An urgent report on the next, explosive stage of the European crisis now unfolding before your eyes …

Yesterday’s election in Greece is just one chapter in this saga.

Regardless of its consequences, the European Union, the largest economy in the world, is now suffering under the weight of TWO traumatic crises striking simultaneously:

Trauma #1. Europe’s governments are in big trouble — debts out of control, tax revenues plunging, interest costs surging.

Trauma #2. Europe’s banks are under siege — drowning in massive losses, swamped with withdrawals, and lining up for bailout money that no government can afford.

Find it hard to believe that the largest economy and banking system in the world is collapsing even as you read these words? Then, read on for the evidence …

Trauma #1. Governments in Big Trouble
Debts out of Control
Tax Revenues Plunging
Interest Costs Surging

Some people seem to think the European Union’s sovereign debt problems are limited to just a few countries that have been in the news.

Others seem to assume that the debts are relatively static and unchanging.

But the hard data shows that, in reality …

Europe’s debt troubles are widespread, making almost every country vulnerable to the contagion now spreading across the continent.

Of course you already know about the countries in the headlines:

Greece with gross government debt of $315.8 billion … Spain with more than double that amount ($839.9 billion) … and Italy with debts that are SIX times larger than Greece’s (nearly $2 trillion)!

But what about the countries that have so far been viewed as “stronger”? Are they debt free?

Absolutely not!

France’s debts are almost as large as Italy’s — $1.8 trillion. And Germany’s debts are actually larger than Italy’s — nearly $2.1 trillion.

Plus, don’t forget others in the European Union, including Austria ($230.1 billion), Belgium ($374.3 billion), Finland ($101.1 billion), Ireland ($180.3 billion), the Netherlands ($427.6 billion), Portugal ($188.5 billion) and more!

Needless to say, not all countries are equal. Relatively speaking, some are stronger and others are weaker.

But here’s the key: They all belong to the same economic entity (the EU) and they’re all entangled in the same financial mess (the sovereign debt crisis).

That’s why it’s so important to note that TOTAL government debts owed by EU countries are now $8.6 trillion dollars — all based on the data from official sources compiled by Weiss Ratings.

Worse, despite all the sworn promises of austerity and all the solemn pacts to control deficits, the hard evidence also demonstrates that these debts are growing by leaps and bounds.

Official data shows that EU countries have added nearly $1 trillion in new debts just since the sovereign debt crisis began! And that doesn’t even include the massive new obligations of the EU institutions providing bailout funds!

And what’s most shocking is that nearly every effort to cut deficits has resulted in even larger deficits.

The main reason: Government cutbacks have slammed the economy. They have strangled the finances of the people. And they have bankrupted their businesses. So when all that happens, the end result is inevitable — they can’t pay their taxes!

Spain is a classic example. In fact, right now, the collapse in Spanish tax revenues is replicating the pattern in Greece, where fiscal revenues have fallen 4.8% in the past 12 months and Value Added Tax (VAT) revenues have plunged 14.6%.

The Daily Telegraph of London says “Spain is in the gravest danger since the end of the Franco dictatorship.”

Spain’s former premier Felipe Gonzales calls it “a total emergency, the worst crisis we have ever lived through.”

And just remember: Spain is NOT alone!

Surging Borrowing Costs

Spain’s borrowing costs have soared to 7%, widely considered the dividing line between stability and chaos.

Italy’s short-term borrowing costs have jumped wildly, as much as 164 basis points in a single day!

Other European interest rates are on a similar path.

This means that …

On top of collecting a lot less in revenues, they now have to pay a lot more for the money they desperately need to borrow.

But sinking government finances and financing is just one of the traumas striking Europe today. Also consider …

Trauma #2. Banks Under Siege 
Drowning in Massive Losses
Swamped with Withdrawals
Lining up for Bailout Money

In addition to America’s banks and thrifts, Weiss Ratings now issues Financial Strength Ratings on all of Europe’s large banks.

