For those of us who have to deal with fiat currencies.
“Martin D. Weiss Ph.D. | Monday, October 10, 2011
As soon as we see the likelihood of major bankruptcies and defaults, we don’t wait around. We warn you immediately.
We know you need time to get your money out of danger. And we also know that financial disasters don’t obey any particular clock.
They can strike suddenly — especially in the stock and bond markets, where investors often start selling in anticipation of the troubles to come.
That’s why we specifically warned our readers about …
• The failure of Bear Stearns 102 days ahead of time (Money and Markets of December 3, 2007) …
• The near-failure of Citigroup 110 days before (Money and Markets of August 11, 2008) …
• The demise of Fannie Mae four years before it collapsed (Money and Markets of September 24, 2004), plus …
• The failure of nearly every bank and insurance company that has occurred since Weiss Ratings began rating them decades ago.
Now, the time has come to issue new advance warnings — some of the most important in the 40-year history of my company.
My new warnings are mostly focused on Europe. But as I’ll explain below, they’re bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.
Greece will default very soon.
Banks and other investors who hold Greek notes and bonds have already seen massive losses in their market value — over 50% on 2-year notes and even more on other issues.
Until now, European authorities have turned a blind eye as their largest banks continued to carry these toxic assets on their books at full value — as if they were the best, most pristine assets in the world … as if the sovereign debt crisis never happened!
But now, European authorities are finally conceding that the banks must “partake in any solution of the crisis.”
In other words, the banks must bite the bullet and take some big hits in their Greek loans. They must officially recognize at least some portion of their losses.
Conclusion: Whether the banks accept this “solution” voluntarily or not, it will mean Greece is in DEFAULT!
The contagion of fear will spread.
Anyone who thinks global investors will turn a blind eye to the Greek default is in for a big shock.
Greece is not a small, third-world country. It’s a member of the European Union and part of the euro zone. It has over 328 billion euros in debt, more than Ireland and Portugal combined.
Moreover, Greece is not alone, and investors know it. Investors will automatically assume — with good reason — that if one major Western government can default, so can others. And with that assumption, they will refuse to lend any more money to highly indebted governments. Or they will demand outrageously high yields.
European megabanks will collapse.
Some of Europe’s largest banks will collapse under the weight of defaulting sovereign debts and in the wake of mass withdrawals.
Spain’s banks are especially vulnerable, swimming in a cesspool of bad mortgages left behind from that country’s giant housing bubble and bust.
In fact, this year, the European Banking Authority ran stress tests on the largest banks in Europe; and among the eight banks that failed the test, five were Spanish. Their names:
- Caixa Catalunya
- Caja de Ahorros del Mediterráneo
- Grupo Caja 3
- Banco Pastor
Major French banks are bigger and in no less trouble. They barely passed the stress tests. And that was DESPITE the fact that they were allowed to cheat — not booking a penny of their losses on loans to Greece, Portugal or Ireland. According to Bankers Almanac, on a consolidated basis …
• BNP Paribas has $2.7 trillion in assets, making it the largest in the world …
• Crédit Agricole has $2.1 trillion and is the world’s fourth-largest bank, and …
• Société Générale has $1.5 trillion.
The total assets of these three French banks alone are greater than the total assets of the banking units of JPMorgan Chase, Bank of America and Citigroup.
All three are drowning in bad loans to PIIGS countries. All three are in danger, in my view.
But there’s an even more imminent threat: mass withdrawals!
You see, banks in the euro zone get less than 35% of their funds from deposits, according to Bloomberg data. Instead, they rely far more heavily on what’s called “wholesale funding” — money borrowed from other banks and institutions.
In other words, they’re hooked on HOT MONEY!
That’s the kind of money that is quickly withdrawn at the first sign of trouble. And that’s also the same kind of money that caused mass bank runs in the U.S. three years ago — runs that doomed big U.S. banks like Washington Mutual, while nearly sinking giants like Citigroup and Bank of America.
Big European banks are especially vulnerable because they rely on hot money far more than U.S. banks. And many appear to be suffering big runs at this very moment.
