The Unfolding EU Crisis

Michael Victory's picture


via TVR:


Coming into Focus

Earlier in the year I warned of a pending EU crisis that has now arrived in full force. I have been writing about the EU problems over the past month to bring them back into focus, because I believe this is the next, biggest, event on the timeline. While everyone was watching Washington Theater, the EU crisis was raging. This is a real risk to banking, currencies, and sovereign debt that is not easily fixed. Sadly, the public has very little understanding of what shapes their world, content to live ignorant until directly impacted. The majority of my writing has been about the US Money Market Mutual Fund exposure to the EU banks (in the area of 50% for some of the largest). I write about these problems not to scare, but to warn. 


Funding Issues within the EU

Over the past few years, the banking industry has funded the majority of sovereign debt buying to keep the EU going. Now that this unsustainable process is coming to an end, interest rates are rising in Spain and Italy - big decisions need to be made soon. Remember the EU banks didn’t get their TARP, yet. Spain’s bond market is bigger than that of Greece, Portugal and Ireland’s combined, at about $900B. Italy’s debt market is roughly 3x the debt market of Greece, Ireland, and Portugal combined, at about $2T. The ECB will need to backstop these debt markets or else face a breakup of the EU. Ultimately the EU will cease to exist, but not yet.

Early Monday morning, August 8th, the ECB promised to “actively implement its Securities Markets Programme.” This decision was made at a time when the banking system was closer to failure than most recognize. One source involved in the talks stated, “I don’t see how we can survive another week like this one.” SocGen, France’s second largest bank, and UniCredit Banca, Italy’s largest bank were both on the brink. While the ECB’s intervention helped stabilize European markets and banking system for now, they will need to significantly expand their efforts in the near future. 


Short Selling Ban

Similar to the ECB intervention on Monday, the recent ban on short selling financial stocks is a temporary stop-gap measure (15-days). The ban, introduced by Belgium, France, Italy and Spain on Friday, was in response to extreme pressure being applied to EU banks. They are in the midst of a bank run. People are sensing the risk in banks that have approximately 20-1 leverage on assets that are egregiously overvalued. Big money is taking deposits out of EU banks and running scared.

While the Spanish ban included derivatives, the French and Belgium bank did not apply the ban to derivatives. One side note, Germany implemented a ban of naked short selling last year, which did include credit default swaps. Nobody should expect this short-term policy to
have any lasting impact or resolve the current issues. In simple terms, the damage within the banking system is too severe and there is no way to contain the derivatives. I agree naked short-selling and CDS are destructive to markets, along with government sponsored manipulation (policies), but the partial ban on short selling will not save the Eurozone markets or banks. 


Crossing the Rubicon

I will offer my view on how this will play-out, but I ask that you take prudent actions to prepare for alternative outcomes. My expectation is that markets will soon pressure the EU to commit to additional and significant steps to keep the EU intact. As I’ve mentioned in the past, these steps are part of the global QE agenda. Before any decision is made, markets (or maybe more appropriately men who walk with canes) will make their case to the ECB loud and clear. The EU sovereign debt market and the banking system will be taken down unless more credit/debt is created. In comes the EFSF. This outcome was decided long ago, the politicians just haven’t informed the underclass/uninformed yet. 

This is where my concern regarding the mmkt funds comes into play. If the ECB doesn’t jump quickly enough to their demands, you could have a situation where some banks are sacrificed. Since US mmkt Funds are so heavily weighted in EU banks, it is quite conceivable that some will “break the buck”. Just as we hit the lowest point, the US investor could encounter a “freeze” in mmkt redemptions, unable to move out of the fire storm surely to hit western currencies. This is not high on the list of concerns of our “masters”. 


Defined Contribution Retirement Accounts
Don’t blame retirement plans, blame the corruption and greed. Unfortunately retirement accounts are at the mercy of a broken system. Paper markets are a collapsing inverted pyramid. As the Ponzi system implodes, it will be difficult to hide within plans that  limit investment options to mmkts, bonds, and general stock funds. Money will be running to safe havens, such as PMs.

Global stock markets will continue their downward move until more credit/debt is pumped in. As this unfolds (it is now), you can try to hide retirement assets (that have limited investment choices) in short-term treasuries or mmkt funds. If you are vigilant, nimble, and have a little luck, you’ll be able to exit these positions before they collapse. If you can navigate this mine field, you’ll then take refuge in a stock fund that will not keep pace with real inflation rates and will see many bankruptcies. The other option within these limited investment accounts is to sit in general equity funds and ride out all storms. Your choice should be based on your individual circumstances, and in either case, keep your fingers crossed that you’ll be able to salvage something in the end. Within an IRA, where you have alternative investment options, my preference is to have positions in funds that hold a physical asset, such as Sprott’s physical gold & silver along with resource and mining stocks.


