Martin D. Weiss Ph.D. – Money and Markets October 9, 2011
As soon as we see the likelihood of major bankruptcies and defaults, we don’t wait around. We warn you immediately.
We know you need time to get your money out of danger. And we also know that financial disasters don’t obey any particular clock.
They can strike suddenly — especially in the stock and bond markets, where investors often start selling in anticipation of the troubles to come.
That’s why we specifically warned our readers about …
• The failure of Bear Stearns 102 days ahead of time (Money and Markets of December 3, 2007) …
• The near-failure of Citigroup 110 days before (Money and Markets of August 11, 2008) …
• The demise of Fannie Mae four years before it collapsed (Money and Markets of September 24, 2004), plus …
• The failure of nearly every bank and insurance company that has occurred since Weiss Ratings began rating them decades ago.
Now, the time has come to issue new advance warnings — some of the most important in the 40-year history of my company.
My new warnings are mostly focused on Europe. But as I’ll explain below, they’re bound to have a life-changing impact on nearly all investors in the U.S. and around the globe.
Greece will default very soon.
Banks and other investors who hold Greek notes and bonds have already seen massive losses in their market value — over 50% on 2-year notes and even more on other issues.
Until now, European authorities have turned a blind eye as their largest banks continued to carry these toxic assets on their books at full value — as if they were the best, most pristine assets in the world … as if the sovereign debt crisis never happened!
But now, European authorities are finally conceding that the banks must “partake in any solution of the crisis.”
In other words, the banks must bite the bullet and take some big hits in their Greek loans. They must officially recognize at least some portion of their losses.
Conclusion: Whether the banks accept this “solution” voluntarily or not, it will mean Greece is in DEFAULT!
The contagion of fear will spread.
Anyone who thinks global investors will turn a blind eye to the Greek default is in for a big shock.
Greece is not a small, third-world country. It’s a member of the European Union and part of the euro zone. It has over 328 billion euros in debt, more than Ireland and Portugal combined.
Moreover, Greece is not alone, and investors know it. Investors will automatically assume — with good reason — that if one major Western government can default, so can others. And with that assumption, they will refuse to lend any more money to highly indebted governments. Or they will demand outrageously high yields.
European megabanks will collapse.
Some of Europe’s largest banks will collapse under the weight of defaulting sovereign debts and in the wake of mass withdrawals.
Spain’s banks are especially vulnerable, swimming in a cesspool of bad mortgages left behind from that country’s giant housing bubble and bust.
In fact, this year, the European Banking Authority ran stress tests on the largest banks in Europe; and among the eight banks that failed the test, five were Spanish. Their names:
- Caixa Catalunya
- Caja de Ahorros del Mediterráneo
- Grupo Caja 3
- Banco Pastor
Major French banks are bigger and in no less trouble. They barely passed the stress tests. And that was DESPITE the fact that they were allowed to cheat — not booking a penny of their losses on loans to Greece, Portugal or Ireland. According to Bankers Almanac, on a consolidated basis …
• BNP Paribas has $2.7 trillion in assets, making it the largest in the world …
• Crédit Agricole has $2.1 trillion and is the world’s fourth-largest bank, and …
• Société Générale has $1.5 trillion.
The total assets of these three French banks alone are greater than the total assets of the banking units of JPMorgan Chase, Bank of America and Citigroup.
All three are drowning in bad loans to PIIGS countries. All three are in danger, in my view.
But there’s an even more imminent threat: mass withdrawals!
You see, banks in the euro zone get less than 35% of their funds from deposits, according to Bloomberg data. Instead, they rely far more heavily on what’s called “wholesale funding” — money borrowed from other banks and institutions.
In other words, they’re hooked on HOT MONEY!
That’s the kind of money that is quickly withdrawn at the first sign of trouble. And that’s also the same kind of money that caused mass bank runs in the U.S. three years ago — runs that doomed big U.S. banks like Washington Mutual, while nearly sinking giants like Citigroup and Bank of America.
Big European banks are especially vulnerable because they rely on hot money far more than U.S. banks. And many appear to be suffering big runs at this very moment.
This is why the European Central Bank rushed to the rescue last week with 40 billion euros in emergency loans for banks suffering withdrawals. But 40 billion is a drop in the bucket, barely covering ONE CENT for each dollar of PIIGS’ debts outstanding.
In the weeks ahead, will governments stand idly by while their biggest banks collapse? Initially, no, which leads me to …
European governments will suffer a
cascade of new credit rating downgrades.
The richest governments of the European Union — France and Germany — will scramble to rescue their failing banks, and so, global markets may breathe a temporary sigh of relief.
But recent history proves that the entire concept of bank bailouts is seriously flawed because of the following, now-obvious sequence of events:
• In their zeal to save the banks and the economy, the governments gut their own fiscal balance.
• They suffer big downgrades, losing their stellar credit ratings.
• And as soon as they have to borrow more money, they must pay through the nose with far higher interest rates.
In other words, in their zeal to lift banks up from the brink of failure, the governments themselves are dragged down into the abyss.
Case in point: Last week, we learned that Dexia, a Franco-Belgian megabank, is in distress. It’s smaller than the giant French banks in trouble. But its assets are still 1.5 times the size of Belgium’s ENTIRE economy!
What happens if the government of Belgium tries to help rescue the bank? It will surely lose its still-good credit rating.
Indeed, late Friday, Moody’s announced it’s ALREADY putting Belgium on review for a downgrade just based on the POSSIBLITY it may have to bail out banks like Dexia.
Moody’s specifically states that a key reason Belgium is on the ratings’ chopping block is “the impact on the already pressured balanced sheet of the government of additional bank support measures which are likely to be needed.”
And the prospect of big bank bailouts is also a key reason other major PIIGS countries have suffered massive downgrades in recent days. (More on this in a moment.)
Spain and Italy will be next to face
default on their massive debts.
Spain and Italy have nearly $3.4 trillion in debt, or about 10 times more than Greece.
But with their borrowing costs surging and their big banks failing, they will be unable to borrow enough new money to pay off old debts coming due.
Result: Spain and Italy will also risk default.
Global debt markets will
suffer a critical meltdown.
In anticipation of a default by a country as large as Spain or Italy, nearly all debt markets in the world will freeze, as investors withdraw in panic.
This panic will not only crush the borrowing power of the PIIGS countries, hastening their default … but it will also threaten to melt down the bond markets of countries like France, Germany, Japan, the U.K. and the U.S. That could mean sharply higher interest rates and, ultimately, the inability to borrow at almost any cost.
The vicious cycle of sovereign debt defaults and
bank failures will lead to a global depression.
Sovereign debt defaults will trigger more bank failures. More bank failures, in turn, will precipitate more sovereign debt defaults.
This vicious cycle will cut off the flow of credit to businesses and households, sink the global economy into a depression, and perpetuate the vicious cycle.
Ultimately, we will see an extended period of great economic hardship for billions of people on every continent.
If so, I don’t blame you, and I assume you have your reasons. Yet there are far stronger reasons to be skeptical of all those who believe we can easily avoid disaster …