Over
the past several months we have seen quite a few credit downgrades all over
Europe, but we have never seen anything quite like what S&P just did.
Standard & Poors unleashed a barrage of credit
downgrades on Friday....
-France
was downgraded from AAA to AA+
-Austria
was downgraded from AAA to AA+
-Italy was
downgraded two more levels from A to BBB+
-Spain
was downgraded two more levels
-Portugal
was downgraded two more levels
-Cyprus
was downgraded two more levels
-Malta
was downgraded one level
-Slovakia
was downgraded one level
-Slovenia
was downgraded one level
This
is really bad news for anyone that was hoping that things in Europe would start
to get better. Borrowing costs for many of these financially troubled
nations are going to go even higher.
In
addition, there was another really, really troubling piece of news that came
out of Europe on Friday.
It
was announced that negotiations between the Greek government and private
holders of Greek debt have
broken down.
The
Institute of International Finance has been representing private bondholders in
negotiations with the Greek government about the terms of a "voluntary
haircut" that is supposed to be a key component of the "rescue
plan" for Greece.
Greece
desperately needs private bondholders to agree to accept a "voluntary
haircut" of 50% or more. Without some sort of an agreement, the
finances of the Greek government will collapse very quickly.
For
now, negotiations have failed. There is hope that negotiations will
resume soon, but Greece is rapidly running out of time.
The
Institute of International Finance issued a statement on Friday which said the
following....
"Unfortunately, despite the
efforts of Greece's leadership, the proposal put forward
which involves an unprecedented 50% nominal reduction of
Greece's sovereign bonds in private investors' hands and up to 100 billion of debt forgiveness has not produced a constructive consolidated response by all
parties, consistent with a voluntary exchange of Greek sovereign debt"
The IIF says that negotiations are
"paused for reflection" right now, but they are hoping that they will
be able to resume before too long....
"Under the circumstances,
discussions with Greece and the official sector are paused for reflection on
the benefits of a voluntary approach"
Something needs to be done, because
Greece is experiencing a complete and total financial meltdown.
Back at the end of July, the yield on
one year Greek bonds was sitting at about 40 percent. Today, the yield on
one year Greek bonds is up to an astounding 396 percent.
That is how fast these things can move
when confidence disappears.
Those living in the United States
should keep that in mind.
Unfortunately, Greece is not the only
European nation that is completely falling apart financially.
We aren't hearing much about it in the
U.S. media, but Hungary is a total basket case right now. The credit
rating of Hungary was reduced to junk status some time ago, and now the IMF and
the EU are threatening to withhold financial aid from Hungary if the Hungarians
do not run their country exactly as they are being told to do.
In particular, the IMF and the EU are absolutely
furious that Hungary is trying to take more political control over
the central bank in Hungary. The following is from an article in the
Daily Mail....
The European Union has stepped up
pressure on Hungary over the country's refusal to implement austerity policies
and threatened legal action over its new constitution.
The warnings escalated the standoff
between Budapest and the EU, as Hungary negotiates fresh financial aid from
Europe and the International Monetary Fund.
Over the past months, the country's
credit rating has been cut to junk by all three major rating agencies,
unemployment is 10.6 percent and the country may be facing a recession.
But bailout negotiations broke down
after Budapest refused to cut public spending and implemented a new
constitution reasserting political control over its central bank.
Slovenia is a total mess right now as
well. The following comes from a recent article posted on EUObserver.com....
Slovenia's borrowing costs have reached
'bail-out territory' after lawmakers rejected the premier-designate, putting
the euro-country on the line for further downgrades by ratings agencies.
Zoran Jankovic, the mayor of Slovenia's
capital Ljubljana, fell four votes short of the 46 needed to be approved as
prime minister by the parliament, with the country's president set to re-cast
his name or propose someone new within two weeks.
Some time ago, I warned that 2012 was going to
be a more difficult year for the global economy than 2011 was.
Well, things are certainly starting to
shape up that way.
Europe is heading for some really hard
times. What is about to happen in Europe is going to shake the entire
global financial system.
Those that live in the United States
should take notice, because the U.S. financial system is far more fragile than
most people believe.
Our banking system is a gigantic
mountain of debt, leverage and risk and it could fall again at any time.
In addition, the U.S. debt problem is
bigger than it has ever been before.
For example, did you know that the
federal government is on a pace to borrow 6.2
trillion dollars by the end of Obama's first term in office?
That is more debt than the U.S.
government accumulated from the time that George Washington became president to
the time that George W. Bush became president.
For now the U.S. government is still
able to borrow giant piles of super cheap money, but such a situation does not
last forever.
Just ask Greece.
Already there
are indications that foreigners are starting to dump large amounts
of U.S. debt. If this trickle becomes a flood things could become very
bad for the United States very quickly.
We are on the verge of some very bad
things. The kinds of "financial bombs" that we saw dropped
today are going to become much more frequent. As governments, banks and
investors scramble to survive, we are going to see extreme amounts of
volatility in the financial marketplace.
Things are not going to be
"normal" again for a really, really long time.
Hold on tight, because 2012 is going to
be a very interesting year.