Is This The Beginning Of A Horrifying Stock Market Crash In Europe?

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Is This The Beginning Of A Stock Market Crash In Europe?Are we witnessing the start of a historic financial meltdown in Europe?  In recent days, two massive corruption scandals have greatly shaken confidence in European financial markets.  The first involves Spanish Prime Minister Mariano Rajoy.  It is being alleged that he has been receiving illegal cash payments, and the calls for his resignation grow louder with each passing day.  The second is a derivatives scandal at the third largest bank in Italy.  Allegedly, there were some very large unreported derivatives deals that were supposed to help hide losses at the bank, but instead they actually made the losses much larger.  The investigation that is looking into this derivatives scandal is starting to spread to other banks, and nobody is quite sure how far down the rabbit hole this thing goes.  But what everyone does agree on is that this derivatives scandal has shaken up Italian politics, and the outcome of the upcoming election is now very uncertain.  Former Prime Minister Silvio Berlusconi is rapidly rising in the polls, and the European establishment is less than thrilled about that.  Meanwhile, stock indexes all over Europe fell rapidly on Monday, and even the Dow was down 129 points.  So will all this blow over in a few days, or is this the beginning of a full-blown stock market crash in Europe?


That is a very good question.  Perhaps there would not be so much concern if the overall European economy was doing well, but the truth is that the underlying economic fundamentals in Europe have continued to get even worse.  The unemployment rate in the eurozone is at an all-time high, and the unemployment rates in both Greece and Spain are now over 26 percent.  Much of southern Europe is already in the midst of a full-blown economic depression, so it really has been remarkable that the financial markets in Europe have been able to hold up as well as they have so far.

But now all of that may be changing.  Just check out what happened on Monday according to Bloomberg

National benchmark indexes declined in all of the 18 western European markets, except Greece and Denmark. Italy’s FTSE MIB Index (FTSEMIB) sank 4.5 percent, the most in six months. Spain’s IBEX 35 slid 3.8 percent for a sixth day of declines, the longest losing streak in 10 months. France’s CAC 40 plunged 3 percent for the biggest drop since April. The U.K.’s FTSE 100 dropped 1.6 percent and Germany’s DAX lost 2.5 percent.

Unfortunately, what happened on Monday was just the continuation of a trend that started last week.  The following is from Zero Hedge

The last four days have seen the biggest plunge in over six months with the IBEX (Spain -5.7%) and Italy’s MIB -6.7%. At the same time, Europe’s seemingly invincible OMT-promise-protected sovereign bond market has started to underwhelm. Italian bond spreads are 32bps wider and Spain 28bps wider – the biggest increase in risk in two months.

European banks have been hit particularly hard during this recent downturn.

Just check out some of the huge declines that European banking stocks experienced on Monday

UniCredit SpA: -8.3 percent

Commerzbank AG: -5.9 percent

Santander: -5.7 percent

Intesa Sanpaolo SpA: -5.4 percent

Credit Agricole SA: -5.4 percent

Société Générale SA: -4.8 percent

Banco Bilbao Vizcaya Argentaria SA: -4.7 percent

Those are huge moves for just a single day of trading.  If we have a couple of more days like that, everyone is going to be talking about a “stock market crash” in Europe.

Unfortunately, it does not appear that any solutions to the scandals that are shaking up southern Europe right now will be forthcoming any time soon.

In Spain, it is increasingly looking like the Prime Minister may actually have to resign.  A recent CNN article explained what the scandal is all about…

Rajoy denied on Saturday allegations that he and other leaders of his conservative People’s Party had received secret cash payments from a fund operated by the party’s former treasurer. Rajoy said he would publish details of his personal wealth and income tax states on the prime minister’s website.

Of course politicians all over the world are accused of doing evil things all the time, but in this instance it appears that there may be some solid evidence that Rajoy may not be able to deny.  The following comes from a Bloomberg report

Newspaper El Pais last week published allegations of illegal cash payments, featuring extracts from handwritten ledgers by the former People’s Party Treasurer Luis Barcenas showing payments to officials including Rajoy.

At this point, opinion polls are showing that even most of his own supporters do not believe him

Polls show that 60pc of his own supporters do not believe the official explanation. A national petition drive calling for his resignation has already collected almost 800,000 signatures. Socialist oppo­sition leader Alfredo Pérez Rubalcaba yesterday joined the chorus calling for Mr Rajoy’s head, saying the country had ­become “ungovernable”.

So definitely expect things in Spain to get worse before they get better.

Meanwhile, the derivatives scandal in Italy continues to get more “interesting”.  Italy’s third largest bank is on the brink of collapse due to huge problems with derivatives contracts, and that bank just happens to be closely linked with the Italian politician that is currently leading in the polls

The Italian scandal is related to Italy’s third-biggest bank, Monte dei Paschi di Siena, which has received two government bailouts and may yet have to be nationalized as its losses mount.

The bank is closely associated to Italy’s Democratic Party, whose leader, Pier Luigi Bersani, is leading in the polls, though slipping from his highs as former prime minister Silvio Berlusconi makes a late surge before the Feb. 25th general election. “The Monte [banking] scandals now look like overwhelming the Italian election campaign and put [Mr.] Bersani and the Democratic Party’s victory at risk,” James Walston, political commentator at the American University of Rome,  said in his Monday blog.

The Monte scandal centres on allegedly unreported derivatives deals that were apparently designed to hide losses and instead made the losses deeper. The bank, now under new management, has admitted that the derivatives losses might total more than €700-million.

