Based on the May 11th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

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Based on the May 10th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

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WHOLESALE MARKET gold bullion prices held above $1730 an ounce in Monday morning’s London trading – roughly in line with where gold has been for much of February – while European stocks and commodities edged higher amid hopes that policymakers might finally approve Greece’s second bailout. US markets are closed for a holiday.

Silver bullion prices were also fairly flat this morning around $33.50 per ounce.

Earlier on Monday, gold bullion prices jumped $14 an ounce in Asian trading after China’s central bank eased its monetary policy stance over the weekend.

“The rally lasted only for a very short period of time,” says one gold bullion dealer in Hong Kong.
“Once we traded [higher], resting [sell] orders took over and stabilized the market. It seems despite various bits of precious-positive news, the market is still in a consolidation phase.”

The People’s Bank of China announced Saturday that it is cutting the reserve requirement ratio – which dictates the amount banks must hold in reserve as a proportion of their assets – by half a percentage point. Large commercial banks will see their RRR fall to 20.5% as a result.

The cut “reflects that stimulating economic growth is currently the government’s priority” reckons HCBS economist Ma Xiaoping, who adds that it will “help release liquidity” to the tune of around 400 billion Yuan ($63.5 billion).

Elsewhere in China, the Shanghai Gold Exchange announced Monday it is cutting its gold trading fees on a number of contracts. It follows last week’s announcement by the Shanghai Futures Exchange that it was lowering its margin on gold futures contracts with effect from the start of next month.

Singapore meantime will make investment grade gold bullion exempt from a 7% sales tax with effect from October, Reuters reported Monday, citing industry sources.

“I think this is really going to change the landscape in Singapore,” says one gold dealer.

“Asset managers will [be] very excited. The trend in the last three years is that people are moving to physical hard assets from paper.”

Eurozone finance ministers are meeting in Brussels today to discuss putting the finishing touches on Greece’s €130 billion second bailout.

“All the elements are in place,” France’s finance minister Francois Baroin told French radio this morning.

Reports suggest there remains uncertainty over how the entire package will be financed. For example, the Financial Times reports that the European Central Bank has been asked to make up a €6 billion shortfall by agreeing to forego some profits on its Greek bond holdings – bought at below-face-value prices on the open market – which would have the effect of easing Greece’s debt burden.

However, “the gut feeling is that this is going to go through” one Eurozone official tells newswire Reuters.

“Everyone feels the pressure this time to deliver… I don’t see anybody wanting to be responsible for pulling the plug on the deal at this late stage.”

“There is [though] scope for events to disappoint,” warns Neil MacKinnon, London-based global macro strategist at VTB Capital.

Economists at Citigroup say they expect today to bring agreement on a bond swap to reduce Greece’s debts, but that final approval of the complete package may be delayed until after the next European leaders’ summit on March 1.

The International Monetary Fund will only contribute €13 billion to a second Greek bailout – equivalent to 10% – the FT reports, much less than its contribution to previous Eurozone bailouts. Relative to its IMF contribution, Greece already holds the all-time record for the amount borrowed from the IMF, the FT points out.

Iran has ceased its oil exports to Britain and France, its oil ministry announced Sunday. The move follows the imposition of sanctions by the European Union. Monday’s FT reports that Iran is struggling to find buyers for its oil and may have to resort to cutting its output or storing it in tankers, so-called floating storage.

The US Congress Friday approved a bill extending a payroll tax cut and unemployment benefits through to the end of 2012.

“Given that it had until February 29 to do this it was not a bad effort from policymakers,” note Standard Bank currency analysts Steve Barrow and Jeremy Stevens, who add that while the extension adds $100 billion to the US deficit, not extending the tax cuts and benefits could have costs the economy up to one percentage point in growth this year.

In New York meantime the difference between bullish and bearish contracts held by Comex gold futures and options traders – the so-called speculative net long – fell over the week ended last Tuesday for the first time since the week ended January 3.

The drop in the spec net long “may mark a consolidation phase in the gold rally in the absence of new price drivers,” says the latest note from precious metals consultancy VM Group.

The volume of gold bullion held to back shares in the world’s largest gold ETF, the SPDR Gold Trust (GLD), rose to its highest level since December 14 last week. By contrast, the iShares Silver Trust (SLV), the world’s biggest silver ETF, saw its silver bullion holdings decline slightly.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

From time to time, one of my friends simply says it better than I could ever imagine saying it myself. I have known Peter Gianulis, manager of Carrelton Asset Management for years. He is one of the deepest thinkers I know of when it comes to the markets. His fund also happens to have one of the best track records out there. So without further ado, I turn the microphone over to my good friend Peter Gianulis.

The Greek population is in constant revolt with another 48 hour national strike underway against ever expanding announcements of economic austerity though to date little of which has actually been implemented and therefore risks at the very a least a delay of the latest tranche of Euro 12 billion in what has now become a permanent flow of funds from core Euro-zone to Greece and other peripheral eurozone countries, therefore tax payers of core Europe and to a lesser degree Britain are being taxed to pay for the unwillingness of the PIIGS to pay their bills.

Core Euro-zone countries are effectively being black mailed by Greece to finance Greece’s public budget deficit and the interest payments due on the ever expanding debt mountain, none of which that the Greece population are having to bare the consequences of, for were they then Greece would have gone bust Iceland style a year ago. The facts are that IF Greece were not being financed as a consequence of being within the Euro-zone then all of the middle class of Greece would have already been swiftly wiped out, as the value of earnings, savings and assets would have collapsed along with the Greek economy as a consequence of the markets immediate adjustment to the true level of debt and inability to ever repay.

Some argue that a short- sharp shock Iceland style would prove better in the longer run but there would be blood in the streets perhaps even revolution that would be infinitely worse for the Greek population than what is taking place today as international trade would literally seize up overnight due to the inability to make payments on goods and services and if a country can no longer import foods, then all that would be left would be food aid being shipped in Africa style to prevent starvation.

Therefore the Greeks life style is being subsidised by hard working tax payers elsewhere, and those demonstrating on the streets of Greece are mostly delusional or represent subversive interests such as the communist party that are banking on profiting from debt crisis chaos, for if Greeks actually got what they are asking for i.e. an exit from the Euro and debt default, then the Greek population would soon, perhaps within 24 hours come to regret the outcome as all roads would lead to instant bankruptcy with all of its consequences. So all this talk of the Greeks wanting to leave the Euro-zone is a load of nonsense, for what the Greeks really need to worry about is Greece being kicked out of the Euro as it continues to act as a funding black hole that is currently costing core euro-zone tax payers Euro 100 billion per year that they will never get back.

If Greece were ejected from the Euro-zone then there would soon be an exodus of Greece’s best and brightest workers as they sought earnings in hard currency such as the Euro rather than be paid in worthless Zimabwe-esk Drachma’s. Something that the Euro-zone politicians may be considering behind close doors in a desperate attempt to save the Euro currency from collapse.

The Greek Trojan Horse Full of Debt

Greece landed its debt filled Trojan horse economy onto the shores of the euro-zone in 1999, following which as if by magic a high interest rate high risk economy immediately became a low interest rate low risk economy. How did Greece achieve this apparent miracle ?

By perpetuating state sponsored fraud as the country proceeded to hide the true extent of public spending, debt and liabilities from the markets and European Central Bank as there was no longer a currency market that would reflect the real state of the economy which allowed Greece to secure funding for the state and its private sector at low interest rates that did not reflect the actual risk of default and debt burden.

The Greek government were not doing anything different than what most of the higher paid working population engages in, where fraud is endemic, be it government economic statistics or the 60% or so of of tax payers that evade the majority of taxes resulting in highly paid doctors paying taxes that can be less than typical public sector nurses.

Off course the Greek population can argue that most of the blame lies with their bankers, which is true, because the bailout is for holders of Greek debt which is mostly held by european bankster’s. But the same holds true for every other country that has seen its politicians dump all of banking sectors losses and liabilities onto the backs of tax payers that has put every western country onto the path towards bankruptcy. But the Greeks by virtue of euro-zone membership have decided not to bare the responsibilities for their debt (public and bankster’s) but for tax payers of other nations to take on both the liabilities of their banks and the Greek state, else the Euro dies. Therefore Greece is effectively black mailing core euro-zone nations into making funding available whether or not they actually implement any of the economic austerity plans as Greek politicians are likely to succumb to the greater weight of voters than follow through on demands from core euro-zone financing countries, after all what does most of the Greece population care, their money is safe against hyper-inflation, whilst they continue to evade taxes and the state runs a large budget deficit, instead letting the tax paying suckers of mainly Germany and France pick up the bill.

Which means the tax payers of Germany and France are effectively trapped into a lose, lose situation, where the only solution is for either collapse of the euro currency (savers wiped out) or for total political, economic and monetary union which means permanent financing of states such as Greece by means of internal transfer payments as occurs in nation states where wealthier areas are taxed to subsidise the poorer areas (UK example – London / South East subsidises most of the rest of the country).

Risks of PIIGS Sovereign Debt Default

Joining Greece are the other european bankrupting nations to varying degrees that are collectively referred to as the PIIGS (Portugal, Ireland, Italy, Greece and Spain), though a few others such as Belgium should also be included in the list as the risks of actual default vary between nations of the Eurozone as the below graphic illustrates the probability of actual default within the next 3 years, though this does not mean that we will have to wait for 3 years for countries such as Greece that are permanently tottering on the brink of default.

