The bailout drama in Cyprus had created an atmosphere of uneasiness and suspense in Europe for the last two weeks. The significance of the events has been dismissed by most people, even economists and political pundits, all pointing out the fact that because Cyprus makes up just 0.2% of the European Union's GDP, that the damage to the larger Eurozone would be minimal. However, the economy is global with a lot of working parts integrated together (and has been that way since the 1400s, but society is more connected now than back then), meaning that when one part sustains damage or goes down, a chain reaction can happen.
As will be demonstrated here, the drama in Cyprus is much more serious than many would think. What happens in Cyprus affects the European Union, and eventually, the entire Western World. The next phase of the "Crisis of the Western World" is approaching. The drama in Cyprus started when the two largest Cypriot banks became insolvent and needed a 10 billion euro bailout.
The stage for the Cypriot financial crisis was set with excessive exposure to the Greek debt crisis (through investment in Greek treasury bonds, which have been considered junk bonds) and the downgrading of the Cyprus economy to junk status. Moody's had downgraded the credit rating of Cyprus to junk status on March 2012, citing the need for the Cyprus government to inject more capital into the banks. In June 2012, Fitch downgraded Cyprus bonds to BB+, no longer qualifying as investment grade as far as acceptance as collateral by the ECB is concerned. A short time later, Cyprus requested a bailout from the European Union's Eurpean Financial Stability Facility or European Stability Mechanism.
The drama started on March 16, 2013 when the European Union agreed to a 10 billion euro deal with Cyprus. In the first action of its kind, the part of the terms of the bailout is a so-called "wealth tax" that takes up to 10% of deposits for all domestic bank accounts.
1 -- News of the "wealth tax" sparked a mini-bank run in which people attempted to pull their money out of the banks as fast as they can. Many local ATMs ran out of cash in a matter of hours. With the sudden scarcity of cash in Cyprus due to the bank closures, many businesses have stopped accepting credit card payments.
2 -- The Cypriot government rejected the terms of the bailout on March 19, 2013. In the aftermath of the failed vote, The Cypriot government declared a bank holiday that would eventually last over a week. When the banks re-opened on March 28, 2013, capital controls were were already in place setting limits on how much money can be withdrawn along with the deployment of police in the streets amid the fears of a bank run.
3 -- When the bank holiday ended in Cyprus, the damage was already done. Many businesses and aging retirees saw their savings wiped out by the "wealth tax", losing as much as 80% of their life savings overnight.
Many politicians, economists, financial analysts, and news pundits have shrugged off the drama in Cyprus as "not a big deal". The significance of the events in Cyprus is not recognized by most people. Confidence is an ironic thing --- it takes decades to build, but it takes only a few days to tear it down. Confidence is a very important part of keeping the banks fully functional. With the "wealth tax" genie now out of the bottle, the first crack in the dam (of confidence) has formed. The "wealth tax" has already caused some real damage to people in Cyprus and it has also caused many people in southern Europe to question whether their savings accounts and checking accounts are truly safe.
When people no longer feel that the money they have in the banks is safe, they become more likely to pull it all out. There is a reason why people stuffed their money under their matress in the 1930s during and shortly after the Great Depression (hint -- over 9000 banks imploded from 1929 to 1932).
There are very strong indications that the people at the top of the pyramid are oblivious to the cracks in the dam of confidence (see above). When a dam develops a crack, it becomes weakened and the cracks get larger over time. Eventually, the entire dam gives way and bursts.
There are already indications of more cracks in the dam of confidence that could form in the future:
1 -- Banks in Slovenia are in need of billions of euros of fresh capital and are struggling with bad loans that equal a fifth of the country's economic output.
2 -- There is already discussion of depositor haircut provisions for systemically important banks in Canada as part of the 2013 budget.
The first crack in the dam of confidence has formed. Over time, the cracks are expected to get larger, weakening the dam over time. When the dam bursting event takes place, the result is a full scale bank run throughout the Western World. The dam bursting event is most likely to take place in 2015 or 2016 and will start in Europe before spilling into the United States and Canada. The "tax wealth" genie is out of the bottle and it is going to be very difficult for people in high places to put it back in.
Showing posts with label Bailouts. Show all posts
Showing posts with label Bailouts. Show all posts
Sunday, March 31, 2013
Tuesday, January 17, 2012
European Debt Contagion Infecting the Core
The European sovereign debt crisis continues to unfold with the contagion starting to affect even the core European Union nations. The GDP of the European Union is now falling again even in nominal terms. Several days ago, the latest GDP numbers for Germany were released, showing that the nation's GDP declined even in nominal terms, along with Spain, Slovenia, and the UK. The European Union is also bleeding jobs again with rapidly rising unemployment in most of the peripheral nations in Europe, as well as a decline in manufacturing and factory orders even in Germany.
