If Europe Goes Argentina

[aa3]

This week with Ireland imploding and what seemed like a fail idea of lending Ireland another 85 billion Euros at 6% interest.. and serious questions about Portugal, Spain and Belgium, the Euro looks in real trouble.

Got me thinking about Argentina which ultimtely chose the printing and default option. Inflation went to 5,000% in Argentina and basically reset the savings and debts of the nation.

Bears don't want to admit it, but the big winners were not the prudent. The biggest winners were people who had huge debt and owned real assets. Like someone with a BTL empire. now there debts were only 1/50th the real value of a year before.

The super rich are doing everything they can to fight it, but the reality is countries like Ireland and probaly every European country except Germany need a reset. Where debt is wiped out, and the corresponding savings. Things like the average house traded hands at the price of a lifetime's earnings, and that money ended up in someone's bank accounts. But ultimately if the debt cannot be repaid, it gets defaulted on, and so the corresponding deposit/bonds must disappear too.

The Sovereigns were hoping they could backstop these debts, but like some of the uber bears were saying from the start, they are just too large. Ireland for example went into the crisis with a great looking sovereign balance sheet. A small deficit, national debt at a very low 21% of GDP, an export surplus.. but they just got obliterated. So when real estate eventually blows up in countries like Sweden, the UK, the Netherlands, Belgium, etc.. they will fall too.

Even Germany, trillions of the depositors money in Germany are backed up by loans in foreign countries.

[interestrateripoff]

I thought you where suggesting the Europeans should invade the Falklands.

That could cause a bit of a problem with the military sharing we are doing with the French.

Ireland's mistake was the buck stop the banking system, it's sovereign position would have been much better if it had said with investing you can make money or lose it. Once the govt decided to play fairy god mother to the bankers the country was sunk.

[Peter Hun]

You don't need a default, inflation can be used to wipe out debts. With a area the size of Europe a default wouldn't affect Europeans like Argentinians who had all their savings and pensions in US dollars due to a ridiculous dollar peg

In Argentina imported products got astronomically expensive and inflation is still running at 25%++. In fact they didn't have 5000% inflation after the last crash in 2001, it was more like 400% as the Peso devalued 75%.

However, default doesn't wipe out the debt. Argentina (had to) stole the savings and pensions to pay back the bond holders in USD, its just taken them 10 years to do it, with the legal cases regarding the bondholder haircuts and deals.

Argentina had 5000% inflation before they introduced the dollar/peso parity peg in the early 1990's. It wiped out all manufacturing while giving them the feeling that they were rich for a few years,

I wish people would stop using Argentina and Iceland as shining examples of how default is a good option. Argentina is hell. Iceland no longer has any working currency or the ability to attract investment and is looking at a couple of lost decades.

You're not going to be popular making suggestions like that. The consensus here is that a 40% property crash can happen with no real ill-effects, just a few people dusting themselves down after a few years negative equity and the shrewd hawks who STRed (like me), or sat out of the housing market, picking up bargains to prove how clever we are.

The scenario you described is now far more likely.

Indeed it is.

The super rich are buying property and paying over the odds for art. Commentators claim its because the rich don't need to borrow to buy; it doesn't stop them borrowing as a inflation hedge - which is what they are doing. With the fall in the pound its made double sense to buy property for the rich.

I went out on bought a farm (on credit) the moment the credit crunch happened. I was a first time buyer.

Edited November 29, 2010 by Peter Hun

[ShedDweller]

Bears don't want to admit it, but the big winners were not the prudent. The biggest winners were people who had huge debt and owned real assets. Like someone with a BTL empire. now there debts were only 1/50th the real value of a year before.

No .. It's a common misconception .. Very few Argentinians had loans in Peso's .. The Peso was pegged to the Dollar at 1:1 .. The government borrowed billions to try and keep it there .. However if you wanted a loan the loan would be in Dollars .. The problem came when the peso/ dollar rate changed downward .. suddenly the repayments were doubled .. In alot of places people simply fled their business or property .. Possibly some people were able to borrow in peso's and had their loans wiped out but for most people the only peso credit available was credit cards and they ran at 200% A MONTH. The feckless middle class were destroyed but the working poor didn't do too badly. (factories where the owners had fled were run as co-operatives and later the banks recovered alot of their money ..)

The "Borrowing in Foreign currency because it's easier/cheaper" is a recipe for disaster (see Iceland in the past and Eastern Europe in the future).

[aa3]

I thought you where suggesting the Europeans should invade the Falklands.

That could cause a bit of a problem with the military sharing we are doing with the French.

