MidnightWatcher – Prophecy in Motion

By MATTHEW CRAFT – “NEW YORK (AP) — The unthinkable suddenly looks possible.

Bankers, governments and investors are preparing for Greece to stop using the euro as its currency, a move that could spread turmoil throughout the global financial system.

The worst case envisions governments defaulting on their debts, a run on European banks and a worldwide credit crunch reminiscent of the financial crisis in the fall of 2008.

A Greek election on Sunday will determine whether it happens. Syriza, a party opposed to the restrictions placed on Greece in exchange for a bailout from European neighbors, could do well.

If Syriza gains power and rejects the terms of the bailout, Greece could lose its lifeline, default on its debt and decide that it must print its own currency, the drachma, to stay afloat.

No one is sure how that would work because there is no mechanism in the European Union charter for a country leaving the euro. In the meantime, banks and investors have sketched out the ripple effects.

They think the path of a full-blown crisis would start in Greece, quickly move to the rest of Europe and then hit the U.S. Stocks and oil would plunge, the euro would sink against the U.S. dollar, and big banks would suffer losses on complex trades…

Here’s where things get scary.

The European Central Bank and European Union would have to persuade investors in government bonds that they will keep Portugal, Spain and Italy from following Greece out the door. Otherwise, borrowing costs for those countries would shoot higher.

The main way European leaders have tried to calm bond markets is by lending to weaker governments from two bailout funds. Experts say these two funds, designed as a financial firewall to stop the crisis from spreading, need more firepower.

Much of the (EURO)248 billion ($310 billion) left in one of them, the European Financial Stability Facility, was pledged by the same countries that may wind up needing it, Vamvakidis says.

There’s also a (EURO)500 billion European Stability Mechanism that’s supposed to be up and running next month, but Germany has yet to sign off on it.

‘If they fail to reassure bond investors, all of the nightmare scenarios come into play,’ says Robert Shapiro, a former U.S. undersecretary of commerce in the Clinton administration.

The biggest danger is a fast-spreading crisis known in financial circles as contagion – a term borrowed from medicine and familiar to anyone who has watched a disaster movie about killer viruses on the loose.

‘It’s like a disease that spreads on contact,’ says Mark Blythe, professor of international political economy at Brown University.” Read more.

“The operator of the stricken Fukushima nuclear plant has been dumping something like a thousand tons per day of radioactive water into the Pacific ocean.

Remember, the reactors are ‘riddled with meltdown holes’, building 4 – with more radiation than all nuclear bombs ever dropped or tested – is missing entire walls, and building 3 is a pile of rubble.

The whole complex is leaking like a sieve, and the rivers of water pumped into the reactors every day are just pouring into the ocean (with only a slight delay).

Most people assume that the ocean will dilute the radiation from Fukushima enough that any radiation reaching the West Coast of the U.S. will be low.

For example, the Congressional Research Service wrote in April:

Scientists have stated that radiation in the ocean very quickly becomes diluted and would not be a problem beyond the coast of Japan.

***

U.S. fisheries are unlikely to be affected because radioactive material that enters the marine environment would be greatly diluted before reaching U.S. fishing grounds.

And a Woods Hole oceanographer said:

“The Kuroshio current is considered like the Gulf Stream of the Pacific, a very large current that can rapidly carry the radioactivity into the interior” of the ocean, Buesseler said.

“But it also dilutes along the way, causing a lot of mixing and decreasing radioactivity as it moves offshore.”

But – just as we noted 2 days after the earthquake hit that the jet stream might carry radiation to the U.S. by wind – we are now warning that ocean currents might carry more radiation to … some portions of the West Coast of North America than is assumed.” Read more.

‘Truly Frightening’: Higher and higher radioactivity levels expected to continue for years in bluefin tuna (Radio) – “It’s truly frightening. What happened was these fish were caught [and tested] five months after the accident…. but the research wasn’t published until June of this year… Scientists sat on this information for 8 or 9 months while they were waiting to get their report published… [The tuna] still had body burdens of both kinds of cesium — 134 and 137 — that were surprisingly high for a fish that had only been near Fukushima for a couple weeks. So my question is, ‘What’s been going on since then?’ cause we know that cesium has been continually released… It’s likely that the next catch of tuna that hasn’t made the scientific literature yet is going to be worse than the tuna that they caught. They caught 15 tuna and all 15 had high levels of cesium 134 and 137 in them… so one would expect that now as more and more tuna start to swim toward the United States we’ll see higher and higher levels of radioactivity in the tuna, and I don’t think that trend is going to stop for the next several years.” Listen to video below.

