all peripheral-country governments are committed to austerity and reform. Debt mutualisation can be devised to stop short of a permanent transfer union. Mrs Merkel and the ECB cannot continue to threaten feckless economies with exclusion from the euro in one breath and reassure markets by promising the euro’s salvation with the next. Unless she chooses soon, Germany’s chancellor will find that the choice has been made for her.

from the print edition | Leaders


Printing money solves no crises: Faber

DOOM AND GLOOM:‘Doctor Doom’ Marc Faber said loose monetary policies, which are meant to be a quick fix, can have unintended consequences in the longer term

By Crystal Hsu  /  Staff Reporter

Marc Faber, center, stands on stage after making a speech at an event sponsored by Chinatrust Financial Holding Co in Taipei yesterday.

Photo: CNA

Marc Faber, publisher of the Gloom, Boom and Doom report, yesterday reiterated his criticism of money printing practices, which he believes will continue in the US, Europe and elsewhere, causing bubbles such as those seen in the Chinese real-estate market.

“A third wave of quantitative easing by the US Federal Reserve is just a matter of time,” said Faber, a contrarian investor who has been referred to as “Doctor Doom” for a number of years.

Printing money is the way global governments will evade debt crises, such as the one that is gripping Europe, Faber said in Taipei.

That would forestall the crisis rather than solve it, keeping prices elevated for assets like stocks, real estate in some areas and precious metal, he said.

Loose monetary policies, including low interest rates, intended as a short-term fix, can have unintended consequences later, Faber said.

While central banks can inject fresh funds into the markets, they cannot control where the funds flow, he said, adding that money printing has encouraged speculation on commodities whose prices have gone up faster than real demand in recent years.

“Some people will benefit from money printing that deflates the purchasing power of currency … but the middle and lower–income classes are being hurt,” said Faber, an investment adviser focused on value investments, who owns Marc Faber Ltd.

Countries with resources are basking in the trend in light of their sharp increases in international reserves, which Faber said was symptomatic of monetary inflation and a shift in wealth.

The fast-growing economy of China has pushed up its inflationary pressures, with the bubble in the real-estate sector on the brink of bursting, Faber said.

“Don’t believe China’s consumer price index stands only at 5 percent,” he said. “The truth is somewhere between 12 percent and 15 percent … The real-estate bubble is so evident that Chinese property shares are very weak as the volume of real-estate transactions goes down and prices fall.”

Faber said China would follow the practice of quantitative easing if it has to choose between printing money and a concrete recession.

The Chinese bubble will burst eventually, in three months or in three years; when it happens, it will have devastating consequences for the global economy, he said.

“Chinese invented paper. They know how to print money,” Faber said.

Still, the ongoing shifting balance of economic power from industrialized countries to emerging economies is building up geopolitical tensions, especially in the Middle East and Central Asia, he said.

All the West needs to do to contain China is seize control of oil supplies, but China and the countries dependent on oil imports would not allow that for the sake of self-preservation, Faber said.

He recommended risk diversification against the current backdrop, but took a dim view of government bond purchases as they would mean trust in the easy monetary policy.

Rather, he suggests owning physical gold, equities and Asian real estate that will prove a better defense against inflation.

Greece, Faber said, is bankrupt whether Europe likes to admit it or not, and the European Central Bank will print money to postpone a systematic failure.


When Even Germany Fails, Europe’s Inverted Yield Curves

Interest-Rates / Eurozone Debt CrisisNov 27, 2011 – 11:27 AM

By: John_Mauldin


Diamond Rated - Best Financial Markets Analysis ArticleAngela Merkel is leading the call for a rule change, a rewiring of the basic treaty that binds the EU. But is it both too much and too late? The market action suggests that time is indeed running out, and so we’ll look at the likely consequences. Then I glance over the other way and take notice of news out of China that may be of import. Plus a few links for your weekend listening “pleasure.” There is lots to cover, so let’s get started.

Changing the Rules

I have been writing for a very long time about the changes needed to the EU treaty if Europe is to survive. Specifically, last week I noted that Angela Merkel has made it clear that the independence of the ECB must not be compromised. This week Sarkozy and the new prime minister of Italy, Mario Monti, agreed to stop their public calls for such changes (at least until their own crises get even worse, would be my guess). And Merkel has called for a new, stronger union with strict control of budgets as the price for further German aid for those countries in crisis. In seeming response:

“The European Commission on November 23 proposed a new package including budget previews at EU level, the establishment of independent fiscal councils and growth forecasts, closer surveillance of bailout recipients and a consultation paper on Eurobonds. There is also a growing consensus among EU policy makers on the need for the adoption of fiscal rules in national legislation. However, it is far from clear whether EU countries would accept the implicit loss of sovereignty this would involve and agree to treaty changes enshrining legally enforceable fiscal oversight at EU level. The German Chancellor, Angela Merkel, is willing to support a change in Germany’s own constitution if the EU Treaty change to that effect is agreed first.” (

But this means a major treaty change that must be approved by all member countries. Note that Merkel wants the treaty change first, or at least the language, before she takes it to German voters, which will certainly be required, since what she is suggesting is not allowed by the present German constitution. Without the changes stated clearly and explicitly in advance, it is unlikely, as I read the polls, that German voters will go along. Merkel has made it clear that any proposed changes will be limited to fiscal issues and central control and not touch on the ECB’s independence. She is adamant against eurozone bonds and putting the German balance sheet at risk (see more below).

But will the rest of Europe go along with what would be a major alterations of their own individual sovereignty and their ability to adjust their own budgets, no matter what? And agree to all this in time to deal with the current crisis? Such changes will be controversial, to say the least. And they would require, if I understand, the yes votes of all 27 European Union members, or at a minimum the 17 eurozone members.

That is problematical. Will even German voters give up their independence and listen to an EU commission tell them what they can and cannot do with their own budget? A budget that is in theory controlled by the rest of Europe? The answer depends on whom you listen to last, as the answers range all over the board.

When Even Germany Fails

Let’s get back to the German balance sheet. This week the markets were greeted with a failed German bond offering. The German central bank had to step in and buy German bunds, at a recent-series-high rate. And while the “trade” has been to buy German bunds as a hedge, Germany is not precisely a model of balance and austerity, with high (above 4%) deficits and a rising debt-to-GDP ratio. And the market senses the contradictions here. When even German bond auctions fail, whither the rest of Europe?

