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As Greece Nears The Precipice Who Or What Will Provide For Greece’s State Workers And Greek Fiscal Spending When It Defaults … And Who Will Provide Credit When The European Banks Get Decapitalized By The Soon Coming Greek Default

|Includes: ACWI, Bank of America Corporation (BAC), EUFN, FXE, FXF, TLT, VGK
Financial market report for Septemeber 20, 2011

1) … World Stocks, ACWI, waive and traded slightly lower, as Greece nears the precipice, with an announcement from the Troika and US Fed planned for tomorrow.
The NYT in Greece nears the precipice, raising fears writes While no one knows for certain what will happen, it’s a given that financial crises always have unexpected consequences, and many predict there will be collateral damage. Because of these fears, Greece is working frantically in concert with other European nations to avoid default, by embracing further austerity measures it has promised in return for more European bailout money to help pay its debts. Total Greek public debt is about 370 billion euros, or $500 billion. By comparison, Argentina’s debt was $82 billion when it defaulted in 2001; when Russia defaulted, in 1998, its debt was $79 billion.

Economists also warn that a Greek default could put further pressure on Italy, the euro zone’s third-largest economy, which, though solvent, is struggling to enact austerity measures and find a way to stimulate growth. Moreover, Italy’s government debt is five times the size of Greece’s, and concerns about Italy’s ability to meet its obligations could grow if Greece defaults. In a new sign of trouble for the country, Standard & Poor’s on Monday cut Italy’s credit rating by one notch to A, citing its weakening economy and limited political response. In part, what would happen in the wake of a Greek default would depend on whether European leaders could create a firewall to control the damage from spreading widely. That would require officials to come together in ways they so far have not been able to, because it is politically unpopular in some countries to spend many billions more bailing out Greece. Bailing out the banks will be crucial if Greece either defaults or imposes a hard restructuring, whereby banks would be forced to take a larger loss on their holdings compared with the fairly benign 21 percent losses that they are now being asked to accept as part of the second, 109 billion euro bailout package set for Greece in June. Merrill Lynch, in a recent report on the contagion effect of a worst-case situation in which a severe Greek debt restructuring results in other weak European countries having to take a hit on their bonds, estimated that overall European bank losses could be as high as $543 billion. French and German banks would be the hardest hit, because they are among the biggest holders of Greek debt. “We believe losses could be substantially larger through deleveraging and second-round effects, contagion from failure of individual banks from or outside the periphery, exposures of the non bank financial sector,” the Merrill Lynch report concluded. While a 60 to 70 percent debt write-down seems extreme, it actually represents the market expectation, with most Greek debt now trading below 40 cents on the dollar. A Greek default also would be costly to the European Central Bank, the Continent’s equivalent of the Federal Reserve. To help prop up Greece, the central bank is believed to have bought about 40 billion euros in Greek bonds at much higher prices than where they now trade. If the central bank were forced to take a major loss on its Greek bonds, it too would need a capital infusion. And the burden would most likely fall on Germany.

Analysts also say the seriousness of the crisis will depend on whether Greece stays within the euro common-currency zone or is forced to leave it, and return to the drachma as its national currency.

Willem Buiter, the chief economist at Citigroup, presents two possible default outcomes. In the first, Greece forces private sector creditors to take a loss on their bonds of 60 to 80 percent but manages to stay inside the euro zone by keeping current on the smaller amount that it owes its official lenders, like the European Union and the I.M.F. While technically a default, the loss would not be an outright repudiation of Greece’s debt and the contagion could, in theory, be contained.One big unknown revolves around the fact that, unlike other countries that have defaulted on their debts in the past, Greece does not have its own currency. The potentially more dangerous default outcome is if Greece decides to leave or is forced to leave the euro, according to Mr. Buiter. Then, Mr. Buiter believes, the debt write-off would approach 100 percent and the effects on international markets could be much more serious. Offsetting this, to some extent, is the fact that exiting the euro zone and re-adopting the drachma would enable Greece to devalue its currency versus the rest of Europe, and help it become more competitive, perhaps spurring economic growth.

