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Posts Tagged ‘sovereign default

What happens when a nation goes bankrupt?

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by Simon Black
of Sovereign Man
Posted Sept 14, 2011

THREE YEARS AGO TODAY, MY BEST FRIEND CALLED ME and told me to turn on my television. I remember the way he described it– “Lehman is finished.”  The TV showed guys packing up their desks on Sunday afternoon, moving out of their offices forever. That was the precipice from which financial markets plunged the following day, taking the global economy along for the next three years.

We appear to be at that moment once more. Greece is out of cash. Again. The Greek Deputy Finance Minister said on Monday that his country only has enough cash to operate for a few more weeks.

As I write this note, French, German, and Greek politicians are all on a conference call, feverishly trying to figure out a way to avoid default.  Everyone seems to understand the consequences at stake… given the chain of derivatives out there, a Greek default will completely dwarf the Lehman collapse. Unfortunately for the bureaucrats, dissent against the Greek bailout plan is spreading across Europe… and leaders can no longer ignore the growing wave of opposition in Finland, the Netherlands, Austria, and Germany.

It’s no wonder, when you think about it. Why should a German hairdresser who retires at age 65 stick his neck out so that a Greek hairdresser can retire at age 50? This, from a continent that was perpetually at war with itself for over a thousand years. Europe’s great benefactor over the last several months has been China, whose treasury has been buying up worthless European sovereign debt to ensure that Greece doesn’t default. It’s a testament to the absurdity of our failed financial system when the highly indebted rich countries of the world have to go to China, a nation of peasants, for a bailout.

Speaking at the World Economic Forum this morning, Chinese premier Wen Jiabao delivered a stern message: there is a limit to Chinese generosity, and it will come at a price. The Chinese will undoubtedly use any further investment in European bonds as leverage to influence western politicians. They already bought Tim Geithner. The US government refuses to label China a ‘currency manipulator’. Similarly, European politicians will now be forced to acknowledge China as a ‘market economy’.

Ultimately, this charade will fail. It’s a simple matter of arithmetic. China could buy every single penny of Greek debt and it still wouldn’t solve the underlying problem: Greece would still be in debt! And more, still hemorrhaging billions of euros each month. Throwing more money at the problem only makes it worse.

Then there are those Greek assets for sale… like state-owned Hellenic Railways Group. It lost a cool billion euros last year. Or the notoriously inefficient, highly unionized, traditionally lossmaking Greek postal service, Hellenic Post. Any takers? These are not exactly high quality assets… nor can Greece expect to get top dollar in what’s clearly a distress sale.

Over 200 years ago, Napoleon was forced to sell France’s claim to 828,000 square miles of land in the New World in order to cover his war expenses. US President Thomas Jefferson happily obliged, paying the modern equivalent of around $315 million (based on the gold price), roughly 59 cents per acre in today’s money.

According to US census records, there were around 90,000 people living within the territory during that time who literally woke up the next day to a different world. This is the sort of thing that happens when governments go bankrupt. With the Lehman collapse, a lot of people got hurt… but it was mostly a financial and economic issue. When an entire nation goes bust, the pain is felt much deeper: the most basic systems and institutions that people have come to depend on simply disappear.

Argentina’s millennial debt crisis is a great example of this… suddenly the power failed, the police stopped working, the gas stations closed, the grocery stores ran out of food, the retirement checks stopped coming, and the banks went under (taking people’s life savings with them).

European leaders (with Chinese help) can postpone the endgame for a short time, but they’re really just taking an umbrella into a hurricane. It would be foolish to not expect a Greek default, and it would be even more foolish to not expect significant consequences. The only question is– how are you prepared to deal with what happens?

It’s Over.

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by Karl Denninger
Posted September 12th, 2011
Market-Ticker.org

SERIOUSLY.

THERE IS PERSISTENT CHATTER ABOUT A GREEK DEFAULT over the weekend, which Greece denied, but the denier refused to be named. If it’s not true, then put your damned name on the statement or be considered what you are – liars. Greece failed to place their short-term bill rollover. That’s a declaration by the market that even for short-term paper the market has utterly lost confidence in Greece and the Euro.