As a quick aside, notice that German yields are not higher than those of UK debt at some points. The market is clearly signaling that the lack of a national central bank with a printing press is an issue. Go figure. But that is a story for another letter at another time.

Let’s look at some recent headlines. Greek 2-year bonds are now at 116%. You read that right. “Bond yields on short-term Italian debt rose above 8 per cent on Friday as Rome was forced to pay euro-era-high interest rates in what analysts called an ‘awful’ auction. A peak of 8.13 per cent was reached on three-year bonds, according to Reuters data, as Italian debt traded deeper into territory associated with bail-outs of Greece, Portugal and Ireland in the past 18 months.

“Italy raised its targeted €10bn in an auction of two-year bonds and six-month bills but at sharply higher yields. ‘Rates have skyrocketed. It’s simply not sustainable in the long run,’ said Marc Ostwald, strategist at Monument Securities in London.

“Investors demanded a yield of 7.81 per cent for the two-year bond, up from 4.63 per cent last month. The six-month bills saw yields of 6.50 per cent, up from 3.54 per cent. That was significantly higher than Greece paid for six-month money earlier this month when it issued bills at 4.89 per cent.” (Reuters)

Spanish bond yields are slightly lower but not by much, with both countries paying more for short-term debt than Greece.

And no one is really talking about Belgium, which I have been pointing to for some time. Belgium debt yield on its ten-year bonds went to 5.85%. Notice the recent trend, in the chart below. It looks like Greece in the not-very-distant past. (Chart courtesy of and Reuters data)

European Inverted Yield Curves

Let’s rewind the tape a little bit. Both the Spanish and Italian bond markets are close to or already in an “inverted” state. That is when lower-term bonds yield higher than longer-term bonds, which is not a natural occurrence. Typically, when that happens, the markets are sending a signal of something. (Charts below courtesy of my long-suffering Endgame co-author, Jonathan Tepper of Variant Perception, who lets me call him up late for data like this.)

Note that Greece (especially) and Portugal inverted when they began to enter a crisis. And shortly thereafter they went into freefall. Why did it happen so suddenly?

The short explanation is that once the market perceives there is risk, the debt in question has to collapse to the point where risk takers will step in. Do you remember two summers ago, when I related what I thought was a remarkable conversation with two French bond traders in a bistro in Paris after the markets had closed? Greece was all the news. It was all Greece, all the time. And I asked them what their favorite trade was (as I like to do with all traders). The surprising answer (to me) was they were buying short-term Greek bonds. They walked me through the logic. I forget the yields, but they were sky-high. They figured they had at least a year and maybe two before the bonds defaulted, plenty of time to get a lot of yield and exit. And there were hedges.

Italian and Spanish yields are approaching that “bang!” moment. The only thing stopping them is the threat of the ECB stepping in and buying in real size. Which Merkel is against. And the market is starting to believe her, hence the move in yields.

Time to Review the Bang! Moment

One of the most important sections of Endgame is in a chapter where I review (and compare with other research) the book This Time is Different by Ken Rogoff and Carmen Reinhart, and include part of an interview I did with them. This chapter was one of real economic epiphanies for me. Their data confirms other research about how things seemingly bounce along, and then the end comes seemingly all at once. Which we’ll term the bang! moment. Let’s review a few paragraphs from the book, starting with quotes from the interview I did:

“KENNETH ROGOFF: It’s external debt that you owe to foreigners that is particularly an issue. Where the private debt so often, especially for emerging markets, but it could well happen in Europe today, where a lot of the private debt ends up getting assumed by the government and you say, but the government doesn’t guarantee private debts, well no they don’t. We didn’t guarantee all the financial debt either before it happened, yet we do see that. I remember when I was first working on the 1980’ Latin Debt Crisis and piecing together the data there on what was happening to public debt and what was happening to private debt, and I said, gosh the private debt is just shrinking and shrinking, isn’t that interesting. Then I found out that it was being “guaranteed” by the public sector, who were in fact assuming the debts to make it easier to default on.”

Now from Endgame:

“If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.

“Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short-term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget.”

And the following is key. Read it twice (at least!):

“Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence—especially in cases in which large short-term debts need to be rolled over continuously—is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!—confidence collapses, lenders disappear, and a crisis hits.

“Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, which makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained —or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

“How confident was the world in October of 2006? John was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. He was on Larry Kudlow’s show with Nouriel Roubini, and Larry and John Rutledge were giving him a hard time about his so-called ‘doom and gloom.’ ‘If there is going to be a recession you should get out of the stock market,’ was John’s call. He was a tad early, as the market proceeded to go up another 20% over the next 8 months. And then the crash came.”

But that’s the point. There is no way to determine when the crisis comes.

As Reinhart and Rogoff wrote:

“Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!—confidence collapses, lenders disappear, and a crisis hits.”

Bang! is the right word. It is the nature of human beings to assume that the current trend will work itself out, that things can’t really be that bad. The trend is your friend … until it ends. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone “knew” that cooler heads would prevail.

We can look back now and see where we have made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.

Until they didn’t, and then it was too late. What were we thinking? Of course, we were thinking in accordance with our oh-so-human natures. It is all so predictable, except for the exact moment when the crisis hits. (And during the run-up we get all those wonderful quotes from market actors, which then come back to haunt them.)

If it was just Europe and if the crisis could be contained there, then maybe we could focus on something else for a change. But Europe as a whole is critical to the world’s economy. A huge percentage of global lending is from euro-area banks, and they are all contracting their balance sheets. In a banking balance-sheet crisis, you reduce the debt you can, not the debt that is the most needed or reliable. And some of the debt will be to foreign entities. As an example, Austria is now requiring its banks to cover their Eastern European loans with local deposits. Which is of course problematical, as the size of those loans relative to the bank balance sheets and the Austrian economy is huge. According to BIS statistics, Austrian banks’ total exposure to the region equates to around 67% of the country’s GDP, not including the Vienna-based Bank Austria, which is technically Italian.

We could find similar results for other European (mostly Spanish), as well as Latin American banks. And as I note below, this will reach into China and throughout Asia.