(In as much as currencies are based upon sovereign debt, an inquiring mid asks just who would buy its debt? Also there would not be growth for years to come, as practically all the people would be unemployed as those who have jobs are currently state workers. Furthermore, Greece would be debilitated as it returns to a pony and cart economy)

Theyenguy news service reports Italy debt rating lowered by S&P on lack of credibility in deficit reduction program.  Italy's credit rating was cut by Standard & Poor's on concern that weakening economic growth and a "fragile" government mean the nation won't be able to reduce the euro-region's second-largest debt burden. S&P says deficit targets will be difficult to achieve with the latest deficit program. The rating was lowered to A from A+, with a negative outlook.

Bloomberg writes European Banks' Dollar funding costs surge amid Italy downgrade. The cost for European banks to fund in dollars surged after Italy’s first ratings downgrade in five years stoked concern lenders will lose money on their euro- region sovereign debt holdings.The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 99 basis points below the euro interbank offered rate at 3:15 p.m. in London, from 92 basis points yesterday, according to data compiled by Bloomberg. The cost was 112.5 basis points under Euribor on Sept. 12, when the swap was the most expensive since December 2008. The cost of one-year dollar funding also climbed, with the cross-currency basis swap for that period at 71 basis points less than Euribor, compared with 66 yesterday, Bloomberg data show. The difference widened to as much as 75 basis points a week ago. “It’s all about banks, the critical thing is trying to manage the euro crisis without it crashing the banks,” said Bill Blain, co-head of strategy at broker Newedge Group in London. “We’ve seen before that, when confidence goes in banking, it goes very quickly.” The Euribor-OIS spread, the difference between the three- month euro interbank offered rate and overnight index swaps, was at 79.9 basis points, from 79.7 yesterday, Bloomberg data show. That’s within five basis points of the highest level since March 2009, reached Sept. 12.

Open Europe relates that the Le Figaro, columnist Yves de Kerdrel argues, “The real catastrophe threatening Europe is not a Greek default. It would be to see banks unable to lend money to businesses. This is why, instead of wasting time looking for a solution which doesn’t exist to make Greece solvent, public authorities, in France as in Germany, would be better advised to set out a rescue plan for our big banks.” And Open Europe relates How the public’s attitude towards Greece and eurozone bailouts is changing in France.

The AP reports EU, IMF raise concerns over bank capital and Calculated Risk presents a Listing of research articles on sovereign debt.

I believe that a global economic collapse will come, in part as money market funds break the buck as they are terrifically overexposed to European banks as communicated in NYT article Suddenly over there, is over here. Zero Hedge reports Global Systemic Risk near record highs prompts ESRB warning.

Tyler Durden writes The corporate bank run has started as Siemens pulls €500 million from a French bank, redeposits direct with ECB.  The implications of this are quite stunning, as it means that even European companies now refuse to work directly with their own banks, and somehow the ECB has become a direct lender/cash holder of only resort to private non-financial institutions!

Paul Mitchell of WSWS writes Credit rating agencies threaten to downgrade Spain. Fitch Ratings warned last week that Spain’s credit rating could be downgraded because the country’s regions have fallen behind schedule on deficit-reduction targets, economic growth had been poor and public funds to rescue banks had been larger than forecast.

Reuters China reports Bank of China halts FX swaps with some European banks. Bank of China's decision was made partly because of the downgrade of these entities by Moody's ratings agency, the sources said. Bank of China has also stopped trading with UBS AG after the Swiss giant declared unauthorized trading had caused a $2.3 billion loss, the sources said. Contacted by Reuters after the story was published, spokespeople for Societe Generale, UBS, Credit Agricole and BNP Paribas declined to comment. "This is a reminder that some counter-parties feel a little bit uncomfortable. We've got many banks over-leveraged," Adrian Foster, head of financial markets research for Rabobank in Asia, told Reuters Insider television. "My guess is that the Chinese banks are not major providers of liquidity or funding to the European banks, so it's not of direct relevance to their businesses if you'd like, but it does send an important reminder there are risks to this balancing act." Banks in Asia and elsewhere have been cutting credit lines and exposures to European banks through the past few months, unwilling to take on the risk of a default by Greece or any other peripheral European country. European banks have turned to swap lines offered by the European Central Bank to get around high funding costs for dollars and a broader unease about counterparty risk in interbank lending markets.

