Friday, July 6, 2012

It Ony Gets Better (Not).

The deterioration of the financial crisis in Europe continues not just unabated by the latest “deal” over bailouts for Spain and Italy but is about to get pushed into an accelerated mode by the growing LIBOR scandal. 

Capital flight from south to north has picked up as well as even tiny Denmark has not only seen its bond yields go negative but deposit rates have also gone negative at –0.2%. (Anyone with savings accounts now must pay the bank for the privilege of having them hold their money.)  As soon as this bizarre phenomenon spreads to the other northern Euro states all hell could break loose, as people will move savings out of accounts and into either safe deposit boxes and or commodities.  Knowing you are loosing money to inflation is one thing but having to pay for even trying to save is quite another. 

France, always willing to outdo its neighbors in terms of insane policy, is now going to raise its top tax rate to 75% and place salary caps on executive pay along with once again lowering the retirement age to 60.  Capital and businesses will soon start to leave France as well. 

Meanwhile in Germany the confirmation of the ESM (European Stabilization Mechanism), although passed buy both houses of the Bundestag, has been put on hold due to challenges in the Constitutional Court.  Its decision may prove moot, as both Finland and The Netherlands have said they will not participate.  The fantasy bubble that Germany can just pony up what ever the rest of Europe needs to continue funding debt that can’t ever be repaid has about reached its limits.  German debt to GDP has already breeched the 80% mark and they have raised their own retirement age to 67.  To think they will continue to work until 67 and strip out 30% (if France slips into the bailout pool over 50%) or more of their GDP so that the rest of Europe can retire at 60 is foolish at best, delusional at worst.  The Europeans ought to start worrying less about Greece leaving the EURO and more about Germany leaving. 

Underneath all the latest maneuverings is the ongoing and deepening LIBOR scandal.  If the investigations expose even a fraction of what is suspected to have been going on it could blow up not just Barclays Bank and the Bank of England, but the ECB (European Central Bank and the U.S. FED as well.  Eventually municipalities and states (and in Europe, provinces) that had heavily invested in LIBOR based interest rate swaps will be launching law suits to recover losses and/or minimized gains that resulted from the manipulation of LIBOR rates.  What were their losses were of course the banks gains. 

Whether or not the British Parliamentary investigation committees will be as sycophantic as the banking committees in the U.S. Congress is yet to be seen, but with growing numbers of municipalities going bankrupt because of not being able to meet pension requirements you can pretty much bet they will soon start to point finger at the banks that steered them into these investments. 

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