Last year at this time I wrote an article “The DOOM that came to the United States” where I outlined the risks of uncontrolled sovereign debt: Wherein I warn of a credit downgrade that would result in monetization of debt that would eventually drive inflation to new highs. 6 months later that little scenario took another step closer to being reality when S&P did downgrade the United States’ bond rating.
Well while the first half of last year was focused on our debt woes; another canary was snuffed out in Europe. A couple of months prior to the US’ downgrade while the Kabuki Theater of the debt standoff was in high swing, Greece was downgraded from B to CCC. In the second half of the year, the US busied itself in alternately flooding the M1 with near zero interest from the Fed, recycled straight into the M3 as US bonds to keep the government funded, where only the sluggish speed of the money is insulates us from hyperinflation, during that time Europe was struggling to contain the sovereign debt problem to Greece. With all of their struggles and failed compromises to fix Greece however were predicated on the assumption the sovereign debt problem not spread to other weak nations specifically Portugal, Spain, and Italy. All the efforts to save the EU hinged on keeping the train wreck confined to the somewhat limited economy of Greece and not the larger nations of the EU. On Friday, the EU lost that battle, and came one step closer to losing the war on their currency. S&P based on financial outlook downgraded nine European nations.
France AAA => AA+
Austria AAA => AA+
Italy A => BBB
Spain AA- => A
Portugal BBB- => BB
Malta A => A-
Slovakia A+ => A
Slovenia AA- => A+
Cyprus BBB => BB+
If that wasn’t enough, yesterday the S&P Downgraded the EFSF from AAA to AA+. For those not familiar with the EFSF here is a blurb from their website.
The European Financial Stability Facility (EFSF) was created by the euro area Member States following the decisions taken on 9 May 2010 within the framework of the Ecofin Council.
The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to euro area Member States.
EFSF is authorised to use the following instruments linked to appropriate conditionality:
Provide loans to countries in financial difficulties
Intervene in the debt primary and secondary markets. Intervention in the secondary market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability
Act on the basis of a precautionary programme
Finance recapitalisations of financial institutions through loans to governments
To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets.
Europe looks to be trying to live out my dire warning way ahead of the US. It makes sense that I append my warning at this point. The two economies, Europe, and the United States, are inherently linked and dependent upon each other. If one goes the other goes with it. If Europe, and their monetary system falls apart, the US will not be far behind. Perhaps this is why we allowed the European Central Bank to join the US Federal Reserve system (That’s right we let the central bank of Europe, join our central bank system) so they could directly auction US dollars into the European financial system to ease the stress on the Euro.
The dollar auctions on Wednesday were the ECB's first since joining the Federal Reserve and other major central banks on Nov. 30 to provide cheap, emergency U.S. dollar loans to banks in Europe and elsewhere, in a coordinated effort to ease strains in the global financial system stemming from the European debt crisis.
But as we buy into the EU to reduce the strain on their currency, propping up a sick and possibly dying currency, with one slightly less sick, we become further impacted if the Euro collapses.
With no credible plan even proposed to grapple with the European debt crisis, the Euro collapse looks to be a matter of time, and not very much time. The DOOM is ON!