And among the largest EU banks (with $200 billion or more in assets), there are now SIXTEEN institutions receiving a Weiss Rating of D+ or lower:

What does our rating of D+ mean?

According to a landmark study by the U.S. Government Accountability Office (GAO), it’s the equivalent to “speculative grade” (junk) on the rating scales of Moody’s, S&P and Fitch.

And also according to the GAO, Weiss was the only one that consistently warned ahead of time of future financial failures.

Indeed, if track record is any guide, our tougher grades — based strictly on the facts without any conflicts of interests — are consistently the most accurate.

Like Moody’s, S&P or Fitch, we look at each bank’s capital, earnings, bad loans, liquidity, and other factors.

But unlike the other rating agencies, we have never accepted — and WILL never accept — any compensation from the banks for their ratings.

Nor do we give big banks special credit based on the “too-big-to-fail” theory. We’ve said all along that, when push comes to shove, governments will have to save their own necks first and let failing banks fail.

Or, alternatively, they will have to print money and devalue the banks’ liabilities (YOUR deposits) in order to keep the banks alive.

Either way, depositors are at risk!

In Spain, we first gave Bankia its E+ rating (meaning “very weak”) three months ago — well before its massive losses were revealed, setting off the latest phase of Europe’s debt crisis.

But despite its $396.3 billion in assets, it’s not the largest Spanish bank in jeopardy:

Banco Santander is FOUR times larger with over $1.6 trillion in assets and merits a rating of D-, also deep into junk territory; while Spain’s BBVA bank, with nearly $775 billion in assets, gets a D.

And based on our metrics, Spain’s Caixabank (a $350 billion bank) is just as weak as Bankia with a rating of E+.

In Italy, Unicredit SpA gets an E+, despite its $1.2 trillion in assets; Intesa Sanpaolo merits a D-, and Banca Monte Dei gets an E.

What most people don’t seem to realize, though, is that most of the largest weak banks in the EU — and in the world — are headquartered in …

France! Crédit Agricole (with a massive $2.2 trillion in assets) is a candidate for failure with a rating of E and Societé Générale is not far behind with a D-. Plus, there are two other large French banks in jeopardy — Natixis and CIC.

But here’s the biggest — and most important — surprise of all:

Germany is NOT the safe haven most people think it is, especially when it comes to banking: In fact, the largest weak bank in the world is Deutsche Bank with $2.8 trillion in assets and meriting a D.
 
Commerzbank, with $857.6 billion in assets, is even weaker, getting an E rating.

All based on the same kind of objective, conflict-free analysis that helped us name nearly all the major failures of the last debt crisis well ahead of time! (See “The Only Ones Who Warned Ahead of Time.”)

Bottom line:

The total assets of just these 16 banks alone is $15 trillion, or about $1 trillion more than the total assets of ALL commercial and savings banks in the United States!

Who Saves Whom?

Late last year, the bonds of major European governments were sinking fast and Europe seemed on the brink of a meltdown.

So the European Central Bank (ECB) decided to come to the rescue with the aid of the largest banks.

The plan was simple:

The ECB hands the money over to the banks via special loans.

The banks hand the money over to sovereign governments by buying their bonds.

And everyone’s happy, right?

Wrong!

The plan has backfired: The government bonds have sunk anyhow. And the banks are stuck with even greater losses.

Now, a “new” old plan is hatching. Instead of banks helping to bail out their governments by buying their bonds … the idea is for governments to bail out their banks with money borrowed from the stronger governments of the European Union.

So one day they talk about banks saving the sovereigns. Next day, it’s the sovereigns savings the banks. They can’t seem to make up their minds as to who will save whom.

But …

Now the Public Is Beginning 
To See Through This Charade!

They remember how many times the authorities have vowed that “the crisis is over.”

They know, first hand, how unemployment has gone through the roof.

They see the crisis feeding on itself.