In the latest series of developments, Standard and Poors downgraded the credit rating of France and eight other European nations. A short time later, the Euro Zone bailout fund was downgraded from AAA to AA+. This is a very clear indication that the sovereign debt crisis in Europe is now infecting the core European Union nations.
Portugal is now following Greece on the road to an eventual default on its debt after having its credit rating downgraded to junk status by all three credit rating agencies, with Spain following close behind. Even as a Greek default looms in the intermediate-term horizon, economists and analysts remain steadfast on their optimistic outlook on the European economy, most dramatically demonstrated by the interview involving the Greek Prime Minister on CNBC.
There are a number of other developments in Europe showing the effects of a spreading debt contagion with even the core nations affected:
1 -- The latest poll is showing that 65% of people in Italy have an unfavorable view of the euro with a substantial portion of the population preferring a return to the lira. This underscores a social trend associated with bear markets, namely the tendency for people to identify with smaller social units.
2 -- The austerity trend in Europe is unfolding in full force even in France and Germany as their governments move to tighten their belts with higher taxes and spending cuts. The social trend of increasing conservatism has continued to increase in Europe, with Greece and Portugal the first nations to implement austerity measures (as they were the first to be affected by the debt crisis) with Spain, Ireland, and Italy following suit. This underscores another bear market trait, namely, increasing conservatism as bearish social mood increases.
3 -- Europe's $39 trillion pension bomb is on the verge of going critical, if it hasn't done so already.
In the western world, the effects of "The Great Deflation" are stronger in Europe than they are in the United States and Canada. In many ways, the developments in the western world are a parallel of the 1930s when Germany defaulting on its debt in 1930 marked the beginning of the third phase of the Great Depression. We are on that path again, and at the present time, the United States is the only developed nation on the planet that is still creating jobs. As with the 1930s, Europe is poised to lead the way into the heart of the abyss with the United States and Canada following suit a few weeks to a few months later as the worst part of "the Great Deflation" unfolds.
Social mood is also deteriorating faster in Europe than it is in the United States as the updated charts of the DAX, FTSE, and the CAC-40 illustrate. The DJIA and the S&P 500 have exceeded the late October 2011 highs, but the DAX, CAC-40, and the FTSE are still below the October 2011 highs, setting up an intra-market bearish divergence.
FTSE:
CAC-40:
DAX:
Social mood in France and Germany has been deteriorating faster than expected -- both indexes are tracing out a truncated C wave within a zigzag in the form of an ending diagonal. If the wave counts for the DAX and CAC-40 are correct, it is a very bearish development as C waves within zigzags almost never truncate, and it is a harbinger of a third wave unfolding as a very fast decline. This is something to really keep an eye on in light of all the economic and political events unfolding in Europe.
In the latest series of developments, Standard and Poors downgraded the credit rating of France and eight other European nations. A short time later, the Euro Zone bailout fund was downgraded from AAA to AA+. This is a very clear indication that the sovereign debt crisis in Europe is now infecting the core European Union nations.
Portugal is now following Greece on the road to an eventual default on its debt after having its credit rating downgraded to junk status by all three credit rating agencies, with Spain following close behind. Even as a Greek default looms in the intermediate-term horizon, economists and analysts remain steadfast on their optimistic outlook on the European economy, most dramatically demonstrated by the interview involving the Greek Prime Minister on CNBC.
There are a number of other developments in Europe showing the effects of a spreading debt contagion with even the core nations affected:
1 -- The latest poll is showing that 65% of people in Italy have an unfavorable view of the euro with a substantial portion of the population preferring a return to the lira. This underscores a social trend associated with bear markets, namely the tendency for people to identify with smaller social units.
2 -- The austerity trend in Europe is unfolding in full force even in France and Germany as their governments move to tighten their belts with higher taxes and spending cuts. The social trend of increasing conservatism has continued to increase in Europe, with Greece and Portugal the first nations to implement austerity measures (as they were the first to be affected by the debt crisis) with Spain, Ireland, and Italy following suit. This underscores another bear market trait, namely, increasing conservatism as bearish social mood increases.
3 -- Europe's $39 trillion pension bomb is on the verge of going critical, if it hasn't done so already.
In the western world, the effects of "The Great Deflation" are stronger in Europe than they are in the United States and Canada. In many ways, the developments in the western world are a parallel of the 1930s when Germany defaulting on its debt in 1930 marked the beginning of the third phase of the Great Depression. We are on that path again, and at the present time, the United States is the only developed nation on the planet that is still creating jobs. As with the 1930s, Europe is poised to lead the way into the heart of the abyss with the United States and Canada following suit a few weeks to a few months later as the worst part of "the Great Deflation" unfolds.
Social mood is also deteriorating faster in Europe than it is in the United States as the updated charts of the DAX, FTSE, and the CAC-40 illustrate. The DJIA and the S&P 500 have exceeded the late October 2011 highs, but the DAX, CAC-40, and the FTSE are still below the October 2011 highs, setting up an intra-market bearish divergence.
FTSE:
CAC-40:
DAX:
Social mood in France and Germany has been deteriorating faster than expected -- both indexes are tracing out a truncated C wave within a zigzag in the form of an ending diagonal. If the wave counts for the DAX and CAC-40 are correct, it is a very bearish development as C waves within zigzags almost never truncate, and it is a harbinger of a third wave unfolding as a very fast decline. This is something to really keep an eye on in light of all the economic and political events unfolding in Europe.
Thursday, November 10, 2011
Prelude to 2012
While the economic fault lines appear to be stabilized (but very fragile), we are already seeing events that foreshadow what is yet to come when we approach the center of Minor wave 3 down in March / April 2012. There has already been a lot of comparisons between 2007-2008 and today as far as the stock market is concerned. The parallel is broader in scope than just the stock market as the same financial and economic implications are poised to play out in 2012 as they did in 2008.
On November 8, 2011, MF Global filed for bankruptcy. The corporation was run by ex-Goldman Sachs chairman Jon Corzine. The company went bankrupt after making bets on European sovereign debt. MF Global was the fifth largest financial-industry public company (with $41 billion in assets and $39.7 billion in debt) before filing for bankruptcy.
On November 9, 2011, Jefferson County, Alabama filed for bankruptcy. This is the largest municipal bankruptcy in US history at $4.1 billion. The bankruptcy resulted from a crumbling infrastructure, a budget shortfall, court rulings, a lagging economy, and public corruption. The debt burden also became too heavy for the county to carry as rising interest rates made the loan payments unaffordable.
The bankruptcy of MF Global and Jefferson County are just precursor events, with larger events poised to unfold as we approach the center of Minor wave 3 down. The bankruptcies are a parallel of the collapse of Bear Stearns in March 2008.
Here are two charts that compare the events of Primary wave [1] down (2007 - 2009) to Intermediate wave (1) of Primary wave [3] down.
Primary wave [1] down:
Minor wave 2 of Intermediate wave (1) of Primary wave [3] down:
The one thing to notice is that the bankruptcy of MF Global / Jefferson County occurred almost at the same position as the collapse of Bear Stearns did -- they both occurred about halfway through the second subwave within the larger downward impulse. Bear Stearns collapsed during Intermediate wave (2) of Primary wave [1] down. The bankruptcy of MF Global and Jefferson County occurred during Minor wave 2 of Intermediate wave (1).
The bankruptcy of MF Global and Jefferson County is a warning of what is yet to come as we approach the center of Minor wave 3 down. The "too big to fail" banks are in worse shape now than they were in 2008 as the banks did not get their credit ratings downgraded in 2008 but three of the "too big to fail" banks were downgraded by Moody's in late September 2011, along with UBS, Goldman Sachs, and JP Morgan Chase facing the threat of a credit downgrade. If the 2008 scenario continues to unfold, then the Obama Administration will be doing a lot of bailouts in March / April 2012 and TARP 2 will be launched to bail out the "too big to fail" banks. The center of Minor wave 3 down will also be characterized by the "Panic of 2012".
On November 8, 2011, MF Global filed for bankruptcy. The corporation was run by ex-Goldman Sachs chairman Jon Corzine. The company went bankrupt after making bets on European sovereign debt. MF Global was the fifth largest financial-industry public company (with $41 billion in assets and $39.7 billion in debt) before filing for bankruptcy.
On November 9, 2011, Jefferson County, Alabama filed for bankruptcy. This is the largest municipal bankruptcy in US history at $4.1 billion. The bankruptcy resulted from a crumbling infrastructure, a budget shortfall, court rulings, a lagging economy, and public corruption. The debt burden also became too heavy for the county to carry as rising interest rates made the loan payments unaffordable.
The bankruptcy of MF Global and Jefferson County are just precursor events, with larger events poised to unfold as we approach the center of Minor wave 3 down. The bankruptcies are a parallel of the collapse of Bear Stearns in March 2008.
Here are two charts that compare the events of Primary wave [1] down (2007 - 2009) to Intermediate wave (1) of Primary wave [3] down.
