World Markets Tumble as Clouds gather over Eurozone
Stock-Markets / Global Debt Crisis Sep 13, 2011 - 07:11 AM GMTBy: Mike_Whitney
Growing fears of a default in Greece sent markets in Europe and Asia plunging on Monday while yields on "safe haven" US Treasuries and German bund fell to record lows. Nearly 3 years after Lehman Brothers collapsed in 2008, the global economy is now facing a second and more lethal financial crisis that threatens to tear-apart the battered eurozone and drag the world economy back into recession.
Indications that the Greek government will not be able to meet its austerity targets has caused rumblings in Germany where the finance minister is working on a bank recapitalisation plan in case Greece defaults. German, UK and French banks hold hundreds of billions in Greek sovereign debt that will lose significant value if Greece cannot secure new loans from the ECB.
How bad will the fallout be? Here's a clip from Bloomberg that explains:
"BNP Paribas SA, Societe Generale and Credit Agricole SA (ACA), France’s largest banks by market value, are trading at levels that imply a 100 percent loss on Greek, Irish and Portuguese holdings, according to Barclays. In the case of Paris-based Societe Generale, the share price even implies full writedowns on Italian and Spanish debt, according to Barclays." (Bloomberg)
"100 percent loss on Greek, Irish and Portuguese holdings", a total wipeout. Hundreds of billions in sovereign bonds have been converted into toilet paper overnight. If Greece goes under, it could take the EU banking system and a good part of the world's financial system along with it.
Here's more from Bloomberg:
"The 90 banks that underwent European stress tests would face an estimated capital shortfall of 350 billion euros ($479 billion) if Greek, Portuguese, Irish, Italian and Spanish government bonds were written down to market values, according to Nomura analysts led by Jon Peace.
No “practical” amount of capital can prepare them for a large sovereign debt impairment or default, Nomura said in a note on Sept. 7." (Bloomberg)
Where are EU banks going to lay their hands on "350 billion euros"? Their stocks are falling like stones, they've already sold a good portion of their liquid assets, and they don't have a "rainy day" fund they can draw from when the shitstorm hits. So they have no place to turn except the European Central Bank (ECB), and there's no way the ECB can go on a bond-buying binge big enough to keep the banks afloat. The ECB is not the Fed; it would need to get the green light from other the eurozone members to launch a bailout of this magnitude.
Angela Merkel wants to give Greece more time to whittle down its budget deficits, but the German Chancellor is swimming against the tide. 80 percent of the German public oppose more bailouts and want a change in policy. The ECB and EU's austerity measures have only accelerated the pace of Greece's decline.
It didn't have to end this way. EU leaders could have restructured Greece's debts and provided fiscal stimulus to help the struggling country grow its way back to health. But the right-wingers prevailed and demanded belt tightening instead of Keynesian remedies. Their failed judgement has only intensified debt deflation dynamics. Now the window of opportunity has closed and default is unavoidable.
The cost of insuring the sovereign debt of EU governments against default is skyrocketing as panic spreads across global markets. Bank funding costs are also rising sharply while interbank lending slows to a trickle.
The liquidationists have won the policy-battle, but lost the war. A Greek default will send the dominoes tumbling across southern Europe. It's only a matter of time before the eurozone splinters and breaks up.
Email: fergiewhitney@msn.com
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
© 2011 Copyright Mike Whitney - All Rights Reserved
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