Professor Niall Ferguson, of the acclaimed book and ABC documentary series “The Ascent of Money“, has recently published a brilliant guide to the global sovereign debt crisis. Click here to read it.
Back in February, Professor Ferguson had this to say in the Financial Times:
… it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate…
From AAP (via The Australian):
Warnings that Europe faces its gravest challenge since World War II and that the “contagion” from troubled states such as Greece could quickly spread have heightened anxiety in global markets after a steep plunge on Friday reversed much of the week’s gains.
The optimism that followed last week’s E750 billion ($1.05 trillion) European bailout evaporated late on Friday, with markets across the continent plunging and Wall Street closing sharply lower.
The euro tripped to its lowest level against the US dollar in 18 months on Friday on fears of years of weak economic growth in the 16-nation European bloc. The euro is at a record low against the Australian dollar, buying just $1.3974, down from more than $2 early last year.
The euro was not helped by comments by US President Barack Obama’s top economic adviser Paul Volcker, who spoke on Friday of the potential “disintegration” of the 16 nations that share the euro currency. And Paris has had to deny reports that President Nicolas Sarkozy threatened to pull France out of the euro to force German Chancellor Angela Merkel to bail out Greece.
European Central Bank president Jean-Claude Trichet at the weekend called for more action by euro-zone governments to improve fiscal governance.
“We are now experiencing extreme tensions,” he said in an interview with Germany’s Der Spiegel magazine. “In the market, there is always a danger of contagion — like the contagion we saw among the private institutions in 2008.”
And from Business Spectator:
Yesterday, Angela Merkel, German chancellor, warned that the $1 trillion rescue package had only bought Europe time, and that further steps were needed to address the differences in competitiveness and budget deficits between the member countries.
In a speech to the annual German trade union conference, Merkel emphasised that speculation against the euro was only possible because of the huge differences in economic strength and the levels of debt between individual eurozone members.
Meanwhile, the head of the European Central Bank, Jean-Claude Trichet, emphasised that it was urgent that eurozone countries rectify their budget deficits.
In an interview with the German magazine, Der Spiegel, Trichet said that the world was now facing “the most difficult situation since the Second World War – perhaps even since the First World War. We have experienced – and are experiencing – truly dramatic times.”
He said that after the events of 2007-8, “private institutions and markets were about to collapse completely”. That triggered governments to step in with very bold and comprehensive financial support.
The problem was that markets were now questioning whether some governments could afford to repay their debts.
Click here for 9 simple charts that show why a collapse of the Eurozone is inevitable.
Here are some simple charts that demonstrate why anything and everything that the EU, ECB and/or the IMF can do now, is simply to delay the inevitable disintegration of the Eurozone.
From Der Spiegel: (click on images to enlarge)
And finally, one more chart showing how interconnected (thus vulnerable) the Eurozone countries are, due to the enormous sums of money owed by member countries just to each other: (click on image to enlarge)
Could the Eurozone go bankrupt? One of Germany’s leading newspapers believes so.
From an excellent major article in Der Spiegel:
Huge National Debts Could Push Eurozone Into Bankruptcy
Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.
…
The euro zone is pinning its hopes on (IMF negotiator) Thomsen and his team. His goal is to achieve what Europe’s politicians are not confident they can do on their own, namely to bring discipline to a country that, through manipulation and financial inefficiency, has plunged the European single currency into its worst-ever crisis.
If the emergency surgery isn’t successful, there will be much more at stake than the fate of the euro. Indeed, Europe could begin to erode politically as a result. The historic project of a united continent, promoted by an entire generation of politicians, could suffer irreparable damage, and European integration would suffer a serious setback — perhaps even permanently.
And the global financial world would be faced with a new Lehman Brothers, the American investment bank that collapsed in September 2008, taking the global economy to the brink of the abyss. It was only through massive government bailout packages that a collapse of the entire financial system was averted at the time.
A similar scenario could unfold once again, except that this time it would be happening at a higher level, on the meta-level of exorbitant government debt. This fear has had Europe’s politicians worried for weeks, but their crisis management efforts have failed. For months, they have been unable to contain the Greek crisis.
