Path to Bankruptcy of Sovereign nations

After, Greece, Portugal, and Ireland which have been hammered by bond vigilantes and downgraded to junk status by Moody's (rightly so), the next targets seem to be Spain and Italy, and looking at fast rate rate at which their spreads are widening , they probably too will need a bailout.

Further, it also remains to be seen when the bond vigilantes will attack the bond markets of UK and US ( the two most financially integrated countries in the world).

Now the focus is :

How will the massive bailouts of Spain and Italy will be funded. ( I do not count the possibility of second bailouts for Ireland and Portugal which are immaterial to Spain and Italy)

Will this result in the situation in which Germany says enough is enough, and it aborts the Euro ( as result of which, ex Germany, the entire financial system of Europe, hence the world, will come into jeopardy.

After Germany aborts, will the bond vigilantes then attack and bankrupt US and UK, by driving yields to 10%+. Even if they were to print money, the effects would be profound, especially in the already battered housing markets.

Now the final question: What will be the safe haven currency, with US/UK/Europe bankrupt? I predicted the Swiss Franc, or at-least observed ( in an another article on the site). Could it be Gold? (Though I doubt that it will hold as strongly as the CHF)

I think that if any of the above materializes, the world economy will be in a much much worse recession than that in 2008.
 
Italy is solvent and liquid at any financially educated eye. Speculation these days really aims to finish Greece by poking a bit Spain and Italy. The fundamental problem in the West is the massive debt from the U.S., shorters are still playing ball.

On the other hand, self fulfilling prophecies are something we smart guys are used already, aren't we?

I cannot believe turbocapitalism, in the form of these sovereign financial piranhas, is so stupid to strangle itself. I cannot believe it yet, but thinking of trading floors full of blown out, amoral kids, I realize it is all truly and bloody possible. As a consequence, China will buy out the rest of the world for peanuts.
 
After, Greece, Portugal, and Ireland which have been hammered by bond vigilantes and downgraded to junk status by Moody's (rightly so), the next targets seem to be Spain and Italy, and looking at fast rate rate at which their spreads are widening , they probably too will need a bailout.

Why? Let the banks that lent them money take the losses. The "bailout" money is going straight to the banks. Unlike the US, Europe has a history of upheavals and revolutions; the people are willing to take to the barricades. So what has played out in the USA is unlikely to work there. The scenes in places like Greece and Spain are only a shadow of the street violence that will break out throughout Europe if the financial oligarchs and their political stooges try these shenanigans there.

Further, it also remains to be seen when the bond vigilantes will attack the bond markets of UK and US ( the two most financially integrated countries in the world).

Not in the US.

How will the massive bailouts of Spain and Italy will be funded. ( I do not count the possibility of second bailouts for Ireland and Portugal which are immaterial to Spain and Italy)

There will be revolutions first.

Will this result in the situation in which Germany says enough is enough, and it aborts the Euro ( as result of which, ex Germany, the entire financial system of Europe, hence the world, will come into jeopardy.

Which Germany? Financial and industrial Germany has gained from the status quo of the last ten years and wants it to continue. The Germany of workers and taxpayers is another Germany.
After Germany aborts, will the bond vigilantes then attack and bankrupt US and UK, by driving yields to 10%+. Even if they were to print money, the effects would be profound, especially in the already battered housing markets.

National bankruptcy is a political phenomenon, unlike individual or corporate bankruptcy. As long as the US remains military hegemon and imposes Pax Americana, the rules it applies to others do not apply to it. The bond speculators are like a band of jackals following in the wake of a tiger (the US). They cannot turn on the tiger. The US is the guarantor of a political, military, and financial framework that privides the ecosystem for speculators to exist and thrive. These speculators can turn on Ireland, Greece, and Argentina -- but not the USA.

I think that if any of the above materializes, the world economy will be in a much much worse recession than that in 2008.

What does "world economy" mean in operational terms?
 
I don't know, Moody's just put the US on downgrade watch. Hopefully this will be further pressure to come up with a long term deficit reduction plan. Also, our banking bailout actually made money. What lost and continues to lose money is Fannie and Freddie.

In Europe the austerity plan being forced down the Greeks throat is pretty harsh. High youth unemployment and very, very rich benefits. Similarities to what could happen in the US, but enough differences to make comparisons difficult.
 
@BBW

I was merely pointing out scenarios. My focus is not whether we should bail out Spain or Italy. My focus was that in a situation similar to Ireland/Greece/Portugal they will need a bailout, or they will go bust, with massive repercussions on the worldwide economy. I think it is safe to say that those effects would be much much worse than post Lehman banking crisis in the world.

