FedUpUSA

Archive for the ‘Italy’ Category

Italian 10-Year Bond Yield

It’s happening folks…

Italian bond yields continue up.

That’s not particularly news.

But now yields are going up in France, Spain and Belgium.

One downgrade to France and it all goes up in smoke for the EFSF.

Political movement no longer works.  You need fiscal resolution and you can’t get there from here.  Don’t believe for a minute that this isn’t going to blow up in people’s faces, because it both can and will.

“It’s a confidence crisis,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.”

This is not going to end well and so far there is nobody talking about what has to actually happen either here or there — that is, whatever services people want from government they must be willing to pay for them with current tax revenues.

That’s the beginning and end of it and the time to take this action is quickly coming to a close.  The market is going to enforce prudence whether the wonks in The Fed, in the ECB and in all of the governments involved like it or not.

Eurostat says that GDP in the Eurozone was 0.2% for the third quarter. This means that the Euro zone as a whole cannot run any fiscal deficit whatsoever without continuing an attempt to build the Ponzi.

I repeat: NOBODY is yet speaking to the truth of the matter.  Not central bankers, not governments, not politicians in either party here and nobody over in Europe.

The market is calling “BS!” on the games; the banksters and governments, having gotten away with bailing out the crooks in 2008 and then refusing to put a stop to the abuses, smugly thinking they could just go on their way and leave everything alone (including the asset-stripping and lying schemes of the banksters) are discovering that the market is refusing to play along and is going to force the truth into the open.

I have warned of this for four and a half years and have been ignored.  To date while there are people using a lot of “if” words, including Evans who is single-handedly destroying the credibility of The Fed right now on CNBC, and Liesman, rather than calling him on it, is (again) being an enabler.

Again folks, the bottom line is simple: You cannot continually borrow and spend more than you make, yet this is the game that governments have continually played for 30 years, and private businesses have attempted to “lever up” to “take advantage” of this without regard to the mathematical inevitability of this strategy’s failure.

Jacob Fugger and Matthaus Schwartz. The filing cabinet shows the names of Fugger's branch offices: Rome, Lisbon, Budapest, etc.

A year ago this would have been instantly moved to the Tinfoil area of the forum.  Today, maybe not.

Italy’s Senate approved debt- reduction measures in an attempt to shore up investor confidence and pave the way for a new government that may be led by former European Union Competition Commissioner Mario Monti.

Who is this guy?  Well beyond the “good” credentials (he’s an economist for whatever that’s worth) and a politician (duh) he’s also the European Chair of the Trilateral Commission (yes, Rockerfeller’s group) and, of course, Bilderberg.

This makes two.  The other was Greece, which now has a former ECB Vice-President as their new President.

Greece is still having some problems with this however; it seems that the alleged “unity government” might not be so unitary.  We shall see.

But one does have to wonder about this pattern…. two in a week is not exactly something to ignore. I’m generally very bearish on such conspiracy theories but occasionally something pops up that just demands a mention, and this appears to be one of those times.

Another day of lies has dawned on the markets.

After being up close to 2% the market is now bleeding again with the S&P threatening to negative and the Nasdaq down into red territory.

The culprit?  The continuation of lies.

Roughly 20% of Italian debt is held by French banks.  And they, of course, are almost-certainly marking that debt to fantasy prices.

Apple is getting cored as the claimed “we’ll be on top of the world forever” crap is turning out to be more than a bit vapid.  Green Mountain got destroyed last night with allegations of “aggressive accounting” (or worse) being thrown around for some time; they had an inadequate response on their call last night and detonated.

The entire damn world is full of Ponzi and nobody is facing reality.  If we don’t cut this crap out the rout you saw yesterday is going to look like a Girl Scout picnic.

There is nothing — literally nothing in the form of leadership showing up from anywhere in any of the international leadership.  The French 10 year yield is now spiking and the spread against Bunds has widened by 12% today.