The Automatic Earth relates the following comments on the EFSF monetary authority, which most including myself believe is dead on and even before arrival,  Bundesbank President Jens Weidmann said:"The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market. If it’s done via the central bank it constitutes monetary state financing," (which is forbidden under European Union rules). And German Finance Minister Wolfgang Schäuble: "We don’t think that real economic and social problems can be solved by means of monetary policy. That has never been the European model and it won’t be."

The Dutch and the Finns are also quite outspoken opponents of bottomless European pits. But most of the finance "experts" there are still cut from more or less the same cloth, and in the end adhere to the same faith-based economic models. They may feel fine about letting Greece go under, and Portugal and Ireland, but they will nevertheless pour their voters' money down the nearest drain they can find when it comes to "saving" their own respective banks. Which is of course the exact same thing, even if it feels different to them.

We have no democratic means in place anymore to put those folks into power who would truly try and alleviate the plight of the people. Our democracies are based on voting systems, but votes are of necessity bought and sold if and when money is allowed to enter the political system. And the money that has bought the system says that it must fork over the money of the people. Or else. The faith-based fake science named economics, (I say perhaps faith based philosophy is a better word) is but a tool used on the ignorant in order to justify this. I sincerely hope that what Ambrose Evans-Pritchard has labeled "Germany's austerity nihilism" will at least beat some sense into some heads. But I don't have much faith in that. For our children, it would seem to be best if Greece falls tomorrow, and takes down a lot of countries and banks all over the globe with it. It's the only way we might be able to stop ourselves from spending tomorrow's money today. But the flipside of that, too, I'm afraid, is religious warfare. (I say perhaps a better wording would be faith warfare)

Stelfla Dawson of Reuters in Sliding toward financial crisis reports "We have entered a dangerous new phase of the crisis," said Christine Lagarde, managing director of the International Monetary Fund, last Thursday. "To navigate it, we need strong political will across the world, leadership over brinkmanship." World Bank President Robert Zoellick a day earlier said: "The time for muddling through is over.

Two factors are driving the crisis -- political discord within Europe over how much support to give indebted euro-zone governments that are implementing tough fiscal austerity programs; and vulnerabilities within the region's financial system, especially in France where banks hold 671.6 billion euros of government debt of high-deficit euro-zone countries.

These factors have fed upon each other in a vicious cycle. Talk among top German officials of Greece defaulting or leaving the euro zone has accelerated investor withdrawal of short-term funding to French banks, raising concerns about bank solvency.

On bank liquidity, the European Central Bank's bold action last week to arrange three-month dollar funding for banks has shown ECB capacity to lead -- despite German dissent within its ranks -- and alleviate liquidity problems for European banks.

On bank solvency, the issue is trickier. Europeans sharply disagree with U.S. officials and the International Monetary Fund that their banks need more capital. The IMF has estimated a 200 billion-euro shortfall, a number that may be revisited in an IMF report this week.

Eswar Prasad,  senior fellow at the Brookings Institution, said the job of the IMF this week is to nudge countries in this direction and highlight serious dangers ahead. "The alternative is political paralysis, which we are seeing in many of these countries and could lead to very substantial risks for the longer term. And that's the big concern," he said.

Simon Black of Sovereign Man questions What happens when a nation goes bankrupt? Speaking at the World Economic Forum this morning, Chinese premier Wen Jiabao delivered a stern message: there is a limit to Chinese generosity, and it will come at a price. The Chinese will undoubtedly use any further investment in European bonds as leverage to influence western politicians. They already bought Tim Geithner. The US government refuses to label China a ‘currency manipulator’. Similarly, European politicians will now be forced to acknowledge China as a ‘market economy’.

Ultimately, this charade will fail. It’s a simple matter of arithmetic. China could buy every single penny of Greek debt and it still wouldn’t solve the underlying problem: Greece would still be in debt! And more, still hemorrhaging billions of euros each month. Throwing more money at the problem only makes it worse.

