The European Debt Crisis: Still A Major Problem With Global Implications

The European debt crisis has not gone away. Concern about Euro debt has ebbed and flowed in the markets for the last two years, but is still far from a solution. Periodically, various high-level meetings and resulting announcements of vague outlines of plans have led to quiet periods, only to re-emerge again when something happens that indicates that not much has really been accomplished, and that there are still serious problems ahead.

The latest eruption of worry burst forth as Unicredit, Italy's largest bank, had to offer more than a 40% discount to existing shareholders to buy two shares for every one held. The disheartening news set off a chain reaction, as the need to raise capital is not restricted to Unicredit, but applies to almost all Italian banks and many major financial institutions throughout Europe as well. As a result, bank stocks plunged throughout the continent and impacted the general markets as well. Interest rates climbed and the Euro broke below $1.28 for the first time since September 2010. In addition the European Financial Stability Facility (EFSF) had to pay much higher rates to sell 3 billion Euros of debt.

That isn't all. As potential harbingers of things to come, the Spanish regional government of Valencia is a week late in repaying a 123 million Euro loan to Deutsche Bank. We doubt that many in the investment community were aware of Valencia's finances before, but this is just the sort of thing that pops up out of nowhere during a financial crisis and snowballs into something much larger. Adding fuel to the fire, the Hungarian florint has hit a record low as the cost...

As EU banks fall apart, US banks holding derivatives on these banks and EU bonds will be on the hook to pay. Desperate and facing prospect that if they did not the entire global system will collapse, the Fed Reserve will instruct the banks thru informal channels to take money out of customer accounts and plug the global gap. Why? From the Fed Reserve, banker and US Treasury viewpoint if the system collapses the customers will lose everything anyway so they might as well as take the customer money and use it to deal with the current shortfalls and deal with the angry customers later. With this desperation and mentality all savings accounts, brokerage accounts, 401k, mutual funds, etc that bankers and Wall Street firms can access are in danger of being seized, firm declares bankruptcy and all remaining ones are frozen by the bankruptcy trustees that takeover and decide which creditor is paid off first (big bankers get first divs along with federal/state/local taxes) and what is leftover goes back to the customer. Of course the little guy can go to court and spend five to six years in legal fees to get his money back. What are the well connected doing, they are taking their paper currency out of their banking accounts and buying hard assets that will soar in value while everyone else will lose everything they had saved from the bank holiday.
Don’t we have FDIC? Remember MF Global. All customer accounts were suppose to be safe. Yet the gov regulators sat while the firm declared bankruptcy and customer accounts were seized/frozen by the bankruptcy trustees. Big creditors go paid while customers could not access their accounts.

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