Ireland's mistake was the buck stop the banking system, it's sovereign position would have been much better if it had said with investing you can make money or lose it. Once the govt decided to play fairy god mother to the bankers the country was sunk.

Yes I think it was either an act of traitorism or incredible stupidity to put the state behind the private bank liabilities of Ireland.. let alone backing up the foreign private bank loans. However say Ireland had not nationalized those 3 banks, certainly they would have collapsed and not some.. BUT ALL of the depositors money would have been lost.

In fact I read a report out of Ireland that a week or two ago before the EU backstopped them, the Irish banks simply would not have opened on the Monday. And no one would have gotten any deposits out. They would all be lost, then the senior bondholders would have sold the organizations and the good loans and recouped what they could.

It would have been earth shaking in Ireland.. like old people with 500k Euros in savings they would simply be gone..and many businesses would be toast. Now imo the vast majority of the Irish population would have beneffited. Afterall the average person has little or no savings, has no bonds, only debts. And a huge chunk of the population like the children and even the unborn have no savings or debt... Yet now they owe all this money!!

Last year the Irish state collected 24 billion Euros in revenue. Now they will owe 5 billion euros just on the new 85 billion euro bailout money. On top of the costs of absorbing losses on the trillion or so Euros they are standing behind. Its actually funny thy are backstopping debts that are 40 times the size of their national annual revenues.

[aa3]

No .. It's a common misconception .. Very few Argentinians had loans in Peso's .. The Peso was pegged to the Dollar at 1:1 .. The government borrowed billions to try and keep it there .. However if you wanted a loan the loan would be in Dollars .. The problem came when the peso/ dollar rate changed downward .. suddenly the repayments were doubled .. In alot of places people simply fled their business or property .. Possibly some people were able to borrow in peso's and had their loans wiped out but for most people the only peso credit available was credit cards and they ran at 200% A MONTH. The feckless middle class were destroyed but the working poor didn't do too badly. (factories where the owners had fled were run as co-operatives and later the banks recovered alot of their money ..)

The "Borrowing in Foreign currency because it's easier/cheaper" is a recipe for disaster (see Iceland in the past and Eastern Europe in the future).

Good post.. Before Argentina started melting down there must have been many people with bank loan in Argentinian Pesos... as the bubble meltup I'm sure many, many went and borrowed in dollars as the interest rates would be much better. Just like in Iceland and other European countries who had loans in Yen and Swiss Francs and other crazy ideas.

[MrFlibble]

Ireland's mistake was the buck stop the banking system, it's sovereign position would have been much better if it had said with investing you can make money or lose it. Once the govt decided to play fairy god mother to the bankers the country was sunk.

Now the bankers will move on to the next sucker, rinse and repeat, until the fiat money system to FUBAR.

[ShedDweller]

Yes I think it was either an act of traitorism or incredible stupidity to put the state behind the private bank liabilities of Ireland.. let alone backing up the foreign private bank loans. However say Ireland had not nationalized those 3 banks, certainly they would have collapsed and not some.. BUT ALL of the depositors money would have been lost.

The states "Job" in an enviroment were all banks are private and (in effect) Unregulated is simply to provide the framework for a banks to fail if necessary without upsetting the commercial life of the nation. If everyone knew exactly what would happen then the chances of capital flight would be much lower ..

If a bank finds it cannot continue then it should inform the ministry of finance (one would guess on a Friday afternoon). Over the weekend a new bank would be created. This bank would contain the over the counter savings of the old bank and would process payments for loan repayments for the old bank. The "Old bank" would then belong to the bond holders and they could decide what to do with it .. Yes the shareholders would take a 100% hit and the bondholders would take a pretty big haircut but they knew the risks when they invested (after all they must have known they were lending into a property bubble).

The new bank would then be floated on the stock exchange and the money raised would go to the old bank ..

No government should ever underwrite private debts ..

[AnObserver]

Can't seem to quote from phone but that was an interesting post from Peter Hun.

Regarding borrowing in a high inflation,or in anticipation of,environment are you expecting equivalent pay rises/increase in interest from capital?

(im a prospective,terrified, ftb )

[aa3]

The states "Job" in an enviroment were all banks are private and (in effect) Unregulated is simply to provide the framework for a banks to fail if necessary without upsetting the commercial life of the nation. If everyone knew exactly what would happen then the chances of capital flight would be much lower ..

If a bank finds it cannot continue then it should inform the ministry of finance (one would guess on a Friday afternoon). Over the weekend a new bank would be created. This bank would contain the over the counter savings of the old bank and would process payments for loan repayments for the old bank. The "Old bank" would then belong to the bond holders and they could decide what to do with it .. Yes the shareholders would take a 100% hit and the bondholders would take a pretty big haircut but they knew the risks when they invested (after all they must have known they were lending into a property bubble).

