Financial Armageddon Inches Closer and Closer

End of the World We Know
Mark Sircus 
Dr. Sircus' Blog

As everyone is well aware, Europe is an absolute mess. The gravity of the global debt crisis is getting worse and for sure it’s the end of the world as we have known it. EU trade commissioner Karel De Gucht recently said, “The endgame has begun, and how it will finish I do not know.” There is an implosion happening in Greece, and Spain is not far behind with Portugal and Ireland running neck and neck into the full embrace of depression and life-shattering bank runs.

Greece is a big deal and Spain is even bigger. Right now the European Central Bank (ECB) is starting to cut off funds from several Greek banks and there is a run going on at the same time. Those banks are going down the toilet into a black hole and there will be a loud sucking sound as these banks pull hard on other banks. The Titanic is going down at the bow and just because you are at the stern (in the United States), not in Spain or Greece, it does not mean the cold waters of economic calamity are not going to come to the shores of your life.

Bank Runs In Greece Will Soon Be Followed By More Bank Runs In Europe

Depression: "Runs on Banks": people milling about outside of bank. Photograph of Anxious Depositors, 02/28/1933 (Photo credit: Wikipedia)

The bank runs that we are watching right now in Greece are shocking, but they are only just the beginning.  Since May 6th, nearly one billion dollars has been withdrawn from Greek banks.  For a small nation like Greece, that is an absolutely catastrophic number.  At this point, the entire Greek banking system is in danger of collapsing.  If you had money in a Greek bank, why wouldn't you pull it out? 

If Greece leaves the euro, all euros in Greek banks will likely be converted to drachmas, and the value of those drachmas will almost certainly decline dramatically.  In fact, it has been estimated that Greek citizens could see the value of their bank accounts decline by up to 50 percent if Greece leaves the euro.  So if you had money in a Greek bank, it would only make sense to withdraw it and move it to another country as quickly as possible. 

And as the eurozone begins to unravel, this is a scenario that we are going to see play out in country after country.  As member nations leave the eurozone, you would be a fool to have your euros in Italian banks or Spanish banks when you could have them in German banks instead.  So the bank runs that are happening in Greece right now are only a preview of things to come.  Before this crisis is over we are going to see bank runs happening all over Europe. More...

Make banks public utilities and prosecute all corrupt bankers

Image by r0b0r0b via FlickrComment by "chindit13" from Chart Of The Week: European "Fear And Loathing" Hits Record $1.3 Trillion

If I sift through everything and try to filter out the noise, what I am left with as the agent of change is this: Greece. I’ll explain.

Greece is the only economic superpower in the world right now, if that terms means the land that has its finger on the financial nuclear trigger. Like democracy and the olympics, everything springs from Greece.

Greece will default. That is obvious. How they default is where it gets interesting. If Greece remains in the euro system, there is a possibility---very slight---that the default can be managed. It will hurt, and hurt badly, but it won't mean annihilation. If Greece leaves the euro, all hell breaks loose.

Think about how a departure from the euro might occur, and what repercussions it would have. If Greece hinted at departure, what Greek would not immediately head to the bank and remove his cash euros? Who wants 'new drachma', at an exchange rate determined first by the Greek government, before the Black Market gets a chance to have its say? Banks will have no choice but to close as their deposit base shrinks to zero. The Greek government also will have to impose capital restrictions, as those euros will want to find a resting place outside of the Greek government's reach.

Then what about the debt held by non-Greek banks? In what currency is it denominated? Will a private Greek borrower be told by his Eurobank that he still owes euro, and if so, will the Greek government even allow the borrower to pay back in euro? I'll bet "NO". There is precedent for this.

Now suppose the Italians or Spanish are paying attention. They, too, will immediately head to the bank and withdraw cash euros, just in case, or move them to Luxembourg or the Caymans or somewhere safe. Spanish and Italian banks will have to close, too. No other bank---not even a medium sized Bavarian bank (aka The Eternal Chumps) is going to do business with a Greek, Italian, Spanish, Portuguese or Irish Bank. Outstanding debts to Italian and Spanish firms will be recalled, in euros.

When nobody gets paid back, or gets paid back in new drachmas or new lire, no Eurobank gets out alive. French and Germans will remove what money they have in the bank. Gold will do well, but for a time so will physical euro cash. Inertia and a desire for simplicity will do that.

Then there's the US banks........what's the exposure? On and on it goes.

And it all started with tiny little Greece. Had Greece been the only profligate son of the EU, its loss could have been survivable, no matter the manner of default. It isn't alone, however, it is just first, and worst.

Is it any wonder the Troika is getting panicky? They are slowly awakening to the realization that they must take the lesser of two evils and try to orchestrate a controlled default of Greece. Even Mervyn King, BOE Chief, says this is the worst crisis since the 1930s...worse than 2008. It might well all collapse anyway. They might not be able to sell "bailout" to their populations, because populations have Armageddon Fatigue. They have heard it all before. That card has been played. The masses were fooled once; they won't be fooled again, as the Who say.

The absolute only way that this in the euro bailout can be pulled off---and even then success is hardly guaranteed---is to offer the concessions that should never have had to be offered, because what needs to be broken down should never have existed in the first place.

What are those concessions? Break up all TBTFs worldwide. Install an international Glass Steagall. Limit bonuses and do clawbacks on unearned bonuses from the last ten years. Make banks similar to public utilities. And the most important thing for public morale: PROSECUTE.

"Sooner than most people think" has arrived. Stopgaps such as announcing a massive stabilization fund or "plans" to recapitalize banks now can buy only a brief respite. Euroleaders can do it the "easy" way, or they can let this hit them full bore. Either way there is pain, but they can minimize the pain by sharing it, which means those who have escaped it thus far are overdue to get their butts smacked.