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  One of the adventures of Odysseus and his crew was to pass between Scylla, the six-headed monster, and Charybdis, the whirlpool creating sea monster. They lived on either side of a narrow straight, so the path between them was considered near suicide.
   That straight has long been considered the Strait of Messina between Italy and Sicily, and last week it became a very dangerous gap again.

 Premier Mario Monti says he's "gravely concerned" that Italy's autonomous region of Sicily may soon default....
   Italian news reports say Sicily's government is €5 billion ($6.14 billion) in the hole and may soon be unable to pay salaries and pensions.
 It's a troubling development for a country that is trying to present itself as above the economic chaos raging in southern Europe.
   Still the news failed to make much of an impact on the markets because it was overwhelmed by much worse developments from Spain.

 Concerns that Madrid is running out of options to bring down the debts of its ailing banks and bankrupt regions sent the country's borrowing costs soaring above 7.2% – a rate seen as unsustainable for a country that cannot devalue its own currency and is suffering a lengthy double-dip recession.
   The bank bailout had been supposed to push down the country's borrowing rates, but the country's problems continue to mount. On Friday the region of Valencia was forced to turn to the Spanish central government for cash help.
 There have long been rumors that Spain's regional governments were in trouble, but no real proof until Friday. Together with Spain's bonds being downgraded to junk and Spain's stock market having its worse day in two years, Friday could be considered the beginning of the end game for Spain in this crisis. Some newspapers in Spain even started calling it "Black Friday".

  The Spanish region of Catalonia went bust back in May, but it was Valencia that opened the floodgate.
   The very next day Murcia asked for a bailout.

 The magnitude of the problem is starting to get so disproportional and uncontrollable that the Spanish Foreign Minister Jose Manuel Garcia, indirectly quoted the ECB as an "underground bank" that does nothing to extinguish the debt firestorm. He demanded that Europe should replace the ECB by a much stronger bank, sounding rather desperate. Mr. Garcia added that the Euro area will break apart before long if the gap between German and Spanish risk premium kept the same dynamics.
 It's now being reported that three more regions will also be asking for a bailout.

  Spain, with a 24% unemployment rate, and a conservative government dedicated to austerity, is facing the same dilemma that Odysseus had - which bad option to chose?
   Spain is not alone. Greece knows exactly what they are going through.

 Greece could go bankrupt as early as September. Spiegel has obtained information that the IMF told the Brussels leadership it would not make more money available for help to Greece.
...
  The troika estimates that giving Greece more time to achieve its goals would cost an additional €10 billion-€50 billion. Many eurozone governments, however, are no longer prepared to shoulder new Greek burdens. Moreover, countries like Holland and Finland have made their help contingent on IMF participation.
 Without the IMF the Greek bailout mechanism will not work. The money will not be there and Greece will default (again). The difference is that this time it will be chaotic and ugly.
   This is happening the same week that Peter Doyle, former division chief in the IMF's European Department, sent a letter to the newspapers with some choice words.
 "After twenty years of service, I am ashamed to have had any association with the Fund at all..."
 Meanwhile, Germany's economy minister, Vice Chancellor Philipp Roesler, said he’s “very skeptical” that Greece can be rescued by Europe's leaders and that Greece's inevitable exit from the Euro had “lost its terror.”

   Roesler wasn't alone in feeling that way.

