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 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 6-May-2010
6-May-10 News -- Deadly riots in Athens shock the world

Web Log - May, 2010

6-May-10 News -- Deadly riots in Athens shock the world

European officials search desperately for a way to stop the approaching meltdown

Three die in violent 'anti-austerity' riots in Athens

Athens rioting: A Molotov cocktail explodes among a group of riot police <font face=Arial size=-2>(Source: Independent)</font>
Athens rioting: A Molotov cocktail explodes among a group of riot police (Source: Independent)

Three people were killed when left-wing demonstrators burned down a bank by throwing a petrol bomb. The Independent reports that over 100,000 protestors filled Athens streets to protest the austerity measures -- spending cuts and tax increases -- imposed on Greece in return for the promised aid package from the European Union and the International Monetary Fund (IMF).

These kinds of riots go on in various countries around the world without drawing as much attention. For example, similar riots in Thailand and Kyrgyzstan have been reported in the press in recent months, but without the massive worldwide public interest.

The interest in this case is caused by the fear that the riots will mean the collapse of the aid package, with follow-on effects causing financial crises in other eurozone countries and around the world. In particular, the violence may completely torpedo the aid package to Greece, leading to immediate default that would quickly spread to other countries.

There are two possible directions that this violence can go.

In some cases, these kinds of deaths cause everyone to pull back from violence and take another path. We've seen this in Thailand for example.

In other cases, the violence feeds into more violence.

The protestors have made it clear that they will continue their protests, but in the next few days we'll see whether the protests become more peaceful or more violent.

Officials fail to halt meltdown of euro currency

As we've been saying lately, portions of Europe's economy are in the midst of a full-scale panic and crash.

There have been a series of attempts by European officials to halt the meltdown by offering various different types of aid to Greece, although in most cases the "aid" was nothing more than words, as we've frequently reported.

This past weekend, Greece was offered 110 billion euros of aid, with the intention of stopping the financial deterioration of the eurozone. But it was as unsuccessful as the previous attempts. On Wednesday, the euro currency fell to below $1.28, it's lowest value against the dollar in 14 months. It was $1.45 at the beginning of this year. Yields on Greek 2-year bonds are around 15%, indicating that investors believe that a default has a very high probability.

The Greek "contagion" is spreading to other countries. According to Reuters, Moody's Investors Service says that a downgrade of Portugal's credit rating is likely. Interest rates on Spanish debt reached their highest levels since the launch of the euro, according to the Telegraph.

The article quotes Marco Annunziata, Europe economist at UniCredit, as saying:

"Contagion pressures continue to rage unabated. The flames have rushed through the firewall of the IMF/EU programme for Greece and now threaten other peripheral countries.

While the sell-off on sovereign bond markets so far remains discriminating, the risk that it might suddenly mutate into irrational panic can no longer be ignored. Eurozone policymakers need to take further steps quickly."

These are strong words, much stronger than might have been heard even a week ago, but they represent the increasingly desperate level of concern of analysts over a potential meltdown -- specifically in the form of a panic.

At the center of the controversy is Germany, the strongest economy in Europe, and chancellor Angela Merkel, who is increasingly being blamed for "causing" the problem by dithering too long.

Merkel is faced with the problem of convincing the Bundestag (parliament) to support the aid package for Greece, particularly Germany's 25 billion euro contribution to the package. She's quoted as saying:

"Nothing less than the future of Europe is at stake. The happy tale of German history since World War Two and our emergence as a free, united, and strong country cannot be separated from the European Union. We owe decades of peace and prosperity to the understanding of our neighbours. Europe today is looking to Germany. As the strongest economy in Europe, Germany has a special responsibility and it takes this responsibility to heart.

Immediate help is needed to ensure the financial stability of the eurozone. This must be done to avoid a chain-reaction to the European and international financial system, and contagion to other eurozone states. There is no alternative."

It's worthwhile to pause for a moment to explain why I focus on quotes of this sort.

