Germany, France May Face Bailout of Nations, Not Just Banks

Feb. 18 (Bloomberg) - By Emma Ross-Thomas - Germany and France may be forced to contemplate the bailout of entire nations rather than just individual banks as European government budgets buckle under the weight of recession.
German Finance Minister Peer Steinbrueck became the first senior policy maker to broach the topic this week, saying some of the 16 euro nations are “getting into difficulties” and may need help. French officials are also concerned about market tensions as the cost of insuring Irish, Greek and Spanish debt against default rises to records and bond spreads widen.
The nightmare for Angela Merkel and Nicolas Sarkozy is that widening deficits will prompt investors to shun the debt of some countries, sparking a region-wide crisis. While few investors are yet forecasting any defaults, the mere risk of it may prompt the bloc’s two richest economies to ignore the European Central Bank and announce their willingness to come to the rescue.

“When push comes to shove Germany, France, the larger players will bail out those smaller peripheral players,” said Alex Allen, chief investment officer of Eddington Capital Management. “You can’t let one part of the system fail because it leads to failure of the whole system.”
Allen’s betting that the risk at least one nation will leave the bloc is higher than the market currently expects.
Swelling Deficits
European deficits have ballooned as governments from Berlin to Dublin committed more than 1.2 trillion euros ($1.5 trillion) to save their banking systems from collapse. The situation will be underscored by the European Commission today, when it publishes a progress report on budget policies at 11.15 a.m. in Brussels.
The European Union’s executive arm forecasts a deficit of 11 percent in Ireland, 6.2 percent in Spain and 4.6 percent in Portugal this year. The euro region’s average budget gap was just 0.6 percent in 2007.
European officials have already expressed concern that their bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers Holdings Inc. in September. ECB board member Lorenzo Bini Smaghi said Feb. 12 there’s a “risk that the mistrust that there is today in financial markets” is “transformed into mistrust in states.”
“I would be very reluctant to say: ‘O.K., let Ireland or Greece default, the market will sort it out, punish them for their irresponsibility of the past,’” said Thomas Mayer, co-head of global economics at Deutsche Bank AG in London. “They tried it with Lehman and realized that was not a good idea.”
Bond Spreads
The gap between the interest rates Greece, Austria and Spain must pay investors to borrow for 10 years and the rate charged Germany yesterday rose to the widest since before they adopted the euro. Credit-default swaps on Ireland rose to a record on Feb. 16, climbing to 378.4 points.
Greek credit-default swaps, 270 points on Feb. 16, show a 4.5 percent chance that the country will default in the next 12 months, according to ING Bank NV.
Eddington Capital’s Allen, who runs a fund of hedge funds, says the market currently “vastly underestimates” the risks and expects credit-default swaps for Greece, Italy, Spain and Portugal to double in the next 12 months.
Any state-funded rescues may meet with opposition from the ECB, which has repeatedly said the Maastricht Treaty forbids bailouts.
“The no bailout rule is an important pillar on which the European Union was founded,” says ECB Executive Board Juergen Stark, who helped draw up the fiscal rules underpinning the euro.
No Bailout?
At the same time, the treaty says that EU nations can grant financial assistance to a member state if a country is “threatened with severe difficulties” caused by “exceptional occurrences beyond its control.”
“The member countries are working hard on a ‘pre-emptive de facto bailout’ to prevent the test of the ‘‘no bailout’’ clause,” said Juergen Michels, an economist at Citigroup Inc. in London.
Part of the problem policy makers now face stems from the fact the currency union does not have a single treasury and relies on the Stability and Growth Pact, which has been breached in the past, to keep budgets in check. Billionaire investor George Soros said yesterday the region’s economy must confront the problem posed by the lack of a Europe-wide finance ministry.
For now, finance officials say that market concerns are not justified. ECB President Jean-Claude Trichet said in Rome on Feb. 14 he’s confident countries will work towards sustainable public finances.
State Rescue

Greek Finance Minister Ioannis Papathanasiou said three days earlier the extra interest rates on his country’s debt were unjustified. Spain’s Deputy Finance Minister Carlos Ocana categorically ruled out a default on Feb. 16, and the Irish Finance Ministry warned yesterday against drawing conclusions about public finances from the CDS market.
Steinbrueck’s comments nevertheless suggest that views in Berlin are shifting as the financial crisis worsens.
“In reality the other states would have to rescue those running into difficulties,” he said Feb. 16. Steinbrueck said that Ireland was in a “very difficult situation.”