Reuters, CNBC – “Greeks pulled their cash out of the banks and stocked up with food ahead of a cliffhanger election on Sunday that many fear will result in the country being forced out of the euro.

Bankers said up to 800 million euros ($1 billion) were leaving major banks daily and retailers said some of the money was being used to buy pasta and canned goods, as fears of returning to the drachma were fanned by rumors that a radical leftist leader may win the election.

The last published opinion polls showed the conservative New Democracy party, which backs the 130 billion euro ($160 billion) bailout that is keeping Greece afloat, running neck and neck with the leftist Syriza party, which wants to cancel the rescue deal.

As the election approaches, publishing polls is now legally banned and in the ensuing information vacuum, party officials have been leaking contradictory ‘secret polls’.

On Tuesday, one rumor making the rounds was that Syriza was leading by a wide margin.

‘This is nonsense,’ one reputable Greek pollster said on condition of anonymity. ‘Our polls show the picture has not changed much since the last polls were published. Parties may be leaking these numbers on purpose to boost their standing.’

The pollster said there was some consolidation, with voters turning to New Democracy and Syriza from smaller parties but the pool of undecided voters remained unusually large so close to the election and the result was impossible to predict.

Both parties say they want Greece to remain in the single currency but Syriza has pledged to scrap the bailout agreement signed in March which has imposed some of the toughest austerity measures seen in Europe in decades.” Read more.

By Max Nisen, Business Insider – “Everyday, we hear some pretty grim predictions about the markets and the economy. But this is one of the more comprehensive and most gloomy outlooks we’ve ever seen.

Raoul Pal expects a series of sovereign defaults, the ‘biggest banking crisis in world history’, and asserts that we don’t have many options to stop it.

Pal previously co-managed the GLG Global Macro Fund. He is also a Goldman Sachs alum. He currently writes for The Global Macro Investor, a research publication for large and institutional investors.

A note on the presentation; the last slide is not meant to suggest that we’re going back to the economic activity of 3000 years ago. It refers to the 3000 year old trade links between the nations along the Indian Ocean, which Mr. Pal believes will be the center of world’s opportunities. Just like the West 50 years ago, they have ‘…low debts, high savings and a young population’.” Source – Business Insider.

By Ambrose Evans-Pritchard, The Telegraph – ““We’re in a situation of total emergency, the worst crisis we have ever lived through” said ex-premier Felipe Gonzalez, the country’s elder statesman.

The warning came as the yields on Spanish 10-year bonds spiked to 6.7pc, pushing the ‘risk premium’ over German Bunds to a post-euro high of 540 basis points. The IBEX index of stocks in Madrid fell 2.6pc, the lowest since the dotcom bust in 2003.

Chaos over the €23.5bn rescue of crippled lender Bankia has led to the abrupt resignation of central bank governor Miguel Ángel Fernández Ordóñez, who testified to the senate that he had been muzzled to avoid enflaming events as confidence in the country drains away.

Markets are on tenterhooks as Spanish yields test levels that forced the European Central Bank to respond last November with its €1 trillion liquidity blitz. ‘Nobody is short Spanish debt right now because they are expecting ECB intervention,’ said Andrew Roberts, credit chief at RBS. ‘If it doesn’t come — if we take out 6.8pc — we’re going to see a hyberbolic sell-off,’ he said.

Italy felt the full brunt of contagion from Spain on Wednesday, with 10-year yileds back near 6pc. The euro fell to a 2-year low of $1.239 against the dollar. Crude oil and metal prices plummeted and save-haven flight pushed rates on 2-year German debt to zero. Gilt yields fell to 1.64pc, the lowest in history.” Read more.

World markets tumble back into the red as fears grow Spain will need an EU bailout – “World markets tumbled back into the red today as fears grew Spain will need an EU bailout. The Dow Jones Industrial Average was down more than 1 per cent on doubts the nation will be able to afford to recapitalise its fourth biggest lender Bankia. There are also increasing worries that other Spanish banks will also need bailing out. The FTSE 100 Index was nearly 2 per cent or 96.8 points lower at 5295.3 as Spain saw the yield on its 10-year bonds rise to a record euro-era high of 6.68 per cent at one stage. This is close to the 7 per cent level that pushed Greece, Ireland and Portugal into taking a bailout in a sign that investors had little faith in the country’s ability to deal with its debts. Chris Beauchamp, market analyst at IG Index, said: ‘Investor confidence wanes by the day, and it could only be a matter of time before the Spanish government is forced to ask for financial aid.'” Read more.

