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For over two years now we have been stating that the eurozone was headed for a disaster. We retreated these facts in the last two articles, "Is The euro Crisis Spiralling Out Of Control" and "eurozone: Trim The Fat, Roast The PIIGS." When we first suggested that Greece should be thrown out; many thought we had lost our minds. Fast forward and now it’s not an” if” scenario but more of a “when” type scenario. European retailer NEXT is offering 25,000 euros for the person who comes up with the best plan for weaker member countries to leave the euro without destroying the European economy. Most international investors predict at least one nation will eventually dump the euro and they say greater fiscal ties or a smaller currency area are the best fixes for the region’s debt crisis, according to the quarterly Bloomberg Global Poll.

It is possible that more than one nation will end up dropping the euro or be forced out of it. It is not lost upon the governments of Portugal and Ireland that Greece basically got away with murder. Sooner or later they will resist the countless number of austerity measures that are being shoved down their throats; the fat has already been trimmed off, now they are cutting into the meat, and soon they will hit bone. There is a limit on how much a government can push its citizens before they start to revolt. It’s just a matter of time before Portugal and Ireland start asking for the same treatment Greece received. This could mean a debt reduction of 50% or more.

While leaving the euro has some serious short term repercussions, the long-term benefits could outweigh the short-term pain. If the weaker members stay their only weapon is to keep cutting back; basically, the citizens of these nations will become slaves. It will create a two tier system. One part will be the well off stronger members who lead relatively normal lives, and then you will have a second-tier system of weaker members whose citizens are forced to live a life of hardship. In the past, these nations inflated their way out of trouble. They simply deflated the currency and made their exports more attractive. This weapon is gone and with their economies in shambles, it is hard to envision how they are ever going to be in a shape to pay debts, which in some cases are well above their respective GDPs.

After a short period of back breaking pain, weaker European countries could reap some long-term benefits. If Greece, Portugal and Ireland were to revert to their former currencies, their exports would become more competitive, tourism would rise, and lastly, they would not be forced to come up with billions to service their debt. They could simply tell the bankers to take a hike as was the case with Iceland. Despite all the gloom and doom scenarios that were portrayed before Iceland declared bankruptcy, it is still here, its citizens are still going about their daily lives, and well, the world is not that much worse off. In fact, if one goes back in time, one will find that many of the high-flying countries of today declared bankruptcy several times in the past before they got their act straight. All we have to do is go back in time to debunk the myth that countries, especially the so called top nations do not or cannot go bankrupt.

Even Germany the engine of the eurozone has experienced the pain of bankruptcy not once but twice. The first one came in 1920s as a result of losing World War 1. And World War 2 produced another bankruptcy in 1945.

Great Britain also went bankrupt after World War 2, an article by the New York Times in 2006 stated that the U.K. was then making its final payment on $4.34 billion that the US lent it back in 1945. This sum in today’s dollars would be in excess of 140 billion; this was twice the size of the British economy at the time.

France declared bankruptcy eight times between 1500 and 1800; many might want to dismiss this data as being old and outdated, but one must remember France was considered a super power at that time.

Argentina declared bankruptcy twice once in 1989 and once in 2001.

China also declared bankruptcy during the 1932-1945 eras, together with Turkey, Italy, Brazil, etc. Note that in 2011, Turkey was the fastest growing country in the world based on GDP.

In 2008, Iceland declared bankruptcy. Clearly, no nation is above declaring bankruptcy. Given the right circumstances even the mightiest of nations will and can fail.

The problem of overspending and living like a king on a soldier's salary is not only restricted to Greece. In fact, all the members are guilty of this. If you look at the Debt/GDP ratio table below, you will notice that it is getting very close to the danger zone for all the top members of the EU. The danger zone starts when the debt/GDP ratio hits 100. For all its big talk, France cannot even get its own house in order, so how can they offer any advice to the so called weaker members? Economists are now predicting that France will soon lose its vaunted AAA status; the prediction is that this could take place within the next three months.

DEBT/GDP Ratios

Country

GDP

Debt to GDP

Greece

310 B

150

U.K.

2.3 T

151

Italy

2.00 T

118

United States

$14.6 T

100%

Spain

1.8 T

55-61%

France

2.6 T

84.2

Germany

3.3 T

75.3

Canada

1.6 T

81.7

China

5.7 T

19.1

Brazil

2.1 T

39.8

Russia

1.5 T

11.1

Ireland

213 B

96.7

Portugal

247 B

93

Turkey

1.16 T

40% and projected to drop to 36.8% by 2013

T= trillion B= billion

While we are not downplaying the initial chaos and pain that would ensue after a member country left the euro, the alternative would be to spend the next 10-15 years as poor countries tied to a wealthy country’s currency. The euro could survive if Greece, Portugal and Ireland left and maybe and this is a very strong maybe; it might manage to perform a Houdini even if Spain left. However, it would simply fall apart if Italy left as Italy is too deeply integrated and move by them would simply rip the foundation apart.