The Risk of Contagion in the US

And the US? I am constantly asked what my biggest worry is. What is the largest monster I think I hear in my closet of nightmares? And the answer has been the same for a long time: it is European banks.

Those who think this is all a non-event note (correctly) that US net exposure to European banks is not all that large, and that while it may not be a non-event, it’s not system-threatening. The problem is that little three-letter word net.

Gross exposure is huge, and we are starting to read that regulators and other authorities are becoming concerned. As well they should. The problem is that as a bank sells risk insurance, it can buy protection from another bank in Europe to hedge it. But who is the counterparty? How solvent are they? It was only a month before Dexia collapsed that authorities and markets assured us that the bank was fine, and then bang! it was nationalized.

That is the part we do not know enough about. If European banks are as bad as they appear to be, then that counterparty risk is large. Will sovereign nations step up and bail out US banks on the credit default swaps their banks sold? Care to wager your national economy on that concept selling in today’s political climate?

Contagion is the #1 risk on the minds of European leaders and regulatory authorities, and it should be in the US, too. This points to a massive failure in Dodd-Frank to regulate credit default swaps and put them on an exchange. This is the single largest error in the last few decades, as it was so predictable. At least with the repeal of Glass-Steagall it was the unintended consequences that got us. Dodd- Frank almost guarantees another credit and banking crisis. Don’t get me started.

Since the ECB is for now off the table as a source of unlimited funds (remember I said “for now”), there are calls for funds from a variety of sources. Some new supranational fund, more EFSF “donations,” etc. The only semi-realistic one is IMF participation. If that is seriously considered, then the US Congress should step in and protest. US funds should not be used for governments of the size of Italy and Spain. These are not third-world countries. This is a European issue of their own making and not the responsibility of US taxpayers, or for that matter taxpayers anywhere else. We should “just say no.”

As I have been writing, there is no credible source other than the ECB for the amount of funds needed. Maybe something can be cobbled together under the pressure of a crisis, but for now there is no realistic option. Europe is at the end of the road unless Germany “blinks.” The only thing we can do now is to see how it works out.

If the ECB can’t print, then the rules have to be changed, if the eurozone is to survive. And while a recession is underway.

“Maersk Line, the world’s largest container shipper by volume, plans to cut its capacity on Asia-to-Europe routes, a senior executive said Friday, as the euro-zone debt crisis weighs on international trade.

“Almost all carriers are losing money now … and it looks like 2012 will going to be similarly challenging,” Tim Smith, the company’s North Asia chief, told reporters at a shipping conference.”

Time is not on the Europeans’ side. Let’s hope they can figure it out, but prepare for what might happen if they don’t.

Time to Start Watching China

I am going to begin devoting more time to analysis of Asia in general and China in particular. There are signs of problems developing, and they demand study. Here is just one note (of a dozen) that came across my desk in the last two days. This is from Andy Lees of UBS:

“We saw today that 80% of Chinese construction firms say developers are now behind on payments (late cash flow), and that consequently land purchases are already 42% down y/y (slowing local authority cash flow). We also heard that pricing controls means that utility companies no longer have the cash flow to afford vital imports. Q3 corporate cash flow was down 27%.

“China’s trade surplus is annualizing this year at USD152bn, FDI [Foreign Direct Investing] @ USD114bn yet its FX reserve increase is USD472bn. The attached chart [below] shows Chinese external borrowings which unfortunately were last updated at the end of last year, but the data would infer these have continued to soar.

“I am being told that European banks are now starting to shrink their foreign loan books to meet domestic needs, with Mexico, Brazil and China all big losers. With China now saying they may run a full-year trade deficit next year, and with them unable to afford to import vital coal and other resources without either suffering domestic inflation or without selling its FX reserves, it may now well be time to consider some sort of puts on the yuan. In fact the only reason perhaps not to is that India may collapse first, reducing the competition for coal and giving China a little more breathing room.

China is not a problem in the short term. But there have to be adjustments to keep that status of “not a problem.” The situation bears watching and becoming familiar with, as I am on the record that Japan is the next in line to suffer a real world-shaking crisis. And China, which does not adjust in advance, can suffer contagion effects from Japan. The world is so connected.

My plan now, in addition to reading more is to tap some very good sources who either live in or travel to China a lot. And I will visit China for at least two weeks next summer, depending on publishing schedules. Europe is getting so old hat, and the crisis there will resolve, one way or another. Let’s focus on a different set of opportunities.

New York, China, and Some Links

Last week I had the privilege of meeting Ken Rogoff at the UBS Wealth Management Conference. He graciously allowed me to take a picture with him. I got to listen to a panel with him; Ottmar Issing, noted German former central banker); and Jim O’Neil, Chairman, Goldman Sachs Asset Management; along with Alan Greenspan. Your basic $400,000 panel, assuming O’Neil was free. Only Greenspan spoke separately (and gave a very short speech). I could have listened to all of them a lot longer.

There was remarkable convergence with the panel I was on, except that I am under no pressure to be politically correct, or simply do not recognize that I should be. Everyone was concerned about Europe. I was not seen as alarmist by any fair comparison.

It was also good to have lunch with Art Cashin and finally hear him speak. He got two standing ovations, both of which he deserved. Not many know his pivotal role at the NYSE or have his level of experience and trust. He is a true legend. And if luck and schedule hold, I get to be with him for dinner Monday night, along with Barry Ritholtz, Barry Habib, Michael Lewitt, Rich Yamarone (of Bloomberg), and maybe Dennis Gartman, as well as Tiffani. What a treat.

Then it’s back home the next morning to be here until January 10, when I fly to Hong Kong and Singapore.

Let me commend to you an interview the BBC did with my friend Kyle Bass of Hayman Advisors, which is the opening story in the current best-selling book by Michael Lewis, Boomerang! You can listen to it at It is 24 minutes, and the video does not seem exactly synced, so just listen to someone who is always thinking about what lies ahead and has done a good job of it so far. And think with him. And kudos to Kyle for handling a very hostile interview so well. He has more patience than I do.

I was at the Cleveland Clinic on Monday and saw eight doctors for a general check-up and some real focus on my arm. Turns out to be a torn rotator cuff and also tennis elbow. They are not related, and no surgery needed, but there is rehab.