The ECB appears to have been playing “aggressive buyer” but this will not work.  It can’t work.  You cannot solve a debt problem with more credit; you must stop the excessive spending!

Last night I saw the most outrageous display of political bullshit and pandering I’ve been witness to in decades.  The Rethuglicans simply cannot bring themselves to speak the truth.  While I heard “excessive spending” a few times nobody is talking about nor will they talk about where it’s coming from — the large budget items and the only ones that matter are all entitlements and defense!

Go ahead and argue with the facts if you want but you’re a buffoon if you do.  The fact of the matter is that Social Security, Defense, Unemployment/Welfare/Etc, Medicare, Medicaid, Interest and Health and Human Services are fully 3/4 of the federal budget.

We’re well over a trillion in the hole meaning that you could cut everything from that point downward in that chart to zero and the budget would not be balanced.

There is no solution that does not involve addressing the “Big Five”: Social Security, Defense, Unemployment/Welfare, Medicare and Medicaid. 

Period.

Now you can dislike this all you want but you can’t change it.  Nor can you argue that cutting Defense along will make a material impact on the whole or bring us “balance.”  How much would you cute defense by?  Let’s say 50% – about $350 billion worth.  That’s nice; we’re still more than a trillion in the hole!

Put a different way those “big five” plus interest consume all of the tax revenues that the government takes in.

Deal with facts folks.  I don’t care if you like them or not; that’s not material.  We call them facts for that reason; it is immaterial if you find the facts savory or distasteful — they just are.

I have seen nothing from any of the Republican Candidates that have made sense in this regard.  Not even Ron Paul, who said he’d cut $1 trillion — but he didn’t say how and someone needs to ask him that before they blow him again with claims that he has a real solution, because the above chart makes clear that if you were to cut $1 trillion from the budget you’d have to basically zero everything other than entitlements were you to cut defense in half to achieve his numbers.  What he’s put forward in public (in the form of “block grants”) are lies since all that does is shift spending and thus taxing demands from one place to another.  This is raw douchebaggery and those who support this crap without calling it out as what it is are blind partisans.

Bald claims such as anything counted in “block grants” must be deemed knowing and intentional lies when put against the above chart because they are.  Cost-shifts from the federal government to the states are not reductions in spending – they’re simply a shift of where taxation has to happen from one place to another and thus are also dishonest.

We are watching the spiral downward in Europe as they simply will not accept that the government cannot spend that which the people will not fund with current tax revenues.  This reality is coming here ladies and gentlemen in the very near future and we can either face it or we will suffer a ruinous financial collapse.

Those on the other side of the issue often ask “but won’t we collapse anyway if we do the right thing?” 

The answer is no.  The raw damage cannot be avoided but there are mitigating steps we can take in tax policy, immigration policy, trade policy, energy policy and reform of the medical and banking industries that will help.  They will not make the pain go away and they will not stop the damage from occurring but they can prevent the damage from being catastrophic.

The problem is that in order to do any of them we have to stop pretending that this is all someone else’s problem, that Medicare will be “as promised” for everyone 50 and older and that the government can continue to run on that chart above while we’re going to “make a serious dent in the deficit.” The truth is that we are refusing to actually reduce spending (not cut from a “baseline increase”) in those five major programs.

We either act now or the choices will be made for us.

What we are all watching unfold right now is a complete and total financial nightmare for Italy.  Italian bond yields are soaring to incredibly dangerous levels, and now the yield curve for Italian bonds is turning upside down.  So what does that mean?  Normally, government debt securities that have a longer maturity pay a higher interest rate.  There is typically more risk when you hold a bond for an extended period of time, so investors normally demand a higher return for holding debt over longer time periods.  But when investors feel as though a major economic downturn or a substantial financial crisis is coming, the yield on short-term bonds will often rise above the yield for long-term bonds.  This happened to Greece, to Ireland and to Portugal and all three of them ended up needing bailouts.  Now it is happening to Italy and Spain may follow shortly, but the EU cannot afford to bail out either of them.  An inverted yield curve is a major red flag.  Unfortunately, there does not seem to be much hope that there is going to be a solution to this European debt crisis any time soon.

