Financial Turmoil in Europe

Over the pond, in Europe, things are not looking too good. The Brexit referendum seems to have unleashed a whole host of problems in an already unstable financial environment.

In Britain, Mark Carney, Governor of the Bank of England, gave a speech on Tuesday – his third since the referendum, – trying to reasure investors, yet again, that he will do everything that is necessary to stimulate the economy. Among the measures he had already promised to implement is an additional cut to the already low interest rate of the Bank of England, currently standing at 0.5%. The latest measure he introduced: the release of £150 billion for loans, available for households and businesses.

Despite all measures introduced by Mr Carney, the British pound is still at a historic low, the shares of British banks have fallen by a whopping 20%, and business investors are desperately trying to withdraw any and all investments they hold in British property funds – so much so that three of the most important such funds have already halted trading and have barred investors from withdrawing their cash! But do not worry, everything is under control – whatever had not already been fixed by money printing, cheap loans and low interest rates (already at zero in many countries around the world), will most certainly be fixed by a lot more money printing, cheap loans and negative interest rates, right?

European stock markets rallied on Thursday after three consecutive days of falling. They were led by companies such as Danone, which announced a major acquisition. As a result of the announced merger, worth $12.5 billion, Danon’s stock price jumped by 7% today alone. This is one of the reasons stock markets around the world have not fallen as much – mergers, acquisitions and stock buy-backs.

According to TheStreet.com, the reason for today’s rally in European stocks were the minutes of the Federal Reserve June meeting, released yesterday. The same website, in a different article, blamed the same Fed minutes for the fall of the stockmarkets in Asia. No comment needed.

Bank stocks throughout Europe, however, continue to fall, showing the main reason for concern – overleveraged banks.

Among the most important concerns is the precarious situation of the Italian banks. The values of Italian bank stocks have been plumetting for the better part of this year. Italian banks are holding enormous amounts of bad debts – non-performing loans amount to a total of about $350 billion dollars. Among fears of bank runs, bailouts and downgrades, the bad loans in Italy are about 17% of all loans – three times higher than the bad loans in the US that started the subprime mortgage crisis and the Great Recession. Italy has the third largest economy in Europe, the eight largest in the world. An Italian banking crisis will have a ripple effect aroud the world.

If this is not enough, Deutsche Bank also seems to be in trouble. The bank’s stock fell to a record low, and traders are already betting on another major plunge in the bank’s value. A week ago, even the International Monetary Fund warned about Deutsche Bank being the riskiest of all “too big to fail” banks, as most exposed to derivatives and currently trading on the markets far below what it is supposedly worth – significantly lower than other major banks aroud the world.

And even the big banks in the US now agree that there may be trouble ahead – three of them, including Goldman Sachs, are recomending that investors stay away from the stock market. And this is only the beginning, a few facts out of a myriad more, all of them “symptoms” of what is to come.

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Endless QE in Europe!

In an interview with France 24 English today, the former president of the European Central Bank and current member of the Board of Directors of the Bank for International Settlements, Jean-Claude Trichet, tried to offer hope with regard of the consequences of Brexit (Former ECB chief says UK ‘shot itself in the foot’ with Brexit). Mr Trichet had been ranked by Newsweek as one of the five most powerful people today.

While Trichet tried to do his best in order to calm down people’s worries, he could not avoid mentioning the fact that he expected volatility to persist on the financial markets. He did not, however, want to specify, how long he expected this volatility to last.

Another interesting thing that Mr Trichet mentioned was the fact that the Europen Central Bank still had means of stimulating the economy, namely, providing unlimited liquidity to all banks in the Eurozone. Read that as “endless money printing”. He also talked about quantitative easing, or QE. QE usually means that the central bank is buying financial assets, such as debt (e.g., mortgage debt, car loans, etc.) and bonds, from financial institutions.

So, basically, Jean-Claude Trichet is sending a message to the markets not to worry, that the European Central Bank will keep printing money, and buying debt, meaning that said banks can keep making reckless decisions, without any consequences. And, if the worst was to happen, the European Union, has legalized, as of January 1 of this year, bail-ins. This literally means that those who keep their money in the banks, as well as the owners of bank stock and/or bonds, will pay for the bank’s recklessness in the case of need. This law has already been implemented, and not even in the poorest memebers of the EU, but in Austria, of all places, where the senior bondholders of the HETA ASSET RESOLUTION AG had to pay for the $8.5 billion hole in the balance sheet of the failed bank. Their bond holdings were reduced by a whopping 54%, and the most they can expect to recieve for their investment would be €0.46 for each euro they were owed, and even that won’t happen before the year 2020.

As I had mentioned in my previous blog posts, we are hearing more and more warnings about the volatility of the world economy and the financial markets. And even though Jean-Claude Trichet’s interview was intended to calm down the spirits and worries of the every day person, it still did not sound “calming” at all.

More Warnings About the State of the Economy

The scepticism that I expressed in my last post, entitled “Brexit!!! The Beginning of the End for the European Union”, seems to be getting more and more widespread. Just yesterday, we heard from George Soros, and he is not optimistic about the future.

Speaking in front of the European Parliament in Brussels, Soros said that the decision of the British people to leave the European Union has “unleashed” a financial crisis resembling the one in 2008, which put the beginning of what we now refer to as “The Great Recession”. (Soros says Brexit has ‘unleashed’ a financial-markets crisis) The billionaire investor had been bearish on the world economy for some time now, warning about the dangers ahead on a few occasions, most recently in January of this year.

George Soros is far from being the only one concerned about what lies ahead. We have already heard warnings on the state of the global economy – from the International Monetary Fund, through Mark Faber, to a group of 10 economists, laureats of the Nobel prize in economics, who wrote a letter to the British newspaper The Guradian, trying to warn about the economic consequences of Brexit.

In my book, I write about the “symptoms” that we can see all around us, showing us the state of the economy. It is easy for each of us to notice the rising food prices, difficulties in the housing market, the unemployment, and so on. Observing these factors, as a doctor examining his patient, we can notice the “symptoms” of the overall health of the economy. And, from what I have been seeing, and having already lived through a hyperinflationary crisis, things are not looking good. The financial system had been volatile for a while now, and, despite the recent rebound in the stock markets, the overall trend – both for the financial markets and for the economy, – seems to be a downward one.