Britain and other european nations outside of the Euro-zone whilst having the ability to print money and inflate their debt away at a steady pace are still at a risk of bankruptcy and actual debt default if they could no longer service their external debts i.e. that which is denominated in a foreign currency courtesy of their bankster’s, which therefore puts Britains risk of default at somewhere between Germany’s 13% and France’s 25%.

Sovereign Debt Default Contagion Risk

To illustrate how severe the current crisis is, Greece’s debt is now rated at worse than that of Pakistan, though Pakistan’s debt never threatened a collapse of the global financial system. Greek government 1 year debt is yielding 20% and 2 year at 30%, that is a sign of markets discounting default i.e. the bond markets are pricing in a Greek debt default which is hitting the Greek banks hard and risks wiping them out and acting as a contagion to other european banks.

All that the European Union has done is to throw good money after bad by wasting 100 billion euros and pushing Greek debt up from 260 billion euros to 330 billion euros, as if a greater debt burden would somehow prevent bankruptcy which I warned over a year ago was inevitable and the solution to the crisis remains the same for the Euro to effectively split into two.

11 May 2010 – E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt).

Financing albeit shrinking annual PIGS deficits over the next few years will still mean that ALL of these countries debt burdens will be HIGHER in 3 years time, i.e. Greece’s debt burden is expected to rise from 120% of GDP to as high as 150% of GDP. How is that a solution for the debt crisis? How will that prevent eventual debt default ? Answer – It won’t!

The ONLY solution is for the Eurozone economies to GET their economic houses in order which means cut the deficits and total debt as a % of GDP which can only be achieved through economic growth which means public sector spending cuts and reform of economies to generate economic growth that means LESS E.U. and national regulation as touched up on in the article Solving Britain’s Economic Crisis Through Micro Business Capital Investments and Credit (31st Mar 2010). However when a country has a debt burden of 120%+ of GDP at interest rates of 5% or higher the inevitable result is still debt default.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

The mainstream press predominantly focuses on the bottom line numbers of by how much are each countries banks exposed to Greek government debt, without fully understanding the total exposure is about 100 times greater as a function of the $600trillion+ derivatives market that gambling prone British banks are more exposed to in terms of per capita then virtually any other nation on the planet.

Forget the official UK statistics of £1 trillion of public sector debt, total actual debt and liabilities are in excess of £11 trillion and the fools in Coalition Government are now contemplating Britain borrowing money in the name of UK tax payers to throw into the Greek black hole!

For instance the mainstream broadcast press smugly declares that British banks exposure the Greek government debt is just £2.5 billion. However throw in the derivatives exposure that also includes Portugal and Ireland and then the figure jumps to at least £350 billion with a figure approaching £800 billion or about 60% of GDP as the default contagion would not stop with Portugal as soon Spain and Italy would also follow their PIIGS brethren over the cliff, which would be enough to trigger a collapse of the global banking system as the earlier article ( Nov 2010 – Global Sovereign Debt Default Bankruptcy Bailout and Contagion Risk Analysis) illustrated the risk each country on its own posed to the global financial system if one were to default on their debts.

The November 2010 analysis treated Greece and Ireland as being on life support pending inevitable bankruptcy with Portugal not far behind that combined present a contagion risk factor to the global financial system of about 22%, an eventuality that the worlds financial system could survive, if only it could be halted to the peripheral euro-zone which it would not as soon Spain and Italy would join the collapse as their bonds are dumped sending interest rates soaring towards where Greece debt currently trades, which would be more than enough to bring about a collapse of the Euro-zone and within hours of which a collapse of the whole global financial system including that of the United States as all fiat currency is dumped for hard assets i.e. an hyperinflationary collapse event and NOT Deflation as the ivory tower academics that populate the mainstream press would lead you to believe (see Inflation Mega-trend Ebook FREE DOWNLOAD).

Inflation is the ONLY Solution to the Debt Crisis and Next Phase of the Mega-Trend

The Inflation Mega-Trend ebook of January 2010, concluded that the ONLY solution to the unfolding global debt crisis was for governments to print money and inflate their way out of debt . What we have seen over the past 2 years is just the first phase of the Inflation Mega-trend in the inflating of asset and commodity prices.

Phase 3 of the Inflation Mega-trend (Phase 2 consumer prices) will be governments INFLATING WAGES, which is completely contrary to everything you hear in the central bank propaganda pumping mainstream press, the next phase of the Inflation Mega-Trend will be for central banks to inflate the wage price spiral, which will result in an acceleration of inflation.

Whilst many may argue that many aspects of UK public debt are linked to inflation such as benefits and state wages and pensions, and not forgetting that some 25% of gilts are indexed. Lets leave aside for the moment that real inflation is a good 2 to 3% above the official inflation indices for Britain and most western economies, if not higher. What people tend to forget that PRIVATE debt is at many multiples of public debt, therefore governments in acting to boost the economy in nominal terms by reducing the debt burden on the private sector that is in a far indebted state i.e. bringing total debt and liabilities to about £11 trillion (more than X10 official public debt statistics), then the indexation argument goes out of the window.

This has major ramifications for depositors who are already subsidising the debtors (both public and private) each year to the tune of at least 3% on CPI (after tax).

Why can’t those who STILL pump out deflation nonsense realise this inflation wage price spiral reality?

Again. I need to reiterate that the rise in asset and commodity prices over the past 2 years is to all intents and purposes just Phase 1, Phase 2 is consumer prices (well underway in the UK), Phase 3 is wages and then off go down the road of the feed back loop the end result will that bond holders and savers will be wiped out, along with the debt.

What this means for Greece ?

Greece cannot inflate so they have no choice but to leave the Euro to enable them to inflate EVERYTHING , i.e. prices, and wages, that is the only way they will be able to STEAL from all of the bond holders and savers as they STEALTH default on their debt by means of high inflation which is the path that the UK and US are upon for a decade long inflation mega-trend.

The ONLY reason why they are being prevented from defaulting and leaving the euro-zone is because banks of other european countries are not strong enough to withstand such an event.

What a Greek Debt Default Will Mean for the UK Economy?

There is no firewall between Britain and Europe if Eurozone banks start to go bankrupt then so will most of Britain’s banks, the only protection savers will have is to protect their deposits by abiding by the compensation limits. Where the economy is concerned the government via its central bank (BoE) will print money to inflate the economy to prevent recession, hence the most probable outcome is continuing stagflation of high inflation and very low economic growth, as governments such as the UK aim to buy time.

Credit Crisis Phase 3 Conclusion

The credit crisis that began in August 2007 when the credit markets froze is not over, far from it, the Lehman’s bankruptcy was just phase 2 of the credit crisis where increasingly over the past 18 months we have seen Phase 3 manifest itself in the bankruptcy of whole countries with Greece, Portugal and Ireland to all intents and purposes bankrupt, only being kept afloat to prevent bankruptcy of the banking system and the larger Eurozone countries namely, Spain, Italy, then France and Germany itself.

The time horizon for the manifestation of the inevitable debt defaults can only be guessed as it depends on how much tax payers money will be thrown at the bankrupt states before the sovereign debt default contagion spreads from country to country. Readers should be under no illusion that bankruptcy of whole countries is inevitable, where even if countries such as Britain, Germany, France and the United States do not default on their debts, there will be a very heavy price paid in loss of purchasing power of earnings and savings as covered at length in the January 2010 Inflation Mega-Trend Ebook.

However depositors need to immediately focus themselves on protecting themselves against nominal loss of deposits as would occur when states go bankrupt and bank deposits are only honoured upto the compensation limits.

Once you have achieved this first emergency step of protecting your wealth in nominal terms then you can purse the second strategy of protecting your wealth in real terms which I have covered at length in 3 ebook’s and ongoing newsletters (ALWAYS FREE), and continue to do so on an ongoing basis in articles that can be quickly viewed at walayatstreet.com

Off course there are also major implications in the costs of compensating depositors, which as we have seen will ultimately fall onto the back of tax payers at the rate of approx £85 billion for every 1 million customers across each banking group, a potentially huge bailout cost that could literally doubles Britians public debt virtually over night. So the governments response would be similar to 2008, which would be to inject capital into the bankrupting UK banks the cost of which would be 1/10th that of making good on depositor guarantees but this would be likely restricted to fully UK banks rather than the likes of Santander.

The risk that European Union is trying to balance is that of systemic risks of a disorderly Default of Greece and resulting collapse of the global financial system, with first in line being the PIIG’s then the larger euro-zone countries such as France and Italy and then countries such as the UK and ultimately the United States will be hit all with-in accelerating trend with little time for professionals let alone ordinary people to react.

Therefore readers should not be under any illusion that the debt default would be halted with Greece, because once it starts it would soon spread to the other PIIGS within a matter of weeks if not days, Portugal would go next, then Ireland and then Spain, with other debt dominos soon falling such as Belgium.

This would bankrupt virtually every European bank whether or not they are exposed to PIIGS debt due to counter party risks, though unfortunately at this point in time the coffers of countries such as Britain, France and Germany are empty after a series of bailouts and huge public sector deficit spending programme’s will mean they will not be in any shape to 100% guarantee bank issued debt or even retail deposits, instead savers are running a serious risk of actual loss of nominal value of their savings on funds deposited in excess of the £85k limit across banking groups.

European Bank Run Contagion Risk

The Greeks have already set the ball rolling by withdrawing their funds out of their banks during May and June as a consequence of their exposure to Greek Government debt, soon to be followed by Banks across Europe if not already in the process of desperately attempting to pull their funds out of Greek banks ahead of an inevitable debt default, and then from other PIIGS banks and financials, that’s banks of Portugal, Ireland, Italy, and Spain as well as Greece on rising default contagion risks.