We are witnessing a crisis of confidence in the European financial system.  All over Europe bond yields went soaring today.  When I finished my article about the financial crisis in Italy on Tuesday night, the yield on 10 year Italian bonds was at 6.7 percent.  I awoke today to learn that it had risen to 7.2 percent.

But even more importantly, the yield on 5 year Italian bonds is now sitting at about 7.5 percent, and the yield on 2 year Italian bonds is about 7.2 percent.

The yield curve for Italian bonds is in the process of turning upside down.

If you want to see a frightening chart, just look at this chart that shows what has happened to 2 year Italian bonds recently.

Do phrases like “heading straight up” and “going through the roof” come to mind?

This comes despite rampant Italian bond buying by the European Central Bank.  CNBC is reporting that the European Central Bank was aggressively buying up 2 year Italian bonds and 10 year Italian bonds on Wednesday.

So what does it say when even open market manipulation by the European Central Bank is not working?

Of course some in the financial community are saying that the European Central Bank is not going far enough.  Some prominent financial professionals are even calling on the European Central Bank to buy up a trillion euros worth of European bonds in order to soothe the markets.

Part of the reason why Italian bond yields rose so much on Wednesday was that London clearing house LCH Clearnet raised margin requirements on Italian government bonds.

But that doesn’t explain why bond yields all over Europe were soaring.

The reality is that bond yields for Spain, Belgium, Austria and France also skyrocketed on Wednesday.

This is a crisis that is rapidly engulfing all of Europe.

But at this point, bond yields in Europe are still way too low.  European leaders shattered confidence when they announced that they were going to ask private Greek bondholders to take a 50% haircut.  So now rational investors have got to be asking themselves why they would want to hold any sovereign European debt at all.

There is no way in the world that any rational investor should invest in European bonds at these levels.

Are you kidding me?

If there is a very good chance that private bondholders will be forced to take huge haircuts on these bonds at some point in the future then they should be demanding much, much higher returns than this.

But if bond yields continue to go up in Europe, we are going to quickly come to a moment of very great crisis.

The following is what Rod Smyth of Riverfront Investment Group recently told his clients about the situation that is unfolding in Italy….

“In our view, 7% is a ‘tipping point’ for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance”

Other analysts are speaking of a “point of no return”.  For example, check out what a report that was just released by Barclays Capital had to say….

“At this point, Italy may be beyond the point of no return. While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.”

But unlike Greece, Ireland and Portugal, the EU simply cannot afford to bail out Italy.

Italy’s national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.

Plus, as I noted earlier, Spain is heading down the exact same road as Italy.

Europe has simply piled up way, way too much debt and now they are going to pay the price.

Global financial markets are very nervous right now.  You can almost smell the panic in the air.  As a CNBC article posted on Wednesday noted, one prominent think tank actually believes that there is a 65 percent chance that we will see a “banking crisis” by the end of November….

“There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks.”

Personally, I believe that particular think tank is being way too pessimistic, but this just shows how much fear is out there right now.

It seems more likely to me that the European debt crisis will really unravel once we get into 2012.  And when it does, it just won’t be a few countries that feel the pain.

For example, when Italy goes down many of their neighbors will be in a massive amount of trouble as well.  As you can see from this chart, France has massive exposure to Italian debt.

Just like we saw a few years ago, a financial crisis can be very much like a game of dominoes.  Once the financial dominoes start tumbling, it will be hard to predict where the damage will end.

Some believe that what is coming is going to be even worse than the financial nightmare of a few years ago.  For example, the following is what renowned investor Jim Rogers recently told CNBC….

“In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful”

Rogers says that the reason the next crisis is going to be so bad is because debt levels are so much higher than they were back then….

“Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse”

So what is the “endgame” for this crisis?