Then there are those Greek assets for sale… like state-owned Hellenic Railways Group. It lost a cool billion euros last year. Or the notoriously inefficient, highly unionized, traditionally lossmaking Greek postal service, Hellenic Post. Any takers? These are not exactly high quality assets… nor can Greece expect to get top dollar in what’s clearly a distress sale.

Over 200 years ago, Napoleon was forced to sell France’s claim to 828,000 square miles of land in the New World in order to cover his war expenses. US President Thomas Jefferson happily obliged, paying the modern equivalent of around $315 million (based on the gold price), roughly 59 cents per acre in today’s money. According to US census records, there were around 90,000 people living within the territory during that time who literally woke up the next day to a different world.  This is the sort of thing that happens when governments go bankrupt.

With the Lehman collapse, a lot of people got hurt… but it was mostly a financial and economic issue. When an entire nation goes bust, the pain is felt much deeper: the most basic systems and institutions that people have come to depend on simply disappear.

Argentina’s millennial debt crisis is a great example of this… suddenly the power failed, the police stopped working, the gas stations closed, the grocery stores ran out of food, the retirement checks stopped coming, and the banks went under (taking people’s life savings with them).

European leaders (with Chinese help) can postpone the endgame for a short time, but they’re really just taking an umbrella into a hurricane. It would be foolish to not expect a Greek default, and it would be even more foolish to not expect significant consequences. The only question is– how are you prepared to deal with what happens?

2) … Who or what will provide for Greece’s state workers and Greek fiscal spending when it defaults … And who will provide credit when the European Banks get decapitalized by the soon coming Greek default?
Austrian Economist Mike Mish Shedlock sees a breakup of the Euro into sovereign nation states as he writes in Point of No Return: Will it be Japanization, Monetization, or Crisis 2.0? as well as a number of previous articles. The Austrian Economists champion libertarianism and free enterprise as a solution to the disintegration of European Socialism that we see in today’s news.  Ludwig Von Mises wrote “State interference in economic life, which calls itself economic policy, has done nothing but destroy economic life. Prohibitions and regulations have by their general obstructive tendency fostered the growth of the spirit of wastefulness.” page 469 Socialism, Google Books.  And Fredrick Hayek said: “The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.” page 763 Human Action Google Books.

But fate is operating and will continue to operate to dissolve national sovereignty through the 1974 Call of the Club of Rome, which is clarion, that is, clear, distinctive, and ringing, and is also trumpeting an authoritarian imperative for regional economic government, which in the case of the Eurozone, implies that out of its sovereign debt and banking crisis, leaders will announce regional framework agreements, waive national sovereignty, disregardful of any declaration by national supreme courts and constitutional law, and establish a fiscal union with authority over fiscal spending, as well of the appointment of a President of the EU, a sovereign ruler, who will be accompanied by a seignior, the word meaning a top dog banker who takes a cut, as presented by Elaine Meinel Supkis in History of seigniorage wealth.

The global economic, investment, and political plates have shifted, an as a result, an authoritarian tsunami consisting of a ten toed kingdom of regional economic government is on the way, as world stocks turned lower in May, investors became aware that a default union occurred in July, and Angela Merkel and Nicolas Sarkozy called for a true European economic government in August 2011. Eventually ten kings will rule in each of the ten toes, that is the world’s ten regions.

Yes fate is operating to provide the Beast Regime of Neoauthoritarianism, to replace the Milton Friedman Free To Choose Regime, together with the post colonial British rule and US Dollar Hegemony, that governed political and economic life from the mid 1800s, up through the time when the world went off the gold standard in 1971 to May 2011, when world stocks began to turn lower.

Not only is national sovereignty failing but as And Zero Hedge reports governments are collapsing  Slovenian Government collapses after confidence vote loss. Where as the previous regime known as Neoliberalism was characterized by wildcat finance, a Doug Noland term, Neoauthoritarianism is characterized by wildcat governance, where leaders bite, tear, and rip one another.  