Germany’s DAX market relative to the United States just hit a five year low today. To add to the “liar liar pants on fire” calls Germany is now reported to be working a plan to recapitalize their banks if Greece defaults.

This in turn means three things:

 

 

• A Greek default is considered credible by Germany and they are taking official actions related to that possibility. So much for the denials.

• German banks (and presumably French banks and all the other big banks too) are insolvent as they are carrying these bonds at well above their actual value in the marketplace. If the bonds were carried at the claimed “loss” values, which is quoted as 50%, then there would be no need to recapitalize them would there? This is an official statement of proof that the banks are lying about asset values and are in fact insolvent.

• Remember that we were just told days ago that these banks were fine and needed no capital and in fact calls for more capital by the IMF were officially refused. The same claim has been made about our banks. You were just told officially by Germany that their claim of adequate capital just days ago was a lie as they are now planning to recapitalize the banks. Do you believe our banks are not similarly exposed and also insolvent? YOU’RE BETTING YOUR FUTURE ON THE BELIEF THAT THEY ARE, SO THIS QUESTION IS QUITE GERMANE AND TIMELY: ARE YOU SURE YOU’RE NOT BEING LIED TO EXACTLY AS WE WERE ABOUT GERMAN BANKS?

Coincident with this hitting the wires there was a massive flow of money into the Japanese Yen – and out of the Euro. A monstrous safety trade – people fleeing the European common currency for what they perceive as a “safe haven.” At the same time our markets are down 300 DOW points, the S&P is down 2.5% on the day and more than forty points off the early-morning top — and there’s no sign that things are stabilizing at all.

I said the Euro was going to par, and that might be too conservative. With that our stock market will get cut in half — or more — from here and once again the banks, insurance companies and everyone else will start crying poor mouth.

The problem is that this time there’s no money to bail them out with in the US and as a result if this outcome manifests they will fail. The embedded losses in those institutions on mortgages alone total trillions, which is several times the available debt ceiling and so far beyond the FDIC’s reserves that there is no way to cover you, the average person.

Nobody – and I do mean nobody – in our political establishment from either party gives a damn about the lies and outright fraud in our financial system. Neither political party, including some very specific representatives that have railed about various problems in capital markets, the IMF and similar over the last couple of years will even open their damn mouths, say much less demand structural changes and an end to the frauds. I have been making attempts to break through that “glass ceiling” now for four years with several representative and senatorial offices. How many speeches have you seen on this topic, or even questions directed at like people such as Bernanke under oath?

I’ll answer that for you: ZERO.

The opportunity to fix these problems has been there since 2007 and I have steadfastly put forward plans that will work to resolve these issues, albeit at the cost of there being no more leverage-driven asset-stripping games. I’ve written over four thousand Tickers [Market-Ticker.org] since 2007 and a couple of White Papers and distributed them to Congressional offices by postal mail and fax. In addition there are literal hundreds of staffers that access The Ticker on a regular basis along with every three-letter government agency, including the law-enforcement ones.

There can be no claim that “nobody saw this coming” because I assure you that not only did plenty of people see it coming I have repeatedly warned of the “end game” and consequences – loudly.

Nobody from either party will address this or even discuss this and the reason should be obvious – the banks own the politicians. That’s fine – they can both hang on the rope of their own construction through their willful and intentional acts of malfeasance and fraud. Absolutely none of this was a mistake.

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Germany and Greece flirt with mutual assured destruction

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by Ambrose Evans-Pritchard
The Telegraph
Posted 11 September 2011

BILD ZETUNG POPULISM HAS PREVAILED. Germany is pushing Greece towards a hard default, risking the uncontrollable chain reaction so long feared by markets. Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself. Photo: AP

First we learn from planted leaks that Germany is activating “Plan B”, telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece’s return to the drachma. German finance minister Wolfgang Schauble has chosen to do this at a moment when the global economy is already flirting with double-dip recession, bank shares are crashing, and global credit strains are testing Lehman levels. The recklessness is breath-taking.

If it is a pressure tactic to force Greece to submit to EU-IMF demands of yet further austerity, it may instead bring mutual assured destruction.

“Whoever thinks that Greece is an easy scapegoat, will find that this eventually turns against them, against the hard core of the eurozone,” said Greek finance minister Evangelos Venizelos. Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself, and Greece has certainly been provoked.

Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been “Unconditional Capitulation”, and “Terrorization of Greeks”, and even “Fourth Reich”.

Mr Schauble said there would be no more money for Athens under the EU-IMF rescue package until the Greeks “do what they agreed to do” and comply with every demand of ‘Troika’ inspectors.

Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.

Let us be clear, the chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy – 16pc of GDP of net tightening in three years – without offsetting monetary stimulus, debt relief, or devaluation.

This has sent the economy into a self-feeding downward spiral, crushing tax revenues. The policy is obscurantist, a replay of the Gold Standard in 1931. It has self-evidently failed. As the Greek parliament said, the debt dynamic is “out of control”. We all know that Greece behaved badly for a decade. The time for tough love was long ago, when the mistakes were made and all sides were seduced by the allure of EMU.

Even if the Papandreou government met every Troika demand at this point, it would not make any material difference. Greek citizens already understand this, and they understand that EU loan packages are merely being recycled to northern banks. Instead of recognizing the collective EU failure at every stage of this debacle, the creditor powers are taking out their fury on what is now a victim.

We have never been so close to EMU rupture. Friday’s resignation of Jurgen Stark at the European Central Bank is literally a kataklysmos, a German vote of no confidence in EMU management. Dr Stark is not just an ECB board member. He is the keeper of the Bundesbank’s monetary flame.

The vehemence of his protest against ECB bond purchases confirm what markets suspect: that the ECB cannot shore up Italian and Spanish debt markets for long without losing Germany. “I look at what is happening in EMU and the words that spring to mind are total and utter disaster”, said Andrew Roberts, credit chief at RBS. He thinks German Bund yields could break below 1pc in the flight to safety.

Citigroup and UBS both issued reports last week on the mechanics of EMU break-up, both concluding with touching faith that EU leaders cannot and will not allow it to happen.

“The euro should not exist,” said Stephane Deo from UBS. It creates more costs than benefits for the weak. Its “dysfunctional nature” was disguised by a credit bubble. The error is now “painfully obvious”. Yet Mr Deo warns that EMU exit would not be as painless as departing the ERM in 1992. Monetary unions do not break up lightly. The denouement usually entails civil disorder, even war.

If a debtor such as Greece left, the new drachma would crash by 60pc. Its banks would collapse. Switching sovereign debt into drachma would be a default, shutting the country out of capital markets. Exit would cost 50pc of GDP in the first year. If creditors such as Germany left, the new mark would jump 40pc to 50pc against the rump euro. Banks would face big haircuts on euro debt, and would need recapitalization. Trade would shrink by a fifth. Exit would cost 20pc to 25pc of GDP. UBS concludes that the only course is a “fiscal confederation”, a la Suisse.

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The imminent failure of the Eurozone

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by Econophile
Posted  September 2, 2011
This article originally appeared on the Daily Capitalist.

YOU KNOW THOSE MOVIES WITH THE BOMB SET TO A TIMER ticking down to 00.00 where the sweaty hero nervously cuts one wire at a time while holding his breath and then at 00.01 he stops the bomb? Well, Europe is like that except that the bomb goes off and kills everyone.

Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world’s population is losing ground.

These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.

What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening “over there.” In a world that is so interconnected financially and by trade, a sinking Europe is everyone’s concern.

Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.

The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states’ banks. The responsible states know they will be stuck with the bill.

The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.

They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills  reached 60%.  It is a sign that investors have no faith in the Greek government’s ability to repay their debt.

The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland’s contribution.

Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don’t want to do, and they will no doubt take to the streets again in protest.

If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium’s Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany’s Commerzbank, it’s about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.

The International Accounting Standards Board (IASB) has warned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don’t doesn’t matter. The fact is that these banks are undercapitalized and in trouble. Their “stress tests” are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.

In other words the Europeans have created a problem that they can’t solve, easily at least.

Here are their alternatives:

1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.