Protective Measures

Additional credit/debts will fix nothing. The ECB and US Fed will continue to place a bid under the massive new debt issuance, leading to rampant price inflation for items of necessity. We will see lower growth, employment, wages, and cuts in entitlements, while cost of living will increase. The ugliness and ungodliness in our society will be on full display. At risk of sounding like a broken record, I am suggesting 30% of your assets be stored in physical gold & silver and holding a portion of your assets in physical cash. The main thing I want to reinforce is the purpose of holding cash. Although the outcome may be abundantly clear, current laws enforce currency which should be held for expenses, emergencies, purchases and so forth. By exiting cash completely, you forfeit your ability to protect other holdings or take advantage of future opportunities. Don’t give up your financial freedom or your ability to protect yourself – in my opinion it’s worth the potential cost of devaluation.


~David Freedom

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WVO Biker's picture

Merkel is toast and Germany's financial position is toast. You may bring Eurobonds, because EFSF is already there. End individual european countries and unify Europe now and pay the price. I don't mind if there is no longer a german government that matters, for obvious reasons. I never liked my german post WWII identity anyway. German sheeples will obey and there will be no more german problems. Germans are quite busy nowadays and won't take to the streets.    

choorles's picture


STOP! WHAT IS MONEY? The money that the world uses today is created by private banks lending non-existent money called credit. This credit has never, does not and will never exist, except in theory on computer screens. People die and they starve all because they do not have enough digits on a computer screen. All of this credit, created by the private banks, is owed back to those same banks, plus interest. By design, there is never enough credit in circulation to pay back all the principal plus interest on the loans outstanding, which is why the concept of bankruptcy is built into the system.

Using the simple system above, banksters are given the ability to manipulate the world’s economies into ‘boom and bust’ cycles. In essence, the only difference between a boom and a bust is the amount of credit in circulation, or rather, the net amount of numbers on people’s computer screens. Initially, banksters create a boom by increasing the supply of credit in the economy. During this boom period, individuals and businesses are encouraged to take on more debt as they are more confident of increasing their income in the future. All this extra credit in the system leads to more activity, which in turn creates more confidence in the system, with many getting into more debt. This boom is akin to a fishing trawler, the bankster throws out a credit line and waits, once the bait has been taken the bankster begins to wind in the credit by taking credit out of circulation, it’s gone. The economy then moves into a slump or recession, simply because there are not enough units of credit in circulation. The banksters are then able to trawl from people the wealth that does exist, in exchange for money that never existed in the first place.

daxtonbrown's picture

Boy, a lot of us were saying years ago that a common Euro currency would never work and would fall apart. Where are the apologies now? Heck, same with taking the US off the gold standard, they were forewarned. And what's with this Keynesian thingy, it is so Weimar republic.  No use holding your breath waiting for the politicians to wise up, they will have to be run out on a rail. Good thing my pallet of Prozac just came in or I would be thoroughly depresseed.

I'm just resolved to watching the whole thing go up in flames. I've been "Going Galt" as fast as I can.

IQ 145's picture

In your opinion, don't get out of cash completely ,because the benefits outweigh the potential loss to devaluation"; Well, apparently you don't know much about devaluations. You might want to start by reading up on that subject. There have been a lot of them in the twentieth century. There are many ways to hold, "essentially" 100% of your savings in Silver Bullion; retaining only a small monthly budget for daily expenses; this can be filled up again every month by a calibrated sale of silver. An entirely practical place to do this is which you can Google and read all about on their website. This is a unique business; it's transparent and very simple; you can sell small quantities of metal at a time and they repatriate the money directly to your originated bank account. A half hour spent carefully reading their information could be a very good investment. The Bullion in the Silver vault is audited daily; the owner of the business is a member of the London Bullion Market and buys it wholesale; it's completely legitimate and works seamlessly.

the PTB's picture

Nice missive.  If I read you correctly, one should get out of gov't controlled retirement plans altogether.  They surely are targeted for termination resulting in digestion and assimilation by the State.  I would flee IRAs and the like as though they were GM bonds.


Just a thought.