No matter, how many bailout funds the EU members come up with; it will not resolve the long-standing problems. The poorer member nations were and still are spending more than they take in. Greece is never going to be able to pay its debt; the only way it’s going to make any of its interest payments is by borrowing more money. At some point Germany is going to tell the Greeks to go to hell. At this point, Germany’s citizens are already stating this, as over 90% of them are against giving Greece anymore money and are in favour of throwing it out of the EU.

These excerpts highlight just how precarious the situation is.

Worries that France has the weakest economic fundamentals among the euro's six AAA-rated countries have drawn the eurozone's second largest economy into the firing line in the debt crisis this month. The rating agency said the deteriorating market climate was a threat to the country's credit outlook, though not at this stage to its actual rating. "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated November 21.

Italy paid a record 6.5 percent to borrow money over six months on Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome's new emergency government.

"The pricing is awful," said Padhraic Garvey, rate strategist with Dutch bank ING in Amsterdam. "The object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say."

Standard & Poor's downgraded Belgium's credit rating to AA from AA-plus on Friday, saying funding and market risk pressures are raising the chances the country's financial sector will need more support. S&P said difficulties in the country's banking system and the government's inability to respond to economic pressures contributed to the downgrade. Belgium's government debt position has worsened in recent months, particularly after it bought the Belgian arm of failing French-Belgian bank Dexia (OTC:DXBGF) earlier this year.

The snap survey of 13 economists found that 11 of them think France will be downgraded by one of the major ratings agencies within the next three months. The only question, following this week's blanket eurozone credit warning by Standard & Poor's, is whether France will be cut by one notch to AA+ or by two to a straight AA. "If you apply Standard and Poor's methodology based on quantitative factors, France should already have a AA rating, as should the U.S. and Britain," said Jean-Christophe Caffet, economist at investment bank Natixis.

Late on Monday, S&P warned it could carry out a mass rating downgrade of 15 eurozone nations within 90 days, depending largely on the outcome of Friday's EU summit to discuss tightening governance in the single currency bloc

Those questioned are almost unanimous in saying Greece will default -- as they have been in past polls -- while the number of those predicting the same fate for Portugal rose to 63 percent from 56 percent. One-third forecast Ireland will be unable to pay its bills, the lowest number since June 2010. Only 9 percent choose France and 4 percent pick the U.K. as likely defaulters. More than four-fifths of investors see the euro-area economy deteriorating, with slightly more than half saying they plan to cut exposure to the euro and its region's debt in the next six months. Deutsche Bank AG, Goldman Sachs Group Inc. and Citigroup Inc. have joined Draghi in warning the euro area faces its second recession in three years as the debt woes undermine confidence and force governments to cut budgets. Fifty-three percent of poll respondents pick the European Union as the worst investment opportunity over the next year, more than four times the number that cited the U.S. Half predict the euro Stoxx 50 index will be lower by the middle of 2012, compared with 28 percent who say it will be higher.

As the Federal Reserve joins global central banks in a collective action against the looming euro meltdown; Slate's Matt Yglesias explains why it's so crucial that the U.S. participate: non-American banks hold nearly 50 percent of the U.S. dollars in the world, and a European crash might suddenly make them unavailable to American borrowers. "

Conclusion

No matter, how many bailout funds are created or whatever crack pot scheme the eurozone members come up with; nothing is going to work until they address the real issue; the issue being the creation of boat loads of new debt with no means of every paying it off, other than creating more money out of thin air. The contagion is moving from the PIIGS and is starting to affect the so called top players. France is barely hanging onto its AAA status, and predictions are that its credit rating is going to be taken down by a notch or two within the next three months. Italy is hanging from a cliff as rates are hitting the unsustainable point, and if they do not dip soon, going forward it is going to have a harder time paying back its creditors and eventually could end up in the same position as Greece.

Nations and individuals will have to learn to live within and in some cases below their means for a period of time; otherwise any solution offered will be nothing but a band aid waiting to fall off. In times upheaval and economic uncertainty, the only currencies that can be trusted are gold and silver. For thousands of years individuals have turned to gold and silver as a means of preserving and storing their wealth, more so during times of uncertainty. Given that it’s just a matter of time before we are hit with another currency crisis, individuals worldwide are finally realising that paper currencies are only as safe as the governments that back them up. As most politicians and bankers share the same bed and don’t really give a damn about the average person, the allure of placing one’s money in gold is increasing. Interestingly enough, even central bankers are now turning into net buyers after being net sellers for more than 20-plus years.

The Germans clearly see the value in holding gold for they immediately discarded proposals by France, Britain, and the U.S. to have them use their gold reserves as collateral for the eurozone bailout fund. Germany is not going to be so stupid as to do this as they still remember what hyperinflations felt like. They are well aware that gold is one of the best weapons when it comes to dealing with inflation.