This is why the European Central Bank rushed to the rescue last week with 40 billion euros in emergency loans for banks suffering withdrawals. But 40 billion is a drop in the bucket, barely covering ONE CENT for each dollar of PIIGS’ debts outstanding.
In the weeks ahead, will governments stand idly by while their biggest banks collapse? Initially, no, which leads me to …
European governments will suffer a
cascade of new credit rating downgrades.
The richest governments of the European Union — France and Germany — will scramble to rescue their failing banks, and so, global markets may breathe a temporary sigh of relief.
But recent history proves that the entire concept of bank bailouts is seriously flawed because of the following, now-obvious sequence of events:
• In their zeal to save the banks and the economy, the governments gut their own fiscal balance.
• They suffer big downgrades, losing their stellar credit ratings.
• And as soon as they have to borrow more money, they must pay through the nose with far higher interest rates.
In other words, in their zeal to lift banks up from the brink of failure, the governments themselves are dragged down into the abyss.
Case in point: Last week, we learned that Dexia, a Franco-Belgian megabank, is in distress. It’s smaller than the giant French banks in trouble. But its assets are still 1.5 times the size of Belgium’s ENTIRE economy!
What happens if the government of Belgium tries to help rescue the bank? It will surely lose its still-good credit rating.
Indeed, late Friday, Moody’s announced it’s ALREADY putting Belgium on review for a downgrade just based on the POSSIBLITY it may have to bail out banks like Dexia.
Moody’s specifically states that a key reason Belgium is on the ratings’ chopping block is “the impact on the already pressured balanced sheet of the government of additional bank support measures which are likely to be needed.”
And the prospect of big bank bailouts is also a key reason other major PIIGS countries have suffered massive downgrades in recent days. (More on this in a moment.)
Spain and Italy will be next to face
default on their massive debts.
Spain and Italy have nearly $3.4 trillion in debt, or about 10 times more than Greece.
But with their borrowing costs surging and their big banks failing, they will be unable to borrow enough new money to pay off old debts coming due.
Result: Spain and Italy will also risk default.
Global debt markets will
suffer a critical meltdown.
In anticipation of a default by a country as large as Spain or Italy, nearly all debt markets in the world will freeze, as investors withdraw in panic.
This panic will not only crush the borrowing power of the PIIGS countries, hastening their default … but it will also threaten to melt down the bond markets of countries like France, Germany, Japan, the U.K. and the U.S. That could mean sharply higher interest rates and, ultimately, the inability to borrow at almost any cost.
The vicious cycle of sovereign debt defaults and
bank failures will lead to a global depression.
Sovereign debt defaults will trigger more bank failures. More bank failures, in turn, will precipitate more sovereign debt defaults.
This vicious cycle will cut off the flow of credit to businesses and households, sink the global economy into a depression, and perpetuate the vicious cycle.
Ultimately, we will see an extended period of great economic hardship for billions of people on every continent.
If so, I don’t blame you, and I assume you have your reasons. Yet there are far stronger reasons to be skeptical of all those who believe we can easily avoid disaster …
Even the highest authorities
have admitted the dangers.
U.S. Treasury Secretary Tim Geithner warns of “cascading defaults,” “bank runs,” and “catastrophic risk.”
The International Monetary Fund says “the global economy is in a dangerous new phase.”
World Bank President Robert Zoellick warns that Europe, Japan, and the U.S. are in such danger, they’re threatening to “drag down not only themselves, but the global economy.”
And never forget: These statements are all from leaders who want to CALM financial markets! Imagine what they’d be saying if they were out of office and speaking freely!
Clearly, the crisis has now progressed far beyond the deniability stage.
The major credit rating agencies have
finally (and belatedly) begun to
recognize the dangers.
Here are just a few of the most recent examples:
This past Friday, October 6, Fitch downgraded Spain and Italy.
Fitch cited the severity of the European debt crisis coupled with an increasingly recessionary atmosphere that can only impair governments’ abilities to come to the aid of their faltering economies.
