(4 pm. – promoted by ek hornbeck)
Unlike the deficit ceiling standoff in Washington, Europe is experiencing a real financial crisis, and today it began to get out of control.
The European money markets have begun to seize up as pressure mounts on the Italian and Spanish banking systems, tracking the pattern seen during the build-up towards the financial crisis in 2008.
“Europe’s money markets are undoubtedly starting to freeze up,” said Marc Ostwald from Monument Securites.
“It’s not as dramatic as pre-Lehman but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis.”
Italian banks have been hit especially hard, with almost daily suspensions of their stock trading due to selling pressure. But today things went to a different level.
Italian bank’s main stock market collapses, causing the suspension
They called it a “technical problem” that just happened to coincide with a collapse in Italian bank stocks.
The bond markets for Greece, Ireland, and Portugal froze up months ago. Interest rates are so high there that those countries have been completely priced out of the private debt markets.
But those are small countries with small economies. That’s what the European Central Bank and IMF has been trying to take care, by forcing those countries to accept draconian austerity measures in exchange for bridge loans.
The problem is Spain and Italy. They are much larger countries with much larger economies. In fact, Italy’s debt market is the 4th largest in the world. These countries are far too large for any bailout. No entity could possibly manage it without risking itself in the process.
Italian bond yields
That’s why fear is now stalking the European debt markets.
(UPI) — Fears mounted Thursday the system sustaining Europe’s debt crisis would collapse amid alarm Italy and Spain were sliding into debt that couldn’t be bailed out.
Italy and Spain — the eurozone’s third- and fourth-largest economies and the world’s seventh- and 10th-largest — opened the bond markets Thursday with borrowing rates near the 7 percent threshold that triggered bailout talks with Greece, Ireland and Portugal.
A full-blown Italian and Spanish debt crisis would hit large European banks hardest, the Post said, but could also dry up interbank lending worldwide.
U.S. banks and investment funds are also more exposed to Italy and Spain than they are to Greece.
You read that right. If things don’t change for the better, and soon, we are looking at something akin to a repeat of the Fannie/Freddie/Lehman collapse of 2008.
The whole debt ceiling thing in Washington had the added benefit of distracting you away from a real crisis.
Let me repeat that, because I can’t emphasis this enough:
Things don’t have to get worse. If the bond and money markets in Europe don’t start improving, and soon, then the banking systems of Spain and Italy will collapse. This will trigger financial contagion that will circle the globe, just like Fannie/Freddie/Lehman did in 2008.
The word for today is contagion.
Ever since the European debt crisis began, the risk of contagion – of problems spreading from smaller countries to bigger ones, like Italy and Spain – has worried government officials and investors.
Now another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain.
It’s hard to believe that we could be back in this situation again so soon, but that is what will happen when you only throw money at a problem rather than address the fraud, corruption, and systemic problems in the global financial system.
The bond markets of Belgium, Britain, and France are already beginning to feel the effects of this contagion. The whole Eurozone is in need of a restructuring, and that won’t happen without the crisis hitting a critical phase.
“We have a revolt taking place by foreign investors in these bond markets,” said Hans Redeker, currency chief at Morgan Stanley. “There have been hardly any purchases for several months. We are seeing net disinvestment because people fear that these countries lack the potential to grow their way out of the problem, and risk falling into a Fisherite debt trap.”
Mr Redeker said the eurozone needs a lender-of-last resort along the lines of the US Federal Reserve to backstop the Spanish and Italan bond markets. The European Central Bank cannot easly step into the breach under its current legal mandate and treaty authority.
“The eurozone faces a very big decision: it either creates a central fiscal authority or accepts reality and starts to think the unthinkable, which is to cut the currency union into workable pieces.”
Simon Derrick from the BNY Mellon said the trigger for the final denouement in each of the eurozone’s bond crises so far has been when the spread over German Bunds reaches 450 basis points, prompting LCH Clearnet to impose higher margin requirements. The Spanish spread hit a record 400 on Tuesday.
The natural thing to think at this point is, “If things were really as bad as you say, I would have heard more about it.”
To which I would reply that in 1931 the American newspapers had simply stopped reporting food riots because of fears that it would alarm the public further. It was around this time that the Austrian bank Credit-Anstalt collapsed. This led to a banking crisis in Europe that forced Britain to devalue their currency and forced the second, more serious episode of the banking crisis in America’s Great Depression.