We continue to hound on the situation in the European Union, the Euro, Greece and the rest of the PIIGS because of a similar situation that existed prior to the Great Depression. The Great Depression, some argue, resulted not from the bubble and subsequent stock market crash leading up to 1929, but rather, the defaults that spread across Europe (and parts of South America). These defaults had a direct effect on the European banking system, which subsequently led to collapses of the major banks.
In March, we opined that Europe will go first and the endgame will be dollar collapse. We may very well see the first part of this play out in coming weeks and months.
One important indicator that Germany is not happy with the austerity measures they are being forced to participate in is that German Chancellor Angela Merkel announced new rules banning naked short selling of stocks on German exchanges. This rule was made effective in the last 24 hours, and is designed to make it difficult, if not impossible, for naked short sellers to make money in the event German companies, namely banks, start to crash.
All this talk we have heard about “bailing out Greece” is just smoke and mirrors. The European Central Bank and Western governments know full well that if they do not “bail out Greece” that those banks which bought Greek Bonds, swaps and other financial instruments will detonate much like they did in the last Great Depression. This is not a bailout of Greece, as it will do nothing but saddle the Greeks with even more debt. The goal here has been to give money to Greece which it can then use to pay off the billions they owe to their financiers, in this case, German and French banks.
But the German people don’t want anything to do with it. And, it seems, that the politicians in Germany may be caving to their demands. The reported $1 Trillion bailout package prepared for Europe the day after the fat-finger heard round the world includes significant contributions from Germany, but the German people have not yet approved their portion of this.
Zero Hedge is reporting that the short selling rules applied yesterday are a preemptive move to help prevent complete collapse of the German banking system once the Germans pull the plug on any talk of bailout.
Zero Hedge has long claimed that Greece will be forced to default, with the only question being how this will be structured by Europe in a way to not allow the evil speculators to make buck on this process. Today, Greece shot itslef in the foot a little after announcing its latest debt number, which makes any expectations of climbing out of its Keynesian hole even more laughable. As Market News reports, “Greece’s general government debt rose to E310.3 billion in 1Q from E298.5 billion at the end of last year, according to data released Wednesday by the General Logistics Office of the Finance Ministry.” That austerity sure is doing miracles already. But it doesn’t matter: it appears that Germany has already made its mind to let Greece drown. As Neil Hume at Alphaville reports, “Big IB to clients: “they have it all planned: they are going to sink the ship (greece). Merkel is now drafting law for orderly insolvencies, but they don’t want anyone to make money out of it, hence the ban.“” If this is true, it ‘s curtains for Europe. Shorting the Euro at this point is like shorting Lehman: you may see savage short covering squeezes but the end result is well known.
Notice that Greece is now reporting debt at over 300 Billion Euro. When all of this started earlier this year, the public was told that they were on the hook for maybe 25 billion. So it’s ten times bigger now, officially. Unofficially, we can only imagine.
While nothing is set in stone just yet, signs are pointing to the possibility that Germany is ready to put anÂ end to this circus and let Greece take it on the chin, as it should. After Greece falls, expect to see similar defaults across the PIIGS in Europe as well as eastern European countries.
For the time being, money will likely flow into what many deem to be the safest asset in the world currently – the US dollar, which means treasury bond yields may continue going down for the near future.
But make no mistake, Greece and Europe are nothing compared to what’s in store for the United States. We, too, will begin to see our own debt crisis in 2010, with California being just a small glimpse. There are over 30 states that are running serious budget deficits and the Federal government, in order to further kick the can down the road, will likely print trillions upon trillions of dollars to bail them out.
It’s only a matter of time that investors in the United States and the world over realize that US debt is the world’s ultimate bubble. And when this happens, the party’s over.