In the first part of this series of articles we
pointed out the developing banking crisis and why we felt that was happening.
When and how gold will have a central bank-approved role depends on the
political agenda on both sides of the Atlantic. Commercial banks are already
harnessing their gold to lower the cost and availability of international
loans! Since the first part of this essay, there have been dramatic banking
developments. Each of these has brought gold close to the day when it will
have an active role in the global monetary system.
v
v The European
Central Bank, Bank of England, Swiss National Bank, and Bank of Japan had
reactivated USD swap facilities with the U.S. Federal Reserve and could thus
offer unlimited USD funding to their domestic banks. French and German banks
hold some €900bn of ‘peripheral’ E.U. debt, nearly equal to
their own capital. Responding to signs of similar stress rising
in Europe now, the E.C.B. and the central banks of Britain, Japan and Switzerland agreed to reintroduce three-month
dollar liquidity operations in the fourth quarter.
v Now it is clear
that Sovereign default and spillover contagion would amount to an end of the Eurozone and the euro as we know it now.
v The situation as we
described it in the first part of this piece, has led to counterparty trust
fading heavily, with many E.U. banks unable to service global clients needing
USD. The actions by these leading central banks have ensured that the E.C.B.
can access whatever dollar liquidity is required.
v Bank of France Governor, Christian Noyer,
said all European banks (not just French ones) would have to adjust their
business models and shrink their balance sheets because U.S. money market
funds were "withdrawing from Europe”.
v The need to
recapitalize E.U. banks has been emphasized by the I.M.F.
Yes, this is reminiscent of the TALP (Term Asset-Backed
Securities Loan Facility) facilities that the U.S. government established to
replace toxic assets and increase liquidity among U.S. banks. The U.S.
emergency fund served to support U.S. lenders in the 2007-2009 crises.
The European
government’s ‘lifeboat’, the E.F.S.F., which used to
deliver E.U. members themselves in a similar way, is being called on to take
over the role of the E.C.B. in buying member government debt in the secondary
market. But in Europe the democratic process works slowly. The
lifeboat’s extended size and job description needs to be approved first
by 17 Parliaments, something that may take till mid-October (if it doesn’t
get derailed by willful parties along the way). Until then it is up to the
E.C.B. to keep sovereign markets alive while propping up banks with unlimited
liquidity. In the process, the E.C.B. itself is steadily getting thoroughly
contaminated. There is good reason for the German exodus from its ranks.
If the Balance Sheet of
the E.C.B. is called into question, then the entire structure of the
E.U. is vulnerable.
With six
member nations having had their debt downgraded, we doubt whether the
increase in political, fiscal and financial integration is possible in the
E.U. Just as Germany is refusing to support the concept of the
‘Eurobond’ (which will lead to Germany giving a blank check to
these weaker nations) so such reformations will have a deep structural impact
on member nations that it will be similar to a conquest of those nations in
all but cultural terms, but without a shot being fired.
The
integration of the individual States into a centralized federal system in the
United States gives us a pattern of what is needed to resolve the problems of
Europe, but the loss of sovereignty would just be unacceptable to most
members.
The crises
highlighting these structural weaknesses can drag on for quite some time still
before they bring the Eurozone down. In the
process, EU banks are grinding their credit extension to a standstill (as in
the U.S. if for different reasons) making the mood somber and anxious, with
business inclined to be more risk averse and unemployment topping 10% with no
hint of a reversal soon. Core Europe is cyclically slowing down, while
peripheral Europe is structurally sinking under its fiscal austerity and lack
of growth engines. More reform and fearful political shifts are needed, with
the E.C.B .keeping markets on board. The worst still lies ahead.
Greece
Referendum
to Exit?
Greek Prime
Minister, George Papandreou, is considering calling a referendum on euro zone
membership as a ways to strengthen the government's hand in dealing with the
debt crisis as pressure mounts from all sides. A bill to be submitted in
parliament, paving the way for such a vote, is to be discussed in coming
days.
Without its
next loan tranche, Athens says it will run out of cash in mid-October. A
default would threaten contagion to larger euro zone economies such as Italy
and hammer European banks with heavy exposure to Greece. Asked
whether Greece would get the next loan tranche, finance minister Venizelos
said, "Yes, of course." Even if
it does, many economists and investors believe Athens will default on its
debt mountain, more than 150% of Gross National Product, within months. Then
its 111 tonnes of gold will be used to retain
access to international markets.
Italy
With
a cut in its credit rating from A+ to A
and being placed on a negative watch we saw the rise in the costs of
financing the government rise. Yields on Italian and Spanish bonds
rose above 5% despite six weeks of European Central Bank buying to stabilize
them. The cost of insuring peripheral debt against default also rose.
Under mounting pressure to cut its
€1.9 trillion debt pile, the government pushed a €59.8 billion
austerity plan through parliament last week, pledging a balanced budget by
2013.
But there has been little confidence that
the much-revised package of tax hikes and spending cuts, agreed only after
repeated chopping and changing, will do anything to address Italy's
underlying problem of persistent stagnant growth. [Since 2001, Italy has
averaged a growth rate of 0.2% per annum]
S & P darkened the picture further by
saying, “We believe the reduced pace of Italy's economic activity to
date will make the government's revised fiscal
targets difficult to achieve. Furthermore, what we view as the Italian
government's tentative policy response to recent market pressures suggests
continuing future political uncertainty about the means of addressing Italy's
economic challenges. Budgetary savings may not be possible because the
government is relying heavily on revenue increases in a country that already
has a high tax burden and is facing weakening economic growth prospects. In
addition, market interest rates are expected to rise.”
U.S.A.
&
CONSEQUENCES
For Subscribers Only
GoldForecaster.com
SilverForecaster.com
|