Plus we keep talking about peripheral Europe, I don't think that even France is any different. The only really strong European economies, in which you can safely invest, are Scandinavian countries - Sweden/Norway/Finland- Switzerland, Netherlands, Austria, and Germany.

The Moody's has already put US on possible downgrade watch. I think the financial world does not care about which country it is. It just wants to make money. The US Investments (although this is just a speculation) brought down smaller ones (US) just to get a bigger share of the pie. So what it makes it inconceivable that they won't do that to the US bond market.

@ ItaUK

I have my doubts that China will be able to buy the world for peanuts for the following reasons:

1) China itself might face a complete economic collapse due to the trillions of dollars of loans extended to state corporations for building infrastructure that was never needed. (leading to high debt). The situation is such that in a couple of years, they might not be able to pay even the interest on those loans.
2) If the big western economies, especially US and UK, face an attack by bond vigilantes, resulting in either massive printing or bankruptcy, China will be a bigger loser, because most of its money is invested in US treasuries and other bond markets.
 
There will be revolutions first.

Agreed

Which Germany? Financial and industrial Germany has gained from the status quo of the last ten years and wants it to continue. The Germany of workers and taxpayers is another Germany.

I think the Germany of taxpayers will force the government to abort the EU. Otherwise, there will be a massive revolution in Germany too.
 
I was merely pointing out scenarios. My focus is not whether we should bail out Spain or Italy. My focus was that in a situation similar to Ireland/Greece/Portugal they will need a bailout, or they will go bust, with massive repercussions on the worldwide economy. I think it is safe to say that those effects would be much much worse than post Lehman banking crisis in the world.

Why should they go bust? You are using terms without examining them. They will default first. They only go "bust" if they play by the rules of a crooked financial game that has been rigged in favor of financial speculators and oligarchs.

The Moody's has already put US on possible downgrade watch. I think the financial world does not care about which country it is. It just wants to make money. The US Investments (although this is just a speculation) brought down smaller ones (US) just to get a bigger share of the pie. So what it makes it inconceivable that they won't do that to the US bond market.

That downgrade is meaningless. Perhaps you're not understanding the point I'm making: Without a strong central state like the US, international property rights and capital accumulation become meaningless. Speculators like George Soros understand this perfectly. Moody's could downgrade US debt to junk status for all the difference it would make. As long as the US is military hegemon and can print its own money, it stays at the top of the heap. It will require a reconfiguration of the international political and military landscape to change this -- not rating downgrades.
 
I think the Germany of taxpayers will force the government to abort the EU. Otherwise, there will be a massive revolution in Germany too.

Not abort the EU but reconfigure it along Nordic European lines -- Germany, Austria, Benelux, Scandinavia, France. I've been saying this for five years.
 
Why should they go bust? You are using terms without examining them. They will default first. They only go "bust" if they play by the rules of a crooked financial game that has been rigged in favor of financial speculators and oligarchs.

They will go bust, because if they default, their bond yields would have by that time reached levels of Greece's, and it would be impossible to raise money to fund the spending that these countries require. In both Italy and Spain, more than 50% of the buyers of government bonds are investors from other countries, unlike Japan where 95% of bonds are bought by the Japanese. Unable to raise money and unable to devalue their currencies (unless they leave EU and adopt their previous currencies), these countries will face cuts in spending(by the government) and cuts in money loaned by both local and international banks and hence complete collapse.

Their local banks too will face massive haircuts in their investments in government bonds, possibly causing a banking crisis in those countries.

These countries will suffer even worse crisis, if they do not honor their obligations ( resulting in extremely high yields on governments making money expensive) or if they leave the EU ( resulting in a Iceland style complete overnight collapse in their currencies). It would lead to hyperinflation in these countries, massive unemployment, foreclosures ( people unable to afford houses at those mortgages), and company bankruptcies.

That downgrade is meaningless. Perhaps you're not understanding the point I'm making: Without a strong central state like the US, international property rights and capital accumulation become meaningless. Speculators like George Soros understand this perfectly. Moody's could downgrade US debt to junk status for all the difference it would make. As long as the US is military hegemon and can print its own money, it stays at the top of the heap. It will require a reconfiguration of the international political and military landscape to change this -- not rating downgrades.