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September 2011: 25 signs that the financial world is about to hit the big red panic button

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from The Economic Collapse
Posted August 30, 2011

MOST OF THE WORST FINANCIAL PANICS IN HISTORY HAVE happened in the fall. Just recall what happened in 1929, 1987 and 2008. September 2011 is about to begin and there are all kinds of signs that the financial world is about to hit the big red panic button. Wave after wave of bad economic news has come out of the United States recently, and Europe is embroiled in an absolutely unprecedented debt crisis. At this point there is a very real possibility that the euro may not even survive.

What is causing all of this? Over the last couple of decades a gigantic debt bubble has fueled a tremendous amount of “fake prosperity” in the western world. But for a debt bubble to keep going, the total amount of debt has to keep expanding at an ever increasing pace. Unfortunately for the global economy, sources of credit are starting to dry up. That is why you hear terms like “credit crisis” and “credit crunch” thrown around so much these days. Without enough credit to feed the monster, the debt bubble is going to burst. At this point, virtually the entire global economy runs on credit, so when this debt bubble bursts things could get really, really messy.

Nations and financial institutions would never get into debt trouble if they could always borrow as much money as they wanted at extremely low interest rates. But what has happened is that lending sources are balking at continuing to lend cheap money to nations and financial institutions that are already up to their eyeballs in debt.

For example, the yield on 2 year Greek bonds is now over 40 percent. Investors don’t trust the Greek government and they are demanding a huge return in order to lend them more money.

Throughout the financial world right now there is a lot of fear. Lending conditions have gotten very tight. Financial institutions are not eager to lend money to each other or to anyone else. This “credit crunch” is going to slow down the economy. Just remember what happened back in 2008. When easy credit stops flowing, the dominoes can start falling very quickly.

Sadly, this is a cycle that can feed into itself. When credit is tight, the economy slows down and more businesses fail.  That causes financial institutions to want to tighten up things even more in order to avoid the “bad credit risks”. Less economic activity means less tax revenue for governments. Less tax revenue means larger budget deficits and increased borrowing by governments. But when government debt gets really high that can cause huge economic problems like we are witnessing in Greece right now. The cycle of tighter credit and a slowing economy can go on and on and on.

I spend a lot of time talking about problems with the U.S. economy, but the truth is that the rest of the world is dealing with massive problems as well right now. As bad as things are in the U.S., the reality is that Europe looks like it may be “ground zero” for the next great financial crisis.

At this point the EU essentially has three choices. It can choose much deeper economic integration (which would mean a huge loss of sovereignty), it can choose to keep the status quo going for as long as possible by providing the PIIGS with gigantic bailouts, or it can choose to end of the euro and return to individual national currencies.

Any of those choices would be very messy. At this point there is not much political will for much deeper economic integration, so the last two alternatives appear increasingly likely. In any event, global financial markets are paralyzed by fear right now. Nobody knows what is going to happen next, but many now fear that whatever does come next will not be good. The following are 25 signs that the financial world is about to hit the big red panic button….

#1 According to a new study just released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

#2 Will Bank of America be the next Lehman Brothers?  Shares of Bank of America have fallen more than 40% over the past couple of months. Even though Warren Buffet recently stepped in with 5 billion dollars, the reality is that the problems for Bank of America are far from over. In fact, one analyst is projecting that Bank of America is going to need to raise 40 or 50 billion dollars in new capital.

#3 European bank stocks have gotten absolutely hammered in recent weeks.

#4 So far, major international banks have announced layoffs of more than 60,000 workers, and more layoff announcements are expected this fall. A recent article in the New York Times detailed some of the carnage….

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders. Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told.

#5 Credit markets are really drying up. Do you remember what happened in 2008 when that happened? Many are now warning that we are getting very close to a repeat of that.

#6 The Conference Board has announced that the U.S. Consumer Confidence Index fell from 59.2 in July to 44.5 in August.  That is the lowest reading that we have seen since the last recession ended.

#7 The University of Michigan Consumer Sentiment Index has fallen by almost 20 points over the last three months.  This index is now the lowest it has been in 30 years.

#8 The Philadelphia Fed’s latest survey of regional manufacturing activity was absolutely nightmarish….

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009

#9 According to Bloomberg, since World War II almost every time that the year over year change in real GDP has fallen below 2% the U.S. economy has fallen into a recession….

Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy.

#10 Economic sentiment is falling in Europe as well. The following is from a recent Reuters article….

