Regardless of its consequences, the European Union, the largest economy in the world, is now suffering under the weight of TWO traumatic crises striking simultaneously:
Trauma #1. Europe’s governments are in big trouble — debts out of control, tax revenues plunging, interest costs surging.
Trauma #2. Europe’s banks are under siege — drowning in massive losses, swamped with withdrawals, and lining up for bailout money that no government can afford.
Find it hard to believe that the largest economy and banking system in the world is collapsing even as you read these words? Then, read on for the evidence …
Trauma #1. Governments in Big Trouble
Debts out of Control
Tax Revenues Plunging
Interest Costs Surging
Some people seem to think the European Union’s sovereign debt problems are limited to just a few countries that have been in the news.
Others seem to assume that the debts are relatively static and unchanging.
But the hard data shows that, in reality …
Europe’s debt troubles are widespread, making almost every country vulnerable to the contagion now spreading across the continent.
Of course you already know about the countries in the headlines:
Greece with gross government debt of $315.8 billion … Spain with more than double that amount ($839.9 billion) … and Italy with debts that are SIX times larger than Greece’s (nearly $2 trillion)!
But what about the countries that have so far been viewed as “stronger”? Are they debt free?
France’s debts are almost as large as Italy’s — $1.8 trillion. And Germany’s debts are actually larger than Italy’s — nearly $2.1 trillion.
Plus, don’t forget others in the European Union, including Austria ($230.1 billion), Belgium ($374.3 billion), Finland ($101.1 billion), Ireland ($180.3 billion), the Netherlands ($427.6 billion), Portugal ($188.5 billion) and more!
Needless to say, not all countries are equal. Relatively speaking, some are stronger and others are weaker.
But here’s the key: They all belong to the same economic entity (the EU) and they’re all entangled in the same financial mess (the sovereign debt crisis).
That’s why it’s so important to note that TOTAL government debts owed by EU countries are now $8.6 trillion dollars — all based on the data from official sources compiled by Weiss Ratings.
Worse, despite all the sworn promises of austerity and all the solemn pacts to control deficits, the hard evidence also demonstrates that these debts are growing by leaps and bounds.
Official data shows that EU countries have added nearly $1 trillion in new debts just since the sovereign debt crisis began! And that doesn’t even include the massive new obligations of the EU institutions providing bailout funds!
And what’s most shocking is that nearly every effort to cut deficits has resulted in even larger deficits.
The main reason: Government cutbacks have slammed the economy. They have strangled the finances of the people. And they have bankrupted their businesses. So when all that happens, the end result is inevitable — they can’t pay their taxes!
Spain is a classic example. In fact, right now, the collapse in Spanish tax revenues is replicating the pattern in Greece, where fiscal revenues have fallen 4.8% in the past 12 months and Value Added Tax (VAT) revenues have plunged 14.6%.
The Daily Telegraph of London says “Spain is in the gravest danger since the end of the Franco dictatorship.”
Spain’s former premier Felipe Gonzales calls it “a total emergency, the worst crisis we have ever lived through.”
And just remember: Spain is NOT alone!
Surging Borrowing Costs
Spain’s borrowing costs have soared to 7%, widely considered the dividing line between stability and chaos.
Italy’s short-term borrowing costs have jumped wildly, as much as 164 basis points in a single day!
Other European interest rates are on a similar path.
This means that …
On top of collecting a lot less in revenues, they now have to pay a lot more for the money they desperately need to borrow.
But sinking government finances and financing is just one of the traumas striking Europe today. Also consider …
Trauma #2. Banks Under Siege
Drowning in Massive Losses
Swamped with Withdrawals
Lining up for Bailout Money
In addition to America’s banks and thrifts, Weiss Ratings now issues Financial Strength Ratings on all of Europe’s large banks.
And among the largest EU banks (with $200 billion or more in assets), there are now SIXTEEN institutions receiving a Weiss Rating of D+ or lower:
What does our rating of D+ mean?
According to a landmark study by the U.S. Government Accountability Office (GAO), it’s the equivalent to “speculative grade” (junk) on the rating scales of Moody’s, S&P and Fitch.
And also according to the GAO, Weiss was the only one that consistently warned ahead of time of future financial failures.
Indeed, if track record is any guide, our tougher grades — based strictly on the facts without any conflicts of interests — are consistently the most accurate.