The problem with the banking sector lies in the hidden exposure to the over the counter derivatives market that won’t become apparent until there is an actual credit event such as Greece defaulting its debts, triggering claims on credit default swaps issued by banks and insurance companies as occurred following Lehman’s bankruptcy in 2008 which brought down the worlds largest insurer AIG. Therefore Greece defaulting could quite easily collapse the whole banking system given that derivatives exposure could result in a crisis that is a100 times larger than the nominal value of the amount of debt defaulted upon.

Over the past 3 years, Santander and other foreign banks have been allowed to run amok amidst Britain’s retail banking sector as a consequence of an incompetent regulator and a desperate Labour government eager for anyone to take on the responsibility of restructuring a string of bankrupt UK banks which allowed Santander to gobble up a string of small to medium sized UK banks such as Bradford and Bingley, Abbey and Alliance and Leicester, which now pose a real risk to UK depositors as compensation licences have been consolidated therefore now instead of protection of 4X £85k, there is just 1X £85k across the banking group.

One can measure the rising contagion risks in the credit default swaps market, where the price of insuring against Santander bonds against default has been steadily on a rise since March 2011. This increasing risk is also manifesting itself in the yield of Spanish government debt that has hit an 11 year high of 5.75% on 10 year bonds, which stands nearly 3% above German Bund’s, a financing level that is not sustainable for Spain, let alone a further surge in yields that would follow a Greek debt default.

The rise of euro-zone default risks, risks another credit markets freeze as the banks of countries such as Britain that do not face default by virtue of its ability to print money and inflate, increasingly pull the plug on financing of euro-zone banks much as occurred following the freezing of the credit markets in August 2007. Similarly UK retail customers would also be wise to limit exposure to euro-zone banks, especially of peripheral nations (PIIGS).

Breaking Up the PIIGS Banks

It is my opinion that at some point in time (if the banking system survives the current crisis) the British Government will force PIIGS banks such as Santander to sell off their British banking arms so as to ensure contagion risks to Britain’s banking system are reduced, that is really the only solution to prevent a run on the UK banking system as occurred in September 2007 with Northern Rock and threatened to occur in Sept 2008. A break-up of the banks in itself would trigger a major credit market event, therefore it is probably going to take place in secret behind closed doors to prevent financial panic, i.e. British banking arms will be floated under the pretense of raising capital, which on balance would be seen as a market calming measure.

UK Safe Retail Banks List

The following table lists Britain’s major retail banking groups (separate licences) in terms of the percentage probability that your deposits above the UK compensation limit of £85k and Euro-zone banks 100,000 (current £/E £86k) would be secure in the event of a series of euro-zone debt defaults starting with Greece and that the crisis is contained to these smaller peripheral euro-zone countries i.e. Greece, Portugal and Ireland, if Spain comes under real risk of default then that would require a revaluation of this list as banks such as Santander would come under far greater pressure given exposure to Spanish government debt.

The government backed National Savings tops the list at virtually 100% depositor safety ranking, as if NS&I goes bust so will have the the whole British financial system. Readers may be surprised to find out that Britain’s safest commercial retail bank is owned and operated by the supermarket Tesco, next to follow are HSBC and Co-op, with Spain’s Santander offering a 50/50 bet on the safety of deposits over £85k. The rest offer an increasing probability of loss of deposits that would take place amidst a sovereign debt crisis induced banking crisis. The government owned Northern Rock is probably 99% safe at this point in time but it is being primed to be sold off as are the share holdings of other high risk major retail banks such as RBS and the Lloyds group.

There are other smaller safe banks such a Yorkshire Bank which is owned by the National Australia Bank Group.

Depositors Protect Yourselves From Potential Banking Crisis

UK bank depositors need to prepare for what will probably follow the Greece debt default contagion snowballing across Europe’s financial system, especially as you are receiving a pittance in interest on even the best deposit accounts of less than 2.5% after tax which does not match the risks of loss of funds in excess of £85k. UK bank account holders have been receiving mail shots from their banks over the past 6 months informing them of the protection of their deposits upto a value of £85,000 per individual customers across the banking group. This should not be treated as junk mail but rather banks laying the ground work for the real risk of defaulting on deposits over compensation limits as a consequence of the bankruptcy of peripheral Euro-zone countries starting with Greece. Remember Greece going bankrupt is not a question of IF but rather when.

Therefore savers with amounts deposited above the guaranteed limit need to ensure that they have measures in place well ahead of a banking crisis to ensure that they survive one both in terms of the ability to transact business as well as ensuring total funds exposed are LESS than the £85k banking limits at the time of a bank run.

Scare Mongering ?

Am I scare mongering? Try asking those that were locked out of their savings accounts when the Icelandic banks went bust during October 2008. The banks froze UK customers out of their accounts on the 7th of October 2008. My analysis of 2nd October 2008 had warned that small countries such as Iceland were at risk of going bankrupt, with Iceland’s bankruptcy preceded by some 24 hours earlier by Iceland Going Bankrupt?, – “savers should at the first opportunity seek to repatriate their savings to a 100% UK bank as the consequences of a country going bankrupt could render guarantees meaningless”.

Steps You Need to Take Now !

The situation is literally critical with a possible default imminent and bank runs probable even if Greece is bailed out again as a consequence of future inevitable default due to the ramping up of Debt burden (Debt/GDP).

1. Ensure that you have at least 2 current accounts across banking groups and at least one with a safe bank such as HSBC.

2. Next make a list of all of your deposit / bank accounts, with the amounts on deposit.

3. Now group your accounts by banking sector group (see list at end of this article as a guide).

4. If you are anywhere near the £85k limit with any banking group then move those excess funds immediately!

5. Consider transferring funds to your spouse so as utilise their compensation limit across a banking group.

6. Ensure you have procedures in place so that you can at short notice transfer funds from high risk banks to lower risk banks so as to limit the fallout from any banking system crisis. For instance open an NS&I Direct Saver account NOW (pays 1.75% gross), then use this during an unfolding sovereign debt crisis event to transfer your cash to as this is the safest deposit account available for UK depositors (Max £2mill, Min £1). Again do this now as you may not be able to do so during a debt crisis event due to high demand for the account.

Instant Access Savings Accounts with Lower Risk banks

• NS&I – 1.75%
• Tesco – 2.90% (includes 1.65% bonus for 12 months)
• HSBC – 0.75% (includes 0.5% bonus if you do not withdraw in a calendar month)
• SMILE (Co-op) 0.25%

Higher Risk banks

• Santander – 3% (includes 2.5% bonus for 12 months)
• Barclays – 1.25% (includes 0.35% bonus when you do not withdraw in a month).
• ING Direct – 2% (includes a 1.6% bonus if you do not withdraw in a month)

All accounts pay significantly less than current CPI Inflation of 4.5%.

7. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

8. Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process for savers having to wait for compensation. Remember that if Spain comes under pressure following perhaps Ireland and Portugal joining Greece, then the risks posed to Santander depositors will also significantly rise.

9. Keep enough in cash to cover at least 1 months expenditure, (I keep 2 months worth of cash).

Savers Paying For Low Risk

Savers preparing to cut their risk by switching banks will be disappointed to learn that the safest banks also pay the worst interest rates on deposits, typically less than 2% gross and often below 0.5% on instant access accounts, similarly the highest risk banks pay the best rates (typically 3%), which is further evidence of a market that is geared towards the risk of default and therefore higher risk banks are more desperate to attract retail deposits.

Britain’s Slow Stealth Debt Default

Off course the system is designed so that you can never win, to keep up with inflation and tax you will need to be in receipt of interest of at least 5.4%. Instead the banks are offering you a pittance WITH the risk of default, so frankly your being treated like fools, suckers by the banks and government as you finance bank losses, liabilities and government deficit spending.

The fact is that Britain is BANKRUPT, it can never repay its current debt in real terms or cover future liabilities with future economic output, its just that we don’t know it, this bankruptcy is manifesting itself in HIGH inflation that is the process for transfer of wealth from workers and savers as the price for stealth bankruptcy . It’s the reason why your savings buy less than a year ago and the reason why your pay buys less than a year ago despite going up a few percent.

There is only one way to escape from this decade long losing streak and that is to realise that approx 50% of the value of your savings will be wiped out over the next 10 years, so it is not the case that your savings are protected but rather they are guaranteed to lose approx 50% of their current value, so you have to learn to take risks with your capital, in which respect the Inflation Mega-trend Ebook (FREE DOWNLOAD) as well as the more recent ebook’s, contain strategies for protecting and growing your wealth in REAL TERMS.

Capital Safety in Index Linked Savings Certificates

One low maintenance high safety cash investment product that comes to mind is the NS&I index linked certificate, which has recently been re-introduced after being suspended due to high demand in June 2010. The returning product now pays 0.5% interest + annual change in the RPI index (currently 5.2%) TAX FREE for upto a total of £15k per issue per individual. In my opinion there is NOTHING on the market that can beat the NS&I in terms of return AND safety of capital, and even more so for higher rate tax payers.

Again no matter what happens to the inflation rate, your capital is 100% secure in real terms, and at the minimum guaranteed a return of 0.5% per annum, so even if deflation took place you would still receive a positive return of 0.5%. The certificates can also be cashed in early (after 1 full year), with little loss of indexation+interest. However these certificates are not suitable if you may require your funds within a year as you will not receive any indexation for inflation.

Banking Groups

Note whilst banking groups may have multiple licences as a consequence of mergers and takeovers, however they also may be in the process of merging licences so for ultimate safety one should remain focused on banking groups.

LLOYDS BANKING GROUP (2 licences)

• Lloyds TSB Bank
• AA Savings
• Bank of Scotland / HBOS
• Birmingham Midshires
• Capital Bank
• Cheltenham & Gloucester Savings
• Halifax
• Intelligent Finance
• Saga

SANTANDER GROUP

• Santander bank
• Abbey National
• Asda Savings
• Alliance and Leicester
• Bradford and Bingley
• Cahoot
• Moneyback
• Honycomb

Nationwide Building Society

• Nationwide Building Society
• Cheshire Building Society
• Derbyshire Building Society
• Dunfermline Building Society

BARCLAYS GROUP

• Barclays Bank
• Standardlife Bank

HSBC GROUP

• HSBC Bank
• First Direct
• Marks and Spencer Financial

ALLIED IRISH GROUP

• Allied Irish Bank
• First Trust

CITI GROUP

• Citibank
• Egg

CO-OPERATIVE GROUP

• Co-operative Bank
• Britannia
• Smile
• Unity Trust Bank

RBS Group

• Royal Bank of Scotland
• Nat West Bank
• Direct Line Savings
• Lombard
• The One Account
• Drummonds
• Ulster Bank

Additional comments

• Foreign Banks under UK FSCS Scheme – ICICI (India), First Save (Nigeria)
• Small business are covered by the FSCS on the basis of 2 of following 3 conditions – upto a turnover of 6.5 million, less than 50 employees, balance sheet total not more than £3.26 million

Banks not under the UK FSCS.

• ING Direct, Tridos – Dutch
• Anglo Irish, Bank of Ireland – Ireland

Don’t delay! Act today to form and implement a quick personal savings protection contingency plan, otherwise you may wake up one day to find yourselves locked out of your funds Iceland style, or worse lose deposits over £85k across banking groups.

Stock Market Trend

The stock market continues to track the conclusion of my last analysis (13 Jun 2011 – Stocks Bear Market Rally is Over Mantra About to Get Busted Again?) for an imminent bottom to be followed by the stock market carving out a base into late June / Early July, so no new analysis is warranted at this point in time.

Yes there is a disconnect between the stock market and economic perceptions, but that is nearly ALWAYS the case, well at least 70% of the time, which is why price trumps economics and the mainstream noise. Though don’t forget that investing in the stock market is at the best of times high risk, so it is never a case of treating stocks as an alternative to bank deposits even if the banks look set to default, as banks going bankrupt would also wipe out their respective stock prices.

Source and Comments: http://www.marketoracle.co.uk/Article28957.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook’s – The Inf lation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Source: Brian Sylvester of The Gold Report (6/29/11).

In this exclusive interview with The Gold Report, Doug Groh, senior analyst with Tocqueville Asset Management, likens the gold price to a mirror that reflects peoples’ concerns about global economic and political events. And he likes what he sees in the long-term prospects for gold equities.

The Gold Report: The situations in Greece, Ireland, Spain and Portugal are proving the unsustainability of deficit financing and are effectively killing the euro as a safe haven currency. As these worries escalate, have you seen more money come into your fund?

Doug Groh: Yes, we’ve seen funds flow into our gold fund product, but that’s been the case over the last year or so. I attribute it primarily to the rise in the gold price. Some investors see gold as an attractive alternative to other investment vehicles and they’re buying the gold ETF (exchange traded fund) and gold equities.

Gold bullion itself has outperformed equities this year. Some people feel there’s security in owning gold, but it seems they’re reluctant to buy the equities because of the risk. In addition to the market and equity risks, mining companies have risk—whether operational or political—with regard to developing their deposits.

TGR: What’s the Tocqueville Gold Fund worth right now?

DG: As of June 27th, the fund is valued at about US$2.4B, with about 6% of the fund in bullion.

TGR: Are you buying bullion now?

DG: No. We’ve been pretty steady in terms of the number of ounces in the fund for five to six years, although it has appreciated in value over the years. In percentage terms, it can go up or down relative to the equity positions in the fund. We have that position because we feel that, as a gold fund, we should own gold as well as gold mining equities. It’s not something we necessarily trade; it’s just a core position for us.

TGR: In 1980, about 22% of all financial assets were invested in gold-related instruments. Today, estimates put the current global investment at around 3%. Why aren’t more investors buying into the thesis that gold will only go higher as paper currencies or fiat currencies lose value?

DG: We think gold is a unique investment vehicle. You can look at gold as a mirror that reflects concerns about a number of factors around the world: uncertainty in Europe, the Arab Spring, U.S. monetary policy and debt, for example. When you analyze it, you might conclude that there’s no real utility to gold. In fact, gold’s utility is that investors see it as an alternative asset. Gold collectively expresses the notion that money isn’t worth what it used to be.

TGR: People are starting to whisper about contagion, much like what happened in Thailand in the mid- to late-’90s and spread to other Asian economies. Do you see contagion as a real risk?

DG: It seems appropriate that one consider that risk in one’s investment analysis. Greek debt is owned by a number of European banks; banks that also own debt from Spain, Portugal or Ireland. If Greece defaults, restructures its debt or cannot meet its obligations, its debt will be worth a lot less. This would put pressure on the balance sheets of those institutions holding Greek debt.

TGR: Would that spread to the United States?

DG: I think it’s certainly possible. If there’s a problem with debt in any part of the world, people will make comparisons. That’s where I think there’s a real risk. People would start to say, “If it could happen there, it could happen here.” That kind of mentality is what concerns me most. As a result of that mentality, you’re going to see the markets start to price that probability into the market. In essence, you’re already seeing that. I believe that’s why we’ve had a pretty tough couple of months in the equity market.

TGR: Let’s turn back to gold. Does the Tocqueville Gold Fund invest in junior mining companies that are strictly exploring for precious metals?

DG: We have exposure to gold mining equities across the spectrum, from those that are exploring and aren’t even mining yet to those that are developing and those that are actually producing gold.

Our approach is to have about a 35% weighting in smaller cap, exploring/developing-type companies. It’s a little hard to characterize because some of the explorers are actually developing. We think of them as exploring/developing companies. They comprise about a third of the fund. Others are producing cash flow and trying to become bigger. One can consider those as major producing companies and they account for another 40% to 50% of the fund

TGR: And the fund was up about 58% in 2010, correct?

DG: Net of fees, the Tocqueville Gold Fund was up 53.33% during 2010, which compares to the Philadelphia Gold and Silver Index, which was up 35.94% during 2010.

TGR: That’s very impressive. In February, you told us that you were “cautious about investing new funds into gold equities.” Is that still the case or has the pullback in gold equity prices created a buying opportunity?

DG: At the end of last year and beginning of 2011, many of the equities that we held had performed very well. It seemed as if the market was well ahead of itself. Year-to-date, however, gold equities in general have not performed well and in particular, since about the time Barrick Gold Corp. (TSX:ABX; NYSE:ABX) announced its plans to outbid Minmetals Resources Ltd. (HKSE:1208) of China for Equinox Minerals Ltd. (TSX:EQN; ASX:EQN). The gold mining equities in general are down relative to gold, which is up. That spread between the rising gold price and the decline in gold equity values, in our view, has created a very good investment opportunity.

At this time of year, you’re probably best served by adding more aggressively to your gold equity portfolio, I believe. Seasonally, we generally see a low valuation point this time of year. The second half of the year, particularly September through November, has seen good performance for gold equities over the past several years. In that regard, now may be an appropriate time to get positioned for that.

TGR: Do you still believe in a dollar-cost-averaging approach to buying equities?

DG: Yes. If you’re not working full time on the gold space, the best way to invest, I think, is to average the cost of the investment over the course of the year. If you’re paying close attention to the gold equity market, you can appreciate that these values don’t reflect what’s going on in the gold price. There can be some good buys in the space. And so, for those that have the time and ability to pay closer attention, it makes some sense to take advantage of the attractive values in the current market. However, the discipline of averaging the investment costs over time is also a good strategy.

The gold price is up over US$100 since the beginning of the year. That US$100 is falling right to the bottom line for gold producers, generating significant cash flow. The gold equities aren’t reflecting that cash-flow-generating ability. The margin has expanded, even though costs are up somewhat, but the investor base has lost interest in the cash flow that’s being generated.

A number of catalysts are coming into the market that could reinvigorate investors in gold mining equities. First of all, you’ll see good earnings and cash flow per share for the second quarter. Companies may increase their dividends. That’s an important element to get investors refocused on companies’ profitability, I believe. Additionally, in the latter part of the year, we expect to see more acquisitions.

TGR: Let’s get to some specific companies in your fund. Seven years ago, you bought Osisko Mining Corp. (TSX:OSK) at US$0.50. It’s now trading at around US$14.50. The company recently poured its first gold bar as it entered commercial production at the Malartic Mine in Québec. At the end of the first quarter 2011, about 4.3% of your fund was vested in Osisko. What’s that percentage now?

DG: Osisko is one of our more important holdings; it’s in the top five and is about 5% of the fund. They announced commercial production this week, about a month ahead of schedule. The reports we’re getting say that the plant equipment and operations are working better than planned. The new mine at Malartic is only part of the story. Osisko is developing other assets. They made some acquisitions over the last year or so that will add to their growth profile. The Osisko story isn’t over, and from our perspective, it’s not fully valued.

