New Rules for Banks will Change the World: Equedia Weekly Newsletter

By Ivan Lo for the Equedia Weekly Newsletter
http://equedia.com

Things are beginning to change. Banking systems are about to unravel. Soon the world will be a much different place, starting with Europe.

Last week I said the ECB would cut rates on the 5th; they did just that. I expected more stimulus from Europe; the Bank of England did just that, raising their QE by another £50 Billion. Then China surprised everyone with yet another benchmark interest rate cut.

But was it really a surprise to those who have been following the underlying tones of the world economy?

For the last few years I have pounded on the notion that the world will continue to stave off its financial collapse by printing more money and do whatever it can to hold off outright disaster.

The people on Wall Street, Bay Street, and Howe Street all walk around talking about how bad the economy is, yet believe that things will be okay because policy makers will do whatever they can to prevent the inevitable from happening. So far the policy makers have done just that. But how much more can they do?

The policy makers are trying to prevent the further destruction of wealth. Yet in order to do that they have print more money. Printing money destroys wealth through debasement. Either way, wealth is destroyed. At some point the things they have put in place to avoid disaster will blow up.

Europe's banking system will need to be saved. As I mentioned last week, it all starts with federalizing Europe's banking system through a European-wide banking supervisor. After the recent rate cut, this will need to be done quickly.


Europe Blacklisted

JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. and BlackRock Inc. (BLK) have just closed European money market funds to new investments after the ECB lowered deposit rates to zero:

From Bloomberg: "JPMorgan, the world's biggest provider of money-market funds, won't accept new cash in five euro-denominated money- market and liquidity funds because the rate cut may result in losses for investors, the company said in a notice to shareholders. Goldman Sachs won't accept new money in its GS Euro Government Liquid Reserves Fund, and BlackRock, the world's largest asset manager, is restricting deposits in two European funds. "The European market environment is in unchartered territory with such historically low -- or even negative -- yields for high-quality issuance," Goldman Sachs (GS) said in a memo to fund shareholders, citing the ECB's rate cut. "It is not currently feasible for our portfolio managers to deploy capital without substantially diluting the yield for the existing base of shareholders." The ECB yesterday reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero. Money funds have been struggling to invest client assets at a profit as interest rates globally are near record lows and Europe's sovereign debt crisis has reduced the supply of available debt. Managers have been forced to cut fees to keep customer returns above zero, and some have abandoned the business. All three firms said the restrictions are temporary and they will monitor market conditions. Investor redemptions from the funds are not being limited."

That means money will be coming out of European money markets...but won't be coming back in. This is yet another blow to the ailing countries in the eurozone already suffering from fundraising difficulties (see It's Time to Get Stinky). It also means euro central banks will have no other option but to step in as lenders or face financial collapse of their banking system.


As I mentioned in past letters, when money can't be made in other markets, they will begin to flow into the one market with value: gold.

The governments of the world will continue to print more money because it has no other choice. As a result we will see volatility in all currencies and inflation will eventually rise. I stress that we remain in a natural state of deflation for now (see It's Time to Get Stinky) which only encourages policy makers to step up the printing press.

A few weeks back I said that Bernanke implied he would print more money:

"By his own words, Bernanke has already told us they will do more: "If we are not seeing sustained improvement in the labor market that would require additional action. We still do have considerable scope to do more and we are prepared to do more."

Stocks are once again falling following the U.S. government's report that only 80,000 jobs were created in June, the third straight month of weak hiring. The unemployment rate remained at 8.2%. Will Ben take action soon?

I don't think he has a choice.

Gold is as Good as Cash...Again

The new Basel III Accord is set to take effect early next year. BASEL III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11.


In the new Accord gold will be promoted to tier 1 status and carry a zero risk weighting; gold currently carries a risk weighting of 50%.

In response to the new Basel III Accord, a   letter was issued by the federal bank regulatory agencies with new rules proposed that would revise the measurement of risk-weighted assets by implementing changes made by the Basel Committee on Banking Supervision (BCBS) to international regulatory capital standards and by implementing aspects of the Dodd-Frank Act. Under the new proposed rules issued by the federal bank regulatory agencies, gold bullion will also carry a zero risk weighting as it has been proposed in Basel III.

In short, that means banks will be allowed to carry gold and consider them tier 1 assets, right alongside cash. Basel III also states that banks must increase their tier 1 holdings from 4% to 6%%. That means banks will have to "cash up."

How will the banks increase their tier 1 holdings as currency continues to lose purchasing power?


Last year I mentioned that Switzerland's central bank returned to a profit in the first nine months of 2011 because their gold holdings helped counter losses on their currency reserves. If you were a bank and had to increase your tier 1 holdings, would you buy gold or currency? Central Banks around the world have already been hoarding gold. But they've only just begun... 

No Guts, No Glory

Consider that hundreds of billions of dollars may soon be available as a result of investors exiting the European money markets. Also consider that global banking institutions have been losing billions of dollars in riskier investments and are under serious pressure to keep a tighter ship.


Where will these institutions invest their money when their traditional investments are providing negative returns? The only safe asset I know that has continued its climb over the last decade is gold.

Institutional investors here at home are packing their bags for their two-month summer vacation. This will leave countless deals unattended and buy side liquidity dry. That means there could be further bargains on the gold and silver stocks you have been so patiently watching.


That also means the big sellers have left the market. As a result, little volume on the buyside could push many of these juniors higher.

The smart guys are seeing buying opportunities in a sector that is clearly undervalued while retail investors remain scared. For the last year and a half gold stocks have trended down right alongside the TSX Venture.

But that's the nature of the business. No guts, no glory.

Until next week,

Ivan Lo

Equedia Weekly  

Source: http://equedia.com/blog/view.php/New-Rules-for-Banks-That-Will-Change-the-World

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Inflation Potential Looms as the Banking System is Re-capitalized

By Shah Gilani
www.moneymorning.com

The implications of Shah's analysis here can be summed up with the following: The efforts of Central Banks to re-captialize the banking system could lead to inflation, and the catalysts for inflation are lurking close.

The Libor scandal is about to get a whole lot worse.

And that's the good news...

Not only are at least 20 more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal.

And that's bad news for central banks around the world.

Well, actually, it could be good news, as in really good news, if it's the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world's big banks.

First the good news.

It's already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on "panels" that submit internal bank borrowing cost data to Thompson Reuters. And Reuters averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) "fixings" (not my word, but actually the established nomenclature for what it apparently is that they do... as in "fix" rates). And it's all under the auspices of the British Banking Association.

