Anyone looking to get their head around how the next round of the Crisis will look should consider what’s happening in Europe today.
Europe is ground zero for the whole debt bomb implosion, not because it has the most debt but because it’s politically and economically on the least sound footing.
Some 19 countries share the currency, all of them in varying degrees of socialism (the public sector accounts for roughly 1 in 3 employees in Germany’s allegedly “free market” economy), and varying shades of broke: even Germany a real Debt to GDP of over 200%.
In this regard, Europe gives the rest of us a front-row seat to learn how things will unfold when the real stuff hits the fan and the political and financial elite are at risk of losing their power and wealth.
We’ve been through this mess multiple times in the last three years. The most notable cases involved Spain and Cyprus. And the formula is as follows:
1) A problem first emerges.
2) Various political and financial officials state that the problem is contained and there’s nothing to worry about.
3) Months later, the market and mainstream media catch on… usually when the problem is already a massive crisis and a bank holiday needs to be declared.
4) Individual investors lose a LOT of money while the same folks who cause the problem A) are not fired, fined or jailed B) never come clean about the full scope of the problem and C) claim that they can solve the problem and have all the answers.
Consider the story of Bankia.
Bankia was formed by merging seven bankrupt regional Spanish banks in 2010.
The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion in funding for the bank (all provided by taxpayers of course).
These preference shares were shares that A) yielded 7.75% and B) would get paid before ordinary investors if Bankia failed again. So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors (including said taxpayers).
Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything when the new bank was created.
Bankia was taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.
One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank (again) and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to).
When the bailout took place, Bankia shareholders were all but wiped out and forced to take huge losses as part of the deal. The vast majority of these were individual investors, NOT Wall Street or its European equivalent (Bankia currently faces a lawsuit for over 140,000 claims of mis-selling shares).
So that’s two wipeouts in as many years.
The bank was taken public a second time in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed.
Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).
Today Bankia is tied up in a massive compensation lawsuit whereby it is to pay out between 200 and 250 million Euros to investors who bought it during its initial IPO. Of course, this payout is based on accounting standards that are at best massaged and at worst likely outright fraudulent (this is, again a bank that has wiped out investors three in times in three years), so who knows what will happen?
While certain items relating to this story are unique, the morals to Bankia’s tale can be broadly applied across the board to the economy/ financial today.
Those morals are:
1) Those in charge of regulating the system will lie, cheat and steal rather than be honest to those who they are meant to protect (individual investors and the public).
2) Any financial problem that surfaces will be dealt with via fraud or lies rather simply allowing those who screwed up to be fired or go to jail.
3) When the inevitable collapse finally does hit, it will be individual investors and the general public who get screwed (not bank executives or politicians).
4) The problem will be prolonged as much as possible, likely fixed years down the road, if ever and individuals will have little or no say in how it pans out.
This is the template for what’s coming.
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