Euro-Crisis Goes Critical (i.e., Europe Falls Apart While I’m on Vacation)
Look at what happened while I was out to play! Here I was openly wondering, as I set off for a vacation, if my prediction was going to prove accurate about the European crisis going global sometime in October and taking the U.S. economy under. While I was on vacation, I deliberately avoided all news. Today I arrive home to run through the past two weeks of headlines in order to find out if the market fall that began on the final day of October developed into a crisis large enough to shove the U.S. completely underwater.
While the stock market has recovered for the time being, the events that created the big drop at the end of October are anything but settled. The following news quotes, excerpted from dozens of sources for the first two weeks of November, show a consistent storyline developing out of Europe:
November 1, 2011: U.S. stocks plunge over news of Greek referendum
U.S. stocks dropped, driving the Standard & Poor’s 500 Index to the biggest two-day slump in a month, on concern that a Greece referendum pledged by Prime Minister George Papandreou may threaten Europe’s bailout.
“…Everybody thought last week that this crisis was behind us on a near-term basis, but Europe is going to be front and center.”
…American banks tumbled following losses in European lenders.
[Had the crisis moved behind us, as "everybody" (except apparently me) merrily thought it had, my prediction would have proved wrong by the end of October. Yet, just as things looked that way to many, and as I myself began to wonder, the Greek Prime Minister turned everything on its head.]
November 3, 2011: European leaders livid with Greek PM
The Greek move [for a referendum on the euro plan by PM Papandreou] — denounced by France’s Elysee as “irrational and dangerous” — raises the serious possibility that a euro member could soon be forced out of the monetary union, setting a precedent with explosive ramifications for other states in trouble.
…[Therefore,] Europe delivered a stark ultimatum to Greece on Wednesday night (3 November), demanding that the country’s planned referendum ask plainly whether the country’s citizens wish to stay in the euro or to get out. French President Nicolas Sarkozy and German Chancellor Angela Merkel — both of whom are reportedly livid with their Greek counterpart, George Papandreou, issued the warning in Cannes, where they had summoned the Hellenic leader, demanding he explain himself.
They told Papandreou that the latest bail-out cash from the EU and IMF … is now suspended and will not be delivered unless Greeks vote in favour of remaining in the single currency zone. It is the first time Sarkozy and Merkel have countenanced the possibility of Greece exiting the euro, an outcome they have battled for almost two years to prevent. ”The Greeks must say quickly and without ambiguity whether they choose to keep their place in the eurozone or not.”
November 4, 2011: Greek Crisis engulfs Italy
Greece’s startling decision to call a referendum on last week’s EU summit deal has set off wild tremors across the eurozone, pushing Italy to the brink of a perilous downward spiral. The referendum ensures weeks or months of eurozone chaos and calls into question every component of the EU rescue package.
…A frantic search for safe havens led to the second biggest one-day fall ever recorded in Europe’s AAA bond yields…. Italy took the brunt of the punishment. Spreads over Bunds spiked to a crisis-high of 459 basis points.
[So, the Greek debt crisis erupted at the end of October and spread it contagion in just four days to Italy!]
November 8: Greek government self-destructs over debt crisis
Greece’s ruling Pasok party appeared to be splintering on Tuesdsay night, leaving it unclear whether the government of premier George Papandreou can survive a parliamentary vote of confidence on Friday…. Signs that the EU’s pain-stakingly negotiated Grand Plan is unravelling within days has been a profound shock to confidence.
…More seriously, an exit from the euro would provoke massive capital flight from the country. Anecdotal reports suggest this is already happening on a significant scale. To prevent further haemorrhaging, capital controls would have to be imposed while an armed presence on the borders and coastal waters would also be required to stop wealthy citizens from attempting to smuggle assets out of the country.
…[Greek Prime Minister] Papandreou withdrew the [referendum] plan Thursday after other eurozone nations were horrified by the delay [it would cause and after] markets around the world tanked and Greece’s international creditors froze the payment of the next bailout. He also agreed to step down as PM.
Critical power-sharing talks between Greece’s prime minister and the opposition leader dragged on into Tuesday night without the expected announcement of who will lead a new interim government, amid intense European pressure for a resolution.
…Talks between Prime Minister George Papandreou and opposition leader Antonis Samaras began Monday. The two agreed over the weekend to forge an interim government that will shepherd the country’s new 130 billion euro ($179 billion) European rescue package through Parliament and end an intense political crisis that threatened Greece’s solvency and membership of the euro.
Papandreou said in the early afternoon that a deal was close. Two government officials said the most likely candidate to replace him as premier was former European Central Bank vice president Lucas Papademos.
…But as the evening wore on, several government and opposition officials said a main sticking point arose after European officials demanded written guarantees by both main parties that they supported the new debt deal — a demand with which the opposition conservatives took issue. All the officials spoke on condition of anonymity to discuss sensitive negotiations.
…Without the Oct. 27 deal, which took European leaders months to work out, Greece would go bankrupt, potentially wrecking Europe’s banking system and sending the global economy back into recession.