What's good is that we now know for a fact that the traders (crooks?) were aided and abetted by their co-workers, the submitters (crooks?), who were overseen by managers and top executives who design most of these schemes (crooks?), and were all blessed by the British Banking Association, an illustrious association of 200 some-odd banks, whose many members (crooks?) are panel members submitting crooked (no question mark necessary) data.

Still don't get why that's good news?

Because it's proof there are crooks out there.

And this time it's easy to see where the "fix" actually occurs.

It's also good news because, according to one multinational banking executive, just quoted in The Economist, it's "the banking industry's tobacco moment."

He was referring to the potential mountain(s) of litigation being drawn up already to claim that gross manipulation of interest rates caused billions, maybe trillions, of dollars of harm to borrowers and financial players of all stripes.

Remember, back in 1998, Big Tobacco had to settle class-action suits related to death and injury from cigarettes and other tobacco use. (These plaintiffs argued that tobacco companies knew of the health risk of smoking and failed to warn consumers.) These lawsuits cost them over $200 billion.

The bad news is the Bank of England, one of the world's stalwart and oldest central banks, is about to face its own potential Lehman moment (at least we can hope). That's on account of the fact that Paul Tucker, deputy governor of the Bank of England (and its supposed next top dog), is going to have to come clean in front of Parliament very shortly.

Mr. Tucker is apparently on record (according to Bob Diamond's phone call notes) suggesting that the Bank of England wanted Barclay's to manipulate it's Libor submissions downward so as to not panic counterparties and the country who might view tight interbank lending conditions as a sign of stress across the entire banking system.

So, here's why the bad news for the central bank (encouraging, no, make that, demanding fraud) is really good news for free markets.

Central banks have done nothing to countermand the trend (nothing but encourage) leading to big banks getting bigger; so big, in fact, that now all of the big banks around the world are all too big to fail.

The bigger the world's banks are (bankers want size, because more size equals more power to price, to manipulate markets, and to pay bigger bonuses), the more important central banks become, both to the big banks, nations, and the global economy.

Central banks are the saviors of big banks that get in trouble, especially when systems and economies are leveraged for profits that backfire, and they all have to be bailed out.

Central banks are supposed to be above what's going on below their ivory towers, but, in fact, they are the puppets being manipulated by the big banks. It's a case of the tail wagging the dog.

Why are central banks pouring money into banks, really? Why aren't governments printing money to pour into ailing economies but instead aiding and abetting central banks?

It's because central banks are independent supra-national bodies who have been ceded monetary power by governments almost everywhere to benefit banks and bankers the world over, who are their only constituents, and for all intents and purposes, effectively "own" legislators and governments.

They're pouring money into banks to keep them solvent. That's what central banks are there for. The banks aren't lending the money (massive reserves are sitting on balance sheets to shore up appearances) because they need it to meet reserve requirements and offset the illiquidity evident in the interbank lending market... the same interbank (Libor) market that the Bank of England wanted to make look more liquid than it was viscous back in 2008.

But it gets worse.

What will happen when the "multiplier effect" takes effect? I'm talking about the potential for massive inflation when all those huge quantities of reserves (stimulus) get lent out instead of shelved on balance sheets.

How about massive inflation?

Heaven help us if all these macro crises are fixed quickly. The flood of idle cash and credits globally will make past inflationary bursts look like a 40-yard dash, compared to miles and miles of potential problems ahead of us.

We need free markets, not manipulated markets. We need to break up all the world's big banks so they can fail when they overleverage themselves and entire systems, nations, economies, and the global economy aren't all brought to their knees.

If we break up all the too-big-to-fail banks, we won't need central banks. We can go back to what are supposed to be free markets dictating interest rates and creating honest, open economies and opportunities everywhere.

Who's with me?
Shah

About the Author


Shah Gilani is considered one of the world's foremost experts on the credit crisis. He not only called for the implosion of the U.S. financial markets, he also predicted the historic rebound that began in March 2009. Shah is the editor of Capital Wave Forecast and Spin Trader. He also writes Money Map Press’s most talked-about publication, the Wall Street Insights & Indictments e-letter, where he reveals how Wall Street's high-stakes game is really played, and how to win it. Learn more about Shah on our contributors page.

Source: Central Banks are the Problem:

Gerald Celente (07/08/2012): LIBOR and The Criminal Activity of Banks

Gerald Celente: Founder & Director of the Trends Research Institute - Gerald discussed big news, story of the 21st century, who has taken over, global activity, gold and much more with King World News. Many consider Gerald to be the top trends forecaster in the world. Gerald has been quoted and interviewed in media throughout the world such as, CNBC, Fox, CBS, ABC, NBC, BBC, Time Magazine, New York Times, Wall Street Journal, Business Week, FT, U.S. News, World Report, The Economist and more.

Source: King world news

The Next Phase of the Eurozone Debt Crisis

July 3, 2012
By Dr. Kent Moores
www.moneymorning.com

Monday, as we digested what happened in Europe, the obvious question arose: What comes next for the Eurozone debt crisis?

For starters, the heads of state coming out of the Council of Europe meeting last week pledged to have the new structure by July 9, even though the new stabilization mechanism will take longer to phase in.

For the first time, there will be a greater accountability (and control) over continent-wide commercial banking and access to some underwriting of debt coverage. It also means that national banking systems will need to relinquish some oversight to the European Central Bank (ECB).

For months, a number of people (myself included) have insisted that the solution to th e Eurozone debt crisis requires greater financial integration. The shortcoming seemed rather straightforward.

The EU had ushered in a more centralized monetary system (single currency and all that) but had no centralized fiscal system to parallel it. Simply put, that required adherence to currency rules without any ability to coordinate the credit and fiduciary end of the spectrum.

Well what came out of the Council in the early hours of Friday will not solve the debt problem in Spain , Italy , Portugal, or Greece. There is no magic short -term fix. But it might just provide the underpinnings for a credit system that may begin to operate.

The banks are the problem right now.

They are short on liquidity, have insufficient reserves, and operat e in a constricted interbank lending environment. Simply injecting new capital into the system will not address the problem.

Some banks need to fail.

But until the Council moved on Friday, no structure was in place to allow failures to occur without massive waves of panic. The Germans were correct that bailouts would not fix the problem .

Setting up a system of floated bonds would simply have required that taxpayer money in healthier nations - Germany, France, the Netherlands, Austria, the Scandinavian countries - would simply have been drained to address financial inabilities (or refusals) in weaker EU sisters.

We all seem to have relatives like that. You know, the ones who cannot get their financial act in order but know who to call when the rent comes due.

That was the shortcoming blown large in Europe.

So what has changed?

New Lines of Credit Emerge

The new stabilization system to replace the current Eurozone bailout program will have access to more money. It will, however, now have a price. Banks needing assistance will be handing over some of their control to receive a check.