On the 7th of November Germany’s Economy Minister Philipp Roesler said, “German gold reserves must remain untouchable.” Mr. Seibert, spokesman for Merkel stated that, “Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit Cannes.”

The Chinese are viewing every pull back in gold as a buying opportunity. The Financial Times reports, that “Chinese gold imports from Hong Kong, a proxy for the country’s overall overseas buying, leapt to a record high in September, when monthly purchases matched almost half that for the whole of 2010. The buying spree follows a sharp drop in the price of the precious metal. After hitting a nominal all-time high of $1,920.30 a troy ounce in September, gold fell to a three-month low of $1,534 an ounce later in the month. Chinese investors snapped up the metal as prices fell

The Chinese government is actively encouraging its citizens to invest their savings in gold. Once the Pan Asian gold exchange goes live in June 2012, Chinese citizens will be able to purchase gold with the click of a mouse. We covered the launching of this exchange and the ramifications (we believe it's going to be a huge game changer and challenge the dominance of the COMEX and London metals market) it could have on the price of gold in a very recent article titled Positioning To Profit From The Pan Asia gold exchange.

There are rumours that the Portuguese, Italians but especially the Greeks are pulling out money from their banks and deploying this into bullion. Economist and Nobel Prize winner Paul Krugman goes on to state that a bank run could be in the works. At this point I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro.” If the rumours are true then it appears that a bank run could/might be in the works at least in Greece.

Investors would be wise to plot a course of action for we feel that the worst is yet to come and would not be surprised to see this crisis take a turn for the worse. Given the mind-boggling rate at which central bankers are creating money all over the world it is just a matter of time before we are hit with another currency/financial crisis.

Investors should place a portion of their funds into gold bullion. For those seeking higher leverage/ rates of returns, purchasing shares in gold and silver mining companies would be the way to go. In the gold sector, the following companies as on a relative strength basis they are among the strongest plays in the gold sector.

Rand Gold Resources (NASDAQ:GOLD) has quarterly earnings growth (yoy) 149%. Gross profits for the last three years are as follows, $76 million for 2008, $148.8 million for 2009 and $148.9 million for 2010 Net income has increased at a much faster pace; $47 million in 2008, $84 million in 2009 and $120 million in 2010. It also pays a dividend of 0.8%.

Barrick Gold Corporation (NYSE:ABX) is the world's largest producer of gold. It has quarterly earnings growth (yoy) of 44%, Gross margin (ttm) of 62.4% and an EPS of 4.17. Gross profits have increased significantly for the last three years. In 2008 gross profits were $3.8 billion, in 2009, they jumped to$ 4.39 billion and in 2010 they soared to $6.7 billion.

In the silver sector, the following 2 companies interesting are amongst the strongest on a relative strength basis.

Silver Wheaton Corp. (NYSE:SLW) has quarterly earnings growth rate (yoy) of 99.5% and a gross margin rate of 87%. Gross profits have increased nicely for the past three years; in 2008 they came in at $122 million, for 2009, they were $175 million and for 2010 gross profits almost doubled to $340 million. It pays a dividend of 1.1%

Compania de Minas Buenaventura SA (NYSE:BVN) has a quarterly earnings growth rate (yoy) of 19.4%, a ROE of 32.7% and has a quarterly revenue growth rate (yoy) 55%. Net income has soared in the past 3 years; in 2008 net income was $160 million, in 2009 it was $593 million and in 2010 it soared to $662 million.

Investors should also consider allocating a percentage of their money to energy sector. The demand for oil is not dissipating with the dollar destined for the gutter; the price of black gold (oil) is set to rise in the years to come. The following 3 companies are worth looking into. The following 3 companies are worth looking into. Anadarko Petroleum Corporation (NYSE:APC) has quarterly revenue growth rate (yoy) of 34.5% and levered free cash flow of $2.2 billion.

PetroChina Co. Ltd (NYSE:PTR) has a quarterly earnings growth rate (yoy) of 7.8% a quarterly revenue growth of 46%, a ROE of 15.49% and gross margins of 40.82%. Net income increased from $18 billion in 2008 to $22 billion in 2010.

Petroleo Brasileiro (NYSE:PBR) has a quarterly revenue growth of 17.8%, a ROE of 12.8% and gross margins of 33.6%. Net income has been trending upwards nicely; in 2008 it was $13 billion; in 2009 it was $15 billion and in 2010 net income jumped to $19 billion.

The Chinese government is actively encouraging it citizens to put their savings into gold, and given that the odds of another financial calamity have risen significantly in the past four years, investors would be wise to take on some insurance. The best form of insurance in times of upheaval is gold. There is an old adage that comes to mind “an ounce of prevention is worth a pound of cure.”

Disclaimer: Do not treat this as a buying list. It is very important that you check the finer details in each of the mentioned plays before investing any capital in them. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels.

Source: The Euro Crisis: No End In Sight