 The leader of the main opposition Radical Left Coalition (Syriza) party, Alexis Tsipras, was quoted as predicting the country's default, while also forecasting that the government will "soon present" a return to a national currency (drachma) as a national success.
 If this feels a little different from the economic crisis of last year, it's because its starting to change. It's getting more serious.
 The sight of protesters on Spain's streets is nothing new. Young "Indignados" (Indignants) protested in their thousands against mass unemployment last year.
   But since Prime Minister Mariano Rajoy announced the austerity steps last week there have been daily demonstrations drawing groups that have previously stayed away.
   On Thursday, policemen and members of the Civil Guard took the unusual step of joining the protests.
   "It has gone beyond an ideological issue... and it's moved beyond the traditional groups that demonstrate. We have seen even the military threatening a demonstration," said Ramon Pacheco, a lecturer in Spanish politics at Kings College London.
   "It's difficult to make predictions, but it's more than likely that this government term could come to an end sooner than expected," said Fermin Bouza, a sociologist at Madrid's Complutense University.
  Recently a few people on DKos mocked me because I've been predicting a break-up of the Euro since early 2010 and it hasn't happened yet. There were similar doubters when I started predicting a housing bust back in 2005.
    All I can say isthat when you jump out of a 20th floor window you can say, "So far so good" as you pass the 12th floor, but it doesn't make it true.

  If you want real proof of the panic in the financial markets, just look at interest rates.
Germany's 2-year bonds are auctioning off at negative interest rates of minus 0.06%.
   Denmark's official interest rate is negative 0.2%.
   Even Belgium, of all countries, is selling their debt at negative interest rates.

 The Belgian Treasury issued three-month bills for EUR1.525bn at a yield of -0.016%.
  Germany, Netherlands, Finland, Switzerland and Denmark have also recently issued sovereign debt at negative interest rates as their securities are being seen as refuge assets against the European debt crisis.
 Low interest rates are a sign of confidence by the markets. Negative interest rates are a sign of panic in the markets. Or at least a serious dysfunction. No one in their right minds would pay someone to take a loan from them unless they were afraid of losing it all.

  As it stands right now, the next two months should show us how the European economic crisis will play out. Historically that is not good. From 1873 to 2008, September has traditionally been the cruelest of months for the markets.

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Comment Preferences

  •  over 7% spread between common users (7+ / 0-)

    of the Euro?  that's crazy.  and I'm sure if you look at the derivative market, there's lots of "smart" money pushing those countries/region's interest rates expecting to make a killing off the coming defaults.
    austerity is a great way to encourage the goal.

  •  Talk of Greece abandoning the Euro... (7+ / 0-)

    resurface again, with: mounting worries that Greece may leave the euro.

    Several articles have discussed the possible domino effects if Greece is forced to abandon the Euro.

    Meanwhile, back in the US:  Earnings Show Recession May be 'Fast Approaching' (emphasis mine)

    ...Estimates for the third and fourth quarters have been dropped to levels not seen since the days of the 2008 financial crisis, below even the muted 2 percent expected level of inflation.

    That's an ominous recession sign for an economy that has barely managed to attain positive growth this year even with the strong level of earnings beats...

    Interesting times...
    •  I still maintain (9+ / 0-)

      That Greece isn't critical to the Euro, and that its exit will actually help Greece in the long-run (after short-term pain).

        The real problem is Spain. Without a full commitment from the rest of Europe, Spain can't be bailed out. They are too big, and I don't see the full commitment there.
         Plus, Greece's exit will have the markets trying to guess who is next, thus making it inevitable.

        All things considered, September might be a very ugly month for the markets (again).

        Get ready for people who weren't paying attention to be asking, "Wait a second. Shouldn't we have already fixed this by now?"

      ¡Cállate o despertarás la izquierda! - protest sign in Spain

      by gjohnsit on Mon Jul 23, 2012 at 05:47:55 AM PDT

      [ Parent ]

      •  There is a chance that a Greek exit (1+ / 0-)
        Recommended by:
        gjohnsit

        will cause bank runs in Spain and Italy.

        If this happens, Germany will pull out of the euro.

        Why?

        Because Germany would be beholden to southern European banks with target2 claims against them, and the ECB would refuse to back collateral for such banks that did not meet the criteria.

        The losses are not simply losses in debt repayment but in interbank lending and guarantees. Taken together, the cost of a Greek exit alone is over a trillion. But if the same thing happens in Italy and Spain, the losses will be piled so high that Germany will leave and stop accepting such target2 claims on its banks (i.e. central bank).

        Everything depends on whether there will be a run on banks immediately after a Greek exit.

