Europe's endgame threatens us all

The final act of the eurozone debt crisis will force the United States down a painful path.

By Anthony Mirhaydari Jan 13, 2012 5:22PM

On Friday the 13th, the eurozone's existential nightmare plunged to new depths: Credit analysts at Standard & Poor's who cut America's AAA rating in August made good on their threats and cut France's AAA rating by one notch. They also handed two notch downgrades to Italy and Spain, according to widespread media reports.


This was done in response to a disappointing European Union summit back on Dec. 9 where, instead of addressing the structural issues at the heart of the crisis there -- namely, inadequate banking regulation and lack of true fiscal union -- or measures that could stem the crisis, the focus was on stricter budget discipline and austerity measures. That's the same mistake we made in 1937. And that same mistake was why the Great Depression lasted so long.


The team at S&P wasn't impressed and took action as Europe plunges headlong into a new recession. This, combined with the collapsing Greek bailout, has markets reeling and Wall Street analysts cutting their economic growth estimates. It couldn't come at a worse time.


The reason the downgrades are so significant is that Europe's bailout fund -- the one that's supplying rescue funding to the likes of Greece, Portugal, and Ireland -- operates by taking seed capital provided by the likes of Germany and France and using it to attract outside, private capital. But now, with the creditworthiness of France and Italy being called into question, the bailout fund's credit rating will come under pressure. As it stands now, Germany will be the only AAA-rated country standing behind the bailout fund. Not good.


All of this will make it harder for Europe to raise the cash it needs to keep Greece going.


The other issue is that as part of the new €130 billion Greek bailout hammered out in October, Athens was supposed to negotiate a 50% reduction in its debt load with private creditors. This would alleviate the budgetary pressures and was the crucial first step in unlocking its new rescue funding.


Friday, we learned that the talks have fallen apart. I'll spare you the details, but essentially eurozone banks and eurozone politicians have been played by hedge fund managers who are now positioned to profit even if Greece defaults on its debt in March -- which now looks increasingly likely.


So, what does this mean for you and me?


The rapid deterioration of the situation across the Atlantic, after a brief holiday reprieve, threatens to pull the U.S. economy down into recession in 2012 via financial market turbulence and a slowdown in global trade. Asia is already catching cold with Singapore, rest stop between Asia and Europe, suffering a 4.9% annualized drop in its economy in the fourth quarter as manufacturing activity plunged 22%. 


Friday's developments, along with Thursday's terrible retail sales report, has Wall Street analysts falling all over themselves to cut their GDP growth projections. JPMorgan economist Michael Feroli cut his first quarter estimate to just 2% and expect policy uncertainty near the election to weigh on growth later this year too.


Expect more of this as the two temporary tailwinds that supported the American economy recently -- savings withdrawals and cheaper gas prices -- both reverse.


Now, with Europe's woes pulling down growth and Washington embroiled in bitter divisions, Federal Reserve officials are out in force trying to talk up the potential for another round of money printing, or "quantitative easing."


But as I illustrated in my last post, this is a terrible idea since instead of supporting growth, it is likely to merely encourage Wall Street to push up commodity prices, inflate gas prices, and cause more economic damage just as the $600 billion "QE2" initiative did in late 2010 and early 2011. 


Not only that, but Republicans are not going to be happy if the Fed chairman Ben Bernanke is seen as toying with the dollar to boost President Obama's reelection chances. Not with anti-Fed presidential candidate Ron Paul still in the running.


It's like this: Europe's debt crisis has reached its final stages where the like of Greece have no choice but to consider debt defaults and possible exits from the eurozone, something that will increase the pressure on Europe's banks and the countries that must stand behind them. This, in turn, will increase the pressure on "core" Europe creditors like Germany and France, weakening their ability to save troubled-but-not-yet-doomed countries like Italy and Spain.


All the while, America faces a stark choice between a new recession that will weaken its own debt problems or having another go at dollar devaluation, commodity price inflation, and having its central bank become a political punching bag. Pick your poison.



As for stocks, I still believe we're still in the midst of what will prove to be merely a bear market rebound, albeit a very, very powerful one.