And then I heard from Richard Russell. Let me belatedly wish Richard an even faster recovery than I enjoy. He broke his hip and is graciously sharing his rehab with readers, as he has shared his life over the years. He wrote yesterday, “I heard rehab for a broken hip was hard. That’s a false statement. It’s harder than hard. You have to build the strength in your good leg and both of your arms, to a point beyond your wildest fantasies. In other words, three of your limbs have to make up for the loss in strength in the leg that you can’t use.”

Makes me think “What arm pain?” I am embarrassed to even mention it. Richard, as in everything, continues to be my hero.

It is time to hit the send button. I fly to NYC Sunday morning to meet with Bill Dunkelberg, and we will spend a long afternoon detailing our book on jobs and employment. Then Tiffani comes in for dinner and we have meetings all day Monday for our business. So much is happening. Have a great week and enjoy the season. Figure out how to spend more time with family and friends. I know I need to.

Your just stopping here before it becomes another book analyst,

By John F. Mauldin
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Make-Or-Break Week For Europe

by John Rubino on November 27, 2011

The people buying bonds issued by Italy and Spain are clearly looking past the dysfunctional balance sheets and focusing on Germany’s reluctance to let a major PIIGS country default. So an Italian bond, in the mind of the market, becomes a German bond.

But this sword cuts both ways. If European debts are tossed into one big communal pot with everyone responsible for everyone else, then buying a German bond is the same thing as buying an Italian bond — since German taxpayers are ultimately on the hook for both. Viewed that way, lending money to Germany for ten years at 2% is hardly risk-free.

Which is why the failure of Germany’s most recent bond auction is so interesting:

German Bonds Fall Prey to Contagion
Nov. 26 (Bloomberg) — European bonds slumped after Germany failed to draw bids for 35 percent of the offered amount at an auction of 10-year bunds, stoking concern the region’s debt crisis is infecting even the safest sovereign securities.

Thirty-year German bonds slid, with yields rising the most since the week through Sept. 3, 2010, amid concern Germany will need to offer greater financial support to its euro-area peers. “Non-residential investors are increasingly troubled by events,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “It was ignited by the 10- year bund auction result showing further credit dilution, and hasn’t been helped by the outcome of Italian sales.”

Thirty-year German bond yields rose 21 basis points to 2.83 percent at 4:54 p.m. London time yesterday, from 2.61 percent the week earlier.

Total bids at the auction of German securities due in January 2022 amounted to 3.889 billion euros ($5.15 billion), out of a maximum target for the sale of 6 billion euros, sparking concern that the turmoil emanating from Greece’s debt crisis now risks engulfing the region’s biggest economy.

And last week was just the warmup for next week’s deluge of new borrowing:

Italy Leads Busy Week of Euro-Zone Bond Sales
FRANKFURT—Italy, Belgium, Spain and France all plan to sell bonds next week, a big test for a region still reeling from unexpectedly weak demand for debt from its German core.

Given the surge in bond-market yields in recent weeks, all four countries are expected to pay considerably more for cash than they did at their previous auctions. Just how much higher the tab turns out to be will indicate the extent to which investors are giving up on the ability of politicians to take tough measures to reduce their debt loads.

All told, five euro-zone governments are together expected to sell about €19 billion ($25.36 billion) in debt next week, more than double the amount three governments sold this week.

Italy will offer up to €750 million in 2023-dated inflation-linked bonds on Monday, followed a day later by up to €8 billion in debt maturing in 2014, 2020 and 2022. The sales come after the country on Friday paid 6.5% to borrow six-month funds, nearly double the 3.5% it paid only a month ago, and its bond yields again soared, to worrying levels solidly above 7%.

Meanwhile, the shape of the bailout is becoming more clear:

IMF Readying Loan of as Much as $794 Billion for Italy, La Stampa Reports
The International Monetary Fund is preparing a 600-billion euro ($794 billion) loan for Italy in case the country’s debt crisis worsens, La Stampa said.

The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt, the Italian daily reported, without saying where it got the information. Monti could draw on the money if his planned austerity measures fail to stop speculation on Italian debt, La Stampa said.

Italy would pay an interest rate of 4 percent to 5 percent on the loan, the newspaper said. The amount could vary from 400 billion euros to 600 billion euros, La Stampa said.

Huge week coming up
It’s no surprise that a new bailout is announced today. Without a compelling distraction, the markets would fixate on upcoming bond sales and would probably demand even higher rates, effectively bankrupting the PIIGS countries and hobbling Germany and France. So something big has to happen, and right away.

The International Monetary Fund, meanwhile, isn’t some independent government with farms and factories and oil wells that it can tax to fund its foreign aid activities. It’s just a bank, sort of, holding deposits from the US and other formerly rich countries, which it then lends to supposedly poorer ones. So an IMF loan to Italy is in reality a US/German bailout. There is no free lunch, there is no extra money sitting around. Everything the IMF has comes, directly or indirectly, from the printing presses of safe haven governments.

And the soon-to-be-announced 600 billion euro bailout is just for Italy. Since Spain, Ireland and Portugal between them owe just as much and are just as functionally bankrupt, expect them to get as much or more in coming weeks.

Which brings us to the nature and function of money. This game is only possible while the US and Germany have currencies with relatively stable values. Should the dollar and/or euro start to fall, then loan guarantees denominated in those currencies become a lot less attractive. Bond prices will fall commensurately, and the owners of those bonds will have massive losses that they’ll have to acknowledge one way or another. The result: zombie banks that can’t afford to lend and underfunded pensions that can’t meet their obligations — and the need for even bigger bailouts.

That’s why this week is so huge. If investors realize that German bonds are really Italian bonds, they’ll demand higher interest rates from all involved (and we should be short the major stock indexes). And if investors realize that the IMF is just the Fed/ECB in drag, they might finally lose faith in those banks’ currencies (in which case gold and silver will soar). In either case, it’s game over for the current system.

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European debt crisis: Investors’ confidence shows signs of crumbling

By and , Updated: Sunday, November 27, 8:24 PM

European leaders will continue this week to slowly hammer out new structural measures to shore up the euro currency zone, but market confidence among investors already showed signs of crumbling late last week.

One month after European leaders struck deals over a bailout fund and a debt restructuring for Greece, financial markets are again gripped with pessimism and impatiently looking for more.

