When Greece Sneezes…

…The euro catches cold.

But the Greek debt crisis is not the only headache the eurozone is facing. Spain’s real estate crisis was even worse than its American counterpart, and as a result the Spanish banking system is severely under-capitalized. There are also major problems elsewhere among countries utilizing the euro — including Portugal, Latvia, and Hungary — with chains of shaky debt obligations that lead back to major banks in Austria, Germany, and France.

You can tell the financial system is in crisis when a prime minister blames its problems on “speculators” — as if there were any inherent problem with investors who look for “short-term earnings”. Why shouldn’t an investor do exactly that? Capital will flow to whatever enterprises yield the largest returns. Investments that bring long- or medium-term earnings will be traded as futures based on their discounted expected value. If a short-term euro-based investment is the vehicle of choice, shouldn’t we assume that the market sees a bleak long-term future?

“Speculators” who do whatever the system permits within the limits of the law deserve no criticism. The problem is the system itself, which is built on fiat money, fractional reserves, deliberately inflated real estate bubbles, state interference and regulation, old-boy networks, and unsustainable levels of debt. It will collapse eventually; a crash is unavoidable. And the differential rates of collapse in different sectors and currencies will allow savvy (or lucky) traders to make a bundle before the system hits bottom.

Prime Minister Zapatero is right to freak out: the future of the euro does not look good. Here’s the story from ANSAmed:

Zapatero Accuses Speculators for Market Decline

(ANSAmed) — MADRID, FEBRUARY 5 — Spanish Premier José Luis Rodriguez Zapatero attributed yesterday’s stock market decline to “speculative movements” by investors who “are looking for short-term earnings”, reported economic daily Expansion today, citing statements made yesterday by Zapatero before leaving for Washington to return to Madrid.

The decline of 6% on the stock market index yesterday in Madrid, due to fears about the debt in Spain, Greece and Portugal, which are also putting pressure on the stock markets, were provoked, according to the Spanish premier, by a push to sell by speculators on variable gains. Today at the opening, the stock markets registered a wave of panic selling for their third consecutive session, with a decline of over 2%.

In a meeting yesterday in Washington with the members of the business world part of the Atlantic council, the Spanish presidency defended itself from “unfounded” criticism advanced against his government and confirmed Spain’s solid economic foundations: “We know where we want to go and the reforms that we want,” assured the premier, cited today by the media.

Yesterday, disinvestments burned 22.4 billion euros in capitalisation on the Spanish Ibex stock index. Construction and bank shares led the decline, which was double compared to the rest of Europe.

Another article ANSAmed gives more details about the declines in banking, commodities, and the national stock markets:
– – – – – – – –

Stock Market: Panic Selling Due to Spanish, Greek Deficits

(ANSAmed) — MILAN — Fears about the deficits of Greece, Portugal and Spain are putting pressure on the stock markets for the third consecutive session and traders on the floor report a wave of panic selling. Benchmark stock indexes in Europe have declined further and losses have increased to over 2%, while the American futures market is down in anticipation of the release of January unemployment data. Bank shares and financial institutions have been hit the hardest. ICAP’s share price has plummeted 17%, while other heavily hit companies on the market include

Bank of Ireland   -5.49%
EFG Eurobank Ergasias   -4.9%
Lloyd   -5.3%
Banco Espirito Santo   -4.97%
Pireus Bank   -4.82%
National Bank of Greece   -4.51%
Banco mercial Prtuguese   -4.47%
Credit Agricole   -4.28%
Bnp Paribas   -3.62%.

Mining and oil company shares are also down, with Bhp Billiton in decline by 1.5% and Bg group dropping by 3.4%. In the auto industry, losses include Renault (-2.9%) and Fiat (-3.89%). The following are the European stock market indexes:

Athens   -3.8%
London   -1.88%
Paris   -2.43%
Frankfurt   -1.58%
Madrid   -2.54%
Milan   -2.66%
Amsterdam   -2.57%
Stockholm   -1.25%
Zurich   -2.19%

Hat tip: Insubria.

9 thoughts on “When Greece Sneezes…

  1. I have previously predicted the collapse of the US dollar, which I am still convinced is going to take place in the not-too-distant future. But maybe the Euro will collapse first, dragged down by the most mismanaged economies of southern Europe. While painful, this could be good if you look at the big picture since it will probably drag the EU down with it and therefore derail some of the worst Eurabian plans.

