Thursday, 23 June 2011

Global Economic Meltdown Imminent

CNBC's, Guy Johnson has just reported that the Northern European Finance Ministers have given up on Greece. Apparently, he has been told, they were fuming at the fact that Greece's new Finance Minister turned up to the meeting expecting concessions. It may be a bluff to try to get the Greek Parliament to vote for the new austerity package next week, but it also appears that the attempts to get the Banks and Finance houses to go along with some voluntary rescheduling also hit a brick wall. Moreover, the Credit Rating agencies have also been playing hard ball.

At the moment, it looks likely that the Parliament will reject the new austerity package, as the Opposition have already said they will oppose it, and they only need seven other MP's to join them. It looks like global Capitalist powers were already aware this development was likely, because at the opening of US trading today, the IEA also announced that it was releasing 60 million barrels of oil from global strategic reserves to try to calm markets and reduce global oil prices. They must realise that if Greece effectively defaults next week, then global economic meltdown will begin. Someone once asked how bankruptcies occur replied "Slowly at first, and then all at once." This will be likely to make the 2008 Credit Crunch look like a blip.

In his blog the other day Paul Mason, asks if it really would be the end of the world if Greece defaults? Well, no, even in economic terms things are always recoverable. But, would Greece defaulting cause a crisis that has not been seen for 80 years? Probably.

It is not that Greece is an important economy. It is not even that Greece's debt is particularly big - though for Greece it is unsustainably big. The problem is that Greece's debt is held by Greek Banks and Bondholders, as well as by the ECB - in fact, the ECB holds so much Greek debt that it has bought in the secondary markets from private Capitalists, that if that debt became worthless the ECB would be insolvent - and by European Banks, and Bondholders. Besides that, the total Greek debt rather like the sub-prime debt in the US from 2008, has been packaged up many times over, various derivatives such as Credit Default Swaps, whose purpose is to insure against default. As in 2008, the problem is that all of the Banks and Finance Houses that own this debt and these derivatives are all potentially at risk, as this debt becomes worthless, and as calls are made for payment against the CDS's. But, as in 2008 no one will know which Banks and fiannce Houses are at risk of going bust - made worse because the Bank Stress Tests carried out over the last year were totally discredited.

The consequence is that no Bank will lend to any other Bank or Financial Institution for fear that it will not get its money back, if they go bust. That means that interbank rates go through the roof, effectively lending stops, and any Banks and Financial Institutions dependent on the Money Markets are likely to go bust too. It means that lending to businesses will grind to a halt, and whatever decisions the Bank of England takes on Interest Rates will be meaningless, because Banks and Building Societies will be unable to advance money for mortgages other than at high rates.

The US markets realised that there must be something serious going on when the IEA announcement was made as the DOW fell by 200 points at the open. Bond markets are also factoring in a serious economic downturn as Yields also fell, a reflection of institutions buying Bonds in supposed safe haven economies in anticipation that an economic slowdown will mean company profits fall sharply, and so share prices too.

As the above video shows, Central Banks have themselves stopped selling Gold, and started buying, a sure sign that they see trouble ahead as further economic declines are likely to see even more paper money printed, making it even more worthless. As in the 1970's such a trashiong of paper currencies leads to a return to Gold as real money. In the 1970's Gold went from $30 an ounce to $800 an ounce, and almost 24 fold increase. Yet, on the news of the oil releases, Gold fell by 2% or around $30 an ounce. That is probably a sign that someone in the amrkets has been tipped the wink that the IMF intends to sell some of its Gold reserves, a suggestion that was made some weeks ago. That would be both to try to staunch a rocketing Gold price, as well as to provide the IMF with short term liquidity to intervene in economies at immediate risk.


davidjc said...

On the point that no one knows what the Credit Default situation is, there was a quote from Merkel the other day:

"Nobody around the globe knows exactly who holds those papers and what it means if they come due," Merkel told a meeting of the German parliament's European affairs committee. She said it was also unclear "who will have to pay how much and who will need fresh capital in what way."

She also said they "must be made transparent" .

You'd think it might be a good idea to make them transparent now, before stiffing the Greeks.

Boffy said...

In Parliament a few days ago a Government Minister said that Britain only had £4 billion of Greek debt. But, he was being very cautious in the words he used. This was Greek Government debt held by British Banks. But as former City Minister, Lord Mynors said later on Newsnight, the total level of UK exposure is many times that. Its not just Government debt Britain is exposed to, but Greek Bank and other debt. In addition there is the debt of other Banks such as in Ireland, France and Germany which if Greece goes bust, means that the shares, debt, and others assets that British Banks hold related to them will then also become worthless.

I'm not totally convinced its going to happen yet, because the consequences for Capital will be catastrophic in the short term. But, as I've pointed out several times the interests of Capital are not mirrored one to one by the actions of politicians. In fact, even the technocratic representatives of Capital can simply misjudge and make mistakes, which is what happened with the 1847 crisis caused by the 1844 Bank Act.

But, I find the IEA action, and the movements on Gold a bit of a coincidence. Also CNBC had an item earlier in the day that US Mutual Funds were being forced to reduce their investments in Europe. It points to me at least as though they are thinking some major crisis is more rather than less likely.

davidjc said...

Good timing for Clegg's 'free' share bonanza.

Boffy said...

You can't see the Tories letting that happen.