Germany is pressing for tighter fiscal discipline through budget controls that would initially draw approval from a few of the 17 nations that belong to the currency union without requiring time-consuming revisions of the union’s treaty. Critics say the plan would effectively create two euro zones, a central one paying lower interest rates and a peripheral one paying higher borrowing rates.

Meanwhile, international investors are holding back, said sources familiar with the financial industry, because of uncertainty about the future of the euro zone and worry about how further downgrades of sovereign bonds by credit agencies might hurt banks.

Banks in Europe have also practically stopped lending to other banks, a key task of the financial system that central banks are now performing. And international financial officials fear a self-reinforcing crisis of confidence that could slow down economies — and damage financial institutions and governments alike — just as experienced technocrats are taking charge in Greece and Italy.

“Europe needs to understand that financial markets don’t work on political timelines, and they are already a long way behind the curve,” Australian Treasurer Wayne Swan said in his weekly economic note over the weekend. He said European Union leaders had to act quickly to prevent a “slow-motion train wreck.”

“Over the past month, it seems to have been two steps forward, one step back for Europe,” Swan added. “The region’s policymakers have been frustratingly slow to build on the framework announced on October 27.”

In an interview Sunday on Canal Plus TV, France’s budget minister, Valerie Pecresse, said, “We won’t restore confidence unless we show proof — very quickly — about the unfailing solidity and solidarity of the euro zone.” In contrast with German officials, she said an “overhaul” of European treaties was needed that would include “real regulators, real sanctions” to restore confidence.

German finance minister Wolfgang Schaeuble said in an interview on ARD television Sunday: “We must together set up institutions that secure trust in the euro. Everything that detracts from that is damaging.”

Upcoming tests

European financial ministers meet this week, but next month holds bigger tests on the political and economic front. On Dec. 5, Italy’s new prime minister, Mario Monti, is due to present a new fiscal plan, most likely with the support of the country’s major parties but badly in need of support abroad. On Dec. 9, there will be a summit meeting of the E.U. that could be marred by disputes over euro bonds. Such bonds would be jointly issued by the 17 member states in the euro zone, but German Chancellor Angela Merkel has rejected the idea. Schaeuble called them “dangerous.”

Then on Dec. 20, Spain’s new prime minister, Mariano Rajoy, takes office. He faces large debts in sectors outside the central government — such as corporations and municipal governments — that could turn into large nonperforming loans for the country’s big banks.

And what will happen in the interim?

Late last week, Germany, the continent’s strongest economic power, could not sell all of its sovereign bonds in an auction. And despite the recent selection of Monti, a veteran technocrat with a good grasp of Italy’s financial needs and broad support in domestic opinion polls, Italy had to pay investors 6.5 percent on six-month bonds in an auction Friday, a record in the euro era. In addition, Standard & Poor’s downgraded Belgium’s credit rating.

“The good news is that practically everyone agrees that the sovereign debt market does not properly reflect the true default probabilities,” Erik F. Nielsen, UniCredit Global’s chief economist, said in a letter to clients Sunday. But he said it wasn’t clear “how long one might think they’ll continue before sanity returns to the debt market.”

Fearful of what could happen in financial markets this week, Belgium’s caretaker government, in office since June 2010, held a marathon 19-hour negotiating session and broke a more-than-one-year-old deadlock over its budget. It said it would agree to run a deficit of 2.8 percent of gross domestic product, within the E.U. target range, and to balance the budget by 2015 through a package of austerity measures, according to the Associated Press.

Also last week, Austria took measures to rein in its three largest banks — UniCredit Bank Austria, Erste Group and Raiffeisen Bank International — by ordering higher capital levels and curbs on the growth of their lending in Eastern Europe.

A closer union

Many of the euro-zone countries are moving toward a closer fiscal union that could, down the line, try to prevent future crises by imposing mandatory penalties on profligate countries such as near-bankrupt Greece.

Tighter fiscal discipline might persuade the German government to drop its resistance to the more aggressive tactics that a chorus of economists now say may be needed to quell the crisis.

At the center of the debate is the role of the European Central Bank. The ECB has already waded into bond markets, buying up the debt of troubled euro-zone countries to try to bring down borrowing costs and provide liquidity to banks. But the ECB has been straining as more investors shy away from the debt of countries such as Italy.

Countries such as France are calling for the ECB to effectively print massive amounts of new euros and launch a much larger bond buyback program that could ease the skyrocketing interest rates in countries such as Italy and Spain.

But the Germans have staunchly resisted a beefed-up role for the ECB, in part because of fears of inflation and because such a plan would rob indebted nations of the urgency to undertake major economic policy changes.

“Right now we are very close to the edge,” said a senior European diplomat who requested anonymity to speak freely on the matter. “There needs to be some quick decisions, but I am not yet convinced that the Germans are really willing to change their stance.”

In the meantime, concern is focusing on Italy and Spain, the euro zone’s third- and fourth-largest economies, where borrowing costs are climbing toward levels that would be unsustainable over the long term.

Some analysts have said that Italian officials have privately begun mulling over contingency plans to avoid a default. They include potentially forcing a one-time levy on Italian households, raising enough cash to scoop up Italian bonds now seen as too risky by a growing number of investors.

“You could call it an internal bailout,” said Raj Badiani, economist with IHS Insight in London. “Italy is a country with a large amount of private wealth. It could be tapped if the situation worsens there.”

But other economists say the recent interest rates, as high as they are, would become a crisis for Italy only if they remained high for a period of months.

An Italian newspaper also said that the International Monetary Fund was drawing up a $800 billion assistance package for Italy, but financial sources who asked not to be identified said that such a plan was unlikely because Italy does not need such a fund and because the IMF does not have the resources to amass such a package.

Staff writer Michael Birnbaum in Berlin contributed to this report.

© The Washington Post Company


Oh and did you see that


Congress members shorted the market in 2008, made big bets against the US economy

Posted by NGE on May 04, 2010 | Leave a Comment


Eurozone Being Swallowed by Expanding Debt Black Holes, Mega Bond Market Profits and Default Booms

Interest-Rates / Eurozone Debt CrisisNov 28, 2011 – 04:41 AM

By: Nadeem_Walayat


Diamond Rated - Best Financial Markets Analysis ArticleThe stock markets plunged last week and euro-zone bond market volatility increased with PIIGS yields spiking to new Euro highs as pressure mounts on the ECB to start printing money to monetize bankrupting PIIGS debt that effectively act as expanding debt black holes that threaten to swallow first the whole of the Eurozone and soon after collapse the worlds financial system.

