Do you feel confused about the EU Debt Crisis? Or have you just
not kept up with it? Not sure what will happen or how to protect
yourself and prosper from it? Here's the past 4 months summarized.
It's a bit simplified, but not by much:
Everything You Need To Know About The EU Debt Crisis And
Why It Matters... A Lot
- Greece needs to pay off about €20-30 Bln in maturing debt
between April and May. They don't have it. Spain needs a similar
amount in July. Portugal and some others will also need to sell
bonds over the coming months.
- No one wants to pay for Greece and the other PIIGS'
[Portugal, Ireland, Italy, Greece, Spain] mismanagement,
corruption, tax dodging, lack of economic dynamism.
- However, everyone is rightly petrified of a Greek default,
which would probably scare bond markets so badly that none of the
other PIIGS (nor about 10 other equally distressed economies in
the eastern Europe, the Middle East, Latin America, etc.) will be
able to sell bonds at affordable rates.
- THAT CAUSES: an historically unprecedented wave of sovereign
defaults by most or all of these countries.
- THAT CAUSES: higher borrowing costs even for the better
- THAT CAUSES: ANOTHER CREDIT FREEZE UP AND MARKET CRASH,
probably worse than in the Fall of 2008 following the mere
collapse of Lehman Brothers (one measly big US investment bank),
because NOW markets are even more nervous, governments even more
debt burdened from the last round of stimulus and bailouts,
- No EU leaders can volunteer taxpayer funds to bail out the
PIIGS without committing political suicide, because their own
economies and taxpayers are struggling and the PIIGS do not evoke
much sympathy anyway, having done so much to deserve their fate.
Nor can PIIGS leaders expect to impose or sustain the draconian
spending cuts demanded by the EU over the coming years and expect
to survive in power.
- THEREFORE, the EU and PIIGS leaders best serve their own
interests by pretending but failing to achieve a rescue package
for Greece (using the unstated but clear threat of a global
economic crash to extract as much cash from the rest of the world
- RESULT: Some kind of international coordinated plan that
allows EU leaders a chance to save their careers, or at least,
- The EU leaders can contribute taxpayer funds to a bailout
but tell their electorates they got the best deal they could
and made the best of bad situation, paid the least and avoided
a financial collapse (at least for now).
- The PIIGS leaders can impose painful austerity plans and
possibly cede control of their economies to international
overseers (demanded by the rescuers to ensure compliance and
repayment of funds contributed), thus transferring blame for
the local suffering to international forces beyond their
With the above facts in mind, the recent events become clear.
- The comic repetitious cycle of EU support pledges for Greece,
followed by refusals to offer any actual cash, or even loan
guarantees. Illogical on the surface, but makes perfect sense if
the goal is just to pretend to rescue Greece without actually
- After months of prideful declarations that the EU could solve
its own problems, the sudden admission this past week by Germany
that the IMF should help save Greece (and by implication, the
other PIIGS). The IMF is funded internationally, the US being the
biggest contributor by far. While EU leaders may not be able to
get away with short term painless money printing, the US sure
While the best long term solution might be to suffer the
consequences of the defaults and begin anew, the near term economic
pain would be bad for the careers of the current global political
leaders, thus they want to avoid that. Politicians tend to choose
short term benefits over longer term solutions in order to defer
painful solutions until after their terms in office.
There will be intense pressure to get Greece resolved before
Twin Debt Bombs Due To Detonate In July
The pressure to devise some solution that calms markets is
considerable. In July:
Spain Bond Sale
Spain needs to sell about €30 bln in bonds to avoid default. It
is in better shape than Greece, but that won't matter if a Greek
default has sent borrowing rates soaring for its fellow PIIGS bloc
members. That means a Greek default in April or May makes a Spanish
one in July far more likely.
U.S. Tidal Wave of Mortgage Rates Resets and
In the US, July 2010 begins a wave of residential mortgage rates
resetting higher on scale not seen since…late 2008 (scene of our
last market meltdown). As the below chart shows, 2009 was a lull in
this storm during which rate resets fell to multi-year lows and
took some pressure off of mortgage default rates (which have
remained brisk nonetheless).
(Click to enlarge)
Hat Tip to Graham Summers:
U.S. Housing: The Big Picture
It's no accident that the peak in mortgage resets in 2008
occurred around the same time as the last stock market collapse and
extensive mortgage write downs in the banking sector.
Remember what happened to stocks in 2008?
S&P 500 Weekly AVAFX Chart April 2008 - March 2009 04 mar
The scale of mortgage resets to occur in 2010-2011 is identical
to that of 2007-2008. Stocks are already at 52-week highs and thus
have plenty to give back.
True, conditions aren't exactly the same. They are much
- The US economy is weaker, having shed around 10 million jobs
- Financial markets are more nervous, as they have seen how
quickly a contagion can spread.
- Bank loan portfolios are more damaged, and mask an already
massive "shadow portfolio" of loans still carried on the books
but in fact needing to be written off (after the bonuses are
paid, off course).
- The Federal Reserve has already shot most of its bullets. In
2007, the Fed had yet to resort to its unprecedented stimulus
package of special bank borrowing facilities, bailouts, takeover
off bad assets, cut interest rates from 5.25% to 0.25% (from
September '07 until now), taken over AIG for $85 billion
(September '08, and later another $40 bln given), initiated TARP
for $700 Billion, bought close to $2 trillion in assorted US
Treasuries, agency mortgage backed securities and debt (March
I've left out plenty, but the point is clear: the Fed's arsenal
is mostly empty, except for just expanding money printing.
One way or another, there will be more money printing, by most
or all of the major central banks. That means:
- Long Term: Further feeding long term inflationary pressures
and the bull market in commodities, especially the preferred USD
hedges, gold and oil, and other hard assets.
- For the rest of 2010, the fear and uncertainty should
continue to favor the US Dollar and other safe haven assets, as
Greece, Spain, the other PIIGS' debt sales and the US mortgage
resets all pressure markets lower, especially as we get deeper
into the second half of 2010 around July.
We hope to do a more detailed analysis of the likely scenarios
for the EU debt crisis soon. Stay tuned!
Greenspan's Highly Notable New Phrase