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XMFSinchiruna (26.50)

Your 5-Minute Wake-Up Call: The Dangers of European Debt Contagion



October 13, 2011 – Comments (19)

From the BBC program Newsnight; last week.

Host: "Let's suppose that political leaders remain dilatory or resistent, what happens?"

Dr. Robert Shapiro: "If they can not address this in a credible way, I believe within perhaps 2 or 3 weeks, we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We're not just talking about a relatively small Belgian bank; we're talking about the largest banks in the world, the largest banks in Germany, the largest banks in France. That will spread. It will spread to the United Kingdom, in part through sovereign debt problems in Ireland. It will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Brittain, and in Japan, and around the world. This would be, in my view, more serious than the crisis of 2008."

Lord Myners (served as Britain's Financial Services Secretary to the Treasury through the 2008 bank crisis): "I wish I could giver a more cheerful complexion, but we're on the verge of a perfect storm."

Later in the video, Dr. Shapiro speaks of the dangers that may lurk within what is NOT known about bank exposures and counterparty risk:

"We do know, in the United States, our banks have relativerly little exposure to European sovereign debt. They've been getting rid of those holdings for a year. However, no one knows the state of credit default swaps held by these institutions against sovereign debt and against European banks. Nor do we know the state of credit default swaps held by British banks. Nor do we know the state of credit default swaps held by British banks. Nor are we certain of how serious the exposure of British banks is to Ireland's sovereign debt problems."


Here is my discussion of these remarks with my take on the risks underlying the Eurozone crisis.


You never forget a near-death experience, and over my years I've had quite a few.

As investors, I believe we are wise never to lose sight of just how close we came during 2008 to some seriously horrific scenarios that could have proven quite fatal to our entire financial system.

In a moment, I will ask you to invest four minutes and 22 seconds of your life, in order that you may give serious and timely consideration to the possibility that right here -- right now -- the world may be far closer than most people imagine to seeing the European debt crisis spiral completely out of control.

But first, let's take a moment to recall just how close the United States and the U.K. came to suffering similar fates such a short time ago.

A pair of near-death experiences
As former Rep. Paul Kanjorski asserted in this astonishing appearance on C-SPAN in 2009, had the U.S. Treasury not taken bold action to stem an "electronic run on the banks" that gripped U.S. money markets on the morning of Sept. 18, 2008, then we could have seen "the end of our economic system and our political system as we know it." Kanjorski added: "If [the Treasury] had not done that, their estimation was that by 2 o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

I remember my jaw dropping to the floor when I first encountered that watershed admission, and I know I was not alone.

The United Kingdom faced its moment of truth a few weeks later, on Oct. 10, 2008. According to then-Financial Services Secretary to the Treasury Lord Myners, the U.K. banking system came within three hours of complete collapse, as the nation experienced its own major bank run. Talk about a trial by fire; Lord Myners had only been appointed to the post the week before!

So both the United States and Britain reportedly came within a few hours of experiencing complete meltdowns of their respective financial systems that would have triggered dire economic scenarios for the world at large. I find it humbling to recognize the underlying frailty of it all, and three years later I find little reassurance that a repeat performance has been taken off the table.

[There is much more to the discussion. Please click to the article here for the full article, and thank you in advance for reading, reccing, and retransmitting as you see fit.]

19 Comments – Post Your Own

#1) On October 13, 2011 at 6:02 PM, BillyTG (28.92) wrote:

I remember seeing the Kanjorski video the first time. Absolutely terrifying.  It's funny the truths that occasionally leak out when congressmen let their guards down a little. Why did no media or other congressmen comment on Kanjorski's remarks?  Without that youtube clip, we wouldn't even know.  We forget so easily, and then go back to stockpicking in a little bubble.

I agree that things are much more fragile than we are led to believe. There will be a tipping point in confidence where the big money and/or masses of people realize the fantasy that is our economy, starting a run on the banks, and the downfall, IMO, will be as rapid as Kanjorski mentioned.

Question for you: Given the nature of this post (read: possibility of global economic meltdown and "end of our political system as we know it"), why do you not hold bullion?  I've seen in other posts where you've mentioned being all in, but not holding any bullion. You mentioned being fully invested in stocks. Isn't that risky in a complete collapse? What happens to your broker if the economy disappears in 24 hours?

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#2) On October 13, 2011 at 8:25 PM, XMFSinchiruna (26.50) wrote:

BillyTG, I have nothing more to add on that. Everyone's situation is different.