And that handover will now include the stabilization entity (under the supervision of the ECB) taking equity positions in the ailing commercial houses.

For some over here, this smacks of the 2009 U.S. stimulus program . But I want you to keep one very interesting observation in mind. Aside from all the problems perceived in the American approach, the taking of equity positions in bailout recipients turned out not to be one of them.

The U.S. taxpayer has been paid back with interest.

Now that does not guarantee the same thing will happen in Europe. There some banks will close. The key there is to limit the contagion when that happens, and , to make this possible, a cross-border structure needs to be in place.

Until Friday morning, no agreement existed to set one up. That was the important decision made in Brussels.

The phrase "creative destruction" has always irked me. An economic system certainly needs uncompetitive enterprises to be replaced by those better able to adapt. But the human pain is always the down side in this process.

Let's face it . It will not be just banks that will close. The changing nature of the financial currents will also sacrifice companies in one country or sector of the EU in favor of others.

Now Europe is used to this and set up an entire system of support to make those transitions less painful. One of the main concerns moving forward is how much of that system will survive the changes coming.

On one extreme is the Greek model, where a huge percentage of the population is on permanent life support paid for by the government. On the other is Wisconsin - when things get tough, just limit workers' rights and balance the budget on the middle class.

Seems Europe has a greater responsibility than just pulling itself out of the swamp it created. We need somebody to start playing Goldilocks and find a manageable way that is somewhere in the middle.

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, emerging market economic development, and risk assessment. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. Those interested in Kent’s specific investment recommendations can check out his Energy Advantage newsletter, his Energy Inner Circle service, and his Energy Sigma Trader options service. Learn more about Kent on our contributors page.

View articles by Dr. Kent Moors

Source: Three Reasons Oil Prices are Gushing:

The Eurozone Crisis is Far From Over

June 20th, 2012
By Dr. Kent Moors for Money Morning
www.moneymorning.com

The Greek election last weekend has brought us a brief reprieve. The nation and the Eurozone have stepped back from the brink.

But the larger truth is that little has changed.

Yes, the Eurozone has survived its latest test, yet there is little indication where it will go from here. Considerable continental support for the common currency remains, and EU officials will soon introduce initiatives to consolidate banking and financial policy in the European Union. Still, the problems keep mounting, and there is very little resolve to fix them. At this point, a lot of actions (or lack of actions) could still upset the entire apple cart.

Greece must now form a government, gain widespread acceptance of tough austerity measures, and wrestle with widening unemployment, pension shortfalls, and reduced government services. With prospects still looking bleak, the streets will not be any calmer, especially with more than 50% of the nation's youth without a job.

The pro-bailout New Democracy party and its leader, Antonis Samaras, now need to form a majority coalition. Samaras must start with the No. 2 vote winner, Alexis Tsipras and the far left "let-the-rest-of-Europe-go-to-hell" Syriza party. Tradition requires that the primary vote earners discuss forming a government first. Tsipras may relent on using his newfound political strength in the interests of national unity, but I wouldn't count on it. The former communist student organizer has another agenda in mind.

Samaras and his conservatives will probably end up forming a government with the socialists. That is, itself, a clear statement on how disjointed European politics has become. The other sick patient is Spain. Actually, what is happening there has been on the radar for some time. With Spanish government 10-year yields above 7% in recent days, the bailout provided only a week ago now seems utterly insufficient.

It is becoming evident that the EU financial markets and a weakening banking sector will not be able to stem this rising tide. Something more needs to be done.

The Myth of American Isolation from the Eurozone

Make no mistake. All of the rhetoric floating around about how insulated the U.S. markets are becoming to the European debt crisis means very little. Yes, America is better situated and possesses a remarkable engine for generating return. However, if Europe starts to slide, the U.S. will be moving in tandem with it. Global markets need a European fix, but any genuine solution is likely to take some time. Still, there are some matters beyond dispute.

For one, despite the problems, European prospects (and thereby wide areas of investment elsewhere) are much worse off without the euro. Greeks may widely disagree as to what policy comes next, but polls consistently indicate that 80% of them want to remain in the Eurozone. For another, looking at the widening interest rates and declining stock markets one country at a time fundamentally misses the point. The EU has reduced the meaning of national borders, especially when it comes to finance. That means this is not a Greek crisis. Nor is it a Spanish, Italian, Irish, or Portuguese crisis.

This is a European-wide crisis.

And when a continental-wide currency exists, the fever will show up there. Unfortunately, the centralized apparatus to attend it is insufficient. The focus now, therefore, is on the relationship between two very different institutions. The first is the European Central Bank, and the second is the European Council. The ECB will need to inject additional liquidity into the Eurozone - and rather quickly at that. We may debate the overall propriety of stimulus projects, but without another dose now, Europe (and American) investment prospects are in for tough sledding. The bank knows that, but it will resist for one simple reason that brings us back to my earlier point. Without resolve and a concerted plan of action, stimulus programs merely move money from one place to another, ultimately contributing little more than a rise in inflation. ECB head Mario Draghi has already warned the EU that it should not expect his bank simply to cut checks (sorry, this is Europe; that should be "cheques"). He has moved the ball into another court. He has framed it (quite rightly) as a European Council matter. That body comprises the heads of state from EU members, and they are set to meet again at the end of this month.

The EU has reached a crossroads. It survives (along with its common currency) only by further integration. Retaining the quaint nationalistic customs of European postage stamps is endearing, but whether they are standing in a crowd before the Parliament in Athens or in a Madrid unemployment line, the average citizen is exhausted. And getting angry.


There is a reason that Tsipras catapulted to political prominence in Greece or François Hollande's Socialist Party followed up his presidential victory in France with a solid parliamentary majority in the other European election over the weekend. The heads of state must act, and decisively. If they continue to debate how to most effectively throw one or another under the bus, we are in for a long and agonizing journey to a fractured Europe. That development will hardly play well in Berlin, Paris, or Rome.

Or Peoria, for that matter.


About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, emerging market economic development, and risk assessment. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. Those interested in Kent’s specific investment recommendations can check out his Energy Advantagenewsletter, his Energy Inner Circleservice, and his Energy Sigma Trader options service. Learn more about Kent on our contributors page.

View articles by Dr. Kent Moors

Source: The Eurozone Crisis is Far From Over:

5 Ways to Avoid the “Spailout” and Sleep Soundly at Night

June 18th, 2012
by Kieth Fitzgerald, Chief Investment Strategist
www.moneymorning.com

It's unlikely the euro will survive what I'm calling the Spailout... meaning, the bailout of Spain, and the contagion to Italy, etc.