TGR: One of those assets is the Hammond Reef deposit in northwestern Ontario, which Osisko acquired when it bought Brett Resources in March 2010. Is Osisko going to plow some of the cash-flow from Malartic into Hammond Reef?

DG: That would be the expected business strategy. We believe the Hammond Reef project offers a lot of merit. They’re now de-risking the project by identifying the resource and a mining plan. That should be the best use of proceeds for them. I wouldn’t be surprised if they announce a property or a project acquisition. I don’t see Osisko acquiring another operating company unless it came with a tremendous amount of growth. At this point, I think Hammond Reef is really the next platform for Osisko to grow ounces from.

TGR: Hammond Reef has a 6.7Moz. inferred resource. So that’s not a small project.

DG: No, there’s good life to that project.

TGR: Another one of your holdings, NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), is developing a mammoth project in the Donlin Creek gold/copper project in Alaska. When is NovaGold going to join Osisko as a gold producer?

DG: I haven’t seen their latest timeline. I think it’s quite a few years out. NovaGold has some significant engineering projects to complete, such as power facilities and road work and permitting; permitting being the more important element of de-risking that project. The company has been working to revise a feasibility study for Donlin Creek that incorporates a natural gas pipeline. That study is scheduled for completion during the second half of 2011.

It’s the type of mining project that major companies wish they had their hands on. Yet, the majors seem to be reluctant to build out assets in that part of the world. They’d rather gain copper and gold exposure in the far-off reaches of Africa and the Middle East as opposed to North America.

TGR: I should mention that Donlin Creek is a 50/50 joint venture (JV) with Barrick Gold. A few years ago, Barrick tried to buy NovaGold outright. Do you think that Barrick might try that again as the project develops? After all, NovaGold has 17 Moz. in the proven-and-probably category.

DG: It would seem to make a lot of sense for Barrick to attempt to acquire NovaGold. But, while it may be logical, it’s odd to us that Barrick was divesting its African assets a year ago and is now acquiring African assets to gain copper exposure, when NovaGold’s other major asset, Galore Creek, has a significant copper endowment along with gold and silver. Logic isn’t always the business principle that’s pursued in the mining space.

TGR: Right. The Galore Creek project is a 50/50 joint venture with Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B), another major. Teck almost went under in the crash of 2008, but it’s rebounded nicely and has good cash flow.

DG: Teck likes to be diversified, and I think would rather share the cost of that project with somebody else. So, I don’t necessarily see Teck making that bid for all of NovaGold. It would have made more sense for Barrick to gain copper exposure by acquiring NovaGold in Alaska than it does for Barrick to acquire copper exposure in eastern Africa and the Middle East.

TGR: NovaGold’s prefeasibility study includes a proposal to build a gas pipeline from Beluga, Alaska to the Donlin Creek project. That would greatly reduce operating costs in terms of fuel and could benefit many projects in the area. Have you begun to examine that as an investment thesis?

DG: The viability of that gas pipeline should be more apparent with the release of the Donlin Creek revised feasibility study; that’s something we’ll have to check as we go through the study. Certainly development into central Alaska with a gas line and fuel source will open up the center part of the country to mineral exploration and development. Kiska Metals Corp. (TSX.V:KSK) is operating not too far from the proposed natural gas pipeline and they’ve reported some very good drilling success. We’ll probably see them broadening their footprint.

TGR: Do you have a position in Kiska?

DG: Yes, we do have exposure to Kiska.

TGR: Kiska expects another resource estimate in 12 to 18 months and is testing new targets at Island Mountain and Muddy Creek this summer. What are you hoping for from those drill programs?

DG: I’d like to see higher-grade results than we’ve seen in the past. I also hope that the geometry of the deposit can improve. As Kiska gains more information, they’ll have a better understanding of the geology and be able to position their drills to define the geometry at both Island Mountain and Muddy Creek.

TGR: Are there any other companies you’d like to talk about?

DG: One of the companies in our top 10 that doesn’t get much coverage is Gold Resource Corp. (NYSE.A:GORO; OTCBB:GORO; Fkft:GIH) in Oaxaca, in southern Mexico. Over the last year, they’ve had a fair bit of success developing their property and initiating production, finding additional ore on their property and generating cash flow. They’ve even started to provide a special monthly dividend. That’s a unique thing for a gold mining company, to initiate production and issue a dividend in such a short period of time.

TGR: Gold Resource put up guidance of 90,000 oz. (Koz.) in 2011. Is the company still on target for that?

DG: It doesn’t seem realistic for this year. Flooding this spring slowed production down. Perhaps by the end of the year they could get to a 90 Koz. per-year run rate.

TGR: The company plans to ramp up to about 150 Koz. in 2012. Is it more likely to achieve that target?

DG: I think the characterization might be at a 150 Koz./year run rate by the end of 2012, as opposed to generating that kind of gold-equivalent oz. during the entire year. It seems reasonable, although I think it’s ambitious. Gold Resource management wants to be ambitious. I think investors have to be a little bit cautious with ambitious statements.

TGR: You were going to mention another company; what is it?

DG: It’s ATAC Resources Ltd. (TSX.V:ATC). The company had two significant discoveries last year in the Yukon. One was a lead/zinc/silver discovery. More importantly, they came across very sizeable gold intercepts with high-grade gold on the eastern edge of their property. Many suggested that it had the look of the Carlin District in Nevada. ATAC is going back into the property there in the Osiris region to drill it off and see what else they can find. I think you’ll hear some good drill results from ATAC in mid- to late-summer.

TGR: Before you go, please leave our readers with a few words of advice on how to play the current market.

DG: One point to keep in mind is averaging costs over time. I think that’s the best way to get exposure. Secondly, it’s important to assess a company’s prospects and to think about a price target before investing. If it reaches that price target, reassess the investment. Third, assess each investment within a certain timeframe. Explorers and developers can take a long time before they realize the value of their assets, whereas producers are not on as extended of a timeline to realize the value of their assets. One has to match one’s expectations with the nature of a company’s operations.

TGR: Doug, thank you for your time and insights.

Doug Groh has 25 years’ investment experience. Before joining Tocqueville in 2003, he was director of investment research at Grove Capital from 2001–2003. Between 1992–2001, as a senior sell-side analyst for JP Morgan and Merrill Lynch, he was recognized as a ranked analyst by Institutional Investor Magazine and The Wall Street Journal for his coverage of basic material stocks in the non-ferrous metals, chemicals and paper and packaging industries. He began his career as a mining analyst and worked as a precious metals portfolio manager at U.S. Global Investors and American Express Financial Advisors in the 1980s and early 1990s. He holds an MA in energy and mineral resources from the University of Texas at Austin and a B.S. in geology/geophysics from the University of Wisconsin—Madison.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: NovaGold Resources Inc. and Kiska Metals Corp.
3) Doug Groh: This article reflects my views as of the date or dates cited and may change at any time. The information should not be construed as investment advice. No representation is made, nor is there any guarantee that any projection, forecast or opinion will be realized. References to stocks, securities or investments in this writing should not be considered recommendations to buy or sell. Past performance is not a guide to future performance. Securities that are referenced may be held in my personal portfolio or in portfolios managed by Tocqueville or by principals, employees and associates of Tocqueville, and such references should not be deemed as an understanding of any future position, buying or selling, that may be taken by either me or Tocqueville. I personally and/or my family own shares of the following companies mentioned in this interview: Tocqueville Gold Fund. I personally and/or my family are paid by the following companies mentioned in this interview: as an employee of Tocqueville Asset Management.

Will a hidden link between the Greek debt situation and the U.S. banking system ignite the next global credit crisis?

The odds of the “next” global credit crisis are increasing with each new day, and with each new revelation. And escalating fears are hitting worldwide stock markets hard.

Just yesterday (Thursday), Greece’s leaders revealed that the country’s socialist government is on the brink of collapse. Greek protesters – angered by brutal austerity measures that will almost certainly heighten the country’s record 16.2% unemployment rate – are rioting in the streets of Athens.

On Wednesday, Moody’s Investors Service (NYSE: MCO) warned France’s three largest banks that their exposure to Greek debt could lead to credit-rating downgrades. There are even concerns that the European Central Bank (ECB) may be technically insolvent – meaning it wouldn’t survive a global financial meltdown.

Investors are right to be worried.

But with the European banking system’s financial woes currently dominating the headlines, those investors might be very surprised to discover that it’s actually the U.S. financial system that may end up as the real weak link in the event of a Greek debt default.

And investors don’t even know this link exists.

The Scary Facts About Greece’s Finances

Since last May, when the International Monetary Fund (IMF) and Eurozone members ponied up $159 billion (110 billion euros) for a Greek bailout, Greece has had to implement radical austerity measures. Terms of the bailout forced Greece to boost taxes and slash government spending. There was a public outcry, but the country’s citizenry largely went along; it had no choice.

One in three Greek workers is employed by the government. As austerity-mandated layoffs have progressed, Greece’s unemployment rate has zoomed from 11.7% in the first quarter of last year to the record 16.2% rate recently reported.

And given that government spending is still at 46.8% of gross domestic product (GDP), additional budget cuts will be coming – meaning Greece’s national jobless rate is certain to increase.

So is the national anger level.

The sometimes-violent demonstrations on Wednesday forced Greece’s Socialist Party Prime Minister George Papandreou to reach out to the opposition party in an effort to form a coalition government.

He was quickly rebuffed, is reshuffling his cabinet and will call for a vote of confidence. A no-confidence vote – pretty much a foregone conclusion at this point – would require new elections to be held quickly.