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#3) On October 13, 2011 at 10:57 PM, SN3165 (< 20) wrote:

Sinch, what do you think of GPL's Q3 production ? I am pretty dissapointed

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#4) On October 14, 2011 at 2:18 AM, traderbach (< 20) wrote:


 Thanks for this!  I actually did watch this discussion on BBC & found it very much in line with the sage commentators that I have been following.  I personally am almost entirely cash right now because I would be surprised if they, the Euro politicians, can pull this together fast enough.  Even if they do I think it will be a rough ride for a while.  Enjoyed your article also.  So I'm presuming, as you included them towards the end of your article, that those half dozen companies are your prime picks right now for this situation.  I would tend to choose the larger beasts right now because of the potential lack of capitalization that would likely result from a degeneration in the sovereign debt situation, which could cripple or bring down many of the juniors.  Thanks for bringing this situation to the forefront here!  Many friends & associates I talk to  about investing do not seem to be fully cognizant of just how close to the edge we are right now.

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#5) On October 14, 2011 at 9:41 AM, XMFSinchiruna (26.50) wrote:


Below where I thought it would come in, but zero cause for concern to a long-term investor. I'll be visiting the Guanajuato mine soon, and will get the complete story for you. :) But given the lower grades encountered in Q2, it's not surprising to have that continue as we wait for their working mine faces to get back into the typical ultra-high-grade ore.

We GPL investors are spoiled. :) Their grades have been so consistently phenomenal, that we get rattled by 175 g/t silver for a quarter. They'll be back into the good stuff soon, as they indicate below.

The deeper extensions of the Alto 1 and 2 zones have been explored and found to be significantly higher grade (see Company news release of August 30, 2011). While mining of these zones was expected in Q3, a short term delay, to allow for the additional diamond drilling, means that production improvements from Cata are now anticipated in the fourth quarter with the addition of high grade ore from the Alto 1, 1a and 2 zones at the 510 level.

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#6) On October 14, 2011 at 9:47 AM, XMFSinchiruna (26.50) wrote:


Aside from a strategic cash stockpile that I will use to buy into any shortlived weakness, I remain fully invested in gold and silver stocks. The larger, low-to-zero debt guys are undoubtedly some of the safest, but I remain entirely comfortable with my junior and even micro-cap components. Lot's of capital will be fleeing traditional allocations, and looking for somewhere to go ... I think a sizeable chunk will end up in gold and silver.

And to be clear, I'm not so much preparing for the complete meltdown of the financial system, as I am for the responses of nations and central banks to the increasingly visceral threat of such a meltdown. The bigger the crisis, the more massive the global QE and stimulus. They know no other way.

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#7) On October 14, 2011 at 10:36 AM, SN3165 (< 20) wrote:

My short term plan is cash (UUP), ultra short financials and short dow as a short term bet... but then re-entering pm stocks at some point.. this whole Greece this is far from over.

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#8) On October 14, 2011 at 11:21 AM, XMFSinchiruna (26.50) wrote:

SN, Am I to interpret that to mean you have exited the sector entirely for the time being? I certainly hope you're sticking to more graduated and methodical moves than that. And relying upon a derivatives-based vehicle while anticipating a potential financial crisis might not be the safest course either.

If Europe attempts to draw a defensive line around a Greek default by executing a massive, as-yet-unannounced, and potentially even leveraged injection of liquidity alongside aggressive QE, you could end up being quite surprised by the behavior of gold and silver even if the result were relative spike in the USD. Furthermore, given the ramifications of that sort of chaos to the US economy, such events place U.S. QEIII firmly on the radar.

IMO, this is not a time for one or the other, but rather a combination of pm exposure and cash.

Good luck to you, but I don't like the sound of your approach here.

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#9) On October 14, 2011 at 11:40 AM, leohaas (29.26) wrote:

"If [the Treasury] had not done that, their estimation was that by 2 o'clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

"So both the United States and Britain reportedly came within a few hours of experiencing complete meltdowns of their respective financial systems that would have triggered dire economic scenarios for the world at large."

And yet there are STILL people who argue that the US (and Britain) just should have let that meltdown happen! Can you believe it? Keep on harping about how good Libertarian dogma is!

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#10) On October 14, 2011 at 11:43 AM, XMFSinchiruna (26.50) wrote:

Did you guys see this article by my fellow Fool Brian Stoffel?

I found it to be an exceptional piece of writing, and hope you enjoy it too.

