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The Coming Financial Collapse in Europe?

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What follows here is a synopsis of an email sent out by Graham Summers, Chief Market Strategist at Phoenix Capital Research.

Summers and other analysts say the coming collapse has been delayed by heavy intervention from the European Central Bank.   European leaders have been quite aggressive in their efforts to hold things together -- the preservation of the euro depends on it, and many economic & commercial benefits accrue from that for most of the countries in Europe.  

However, by the end of last year, Greece had already received bailouts in excess of 150% of its GDP -- yet still posted a GDP loss of 6.8%!    So it was hard to believe that the Greeks would accept yet more austerity measures and more debt.   But they did.

Political tensions between Greece and Germany had reached the point that Greeks were openly comparing German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble to Nazis while the Germans referred to Greece as a "bottomless hole" into which their money was being tossed.

The obvious reality was that Germany wanted to force Greece out of the EU, but didn't want to do that explicitly or directly.   So instead they acted indirectly, offering Greece the worst deal imaginable that could still be portrayed as an offer to help:     The German aid package stipulated that Greece would have to accept levels of austerity measures so onerous that there was no chance the Greek people would ever tolerate it.   Or so the Germans thought.   But Greece surprised them and accepted it.   And so it is that the EU experiment continues to exist today.   But it hangs by a thread and will not last much longer.   The reasons are as follows.

For starters, unemployment in Greece as a whole is now over 20%.   For Greek youth (aged 15-24) unemployment if over 50%!   The country is in nothing short of a Depression.   So let's not fool ourselves with pretensions to the contrary.

Instead understand that Greece has by now experienced five straight years of economic contraction, resulting in a 17% contraction of its GDP.   To view this in perspective, understand that when Argentina collapsed in 2001 its total GDP loss was 20%, and this was accompanied by full-scale defaults as well as systemic collapse and open riots.

So, with freshly installed austerity measures now in place in Greece, there is little doubt that this country too will soon see a GDP contraction of 20%, if not more.   Therefore this will almost certainly lead to an Argentina-style default in this country as well.  

The only thing that could alter this outcome of systemic collapse and ever worsening riots would be if Greece staged a pre-emptive, full-scale Icelandic type of default, now.   While Europe's political leaders and bankers view a total default now as the worst possible nightmare (and it would be for Greek pensions, retirees, and many EU banks), the irony is that it is only a total default, now, that could possibly solve Greece's debt problems and thereby allow it to quickly return to growth.

Understand, however, that such defaults are akin to forest fires:   they wipe out all the dead wood, and that is what sets the stage for a new period of growth.   As mentioned, we've just witnessed this phenomenon in Iceland, which did the following between 2008 and 2011:

*  Had its banks default on $85 billion in debt, an amount that is more than 6 times the size of the country's annual GDP ($13 billion).   (The debt of most advanced countries is nowhere near that multiple of its GDP.)

*  Jailed the bankers responsible for committing fraud during the bubble.

*  Gave Icelandic citizens debt forgiveness equal to 13% of GDP!  

And today, just a few years later, Iceland is posting GDP growth of 2.4%, which is more than that of both the EU and the developed world in general!   In short, the short-term pain combined with moves that reestablished trust in the financial system (i.e. holding those who broke the law accountable) created a solid foundation for Iceland's recovery.

Now, compare this to Greece which has "kicked the can down the road" (i.e. put off a default) for two years now, thereby allowing its economy to be dragged into one of the worst depressions of the last 20 years, while continuing to increase its debt load.   This latest bailout added 130 billion euros in debt (much of which will eventually have to be paid back), in return for a measely100 billion euros in debt forgiveness).  

Iceland, by contrast, staged a total default, and returned to growth within 2-3 years.   Greece and the Eurozone in general have done everything they can to put off a REAL default, and have done so with miserable results.   Let the economic numbers tell the story:

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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  I understand Iceland also rewrote their en... by Thomas Brown on Monday, Mar 26, 2012 at 12:08:48 PM
I  believe that forgiveness  of all debt... by Richard Clark on Monday, Mar 26, 2012 at 12:56:44 PM
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