Believe me, you're going to be seeing and hearing this non-stop in the media for quite some time. And fear will be running rampant as a result.

I'm going to explain everything about the Spanish situation in a moment - probably more than most people care to know - but first, let me share something with you that's worth your attention.

You don't have to repeat the fears and frustrations of this financial crisis, let alone see a huge drop in profits.

So take a deep breath and think about these five things you can do right now that will help you protect your money, build your future despite this madness and sleep soundly at night.

1. Take advantage of stimulus-induced rallies to sell into strength and rebalance your portfolio. Many people think you want to sell your losers and let your winners run but that's not quite right. What you actually want to do is sell as the markets are rising (and demand is strong) and use the proceeds to shore up underweighted segments of your portfolio. Over time, this can dramatically improve your returns because it forces you to harvest winners and constantly capitalize upside potential.
2. Raise cash using your trailing stops to prune those holdings that do roll over - you are running them, right!! This is closely related to Item #1. Here, too, many investors make a classic mistake. They assume trailing stops are used only to protect against losses. What they fail to realize is that trailing stops are one of the most effective means available to capture gains. To use them properly, you want to ratchet them up constantly as stocks (or any investment, really) runs higher. You never reduce them. So, for example, if you buy a stock at $5 and it runs to $12.70 as NetQin (NYSE: NQ) recently did for my Strike Force readers, a 25% stop means you'd sell out at $9.52 and realize a healthy 90.50% gain...with no emotional turmoil, no hesitation and no fear of letting a healthy winner turn into a loser as so many investors do.
3. Confine new money to "glocal" choices put on sale. Focus on yield because it helps solidify your portfolio and hold down risk. Fragile markets and an unsettled future mean that quality matters more than ever before. I prefer big multinationals with fortress-like balance sheets, growing earnings and solid dividends right now because they're more stable than the broader markets and, indeed, entire countries at the moment. The key is not so much the diversification of risk in the classic sense, but the concentration of potential. I'd rather bet on savvy business leaders than feckless politicians any day.
4. Include specialized investments like the Rydex Inverse S&P 500 Strategy Fund (RYURX), the Rydex Inverse Government Long Bond Strategy (RYJUX) and gold in whatever form you prefer. The takeoff may not be immediate, but that's not the point. Hedges work over time, not just in the immediate moment. What you are doing is adding holdings like these to stabilize your upside and give you the chance to stay invested when times are tough.
5. Try not to overthink this mess no matter how ugly the headlines get. Believe it or not, the markets have seen far worse over the years, including the panic and depression of 1869-1873, the economic collapse of 1893, and, of course, the rout in 1929 that lead to the Great Depression. All proved to be tremendous buying opportunities for those who had the courage to go on the offensive and the knowledge to invest selectively.

Now let me give you the skinny on the Spailout and why it will destroy the euro as we know it.

The Problem with the Spailout

First off, last weekend's 100 billion euro ($126 billion) Spanish bailout has staved off the inevitable for now.

What most people don't realize, though, is that it actually spells disaster for the euro -- there simply isn't enough liquidity in the system and never has been. 100 billion euros is chump change.

A trillion euros is more like it. Probably more, to be quite candid.

Let me lay out the math that European politicians, whose skill set apparently consists of saying "present," rather than developing real solutions, can't be bothered to do.

According to the latest data, the European Stability Mechanism (ESM) and the European Financial Stability Fund (EFSF) have a combined lending capacity of 700 billion euros. If Spain requests the full 100 billion euros it approved last Saturday, this leaves 386.7 billion euros in excess capacity. The EFSF has already committed 213.3 billion euros.(700b euros minus 213.3b euros minus 100b euros equals 386.7 billion euros).


The problem is that Spain and Italy have combined total needs of 620 billion euros in the next two years alone.
If you're doing this math in your head, you'll quickly realize that's 233 billion euros more than the total bailout mechanisms now in existence.

Oops.

Call me crazy, but under the circumstances I don't understand how European leaders can pursue the same course of sorry-assed lending in Spain that they did in Greece and expect different results. It's simply irrational.

Don't get me wrong, I understand why they are trying to pull the wool over everyone's eyes. But in reality, who's kidding who?!

The markets know the politicos can do nothing to stem the tide of money flowing out of Spain any more than they could stop money from leaving Ireland, Italy and Greece.

The only practical consideration is preventing an all-out bank run through the front door - never mind that it's already well underway out the back door.

Frankly, I think they've failed on both counts. Deposits in German banks are up 4.4% year over year to 2.17 trillion euros as of April 30th, while deposits in Greece, Ireland and Spain fell 6.5% over the same time frame.

Swiss bank sight deposits have reached five-month highs of 252 billion francs as of June 1, according to the Swiss National Bank. CNBC is reporting that up to 800 million euros ($1 billion) a day is being pulled out of Greek banks alone. Data from Spanish banks related to withdrawals is being closely guarded, but I can't imagine it's that much different.

No wonder the world's traders recognize the Spailout for what it is - a colossal mistake.

I'd tell you what I think, but the legendary Jim Rogers put it so succinctly I don't believe I can do any better. Speaking in an interview on CNBC recently, Rogers noted that the Spanish bailout is "the most insane thing I've ever heard."

I agree.

Financial systems function because of an incentive to succeed that by its very definition includes the possibility of failure. You can't have one without the other.

Rogers noted this as well, saying that this is "the way the system is supposed to work - when you fail you fail - competent people come in and take over the assets."

As he put it to me a few years ago during a conversation we had in Singapore just prior to our bailout here (and I am paraphrasing), "history is littered with the bones of failed financial institutions. Why should this be any different?"

The problem in Spain is the same as it was in Greece. They're effectively handing over the reins and 100 billion euros to the same incompetent, incapable people who helped caused this mess in the first place.


A Euro-Comedy of Errors

Want proof? Look no further than how the 100 billion euros in "aid" is supposed to be disbursed.

The bailout cash is supposed to be put into the Fund for Orderly Bank Restructuring (who comes up with these names??!!) which has been created specifically to fund insolvent banks. Apparently the word insolvent doesn't bother them one bit.

But that's not the half of it.

This aid - and it's a stretch to call it that without turning into a drooling idiot - potentially adds another 10% to Spain's debt and takes it up to 80% at the end of this year. Factor in Spain's national and European debt and total debt to GDP exceeds 140%, according to Lance Roberts of Streettalk Live.

In other words, the Spailout just threw that nation into the ditch they've dug for themselves.

I can only shake my head and recall the Australian comedic duo of Clark and Dawes who impeccably summed this up, asking, "How can broke economies lend money to other broke economies who haven't got any money because they can't pay back the money that the broke economy loaned to the other broke economy and shouldn't have lent it to them in the first place because the broke economy can't pay it back?"