Mongrel's picture

Remember this: Living well is the best revenge. Don't let these jerk-offs in the elite establishment bring you down. They don't have a clue about their fate . . . or do they (see Psalm 2)?

Mallenet's picture

In the land of the blind - the one-eyed man is king!  Can't wait to meet a one-eyed man in the sightless of the EU!

Bananamerican's picture

"In the land of the blind, the one-eyed man is lame!-Bananmerican

PulauHantu29's picture

Strong gold and silver sales reports Ebay:


"The Dow index fell 6 percent in the week ending Aug. 6. That week, the number of gold buyers on eBay rose 11 percent compared with the year's weekly average. The number of gold sellers rose 14 percent. EBay would not provide the total number of buyers and sellers.

"With all the turmoil in the markets, this is seen as a way to diversify," said Anthony Delvecchio, eBay's vice president of business management and strategy for eBay's North America business.

The increased popularity of gold on eBay echoes what's happening in the broader gold market, where prices have spiked during the past two years.

Gold traded at about $900 per ounce in the summer of 2008, before the financial crisis unfolded that year. It passed $1,600 in late May and briefly rose above $1,800 for the first time on Wednesday before pulling back to $1,784. On Friday, gold fell to $1,740.60 per ounce, still nearly twice the summer 2008 prices."


Even Joe the Plumber understands when his paper money and savers are being destroyed by the Fed's Zero Interst Rate Policy to "stimulate" the economy.


BTW, beautiful silver Kangaroo coin! I read that only 5,000 of them were minted. Very precious, eh.

WestVillageIdiot's picture

You are wrong.  Metals are in a bubble. Just ask anybody that doesn't own any. 

Mallenet's picture

Ouch - you are so bitchy: got any? Or just mouthing like someone who can give headway?

ZDRuX's picture

I might be wrong, but I think he was being sarcastic.

WestVillageIdiot's picture

What does any of this have to do with Michelle Bachmann gobbling down a corndog?

It looks like my local boy dropped out of the race today.  I guess he pulled a hammy the moment the starter fired the pistol. 

StychoKiller's picture

Didn't vote for Pawlenty to be Governor here, nor did I vote for the Decepticrat.

zorba THE GREEK's picture

That was the biggest corn dog I ever saw. I wonder if they made it special for her.

Did you notice how her eyes got all funny like she was about to deep throat it.

If she had, she would have won my vote for president.

ElTerco's picture

If you are going to hold physical cash, make sure it is in small bills, and even then, beware that new money may be printed, and old money will be deemed worthless.  Here's a history lesson from Russia's central government:

apberusdisvet's picture

When they come for my PMs I will tell then my ex wife, who is an ex Chemistry major who dabbled in explosives, stole them when she took off with a Russian speaking Biker who started a Muslim Brotherhood chapter in Mongolia that has been rumored to be infiltrated by the Mossad.  The ensuing peperwork should be interesting.

StychoKiller's picture

You must not like your ex-wife much!  :>D

Lord Koos's picture

Why hold a lot of cash when you can trade gold for cash at any time, anywhere in the world?

WestVillageIdiot's picture

In 2010 I was in a European country.  On the last day of our visit I handed a silver eagle to a desk clerk that I had talked to a lot while we were there.  You would have thought I had just handed him a sacred piece.  His reaction was priceless.  I hope he still has that silver eagle. 

max2205's picture

20 - 30% might be a tad low for some of ZH readers. LOL

newt22's picture

Today’s biz news is boring, time for a break and some politics


A political statement that is way over due. For all you die hard party people, this is against both parties. I introduce a new candidate. It is called The Journey.


Youtube Link:


Enjoy Netw22

magpie's picture

Sure, bring on the Eurobonds...after a 60 % haircut. Operation Euro-Twist.

WestVillageIdiot's picture

I have 7 weeks until my next Euro trip.  I was hoping the Euro would come down before then.  I guess I will be drinking more expensive beer.  I will adapt.

magpie's picture

BTFD in CHF until then ?

Don't you want to order the world's most expensive Big Mac ?

WestVillageIdiot's picture

I hate to admit that I have had Burger King in London, McDoanlds in Austria, McDonalds in Prague and Burger King in Paris.  Sadly, when we travel we always have that one meal in a foreign city that reminds us of the U.S.  When I eat at these places I am always amazed at how much the foreigners love it and how much they are willing to pay. 

magpie's picture

I actually spent my last greenbacks in a BK.

And despite all adverse events my favorite junk food is still the Gyros.