[On October 27th, it looked to many like Europe had a plan in place to resolve the Greek crisis and stop its contagion from becoming a global epidemic. A few, including myself, pointed out the holes in the plan, while acknowledging that, for once, the plan had some strong points. On Halloween, the Greek PM stood the European plan on its head and sent the world reeling. In the end, it turned out he'd stood himself on his head, as well, and he was deposed.]
Meanwhile (November 3-9): Italy replaces Greece as center of the euro crisis
The collapsing credibilty of Silvio Berlusconi’s coalition in Rome is bringing matters to a head. The Democrat opposition called on Italy’s president to appoint a salvation government immediately. “This is an urgent necessity to face the coming storm,” it said.
…Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconi’s insistence on elections instead of an interim government opened the way to prolonged instability and delays to economic reform.
…Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors’ concerns that they may not get their money back and prompting German Chancellor Angela Merkel to issue a call to arms.
Merkel said Europe’s plight was now so “unpleasant” that deep structural reforms were needed quickly, warning the rest of the world would not wait.
“…This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years,” one EU diplomat told Reuters. “This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it.”
…Such EU treaty changes could take a year or more. Rome does not have that much time.
…Italy has replaced Greece at the center of the euro zone debt crisis and is on the cusp of requiring a bailout that Europe cannot afford to give…. Portugal and Ireland were forced to seek EU-IMF bailouts when their borrowing costs reached similar levels.
[So, Germany and others acknowledge that the Greek crisis had reach a point where it was about to turn all of Europe upside down.]
November 10: Italian debt crisis spreads globally
Borrowing costs for Europe’s third biggest economy [reached] unsustainable levels and the [euro] bloc [is] unable to afford a bailout…. Asian shares fell more than 3 percent after similar falls on Wall Street and in Europe as investors took fright at the accelerating sovereign debt crisis and at buck-passing among European leaders and institutions.
…One euro zone official said the bloc was not making any plans to bail out Italy, which is deemed too big to save with the 440-billion-euro European Financial Stability Facility. ”Financial assistance is not in the cards,” the official said, adding that the bloc was not even considering extending a precautionary credit line to Rome.
…Greece teeters, Italy wobbles, and France begins to tremble. The precariousness of the situation was on full view Thursday when a leading ratings agency, Standard & Poor’s, mistakenly suggested on its website that it had downgraded France’s prized AAA rating, prompting a sell-off in French government bonds.
[So, the Greek PM's move at the end of October caused gyrations in larger economies nearby within ten days. The Italian government more than wobbled; it fell down:]
Italy’s government topples
On Saturday, the crisis swept away another leader, when Prime Minister Silvio Berlusconi resigned after 17 years of dominance in Italian politics to the jeers and cheers of crowds in Rome.
Even with the exit of a man who came to symbolize scandal and empty promises, it will not be easy for Italy to convince markets it can cut its huge debt, liberalize the labor market, attack tax evasion and boost productivity.
…For all the speculation over weaker countries eventually choosing to leave the euro, there is really no euro without Italy, certainly not a euro that can be considered a common European currency.
Where does the euro crisis go from here?
“There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system,” according to analysts at Exclusive Analysis, a research firm that focuses on global risks.
And Today’s News (November 14, 2011): Stocks and Euro Decline on Debt Concern
Stocks and the euro slid as Italy’s borrowing costs increased to a euro-era record at an auction today, deepening concern Europe will struggle to contain its debt crisis.
Italy sold 3 billion euros ($4.1 billion) of five-year notes priced to yield 6.29 percent, the highest since June 1997.
…U.S.-traded shares of Credit Suisse Group AG, the second- biggest Swiss bank, tumbled 3.4 percent after Moody’s Investors Service said the Swiss lender may have its long-term credit rating cut.
…The yield on Italy’s 10-year bond increased 25 basis points to 6.70 percent, compared with a euro-era record last week of 7.48 percent.
Europe’s October Surprise
So, while I was on vacation, two European governments went down in flames because Greece toppled against Italy. Each government came down because of its own debt crisis, but the Italian situation came to head because of the gyrations of the Greek government, proving how flimsy the global economy really is. As a result, France and Germany began for the first time in two years to speak of (actually to threaten) the removal of Greece from the euro-zone. Next, Germany proclaimed the need to reform Europe into a more unified, centrally controlled economic structure. Italy finally moved into that impossible stage where its interest rates on its debt are rising faster than it can find ways to pay its existing interest.
The European crisis did cause the U.S. stock market to tumble at the end of October, thought it has temporarily recovered. Still, it convulses daily, and the problems created by Greece’s move in October are still rumbling through Europe. Now that the fears created by Greece have pushed Italian interest rates higher, Italy could buckle, and Europe has no capacity to stop that from happening. If Italy goes, then France, and then we have complete global contagion.
Thus, it is looking more and more likely that a single move by a single player in Europe has begun to topple the rickety European economic system. That was just the kind of event I predicted — not a major hit like an act of war, but a European economy that would become so frail by October that a single dumb move could cause everything to fall while the U.S. economy is too weak to survive such a nearby collapse.
Europe is reeling now even more than it was before the euro plan was concocted on October 27th. Each new plan fails to resolve the crisis, and Europe is looking like a drunkard, ready to fall over in the street.
For further reading on the euro crisis: