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Thursday, May 26, 2011

Mailbag; "Bear Trader " Writes re EU Debt Crisis

So, what would happen if Greece defaulted on its debt? Would it be as bad as Lehman Brothers? Here's an excerpt from The Guardian:

"If Athens reneged on its debts it would shatter the markets' confidence in the eurozone project... Given the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt, there is only one answer. Greece could certainly be the next Lehmans. The likelihood that a Greek default would pose a threat to the future of the eurozone as well as to the health of the world economy means it has the potential to be worse than Lehmans. Much worse...."

If Greece goes under, then it could take Portugal, Ireland and (perhaps) Spain along with it. So why is ECB chief Jean-Claude Trichet dilly-dallying? Does he really think the problem is just going to go away? And why did French Finance Minster Christine Lagarde (who is the leading candidate to replace ex-IMF chief Dominique Strauss-Kahn) announce that "that a rescheduling or reprofiling of Greek debt is NOT an option (and that) executing the planned austerity program, proper implementation of privatization, and commitments across the political spectrum in Greece are the key for a solution in Greece" ("France's Lagarde: Option Of Rescheduling Greek Debt Not On Table", Wall Street Journal)

Talk about throwing gas on a fire! Does Lagarde want to kick off her appointment by sending the markets into freefall?

Things are looking bleaker and bleaker for Greece. Bond yields are widening, the red ink is rising and the ECB is as inflexible as ever. There's a good chance that policymakers will push this austerity-thing too far and bring the whole EU crashing down around them."

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Well, the Lefties are always pushing an agenda, and what they haven't mentioned is who is to pay for all this EU largess. The amount of money involved is way larger than the European Central Bank (ECB) can manage, keeping in mind that if you pay off Greece's debt, you will have to pay off Ireland's, Portugal's, Spain's, Italy's, etc. Otherwise, the way overleveraged, Basel II reserve level European banks have to take the hit. It would be worse than Lehman and result in immediate destruction of the EU. I personally don't think this would be bad. It would blow out the US "too big to fail" banks in a heartbeat. I mean, the TBTF banks would be in the hole way worse than the Federal Government is, maybe $100 Trillion or more. They would be gone in seconds. History.

This would be the result of the collapse of the $1 Quadrillion 600 Trillion derivatives market. The Swiss banks would mostly not survive either.

So, bankers everywhere are looking their darkest nightmare straight in the face - a run on all banks, all at once, and everywhere. One much too large for the politicians to paper over. To get their books in order they have to, must ("Civilization is at stake!") transfer their excess liabilities to someone else or must keep then hidden. The USA (taxpayer) has strained his gut taking on Goldman Sachs' liabilities. Try the whole world. The GDP of the entire planet is a thousand times too small.

Could mean the end of central banking as we know it. The derivative pile blowing up would do this.

So there is desperate "kicking the can down the road" by politicians, central bankers, and everyone else in the financial world. That is why QE1, QE2, etc. If derivative values collapse it will be the end of the world as we know it. Myself, I am increasingly of the opinion that this "fall of the towers" is unavoidable. Might as well just let 'er rip.

The end of fiat money. What a trip. Andrew Jackson turns out to be right about a central bank.

What we are seeing is simple human nature. A crowd in panic, like being inside a theater that catches fire. The Four Horsemen ride again, and we thought we were done with them. All this because of mere marks on paper, nothing to do with the real economy.

So there is no choice but for Greece to take the rap, to be the scapegoat, to take the loss, even if that requires occupation by foreign troops. Anything is justified by the need to stop the contagion (as seen through the eyes of the ruling class). It won't come to military occupation though, as Greece will take it's beating like a good boy. If Greece becomes the horrible example then the other PIIGS will stay in line. Euro is saved. The EU is saved. The USA does not break up.

If Greece is a good boy the EU won't let anyone starve there. If the Greek government with EU financial help can't make that happen then the Germans will.

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