The pressure cooker reached a new extreme with the apparent shock of the FAILURE of a German Bund auction as the eurozone debt crisis contagion appeared to have spread to Germany as it experienced its worst bond auction since the launch of the Euro in failing to sell some 2/3rds of a routine auction which the mainstream press took as evidence of the flight of capital from the euro-zone accelerating on risks of announcements for a Euro-bond and the start of inevitable money printing of several trillions of euros as I have warned of several times over the year as being inevitable, where the longer the delay will result in more desperate actions.

However the facts of the German bond auction failure are more to do with German greed than imminent euro-zone contagion, as Germany has sought to benefit from the internal flight of capital by offering its bonds at successfully lower interest rates culminating in the record low yield offering of just 1.98%, a rate which is in the face of 3% Inflation which the bond markets were just not able to stomach, so in reality it is a technical failure and nothing akin to that which has hit the PIIGS and lately spreading to hit France and Belgium.

The Germans continue to resist out right money printing and implementation of Euro bonds because they know where it will lead to, i.e. lazy southern states that constantly spend far beyond their means (tax revenues) will put ever greater pressure on the ECB to print ever greater amounts of euros this resulting in ever higher annual inflation rates until the whole eurozone resembles what the likes of Greece, Italy and Spain were before they joined the Euro, i.e. basket case high inflation economies that rely on euro-zone core to finance government spending.

The problem with euro-zone is that in its present form it is actually such a hard a currency when compared against the money printers such as the UK, US and Japan, that it is threatening to blow apart under the pressure of being too strict in terms of relative monetary policy.

For instance the ECB purports to cleanse its bond purchase of PIIGS debt by selling other debt and assets, when it should be printing money to monetize the debt as other soft currencies are doing, i.e. acting to relieve the building pressure instead of being too hard and too strict the Euro-zone continues to be pushed towards the abyss because there is no real mechanism for dealing with the internal imbalances between the PIIGS and the likes of Germany the consequences of which are playing out in the euro-zone bond markets.

The solution remains as I voiced near 2 years ago at the very start of the current phase of the inflation mega-trend which is that governments have no choice but to print money and monetize debt that will result in a decade long high inflation for ALL currency blocks (See January 2010 The Inflation Mega-trend Ebook (FREE DOWNLOAD), so regardless of where the Eurozone stands today it will also eventually end up as being a high inflation money printing debt monetizing economic block.

The Eurozone crisis illustrates a key point that fails to register with many market commentators and that is that the right to print money by sovereign states is a major advantage, the lack of the ability to print money is a major flaw in the Euro that needs to be corrected which probably does mean implementation of a Euro Bond. Which is why US and UK debt yields are hitting record lows whilst Italy 10 year bonds are spiking above 7% against Britain with similar level of indebtedness currently stands at just 2.20%. which is because Britain can print as much money as it needs to, whilst Italy cannot print a single Euro! Therefore the Eurozone has effectively crippled all of the PIIGS and put them at a fundamental disadvantage compared to countries outside of the Eurozone – ALL to the advantage of Germany which gets record low interest rates AND a weak currency to feed its exports revenue generating machine.

Remember that there is no solution that does not deal with the core problem which is that countries such as Greece continue to accumulate more debt whilst the economy contracts thus continues to maintain a large budget deficit which means debt to GDP continues to trend higher, and well above 100% towards 200% and bankruptcy.

Structural flaws in the eurozone remain as I discussed well over a year ago in May 2010 (11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt) . Long before the mainstream press and BlogosFear that Germany is effectively bankrupting ALL of the eurozone because they cannot compete it, so my solution was and remains for Germany to leave the eurozone. The contagion is spreading from Greece that is consuming all of the other PIIGS, and lately Italy with France seeing its borrowing rates soar to their widest spread against German Bund’s in a decade.

The Case of Italy

ECB is putting pressure on Italy to adopt economic austerity, by holding off on buying bonds and pushing Italian yields back below 6%, last trade was at 7% after having spiked to 7.5%.

ESFS Bailout Fund Busted
The agreed fund of 440 billion Euros guaranteed on the back of Germany has already seen Euro 150 billion committed to Greece, Portugal and Ireland, with 106 billion committed to the support of the banking sector, leaving a balance of just 184 billion (of funds yet to materialise) which cannot cover Italy’s Euro 1.4 trillion of debt, never mind Spain which combined would be looking at financing of at least Euro 400 billion per year. Therefore the Euro 1 trillion announced bailout fund without details now will need to materialise in detail as there already is a financing hole of at least Euro 216 billion for just Italy and Spain, never mind further support for the remaining PIIGS and the banking sector, collectively this would consume an approx 500 billion over just 2012, and probably a similar amount for 2013 therefore confirming my expectations for an ultimate bailout fund in the region of Euro 2-3 trillion to just stabilise the Euro-zone against the prospects of collapse of the Euro-zone banking system and thereby the whole world’s banking system.

Again the only solution is for the central banks to print money and monetize debt. That is what the ECB will do which will feed the euro-zones inflation mega-trend just as Britains money printing starting in March 2009 has fed the UK’s inflation mega-trend pushing inflation indices to 20 year highs.

Invest in Italian Bonds?
With italian bonds yielding 7.22% fro 10 year, 7.65% 5 year and 7.28% for 2 year, it can be quite enticing for investors to contemplate buying at such deep discounts. However the problem is how confident can one be that these yields won’t rise still higher to above 7.5%, especially as 6% was supposed to be have been the danger level and 7% the critical bailout level.

The point is that financing costs of above 6% are not sustainable in terms of debt interest payments that risks triggering an exponential debt interest spiral that ensures ever higher yields all the way to default, just as has taken place with Greece and likely to take place with at least Portugal and Ireland. Therefore Italy is at that critical point where it has only a few months to get the yields lower before significant amount of debt starts to be sold at ever higher yields.