Primary wave [1] down:
Minor wave 2 of Intermediate wave (1) of Primary wave [3] down:
The one thing to notice is that the bankruptcy of MF Global / Jefferson County occurred almost at the same position as the collapse of Bear Stearns did -- they both occurred about halfway through the second subwave within the larger downward impulse. Bear Stearns collapsed during Intermediate wave (2) of Primary wave [1] down. The bankruptcy of MF Global and Jefferson County occurred during Minor wave 2 of Intermediate wave (1).
The bankruptcy of MF Global and Jefferson County is a warning of what is yet to come as we approach the center of Minor wave 3 down. The "too big to fail" banks are in worse shape now than they were in 2008 as the banks did not get their credit ratings downgraded in 2008 but three of the "too big to fail" banks were downgraded by Moody's in late September 2011, along with UBS, Goldman Sachs, and JP Morgan Chase facing the threat of a credit downgrade. If the 2008 scenario continues to unfold, then the Obama Administration will be doing a lot of bailouts in March / April 2012 and TARP 2 will be launched to bail out the "too big to fail" banks. The center of Minor wave 3 down will also be characterized by the "Panic of 2012".
Tuesday, July 12, 2011
Too Big to Bail Out
Debt fault lines continue to spread and grow in Europe. Although most of the focus continues to be on Greece even after the second bailout was completed, there are many other nations in Europe that are facing a debt crisis of their own.
Greece, Portugal, Spain, Ireland, and Italy are already quite deep into Primary wave [3] down in terms of social mood. In Greece, Primary wave [3] down has been unfolding for over a year, and yet, it is still in its early stages as optimism about future economic prospects are still present. In the coming months and years, "too big to fail" is going to be replaced by "too big to bail out" as larger nations start to fold under the increasing weight of their debt burdens.
Recently, Spain and Italy are under increased financial stress from their debt crisis and will need a bailout in the near future. Analysts are now warning that Italy is following the same path as Greece. There are already fault lines taking hold in the UK as well, and protests erupted last month when the government attempted to implement austerity measures which made changes to pensions and raised the retirement age. The magnitude of the labor and work strikes that unfolded in the UK last month is indicative of the degree of the bear market, considering that we are still in the early stage of the bear market.
As I indicated 2 months ago, bailing out a small nation isn't much of a deal, but bailing out a large nation is far more difficult, if not impossible. Spain, Italy, and UK are all too big to bail out, which is why a default in Europe, followed by debt contagion, is inevitable. The most likely scenario is for the UK to default on its debt, most likely in the next several months, creating a global ripple effect. The chain reaction would commence and within the next six months, Greece, Spain, Portugal, Ireland, and Italy would all default on their debts. A debt default by Italy would also create a global ripple effect.
The fault lines are on the verge of going critical, and some economists are starting to recognize the implications. A cascade of debt defaults in Europe would indeed be a defining characteristic of the first half of Primary wave [3] down (2011 - 2013) in the DJIA, the FTSE 100, the DAX, and the CAC 40. A cascade of debt defaults in Europe could possibly result in the breakup of the European Union either in October 2013 (the center of Primary wave [3] down) or 2019 (the center of Primary wave [5] down), and the abolishment of the euro.
Greece, Portugal, Spain, Ireland, and Italy are already quite deep into Primary wave [3] down in terms of social mood. In Greece, Primary wave [3] down has been unfolding for over a year, and yet, it is still in its early stages as optimism about future economic prospects are still present. In the coming months and years, "too big to fail" is going to be replaced by "too big to bail out" as larger nations start to fold under the increasing weight of their debt burdens.
Recently, Spain and Italy are under increased financial stress from their debt crisis and will need a bailout in the near future. Analysts are now warning that Italy is following the same path as Greece. There are already fault lines taking hold in the UK as well, and protests erupted last month when the government attempted to implement austerity measures which made changes to pensions and raised the retirement age. The magnitude of the labor and work strikes that unfolded in the UK last month is indicative of the degree of the bear market, considering that we are still in the early stage of the bear market.
As I indicated 2 months ago, bailing out a small nation isn't much of a deal, but bailing out a large nation is far more difficult, if not impossible. Spain, Italy, and UK are all too big to bail out, which is why a default in Europe, followed by debt contagion, is inevitable. The most likely scenario is for the UK to default on its debt, most likely in the next several months, creating a global ripple effect. The chain reaction would commence and within the next six months, Greece, Spain, Portugal, Ireland, and Italy would all default on their debts. A debt default by Italy would also create a global ripple effect.