The Surprising Trigger for the Next Global Credit Crisis?

This kind of leadership chaos is unnerving to stock-and-bond investors around the world – especially since Greece needs an infusion of $85 billion (60 billion euros) by mid-July to remain solvent.

And Wednesday’s announcement by Moody’s isn’t helping. In addition to its warning that France’s three biggest banks may be downgraded, the U.S.-based credit-rating firm made it clear that there were other banks in France, Germany and the rest of Europe that could face the same treatment in the event of a Greek debt default.

All of this is widely known. But the largely untold “rest of the story” is this: If the European banking sector implodes, the U.S. financial system could take an unqualified beating.

B ig U.S. banks have been lending generously to banks across Europe. C lose to 29% of their lending books during the past two years have gone to their heavyweight European counterparts. While they have pulled back considerably as a result of recent turmoil, U.S. banks are widely believed to have $41 billion of direct exposure to Greece.

The amount of exposure to the rest of Europe is not easily quantifiable.

And this U.S. financial system link doesn’t end there: U.S. money-market funds have a hefty European exposure, too.

A recent report in The Wall Street Journal said that the three large banks Moody’s is threatening to downgrade – BNP Paribas SA, Credit Agricole SA, and Societe Generale SA (PINK ADR: SCGLY) – get a significant amount of their short-term funding from America’s money markets.

According to The Journal, about 12% of the loans made by our biggest money-market funds were made to those three banks.

The interconnectedness of U.S. banks and money-market funds to global banks, many of whom are now at risk from a Greek default, is a sobering revelation.

Even the European Central Bank won’t be immune.

Bad News for the ECB?

According to Open Europe, a U.K. think tank, the ECB will be close to insolvency if Greece defaults – or even “restructures” – its outstanding debts.

The ECB has $116 billion (82 billion euros) of equity capital against a balance sheet just shy of $2.84 trillion (2 trillion euros) of “assets” consisting of bonds, loans and “credits”. Of that amount, it holds $637 billion (444 billion euros) of debt paper from the so-called “PIIGS” countries of Portugal, Ireland, Italy, Greece and Spain.

Of that total, approximately $270 billion (190 billion euros) are Greece’s crumbled paper. Open Europe estimates that a 40% to 50% haircut on Greek debt would come close to wiping out the ECB’s capital base. And the spillover from the contagion – the next global credit crisis – would sink the central bank almost overnight.

Lorenzo Bini Smaghi, an ECB executive board member, doesn’t buy the conclusions reached in Open Europe’s rapidly circulating report – telling the WSJ.com blog that they are “fundamentally flawed.”

For instance, on the subject of the ECB’s holding bonds that might fall precipitously, Bini Smaghi said that “not being a liquidity-constrained institution, we can act as a buy-side counterparty in markets where sell-offs are taking place, and our investment in those markets can be held to maturity, so that only default risk could threaten our profit and loss accounts.”

In terms of collateral, the ECB board member said that “assets held as collateral only constitute a guarantee, not a direct exposure. Accordingly, related price decreases could only induce Euro system losses if those decreases took place after the default of the counterparty.”

But here’s what’s frightening: In dismissing claims that the ECB could fail, Bini Smaghi makes arguments that repeatedly rely on the premise that there won’t be any actual defaults.

When talking about the bonds the central bank holds, he opened up the proverbial can of worms by saying that “only default risk could threaten our profit and loss accounts.”

Doesn’t he realize that default is exactly what’s on the table?

It’s the “Euro system losses” that would take place as a result of a Greek default that has the global investing community frightened to death. European contagion spells global contagion.

French President Nicholas Sarkozy is in Germany today (Friday) to meet with German Chancellor Angela Merkel. Not surprisingly, the topic will be the Greek debt crisis. President Sarkozy will be pleading with the German Chancellor to back off Germany’s call for Greek debts to be “restructured.”

The rift between France and Germany, the strongest members of the European Union (EU), could be the straw that breaks the Union’s back. That could certainly mean that the next global credit crisis is fait accompli. And it would also represent a definite end to the global recovery.
Source: Money Morning

News and Related Story Links:

• Reuters:

  Greek Unemployment Soars in March, Industry Slumps.

• The Guardian:

  Europe Warned of Financial Chaos Over Greek Debt Crisis.

• Time:

  As Austerity Anger Swells, Greece’s Government Struggles.

• Bloomberg News:

  Papandreou Reshuffle Fuels Dissent Among Allies as Financial Markets Slump.

Debt Default ‘Deferral’ of Greece a Dangerous Precedent – Got Gold?

www.FinancialArticleSummariesToday.com

If the implications of the recent Greek tragedy were not so serious it would have been seen more as a Greek comedy (of fiscal errors). In fact, however, to deploy another metaphor, Greece’s sovereign debt is seen as the proverbial canary in the coal mine – a microcosm of the relentlessly growing sovereign debt that has taken much of Europe by storm and is threatening to spread to the U.S.

Short-Term Bail Out

Fifteen other member nations comprising the Euro currency club have recently saved colleague Greece from defaulting on its debt … for now.  On the surface this solution is just what any Keynesian economist would advocate because, as part of the bargain, Greece has agreed to implement a variety of painful spending constraints which will result in a much reduced standard of living for its people.  In spite of such action, however, Greek debt will continue to grow to 150 percent of GDP by 2012.

Long-Term Debt Tomb

Unfortunately, however, this new bailout provokes and perpetuates a series of errors because Greece cannot, and will not, be extricated from its debt tomb.  According to the UK Telegraph, Greece will now be doomed to transferring to foreign creditors an amount equal to 8 percent of its GDP in perpetuity … much more than German reparations to foreign creditors after WWI.  It cannot, and will never, be repaid.

Temporary Hiatus

Further proof that these loans will provide only temporary relief is recent research by economists Carmen Reinhart and Kenneth Rogoff in their new book “This Time is Different:  Eight Centuries of Financial Folly.”  They concluded that when sovereign debt exceeds a level of over 80 percent of its GDP, that debt grows ever more rapidly invariably pushing the country into financial default.

Inevitable Default

If we are to take the Reinhart/Rogoff research at face value then all that this recent bailout of Greece has done is buy it sometime before its inevitable financial default.  It also allows Euro countries, the IMF and other agencies and persons with responsibilities for debt issues to work their magic.  Moreover, it conveys hope to other countries on the brink of financial collapse.  It defers the calamity and appeals to the overwhelming need of politicians everywhere to avoid and escape responsibility, if only to have the debt implosion occur on someone else’s watch.

Dangerous Precedent

While the temporary hiatus given to Greece should be characterized as default deferral, it also, unfortunately, sets a highly dangerous precedent.  Each of the next Euro default candidates – Portugal, Spain and Italy – comprise of much larger economies which will therefore require substantially greater levels of assistance.  Of course, fairness will demand that they too receive an equivalent boost from their Euro partners and backstopping by the IMF.

A closer look at bailout details brings to light something else which should raise serious concern.  Who are the foreign creditors which Greece is having difficulty paying?  While the current bailout originates among the taxpayers of the sixteen member nations of the Euro group, the existing debt which is in danger of default is held by foreign banks…not foreign nations.  These foreign banks are headquartered in France, Germany, Switzerland, the UK and elsewhere.  A short list includes Credit Agricole and Germany’s Landesbanken. This begs a few unanswered questions:

a) Is this a Greek government bailout or is it an indirect bailout of foreign banks by their own governments under the guise of loans to the government of Greece?

b) Will this Greek script be played out on the stages of other Euro nations?

c) Will it spread to the United Kingdom and the United States?

Will the Debt Default Tragedy ‘Tour’ the U.S.?

U.S. national debt now stands at $12.78 Trillion, more than twice as large as it was in the year 2000.  Even the President Obama’s budget director admits that the on-budget debt level will reach close to $20 Trillion by 2020, almost double over what it was just over one year ago.  The non-partisan Congressional Budget Office says it will be even higher.

As major as those debts are, however, the genuinely mind-boggling debt projections are the future commitments to citizens for such services as Social Security and Medicare, as well as a myriad of additional federal government obligations.  These Unfunded Contingent Liabilities are now well beyond the $100 Trillion level. Some calculate the number is closer to $137 Trillion. Remember that these pending expenditures are the unfunded portions.  No money has been set aside, just another promise.

It has been calculated that the net present value of these future budget needs is in the neighbourhood of $35 Trillion.  What that means is that $35 Trillion of 2010 dollars needs to be invested  today in order to meet the $137 Trillion United States government responsibilities to its citizens in the years ahead.

Combine the current budget debt of $12.78 Trillion with the $35 Trillion net present value for future obligations, then add in $1.5 Trillion of continuing annual deficits for as far as the eye can see and factor in future rising interest rates from their current multi-generational lows and it is clearly evident that:

America’s debt picture is truly astronomical and, like the situation with Greece, the debt cannot, and never will, be repaid. Indeed, any way you look at it, the consequences for the United States, let alone the many other haunted economies, are grim, dismal – even disastrous.

As long as bond creditors retain a modicum of confidence the play – the ‘Greek’ tragedy - can continue for awhile longer, maybe even indefinitely. However, should interest rates spike northward or external events affect us it is highly likely we will witness a sudden unscripted end.  We can only hope that creditor confidence, supplemented by modest economic gains and strengthened by politicians who exhibit vision and serve tough love to their respective electorates, might be sufficient to enable us to experience a ‘muddle through’ scenario. Time will tell.