        If that happens, the eurozone collapses almost instantaneously with a Greek exit.

        Even worse, if a run on banks doesn't happen, the eurozone will still be unable to save Spain unless it changes its current policies--which it will not do.

        There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

        by upstate NY on Tue Jul 24, 2012 at 09:22:39 AM PDT

        [ Parent ]

    •  From the domino effects article (5+ / 0-)
      Recommended by:
      gjohnsit, semiot, gulfgal98, Gemina13, kurious
      So why would that be bad? Think of what it would mean for the other countries in the euro zone. How could the Italian government convince its people of the need for higher taxes or the Spanish government explain soaring unemployment if Greece were obviously better off outside the euro zone? Result: the entire European Union might unravel, with financial consequences many times greater than those resulting from Greece alone.

      Read more: http://business.time.com/...

      To live a creative life, we must lose our fear of being wrong. -Joseph Chilton Pearce

      by glitterscale on Mon Jul 23, 2012 at 06:08:10 AM PDT

      [ Parent ]

  •  Adding to the misery (7+ / 0-)

    Catalonia is literally on fire
    Catalonia's forest fires rage amid high winds

    And bailout talks are back, with US futures tanking in response.
    Spain in crisis talks with Germany over €300bn bailout

    Thanks for taking the time on this. It seems it is going to be a significant week for the EU. Your insights always help focus on what's important in what is confusing and/ or chaotic.

    'Cause the fire in the street, Ain't like the fire in the heart/ And in the eyes of all these people, Don't you know that this could start, On any street in any town ~ FZ

    by cosmic debris on Mon Jul 23, 2012 at 05:55:36 AM PDT

  •  At last, the guards are opening the gates (5+ / 0-)
    The sight of protesters on Spain's streets is nothing new. Young "Indignados" (Indignants) protested in their thousands against mass unemployment last year.
       But since Prime Minister Mariano Rajoy announced the austerity steps last week there have been daily demonstrations drawing groups that have previously stayed away.
       On Thursday, policemen and members of the Civil Guard took the unusual step of joining the protests.
       "It has gone beyond an ideological issue... and it's moved beyond the traditional groups that demonstrate. We have seen even the military threatening a demonstration," said Ramon Pacheco, a lecturer in Spanish politics at Kings College London.
       "It's difficult to make predictions, but it's more than likely that this government term could come to an end sooner than expected," said Fermin Bouza, a sociologist at Madrid's Complutense University.
    Without those guards at the gates, the banksters are done in Spain.

    To live a creative life, we must lose our fear of being wrong. -Joseph Chilton Pearce

    by glitterscale on Mon Jul 23, 2012 at 06:01:44 AM PDT

  •  Sicily represents what % of Italy's GDP? (3+ / 0-)
    Recommended by:
    gjohnsit, Gemina13, northsylvania

    Can anyone seriously claim that Sicily can be - as the "experts" said at the beginning of admitting there was a sub prime mortgage problem in relation to the rest of the mortgage market - "easily fire-walled" from the rest of the Italian economy?

    When you are right you cannot be too radical; when you are wrong, you cannot be too conservative. --Martin Luther King Jr.

    by Egalitare on Mon Jul 23, 2012 at 06:37:03 AM PDT

  •  As someone who is moving to Ireland in the next (2+ / 0-)
    Recommended by:
    gjohnsit, northsylvania

    6 months let me say that I could care less what happens to the markets. Whether Ireland is in or out of the Euro is an issue for the bankers, who should be in jail anyway. The fallout of the collapse of the Euro will be higher taxes on the rich or the real threat of massive strikes and potentially violent demonstrations. But Europe will survive. With or without the banker class being on top.

    The question is how long will people put up with austerity and further loss of benefits. Ireland seems to have escaped the worst but you are beginning to see bankers go to jail. Just today a senior banker was charged in the Irish courts and another is in jail for contempt of court for hiding money.

    Spain, Italy, Greece, and France are much more likely to get violent if the past is any indicator. And the authorities should be more worried about that.

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