So they are beginning to ask the real question of the day: Who sinks whom?

Will the sovereign debts sink the banks?

Will the banking crisis tear down the sovereign governments?

Or will they both go down in a spiraling cycle of bond market collapses and bank failures?

Our Suggestions …

1. Keep most of your liquid funds in cash, ready to be deployed on a moment’s notice, but as safe as can be right now. The best way: A short-term Treasury-only fund in the U.S., or equivalent.

2. Hold on to all long-term gold holdings. You do not want to let go of those. We feel gold could be headed to $5,000 an ounce over the next few years.

In the short term, however, we would not be surprised to see gold — and silver — move lower.

3. Consider prudent speculative positions to grow your wealth.

But no matter what you invest in — stocks, bonds or commodities — always be open to playing both the declines and the rises.

Even gold, silver and oil, despite major long-term bull markets, are bound to suffer further declines before turning higher.

And never forget this critical fact: As we’ve demonstrated here repeatedly, the U.S. government and U.S. financial institutions have made many of the same mistakes and are vulnerable to most of the same dangers.

Best wishes,

Martin and Larry

China is widely expected to overtake India as the world’s biggest consumer of gold this year with gold purchases rising by 10 per cent, according to the leading Chinese bank ICBC. Why?

The Chinese are moving out of the dollar and into gold. That is what a seemingly ill-educated gold trader in the Sharjah Gold Souk told us earlier this year.

King for a day

You don’t need to be a genius to see the logic behind this move. The dollar might be king today but only against the faltering euro. But what happens when we are reminded that US debts are running at levels comparable with Greece?

As the largest holder of foreign dollar reserves the Chinese are only too painfully aware of how exposed this leaves their savings in a slump. US treasuries are the biggest bubble in history as legendary investment adviser Dr Marc Faber reminded us recently (click here).

Diversification for protection really means something if you have most of your wealth tied up in US t-bonds. And where do you go for safety? Things have already gotten so bad for the Swiss franc that it has become pegged to the euro to stop further appreciation.

Then again if you are Indian and with your money in gold and not rupees then you are laughing. The massive depreciation of the rupee puts gold at a fresh all-time high in rupees, even while it is several hundred dollars off its dollar-denominated high of last September. This experience is not lost on the Chinese.

There are less and less safe haven assets in the world and more and more financial markets are manipulated by central banks because they have control over the supply of paper money. Gold and silver they can suppress through the collusion of the bullion banks but this will not withstand the pressure of massive demand for precious metals as the global economic system cracks up.

Base rate scenario

Imagine what the US economy would look like with the base rate set to Italian levels of six per cent. Asset values from bonds to stocks to real estate would be decimated. A deflationary depression would set in.

And yet nobody currently looks seriously at what is a very obvious future scenario as the artificial supports used to keep the world economy afloat since the global financial crisis begin to fail. The Chinese in buying gold and silver are just peering a bit further into the future and buying insurance against the worst case scenario.

The problem is that a seriously mishandled eurozone sovereign debt crisis may now make this the base case scenario.

About Peter Cooper:

Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group. 

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner inwww.ameinfo.com, which later became the Middle East’s leading English language business news website. 

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier. 

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation. 

Order my book online from this link 

Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for Moody’s, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated. 

Last week in an interview on CBS Network News, Economist Mark Zandi, the chief economist for Moody’s, unwittingly revealed a central error of the global economic establishment. Zandi has made a career out of finding the middle ground between republican and democrat economic talking points. As a result of this skill, he has been rewarded with large quantities of airtime from media outlets that want to appear non-partisan, despite the fact that his supposedly neutral analysis often leaves listeners frustrated. 

When asked about the recent deterioration in the global economy, Zandi said that “the worst possible scenario” at present would occur if Greece were to leave the Eurozone. He claimed that the economic gyrations and liquidations of bad debt that would result from such an exit would be sufficient to create a vicious cycle that could drag the global economy back into recession. As a result, he urged policy makers to take whatever steps necessary to maintain the current integrity of the 17 nation Eurozone. 

