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Debt Contagion and the Global Economic Collapse
World markets experienced dramatic losses and rebounds last week as investors watched economic developments in Greece with growing anxiety. The jitters come after weeks of gathering turmoil in the Eurozone, starting earlier this month when credit rating agency Moody’s Investors Service downgraded Greek debt to CAA1 and indicated a 50% chance that the country would default on its bonds. Just two weeks ago, Standard and Poor responded by downgrading Greek debt to CCC, giving it the lowest credit rating for any country in the world.
One fear is that the contagion of a Greek default would spread throughout the Eurozone, causing borrowing rates for other fragile European economies in Ireland and Portugal to skyrocket. A Portugal default would be a massive hit to the Spanish banking system, which has the largest exposure to Portuguese debt in the Eurozone. Now Moody’s has threatened to downgrade the credit worthiness of some of the largest Italian banks, and has put the Italian public debt on review for downgrade.
The EU and the IMF have scrambled to throw together a second massive bailout for the tiny Greek nation, this one expected to be worth 120 billion Euros, with 12 billion Euros of those funds to be disbursed early next month. The Greek parliament will have to vote this week on whether or not to accept the package, which contains another round of punishing austerity measures as conditions for the funds.
As European leaders scramble to further ensnare Greece in a web of bailouts, the Greek people have once again taken to the streets en masse to protest the austerity cuts that are the condition for the so-called rescue. Mass riots have turned the streets of Athens into battlezones between protesters and police, with demonstrators throwing stones and petrol bombs, and police returning fire with tear gas and stun grenades.
These protests are reflected in similar large scale marches in Spain, where demonstrators from Barcelona, Valenca, Cadiz, and other areas of the country plan to converge for a mass demonstration in Madrid next month, where activists have been occupying the central square for several weeks. Now the Germans are beginning to show their frustration at shouldering the brunt of the burden for the Eurozone bailouts, with German Chancellor Angela Merkel under attack by members of her own party for her handling of the crisis.
Puzzlingly, the fact that so many European nations are on the verge of economic collapse and the future of the Euro itself has now come in to question has not only failed to give proponents of European integration pause for thought, it has emboldened them to use the crisis to argue for further centralization of power in the European Union.
Earlier this month, European Central Bank President Jean-Claude Trichet used the occasion of a gala where he accepted the Charlemagne prize for contributions to European unity to call for the creation of a European finance ministry with authority to exercise control of the governments of individual nations.
Speaking at the gala, Trichet opined: “In this union of tomorrow, would it be too bold, in the economic field, with a single market and a single central bank, to envisage a ministry of finance of the union?”
Last week the centre-left German newspaper Suddeutsche Zeitung wrote: “The idea to create a European monetary fund comes from German Finance Minister Wolfgang Schauble. It’s hardly believable that the world’s second-largest currency doesn’t already have such an independent institution…Perhaps some things are too ambitious for the moment, but there’s no reason not to try.”
However, critics note how the very tendency toward centralization exemplified by the single European currency has itself been the cause of many of the problems and made the risk of a systemic meltdown spreading beyond the borders of each nation that much more likely.
On the floor of the European Parliament in Brussels last week, Member of European Parliament Nigel Farage took the opportunity to put these criticisms to EU President Jose Manuel Barroso.
Meanwhile in the US, even the Federal Reserve is admitting that the American economy is slowing down, cutting their growth forecast for both this year and next. At a press conference announcing the decision, Fed Chairman Ben Bernanke admitted he doesn’t understand why the economy is in such dire straits.
Now even mainstream media outlets are beginning to discuss the extent of America’s economic woes and to openly air critiques of the Federal Reserve and chairman Bernanke.
Perhaps unsurprisingly, the banks, vulture funds, and financiers are positioning themselves to benefit from the economic turmoil the world over.
In Europe, banks such as the German investment fund StarCap, Swiss private bank Julius Baer, US asset managers BlackRock and others have acquired 150 million Euros of Greek debt in the secondary market. The bonds are currently trading at one half of face value, but the vulture funds are betting on redeeming the debt at par if the bonds are secured as part of a second bailout.
In the US, Wells Fargo and Deutsche Bank have attempted to redeem their reputations by promising 2.4 million dollars for a fund that is designed to rehab foreclosed homes and provide assistance to borrowers. The Department of Justice opened an investigation into Deutsche Bank earlier this year for accusations that it had filed false documents in foreclosure proceedings and lied to a bankruptcy judge, and Wells Fargo admitted in February that it was being investigated by several agencies for its foreclosure practices.
Some homeowners who have been subject to fraudulent foreclosure proceedings, however, have decided not to wait for government action and have instead started their own foreclosure proceedings to seize bank property.
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