I have my doubts. There is a first for everything. Boy does it not sound the tech bubble or the great housing boom or a country cannot fail - inconceivable in the Western world 3-4 years ago ( This time it is different because blah blah blah...). The great English empire fell as a result of high debts incurred. US is no exception. Also, the world economic and military power is slowly shifting towards BRICs. China, which usually never discloses it actual military spending, is speculated to have spent anywhere between $130B - $200B in 2010 by US DoD. Anyway the logic behind US not being hit by speculators because of its high military power and ability to print money baffles me. In fact, these are the characteristics of the empires that have fallen very soon : UK, Germany ( big military superpower back in 1920's and 30's), and USSR. Soviet Union matched US step for step, probably even lead in some cases, in military spending.
 
They will go bust, because if they default, their bond yields would have by that time reached levels of Greece's, and it would be impossible to raise money to fund the spending that these countries require. In both Italy and Spain, more than 50% of the buyers of government bonds are investors from other countries, unlike Japan where 95% of bonds are bought by the Japanese. Unable to raise money and unable to devalue their currencies (unless they leave EU and adopt their previous currencies), these countries will face cuts in spending(by the government) and cuts in money loaned by both local and international banks and hence complete collapse.

Their local banks too will face massive haircuts in their investments in government bonds, possibly causing a banking crisis in those countries.

These countries will suffer even worse crisis, if they do not honor their obligations ( resulting in extremely high yields on governments making money expensive) or if they leave the EU ( resulting in a Iceland style complete overnight collapse in their currencies). It would lead to hyperinflation in these countries, massive unemployment, foreclosures ( people unable to afford houses at those mortgages), and company bankruptcies.

Countries have defaulted in the past without all these things happening. Argentina defaulted about 10 years back. Sure, it makes deficit financing more difficult -- but that is preferable to the alternative of "austerity" programs, and selling off state and other public assets. To my mind, it is infinitely preferable to ordinary Greeks that their government default rather than go along the route it has decided on.

And if domestic banks suffer -- so what? Let there be a "banking crisis." It seems to me something is wrong if the lives of real people, and real economic activity -- growing food, manufacturing things -- are suborned to parasitical finance capital and everything is oriented to placating it. This is precisely what the corrupt and scummy Greek government is doing. If finance capital hadn't achieved its dominant role, we wouldn't be having these periodic economic, financial, and banking crises. The lives of ordinary people are being sacrificed to prop up an unsustainable and inequitable socio-economic order where finance and financiers reign supreme.
 
Countries have defaulted in the past without all these things happening. Argentina defaulted about 10 years back. Sure, it makes deficit financing more difficult -- but that is preferable to the alternative of "austerity" programs, and selling off state and other public assets. To my mind, it is infinitely preferable to ordinary Greeks that their government default rather than go along the route it has decided on.

And if domestic banks suffer -- so what? Let there be a "banking crisis." It seems to me something is wrong if the lives of real people, and real economic activity -- growing food, manufacturing things -- are suborned to parasitical finance capital and everything is oriented to placating it. This is precisely what the corrupt and scummy Greek government is doing. If finance capital hadn't achieved its dominant role, we wouldn't be having these periodic economic, financial, and banking crises. The lives of ordinary people are being sacrificed to prop up an unsustainable and inequitable socio-economic order where finance and financiers reign supreme.

Agreed. I too would favor any default over any bailout, resulting in such severe austerity plans. It has many advantages indeed. First off, these countries are able to start everything afresh. Economic growth will be much higher indeed, with more government money going into development than into paying off debt (in this case). These countries, upon accepting bailouts, are slaves to Germany and France.

Secondly, we will avoid the dreaded hyperinflation. Anyday, normal people ( who earn their bread honestly) would prefer an economy with deflation than the one with with massive inflation.

Third off, the finances of the core countries would remain intact ( as a result of much lesser debt).

Anyway, the way EUR/USD is moving, it shows that even with this crisis EU as a whole is still stronger than US, primarily on the back of German and French economies. Though this is a relative comparison. A better comparison, in my opinion, is EUR/CHF and USD/CHF. These crosses reinforce the fact that how weak the US and EU ( as a whole) are and the amount of currency devaluation going on around the world.
 
@ rishab

CHF is so high because of their closed banking system that hosts trillions from "undeclared" activities all over the world.

The current issue in Europe is political and the markets are actually stress-testing the unification process. The euro currency, per se, is not strong enough to withstand the challenges of globalization. So the point is: integrate for real or abort the process.

U.S. are a different beast, they are really going under. Minnesota just defaulted.

As for China, they're still running a monster surplus, never seen in history. What are they going to do with all that money? You can make head (develop your own country towards democracy) or tail (colonize the cheap, debt ridden assets of the West) as you prefer.

