Is a financial crisis about to erupt worldwide?

I’ve said before that the next major financial crisis may arise when any one of a number of factors – or a combination of them – suddenly erupts.  Right now there are several such factors that are poised on a knife-edge.  If two or more of them blow up . . . I think the next worldwide financial crisis will be upon us.

Greece is poised to default on its debts and (probably) exit the Eurozone.  This crisis has been brewing for years, but is now near boiling point.  It’s fundamentally about much more than just Greece.  As the Telegraph comments:

As an institution, the EU promises security, stability and prosperity to member states in exchange for pooling their sovereignty. Yet for Greece, it has provided the opposite. Everyone knows the country should never have joined the eurozone in the first place and having done so, should not have compounded that mistake by going on a borrowing binge.

But the humiliation now being heaped upon a proud and ancient country is a salutary lesson to all member states – that without the power to make their own decisions they are always at the mercy of the unelected bureaucrats and financiers who run the institutions.

The democracy that was born in Greece more than two millennia ago no longer applies when control over the currency and economic policy is handed to a supranational body. The question of whether the price is any longer worth paying is not one for the Greeks alone to answer.

There’s more at the link.

Nor is Greece the only European nation in danger of default (although it’s certainly the most at risk right now).  “Altogether there are six European nations whose debts are larger than their economic output, and 16 that have debts larger than the 60%-of-GDP limit set out in the Maastricht Treaty.“

If Greece defaults and gets away with repudiating its debts, at least in the short term, I fully expect one or more of the other most-debt-burdened nations in the EU to follow suit.  After all, if creditors have to deal with more than one massive default, their options become more and more limited.  As J. Paul Getty famously said, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”

Central banks and major commercial lenders in other parts of the world are waking up to that reality as well.  China’s premier stock exchange is crashing, and Morgan Stanley warns that no improvement is in sight – rather the opposite.

China’s stock market got wrecked on Friday with the Shanghai Composite index crashing by 7.4%.

The red-hot market is now down 19% from its high, which it set on June 12.

Some folks may see this as a buying opportunity, but not the analysts at Morgan Stanley.

. . .

Garner warns that the Shanghai Composite, which closed at on Friday, could have much farther to fall.

“We set a new 12-month Target Price range for Shanghai Composite of 3,250-4,600,” he said. “This range is ~30% to -2% below the current level of the index.”

Garner’s not kidding when he warns of the 30% downside. While a crashing stock market could be bad enough to trigger some social instability, it’s not without precedent to see regulators allow the market to just collapse.

Again, more at the link.

The USA is at serious risk of further Detroit-style defaults, not just at city level but involving states too.  Consider:

• Puerto Rico’s governor has just announced that the island’s $72 billion public debt is ‘unpayable’.
• Many states are running budget deficits ranging from tens to thousands of millions of dollars.  Some have accumulated massive debts that make Puerto Rico’s $72 billion liability look moderate in comparison.
• Attempts by Illinois to deal with its looming state pension crisis were derailed last month when its Supreme Court ruled that a law designed to shed unpayable obligations was unconstitutional.  The same ruling imperils some Chicago ordinances designed to achieve similar savings.  It also caused Chicago’s credit rating to be downgraded to junk status.
• State and local pension crises aren’t limited to Illinois.  “Years of gimmicks and politically motivated benefit increases for government workers have left America’s states and municipalities with pension funds that are short at least $1.5 trillion — and possibly as much as $4 trillion if the investment returns of these funds don’t live up to expectations in coming years.”
• Many commenters, including yours truly, believe that the US national debt is unsustainable.  Niall Ferguson addressed the issue back in 2010, and I think his comments are still valid.

Put all these current and near-current events together, and you have a very dangerous picture indeed.  I can only compare it to the well-known simulation of a nuclear reaction using mousetraps and ping-pong balls.

All it takes to start the reaction is one ball . . . or, in terms of a
financial crisis, one major collapse or other economic event.  There
are so many of them out there that contagion is inevitable.  If any one of the world’s current fiscal crises goes out of control, the odds of another crisis doing the same increase exponentially.

I think we’re living in very dangerous times, economically speaking.  The Bank for International Settlements (an association of central banks) has warned that “The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises“.

I’m currently making sure I have two months’ expenditure available in cash, tucked away in a safe location.  If we’re forced to endure a compulsory ‘bank holiday’ as Greece is now enduring, I want to make sure I can buy what I need.  Other than that, there’s not much I can do.  I’m not wealthy enough to have high-value assets like gold or silver in quantities sufficient to preserve wealth in times of crisis.  Like almost all of us, I’ll just have to ride it out as best I can.

Peter