So who benefits from all of this?  Well, it turns out that as a result of this scandal former Prime Minister Silvio Berlusconi is rapidly gaining more support.  The following is from a recent Telegraph article

In Italy, ex-premier Silvio Berlusconi has upset the political landscape just three weeks before elections, surging back into contention with vows to rip up “German-imposed” austerity policies and cancel a hated property tax.

His Right-wing alliance has risen to 28pc in the polls, relishing a widening scandal at Banca Monte dei Paschi that has embroiled the Italian left.

But even if none of these scandals had happened, it was inevitable that the gigantic debt bubble in Europe would end up bursting at some point.

In fact, the entire globe is on the verge of a debt implosion.  This was something that Bill Gross of Pimco discussed in his February newsletter

So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.”

No debt bubble can expand indefinitely.  At some point it can no longer hold itself together.

Europe is rapidly approaching that point, and so is the United States.

So how much time do we have left?

Feel free to share your thoughts on that question by posting a comment below…

European Central Bank - Photo by Eric Chan

  • Europe has gone down the road of bankruptcy for a long time. It has been held at bay by foreign aid from us.
    The problem is socialism. Cradle to grave security from the local governments. The problem is social medicine as well. It is costly. The value added taxes were supposed to take care of it. But the entire story is hidden taxes. The problem is socialism does not really work even when supplemented with government funds.
    Britain is just as bad. The mind blowing thing is that everything costs too much. A simple USB printer cord in Britain costs almost $15. I can get it here on the open market for much less. The word is competition in an open market place. It brings down the cost of things.
    Capitalism works. Socialism doesn’t. The jungle works. The natural competition keeps things both inexpensive and competitve. When government gets involved the prices keep going up and up.
    The European Union is breaking up. The cost of supporting all those people not working will break an economy.
    So now the worst offenders are going belly up.
    The banks are not the problem. They are sitting on a time bomb. The bomb is they are all bankrupt. A lot of banks have gambled on a continuing increase in profits from expanding industry. It hasn’t happened. And that is the bomb I speak of.
    To everything there is a season. This is the season of winter come to the financial institutions all over the planet. It is the season of destruction of those not fit to survive.

    The ones that are left will eat the banks that did not make it.

    • alan watson

      Sounds like the good old USA doesnt it? We now have more people here taking than we do paying in and our govt printing more and more money and a good majority are to ignorant to realize that you can’t turn out worthless paper forever and when it falls apart it won’t be nice for the takers when the govt teet they have become dependent on runs dry will it

    • wotevs

      No, the problem is white collar criminality being permitted on an industrial scale, even after the global economic crash that resulted from it. The banks may not be the problem in your opinion, but if such were the case, that would only because the politicians are for being their doting servants. But hey, maybe you don’t think rate-rigging or money laundering are crimes worthy of a criminal convictions.

      The USA returned to a state of normality after the Wall Street Crash not because of a fiscal stimulus or the Second World War armaments boom, but because they jailed the criminals who caused it and regulated the banks with Glass-Steagall. It’s fine you think socialism is to blame but the 30 years during which

      If you want another disaster like the Great Depression followed by another world war, by all accounts keep cutting taxes and spending and keep doing nothing whatsoever about financial crime. And don’t forget to bail them out when the shit hits the fan again, since it’s heresy under neoliberal religion (moneytheism) to nationalise failing institutions.

    • dixie

      If capitalism works then why the big welfare checks to the bank boy?

    • Nexusfast123

      You have no idea what you are babbling on about. Superficial and childish drivel. Have you ever left your town, state, US? Capitalism is well and truly screwed. The reason for the debt is all the Trillions used to bail out the thieving banks. Has nothing to do with anything else.

      The only reason you are not mired in rampant inflation on the US is that the US Dollar has some value as other countries have to hold it to trade. The US can continue to debase its currency but at some point this will cease.

  • nilst2011

    Exactly the same will happen in USA. USA live on money that don’t exist….

  • WarriorClass3

    Hopefully people will figure out the evil of central banks, like the privately owned Federal Reserve, which is the conduit for the massive fraud in the financial markets. There will always be corrupt people and politicians, but central banks allow theft on a world wide scale.

  • Hondo

    Hey, everything is going to be okay. I just saw a news article in the lame stream media saying that Europe and stocks were recovering better than expected.
    Did you forget to put on your rose colored glasses this morning, and drink your kool aid? ;)

  • everything based on CNN and Bloomberg articles is just another distraction…central euro-bank and all stocks are owned by same world-hoax-reserve elite,and numbers will continue to do what these bosses say (command)..all these analyses are as far from reality as they could be. In my humble opinion..:)

  • leeholsen

    no, europe is okay for now; this will pass. at some point they’ll have to deal with their debt but they dont have to right now, so just like the US govt; they’re going to wait to do anything until they absolutely have to.

  • THEanon

    A little soon to be making speculations, eh? I’d wait a few days or months before making such a guess.

  • piccadillybabe

    The UK’s financial regulatory commission is passing some pretty stiff laws governing the banks in the UK. They will not longer be able use investor’s/residential money for risky financial hegding and betting. They are going to separate these monies and they will be off limits to any kind of risk, under lock and key. If anyone within the system tries to gain access, they will be arrested go through their judicial system and be tried under full extent of the law. Maybe when the US gets as bad off as the eurozone, we will finally take similar action.