@ bigbadwolf

the argument of America-centered world, or Pax Americana, is a bit out of date and maybe a delusion. China and the U.S. are strongly connected but I think there is no doubt about who has the upper hand in the short/middle term.
 
Greece should default. It will be painful in the near term and in 5 years they will be able to enter the markets and raise debt. Russia did it as well as other countries. Only feasible, non bankruptcy option, is a discount on the debt they owe. Maybe take a 20-30% haircut.
 
@Anthony

Agreed.

But the situation is much bigger than Greece. It's Spain and Italy now. Given the rate of deterioration of the Pubic Finances and credit markets for the countries ( specifically bond markets), I see that they too will need a bailout in next year or so. What would you suggest then? Clearly Germany and France, alone, cannot bail them out. If they do, they'll put their own future into jeopardy, with bond vigilantes attacking German and French bond markets. If they default, the entire banking system of Europe (definitely that of Spain and Italy) will completely collapse.

@ItaUK

Those trillions of assets did not find their way into Swiss banking system overnight! Also, if the amount of money in the banks is the real criterion by which you determine the strength of a currency, then USD should by far be the strongest currency on the planet, and USD must definitely be stronger than British Pound. Citigroup, JPM, Bank of America, and Wells Fargo would have several times more money than all the Swiss Banks combined. Further, USD must also have been, by this logic, more stronger than the Canadian dollar or the Aussie dollar.

A better way to see it is the rapid clip (even by Chinese standards) at which Swiss forex exchange reserves are rising. This is putting an extreme upward pressure on the Swiss currency. Just 1 or 2 years ago Swiss Forex reserves were barely $70B. Today, they risen by almost 4 times ( $300B++). Now that is a lot of money flowing very fast into Switzerland.
 
I dunno whether people will agree with me. I think the best approach for PIIGS and for Germany/France is to let the PIIGS default on their debts, and instead of bailing out the countries directly, they should bail out the banks ( the banks of the core countries) that held the bonds issued by PIIGS. I think that this is the prime reason Germany and France are being forced to bail out these countries ( other people may have their own conspiracies). This way the PIIGS get to start afresh, and the core countries can hope to get their money back.Otherwise, these irresponsible governments will keep spending money and asking for bailout, resulting in possible bankruptcy of even the core countries - there is only so much they can do. Time ans again, it has been demonstrated that private sector is much much more efficient than public sector. Even in the US, the TARP actually ended up making money.

Just my 2 cents.
 
I think the best approach for PIIGS and for Germany/France is to let the PIIGS default on their debts, and instead of bailing out the countries directly, they should bail out the banks ( the banks of the core countries) that held the bonds issued by PIIGS.

What do you think they are doing? Do you think Greece sees one red cent of the bailout money? It goes straight to the German and French banks.
 
@ rishab:

You seem in love with your own scenario, but it is wrong in the diagnosis. As for the prognosis, at this stage everyone and his brother are still entitled to one.
 
What do you think they are doing? Do you think Greece sees one red cent of the bailout money? It goes straight to the German and French banks.

Then who paid for the salaries of the greek government workers? Without that money all of those workers ( who work for the state) would have been unemployed. Finally, besides your own conspiracies, what proof is there that Greece is not getting the money. If Greece says ( the government) that it got money, how can you say that Greece didn't get money. A more correct statement would have been Greece got subsidized money, which it blew away on useless expenditures, paid old debt with it, and took more debt.

Now loaning money in this way to Greece still puts you at mercy at Greece, as Greece keeps taking on more debt (knowing it will be bailed out) and banks keep investing in Greek debt (knowing that they'll get paid) because of bailout funds. This way the core countries will keep bailing out Greece, and this will never stop. The idea that the core countries will get their principal back, let alone the interest, is asking for moon.

A more rational solution would have been : let Greece default ( this way, it will learn the lesson. Its expenditures will be kept under check by bond markets), pay banks directly for the losses they incurred, and do not allow debt of such countries (PIIGS) to be used as collateral - mainly referring to ECB.
 
Then who paid for the salaries of the greek government workers? Without that money all of those workers ( who work for the state) would have been unemployed. Finally, besides your own conspiracies, what proof is there that Greece is not getting the money. If Greece says ( the government) that it got money, how can you say that Greece didn't get money. A more correct statement would have been Greece got subsidized money, which it blew away on useless expenditures, paid old debt with it, and took more debt.

You are confusing different things. The bailout funds have been set against Greek debt obligations -- e.g., about 6.5bn euros worth of bonds were redeemable this month alone, and maybe about the same again next month. That the Greek govt is still running fiscal deficits is another matter. The bailout money is earmarked for foreign creditors.​
 
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