FedUpUSA

Archive for January 16th, 2012

The European debt crisis has just gone to an entirely new level.  Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe.  Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations.  This included both France and Austria losing their cherished AAA credit ratings.  When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation.  Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters.  Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge.    Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did.  Standard & Poor’s unleashed a barrage of credit downgrades on Friday….

-France was downgraded from AAA to AA+

-Austria was downgraded from AAA to AA+

-Italy was downgraded two more levels from A to BBB+

-Spain was downgraded two more levels

-Portugal was downgraded two more levels

-Cyprus was downgraded two more levels

-Malta was downgraded one level

-Slovakia was downgraded one level

-Slovenia was downgraded one level

This is really bad news for anyone that was hoping that things in Europe would start to get better.  Borrowing costs for many of these financially troubled nations are going to go even higher.

In addition, there was another really, really troubling piece of news that came out of Europe on Friday.

It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.

The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a “voluntary haircut” that is supposed to be a key component of the “rescue plan” for Greece.

Greece desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Without some sort of an agreement, the finances of the Greek government will collapse very quickly.

For now, negotiations have failed.  There is hope that negotiations will resume soon, but Greece is rapidly running out of time.

The Institute of International Finance issued a statement on Friday which said the following….

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt”

The IIF says that negotiations are “paused for reflection” right now, but they are hoping that they will be able to resume before too long….

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach”

Something needs to be done, because Greece is experiencing a complete and total financial meltdown.

Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent.  Today, the yield on one year Greek bonds is up to an astounding 396 percent.

That is how fast these things can move when confidence disappears.

Those living in the United States should keep that in mind.

Unfortunately, Greece is not the only European nation that is completely falling apart financially.

We aren’t hearing much about it in the U.S. media, but Hungary is a total basket case right now.  The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.

In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary.  The following is from an article in the Daily Mail….

The European Union has stepped up pressure on Hungary over the country’s refusal to implement austerity policies and threatened legal action over its new constitution.

The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.

Over the past months, the country’s credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.

But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.

Slovenia is a total mess right now as well.  The following comes from a recent article posted on EUObserver.com….

Slovenia’s borrowing costs have reached ‘bail-out territory’ after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia’s capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country’s president set to re-cast his name or propose someone new within two weeks.

Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.

Well, things are certainly starting to shape up that way.

Europe is heading for some really hard times.  What is about to happen in Europe is going to shake the entire global financial system.

Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.

Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.

In addition, the U.S. debt problem is bigger than it has ever been before.

For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama’s first term in office?

That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.

For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.

Just ask Greece.

Already there are indications that foreigners are starting to dump large amounts of U.S. debt.  If this trickle becomes a flood things could become very bad for the United States very quickly.

We are on the verge of some very bad things.  The kinds of “financial bombs” that we saw dropped today are going to become much more frequent.  As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.

Things are not going to be “normal” again for a really, really long time.

Hold on tight, because 2012 is going to be a very interesting year.

The Economic Collapse

Nice editorial……

At some point in every negotiation over fiscal policy, once the high-minded speeches and other pleasantries have been delivered, the disagreeable details poison the atmosphere. Everyone is in favor of tax and entitlement reform, after all, until they see the specifics.

The reaction to the cost-cutting strategy that Defense Secretary Leon Panetta revealed last week suggests this is about to happen with regard to Pentagon spending.

Let me be very clear: Substantial efficiencies can and should be wrung from the defense budget, and Panetta’s approach has many attractive features. But the strategy he sketched out — most of the details have yet to be provided — reveals the underlying tensions that arise whenever significant defense cuts are promised.

Bah.  Like so many before him and in fact like Pete before, he’s willing to lay markers that he knows are false — just like the so-called “Tea Party”, just like Democrats, and just like so-called “mainstream” Republicans.

The truth is much uglier: Our government is fully 50% larger than we can afford.

This means we must either double tax revenues (not rates, revenues, cut the size of government in half, or some combination of the two.

Let’s take defense.  To have defense pay its “fair share” of these reductions our roughly $750 billion in expenditures would have to be slashed by $350 billion per year, or $3.5 trillion over a decade.  This is nearly four times the amount that people are screaming about now.

To do the same thing with Medicare not only must we stop adding 9% a year to expenditures we must cut the $800 billion that medical expenses are consuming in half, that is, by $400 billion a year, or $4 trillion over ten years — and we must do it now.

What’s also interesting is that the budget cuts needed in areas outside defense are, if anything, even steeper and thus even less realistic. As Richard Kogan of the Center on Budget and Policy Priorities has noted, if the cuts are actually made, by the end of this decade, non-defense discretionary spending would wind up at its lowest share of gross domestic product since 1930. I wouldn’t bet on that, either.

All of which suggests that both political parties have locked into inadequate revenue levels for the next decade. As a result, they are forced to count on spending cuts much larger than what, in the end, they are likely to implement — in some cases, much larger than what they should implement.

Nonsense.

What’s clear is that we have been, and are, continuing to write checks we cannot cash.  We’ve been doing it for a long time too — it’s not new.  In fact, it goes back thirty years or more, and it’s not just in Washington DC — it’s everywhere.

Look around you.  The vast majority of Americans, were they to lose their jobs and their credit card access would literally starve and/or freeze to death within two weeks as they have zero savings and once the food in their pantry was exhausted (what little there is) they’d be utterly hosed.  With not one dime in savings they could not put gasoline in their cars or pay the electric bill either.

In the last month of 2011 the Federal Government borrowed $112.4 billion in new funds.  That’s $3.63 billion every single day, or about $11 per person in America, per day, every day for a total of $340.61 for each man, woman and child in America in the month of December alone.

This is new debt and does not include the interest on existing debt — just new obligations.  You sunk that far further into the hole.

This will stop.  It will either stop voluntarily or it will stop as it is ending in Greece.  Those are the choices — the only choices.

Yeah, Pete is right to bring this up in the context of the Pentagon, but the biggest issues are not with military spending.  They lie in the medical realm where roughly 8% compounded growth over the last 30 years has taken the US Federal on-budget spending on medical care from $53 billion in 1980 to over $800 billion today, with fully half of that borrowed instead of taxed.

Get ready folks — it’s coming.