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#11) On October 14, 2011 at 12:03 PM, amassafortune (28.97) wrote:

At the individual and family level, don't overlook paying down debt as part of a worst-case financial scenario. This is one way to counter many of the unknowns today.

If we really do get to an all-out collapse, that will probably also mean currencies collapse or show extreme weakness. A typical governmental response in these situations is to devalue. This does not mean individuals get to pay back loans with devalued currency - balances of loans to individuals held by banks would be adjusted accordingly. If currency is devalued by 20%, your loan balance gets adjusted up by 20% to help the banks survive.

For individuals, paying off debt is one of the few ways a payback is nearly guaranteed in this financial environment. 

As for holding physical PMs, consider that if some of these paranoid predictions come true, food, water, and PMs are all heavy. Once it comes out of the ground, it must be protected. When things get really bad, people tend to bury it again. I prefer to hold partial ownership to proven deposits, especially now that miners have lagged physical for some time.

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#12) On October 14, 2011 at 12:25 PM, XMFSinchiruna (26.50) wrote:


I am one of them, proudly. The time to let it all delever and cleanse was at the beginning, before raising the stakes so much higher still by impairing sovereign debt alongside the rest.

Had we let the dominoes fall, we would today be in the midst of a horrific and protracted great depression with unsavory ramifications for each and every one of us. But the leverage and toxic assets would have been cleansed from the system, and we would be about our business rebuilding the global economy in a more sustainable fashion.

Instead, here we are 3 years later with so much of that leverage and toxic soup still festering in the shadows of corporate and public balance sheets, but now with sovereign debt itself placed in the croshairs of the next phase of the crisis. If you believed as I do that no quantity of sovereign backstops nor monetary easing will suffice to permanently avert a crisis of now even greater scale, then you too would be wishing we had opted for Plan A.

As the Bank of England's Governor Mervyn King pointed out:

"Dealing with a banking crisis was difficult enough, but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop."

And from Deutsche Bank CEO Josef Ackerman:

"It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels."

The core of our predicament is more about the assets we can't see than it is about those of which we are presently aware. Dr. Shapiro also speaks to that point in the above video clip. The public's overall awareness of the situation is based primarily upon mark-to-model asset valuations. If the banks had to switch to a more truthful accounting methodology today, I doubt there'd be a solvent one in the bunch!

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#13) On October 14, 2011 at 12:58 PM, L0RDZ (87.62) wrote:

So who got held accountable for this ??

the common tax payer...

its sort of like an insulting tip added onto the end of a ridiculous  food bill for people  who you got suckered into buying dinner  with  additional taxations...

shakes head.


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#14) On October 14, 2011 at 1:37 PM, Bkeepr100 (< 20) wrote:

With the gobal interlinking of the banking systems, this crisis can quickly spread out of control. In 2008 we dodged the bullet. I have been following the news on this situation for some time.

There are too many "Classicaly trained" economists that are still calling for more governmental spending to hold off this day of finally paying the piper. This is just purely wrongheaded Keynesian thinking.  I fully agree with you, Sinchi, that the QE series should never have been allowed to occur in the first place. The economic pain though bad at that time, will be made much worse by the governmental intervention. Like a junkie shooting up on Heroin, the QE effects are less and less for much more freshly created currency each time. 

We are soon to be entering the time of the Greatest Depression in the world. 

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#15) On October 14, 2011 at 3:01 PM, SN3165 (< 20) wrote:

Ha, not a chance. Looking back I should have rewritten that comment.  I'd say about 5-10 percent of my portfolio are in those positions

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#16) On October 14, 2011 at 3:08 PM, traderbach (< 20) wrote:

I'm w SN & Bkeekpr100 on this.  I hope to be wrong but I feel strongly that there is more downside coming, maybe much more, & that not staying mostly in cash for the mid-term would be throwing good money after bad.  At least I sleep better & that is no small thing.

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#17) On October 14, 2011 at 3:53 PM, XMFSinchiruna (26.50) wrote:

I'm trying really hard to raise cash, but man ... it's really hard to pull the trigger at these prices. :)

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#18) On October 14, 2011 at 4:03 PM, XMFSinchiruna (26.50) wrote:


phew! You scared me.  :P

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#19) On October 22, 2011 at 10:34 PM, memoandstitch (< 20) wrote:

Chris, a question about gold.

If Greece and other Eurozone countries default, the money supply will shrink and that leads to deflation, which is bad for gold.   Do you think holding gold is better than the US dollar in that scenario?

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