A monthly European Commission survey showed economic sentiment in the 17 countries using the euro, a good indication of future economic activity, fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors.

#11 The yield on 2 year Greek bonds is now an astronomical 42.47%.

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What recovery? Undemocratic and corrupt, the EU faces dis-Union

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from The Daily Bell
Posted August 31, 2011

Double-dip fears across the West as confidence crumbles … The Western world is at mounting risk of a double-dip recession after key measures of confidence collapsed in both the United States and Europe, with Germany the steepest one-month fall since records began in the 1970s. The IMF has slashed its growth forecast for America and Europe, according to a leaked draft of its World Economic Outlook. – UK Telegraph

Dominant Social Theme:
Everything has been going very well, and employment and profits are picking up. So let’s not spoil a good thing, eh?

Free-Market Analysis:
This article in the UK Telegraph takes a dim view of the “recovery” that the West is supposed to be enjoying. In fact, it cites a good deal of evidence to show the West’s economic situation is about to get even worse. In doing so it all but predicts the EU itself – or at least the euro – may be only weeks away from fracturing.

This is good, of course, though perhaps (unfortunately) over-optimistic. The EU is nothing but a fascist enterprise that should be broken up as soon as possible. Astonishingly, the appendages of the EU have not been audited for years because the auditing firms will not take responsibility for an institution of such corruption.

There is an inner circle in the EU that is answerable to no one expect perhaps the great banking families of Europe and America that have created this monstrosity. It is from this tiny circle of “leaders” – all of them either coming from communist or socialist backgrounds – that EU policy is created.

The result is a mishmash of oppressive regulations and overweening ambition. The EU leaders have had ambitions to build an army and to create a fuller union of EU states that will mimic the worst federal excesses of the United States.

What is even worse is that all of this was planned long ago; even as EU member states and their populations were being assured that the EU was nothing but a large trading facility, its top executives were plotting and planning a 400 million strong, federal union. One hears echoes of that today, as academics and politicos alike call for a closer EU to counteract the implausibility of the euro’s current condition.

In fact, these days the euro itself is not a currency mechanism so much as a kind of metaphorical manacle that increasingly is keeping Europe’s Southern flank – miserable and bleeding – tied to the richer North. The result: higher taxes, resource fire-sales and the slashing of public services and retirement benefits.

Of course, we’ve long predicted that the EU, or at least the euro, is in significant trouble. This is based on the idea, generally, that there is no “recovery” – not in America and not in Europe. In fact, Europe’s Southern PIGS are bankrupt; meanwhile, the US’s unemployment refuses to go down and may even be headed up.

What’s left? The world’s economy basically hangs on the thread of China and as we’ve tried to point out in numerous articles, that’s a thin support indeed. China’s social unrest is actually quite staggering at this point, though under-reported. Its much discussed (finally) empty cities, skyscrapers and malls are symptomatic not of central planning so much as communist party desperation.

The ChiComs will do anything to meet their self-imposed growth targets. But the result has been the biggest building and buying binge the world has ever seen. It has to end sometime, and it is very possible that it will put an end to the Chinese government itself. Without China, the world will reel round like a drunk looking for a handhold.

Without support, the global economy will fail. India, Brazil and Russia shall not provide salvation. Germany will not salvage the EU, for without anyone to buy its products, Germany will participate in the upcoming worldwide “recession.”

But the UK Telegraph article tells us to expect grim times – really grim ones – even without China’s participation. In the US, we learn, the US Conference Board’s index of consumer sentiment “plunged to the lowest level since the depths of the slump in 2009, falling to 44.5 from 59.2 in July.”

Meanwhile, Christine Lagarde, new chief of the International Monetary Fund, put her wrong foot first, irritating the Germans and then the French by discussing a global crisis is entering “a new phase.” This was not welcome news to the leaders of either country, and the Germans especially do not want to be pressured into supporting a weaker euro, no matter how concerned Ms. Lagarde is.

Lagarde is actually reacting to her own research. We learn from the Telegraph that the IMF has slashed its growth forecast for America and Europe, according to a leaked draft of its World Economic Outlook. Lagarde and the IMF want American and European central banks to print more money, even though it doesn’t seem to be working. The Germans know it; the IMF does not seem to.