German Chancellor Angela Merkel is saying that fundamental changes are needed….

“It is time for a breakthrough to a new Europe”

So what kind of a “breakthrough” is she talking about?  Well, Merkel says that the ultimate solution to this crisis is going to require even tighter integration for Europe….

“That will mean more Europe, not less Europe”

As I have written about previously, the political and financial elite of Europe are not going to give up on the EU because of a few bumps in the road.  In fact, at some point they are likely to propose a “United States of Europe” as the ultimate solution to this crisis.

But being more like the United States is not necessarily a solution to anything.

The U.S. is 15 trillion dollars in debt and extreme poverty is spreading like wildfire in this nation.

No, the real problem is government debt and the central banks of the western world which act as perpetual debt machines.

By not objecting to central banks and demanding change, those of us living in the western world have allowed ourselves to become enslaved to gigantic mountains of debt.  Unless something dramatically changes, our children and our grandchildren will suffer under the weight of this debt for as long as they live.

Don’t we owe future generations something better than this?

The Economic Collapse

If you haven’t noticed this morning is downright ugly in the stock market, with the futures indicating a more than 200 point down open on the DOW.

The culprit is Italian bonds, which have accelerated their march higher on yield and now the 2yr has inverted as well.

Note carefully that Italy, in “immediate terms”, does not appear to be in distress. That is, while they’re spending a lot on interest they don’t have a coverage problem (ability to pay the interest) – for now.

The market doesn’t care.  The market has discerned that Italy will not enact the actual government spending cuts necessary to bring revenues in line with expenses.

In the end analysis that is all that matters.  Everything else is arm-waving and obfuscation; if you spend more than you make eventually you go bankrupt.  Period.

All the monetarist claptrap is the product of a deluded mind or worse, an intentional lie.  But none of the armwaving changes the perception of the market, and in the end that perception is all that counts.

The lesson from first Greece and now Italy must not be lost on our clowncar brigade in Washington DC: The government cannot spend more than it takes in via taxes.

Let’s face the fundamental facts folks: Government spending is always — without exception — nothing more than a transfer.

That is, every dollar that the government spends on some program is a dollar that the private sector cannot spend or form capital with itself.  When the government taxes and then spends it removes the money from your wallet in order to make a decision that you would otherwise be able to make.

The premise that government can avoid this fact is false.  If government borrows to spend it simply time-shifts when that taxation will take place — it spends now to pay later, exactly as you would were you to borrow to buy a car, a house, or a refrigerator.

The dynamic is exactly the same.  The “monetarist” view that the government borrows money into existence and this “powers” the economy is nonsense.  “Money” in that sense is merely a token; it does not “come into existence” as a consequence of government printing or borrowing it.  Actual money is the fruit of labor and we use tokens such as paper bills and metallic coins to represent money as a means of lubricating commerce — that is, giving the public a convenient way to exchange produced economic activity with desired consumption.

Credit money spends exactly as does produced money.  In the economic parlance they’re fungible; that is, exchangeable without distinction.  As a merchant you have no idea if the person who walks into your shop bearing a $100 bill obtained it by picking strawberries or hitting the ATM outside your shop with his credit card, promising to repay the $100 later.

The economy is only in balance as long as the amount of produced goods and services equates with the amount of “money”, defined as credit money and produced money summed, is in balance.

We have spent 30 years distorting this fundamental fact.  We have done so through intentional overspending as a nation.  Our government has engaged in an orgy of making promises that the lawmakers know cannot be kept, and they have intentionally goaded private citizens into taking on more and more debt that they ultimately will not be able to pay as well.  Like all delusions and addictions when one begins the side effects seem small and the pleasures large, but in fact the costs are large or even permanent while the pleasures are in fact fleeting.

This charade must end.  Europe is self-destructing over this exact paradigm — promising “social benefits” that cannot be paid with current taxes, relying on the bond market to hand out ever more “cheap money.”

