THE APOCALYPSE TO COME
It would now appear that in addition to a banking collapse, in the form of Bankia and with others to follow,
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. 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, Spain
apart, are ex growth and heavily indebted.
In short, there are no resources to fix
the problem. Germany
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
budget deficit. US
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
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
thereafter it will sweep across the
world and spare nobody. Spain
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.