At Risk Eurozone Sovereign Credit Ratings
Stephen Lendman | 11.30.2011
At Risk Eurozone Sovereign Credit Ratings - by Stephen Lendman
Moody's says Eurozone crisis conditions place all member state credit ratings at risk.
It warned 87 European banks to expect downgrades. Moreover, Fitch revised America's debt outlook to negative. Nonetheless, its AAA rating is unchanged. For how long is another issue.
At the same time, Italy's La Stampa said IMF intervention will rescue the country. No source was given, and Il Sole 24 Ore, Italy's Financial Times, didn't report it. It makes the claim all the more suspect.
IMF's funding capacity gives it $387 billion to contribute. It can also raise another $250 billion from willing contributor countries and has other tools.
At issue is will IMF use all its firepower for Italy? Will member states lend it more? Will bilateral loans be sought from countries like China, and/or will the European Central Bank (ECB) supply additional funding?
Two Financial Times articles appealed to Germany to save Europe and Italians to be patriotic and buy debt.
Imagine asking Italian workers to rescue the country that sold them out. Imagine asking Germany's $3.5 trillion economy to rescue other Eurozone ones with a combined $9 trillion GDP.
It's high time solutions accepted reality. Europe's monetary union failed. Combining 17 dissimilar economies under one system was doomed from day one. It was just a matter of time and circumstances. They've now arrived.
The main issue is will anything do more than buy time? Adding more debt compounds today's crisis. Rising sovereign debt bond yields say so. So do credit rating cuts on Portugal, Belgium and Hungary with more coming.
Talk is increasing about the troubled Eurozone dissolving. UK financial regulator Andrew Bailey believes it's "within the realm of contingency planning."
Others say breaking up is an idea whose time has come. It's hard to do, but bad unions are worse. Doomsday scenarios are mentioned, including separating strong countries from weaker ones. Historically, monetary and fiscal union succeeded only in America.
Other troubled countries include Japan. It's coping with a staggering 200% debt/GDP ratio, far greater than EU economies or America. Even China's looking less rock solid. Its industrial sector contracted and export volume slowed to single-digit volume.
Contagion is spreading everywhere. It hit Greece two years ago, then Ireland, Portugal, Spain and Italy.
Spain's economy is double the size of Greece, Ireland and Portugal combined. It's mortgage, commercial loans, and other debt can bankrupt Europe. Its impact would affect nations globally. It's running out of time. It's heading rapidly for default.
Its unemployment rate is 23%. Around half of all youths can't find work. A million or more people may lose homes, the equivalent of seven million in America. Its income inequality is the highest since the EU's Eurostat (its official statistics agency) began analyzing income distribution in 1995.
Following the fall 2007 crisis, its PSOE government clashed salaries up to 15%, attacked pensions, cut child benefits, introduced destructive labor reforms, and ended banning employing contracted temp workers indefinitely.
Expect Spain's new right-wing Popular Party (PP) to pass stiffer austerity measures. As a result, anger may explode more than already. Spain's a power keg. New Prime Minister Mariano Rajoy wants all Spaniards working together. Punished workers may take another route.
Unemployment, homelessness, strikes and mass protests are increasing. Bond investors want no part of Spanish debt. It's priced nearly 5% above equivalent German bonds. It's nearly fourfold the 2008 peak level and beyond what triggered Greece's collapse.
Moreover, in one month, Spain's 3-month sovereign yields doubled to over 5%. Its new government won't fare better than previous ones. Names and faces may change, but problems remain and grow. If Spain defaults, it's too big to save. So is Italy, and, of course, America dwarfs them all if it falls.
Everywhere, especially in troubled sovereigns, governments spend all their resources. They're borrowing all they can get internally and abroad. Push is rapidly reaching shove. A day of reckoning too onerous to manage approaches.
Funding holes for European banks are deepening. The Financial Times said they managed to roll over just $413 billion of the $654 billion due this year. As a result, they've got a huge $241 billion funding gap. In 2012, $720 billion in debt comes due.
Europe's banking sector deleveraging problem grows greater than they're able to handle. The FT says disposal assets on their balance sheets total $3.3 trillion in the next few years. Who has pockets deep enough to absorb it?
America's in greater trouble than people realize because of extreme speculative excess. Toxic derivatives impose crushing burdens. The Comptroller of the Currency estimates banks held $176 trillion of them at the height of the 2008 debt crisis. Today, US banks hold $249 trillion, 41% more.
Moreover, America's crushing federal debt exceeds 118% of GDP. Add unfunded liabilities and it's over $120 trillion. Totals rise despite imposed deficit reduction measures and proposed new ones. Over $1 trillion added annually compounds an already unmanageable burden.
Expect international creditors to balk. Borrowing will get tougher. Economic decline will follow. A burgeoning new debt crisis will dwarf 2008. Its effects will spread globally.
Progressive Radio News Hour regular Bob Chapman believes "Europe still does not have a longer-term structural solution to its debt crisis and none is in the offing."
The Eurozone's crisis is undermining the entire continent. It has global effects. Worse yet, he learned, "the Bundesbank usually holds back bonds for market making operations." It only sold about half its latest issue. "If the crisis continues to deepen, Germany and the other eurozone nations will have to reexamine where they are headed."
Eurozone 10-year debt costs close to 7%, the highest level since the euro's creation. The 2% spread between France and Germany's unprecedented. Bond markets can't function without ECB help. Sovereign government debt is unmanageable. Increasing it makes it worse.
Italy's largest bank, Unibank, has $51 billion to refinance. Its bond yields now yield over 10%. Only the ECB can bail them out like the Fed does for Wall Street.
Besides what Eurozone countries have to refinance next year, banks have to roll $720 billion of their own at high rates. Moreover, troubled sovereigns need around $6 trillion to avoid default. Solvent countries can't provide it without going broke. Neither can the Fed, ECB or IMF.
Capital flight is also an issue. In 2011, Greek banks lost 20% of their deposits. Will Italian and Spanish ones be next? Smart money says so. World leaders grope for solutions. Good ones aren't being chosen "The situation is unsustainable," says Chapman.
If troubled Eurozone sovereigns default, or just Italy and/or Spain, "US banks cannot possibly stay solvent." Knock-on contagion will crush them. All 27 EU nations are at risk. So are others globally. "This as we predicted has no solution."
Weaker states will be cut loose. The euro will be phased out. Article 123 of the EU Treaty prohibiting ECB financing is illegal. Sticking with treaty provisions assures collapse. Germany won't abandon the system. Instead, they'll drop weaker states and hope others hold together.
Worsening conditions assure damned if you do or don't outcomes. Ordinary people will be hurt most, including in stronger nations like Germany. End game trouble's approaching at a faster clip.
Stephen Lendman lives in Chicago and can be reached at firstname.lastname@example.org.
Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.