The fault lines are on the verge of going critical, and some economists are starting to recognize the implications. A cascade of debt defaults in Europe would indeed be a defining characteristic of the first half of Primary wave [3] down (2011 - 2013) in the DJIA, the FTSE 100, the DAX, and the CAC 40. A cascade of debt defaults in Europe could possibly result in the breakup of the European Union either in October 2013 (the center of Primary wave [3] down) or 2019 (the center of Primary wave [5] down), and the abolishment of the euro.
Friday, May 6, 2011
Fault Lines in Europe
A couple of days ago, Portugal accepted $116 billion in international aid. This was the third time in a year that a nation in Europe needed a bailout. Although many economists still believe that the damage has been contained and a possible contagion has been contained, there is strong evidence that the fault lines continue to grow in number and extent in Europe.
There is reason to believe that the events that have unfolded in Europe since March 2009 -- and even the United States for that matter -- are consistent with the characteristic of a large degree wave 2 in a bear market. On the outside, everything appears to be on the mend and a recovery appears to be taking hold. Underneath the surface, however, are fault lines that grow in size and number until they reach critical mass. During that time, economists and analysts start to believe in recovery and renewed growth as the later part of the bear market rally unfolds.
Here is what has happened in Europe in the last year:
April 2010 - May 2010: Greece goes into a debt crisis as yields on Greek bonds exceed 10 percent, making the debt too heavy of a burden to bear. Greece gets bailed out by the European Union in April 2010. Greece then attempts to implement austerity measures, which is then followed by mass protests in the streets.
June 2010: There is fear that Ireland, Portugal, Spain, and Italy would possibly default on their debt, creating the fear of debt contagion.
Nov 2010: Ireland gets bailed out as its deficit reaches 32% of its GDP.
March 2011: Portugal's government collapses, creating the fear of a debt default.
April 2011: Finland votes against bailing out Portugal, which is indicative that a Primary degree trend change in social mood is imminent.
May 2011: Portugal gets bailed out by the European Union.
The end game is unfolding. All eyes are now on Spain, yet fault lines are appearing in unexpected places. There are now indications that the United Kingdom will need a bailout in the near future. There is more information about the development here. Greece, Portugal, and Ireland are small countries. Its one thing to bail out a small country. Trying to bail out a large country is another matter. The UK is 7 times bigger than Portugal in terms of GDP. In other words, the UK is too big to bail out. A debt default is inevitable.
This is how the second leg down of the Great Depression got started. Germany defaulted on its debt in 1930, and the ripple effects that followed were global in scale. The next leg down of "The Great Deflation" could easily be precipitated by the UK defaulting on its debt, and the resulting ripple effect would be global, creating a chain reaction of defaults throughout the western world.
There is reason to believe that the events that have unfolded in Europe since March 2009 -- and even the United States for that matter -- are consistent with the characteristic of a large degree wave 2 in a bear market. On the outside, everything appears to be on the mend and a recovery appears to be taking hold. Underneath the surface, however, are fault lines that grow in size and number until they reach critical mass. During that time, economists and analysts start to believe in recovery and renewed growth as the later part of the bear market rally unfolds.
Here is what has happened in Europe in the last year:
April 2010 - May 2010: Greece goes into a debt crisis as yields on Greek bonds exceed 10 percent, making the debt too heavy of a burden to bear. Greece gets bailed out by the European Union in April 2010. Greece then attempts to implement austerity measures, which is then followed by mass protests in the streets.
June 2010: There is fear that Ireland, Portugal, Spain, and Italy would possibly default on their debt, creating the fear of debt contagion.
Nov 2010: Ireland gets bailed out as its deficit reaches 32% of its GDP.
March 2011: Portugal's government collapses, creating the fear of a debt default.
April 2011: Finland votes against bailing out Portugal, which is indicative that a Primary degree trend change in social mood is imminent.
May 2011: Portugal gets bailed out by the European Union.
The end game is unfolding. All eyes are now on Spain, yet fault lines are appearing in unexpected places. There are now indications that the United Kingdom will need a bailout in the near future. There is more information about the development here. Greece, Portugal, and Ireland are small countries. Its one thing to bail out a small country. Trying to bail out a large country is another matter. The UK is 7 times bigger than Portugal in terms of GDP. In other words, the UK is too big to bail out. A debt default is inevitable.
This is how the second leg down of the Great Depression got started. Germany defaulted on its debt in 1930, and the ripple effects that followed were global in scale. The next leg down of "The Great Deflation" could easily be precipitated by the UK defaulting on its debt, and the resulting ripple effect would be global, creating a chain reaction of defaults throughout the western world.
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