Friday, May 14, 2010

Greek Wildfire Engulfs The Euro

¹²Greek Wildfire Engulfs The Euro In Flames

By Gary Dorsch, Editor, Global Money Trends | 14 May 2010

EU Leaders Rescue European Bankers

With the wildfire blazing through the Greek, Portugese, and Spanish and European junk bond markets, German Chancellor Angela Merkel warned of a battle between governments and speculators. "To some degree, this is a battle between the politicians and speculators. I am firmly resolved to win this battle," she warned.

Merkel turned to ECB chief Jean "Tricky" Trichet, to deliver a knock-out blow to the CDS speculators, and extinguish the fires ravaging the Club-Med bond markets, and prop-up the Euro currency. "Tricky" Trichet set a trap for the CDS vigilantes, saying on May 6th, that ECB policymakers didn't even discuss the idea of buying Club-Med bonds at their Lisbon meeting, despite intense market speculation. Within minutes, CDS rates on Greek, Portuguese, and Euro-zone Junk bonds soared.

Then on May 10th, "Tricky" Trichet made a radical U-turn, and bludgeoned the CDS vigilantes, by revealing a backroom deal with EU finance ministers, central bankers and the IMF,— saying Euro-zone central banks would indeed buy Club-Med bonds in the open market. The "shock and awe" triggered a massive plunge in Greek and Portuguese bond yields and drove CDS rates sharply lower. For their part, the Euro-zone politicians and the IMF upped the bailout fund to a staggering 750-billion Euros, including loan guarantees to be tapped by highly indebted Euro-zone governments shut-out of credit markets. Senior IMF official Marek Belka said the emergency package was "morphine for the markets."

Like other bailouts before it, this package promises a gigantic transfer of public funds to the European Oligarchic banks. The biggest winners were major banks in Spain, France, and Italy. Banco Santander, BBVA, Société Générale, BNP Paribas, and Unicredit all saw increases of 20% or more in their stock price. Like the $750-billion TARP bailout fund, this money is being handed over to the European Oligarchic banks with no strings attached. Teetering on the edge of default, the banks holding €650-billion of Club-Med government bonds averted catastrophe again, with €550-billion in funding from European governments, and €200-billion from the IMF.

However, EU countries with AAA credit ratings, such as Germany, the Netherlands, or France, would have to borrow hundreds of billions of Euros to fund the bailout, thereby undermining their own creditworthiness. Thus, the next phase of the global debt crisis could be an exodus from AAA-rated sovereign bonds. As for Greece,— higher taxes, fewer welfare benefits, 10% salary cuts and no bonuses for public workers could provoke a catastrophic collapse of its economy.

The foundation of the Euro rests on the "Stability and Growth Pact" adopted in 1997, by which the signatory countries agreed to enforce strict fiscal policies, including limiting budget deficits to 3% of GDP and public debt to 60% of GDP. But today, only three of the 16 Euro-zone countries are in compliance, casting doubt over the viability of the single currency experiment. Greece is the worst offender, with a budget deficit of 14% of GDP and total debt equalling 115% of GDP.

The wildfires blazing in the bond markets of Greece, Portugal, and Spain, drove the Euro down sharply to the $1.25-level. ECB chief "Tricky" Trichet came out fighting on its behalf, "I am more confident than ever in the future of the Euro," he told France's radio one on May 11th. However, by shifting to the radical QE-scheme, Trichet has irrevocably tarnished the ECB's anti-inflation credentials and set in motion the eventual disintegration of the Euro.

The ECB won't reveal the size of its bond-buying spree, because "the information could assist speculators." However, such secrecy fuels suspicions that the scope of the Euro printing operation is going to be enormous. Speaking to German radio station Deutschlandfunk, Bundesbank hardliner Juergen Stark said the "ECB would hold the Club-Med bonds, until the end of their maturity," indicating that the massive injections of Euros would be very long-term.

Trichet also denied suggestions that the ECB has adopted the monetary strategy of Zimbabwe. "We have not changed our monetary policy. All liquidity which is being put in through these interventions will be taken back. We are not running money printing presses". But alas, Trichet has already dumped the Euro experiment into the trash heap of history.

The only defense for the Euro is a foreign currency swap arrangement with the US Federal Reserve, which can increase the supply of US-dollars in the short-term, and help the ECB to engineer an orderly devaluation of the Euro, and reduce the risk of a frightful free-fall. "Tricky" Trichet is a crafty poker player. But while he's rescued the French and German banks, he's stripped the Euro of its reserve currency allure.

"We will mop up this extra liquidity again. We've done this in the past," he said, spewing worthless propaganda about sterilization. As part of its war on the bond vigilantes,the ECB is lending unlimited amounts of Euros to the banking Oligarchs, at borrowing rates of 1%, encouraging them to buy Euro-zone government bonds— ie, backdoor QE. However, central bankers holding roughly $2 trillion worth of Euros in their FX reserves can see through the smoke and mirrors, and they're nervous.

Already, a massive flight for safety from the Euro and into the king of currencies— Gold is underway. Gold has soared in parabolic fashion, up 20% from a month ago, zeroing in on the psychological 1,000-Euro /oz level. After parabolic rallies, gold becomes subject to minor bouts of profit-taking. However, it's increasingly obvious that all paper currencies are at risk of collapse compared with Gold, due to the extreme abuses of central bankers worldwide.

"What the ECB is doing is a 180-degree about-face," declared Eurosceptic economist Joachim Starbatty on May 12th, noting Greek bonds were already rated at junk level by ratings agency S&P. "If a central bank buys bonds that international ratings agencies have declared are junk, then it should not be surprised that the Euros it produces are quickly seen as junk as well," he said. Starbatty said the ECB is "rewarding speculators who are betting on higher inflation".

The ECB's shift to "nuclear-QE" is expected to usher in a steady devaluation of the Euro. Already, the German economy is getting a significant boost from the weaker Euro, with its exports surging 10.7% in March to 79.0 billion Euros, the biggest monthly increase since July 1992. Germany earned a trade surplus with the rest of the world of 13.3 billion Euros, and business morale is at its highest in two years. Expectations of a weaker Euro ignited a powerful 500 point rebound in the German DAX Index this week, recouping nearly all of its losses from the Greek wildfire.

However, when measured in "hard money" terms,— compared to the price of Gold, the German DAX's rebound is simply a monetary illusion,— 1 DAX share fetches 6.4-ounces of gold today, or 13.5% less than a month ago. The ECB's money printing operation has essentially inflated the German DAX by 500-points. However, a weaker Euro would also increase the cost of raw material imports, and erode the profit margins of DAX exporters over time. ThyssenKrupp, Germany's biggest steelmaker, said prices for iron ore and coking coal are expected to rise sharply. "The enormous price increases will place significant burdens on the steel industry and its customers, for example, in the automotive and engineering sectors," it warned.

The ECB is now actively engaged in rigging the stock markets, ready to massively increase the money supply, (QE), at the sight of a significant meltdown in the equity markets. In this regard, stock market indexes are used by many European traders as a hedge against monetary inflation and the Euro's devaluation. However, there is no substitute for the real thing, when operating under a de-facto Gold standard.