The Germans apparently understand that nothing can be done, at least when it comes to Spain, Portugal, Greece and Ireland. Lagarde’s IMF disagrees. Jose Vinals, the IMF’s head of capital markets, “rebuked Europe’s leaders for failing to beef up bank defences and allowing the debt crisis to fester.”

Vinals received support from Charles Dumas of Lombard Street Research, who said a further “recession” in the West is inevitable because of fiscal deflation. What should have happened? The ECB should have loosened considerably this summer; Jean-Claude Trichet, Europe’s central banker has got it all wrong, and has been behind the curve besides.

Yet can Trichet really be blamed? He’s feeling considerable heat from the Germans who have claimed that the ECB has engaged in “legally questionable” purchases of Spanish and Italian bonds. The Germans apparently feel they are losing control of the ECB, even though it is German money that drives the EU and the euro.

The rhetoric is building in Germany. The Telegraph notes that Hans-Olaf Henkel, former head of Germany’s industry federation (BDI), wrote in the Financial Times that his support for the euro had been “the biggest professional mistake I have ever made.” What’s the solution? A so-called ‘Plan C’ under which Germany, The Netherlands, Austria and Finland make their own currency, leaving the South to struggle on without the straightjacket of a German euro.

Stephen Jen from SLJ Macro Partners believes that the EU’s debt-ridden Southern flank may act first, as politicians revise their views on the PIGS’ unpopular austerity and propose radical solutions featuring disunion either of the EU itself or of the currency. “I think this will happen in weeks rather than months,” the Telegraph quotes him as saying.

We are not holding our collective breath. (Just today there are reports that Merkel DOES have enough votes to push through yet another EU bailout package in Germany.) But it does occur to us that the combination of an intractable sovereign debt crisis, an oncoming German recession and a court case intended to decide whether Germany’s current government is acting unconstitutionally may be enough – eventually – to crack open the union.

We have never predicted in the past what may happen to the EU, at least not in the short term. In fact. this deeply dishonest political system was meant to grow by crisis. Its top men assumed that there would come a time when the euro would not function properly. One can even make a case that the European banks were encouraged to acquire sovereign debt in order to precipitate the current crisis.

But something happened on the way to a closer union. We believe the Internet Reformation has thoroughly exposed the plans of those at the top in a way that was not anticipated. It is one thing to manipulate people who do not understand what’s occurring. It is another to move ahead with a slippery program that people understand is not in their best interests.

The EU, if it fails, becomes merely one more dysfunctional meme. It takes its place in an increasingly long line that includes the foundering war in Afghanistan, the rising tide of disbelief over the war on terror, the obloquy that global warming now attracts, the derision to which central bankers are increasingly subject, etc.

The 21st century is nothing like the 20th. The great banking families are losing control of communications and increasingly cannot configure their messaging. Mainstream media is struggling to survive. The vast fear-based promotions rolled out by Tavistock Institute are not working so well these days. The directed history that seems to have run the world for nearly 200 years is becoming undone. This world lives in interesting times. Such lack of elite control was seen last some 500 years ago during the era of the Gutenberg Press, which led to the Protestant Reformation and a wholesale shift in the way populations were controlled.

It may be that the powers-that-be have already anticipated the break-up of the EU or at least the degradation of the euro. Perhaps such an occurrence will be used to bring pressure on world leaders to create a truly global currency. But even so, this must be seen as a secondary strategy more than an original plan.

Conclusion:
Definitively, the great families and their enablers did not wish for the EU to fail, so far as one can tell. Its dissolution, were it to occur, will be no victory for them. In fact, it would be a most important and startling defeat, one that might have an extremely negative effect – not just on European unity but also on regulatory democracy and even on the central banking system. It might even signal the beginning of the end of the modern conspiracy to rule the world.

September 23: The beginning of the end for Merkel… and the Eurozone?

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by Tyler Durden
Posted Zero Hedge
August 8, 2011

EVERY TIME WE DISCUSS THE FUTILITY of the nth bailout of [Greece\PIIGS\Europe\the Euro] we make it all too clear  that the trade off between Germany taking on board ever more peripheral financial risk in one after another all too brief attempt to prevent the implosion of European capital markets and its currency, is not only a relentless creep higher in German default risk (and lower in the German stock market, as August has so violently demonstrated) but increasing political discontent, which after claiming countless political regimes across the world, has finally settled down on one that truly matters: that of German chancellor Angela Merkel.