I believe that the EU ministers have acted, once again, in knee-jerk fashion and without a complete understanding of the facts. Or worse -- in deliberate omission of the facts.

Nobody knows how much money will ultimately be required. We won't even have an inkling until June 21st. That's when Roland Berger and Oliver Wyman are scheduled to turn in the results of their Spanish bank stress-test audits.

There is hope for a more complete picture, including audits of 14 of the largest Spanish financial institutions, but that data isn't going to be ready until the end of July...at the earliest.

In closing, I realize that what I've shared with you today may be scary...downright terrifying even. Do yourself a favor and take it with a grain of salt.

Despite that European politicians can't seem to understand the reality closing in on them like a gigantic anaconda, there are still companies busy building the future.


And those are the ones you want to buy no matter how bad it "gets."


Related Articles and News:

• Money Morning: No Bull: Could the 10-Year Note Hit 1%?
• Money Morning: Five with Fitz: What I See When I Look Over the Horizon
• Money Morning: Everything You Need to Know About Gold Prices
• Money Morning:The Five Questions You Need to Ask Your Financial Advisor Right Now

About the Author
Keith Fitz-Gerald has been the Money Morning team Chief Investment Strategist since 2008. He’s a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to being editor of the Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and the Strike Force service, which aims to get in, target gains, and get out clean. Learn more about Keith on our contributors page.

View articles by Keith Fitz-Gerald

Source: 5 Ways to Avoid the “Spailout” and Sleep Soundly at Night:

The Eurozone Bailout: Prepare for What's Next

June 15th, 2012
By Kieth Fitzgerald
www.moneymorning.com

"At this stage in the game, the thing you don't want to do is bail out. What you do want to do is make sure you have your protective stops in place, get your pencils ready because there's a possibility that many good companies are going to get put on sale, and history shows that you buy into massive sell-offs, not run the other way." - Keith Fitzgerald

Q: What will happen in Europe?

Greece chickens out. The G20 has its hands out and wants to have Germany's standard of living. Germany should leave the EU and preserve its economy. There is no reason it should sacrifice itself to pay for the malfeasance and incompetence of everybody else.

Politicians will kick the can down the road while hoping rumors of future action will carry the day.

To load the video, please visit moneymorning.com

Q: Will we get a bailout?

Will we get a bailout? - I think it's a foregone conclusion. The only question is whether or not we go through the front door or the back door.

I believe the Federal Reserve will get involved ultimately to bailout the European banking system, which will grind to a halt. This has significant ramifications at the very highest political levels in Europe and the United States, especially with the U.S. heading into elections and approaching a repeat of the debt debates.

Q: Would I own stocks going into this weekend when so much is on the line?

Yes. No question about it. At this stage of the game, bailing out is the wrong thing to do. Many good companies will get put on sale and history shows that you want to buy into chaos rather than run the other way.

Q: Finally, what will this global chaos do to gold prices?

I expect gold prices to drop initially, perhaps even sharply, as trading houses raise cash. But the moment a bailout is announced, watch gold head the other way. The only question at this point is the order: drop first, bailout later or bailout first, correct, and rise later.

Ultimately gold will resume its place at the head of the class. I still expect $2,000 an ounce or higher within the next 12 months.


Related Articles and News:

• Money Morning:
  5 Ways to Avoid the “Spailout” and Sleep Soundly at Night
• Money Morning: Three Reasons Why the U.S. Dollar is Really Rising
• Money Morning:
  Everything You Need to Know About Gold Prices
• Money Morning:
  Why the Spain Bailout Package Won't Work

About the Author
Keith Fitz-Gerald has been the Money Morning team Chief Investment Strategist since 2008. He’s a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to being editor of the Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and the Strike Force service, which aims to get in, target gains, and get out clean. Learn more about Keith on our contributors page.

View articles by Keith Fitz-Gerald

Source: The Eurozone Bailout: Prepare for What's Next:

Now is the Time to Buy Hard Assets on Sale: Martin Hutchinson

June 17th, 2012
By Martin Hutchinson
www.moneymorning.com

What happens this Sunday, June 17 , may be the trigger for a final resolution of the Eurozone debt crisis.

Now I understand that you probably don't follow Greek elections. But this is one you'll want to keep an eye on. At the moment, it dwarfs the contest between Mitt Romney and President Barack Obama. In fact, come Monday it will be what every banker, politician and trader is talking about.

In the balance is the very fate of the Eurozone. The ripple effects could be enough to actually bring the EU down. That's the first part of the story. Admittedly, it's not a very pleasant one. The second part concerns your portfolio, since the solutions will involve more money-printing and, in the long run, more inflation. But you needn't worry. We've already read the central banker's playbook for you.

In this case, the message is clear. Don't buy Europe. But do buy hard assets -- whether gold, oil, or other commodities. These safe-havens are one of the best ways to hedge yourself against these characters and their money printing schemes. Now that you know why Sunday is so important, here is how it will likely play out-in both the short term and in the long run.

The Make or Break Moment for the Eurozone

It all comes down to power of the ballot. If the far-left SYRIZA party under its sinister leader Alexis Tsipras wins, even the EU leaders will have no alternative but to throw Greece out of the Euro. It would be the only way to end that monstrous drain on the region's productive citizens.

However, even if the moderate Antonis Samaras manages to scrape his way to victory, he will be pressured to go back to the table to try to renegotiate the rescue deal just passed in March. And let's face the facts here. It is highly unlikely the German electorate is going to put up with this affront. You can't really blame them. If you were in their shoes, you'd feel quite fleeced already.

After all, the Germans have been the major funders of bailouts for Greece, Ireland and Portugal, all of them passed mostly at taxpayer expense. All told, hundreds of billions have been issued in new debt, not much of which looks likely to be repaid. And now, just last weekend, another 100 billion euro at ultra-cheap interest rate loans was offered to Spain to sort out its banking system. If you're a German voter, that must absolutely stick in your craw - especially since southern Europeans still have social welfare levels far above yours and aren't really interested in trimming them back.

Austerity?... "You can't be serious," they say.

In fact, France's new president Francois Hollande last week reversed an increase from 60 to 62 in the retirement age, and promised to make it much harder for companies to fire people. Meanwhile in Germany, it's much easier to fire people than it used to be, and the retirement age is an actuarially sensible 67.

How Much Can the Taxpayers Take?

There is also an additional factor that I apprised you of back in April. Called the "Target 2" payments system, it's a secret flaw that promises to blow yet another hole in the euro.

How big?...

