Tuesday, June 19, 2012



It would now appear that in addition to a banking collapse, in the form of Bankia and with others to follow, Spain is staring a sovereign debt collapse in the eyes.  The follies of recent acts such as lending banks money to buy sovereign debt have compounded the problem. Bank nationalisation is scarcely a credible option as the government is also known to be insolvent, and with Spanish banks needing to roll over several hundred billion EUR of loans this year themselves, the scene is set for disaster.

So with Spain, a key member of the world’s most important economic block, on the ropes, what firepower is available to tackle the problem. All economies which could come to the rescue, Germany apart,  are ex growth and heavily indebted.  In short, there are no resources to fix the problem.

The much vaunted increase of IMF funding to USD 456 Billion represents about 0.7% of world GDP of USD 65 Trillion, which is intended to rescue everybody. In other terms, this amount barely represents 4 months US budget deficit.

If we look at the ESM, with a EUR 500 Billion target, only 4 countries, representing less than EUR 50 Billion have given firm signed commitments. It requires firm commitments totalling EUR 450 Billion minimum before the “virtual” fund is closed and can actually lend money.

Once invested IMF and ESM funds have preferred creditor rights, making it extremely unattractive for a professional bond investor, to invest and risk being treated as a subordinated creditor, as occurred in Greece.

The domino effect of multiple sovereign debt defaults has been explained before. However domino failures of insolvent systemically important Global banks,  will cause a crisis of much greater importance.

This will lead to the biggest financial  and economic crisis ever seen. All the signs are that the first domino will fall  in Europe, maybe even Spain, but thereafter  it will sweep across the world and spare nobody.

The interdependency of banks is enormous, they are counterparties in financing all aspects of world trade, oil, metals, commodities, agriculture and food. Stock and bond  and other credit markets will be paralysed, and  Bank holidays for a period may become commonplace.

The coming weeks and months, certainly not years, represent the end of the post war debt fuelled Keynesian experiment.

Prepare accordingly.

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