And as Reuters reports, Merkel’s disappointing response to an ever escalating set of crises, both domestic and international, means that the beginning of her end (and by implication of the Eurozone, and of the Euro) may be as soon as September 23, when the vote over the expansion of the latest and greatest European bailout lynchpin, EFSF, will take place.

To wit: “Germany’s Angela Merkel faces the biggest challenge to her leadership since coming to power in 2005, with traditionally loyal conservative allies openly criticizing her approach to the euro zone crisis and her hands-off Libya policy in shambles….it is Merkel’s piecemeal approach to the euro zone’s worsening debt crisis that has come under fire over the past week and now threatens her iron grip on power in Germany.” The biggest problem for Merkel is that she has gone “Japanese” in the opinion of the public: doing neither nothing, nor enough, to halt the European crisis in its tracks: “For some in Germany, she has gone too far by bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home.” This latest attempt to placate everyone, while achieving precisely the opposite, will come to a head on September 23 when the vote to expand the EFSF takes place: she is for the time being expected to have a sufficient number of votes to pass the critical for the eurozone proposal. “If it’s not enough, Merkel would be forced to resign. It would lead to a crisis.” And should there be a crisis, it will be the end for the European experiment as well, since with the political situation at the Euro’s biggest financial backer in flux, the free fall in European risk will be one that no one, certainly not the ECB, will be able to arrest. Cue even more improvised bailouts by the central banker oligarchy, yet without Germany, the credibility of any and all such deseprate measures will be nil. This incremental political uncertainty will likely make the life of the FOMC’s Sept 20-21 meeting slightly easier, as an adverse monetary announcement by the Fed, contrary to that priced in, coupled with the risk of a full blown European crisis, will be very frowned upon by the Status QuoTM.

From Reuters:

Seen for much of the past six years as a reliable, steady leader whose competence and knack for brokering deals made up for a lack of bold vision, Merkel’s image has taken a beating over the past months and polls show an increasing number of Germans view her government as directionless.

The chancellor’s troubles can be traced back to two decisions taken in March, when she abruptly dropped her long-standing support for nuclear power in the aftermath of the Fukushima disaster in Japan, and days later backed Germany’s abstention from a U.N. vote authorising military action in Libya.

Coming shortly before a crucial state election, which her conservatives subsequently lost, the steps looked to many in Germany and abroad like cynical political ploys to placate domestic opinion.

For some in Germany, she has gone too far by bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home. This conflict will come to a head next month. Merkel’s coalition has a comfortable 20-seat majority in the lower house of parliament. But if she is hit with dissent in her own ranks, and is forced to rely on opposition parties to pass legislation to expand the single currency bloc’s rescue mechanism – the European Financial Stability Facility (EFSF) – then her coalition could collapse, sparking early elections.

“The euro crisis entered a new phase over the past week,” influential German weekly Der Spiegel said on Sunday. “Before the main question had been how the common currency could be saved. Now it is also about saving Merkel’s chancellorship. If her coalition does not deliver a majority for the enhanced euro rescue mechanism in the autumn, people close to the chancellor say, the coalition is all but finished.”

On the significance of September 23: The chances of Merkel failing to secure her own majority in the EFSF vote, which is likely to take place on Sept. 23, still seem slim.

Her Christian Democrats (CDU), hovering at a weak 30 percent in opinion polls, have little incentive right now to bring forward an election that is not scheduled to take place until the autumn of 2013. Merkel’s conservative bloc — composed of the CDU, Bavarian Christian Social Union (CSU) and Free Democrats (FDP) — has shown discipline in previous euro zone aid votes, with only a handful of lawmakers rebelling.

“I expect she will get majority backing from her own coalition,” said Gerd Langguth, a political scientist at Bonn University and biographer of Merkel, putting the number of dissenters at around fifteen. “If it’s not enough, Merkel would be forced to resign. It would lead to a crisis. No one is interested in an early election.”

Slim… but getting bigger:

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