Haole's picture

What do you guys think of Rickards talking about the potential for oppressive taxation (confiscation essentially) of bullion in the future at GATA 2011?

FeralSerf's picture

As soon as this begins to be discussed seriously, bullion will disappear from within the taxing authority.

WestVillageIdiot's picture

"Did you hear about the Polish car pool?  They all met at work."

NoClueSneaker's picture

Hm, getting lazy ...

Full insured Mercedes owner in Germany on the phone:

" Six hrs. ago I parked in front of your pub, Zbigniew ... Can you tell me why TF is the bloody rig still there ...? "



MarkS's picture

Actually this is a little out of date.  US Mmkt funds have been withdrawing from Euro bank CP for about a month now.  And, US regulators have told US banks to decrease there exposure to European banks as a counter-party issue.

The withdrawal of US Mmkt funds is a driver in the liquidity crisis as it now stands. It has forced banks, especially French banks to have to rely on FCB support.  And, the FCB is getting the money as needed from the ECB through the credit and debit system that they use loaning excessas of other CBs to the needy (the Germans being the main balance holder).

The big battle will come over the issuance of ECB Euro bonds.  This will all come down to Germany...if they refuse to allow recourse to German assets (taxpayers) then we may see the point at which the can can't be kicked any further. 

DFreedom's picture


Thanks MarkS – You are correct, we’ve heard a lot about the big mmkt funds shortening maturities and letting some maturing paper roll off of EU bank paper since this was brought to light a couple months ago.  It appears exposure was cut over the past couple months in some of the more notable funds, so the 50% number I had posted may be closer to 30-35% now.  Money’s on the run, looking for a safe haven.  Got gold?

European bank shares tumbled to the lowest since March 2009 on Aug. 10, led by Paris-based Societe Generale SA, amid concern that France’s creditworthiness was in doubt. U.S. prime money funds have reduced European debt holdings by $38 billion to $340 billion in July, according to an Aug. 9 report by JPMorgan



WestVillageIdiot's picture

Do the Euros have the equivalent to the FDIC?

It was fun to watch stocks boil up on Friday but the financials seemed to not do so well.  I was watching MS and C.  Both had underwhelming performances.  It was like watching a movie with David Schwimmer and Cameron Diaz.  Of course to watch such a monstrosity they would have to give you the Clockwork Orange treatment.

"I'm singing in the rain.  Just a singing in the rain.  What a wonderful feeling I'm happy again." 

magpie's picture

mmmm, Pan-European deposit insurance.

Manthong's picture

Anybody got an opinion on any hazards or glitches that might arise for customers with MM's and securities of a couple hundred K (with SIPC supposedly to $500K), if a broker gets in trouble or funds go under?

StychoKiller's picture

"The call is coming from INSIDE the house, for God's sake, get out!"

Jasper M's picture


Actually, not so. JPM, Fidelity, and one other recently revealed to be still up to theis kness (c. 10%) in Euro bank debt. 

Las time, one fund "broke the buck" by al of 3 ¢. This time, it'll be more like 10¢


zorba THE GREEK's picture

I agree Mark, and interbank lending in the EU is rapidly freezing up, as it did in U.S. during the

'Lehman' crisis. The problems in the EU are more complicated than most outside observers


WestVillageIdiot's picture

Oh, blow me, Zorba.  It is all fixed.  Now go get your shinebox.

Just kidding.  Don't take offense.  I just wanted to be contrarian to your negativity.  Meet me at Fraunces Tavern and I will buy the first round. 

zorba THE GREEK's picture

@WVI    No offense taken.. Zorba does drink Mt. Gay Rum, but Zorba does not play for that team.

disabledvet's picture

The banks collapse so collapses the country. This is no loss of confidence if u r living it. Germany will do what is in its interest. So will the USA it appears.

WestVillageIdiot's picture

Even during the dark days of World War II there were thriving economies in occupied countries.  They may have been underground but they existed.  The reality is that economy is about people.  Markets are about bullshit.  I have enough that I could be a part of a sunny economy even if the markets collapsed.  I bet many of you can say the same. 

smore's picture

Excellent FSN interview with Felix Zulauf on the Growing Debt Dominos in Europe here:

risk-reward's picture

Current laws enforce currency?

WestVillageIdiot's picture

Who cares?  Fuck currencies.  My wife and I shared a sandwich and a laugh the other night.  It was the greatest moment of my week.  It is time to realize that the bullshit these assholes create is secondary to happiness.  They are full of shit.