The new bank would then be floated on the stock exchange and the money raised would go to the old bank ..

No government should ever underwrite private debts ..

Here is the minor problem. First the shareholders get wiped out.. then next in line is the depositors as they are junior creditors. Then come the normal bondholders, then senior bondholders.

It is in this way the banks are holding nations hostage. Come the revolution a simple reform we need is to make depositors the most senior creditors, even more senior than bank employee pension funds.

[Peter Hun]

Now the bankers will move on to the next sucker, rinse and repeat, until the fiat money system to FUBAR.

Ireland is by no means innocent in the scheme. If they defaulted, it would make the PIGS default too and Ireland would lose over 100% of its GDP it has lent to them.

The banker ****ers have linked it all together like spaghetti.

Regarding borrowing in a high inflation,or in anticipation of,environment are you expecting equivalent pay rises/increase in interest from capital?

In high inflation wages don't keep up, same as savings. (I remember the 27% inflation in the UK and it is real bad)

Its a case of protect what you can. Gold bugs say buy gold, but it doesn't give an income. Personally I bought property in Poland becuase the Zloty is the most undervalued, saving rates are 5%, property demand is high and the economy is booming, I'm half Polish and I got married to a Polish woman.

Ferfal is living in Argentina and he give a lot of advice about the situation there. http://ferfal.blogspot.com/

I'm loath to recommend you visit his site though, his advice on the economic crash is good but he is clueless about the rest of the world and the problem of living there. He is obsessed about moving to the US, though if the authorities see that he is a gun freak with an obsession about buying gold and economic collapse they will exclude him as a terrorist threat.

However, he recommends

a) Buy gold. Not coins or bullion (becuase its difficult and very dangerous to sell) but scrap gold - rings, chains and break they up to sell to a jeweller to convert to cash.

Keep cash, a month or two's worth at least. Dollars, Euro good whatever to spread risk.

c) Buy rent-able property. Cheap and cheerful, people who still work still pay rent.

d) Get the option to emigrate to another country, put some of your investment/assets there. Source of foreign currency if yours go down. Bug out destination if things get hot.

e) Find a dependable source of income, nothing depending on high spending shit.

f) Keep fit and healthy (this is number one above all else, actually).

g) Buy solid dependable consumer goods while you can afford them and never buy tat, unnecessary stuff. This does not mean buy years worth of supplies and eveything you may need if the end of the world comes. Spend spare cash on Gold.

f) Buy a Glock, .22 LR and shotgun plus body armour and spend a few thousand per year training to use it all. (This in my opinion is bonkers, if you need to spend that amount of money teaching yourself, wife and kids how to survive a gun battle... MOVE)

[catsick]

I actually think the "argentina" option was much better for the Irish , Argentina has been in a big mess since the 50's the recent default is just one in a long list of problems they have had over time, however just like iceland they are finding it is a Joker that you can play once and it gets you out of jail free very quickly and back on the path to recovery. I would also tend to agree with you about Poland which I use as my proxy for the pound in that its on the edge of the euro zone and will vastly outperform the GBP over time , I have friends drilling for shale gas there and hope to make gazilllions out of that too ......

[The Masked Tulip]

I thought you where suggesting the Europeans should invade the Falklands.

That could cause a bit of a problem with the military sharing we are doing with the French.

Ireland's mistake was the buck stop the banking system, it's sovereign position would have been much better if it had said with investing you can make money or lose it. Once the govt decided to play fairy god mother to the bankers the country was sunk.

We would have to bid on eBay to get our aircraft carrier back. Knowing our luck we would end up with a pirated copy of Call of Duty, some bootleg nylons and a genuine Prada bag made in Hong Kong!

[Bloo Loo]

whats wrong with everyone defaulting?

Balance sheets restored, a few banks actually bust...over in months.

but no, they want a war. lets make a load of stuff and destroy it all, and millions of lives too.

Some would have us beleive this is a PLAN.

I think its more of a cockup....an inherent weakness of democracy,

[Peter Hun]

We would have to bid on eBay to get our aircraft carrier back. Knowing our luck we would end up with a pirated copy of Call of Duty, some bootleg nylons and a genuine Prada bag made in Hong Kong!

Seriously there is no chance Argentina would attempt to invade. The Falkands themselves are the biggest aircraft carrier in the South Atlantic and the Argies only have 30 aircraft, most of which are probably un serviceable.