Let's just say the Bundesbank is owed close to $1 trillion by the central banks of Greece, Italy, Spain and Portugal-every nickel of which is above and beyond the bailouts. Of course, if those countries default, the German taxpayer will have to bail out the Bundesbank, on top of any other obligations. It makes you wonder how much the German electorate can take before they decide to throw in the towel.

Either way, in the short-term you can expect more bailouts - regardless of which way the Greek election goes. At the moment, France, Spain, Greece, Ireland and the rest of the tottering dominos are simply "too big to fail." For investors, that means you need to stick to things of real value - especially as the central banks go into overdrive. But it won't last. When the Germans decide to leave the bar, the party's over.

Further Reading:

Martin's take on the Eurozone elections and their aftermath has been spot on. In this article on May 4th he predicted that Nicholas Sarkozy's days were numbered. Two days later, Francois Hollande began to grab the reins of power...

But what should concern you is what he said in this article. In April he warned that while everybody is watching Spain, it's France that could topple. Consider it something to put on your radar screen.

About the Author
Martin Hutchinson has nearly 30 years’ experience as a global investment banker – plus a reputation for being bearish at just the right time. Slate magazine singled him out as the financier who most accurately predicted how bad the 2009 bear market would turn out to be. Martin is the editor of the Permanent Wealth Investor, where he focuses on stocks that pay high, reliable dividends. In his Merchant Banker Alert, Martin uncovers the fastest-growing companies in the fastest-growing economies and brings those ideas back home to you. Learn more about Martin on our contributors page.

View articles by Martin Hutchinson

Source: Eurozone Debt Crisis: The Greek Elections are a Make or Break Moment:

This is How the Spanish Bailout will Impact Key Markets

By Michael Pento for King World News

With investors around the world wondering how the $125 billion Spanish bailout will affect trading, today Michael Pento, of Pento Portfolio Strategies, writes exclusively for King World News to let readers know exactly how this bailout will impact key markets.  Here is what Pento had to say about the situation:  “It was announced this weekend that Spain has requested and will most likely receive $125 billion (100 billion Euros) to recapitalize their banking system.  The money for the bailout will be channeled through the Fund for Orderly Bank Restructuring (FROB), whose funds count towards public debt.”

To continue reading, please visit the King World News Website:
This is How the Spanish Bailout will Impact Key Markets:

Ferocious Upside Potential in Gold

By Ryan McGuire for Gold Avalanche

I wrote this article on May 22nd, but didn't publish it because I really wasn't sure about whether my methods and analysis were correct. After some more research, I've decided to go to press with it.
 
Look at what is happening around the world - there is near certainty that Greece will have to exit the Euro currency system, Spain, Italy and France find themselves in ubiquitous positions with debt and anti-austerity government sentiments, China and the US are engaging in some stealthy currency battles (china is dumping us treasuries and allowing their currency to slowly appreciate against the dollar), The US is seeing negative real interest rates  (as well as most of the West), and emerging economies seem to be experiencing a temporary pause in growth.

The conference board of Canada, in it's recent commentary on the Eurozone, had this to say: "If the eurozone is to stay intact, many of its members have little choice but to keep cutting domestic wages and benefits and find ways to boost productivity ... [a Greek exit from the Euro Zone] is the most likely option in our view, and its probability is rising."

If the above three paragraphs don't provide you with enough reasons to own gold, then there may never be enough reasons aside from a mania. The world's economic powers have gotten themselves into a terrible position - JP Morgan's 3+ billion dollar loss on some bad (and frankly, stupid) hedges is a testimony to the level of leveraging the banking system is allowed to get away with. Remember, for every 1 dollar you put into the bank, the bank can leverage it out to up to $9 in real estate, market bets and hedges of various kinds. This is 'fractional reserve banking' in the broadest, simplest sense.


Back to gold, lets take a look at the Gold/S&P500 relationship. It is plain to see that bad news for the economy is very good news for Gold. Given the above situations, I expect that the bad news will eventually eclipse the good news (or any sense of good news) in the markets. It may not happen yet, as evidenced by the Dow/Transportation relationship, but there is an ominous something out there - and when it rears its head, we want to be more than ready to short the broad market and/or take our last exit and wait on the sidelines for the dust to settle.




On a more tangible level, when Greece finally is forced out of the Euro currency, or is forced into continued austerity and thus depression, things will likely get very hairy very quickly.

(Click on the image to enlarge)

Greg Weldon: Turbulence is Coming

This call was made a month ago ... This is well worth the listen. While the markets gyrate with every piece of news coming out of the Euro minefield, investors should keep strong company fundamentals in mind, understand the value of their money (or the devaluation thereof!), buy everything in tranches (not full allotments at one time), and rid your portfolio of the chaff.

We could be in for a very bumpy summer ....

Greece and the Eurozone - A Must Listen

Originally Aired January 20th, 2012

"If you're like us, when the words "European debt crisis" pop up in the news you feel a little worried, and a little like taking a nap. Turns out, there's a story behind this story. One that's filled with guilt, drama, betrayal, and 100-year-old dreams come true. Alex Blumberg of Planet Money guest hosts."

http://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup

Long Term Investors: Buy NYSE:ABB below $16

May 4, 2012

By G. S. Early, Contributing Writer

www.moneymorning.com

As investors, we constantly hear that the markets are forward looking. There is a good reason for that.

The future is precisely where smart investors need to be focused these days.

It doesn't matter whether you are investing for income or for growth, it is what's over the horizon that matters most.

One of those horizons is the "New Energy Age".

It's a place where technology is having an enormous impact on how we generate, distribute and consume energy on every level.

And the companies that embrace this paradigm shift are creating a whole new approach to the markets I call Innovation Investing.

One of the poster children for Innovation Investing is ABB (NYSE: ABB). A go-to player in every major market, including the United States, ABB is a must for any long-term investor.

The Story Behind ABB (NYSE: ABB)

The Switzerland-based company is a global leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering environmental impact.

For some that may sound "green" but for most of its customers, it's about improving efficiencies and the bottom line.

This is a company that is not only a major global player in all the major markets in the world-- developed and developing--but it does almost everything in the energy business. And usually it is on a scale that few others can match.

Plus, ABB kicks off a nice dividend yield that's approaching 4%.

But with all of these global opportunities for ABB, the company's recent quarterly numbers stumbled because China has slowed. That was enough for Wall Street analysts to begin to bail on the stock.

That's true even though ABB has been deeply involved in building out China's energy infrastructure, including China's smart grid. ABB has also been busy in China implementing new renewable energy resources as well as integrating them with traditional energy sources.

At this point, it is safe to say that China is both its brightest spot and its Achilles heel. However, investors shouldn't expect ABB's Chinese troubles to last for long. The opportunities are simply too great.