How Can You Protect Yourself From Sovereign Debt Defaults?

Quite simply, individuals should invest in gold and silver in the form of bullion and select precious metals mining stocks. There is no better protection available.

Arnold Bock is a frequent contributor to both www.FinancialArticleSummariesToday.com. and www.munKNEE.com. He can be reached at editor@munknee.com

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Natural forces are at work in Europe, powerful forces, in fact forces that are not evident. It is amazing how little the financial analysts notice the forces at all. Since the year 2007, a hidden force began to put pressure on the European Union financial underpinning. Like any fiat currency, the foundation resorts to debt. It came to my attention almost three full years ago that Spanish EuroBonds had a yield slightly higher than the benchmark German. Commentary swirled that the EuroBonds were not homogeneous, and therefore the Euro currency was badly flawed. They were identifiable by the markings on the bond IDs. German EuroBonds carry an ‘X’ in the ID. So the arbitrage professionals went to work, buying the German and selling the Spanish bonds. The flaw was to the structural foundation to the Euro currency, not the market that traded them, surely not the alert speculators. In time, the Greek, Italian, and Portuguese bonds, even the Irish bonds, showed significant separation from the German benchmark. Last December, the Greek bond broke first. Its arrival to the crisis was not part of evolution (natural selection) as much as European tribal leader selection. Greeks are neither Latins nor Teutonics. The bust of the EuroBond structure invites the arrival of a gold-backed currency, urgently needed to provide stability.

A second natural force has arrived in the gigantic bond marketplace. While as many political analysts as financial analysts promote the wisdom of a preserved European Union, and a shared Euro currency across that union, a natural force works to separate the entire group of PIGS nations. Refer to Portugal, Italy, Greece, and Spain. As much force comes from the Nordic Core power center to push the PIGS nations away from the common European financial structure, as does the force from the PIGS nations to sever ties and go it alone. A German banker contact has repeated an important point on numerous occasions. The European Monetary Union experiment has cost the nation of Germany over $300 billion per year, all for what clearly appears to be a welfare program directed toward the benefit of wasteful inefficient nations not deserving of a low bond yield. After ten years, the cost has been $3 trillion to Germany. It is not a matter of German willingness to continue the Southern Europe Welfare Program, as much as their ability to continue. They cannot continue. They cannot afford it.

My forecast made since January was that Germany would not aid Greece, but would say all the right things. Their leaders did occasionally show human tendencies, like when some critics claimed Greece possessed innate specialty in dance, drink, and song. My longer standing forecast is that all PIGS nations would revert to their former currencies, the Greeks to the Drachma, the Italians to the Lira, the Spanish to the Peseta, and the Portuguese to the Escudo. The forecast is of decentralization and increased local autonomy. However, and very importantly, the path is a very slow one with political obstacles, face saving requirements, economic pressures, and social pressures too. Notice the Germans appeared to be cooperative in aiding Greece, but when money had to be committed, arguments ensued surprisingly. Not a surprise to the Jackass. The German High Court will surely reject both the Greek aid and the Euro usage itself, all in time.

ADVANTAGES OF REVERTED CURRENCY

The political ideals of a unified Europe are all well and good, but might be fantasy built upon folly in ignorance of practicality. The national differences are significant in work habits, industrial efficiency, tax structure, credit practices, federal bureaucracy load, economic diversity, educational depth, native intelligence, demographic makeup, arable land & sunny climate, and more. The pursuit of a unified Europe has proved elusive for a millennium. Not gonna go there here. The pope in the Dark Ages had the most success, except that its church accumulated an outsized collection of wealth, even in the form of gold, enough to be a clandestine global player.

Enter the London financial analysts and economics brain trust. They have entered the room with some interesting counsel, not the typical self-serving defense of their system. Instead, a prominent think tank suggests to Athens leaders a debt default and return to the Drachma currency. Greece is urged to leave the Euro currency. We are moving gradually toward a restructure of Greek Govt debt, and a corresponding stimulus to the Greek Economy via devalued currency. When tied to the Euro currency yoke, such a Greek stimulus is impossible. British economists advise Athens to abandon the Euro and default on its €300 billion debt under the basic motive to save its economy. The Centre for Economics & Business Research (CEBR) out of London has warned Greek Govt officials of the horrible bind. The CEBR believes Greece will be unable to escape a debt trap without devaluing their own currency to boost exports. Greece must pursue economic expansion, but cannot with the Euro straitjacket. The only workable path is for Greece to return to its own currency, the Drachma. To date, the EU Bailout is a poorly disguised rescue for German and French banks, even London banks. The dirty secret across Europe is that the major nations all own a huge raft of PIGS debt, and each nation within the PIGS pen all own a huge raft of the same debt. Any departure by Greece from the Euro would create a grand shock for banks across all of Europe, cause great disruption, and subvert the banker plan for their latest welfare program in continuation of public governmental adoption. It all ends in ruin.

Doug McWilliams is chief executive of the CEBR. He said “Leaving the Euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in Euros, this would raise the debt from its current level of 120% of GDP to 140% overnight. So part of the package of leaving the Euro must be to convert the debt into the new domestic currency unilaterally… The only question is the timing. The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.” McWilliams called the move virtually inevitable (in his words) but he minimizes the devaluation potential. See the Business Times article (CLICK HERE).

The advantages are as numerous as they are deep, all significant.

Defaulted Restructured Debt: A return to the Drachma currency would enable a restructure of the Greek Govt debt. Look for at least a 50% debt reduction, but against a currency devaluation. The Athens leaders can win a very large portion of debt forgiveness, or else threaten default. European banks will choose a writedown rather than a total wipeout loss. These bankers will realize the futility of carrying full debt on their books, all too aware of the poison pill nature of the compulsory austerity programs heaped upon Greece.

Economic Stimulus: A return to the Drachma currency would enable a strong stimulus to the Greek Economy. Nothing is free, however. Currency devaluation is a double-edged sword. The benefit to be realized with cheaper exports (including tourism) will be offset by higher energy costs and other import costs (like cars, cellphones, and machine equipment). The historical effective tool is for a currency devaluation, one that leads to valid stimulus but with a steady dose of price inflation. Greece, like other European nations, is no stranger to socialist solutions to spread the misery.

Poison Pill Revenge: A return to the Drachma currency would enable a national rejection of the IMF/EU poison pill solution. The austerity measures have no precedent of effectiveness. They are ruinous, lead to greater federal deficits, worse unemployment, and more social disorder, yet the Banker Elite continue to push such non-solutions. Rejection of the austerity programs would incite a national rally of pride and celebration. Obviously, when Greek reverses the austerity cuts, the maneuver would ensure a second thump one year afterwards. Bloated government payrolls would remain, at a heavy cost. The Drachma would suffer a continued devaluation later on. Stimulus would be required in additional doses. The shared pain from price inflation would follow.

Autonomy & Control: A return to the Drachma currency would enable a national movement for the Greek people to take control of their fate. Their population feels on the receiving end of dictums and forced solutions, complete with massive job layoffs and budget cuts. They detect duplicity, since other nations in Europe are in violation of guidelines. Nevermind that something like 11% or 12% of all Greek jobs are located within the government sector. Turn a deaf ear to the rampant tax evasion and other corruption that might be more prevalent than Italy. The psychological benefit to a reversion to the Drachma is to spit in the faces of bankers and to take the reins of national control. This has a value in national pride and spirit, which ironically would avoid most internal reform.

PRECURSOR TO NEW NORTHERN EURO

Prepare next for a Euro currency with a more trim look, one with the PIGS fat trimmed off. The next three big big shoes are about to hit the floor, with severe crises erupting much worse for Spain, Portugal, and Italy. Banks in those nations will suffer failures, liquidations, stock declines, CDSwap contract rises, rescue requests, mergers in desperation, and more. These three nations represent the remainder of the famed PIGS descriptor, as Greece has captured far too much news and attention. When the Greek Govt debt news broke out and was developed from February through May, was Spain deeply committed to reform? NO! Was Spain deeply involved in liquidations and bank asset writedowns? NO! They delayed. Attention turns to the other PIGS in distress. Greece has served to distract attention not just from the other PIGS nations but from the United States and United Kingdom as well. Sovereign debt default will not end as a story until the USTreasurys and UKGilts default, even if technical defaults. All four PIGS nations will be removed from formal Euro currency participation. Economics and nationalism dictate it.

Prepare next for a Euro currency with a more trim look, one with the PIGS fat trimmed off. As the PIGS sovereign debt is discharged, written down, and defaulted, the demand will increase for the survivor Euro core, the healthy strong core. The new Northern Euro currency will initially be comprised of a PIGS-less Euro, which awaits on the other side of the door, here and now. The PIGS-less Euro currency will have much less debt to refinance in the short horizon. The PIGS-less Euro currency will have much stronger fundamentals with smaller annual deficits and better looking debt ratios versus economic size. The PIGS-less Euro currency will have a much healthier trade surplus picture. The PIGS-less Euro currency will realize much greater respect in a faith-based fiat world. But it is a transition vehicle.

The events in the next few months regarding the European Monetary Union are set to accelerate rapidly. The Greek Govt debt situation was replete with delay, debate, deliberation, confusion, distortion, false starts, deceptive fixes, reversals on decision, difficulty in endorsement, revealed lies on debt volume, harsh criticisms, low blows, violence, and much more. The new few months will be different. One well connected banker source told me a few months ago that the Greek debt situation will come to a resolution, all rescues will fail, as default is inevitable, complete with a return to the Drachma currency, but afterwards, the default of Italy and Spain will occur with lightning speed. He expected the events to occur in a fast chain reaction. We are seeing it.