Given what most economists now know, few would actively argue that Greece’s entrance into the Eurozone back in 2001 was a good idea. In fact most concede it was a terrible idea based on bad forecasting and outright fraud. There is little disagreement over the fact that Greece grossly misrepresented its financial position in order to gain initial entry into the monetary union. It is also widely agreed upon that in the ensuing decade Greece exploited its monetary advantages to borrow irresponsibly.

Much has been written about how the fundamental misfit between Greece’s economy and currency gave birth to a deeply flawed system that was destined to run off the rails. Most also agree that the countries like Greece and Germany are too economically and culturally disparate to exist under the same monetary umbrella. But despite all this, Zandi wants to maintain the status quo. In his opinion, it is so imperative to prevent the deflationary consequences of an economic restructuring that it is preferable to prop up a failed system, perhaps indefinitely, rather than allow a newer, healthier system to replace it. In the process, the moral hazard created not only assures that Greece will become an even greater burden on Europe, but so too will other nations whose leaders will be emboldened in their profligacy by the anticipation of similar help.

From Zandi’s perspective (and he is certainly in the majority on this point) the goal of economic policy is to keep GDP growing. It follows then that he will oppose large-scale debt liquidations which drag down GDP in the short term. But sometimes debt needs to be liquidated. Bad ideas need to be abandoned. Once economies stop throwing good money after bad, capital is freed up to flow into more economically viable purposes. But economists and politicians never look at the long term. Their job seems to be to manage the economy for the next election.

The same “damn the torpedoes” mentality dominates economic thinking with respect to the U.S. economy as well. Years of artificially low interest rates, and government subsidies that direct capital towards certain sectors and away from others, has created an economy with too little savings and production, and too much borrowing and consumption. The ultra-low interest rates currently supplied by the Fed serve to perpetuate this unsustainable artificial economy. Higher rates would work quickly to redirect capital to the more productive sectors. But high rates could bring deflation and liquidation, which few economists are prepared to risk. 

We have too many shopping malls selling stuff, but not enough factories making stuff. We have too many kids in college studying liberal arts, and not enough in the workforce acquiring skills that will actually increase their productivity. Banks are loaning too much money to individuals to buy houses, and not enough money to entrepreneurs to buy equipment. We have too many tax-takers riding in the wagon, and not enough taxpayers pulling it. The list is long, but the solutions are short. 

We need to let interest rates rise to market levels, and allow the economy to restructure without government interference. We need to stop beating a dead horse and hitch our wagon to an animal that can really pull. The process will be painful for many, but like ripping off a band-aid, the pain will be over relatively quickly. However, since a painful restructuring means recession, politicians resist the cure with every fiber of their beings. So instead of a genuine recovery, one that will provide productive jobs and rising living standards, we get a phony recovery that produces neither.

Preserving a broken system merely to avoid the pain necessary to fix it only makes the situation worse. Propping up sectors that should be contracting prevents resources from flowing to other sectors that should be expanding. Keeping workers employed in nonproductive jobs prevents them from gaining productive employment elsewhere. Encouraging activity or behavior the market would otherwise punish discourages alternatives that it would otherwise reward.

Unfortunately, leaders on both sides of the Atlantic put politics above economics, and economists like Mark Zandi provide the cover they need to get away with it.

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For a more in depth analysis of our financial problems and the inherent dangers they pose for the US economy and US dollar, you need to read Peter Schiff’s 2008 bestseller “The Little Book of Bull Moves in Bear Markets” [buy here] And “Crash Proof 2.0: How to Profit from the Economic Collapse” [buy here]

For a look back at how Peter Schiff predicted the current crisis, read his 2007 bestseller “Crash Proof: How to Profit from the Coming Economic Collapse” [buy here]