  2. The euro could indeed go down first, as we have a different tradition for having individual currencies in Europe (which I think was a Good Thing).

    It is remarkable how Greece has become the scapegoat for what is really a systemic crisis of the euro as such:

    The responsibility-shifting from national governments upwards in the EU system, permitting member countries to take on disproprotionate amounts of debt – financed for a great part by money-printing on part of the ECB.

    This is going to break. Period.

  3. What I fear is that war will probably follow a major ‘correction’. The greatest war in mankind’s history was immediately preceed by the worst economic downturn in man’s history. Although humans can be somewhat unpredictable, it has been a long time since a big war occured. We already have the makings for a large war concerning Islam. All it would then take is a match, say WMD. Even more scary is that this is only a matter of time.

  4. Minor clarification : Latvia does not use the euro – but the currency is pegged to the euro and hence the government cannot print money/devaluate/inflate, while Hungary still uses the Forint and is in a similar situation. Both countries do have very large creditors elsewhere in Europa (Sweden and Austria respectively), hence the EU desperation to avoid crashes and resulting domino effects.

    It is hard to see how the euro can survive, without a central european government to create centralized economic and budgetary policy to support ECB monetary policy, and therein lies the danger.

    Thats no rocket science, surely was it not forseen that sovereign states sharing a single currency is unsustainable long term?

  5. I agree with Fjordman about the coming collapse of the dollar. Given the reckless spending by Obama and the Democrats I’m convinced it’s only a matter of time. But the same forces dragging down the dollar have been active in Europe longer than in the US, so the Euro’s current troubles shouldn’t come as a surprise.

    Electing and re-electing socialists has consequences, none of them good.

  6. Regarding Fjordman’s and others comments:
    The Euro goes down a little and the the Greenback goes up. The Dollar goes down and the Euro gets a bump up.
    But if either one really dives then they are both going down big time.
    Or can anybody see one failing and the other hanging in there? I mean a big move like 50 per cent.

    Also the big hit might not happen for months or years. Does anyone have a crystal ball for the timing?

  7. First of all, I’d like to say that I welcome this crisis. It will force the socialists to pull their heads out of their asses and maybe the electorate will realize that public ponzi schemes(retirement provisions) are the same as private ones.

    Anyway, the ECB actually deserves some merit because unlike the Fed, they didn’t bail out Greece.

    You New, that’s technicals. Fundamentally, the Euro is more sound than the USD. Actually, all fiat money is depreciating, it just depends on how fast it does, which is what we see as currency fluctuations. But to be to the point, there’s no real link in between the Euro and Dollar in the sense that one provokes the opposite move in the other. You see it as such because you price one in the other – price both of them in a commodity or the currency of my country and they’re both going down.

    Proud Infidel, I wouldn’t be too proud of the GOP and Bush either.

    Fellow Peacekeeper, actually this is exactly what will lead to the Euro surviving. That there is no central Eurogov that will do budgetary policy in tandem with the monetary policy which would lead to the Greek or whatever government going broke, not putting the currency in jeopardy.

  8. Latvia does not use the euro – but the currency is pegged to the euro and hence the government cannot print money/devaluate/inflate.

    That’s not quite so, for technical reasons. Latvia will be forced to inflate somewhat along the euro, due to the insanely low interest rate. The way to create an interest at such sick levels is to print money. For if you have no money to lend at that rate, it doesn’t exist. Central banks create money in order to achieve this – which can be seen in the growth of the money supply.

    Wether the dollar or the euro is sicker is a matter of qualified debate, and depends on your definition of ‘sick’. To assess this, we need good statistics, which neither the European Union nor the US federal government supply in easily viewable formats.

    For the US, probably the best bet is Shadow Government Statistics, which provides some very interesting (and well-documented) alternative calculations of key economic indicators. It puzzles me that money supply growth in the $ is approaching 0 % – but that is from an extremely high level, and leaves the hyperinflation scenario intact. They have a Hyperfinflation Special Report. ShadowStats predicts hyperinflation within five years.

    For the Euro, the best explanation of the situation as been provided by Anatole Kaletsky in The Times. It’s a sad tale of covert money-printing disguised as ‘lending to banks’. Kaletsky has a take on the Greek crisis as well, but I disagree with him in several aspects, in particular the ones related to Keynes.

    To understand the fallacies of Keynesian thinking, please, please read Where Keynes Went Wrong. Anyone who does so will understand economics better than most politicians.

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