Now the market has discerned that this scheme is in fact a racket and will inevitably lead to massive losses.  It is thus withdrawing its support.

There is no option other than to cease the deficit spending — both there and here — right now.

I know what all the “pundits” tell you — we can’t do that right now, we have to wait until the economy is on a better footing and then we’ll do it.

Sorry, that won’t wash; this claim has been made for 30 years every time the economy turns down.  We have never withdrawn the deficit spending.  Ever.

The fact of the matter is that all we had to do was hold government spending constant with tax revenues in 2000.  We refused, because in 2000 when the Nasdaq market collapsed tax revenues from capital gains (which is where Clinton got his “improvement”) disappeared.  Rather than accept that the government had gotten too big, we instead made it bigger with the excuse that we’d stop once the economic downturn was over.

But we didn’t.  We instead expanded government and cut tax rates at the same time.  We went from “hold spending to tax revenues” to a point where government had to contract in size by about 20% in 2007.  Then the collapse came and now on a gross numbers basis it looks like we need to shrink the government by 43% – a doubling in less than four years.

But in truth it’s more than 43%, because when you stop the overspending the follow-through effects will depress tax revenues (and employment) for a time as well. 

This is the death spiral that has taken hold in Greece, where commerce and tax collection has essentially ceased, and now it is threatening to occur in Italy. 

If we do not act now we will cross that line here in the United States — and nobody knows exactly where it is, myself included.  All we do know is that it’s out there and we’re perilously close to the point of no return and may already be beyond it.

Nonetheless we must stop the deficit spending now and try to avoid the cliff.  If it’s too late then it makes no difference whether we act or not.  But if it’s not too late then we must save ourselves while we’re still able.  Today, I believe we’re still able.

Please understand that there is no solution found in tax hikes.  You could literally tax all income over $250,000 (yes, at 100%) and not close the budget deficit.  The primary entitlement programs currently consume all tax revenues — Social Security, Medicare, Medicaid, Unemployment and Welfare/General Assistance (of its various programs) leaving nothing to pay the light bill say much less than dozens of additional departments in the Government.  Nor have tax revenues covered the interest on the national debt.  Worse, Medicare and Medicaid (medical) are growing in cost at 9% a year and have been for the last two decades — which cannot continue as that chart of cost looks like this over the next 40 years, starting with $10,000 per person, per year:

There is no way anyone is going to come up with nearly one million dollars per person per year for medical care, but that is exactly what you are being promised.  It was and is a damned lie.

I understand that today’s Seniors and those who will become Seniors (your author here is pushing 50!) were promised these benefits.  I was promised them too.  That promise was an intentional lie used to buy votes.  The AARP should not be running ads on TV telling politicians “we’ll vote you out if you don’t give us a pony!” they should be calling for Seniors to occupy the Washington Mall and encircling the Capitol building right now demanding heads on plates for the lies that were sold to its members in exchange for votes — political power – over the last three decades.

That which cannot happen won’t happen folks, no matter how many babies some politician kisses or how many slick lies he tells you while wearing a $3,000 suit.  Arithmetic does not care about politics or votes; it just is.

We must stop this charade right now.  Jim Cramer is screaming that “they need to buy some time” over in Europe.  We cannot play the “buying time” game any more; there is no more time.

We must, right now, cut off the deficit spending. 

Now.

Today.

Not promise to do it tomorrow, not promise to do it when unemployment comes down, not in the “intermediate term” and certainly not as was “promised” by Ryan over the next 10, 20 or 30 years.

It has to happen right now; we must accept that the promises made were lies, that the output in the economy over the last three years was false as the government has been borrowing and spending 12% of GDP and this cannot continue.

We must accept that the economy has to be allowed to adjust to the actual output of our people.  This will be a massive and painful adjustment but it is unavoidable. 

As just one further example GM’s pension system is underfunded by more than $10 billion — that’s money that doesn’t exist and won’t.  State and local pensions are in similarly bad condition.