[aa3]

whats wrong with everyone defaulting?

Balance sheets restored, a few banks actually bust...over in months.

but no, they want a war. lets make a load of stuff and destroy it all, and millions of lives too.

Some would have us beleive this is a PLAN.

I think its more of a cockup....an inherent weakness of democracy,

Imo its the power of the people and institutions which hold the bonds and deposits. Obviously your average citizen with a few thousand in savings would be manifestly better off in a default and free of debt. But it would be an unbelievable reset for people who have like 50 million in bonds, or countless elderly with half a millon in savings.

[Killer Bunny]

Got me thinking about Argentina which ultimtely chose the printing and default option. Inflation went to 5,000% in Argentina and basically reset the savings and debts of the nation.

Bears don't want to admit it, but the big winners were not the prudent. The biggest winners were people who had huge debt and owned real assets. Like someone with a BTL empire. now there debts were only 1/50th the real value of a year before.

Anyone got any stats (chart?) on what actually happend to HPs in this time? Just because debt devalued doesn't mean HPs revalued. They probably did but do we know?

[Killer Bunny]

Yes I think it was either an act of traitorism or incredible stupidity to put the state behind the private bank liabilities of Ireland.. let alone backing up the foreign private bank loans. However say Ireland had not nationalized those 3 banks, certainly they would have collapsed and not some.. BUT ALL of the depositors money would have been lost.

Why can;t you secure the deposits if the institution goes under? Tha answer is the state can do anything it pleases.

[Bloo Loo]

Imo its the power of the people and institutions which hold the bonds and deposits. Obviously your average citizen with a few thousand in savings would be manifestly better off in a default and free of debt. But it would be an unbelievable reset for people who have like 50 million in bonds, or countless elderly with half a millon in savings.

£50 million.

sounds like a nice round figure for a cup of tea and a sandwich, 2015 style.

Hyperinflation IS a default.

[Peter Hun]

Anyone got any stats (chart?) on what actually happend to HPs in this time? Just because debt devalued doesn't mean HPs revalued. They probably did but do we know?

In Argentina property prices went ballistic after the default, and thats in real currency the USD. In the official money, the Peso, I think they went up 800%.

When you get a failing currency people move into hard assets - i.e property

[Peter Hun]

Imo its the power of the people and institutions which hold the bonds and deposits. Obviously your average citizen with a few thousand in savings would be manifestly better off in a default and free of debt. But it would be an unbelievable reset for people who have like 50 million in bonds, or countless elderly with half a millon in savings.

Your pension is in Bonds. In a default the middle class are converted into poverty. The average citizen will have no savings and their wage will be reduced by 75%. Interest rate will go up to hold down inflation. 25% would not be unusual (Iceland recently had a base rate of 18%. UK have had double digit base rates for many years), so house prices collapse, mass unemployment, wages shrink.

The only people who survive a default are the super rich.

In Argentina this is exactly what happened, the middle class were obliterated.

[Peter Hun]

Oh and the first thing that would happen is that the idiots (and their families) boasting about their Gold stash would get raped/murdered/tortured for it.

Obtaining your home address from your IP would be cheap and easy in a default. Even a Glock would not be sufficient if they KNEW your had Gold.

Edited November 30, 2010 by Peter Hun

[Bloo Loo]

Your pension is in Bonds. In a default the middle class are converted into poverty. The average citizen will have no savings and their wage will be reduced by 75%. Interest rate will go up to hold down inflation. 25% would not be unusual (Iceland recently had a base rate of 18%. UK have had double digit base rates for many years), so house prices collapse, mass unemployment, wages shrink.

The only people who survive a default are the super rich.

In Argentina this is exactly what happened, the middle class were obliterated.

Interestingly, but the MSM still deny their is a problem.

Watching Doomberg, they are talking about the Euro and its "woes", and every presenter, EVERY interview Ive heard so far, talk about SOLVING the debt problem.

without wealth, how can it be solved? anyone? Please???

[RufflesTheGuineaPig]

Ireland isn't bankrupt. They CAN pay their debts they just don't WANT to.

[Peter Hun]

In real terms? Not if inflation is rising faster than wages, few have spare money and there's no mortgage availability.

Argentina is a oddity as its had a long-standing currency/inflation issue that results in most of its wealth being in USD. So if you want to buy property they use dollars, people avoid using banks. Even walking out of the bank there is a real danger of armed robbery.

The government stole all the dollar accounts when they defaulted (As as did Iceland actually, I think access was given back gradually).

BTW, foreign currency bank accounts are not depositor protected like home currency accounts.

Edited November 30, 2010 by Peter Hun