“There will have to be some kind of support package for some of the smaller economies to avoid the tension and speculation about breakup,” said Ken Wattret, senior economist at BNP Paribas SA in London. “The bigger national governments will say this isn’t our problem. But when push comes to shove they might need to provide some kind of financial support.” Source

Ten Reasons to Avoid the Gold ETF

Must read of today here (if you are thinking to invest in gold, as you should). The conclusion: paper gold is just paper. Go physical. A convenient way to do it is by Bullionvault.

California is going out of business

"...So this is what things have come to here in America's most financially powerful state - a state whose $1.8 trillion economy is theoretically the eighth-largest economy in the world (just behind the United Kingdom, France, and Italy). If you thought that the collapse of Iceland made things tricky, confidence-wise, just wait until this sucker goes down. Which it is expected to do this week or next, as it technically becomes insolvent, unable to pay tax refunds, repair roads and bridges, keep schools open, or indeed provide a wage for anyone unfortunate enough to find themselves on its payroll.
After years on the brink, it has finally come to this: California is going out of business." More

Under Republican Arnold Schwarzenegger, 20,000 state workers may lose jobs. California,in severe budget crisis

Nothing will help. Expect bank holidays and revolution as early as this year.

Doom-porn du jour from Captain Hook: "...That’s why the stock market keeps going down, because investors know more pork belly measures will not work, making this the worst January on record. In this regard you have to wonder just what the politicians and bureaucrats are thinking about in ramming increasingly grandiose theft schemes down people’s throats like this? Obviously however, they will just keep doing it until they can’t get away with it anymore. To be specific, what they are doing is wasting stimulus money on completely non-regenerative endeavors at the behest to interested constituents and parties, leaving little left over for proposed infrastructure projects that by themselves, promise little in sustainable spin-offs anyway.

So you see, even if Obama had followed through with his election promises, what’s happening is the doctor is attempting to revive a dead patient. This is of course important to understand. The patient, being the larger economy and its monetary system, is dead. And no matter what the bankers and bureaucracy do to revive it, even if they adopted constructive policy at this time, nothing will help.

Nothing will help because the health of the economy and monetary system depend expanding credit, where all new money must be borrowed into existence. This was the deal made on Jekyll Island all those years ago, where a group of unscrupulous bankers were granted monopoly control of US currency issuance, with the rest being history. Under the present system, historically, when the consumer needed support so that more could eventually be borrowed in further enriching the banking elite, politicians were employed to provide stimulus to get the economy rolling again through fiscal policy, which worked well up until present times. Now however, the US consumer is saturated with too much debt set against a hollowed out economy, an economy which in itself was hollowed out via globalization to extend the larger cycle, which extended the life of the system / patient for the banking elite. New populations have been enslaved in the Western model debt trap in buying into the American dream of higher living standards, washing machines, etc....

...From my perspective I know one thing for sure, my boldness factor with respect to playing the post crash bounce has been reduced considerably, primarily due to the relatively rapid pace process is taking hold of the meltdown. And that’s the right word to be using here in my opinion as well – meltdown – especially if the money supply measures attached here roll over for real. If this were to occur, which is a possibility because don’t forget, the patient (credit growth) is dead, then an economic unwinding process could be quite rapid indeed, possibly involving bank holidays and revolution as early as this year if Gerald Celente is correct.

In looking back in history, which as you know is something we like to do in searching for modern day comparables, scary as it may be, we can in fact find precedent for an accelerated crash directly ahead, with examples found in Grand Super-Cycle Degree events. And the funny thing about possibilities here is because nobody takes this risk seriously, where with exception of a few like Gerald Celente, most remain complacent in this respect, such an outcome does I fact become a possibility. In terms of the other global manias that unwound in a straight down crash with no reprieves we have the Tulip Bulb Mania, South Sea Bubble, and in modern times, the Nikki, which crashed some 70 % in just a few years.

And then there’s the tech wreck of the Nasdaq Bubble as well, which as you know from our work on the subject was very similar to the Nikki experience, down some 80 % over the exact same period. (See attached above.) The fact modern day crashes of high degree have taken two-year intervals is of course understandable given the size and complexity of the markets involved, not to mention interventions, with both of these examples still working their way to ultimate bottoms many years after onset..." Read all here

Gold Leaps as Stocks Fall, Dollar Rises; "No Bubble...Ample Room" for Further Gains, Analysts Say

By Adrian Ash, BullionVault - THE PRICE OF GOLD jumped to a new 7-month high for US-Dollar investors during Asian and early London dealing on Tuesday, breaking above $965 an ounce as world stock markets slumped. Full Story
See here for more: Bullish Long Term Outlook for Gold , this: What Gold Price Is Telling Us About World Markets and this: Demand for gold rose to 102bn in 2008 an increase of almost a third on the previous year. and this: Don't Kick Yourself Later for Not Buying Gold and Silver Now