By Andrew Cave, The Telegraph – “Richard Ward said the London market had put in place a contingency plan to switch euro underwriting to multi-currency settlement if Greece abandoned the euro.

In an interview with The Sunday Telegraph he also revealed that Lloyd’s could have to take writedowns on its £58.9bn investment portfolio if the eurozone collapses.

Europe accounts for 18pc of Lloyd’s £23.5bn of gross written premiums, mostly in France, Germany, Spain and Italy. The market also has a fledgling operation in Poland.

Lloyd’s move comes as a major Franco-German provider of credit insurance for eurozone trade, Euler Hermes, said it was considering reducing cover for trade with Greece because of the risk the country might leave the eurozone.

When a company goes bust, it is often sparked by withdrawal of credit insurance for suppliers wanting to trade with it.

A spokesman for Euler Hermes, Bettina Sattler, told Bloomberg: ‘The outcome of the new elections in June remains highly uncertain. Consequently, the situation is further deteriorating. The risk of Greece exiting the eurozone has been revived.

‘In light of the recent developments, Euler Hermes will most probably have to switch to a more prudent approach. [We have] maintained a high level of cover for [our] customers until today. But now we are confronted with a changing situation.’

Lloyd’s fears are likely to be shared by a number of European businesses, which are watching developments in Greece.” Read more.

Greece warned of public finances collapse – “Greece’s public finances could collapse as early as next month, leaving salaries and pensions unpaid unless a stable government emerges from the June 17 election, according to Lucas Papademos, the technocrat prime minister who left office after this month’s inconclusive vote. Mr Papademos warned that conditions were deteriorating faster than expected with cash flow likely to turn negative in early June amid a sharp fall in tax revenues and a loosening of spending controls during two back-to-back election campaigns.” Read more.

By Joel Hills, Sky News – “Greece’s former finance minister has told Sky News that if Greece reneges on its bailout deal with the EU and the IMF it will ‘open the door to hell’.

Sky News last interviewed George Papaconstantinou two-and-a-half years ago.

In December 2009 he told how Greece could survive independently and Greece’s creditors had nothing to fear – they would get back every euro they were owed.

A lot has changed since then.

Greece is in the process of borrowing 240bn euros of emergency loans from the EU and the IMF (in return for pledges to raise taxes, cut spending and balance the books) and investors holding Greek debt have been forced write off up to 50% of their money.

Even now Greece remains heavily in debt, deep in recession (now in its fifth year) and without a functioning elected government.

Mr Papaconstantinou lost his position as finance minister last summer, shortly after the second bailout package was agreed.

In the general election, two weeks ago, he also lost his seat as an MP. He was not alone as support for his Pasok party collapsed.

The result of the election was inconclusive and, ultimately, no party was able to form a coalition government. In four weeks’ time Greece will vote again.

The opinion polls suggest that were an election to be held tomorrow the result would, once again be inconclusive, but the Syriza party, which is promising to ‘tear up’ the bailout agreement with the EU and the IMF, continues to attract support…

Interestingly, he admits there are elements of the bailout deal that he would seek to renegotiate but he says if Greece were to do what Syriza’s leader, Alexis Tsipras, is proposing and fail to honour the promises the country has made in return for emergency funding then the results would be disastrous.

‘The extremist parties are lying to the Greek people because they are not telling them that reneging on the agreement means that you have opened the door to hell,’ he said.” Read more.

EU banks fear a Greek exit could cause bank run across continent – “… the continent’s financial system remains vulnerable to the prospect that stampedes of customers could yank their deposits from institutions perceived as shaky. That threat was shoved into the spotlight last week when customers withdrew more than €700 million from Greek banks in a single day… If Greece leaves the eurozone, it will almost certainly restrict bank customers from moving their money out of the country. That could prompt depositors in struggling countries such as Spain and Portugal to … pre-emptively transfer their funds out of their countries to avoid having their savings converted into rapidly devalued Spanish pesetas and Portuguese escudos. ‘That’s what markets are starting to worry about,’ Bodereau said. ‘It takes you to a whole different level of liquidity crisis.'” Read more.