There has been a massive shift in sentiment as the temporary boost in U.S. economic data, intermission in the eurozone debt crisis, and the positive seasonality of the holiday trading season combined into a confidence inspiring concoction. It's reaching extremes now just as the fundamental data turns sour.


According to the folks at Sundial Capital Research, for only the 19th time in 25 years, fewer than 17% of individual investors have a bearish outlook for a second consecutive week according to survey data. At the same time, large, heavy hitting S&P 100 options traders are eagerly snapping up put option protection against market declines. Right now, there are 171 put options outstanding for every 100 call options.
Historically, ratios this high have presages poor periods of market performance with an average 30-day return on the S&P 500 of -1% with only 33% of all days positive (out of 131 days) over the past decade. Reversing the situation, when calls were more popular than puts, the 30-day return averaged +2.1% and was positive 67% of the time.
I guess this was a Santa Claus rally for the record books. But that doesn't change the fact that it was merely a distraction, a head fake on the path to lower prices.


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.



Jan 13, 2012 11:26PM
Countries are too big for their financial britches. Spending more than they have then wanting to be rescued. The United States is included. Printing stimulus money without a vote from the citizens then rewarding failed companies of their choice. That is not democracy. Companies making bad business choices should pay the price we all pay. The politicians with their specials laws that favor only them are getting rich while poverty row grows for workers.
Jan 13, 2012 9:14PM

The FED wants more QE3.  There are lots of things I don't necessarily like about Ron Paul, but the one thing that matters is that he is hellbent on getingt rid of the FED.  Getting rid of the FED basically annhilates Wall Street.  Destroying Wall Street means the 99% win!  America wins.  Why?  With inflation rising, soon about to rip out the behinds of the middle class, continued money printing to save Wall Street and the 1% will send the country down a hyperinflationary spiral..  you really want to pay $5 for a loaf of bread and $10 for a gallon of gas?  (not a problem for the 1%)


I'm done with Obama.  He overpromised and underdelivered.  I don't care what else Ron Paul does or doesn't do, but getting rid of the FED is what a true American would do.  Romney, while possibly the shrewdest businessman, is another Wall Street shill, and the rest of the GOP pool are either Tebow-wannabes and/or blathering idiots.

Jan 14, 2012 12:43AM
"Today, we learned that the talks have fallen apart. I'll spare you the details, but essentially eurozone banks and eurozone politicians have been played by hedge fund managers who are now positioned to profit even if Greece defaults on its debt in March -- which now looks increasingly likely." .....Quoted from the article.

Right there is a key problem not only for Europe but the world. Wall Street type scumbags. Why aren't these people being rounded up and shot?

Jan 14, 2012 12:51AM
Open-mouthed The reason of the big crash in 1929 is the big bad boys took all the money and then they ran. There are now too many big bad boys making a lavish living off wall street.  It looks like it is going to be worst this time when hell breaks loose.Disappointed But they say that crash only happens when no one expects it so at this point it is not to be expected as there obviously some degree of expectations therefore there won't be any crash?Tongue out
Jan 15, 2012 1:03PM

As for Europe, their collapse is assured.  The only way out of Debt is to pay it off, or INFLATE your way out of it.  Paying it off is impossible when every PIIGS country is still running massive deficits.  INFLATING means wiping the half the savings of the French and German middle class out.


Greece is a classic example.  The rich long ago fled.  The middle class is supporting the poor.  They no longer can support the raises the poor keep voting themselves.  Greece refuses to sla**** spending and balance its budget.  It must abandon the Euro, recreate the Dracma, and then INFLATE its way out of debt, or it must default, and immediately balance it's budget as it will not be alble to borrow.


The banks in Europe of course are all in trouble, BECAUSE they hold government bonds that at most are worth 50 cents on the Euro.  They are in trouble because GOVERNMENT's cannot pay what they owe.   This should be a lesson for all our banks holding Treasury bills.  How long before they either ask the holders and banks to take a "Haircut"?  Will helicopter Ben PRINT up enouigh new dollars to honor this 15.8 Trillion in debt?   16 Trillion at 5% exceeds what we spend on Defense! 