Libertarians are of the belief that they are sovereign individuals; this group of individuals includes: individualist anarchists, (Lysander Spooner), anarcho-capitalists (Murray Rothbard, John Locke), constitutionalists (Chuck Baldwin), fiscal libertarians (Kristin Davis), objectivists (Ayn Rand), libertarian economists (Milton Friedman), left-libertarians (Noam Chomsky), and anarcho surrealists (Andre Breton).Yet, under Neoauthoritarianism, there are no sovereign individuals as there are only sovereign leaders. As for freedom and choice, they are illusions, yes, mirages, on the Neoauthoritarian Desert of the Real.   

A default by Greece will relieve Greece of paying off a mountain of debt that it cannot afford, but an inquiring mind asks, who or what will provide for Greece’s state workers and Greek fiscal spending when it default as CNBC reports on the patronage and pork of Greek Socialism Every Greek family has one public servant in its ranks.

Gideon Rachman in FT notes, “The images on euro notes are of imaginary buildings. While national currencies typically feature real people and places, George Washington on the dollar bill, the Bolshoi theatre on the Russian rouble, European identity is too fragile for that. This lack of a common identity is the fatal flaw that may sink the common currency.”

Out of soon coming economic collapse, the Euro will suffer a loss of value, and Greece may be ejected from the Eurozone, but, the currency will prevail. The word, will and way of the Sovereign, and the Seignior, will provide a new moneyness, which will be the basis of a European identity. People will be amazed at this new seigniorage based upon diktat, and give their full allegiance to it, even as it imposes austerity and debt servitude on all.   

The extremity of consequences of the sovereign debt crisis is seen in the Jeanne Whalen WSJ report Roche keeps drugs from strapped Greek hospitals.

Bank nationalization will be the order of the day as Tyler Durden in article Jefferies: Expect massive policy response In Europe, Bank nationalizations and TARP In Drachma writes: The most scathing report describing in exquisite detail the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies and specifically its chief market strategist David Zervos.

"The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe without an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly, wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs,one for each country. That is going to require a US style socialization of each banking system, with many WAMUs, Wachovias, AIGs and IndyMacs along the way The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks,even though it is probably a more cost effective solution for both the German banks and taxpayers. Expect a massive policy response in Europe and a move towards financial market nationalization that will make the US experience look like a walk in the park/"

3) … With the failure of the Milton Friedman Free To Choose Currency Regime, and the emergence of the Neoauthoritarian Regime, deleveraging is the order of the day.
Love grows cold in the age of deleveraging as WSJ reports Greek crisis exacts the cruelest toll. Two years into Greece's debt crisis, its citizens are reeling from austerity measures imposed to prevent a government debt default that could cause havoc throughout Europe. The economic pain is the price Greece and Europe are paying to defend the euro, the centerpiece of 60 years of efforts to unite the Continent. But as Greece's economy shrinks, its society is fraying, raising questions about how long Greeks will be able to take the strain. Gross domestic product in the second quarter was down more than 7% from a year before, amid government spending cuts and tax increases that, combined, will add up to about 20% of GDP. Unemployment is over 16%. Crime, homelessness, emigration and personal bankruptcies are on the rise. The most dramatic sign of Greece's pain, however, is a surge in suicides. Recorded suicides have roughly doubled since before the crisis to about six per 100,000 residents annually, according to the Greek health ministry and a charitable organization called Klimaka. About 40% more Greeks killed themselves in the first five months of this year than in the same period last year, the health ministry says. And Business Insider reports The completely outrageous cost of living in Brazil.

Irvine Renter writes of the deleveraging that comes with the collapse of mortgage banking cartel stating Bank of America increased its foreclosure notices an astounding 116% over last month. The resulting foreclosures are scheduled to hit the market in spring of 2012 thus dooming any rally.

Wall Street Journal reports Swiss Franc tumbles as market eyes possible SNB moves. Widespread market speculation that Switzerland may adopt new measures to prevent its currency from inflicting further damage on its export sector sent the franc sharply lower Tuesday, with the move momentarily distracting traders from Europe's ongoing sovereign-debt problems.