So for investors built of stronger stuff, and that have a calmer temperament than over-caffeinated Wall Street types, ABB is an excellent long-term "Buy."

Put it this way: If you think the energy and infrastructure sectors are going to be big global markets for the next couple decades, then ABB is a "Must-Buy," especially at these levels.

And while China recovers, ABB gives you the chance to buy the 21st century version of a widows-and-orphan stock at a great price.

China is Just Part of the ABB Story

But enough obsessing over China for a moment...

Here's what's been going on elsewhere in ABB in just the last four weeks:

In the U.S.: ABB received Department of Justice antitrust clearance to purchase Thomas & Betts (NYSE: TNB). The 130-year-old company is well-established in commercial and industrial construction, industrial plant maintenance, repair and operation, electrical utility distribution, and original equipment manufacturing.

ABB also won a long-term service contract from Carnival Corp. (NYSE: CCL) - the largest cruise ship line in the world - to maintain and upgrade ABB's Azipod equipment over the next 15 years for 20 ships in their fleet, cutting costs by as much as $1 million a year per ship.

In yet another contract, ABB secured $45 million from U.S. utility Oncor (formerly TXU), to provide electrical solutions that will increase transmission capacity, ensure grid stability, and facilitate the integration of renewable power in Texas.

In Europe: In Germany, ABB built a link from offshore wind turbines to the mainland grid which has a capacity to transmit 111 megawatts (MW) of clean wind power. That's enough to serve the needs of more than 100,000 households and help save up to 500,000 tons of carbon dioxide emissions per year, once commissioned in 2013, by replacing fossil-fueled generation.

In the Middle East, Asia and Australia: ABB has won a $60 million contract from Shell Gas Iraq B.V. to build a new power plant in southern Iraq. It also has won an order worth approximately $16 million from Mass Global Investment Co. for the construction of a substation and static VAR compensator (SVC) system that will supply electricity to a new melt shop and steel rolling mill in northern Iraq.

ABB also won a $70 million contract to execute substation projects for the Saudi Electricity Company (SEC), the country's national power transmission and distribution operator.

In India, ABB won an order worth $15 million from Delhi Metro Rail Corporation Limited (DMRC) to provide power solutions for a planned metro rail network for Jaipur, the capital of Rajasthan, a state in northern India. And the company is investing another $50 million to expand its power products manufacturing base in the western state of Gujarat.

In Western Australia, ABB has won orders worth around $100 million from Rio Tinto (NYSE: RIO) for 17 distribution substations to support increased production at iron ore mines.

In Japan, AAB won an order worth $60 million to provide complete power and propulsion systems for two new cruise ships to be built by Mitsubishi Heavy Industries.

So, as you can see, China is just a part of the ABB story. In the bigger picture, ABB is an investment in an energy future well on its way to becoming a reality.

What's more the stock went ex-dividend on Wed., May 2, so it's an even better deal now. Buy ABB under $22/share.

Gold Avalanche Note: If you are willing to take some extra risk (that is, risk that you won't get filled), try a bid at, or below $16. Our long-term trend analysis suggests that ABB is positioned to trade down into that range before assaulting new highs. There is also a chance that larger market trends could force ABB (and most equities) into a downward slope for a time. It is thus prudent to keep 5% of your portfolio in an inverse market fund like RYRUX.

source: http://moneymorning.com/2012/05/04/innovation-investing-now-is-the-time-to-buy-abb-ltd-nyseabb/

Look for $1,500 Gold & $22 Silver as Debt Crisis Worsens in Europe

By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning

Despite all of its best hopes, Wall Street will never escape what's happening in the Eurozone.

The 1 trillion euro ($1.3 trillion) slush fund created to keep the chaos at bay is not big enough. And it never was. Spanish  banks are now up to their proverbial eyeballs in debt and the austerity everybody thinks is working so great in Greece will eventually push Spain over the edge. Spanish unemployment is already at 23% and climbing while the official Spanish government projections call for an economic contraction of 1.7% this year. Spain appears to be falling into its second recession in three years.

I'm not trying to ruin your day with this. But ignore what is going on in Spain at your own risk. Or else you could go buy a bridge from the parade of Spanish officials being trotted out to assure the world that the markets somehow have it all wrong. But the truth is they don't. EU banks are more vulnerable now than they were at the beginning of this crisis and risks are tremendously concentrated rather than diffused. You will hear more about this in the weeks to come as the mainstream media begins to focus on what I am sharing with you today.

The Tyranny of Numbers in the Eurozone

Here is the cold hard truth about the Eurozone. European banks reportedly will have more than 600 billion euros ($787 billion) in redemptions by the end of the year. They come at a time when the banks have sustained billions in capital losses they can't make up.Worse, they've borrowed a staggering 316.3 billion euros ($414.9 billion) from the ECB through March, which is 86% more than the 169.8 billion euros ($222.7 billion) they borrowed in February. This accounts for 28% of total EU-area borrowings from the EU, according to the ECB.

There will undoubtedly be more borrowing and more losses ahead as interest rates rise further. The process will not be pleasant:

• Credit default swap costs will rise, pushing debt yields to new highs while at the same time making fresh Spanish debt cost-prohibitive;
• The Spanish government will force national banks to buy debt at higher rates, triggering capital losses on their bonds;
• Those same losses will trigger margin calls, forcing banks to unload segments of their debt and equity portfolios;
• Rinse and repeat steps 1-3 until there is no more money, the public revolts, the EU splinters, or all three.

Unfortunately, this vicious cycle is already under way.

The Big Boys Go on the Offensive

On Monday, Spanish 10-year bond yields pushed up to 6.07%. (Yields and prices go in opposite directions. If one is rising, the other is falling.) They relaxed slightly on Tuesday, but... At the same time, Spanish credit default swaps touched record levels, reaching 502.46 basis points according to Bloomberg News. That process actually began in February when traders starting upping the ante on Spanish debt.



Figure 1: Source: Bloomberg.com - CSPA1U5: IND

Credit default swaps pay the buyer face value if the borrower - in this instance Spain - fails to meet its obligations, less the value of the defaulted debt. They're priced in basis points. A basis point equals $1,000 on each $10 million in debt. Wall Street sells them as insurance against default. In reality though, they are like buying fire insurance on your neighbor's house in that you now have an incentive to burn it down.

Let me briefly explain how the playbook works. The big boys are going on the offensive and pushing the cost of insuring Spanish debt to new highs because they know that the Spanish government prefers more bailouts to pain. It's the same thing they did with Greece, Ireland and Italy. At the same time, they're shorting Spanish debt knowing full well that there will be massive capital losses as Spanish bonds deteriorate. What these fiscal pirates are counting on is the ECB and Spanish government riding to the rescue. At that point, they will sell their swaps and go long Spanish bonds, thus netting themselves a two-fer.