On Spain, Fitch talked about the still sizeable structural budget deficit, high level of net external debt, and the fragility of the economic recovery as the process of deleveraging and rebalancing continues render the country especially vulnerable to such an external shock.
For Italy, Fitch also stressed the “high public debt and tax burden; an inefficient public sector; barriers to competition in product markets and services; inflexible labor market; and a pronounced north-south divide.”
Most alarmingly, Fitch says it has concerns about “the risk that a further worsening of the euro-zone debt crisis and volatility in the value of Italian government bonds will further erode confidence in the banking system.
“In such a scenario,” Fitch continues, “concerns about the banks would start to weigh on the sovereign credit profile as a contingent liability and a vicious cycle of deteriorating sovereign and bank credit quality could emerge.”
The day before, on October 6, Moody’s downgraded 12 U.K. financial institutions.
The reasons? Similar to those cited for its earlier downgrades of major U.S. banks:
Moody’s believes that the U.K. government is now more likely to allow smaller institutions to fail if they become financially troubled … and that even U.K.’s larger banks will suffer a reduction in the government’s support.
In other words, even if big banks fail, the government is likely to dish out less cash and more tough love.
On Wednesday, October 5, Moody’s downgraded Italy by three notches in one fell swoop.
Moody’s says Italy’s ability to tap into sovereign debt markets may be constrained by the “uncertain market environment and the risk of further deterioration in investor sentiment.”
Alarmingly, writes IHS Global Insight, “the rating agency also warned of further downgrades should any long-term uncertainty arise over the availability of external sources of liquidity support to Italy.”
All told, including the downgrades of Citigroup and Bank of America announced the week before, we calculate that the countries and institutions downgraded in the last 10 days alone total at least $7.3 trillion in debts outstanding (see chart below).
Countries and Institutions Downgraded in
Past 10 Days Alone Have at Least
$7.3 Trillion in Total Debts Outstanding
The era of big bank bailouts is over!
The facts are simple:
• Not even the richest countries of Europe could possibly afford to bail out their biggest banks. And conversely …
• Not even the richest banks of Europe could possibly afford to finance the bulging deficits of their sovereign governments.
Yet, right now, they are leaning on each other to avoid failing. European banks are holding on to the bad debts of sinking European governments. And, at the same time, European governments are trying to find ways to keep the banks afloat.
But this entire structure is based on nothing more than a pack of legalized lies: Banks are allowed to lie about the value of their loans to PIIGS countries, their capital and their solvency. And governments lie about how much it would really cost to save the insolvent banks.
Solemn promises are made. Paper is shifted back and forth. But it’s no better than rearranging chairs on the deck of the Titanic.
This Impacts You No Matter Where You Live
If you’re a U.S. investor, you may think you’re better off simply because the downgrade of the U.S. did not precipitate the feared collapse in U.S. Treasury securities. But that’s merely due to a temporary flight to quality.
Or if you’re living in a country that’s growing nicely and in good shape financially, you may think you’re even more immune to Europe’s crisis.
But the European Union has the largest economy and the largest banks on Earth. It would be vastly unreasonable to think that Europe could fall and leave any other region standing.
The market contagion ALONE would be enough to cause a global meltdown, destroying trillions of dollars in wealth in bonds, stocks and real estate. The big blows to corporate profits, trade and trust would merely compound those losses.
So my recommendations are unchanged:
• Get all or most of your money out of danger immediately. (To look up the relative strength or weakness of your bank, credit union, insurance company, ETF, stock or mutual fund, sign up for www.WeissWatchdog.com.)
• For any vulnerable assets you may still own, buy protective hedges — inverse investments specifically designed to rise when asset values fall.
• For funds you can afford to risk, go for potentially windfall profits, using those same inverse investments.
And above all, stay safe!
Good luck and God bless!
Dr. Weiss founded Weiss Research in 1971 and has dedicated the past 40 years to helping millions of average investors find truly safe havens and investments. He is president of Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. And he is the chairman of the Sound Dollar Committee, originally founded by his father in 1959 to help President Dwight D. Eisenhower balance the federal budget. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recesssion and Depression. “