Fire Mr. Obama and as many Democrats as possible or face their Depression.  If you think its tough in the poor areas of the big cities, you have not seen anything yet.

Jan 14, 2012 7:21PM
They need to deal with their problems, we need to keep out of theirs, we have enough of our own. They are pressuring us to bail them out. They need to bite the bullet and slash entitlement programs and government spending. So do we. If you tax the top 50% of American earners at 100% of their earnings, you will still be far short of the money being spent. Big government is not the solution, it is the problem.
Jan 13, 2012 7:14PM

The official economies of Italy and Spain and their real economies are two parallel universes. For example, it is estimated that the mafia has close to $300B in loans. It’s a rough estimate of course because if it were official, they would have to pay taxes on it. By this account the mafia is the number one bank in Italy. In Spain you have thousands of people who own luxurious beachfront properties and who report annual incomes of less than $20k (or don’t report at all). The son in law of the Spanish King just got involved in a $100M scandal; you can be sure that nothing will happen to him or the King’s daughter.

Italy and Spain do a lot of business under the official radar. They aren’t prosperous economies but they are not starving to death either. If the official 20% unemployment in Spain were real there would be a civil war; they have a history of that. Take their official figures with a ton of salt.

Jan 14, 2012 3:09PM

The EU is just another centrally planned economic system going down the tubes. Of course the financial destruction will be ugly when it finally hits bottom. It always is. But, we’ve seen and survived situations like this before. What bothers me is all the fear mongering by the central economic planners, including the Fed, U.S. government, and the large Wall Street banks that control it all. They want desperately to convince us we will all die or at least end up with an economy second to Zimbabwe if we don’t make sacrifices to hold it all together and keep them in power. Now where have I heard that before?  Oh yea, TARP, TALF, AIG and big bank bailout 1….n. And, as we all fall in line to support them they secretly position themselves in the markets to profit from the inevitable collapse at our expense. It’s ultimately nothing more than another pump and dump scam, this time on a world scale.

Jan 15, 2012 12:10PM

Campaign money


Obama has raised 5 times the amount of the next Repub candidate.

5 times more!

Over $200 million!!


Let's see -- where did this money come from?

Could it have come from his base of beggars?

I really don't think so. When you are begging for more , more and more, it isn't likely you are going to contribute campaign money, now is it?

How about that middle class that he is so wildly "defending" now?

Why no, they don't have any money LEFT to contribute.

He already stole that and took away their jobs


Well, where did the money come from?

Why it came from capitalism!!

The very thing he is peeing on, lines his pockets!


GE (you know the company that pay ZERO taxes here in USA)

Unions- who buy his vote

Perhaps a few companies that were given pork by Obama's failed "stimulus " plans?

Acorn (or one of it's many new names) -- maybe the money goes back to Obummie after a little skimming off the top by them?


Yes, his war on capitalism is not a hypocrisy, he is not a liar or a thief!

It's all good.

That's our dear leader!

Aren't we lucky?  

Jan 13, 2012 10:29PM

Seems like back in the 80's there was this entertaining thought, globally about converting over to the Euro and metrics system of measure. I can't help but think how things would be today if we would have embraced this idea? I'm sure as the global economy matures we will see soon enough. Problem is as the world leaders and business organizations continue to exploit the globe we will have less and less stability. China seems to be on the home court presently. Democracy is the visitors.

In God I Trust, who else is there?

Jan 14, 2012 12:33AM
Greece and Portugal will default in March. Then we can go in and purchase the countries. Then we can work them like we are treated on our jobs in America, Like an overworked dog. Smack them and smack them hard. They are lazy.
Jan 14, 2012 11:50AM
A big stockmarket crash is looming, time to run to the hills
Jan 14, 2012 10:25AM

Only if you are blind or have no idea how the system works,Europe hurts as does the world as it follows the up and down of America's economy.


Waiting on the new paper tiger economies like India,China to bear this burden is too much hope and expecting way to much as you can see by the world markets and currency.

The safety net is gone and  that would be , The good old U.S.A. that sold it's family business's for profits. In the end, greed leads us to it and we cannot get out of this paper bag.