Generational Dynamics studies changes in attitudes and behaviors of large masses of people, entire generations of people. These two quotes are important because they reflect major changes in attitudes among Europeans in just the past two weeks. These indicate that Europeans are increasingly anticipating the full-scale crash that Generational Dynamics has been predicting for some time. It's the desperate nature of these quotes that's significant.

The desperation is buttressed by more sober analyses.

Last week I quoted highly respected financial columnist Wolfgang Münchau as predicting that Greece would default next year, not this year. I pointed out that there was a logical inconsistency in this statement: If investors believe that Greece will default next year, then they won't want to invest in Greece this year, and so Greece would default this year.

Now Münchau has a new analysis in EuroIntelligence:

"The numbers still do not add up

The aim of the rescue package agreed for Greece cannot conceivably have been to prevent a default. For all the daunting austerity and structural reform it requires, the numbers do not add up. The main purpose I can detect is to reverse the rise in Greek bond yields and stop contagion.

We should not knock this deal from Athens. The eurozone might not have survived otherwise. This column would have been an obituary. I am also glad to note that those in charge gave a positive answer to a question I posed last week, which was whether the authorities would ever get ahead of the situation. They did, and they deserve credit.

But in spite of the readiness to accept extreme austerity, Greece will not get by without some form of debt forgiveness. I can understand why the International Monetary Fund and the European Union did not want to open that can of worms at this point. It would have prolonged the negotiations. In the middle of an acute bond market crisis one has to manage expectations very carefully.

A debt restructuring will eventually be necessary, however, because Greece’s debt to gross domestic product ratio is going to rise from its current 125 per cent to about 140-150 per cent during the adjustment period. Without restructuring, Greece will end up austere, compliant, and crippled."

This analysis pretty much rips apart all the assumptions that we're hearing from politicians and other analysts. And once again, we have the same logical inconsistency: If Greece is going to default (debt will require restructuring) in the future, then investors will not invest in Greece today.

With that in mind, let's go back to what Merkel said: "Immediate help is needed to ensure the financial stability of the eurozone. This must be done to avoid a chain-reaction to the European and international financial system, and contagion to other eurozone states. There is no alternative."

But in fact Münchau's analysis indicates that the "immediate help" does absolutely nothing to ensure the financial stability of the eurozone, or to avoid a panicked chain reaction. Since the aid package will have no effect on the outcome in Greece, it cannot have any effect on the outcome in the eurozone.

And we're seeing this in action. The violence in Athens means that the required austerity package may be watered down. The weakness of Greece has already spread to Spain and Portugal, and worsens by the day. And an analysis in Financial Times indicates that there's increasing concern of a default in Italy. And Merkel has already made it clear that the situation in Greece was unique, and bailout will not be repeated for these other countries.

As we've said several times in the last couple of weeks, there's only one desperate measure left, what the Europeans call the "nuclear option." This means that the European Central Bank (ECB) will issue hundreds of billions of euros in new debt ("print money"), and use the money to aggressively purchase bonds of eurozone countries. This would effectively bail out the individual countries, and prevent them from defaulting, but it's quite possible that ECB will then be in danger of default.

As regular readers of this web site know, from the point of view of Generational Dynamics, there's little doubt where this is going. Europe and the world are headed for a major financial crisis, worse than in the 1930s. Right now, readers should be aware that the rapidly deteriorating situation in Europe means that this crisis may be very close.

Additional links

The ten best geek characters in mainstream movies. The winner: Indiana Jones. Wired

Another sign of political realignment: A surge of black Republicans are running for Congress, the greatest number since Reconstruction, as an unexpected consequence of President Obama's election and the rise of the Tea Party. NY Times

Explosive traces have been found on debris from the sunken South Korean warship Cheonan. This confirms that the explosive that sank the Cheonan came from a torpedo, further implicating North Korea. AFP

(Comments: For reader comments, questions and discussion, see the 6-May-10 News -- Deadly riots in Athens shock the world thread of the Generational Dynamics forum. Comments may be posted anonymously.) (6-May-2010) Permanent Link
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