The European Debt Crises is front and center of all the world’s man y economic problems. On Wednesday, we discussed the potential directions their untenable situation could go. Today, we’ll take a wild guess at what exactly is going to happen. Keep in mind, this is a guess. And the guess we’re going to make is seemingly the least probably because of the terrible chaos that it is likely to provoke throughout the world. That being said, it looks to be the way we’re going today. The way of Default.
Now, sovereign default seemed extremely likely a year ago when examining the situation. The European Central Bank (ECB) refused to print money to bail out the debtor nations the way the Fed has done in the US (and China, the UK, & Japan have also done amongst others). Many European countries had amassed far too much debt and were going deeper into debt each year with deficits that were far too large. These countries are for the most part (with the exception of Ireland which has a completely different problem than the rest…the Irish Gov’t bailed out bankers and put their problems on the people).
The worst of these countries are Greece, Italy, Portugal, & Spain (PIGS) with Belgium somehow getting a free pass from the press because they’re northern European? We’re also not counting Hungary’s big problems because they’re not in the Euro Zone and thus are less likely the take down all of Europe.
These PIGS can never hope to pay off their debts without inflating them away through the printing press and the solution being forced upon them by northern Europe is make massive cuts in their budgets. You have to realize that the reason these countries have such large fiscal problems is because they are extremely socialist to begin with. Thus their economy is in large part derived from government revenue.
So currently, the economies of these countries are shrinking rapidly because they have reduced government spending. Meanwhile market interest rates for the government to roll over its debt &/or acquire new debt for the deficits has skyrocketed so it’s even beyond the fairy tale dreamers to believe these bonds could ever be paid back.
So it’s an impossible situation because the solution (austerity or budget cuts) begets bigger problems (budget deficits) since the socialism has taken over these countries’ economies.
Thus, two years ago, we told you that many European countries would be defaulting. Yet recently, even though the ECB has repeatedly said that they won’t print to bail out individual countries….have been printing to bail out individual countries. They’ve just done it using loop holes instead of blatantly doing it the way the rest of the world has done.
So they’ve printed up unlimited amounts of money for the bankrupt European banks to borrow (which temporarily saves them), but for only a period of 3 years (which somehow makes this seem “sterile” to the ECB). The banks then turn around and buy high yielding PIGS & other government debt. So it has been appearing that Europe will print its way out of this mess. And this is still a definite possibility in this always changing game of high stakes poker.
But now, it’s appearing more and more as if northern European countries are tired of Greece promising to reduce their budget and yet never actually following through. They’ve started to say that they believe they have “ring fenced” Greece as a problem so that it won’t damage the rest of the EU if Greece defaults.
So, today, it appears Greece is going to be allowed to default because there’s no way they won’t default unless someone gives them money to keep the lights on.
What happens next is anyone’s guess because we’re in uncharted water here (there’s not been anything like the Euro Monetary Union in the recent era of high finance). Obviously, the power brokers of the EU believe it won’t damage the rest of the EU if Greece is kicked to the curb. Of course, that’s what people in Washington and New York thought before they let Lehman Brother’s go under 4 years ago!
We believe that it would be disastrous for sovereign debt around the world if Greece goes under. All this debt piled on top of each other is a massive confidence game. It works as long as everyone believes it will work (even though a rationale analysis should tell anyone looking that it can’t possibly work at some point.) But the moment the market comes to the realization that a major country can default, they will start to see that any of them could default.
And rational analysis will begin to take over the place of hopes and dreams and funny money. And things will get very ugly indeed.
This is the ninth post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 8) European Options, 9) European Prediction, 10) Recession in Japan, & 11) Japanese Yen Crash.