The transition currency stripped of PIGS fat-ridden lining will eventually make way for the new Northern Euro. It was described in last week’s article. It will contain much more independence among its members and their central banks. It will contain an embedded gold component. Watch in the future for a crude oil component, even possibly OPEC oil sales tied to new Northern Euro currency payments. Time will tell. Events are moving rapidly. The PIGS-less Euro currency forces the monetary issue, as it demands a better and more perfect form of currency. An old maxim goes “A paper currency cannot be replaced by another paper currency, but rather by a metal currency.” How true!! Regard the PIGS-less Euro currency as a vehicle whose arrival will serve as a penultimate event in the Competing Currency Wars. The arbitrage will continue to pull apart paper currencies, tethered to lost integrity and faded trust. The PIGS-less Euro currency will require the broader adoption of a strong viable realistic currency born of crisis, a currency formed in a golden crucible.

The reversion to local currencies, complete with more autonomy taken back by individual central banks, will demonstrate a strong DECENTRALIZATION TREND. Even the new Northern Euro currency will feature greater decentralization. Those who feared a continental Amero currency for North American usage, a sustained Euro currency for European usage, and an emerging Yuan currency for Asian usage, must go back to the drawing board or replace the perceptual prisms. Prepare for several gold-backed new currencies. China is talking of a gold component to the Yuan currency. So is Russia. My hunch is that Russia will either participate in the new gold-backed Northern Euro currency or launch its own gold-backed Ruble currency.

The Americans and British will be last on board, as their nations tumble into the Third World where corrupt leadership and tight corporate mergers are their calling cards. Gold will be the stability mainstay, the common anchor applied across the world, but its application will enable decentralized power to be managed. Gold will emerge as the great liberator. Those nations first to embark on true remedy and reform will be the new global leaders. Those nations stuck in stubborn refusal will elect themselves Lord of the Flies in the Third World, where apparently oil-soaked shorelines and dead marine ecosystems will be the norm, maybe even toxic rain.

ITALY NEXT ON THE BLOCK

The Italian Govt debt picture is seriously distorted. Financial analysts point to more favorable debt ratios as a proportion to their larger economy. The debt volume in Italy to be refinanced this year alone is almost ten times that of Greece. The important factor is the volume of short-term debt to be financed, that must come from the bond market. So what if its ratios look more favorable? The money aint there!! Over half of all the 2010 total finance needs for PIGS nations plus Ireland are derived from Italy alone. The needs for Italy diminish somewhat in following years, but the volume remains grand. Unlike other European nations, the Italian vendors and shopkeepers have maintained a stubborn habit of showing sales receipts in both Euro terms and Lira terms over the years. Never argue with an Italian, since their hands move faster than others.

The Italian Govt debt is under sharp attack. During this week, the sovereign risk returned with a vengeance as the Italian Govt debt took heavy blows. The reminder is stark, that sovereign debt is a major contagion across all of Europe. The Credit Default Swap contract, which insures the 5-year bond, rose in a big way on Monday. MarkIt reports the Italian CDSwap went from 200 basis points to 250 bpts in a single day, to mark a new record high level. The new story to replace Greece has arrived to take away attention in the financial news media. The contagion is spreading globally now, even to South Korea, far beyond Iceland from two years ago. An important new trend evident in the last few months is the appearance of sovereign nation debt as the most actively moving in the official CMA reports. The trend of national debt struggles and deep distress will continue until a true monetary anchor can be constructed, fashioned of a gold alloy, urgently needed to provide stability.

SPAIN NEXT ON THE CROWDED BLOCK

The Spanish Govt debt picture is seriously distorted, in different ways. The banks in Spain have chosen to ignore the reality of lower property prices, and have carried credit assets at absurdly high values. It is safe to say that the Spanish banks are ready to enter freefall. A major shock comes to Spain. For well past a year, they have refused to mark down much of any credit assets tied to property. Furthermore, their property markets have refused to mark down prices seeking buyers on the open market. The result has been a mammoth reduction in sales volume, as sellers want prices that buyers are unwilling to offer, with huge price gaps that are sometimes described as comical. Reality is set to strike, and strike very hard. The Greek focus will soon turn to Spain, and also Italy.

Not being an expert, this analyst regards the Caja sector of the Spanish banks to be the large group of savings banks. They are all operating in a fantasy land, as their credit portfolios have been shattered for a long time. The common practice of carrying lofty valuations is slamming against the wall of reality. The Spanish Govt has been attempting to enforce a grand restructure process among its cajas. They are in deep debt and teetering. Merger with larger banks is seen as a potential solution, but that constitutes fusion of insolvent pieces with bad glue. The Govt has created a Fund for Orderly Bank Restructuring, (FROB) to facilitate the process. Usage of the fund comes with a timetable, as the savings banks have until June 30th to make formal requests for the money urgently needed. The FROB fund has a total value of €99 billion and is funded with €9 billion of capital and up to €90 billion of new government supported debt. Yet more monetary inflation enters the picture.

The savings banks within the Spanish Caja system total 45 in number. They, like the bigger banks, have stalled on taking proper liquidation and writedown action. The Bank of Spain has stirred things up with a recent seizure of troubled Cajasur one week ago. Other merger announcements have followed. Cajasur had a distinction, since its board of directors contained some stubborn priests, who refused to merge with the bigger Unicaja. Bank analysts are coming to the conclusion that the collective costs of the bailouts in Spain by their government will be an order of magnitude higher than what it anticipated. The Spanish Govt deficit ran at 11.2% of GDP in 2009. That ratio must come down. My forecast is that it will rise, not fall. The reason is simple. Just like with the United States and United Kingdom, no reform has come, no bank liquidations have come, no housing market remedy has come, no initiatives to plow under generally have been embraced, and those in charge of the disaster remain at their posts. So the banks will face continued losses. So the housing market will face continued declines. So the economies will face continued recession.

Rumors swirl that Caja Madrid said to ask for €3 billion of aid from the official rescue fund. The news has captured much attention since it is the second largest among the cajas. By the way, caja in the spanish language means box, cage, booth, register, teller unit, or repository. Confirmation came in the form of an official denial by the bank, calling it speculation. The savings bank did reveal last week as being in talks to merge with several regional cajas. Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia, and Caja Rioja were mentioned.

COMPARTMENTALIZED PERCEPTIONS

Think nation, not bank! Until 2008, perceptions and evaluations of the banking sector were specific. Talk was about Santander in Spain, their big bank, and not about Spanish Govt bonds. Talk was about Societe General in France, and not about French Govt bonds. Talk was about Royal Bank of Scotland and Northern Rock and Lloyds in Great Britain, but not about UK Gilt bonds. Talk never was much about individual Italian or Greek or Portuguese banks. But now, talk is replete with Italian and Greek and Spanish Govt debt securities, and not of private banks. The line of thinking, the analysis, the focus is much more directed at national debt exposure, the sovereign debt. The insolvency of big banks has been transferred to insolvency for entire nations and their governments. After 18-20 months of shifting the debt risk from individual banks to the government balance sheets, the impact has finally come to be felt. The sequence of formal debt downgrades reads like a parade of disasters, mostly concentrated on the distressed nations and their sovereign debt. It has become a global phenomenon, since Korean debt, Brazilian debt, and other nations have joined the sovereign debt crisis. Remember that the clownish popular financial analysts called the Dubai debt default isolated. My analysis actually forecasted the Dubai debt event over three months in advance. My analysis also pointed out the interwoven nature of the sovereign debt exposure, since banks across London, France, Switzerland, and Germany share the debt risk as underwriters and investors. We have vividly seen the interwoven debt exposure.

The Spanish Govt debt situation has provided a gloomy cloud over their entire banking system.

Last week, Fitch Ratings became the second major ratings agency to downgrade Spanish sovereign debt. They marked it down to AA+ from AAA. Standard & Poors had cut the same Spanish debt rating back in April, lower than AAA. In their formal announcement, Fitch stated belief that the unemployment rate in Spain over 20%, along with the reversal of fortune tied to the construction boom, will weigh heavily on their economy struggling under extremely high debt burden levels. Neither the Spanish Govt nor their banking leaders have any firm resolve or grip on the situation. Recall that delay to remedy and reform always results in much worse bank losses and much deeper economic recession. Their government has delayed on bank accounting practices, and only last week worked the austerity measures through the Parliament by a single vote. Fitch offered a mealy mouthed vapid statement about how the special FROB fund to clean up their banks should be sufficient, in a total denial of the depth of the problems and future losses. The FROB fund is designed to aid the caja banks heavily exposed to the real estate and construction sectors. Fitch noted that their restructuring process is progressing slowly, which means not quickly enough. The politicized wrangled process could intensify constraints on the supply of credit and affect the pace of economic recovery for the country, so claims Fitch rightfully so.

The next three big big shoes are about to hit the floor. The bang will reverberate around the world. The Spanish, Portuguese, and Italian banks will next go belly up and quickly, as they sink with PIGS debt and other credit assets tied to fallen property. Spain will make the most shrill sounds, for a simple reason. They were the worst offender in holding onto mindless unreasonable lofty property values. Their bank books have the biggest drop to realize, after re-entry to reality. The crises underway in the remainder of PIGS nations will continue unabated, and usher in magnificent events where a legitimate gold-backed currency arrives, urgently needed to provide stability.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at JimWillieCB@aol.com