We must accept the truth ladies and gentlemen.  There is no other choice.

But at the same time, there are things we can do to help.  We can fix trade policy.  We can fix immigration policy.  We can collapse the college and medical cost bubbles.  We can fix tax policy so that America earns a place for corporate headquarters to relocate to rather than one firms flee from, thereby bringing us good-paying white-collar jobs.  And we can fix our energy policy allowing us to rationalize our defense spending.

None of this is easy.  But all of it is possible.  And while this may sound like a broken record, and to some degree it is, you can read it all here in the more than 4,000 articles I’ve written over the last four and a half years, or you can find those prescriptions in the book on the right sidebar..

But if we don’t act — and act now — it’s not going to matter what we do, as the choices will be made for us by market forces we cannot avoid.

Oh, how the mighty have fallen.  In just a matter of days, two of Europe’s most venerable leaders have been toppled.  George Papandreou was the third member of the Papandreou dynasty to be prime minister of Greece.  Silvio Berlusconi had dominated Italian politics for nearly two decades.  But now they are both heading out the door and the international media have been reporting on their resignations with the kind of enthusiasm that is normally reserved for sporting events.  “Down goes Papandreou!  Down goes Berlusconi!”  If you didn’t know better, you would almost be tempted to think that some of the recent news reports were describing a boxing match.  But this is what happens when debt problems spiral out of control.  It is the leaders who take the fall.  So will the resignations of Papandreou and Berlusconi help anything?  Of course not.  Europe is still headed for a financial collapse of epic proportions.

As I wrote about recently, it has been the fumbling of the Greek debt crisis by European leaders which has set the stage for the burgeoning financial crisis in Italy to go to a whole new level.

Once the Greek debt deal was announced, I warned that it would shatter confidence in the sovereign debt of the rest of the PIIGS and it would cause their bond yields to soar.

That is exactly what has happened.

The yield on 10 year Italian bonds (probably the most important financial number in the world at the moment) is now up to 6.7 percent.

Never before in the euro era has the yield on Italian bonds been as high as we have seen this week.

So why is this important?

Well, the reality is that Italy simply cannot afford to service its massive national debt when yields are this high.

We are officially in the danger zone.

Carl Weinberg, the chief economist at High Frequency Economics, recently said the following about what would happen if Italian bond yields go up into the 8 to 10 percent range….

“If it has to pay those yields to finance itself, Italy is dead, and the sovereign crisis just blew up”

So watch that number very carefully over the next few months.

Italy is being called “too big to fail, too big to save”.  There is no way that Europe can afford Italy to crash, but there is also no way that the rest of Europe can put together enough money for a full scale bailout of Italy.

So there is panic in the air.

The Italian government is in a state of near chaos and over the past couple of weeks we have seen Berlusconi’s coalition break down.  Now Berlusconi has agreed to resign, and the future of Italian politics is murky at best.

The following is how a Reuters article described the agreement for Berlusconi step down….

Berlusconi confirmed a statement from President Giorgio Napolitano that he would step down as soon as parliament passed urgent budget reforms demanded by European leaders after Italy was sucked into epicenter of the euro zone debt crisis.

The votes in both houses of parliament are likely this month and they would spell the end of a 17-year dominance of Italy by the flamboyant billionaire media magnate.

Many believe that the departure of Berlusconi is going to pave the way for brutal austerity measures to be imposed on the Italian people.

Suddenly, it very much feels like we are watching a replay of what has happened in Greece over the past couple of years.  Just check out the following excerpt from a recent article in the London Evening Standard….

The Italians feel they’ve been humiliated by having to accept that monitors from the IMF will be arriving in the country this week to oversee a rise in pension ages, a sell-off of state assets and new rules to make jobs less secure.

Does that not sound like exactly what happened in Greece back near the beginning of their crisis?

In Greece, brutal austerity measures demanded by the EU and the IMF plunged the country into a depression, tax revenues plummeted, Greek debt exploded to even higher levels, bond yields soared into the stratosphere and the EU and the IMF demanded even more austerity measures be implemented.