In this respect Italy is seeking to finance approx Euro 25 billion during the remainder of 2011, with 2012 seeing a sizable Euro 350 billion of bonds marketed most of which will be during the first half of 2012, so Italy does not have a year or two to sort itself out it has perhaps three months at most and this is the risk that investors need to contemplate, in which respect I am not willing to put my own money on the line for this risk, i.e. that I would effectively be taking an approx 25% risk on capital against a potential return of 7%, plus a one off capital gain of 10%  so 17.25% potential against a 25% risk (before tax, currency and inflation), against UK 2.25% where the effective risk is inflation as the UK is stealth defaulting by means of high inflation, so outright default is an extremely low probability.
The problem is Italy should really be paying about 7-8% anyway IF it were outside of the eurozone and printing money resulting in high inflation.

Therefore without the ability to print money Italy will default on its debts which means someone is going to have to print money and monetize Italy’s debt, who ? the ECB is the only real candidate to do so, this will result in higher eurozone inflation, especially when  France comes knocking on the ECB’s bailout door.

So far Germany has prevented the ECB from printing money proper along the lines if the UK and USA, how long will Germany hold out on money printing. My view as it has remained for approaching 3 years now and as illustrated in the conclusion of the Inflation Mega-tend ebook that all governments will print money to monetize debt which will result in decade long high inflation.

My last analysis estimated money printing of Euro 2-3 trillion, which given the euro-zone debt dynamics remains as the likely amount to agree to at this point in time, though the longer the Eurozone delays in printing money and monetizing debt, then the debt crisis contagion will mean a higher eventual bill, for instance if the eurozone continues as it has done for the past year to delay and muddle through with half measures then the bailout money printing bill will have risen to more like 4  trillion euro’s, so time is critical.

Off course there is a price for money printing and that is INFLATION, which you CAN relatively easily hedge against inflation in virtually any asset that CANNOT be printed , that’s precious metals, commodities, land and housing (yes you have to do your research because land and housing are location dependant) or paper assets that are leveraged to inflation such as dividend increasing stocks and inflation linked government bonds (which are subject to inaccurate inflation indices that consistently under reported real inflation)

As euro-zone core countries are consumed by the debt contagion black holes then so will countries such as Germany experience their own soaring interest rates, which will prompt Germany to panic and start money printing and monetize its own debt and thereby will be the trigger for huge Eurozone wide money printing inflation.

Bankrupting Sovereign Bond Market Mega-Profit Opportunities

Whilst the mainstream press focuses on the bankrupting PIIGS the rest of the bankrupting sovereign states outside of the eurozone continue to fly under the radar, as illustrated by smug politicians in the UK attempting to lecture Europe on how to solve its debt crisis. However as the following table illustrates the debt crisis is likely to come knocking on the doors of the UK and Japan sooner rather than later.

Country Total Debt (Public+Private) % GDP 10 Year Bond Yield

UK and Japanese government bonds are grossly over valued and on the precipice of moves resulting in sharply higher interest rates (yields). The bottom line is that the UK Gilt has reached its safe haven status peak that is being artificially supported by the Bank of England money printing (electronically) to buy government bonds which is resulting in very high inflation, and because the bond markets are manipulated by artificial buying then this will have to ultimately have to play itself out in the currency markets which implies a sharply lower sterling exchange rate even against an exploding euro, though note that ALL currencies are in FREE FALL against one another, it all depends on the relative rate of free fall as measured by the real rates of inflation which for the UK is approx 7%.

People of Britain sit up and take notice, the UK is in a far worse debt position than virtually every major western nation, whilst Italy is making the headlines today, then where the PIIGS are today the rest will eventually follow, that’s the UK and Japan first and eventually France, Germany, US, ALL of these countries bond markets are trading at or near record low interest rates. This gives investors a series of opportunities of the decade to profit from the inevitable by shorting bonds of first the UK, then JapanFrance, Germany and finally the United States, which given the debt mountains the magnitude of profit potential is likely to be huge, nearly as large as for those that shorted Greek bonds 2 years ago.

In terms of the sequence of which bond market is likely to explode sooner rather than later, then I would rank the UK and Japan as the prime candidates to join their PIIGS brethren with soaring interest rates and collapsing bond markets, this collapse in market confidence and prices will likely take place within a matter of weeks that could be triggered at any time by ironically good news out of the euro-zone as that would switch the global bond markets attention to the fact that the UK and Japan are just as bankrupt as any of the PIIGS, and as we have seen with the PIIGS, a sequence of financial shockwave’s could result in a collapse of the Coalition Government. This is not idle speculation but a trend that is in motion which I will expand upon in my next in-depth analysis as to its consequences.

Again Take Note, PIIGS Sitting on Interest rates of between 6% to 7.5% have similar or even smaller debt mountains to that of the UK, Japan, France, Germany and USA, which means that this is the normal market interest rate range for western bond markets. Japanese Bonds sitting at 1% are the short of the decade, UK bonds sitting on 2.20% are the short of the decade, German bonds sitting at 2.20% are the short of the decade, US bonds sitting on 1.90% are the short of the decade…….

The Sovereign Debt Crisis and the Inflation Megatrend
If you recognise the fact that the primary economic lever at disposal of governments and central banks is INFLATION, then you will begin to understand how the global economic system really works and not as vested interest academics want to model of how it should work.

The bottom line is that Governments NEED inflation. They need inflation to BUY votes, they do this by printing money or debt. There are a multitude of mechanisms that governments employ to print money from the fractional reserve banking system creating credit, to governments printing debt, to governments printing electronic money to monetize their debt, to governments printing bank notes.

This debt be it banking sector, private or government is devalued by INFLATION, the higher the the inflation the more votes governments can buy.

What cash obsessed deflationistas’ FAIL to understand is that the governments will not allow deflation to take place, they can and WILL FORCE YOU TO SPEND YOUR SAVINGS, How ? By using INFLATION. They will PUSH inflation ever higher until you SPEND YOUR EARNINGS, LIQUIDATE YOUR SAVINGS, else you will LOSE ALL OF YOUR HARD EARNED WEALTH.

This is the exact experience for those in the UK, where after tax even on the official CPI that is at least 2% below real inflation, UK savers are losing approx 3% per annum of the value of their savings. How long are you going to save for if you are losing 3-5% of the value of your savings. Your going to move your cash out of deposits and into capital investments or consumption, this is called increasing the velocity of money, it’s just that governments love inflation so much that they get carried away and inflation runs far ahead of anything that anyone ever imagined it would be.