How to Play the Eurozone Crisis

This could be a good thing for savvy individual investors-- at least temporarily. The markets have become addicted to bad news. We cheer when central bankers step in with quantitative easing, conveniently forgetting things are so terrible we "need" it in the first place. We'd rather take one more "hit" than step away from the narcotics of cheap money. That's why I expect a rally when the ECB is forced to step in no later than Q3 2012.

Here's what to do ahead of time:

• Buy volatility when it's low. My favorite choices are either call options on the VIX or the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX), an exchange-traded note that effectively tracks the VIX. This will help you capture the initial downturn while also taking the sting out of your broader portfolio. At 18.85 the VIX is not as low as I'd like to see it, but not a bad entry point, either. If the VIX drops to 12-15, that's the time to be very interested in this trade.
• Sharpen your pencils and pick up shares of large "glocal" companies when they get put on sale in the months ahead. Many will actually use the downdraft to solidify their competitive positions and be stronger on the other side.
• Gold and silver are going to get whacked. This is not a problem for those with a longer term perspective - both metals are likely to be sharply higher in the years ahead. However, in the shorter term, gold is likely to trade down sharply as banks raise cash. I'll be looking to $1,500 or so as line in the sand. Silver's retracement will be more nuanced because it is a function of the perceived drop in industrial usage that will accompany an EU disintegration. In that sense it won't be as deep or probably as steep. I see $20-22 as a very attractive price.
• Short the euro. Go long German Bund futures and bonds. According to Bloomberg, the June 10-year bund futures contract is 140.43, or slightly below the record 140.51 it hit recently.
• Buy U.S. dollars. Longer term, they still stink but the world will run to them once again when the stuff hits the fan.

At the end of the day, thinking about all this is no fun. I know - I get paid to do it every day. When the fundamental environment is such a wreck, it can wear on you. It certainly does on me.

But you know what? That's not actually so bad, because big down days are actually profits in the making; it's how you deal with them that makes the difference.

Source: http://moneymorning.com/2012/04/19/why-wall-street-cant-escape-the-eurozone/

Keep a Keen Eye on France

By Martin Hutchinson, Global Investing Strategist, Money Morning

Commentators are wringing their hands again, worried the troubles in Spain could cause the whole euro project to collapse. As a result, all eyes are now on Spanish 10-year debt yields, which went above 6% last week as the threat of euro-chaos returned. But it's not Spain the markets should be worried about.

The reality is that Spain is not in too bad a shape and that a rescue would be affordable for the European Central Bank even if it was needed. The real tottering European domino to worry about is France. After all, it would be impossible for the remaining solvent members of the EU to bail out France if it began to fall.

The larger reality is that France's fiscal position is considerably worse than Spain's. The country's debt-to-GDP ratio was 85% at the end of 2011, while Spain's was only 66%. What's more, France's public spending is 56% of GDP, according to the Heritage Foundation, compared to Spain's 45% of GDP. Spain's current government has also instituted a stiff austerity program, mostly comprised of cuts in public spending, which will reduce its deficit below France's by 2013. Meanwhile, France's austerity has so far consisted almost entirely of tax increases on the rich -not actual spending cuts. Spending cuts, especially from governments which are overspending, may well stimulate GDP because they free resources for the more productive private sector, whereas tax increases generally worsen recession.

French Elections Hold the Key to the Euro

Whether or not France brings down the euro hinges on the outcome of its upcoming presidential election, set for two rounds April 22 and May 6. France's current position is very confused, to say the least. No fewer than five candidates have a chance to make it into the two-candidate runoff. The incumbent, Nicolas Sarkozy, is currently running slightly behind the mainstream socialist Francois Hollande, but three other candidates potentially could knock one or the other of the front-runners out of the second round.  They are Marine LePen, a nationalist; Francois Bayrou, a moderate; and Jean-Luc Melanchon, an extreme leftist.

Presumably if any of those three made it to the second round, they would be beaten by the remaining major party candidate, as was LePen's father by Jacques Chirac in 2002.  But it has to be said that electoral prognostication is exceptionally difficult. If Sarkozy or Bayrou win, nothing much changes; France remains committed to the current consensus Eurozone policies and the Eurozone probably "muddles through." But if one of the other three wins, there is going to be a big problem for the European Union (EU). LePen would be anathema to the EU leadership, so even if she committed to continue austere fiscal policies, the markets would probably react badly.

As for a Hollande or Melanchon victory, the commitment to government austerity is just not there. In the current nervous state of the markets, France's budget deficit could become impossible to finance. Hollande, for example, wants to reverse Sarkozy's earlier raising of France's pension age, while also pushing the top income tax rate to 75%. An election win by Hollande or (very unlikely) Melanchon would simultaneously weaken the credibility of France's own austerity program and weaken the Eurozone coalition that has imposed austerity on Greece, Portugal, Ireland, Italy and Spain. That would almost certainly cause markets to attack French government bonds, as well as stepping up the attack on Spanish, and probably Italian, government bonds.

The reality is that a France managed by an anti-austerity leftist, even a moderate one, is simply too far from Germany and Scandinavia in its fiscal management and economic outlook to remain part of the same currency zone. And even if Germany and Scandinavia wanted France to remain part of the euro, they don't have the resources to bail France out. Hence a Hollande victory at France's election May 6--currently believed to be at least a 50-50 probability--would almost certainly mean the end of the struggle to hold the euro together, and its collapse in failure.

Questions About France, Italy, Spain and the Euro

France, Italy and Spain - unlike Greece - do have ample resources with which to support their government bond markets, provided they control their own currencies. Since most of their obligations are denominated in euros, their debt/GDP ratios would rise, but probably only by 15-20% since a devaluation of that level would be sufficient to make them export powerhouses. Thus in principle a break-up of the euro need not lead to a world banking collapse, since the value of French, Spanish and Italian government debt would remain solid. However, all three countries would have questions about their future.

In France's case, the commitment of the new government to controlling public spending would be questionable. In Spain, the current government's position would be weakened. What's more, there would be a further round of banking trouble, as home mortgages denominated in euros would be secured only against houses valued in new pesetas. In Italy, the Monti government, imposed by the EU, would doubtless fall, bringing political uncertainty and further aggression by the country's powerful unions. And even if everything turned out to be okay in the end (except in Greece) the uncertainty would roil world markets, including in the United States.

For investors, that means it may pay to keep our heads down until the French election results are known.
While everybody is watching Spain, it is France that could topple.

Source: http://moneymorning.com/2012/04/18/france-may-be-domino-that-causes-euro-to-collapse/