There are, in fact, striking similarities to the Lehman bankruptcy. This isn’t exactly surprising. The financial crisis isn’t over by a long shot, but has only entered a new phase. Today, the world is no longer threatened by the debts of banks but by the debts of governments, including debts which were run up rescuing banks just a year ago.
The banking crisis has turned into a crisis of entire nations, and the subprime mortgage bubble into a government debt bubble. This is why precisely the same questions are being asked today, now that entire countries are at risk of collapse, as were being asked in the fall of 2008 when the banks were on the brink: How can the calamity be prevented without laying the ground for an even bigger disaster? Can a crisis based on debt be solved with even more debt? And who will actually rescue the rescuers in the end, the ones who overreached?
So, the GFC is ‘over’, is it Ken?
From Business Spectator:
Global share markets plunged overnight as panicked investors worried that the eurozone could fragment as a result of the escalating European financial crisis.
The European banking system is under huge strain* as banks are increasingly reluctant to lend to each other. The European banks are worried about how much other banks have lent to the weaker eurozone countries – the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) – and the catastrophic losses that could ensue if any of these countries defaulted on their debt.
At the same time, there’s been a flight of capital out of the eurozone as investors have worried the common currency might crumble as a result of the problems in the vulnerable economies of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
…
The huge question mark over the eurozone’s survival is causing the euro to plummet. Increasingly, market analysts are predicting that the currency, which broke through the $US1.30 earlier this week for the first tine since April 2009, is set to hit parity with the US dollar.
There is an increasing consensus that the $US145 billion European Union-IMF rescue package for Greece is not sufficient to solve Greece’s basic problem – that it is simply unable to service its colossal debts. There are also questions as to whether Greece will be able to implement the punitive austerity measures it is being forced to adopt in exchange for the bailout.
At the same time, there are increasing signs that even if it bails out Greece, Germany will not be prepared to write the huge cheques required to help other vulnerable PIIGS.
German taxpayers are already outraged at having to pick up a large chunk of the cost of the Greek bail-out, and Germany’s largest opposition party, the centre-left SPD, has said that it will not vote in favour of the bill.
Predictions that the cascading PIIGS debt crisis will cause the eurozone to collapse are becoming more widespread.
* That the European banking system is “under huge strain” and is beginning to freeze up (again) has profound implications for our economy. Why?
As explained in this post a few days ago, even the heads of our major banks quietly admit that our banking system has an “achilles heel” – it is desperately dependent on the international wholesale capital markets for funding. If/when the banking system abroad seizes up again, our banks will be in deep trouble.
Watch out for the emergency reinstalment of the government’s Bank Guarantee, hoping to again prop up international confidence in our banks so that they can continue to attract funding in a second credit crunch.
Watch out also for higher interest rates charged by the banks – irrespective of the RBA cash rate – due to their having to pay ever higher interest rates in order to get that international funding in the first place.
From headline news around the globe (in this case, The Australian):
Wall Street Plunges On Eurozone Contagion Fears
US stocks plunged today in a flashback to the panicked trading of 2008 and at one stage the Dow was down almost 1000 points — its biggest intraday fall in history.
Investors fled everything from stocks and risky corporate bonds to commodities and poured money into safe assets such as US Treasuries and gold.
The US stockmarket fell for a third-straight session, as jittery investors grew even more restless over southern Europe’s festering sovereign-debt woes.
The sell-off turned ugly quickly, with Bank of America, Procter & Gamble and 3M among the big decliners, as potentially erroneous trades accelerated the drop.
The Dow Jones Industrial Average ended the session down 347.80 points, or 3.20 per cent, to 10,520.32, its biggest point drop since February 2009. The average at one point fell as much as 998.50 points, or 9.2 per cent, the biggest intraday drop in its history.
From Bloomberg:
European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.
As OECD head Angel Gurria likens the crisis to the Ebola virus, Europe may need to come up with a plan equivalent to the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers Holdings Inc. “It is perhaps time to think of policy options of the last resort in the current sovereign crisis,” said David Mackie, chief European economist at JPMorgan in London.
“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television yesterday. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”
Barnaby Is Right 
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