Is the same sad story going to play out in Italy?

The Italians are definitely going to agree to some pretty significant budget cuts.  But if bond yields keep rising, they are going to wipe out all of the savings from the budget cuts and then some.

This is why I keep preaching about the horror of the U.S. national debt over and over and over.  If you don’t deal with it when you can, eventually interest rates rise to unbearable levels and a horror show quickly unfolds.

Anyway, right now Italy has a debt to GDP ratio of 118 percent.  If they keep expanding that debt it is going to result in a financial nightmare, but if they try to implement strict austerity measures it is also going to result in a financial nightmare.

They are damned if they do and they are damned if they don’t.

Of course we should not forget about Greece.

The EU has been freaking out for quite a while about what to do about tiny little Greece.

Now that George Papandreou has been kicked to the curb, it looks like Lucas Papademos is going to be the next prime minister of Greece.

Papademos previously served as the governor of the Greek central bank, as a vice president of the European Central Bank and as a senior economist at the Federal Reserve Bank of Boston.

In other words, he would be the ideal choice of the international banking community.

Not that anyone is going to be able to do much for Greece at this point.  Greece is a financial basket case, and unless someone gives them gigantic piles of money for free that is going to continue to be the case.

A year ago, the yield on 2 year Greek bonds was a bit above 10 percent.  Today, the yield on 2 year Greek bonds is over 100 percent.

If you want to see what a financial meltdown looks like, just check out what is happening in Greece.

The rest of Europe is in panic mode too.  For example, France is desperate to keep their AAA credit rating.  In an article for the Telegraph, Ambrose Evans-Pritchard described the austerity measures that France is implementing in an attempt to head off a debt crisis of their own….

The belt-tightening plan — the second package since August, taking total cuts to €112bn — include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone.

In the end, all of this is too little, too late.

Europe is heading for a date with destiny.  They have spent themselves into oblivion and now they are going to pay the price.

Some members of the financial community fear that a full-blown crisis could erupt at any moment.  For example, according to Business Insider, Colin Tan of Deutsche Bank recently said that he believes that it is possible that “we could be in full crisis mode” by the time the week ends….

Its not inconceivable that we could be in full crisis mode by the end of this week. The situation with Italy feels increasingly like one that has little chance of materially improving until some
extreme pressure is put on someone to act. It may not come to a head this week but the signs are not good that we can avoid an extreme situation emerging soon.

For those of you that are freaking out about now, don’t worry too much.  A full-blown crisis is not going to happen this week.

But time is running out.

And when Europe comes apart, it is going to have a dramatic impact on the United States as well.

According to an article in the Financial Post, the Federal Reserve made the following statement in a report about a survey that it just released….

“About one-half of domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries”

Big U.S. banks have a lot of exposure to European debt and to European banks.  When the financial dominoes start to fall, a lot of those dominoes are going to be in the United States.

One of the biggest dangers to be concerned about are all of the credit default swap contracts that U.S. banks have written on European debt.  Just check out what a recent article posted on the website of MSNBC had to say about that….

U.S. banks have written about $400 billion in CDS contracts on European sovereign debt, according to the Bank for International Settlements. Those payouts would be triggered if Greece or Italy defaults. Because financial institutions are not required to report their CDS holdings, little is known about which banks or investment firms are on the hook, and for how much.

As I have written about previously, there is a very good chance that the world could be facing a massive derivatives crisis at some point in the next five to ten years.

If you hear the news talk about a “problem with derivatives” or a “derivatives crisis” then you will want to pay very close attention.

Over the past 30 years, the global financial system has constructed a gigantic mountain of debt, risk and leverage unlike anything the world has ever seen before.

At some point the whole thing is going to come crashing down.

When it does, it is going to affect the entire globe.

A huge storm is coming.

Get prepared while you can.

The Economic Collapse