True options will not be addressed as no sacrifice will truly be made just kick it down the block.



Jan 16, 2012 12:42PM

I find it absolutely disturbing that the federal reserve wants and has the power to dilute the value of every American's money. So the government takes it from us directly in taxes and the fed reserve takes it from us in terms of value. So not only is our government taking money from us, but they are making each one of us "more poor" by destroying the value of the money we have left after the took it.


How do we allow this crap to continue? The government is going to take from every American in the form of taxes AND THEN take from every American who has any money left over in the form of inflation (destroying purchasing power) by printing more money?


So if you didn't do what you were supposed to and lived a life of excess... you are screwed by design of your situation.


Now if the fed gets to do another round of quantitative easing, if you did do what you were supposed to and lived within your means... you are screwed because the government is going to decide that everything you saved and worked for should be worth less. Because it will get them re-elected.



Jan 15, 2012 12:55PM

It appears that the only way to get our economichouse in order and reduce spending at least 1 Billion per year (mind you this will just return us to W levels of insolventcy) is to fire as many Democrats as possible, starting with the clueless Obama.


For those that spout numbers, 10.2 Trillion is the debt Obama started with, it now stands at 15.8 Trillion, thats 208,000 for every family in the country.   Mr. Obama continues to want to INCREASE spending as wittnessed by his  budget that  was voted down 97-0 without a  single Democrat vote.

His Stimulus II fortunately for the unemployed, was killed off.


Mr. Obama is a obstructionist in getting our house in order.  He believes in SPENDING, BORROWING, TAXING and DEBASING our way to prosperity.  If you believe these things will bring prosperity, by all means vote for Mr. Obama, and practice them in your personal life.


Otherwise FIRE Mr. Obama and as many Democrats  as you can, before their great Depression crushes what  little that have left of the middle class...

Jan 16, 2012 1:15PM

"Hope & Change"

has now become :


Divide  &  Conquer !!


Now THAT'S leadership!!!

The President of the country absolutely can't run on his awful, woeful record (of failure)

so what to do?


Why you divide the country, by using race and class warfare!


Yes-- we are SOOOOO lucky to have the "dear leader" in power.


The touchy, feely, change you can believe in , most "transparent" president ever, has morphed into the most PARANOID, race mongering, class dividing, least transparent, president ever!




Jan 15, 2012 9:58AM
Run to the hills !!!!!!!!!!!!!!!!!!
Jan 13, 2012 10:36PM
The Russian tanker ship and US Coast Guard ice breaker made it to Nome, Alaska .. so heating fuel cost will fall from the $9.00 a gallon expected price.  Of course it is only minus 31 F below zero and the crew have to drag hoses across the frozen shore fast ice for six miles to unload the 1.3 million gallons.  Now what was this problem about EU credit freezing up?
Jan 14, 2012 6:01PM
Someone here said they would support Obama's reelection.  Excuse me, but what a moron.  Europe is bankrupt becuase it spent too much money, borrowing most of it, and spending it on socialist entitlements.  What the Hll do you think Obama and the Democrats are doing?  And they are fighting every effort, how ever feable, to rain it in.  Sure, we need Obama to add another 7 trillions to teh 7 trillion he will have added by 2013.  What kind of morons do we have in this country.  The days of supporting my team (Democrats) no matter how stupid and dangerous they are, dmmm well better end of this country will end.
Jan 16, 2012 1:05PM


oh peter, of course we are lucky, actually blessed to have obama as president.  stop the excuses for his great fundraising - much of that money comes from a wide swath of independents including me (a little less this year until i hear more from romney on normalized tax policy).


Can you imagine there are STILL people in this country that actually support this bum?

His "great fund raising" is a direct result of his relationship with unions and his corrupt "stimulus"

It did NOT come from his base of beggars, or from you.


$240,000,000 and it ALL came from bozo's like YOU?


I don't think so

It came from CAPITALISM, you know the very thing he is trying to kill

How about GE the company that PAID ZERO TAXES LAST YEAR - ZERO!!!

How many millions did they give "dear leader" so they will not again pay one dollar in taxes?

No corruption there I suppose?


No, he is not a hypocrite or a liar. 

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