So whilst volatility in the stock market may be high, I know that in the long-run my portfolio of dividend increasing stocks will HEDGE me against the Inflation Mega-trend.

The current eurozone debt crisis is as a consequence of the inability of the bankrupting PIIGS to print money, something they gave up because they wanted a stable currency instead of a currency that is destined to wipe out all savings every 10 years. So these stealth defaulting states did make the right decision for joining the Euro, but the error is in the design of the euro-zone for it is not a properly functioning currency because it does not allow for stealth default for bankrupt states by virtue of the German fear of hyperinflation instead it is designed to be ANTI INFLATION MEGA-TREND for as long as Germany does not economically suffer, for if Germany suffers then Inflation is back on the menu! but as I explained earlier the worlds financial system is designed to be inflationary, this means that either the ECB PRINTS MONEY and monetize’s debts and therefore feeds the Eurozone inflation mega-trend OR the PIIGS default on their debts AND STAY in the Euro so as to replicate aspects of the Inflation Megatrend boom bust business cycle, though with far greater monetary stability than the PIIGS usually experience because of their German fiat currency anchor.

This is what those in charge of the Eurozone need to recognise and implement, i.e. mechanisms for periodic orderly defaults of states in line with the business cycle, which is the ultimate solution to the crisis’s that I expect and which supports my ongoing analysis that Greece will default on its debts AND stay within in the Eurozone.

Economic Boom Soon Follows Debt Default

The best solution for the debt crisis is for bankrupt countries to have a short-sharp shock to default on total debt, get the economic contraction out of the way,shrink the public sector and then out of the pain implement sound government spending policies which will ignite the next economic boom.

Why economic boom when every one is obsessing over economic collapse ?

Because the markets DISCOUNT THE FUTURE, the panic plunge of asset prices as a consequence of the debt default and economic contraction will present investors with buying opportunities of the decade! As investment floods in, especially when the the Euro with Germany behind is relatively stable, compared to what would happen to the likes of the Drachma, and Lira, which means cheap assets, no debt, small public sector, low wages and relatively stable inflation, what more could investors ask for?

Therefore the economy then booms, and a few years down the road governments again start to increase spending and the size of the public sector as governments borrowing once more goes out of control and the economy goes bust, and so repeats the boom bust cycle, however in the meantime investors and workers profit and prosper.

So don’t write off the bankrupting PIIGS for if they do have their debt cleansed, and shrink their public sector and wages to a competitive level then watch their economies BOOM for MANY YEARS! (depending on the competency of their governments to not mess things up, as not all countries governments have shown themselves to be equally competent, for instance Ireland and Spain appear to be more competent than Greece and Italy which has been in a growth recession for nearly as long as Japan as a consequence of NOT defaulting on its debts many years ago).

Protect Your Deposits Against Collapse of the Banking System

Meanwhile take note of my preceding articles warning to protect your deposits, not because I think that the euro-zone will collapse, but because the risk of collapse is NOT ZERO, therefore the risk of loss of funds deposited in any UK bank is NOT ZERO, as once the euro-zone collapses it will likely take the whole global financial system down with it, so you need to protect your deposits by ensuring you are within the FSCS limit of £85k per banking licence group.

Whilst actual loss of funds is a very low probability, what is more probable during an unfolding crisis is that deposits in Euro-zone banks are frozen, therefore I would be reluctant to hold any funds in a euro-zone linked bank no matter how much propaganda is pumped to pretend that their UK arm is separate and in no way connected to their group head office in for instance in Spain, as after accounts are frozen it will be too late to wish you had acted when you had the chance to do so…. more steps on protecting your deposits – Savers Protect Your Deposits From Bankrupting Banks and Quantitative Inflation.

I still stand by my long standing conclusion that Germany will leave the Eurozone and the Eurozone will print trillions to prevent a banking system collapse, both of these outcomes will feed the Inflation mega-trend.

More on the Inflation Mega-trend in my next newsletter, ensure you are subscribed to my always FREE Newsletter to get this in depth analysis in your email in box.

Your UK Bond market shorting, pulling funds out of euro-zone banks analyst.

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By Nadeem Walayat

Copyright © 2005-2011 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook’s – The Inflation Mega-TrendThe Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

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Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Prepare for riots in euro collapse, Foreign Office warns

British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain.

British expats braced for collapse of Euro

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way Photo: BLOOMBERG
James Kirkup

By , Deputy Political Editor

10:00PM GMT 25 Nov 2011

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.

Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

“It’s in our interests that they keep playing for time because that gives us more time to prepare,” the minister told the Daily Telegraph.

Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.

Greece has seen several outbreaks of civil disorder as its government struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses.

Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash.

Fuelling the fears of financial markets for the euro, reports in Madrid yesterday suggested that the new Popular Party government could seek a bail-out from either the European Union rescue fund or the International Monetary Fund.

There are also growing fears for Italy, whose new government was forced to pay record interest rates on new bonds issued yesterday.

The yield on new six-month loans was 6.5 per cent, nearly double last month’s rate. And the yield on outstanding two-year loans was 7.8 per cent, well above the level considered unsustainable.

Italy’s new government will have to sell more than EURO 30 billion of new bonds by the end of January to refinance its debts. Analysts say there is no guarantee that investors will buy all of those bonds, which could force Italy to default.

The Italian government yesterday said that in talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Prime Minister Mario Monti had agreed that an Italian collapse “would inevitably be the end of the euro.”

The EU treaties that created the euro and set its membership rules contain no provision for members to leave, meaning any break-up would be disorderly and potentially chaotic.

If eurozone governments defaulted on their debts, the European banks that hold many of their bonds would risk collapse.

Some analysts say the shock waves of such an event would risk the collapse of the entire financial system, leaving banks unable to return money to retail depositors and destroying companies dependent on bank credit.

The Financial Services Authority this week issued a public warning to British banks to bolster their contingency plans for the break-up of the single currency.

Some economists believe that at worst, the outright collapse of the euro could reduce GDP in its member-states by up to half and trigger mass unemployment.

Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder.

“When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” UBS said.


and on and on

Are you prepared to meet your Lord

The One and Only Creator of the Universe and Almighty Majestic Most Merciful God


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