Like Moody’s, S&P or Fitch, we look at each bank’s capital, earnings, bad loans, liquidity, and other factors.
But unlike the other rating agencies, we have never accepted — and WILL never accept — any compensation from the banks for their ratings.
Nor do we give big banks special credit based on the “too-big-to-fail” theory. We’ve said all along that, when push comes to shove, governments will have to save their own necks first and let failing banks fail.
Or, alternatively, they will have to print money and devalue the banks’ liabilities (YOUR deposits) in order to keep the banks alive.
Either way, depositors are at risk!
In Spain, we first gave Bankia its E+ rating (meaning “very weak”) three months ago — well before its massive losses were revealed, setting off the latest phase of Europe’s debt crisis.
But despite its $396.3 billion in assets, it’s not the largest Spanish bank in jeopardy:
Banco Santander is FOUR times larger with over $1.6 trillion in assets and merits a rating of D-, also deep into junk territory; while Spain’s BBVA bank, with nearly $775 billion in assets, gets a D.
And based on our metrics, Spain’s Caixabank (a $350 billion bank) is just as weak as Bankia with a rating of E+.
In Italy, Unicredit SpA gets an E+, despite its $1.2 trillion in assets; Intesa Sanpaolo merits a D-, and Banca Monte Dei gets an E.
What most people don’t seem to realize, though, is that most of the largest weak banks in the EU — and in the world — are headquartered in …
France! Crédit Agricole (with a massive $2.2 trillion in assets) is a candidate for failure with a rating of Eand Societé Générale is not far behind with a D-. Plus, there are two other large French banks in jeopardy —Natixis and CIC.
But here’s the biggest — and most important — surprise of all:
Germany is NOT the safe haven most people think it is, especially when it comes to banking: In fact, the largest weak bank in the world is Deutsche Bank with $2.8 trillion in assets and meriting a D.
Commerzbank, with $857.6 billion in assets, is even weaker, getting an E rating.
All based on the same kind of objective, conflict-free analysis that helped us name nearly all the major failures of the last debt crisis well ahead of time! (See “The Only Ones Who Warned Ahead of Time.”)
The total assets of just these 16 banks alone is $15 trillion, or about $1 trillion more than the total assets of ALL commercial and savings banks in the United States!
Who Saves Whom?
Late last year, the bonds of major European governments were sinking fast and Europe seemed on the brink of a meltdown.
So the European Central Bank (ECB) decided to come to the rescue with the aid of the largest banks.
The plan was simple:
The ECB hands the money over to the banks via special loans.
The banks hand the money over to sovereign governments by buying their bonds.
And everyone’s happy, right?
The plan has backfired: The government bonds have sunk anyhow. And the banks are stuck with even greater losses.
Now, a “new” old plan is hatching. Instead of banks helping to bail out their governments by buying their bonds … the idea is for governments to bail out their banks with money borrowed from the stronger governments of the European Union.
So one day they talk about banks saving the sovereigns. Next day, it’s the sovereigns savings the banks. They can’t seem to make up their minds as to who will save whom.
Now the Public Is Beginning To See Through This Charade!
They remember how many times the authorities have vowed that “the crisis is over.”
They know, first hand, how unemployment has gone through the roof.
They see the crisis feeding on itself.
So they are beginning to ask the real question of the day: Who sinks whom?
Will the sovereign debts sink the banks?
Will the banking crisis tear down the sovereign governments?
Or will they both go down in a spiraling cycle of bond market collapses and bank failures?
Our Suggestions …
1. Keep most of your liquid funds in cash, ready to be deployed on a moment’s notice, but as safe as can be right now. The best way: A short-term Treasury-only fund in the U.S., or equivalent.
2. Hold on to all long-term gold holdings. You do not want to let go of those. We feel gold could be headed to $5,000 an ounce over the next few years.
In the short term, however, we would not be surprised to see gold — and silver — move lower.
3. Consider prudent speculative positions to grow your wealth.
But no matter what you invest in — stocks, bonds or commodities — always be open to playing both the declines and the rises.
Even gold, silver and oil, despite major long-term bull markets, are bound to suffer further declines before turning higher.
And never forget this critical fact: As we’ve demonstrated here repeatedly, the U.S. government and U.S. financial institutions have made many of the same mistakes and are vulnerable to most of the same dangers.
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Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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