Brace yourselves

Last week I wrote an article titled ‘Waiting For The Collapse‘.  Basically, I pointed out that all the signs indicate that the economies of the industrialized world are about to fall off the cliff.

Even in the few days since I wrote that article, the situation has deteriorated.  Europe is now right on the brink.  I predict a major economic convulsion there within weeks – certainly within two months.  I shall be astonished if it can be avoided longer than that.  Any such convulsion will, of course, have a direct and immediate impact on the US economy as well.

As evidence, consider the following headlines from the past couple of days alone.  A brief excerpt is provided beneath each one – click the headline to read the whole thing.  Bold print is my emphasis.

Greece on brink of collapse

Following this month’s inconclusive election, Greek parties yesterday failed again to agree a new government. A new election, most likely to be held in mid-June, could see more gains for parties that want to reject the austerity measures that are a condition of international efforts to bail out the debt-crippled state.

Karolos Papoulias, the Greek president, warned party leaders that their continued failure to agree was risking “fatal consequences”. Citing a secret government document, he said Greeks were already pulling £80 million a day out of the country’s banks. Almost €1 billion (£795 million) has been withdrawn since the last elections on May 6.

“The extension of political instability will lead to fatal consequences. The absence of government is a serious risk to the financial security of the Greek people and our national existence,” the president was reported as saying.

Mr Papoulias said he had been warned by the central bank and finance ministry that the country faced “the risk of a collapse of the banking system if withdrawals of deposits from banks continue due to the insecurity of the citizens generated by the political situation”.

Global lenders face ‘killer losses’ on Greek debt

Foreign holders of €422bn of Greek debt were warned to brace themselves for “killer losses” as coalition talks in Athens collapsed, threatening Greece’s future in the eurozone.

. . .

Yesterday the IESEG School of Management said the total losses could reach €66.4bn for France and €89.8bn for Germany. “Assuming that the new national currency would depreciate by 50pc against the euro, which is realistic, the losses for French banks would reach €19.8bn. They would reach €4.5bn for German banks,” it said.

The Institute of International Finance has estimated that the global cost of a Greek exit could hit €1 trillion [about US $1.3 trillion]. When Argentina defaulted in 2001, foreign debtors lost around 70pc of their investments.

. . .

As experts called for the IMF and other international bodies to intervene, IMF managing director Christine Lagarde told French television she was “technically prepared for anything”.

Italy’s banks shaken as economic slump deepens

As Greece erupts, Italy is moving into the eye of the storm. Its economy is contracting at speeds not seen since the depths of the slump in 2009 as draconian austerity bites, greatly increasing the risk of social revolt and a banking crisis.

With the world’s third largest debt after the US and Japan at €1.9 trillion (£1.18 trillion), it is big enough to bring the global financial system to its knees. It is also in the front line of contagion as the Greek crisis metastasizes.

. . .

Rising anger has led to a spate of violent attacks by terrorist groups over recent weeks, all too like the traumatic ‘years of lead’ in the late 1970s. The government is mulling use of troops to protect targets after anarchists shot the head of Ansaldo Nucleare last week and hurled petrol bombs at tax offices.

. . .

Italy’s former premier Romano Prodi said the EU risks instant contagion to Spain, Italy, and France if Greece leaves. “The whole house of cards will come down”, he said.

Francois Hollande has ten weeks to avert a French bond crisis

French economists say the moment of danger will come later this summer … as the full force of Europe’s contraction crisis hits France.

“They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.

. . .

Paris has a strange atmosphere right now. It is hard to get a table at the bistros of Saint-Germain, yet people have a sense of foreboding.

They know austerity has hardly begun. The press is full of stories that the biggest property bubble ever known in France has begun to deflate. Yet the party goes on. Perhaps this is what it felt like in May 1931, avant le déluge.

. . .

Little has been done so far beyond repeal of the infamous 35-hour week. Labour rigidities – employment protection, high tax wedge and minimum wage (SMIC), etc – are among the most entrenched in the OECD club. The unreformed French state takes 55pc of GDP.

The current account has swung from a surplus of 3pc of GDP to a deficit of nearly 2pc in twelve years. France’s share of EMU exports has dropped from 17pc to 13pc. French trade data has become an “event risk”, keenly watched by traders.

Spain Struggles to Control Escalating Bank Crisis

Spain’s banks are now amongst the greatest problem children in the euro zone. Developments on Wednesday night underscored just how dire the situation has become. The Spanish government announced that Bankia, the country’s fourth-largest financial institution, would be largely nationalized. The announcement, made with little notice, suggests a hectic situation. The cabinet of Prime Minister Mariano Rajoy had actually been planning to announce a new bailout program on Friday.

. . .

the biggest problems in the crisis have been the banks that are “too big to fail” — institutions whose insolvency had the potential to create such systemic problems that governments had no choice but to bail them out. This also appears to be the concern that prompted the Spanish government to nationalize Bankia, which still manages about one-tenth of Spanish savings.

In addition, the scope of the risks in Spain’s banking sector are still very difficult to assess. The International Monetary Fund attested in April that “a major and welcome restructuring of the savings bank sector is taking place, but the capacity to cope with the needed adjustments differs significantly across the system.”

. . .

Madrid’s room for maneuver is also limited by the fact that it is currently seeking to bring a precipitous rise in government borrowing under control through far-reaching austerity measures. The situation on the labor market is getting increasingly more dramatic, with one in four Spaniards currently out of work. That in turn intensifies the situation at the banks: Increasingly, it’s not just bad credit from misguided boom-era construction projects that is proving to be a problem. It is also the fact that normal workers are losing their jobs. “That is a self-perpetuating negative factor,” Burghof says.

And, lest you think the problems are confined to Europe, how about China?  Ambrose Evans-Pritchard predicts deflation there, rather than inflation.

All key indicators of China’s money supply are flashing warning signs. The broader measures have slumped to stagnation levels not seen since the late 1990s.

. . .

If China were a normal country, it would be hurtling into a brick wall. A “hard-landing” later this year would already be baked into the pie.

Whether this hybrid system of market Leninism – with banks run by Party bosses – conforms to Western monetary theory is a hotly contested point. The issue will be settled one way or the other soon.

What seems clear is that China’s economy did not bottom out as expected in the first quarter. It is flirting with real trouble. Yao Wei from Societe Generale says a blizzard of awful data “screams out for easing”.

. . .

All the BRICs need watching. India’s industrial output fell 3.5pc in March. The country seems caught in a 1970s stagflation vice. Brazil has softened too, with car sales down 15pc and industrial production contracting in March. The bad loans of the banks have reached 10.3pc, higher than post-Lehman.

Brace yourselves, folks.  I have a feeling in my water that things are going to get very bad, very quickly.  I can only hope and pray that I’m wrong . . . but in the face of evidence like this, you can assess the realism (or otherwise) of that hope for yourself.

Peter

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