Many of the financial problems that have been getting ignored began to reassert themselves this week.

Ireland, Greece, Portugal, Spain 10-year bonds, 1/23/2011

Portugal’s government is close to collapse on Wednesday, after the Parliament rejected an austerity (“stability and growth”) plan proposed by prime minister José Sócrates, according to Bloomberg. It’s thought that this major political defeat will force Socrates to dissolve the government and call early elections.

Update: Socrates has resigned, throwing Portugal and the euro into a new crisis.

Portugal has been playing the same game the Ireland and Greece played, to no avail, last year before they were bailed out by the European Union and the International Monetary Fund (IMF). The game is to pretend, for as long as possible that there’s no debt problem, and that there’s no chance of default.

However, as can be seen in the above array, the yield (interest rate) on Portugal’s 10-year bonds has been increasing steadily during the last year, and now exceeds 7.5%. When investors demand higher yields, it means that investors believe that the likelihood of the country’s default is increasing.

A 7.5% bond yield is not per se a sign of crisis, but the the continuing, steady increase is a cause for great concern.

What REALLY creates the crisis atmosphere is the bond yields for Ireland and Greece. Those two countries were bailed out last year, and the politicians promised that the bailouts would guarantee that the two countries would NOT default. Ireland’s bond yields now exceed 10%, and Greece’s exceed 12%. The yields keep increasing even though both countries were “bailed out,” and even though both countries have implemented sharp austerity programs to reduce debt.

So, you can imagine being an MP in Portugal, deciding whether to vote for Socrates’ austerity proposal, and looking at the above array of graphs, and thinking, “It’s perfectly obvious that Portugal is not going to do any better than Greece or Ireland did, so why even bother to pass an austerity program? I might as well vote against it, and say we can do well without an austerity program. That’s a lie, but who cares, as long as I get re-elected next time?”

Certainly lying politicians, analysts and journalists are the norm these days, but in this case, it’s really obvious. When these bailouts occurred last year, a number of analysts did the math and reported that both Ireland and Greece were in a debt spiral that was inescapable, and that it’s IMPOSSIBLE for them to avoid default.

Still, they all play the game, and aver that their countries will avoid default. Are they just lying, or do they have any justification at all for their aversion to the truth?

There are two unrealistic assumptions that they and others make, either consciously or unconsciously.

First, they believe that the current “recession” will pass, and that the global economy will return to the days of the huge real estate and credit bubbles. That’s obviously impossible, but it’s a visceral hope.

Second, they believe that quantitative easing and other government programs are going to lead to inflation and hyperinflation, which would wipe all debts out. Once again, that’s impossible, since financial institutions are still rapidly deleveraging, meaning that each week there’s less money in the world than there was the week before, and the world is in a deflationary spiral.

See “14-Feb-11 News — Bangladesh stock market continues free fall, while Cairo’s remains closed” for further information.

Cairo stock exchange opens and crashes

As the riots began in Egypt, Cairo’s stock exchange crashed, falling 20% in a few days. (See “28-Jan-11 News — Egypt stock market crashes as riots spread through Mideast.”)

Cairo and Saudi Arabia stocks, 1/23/2011

The stock exchange reopened on Wednesday for the first time since January 27, and fell an additional 8.9% in a shortened trading day, according to Bloomberg.

Saudi Arabia’s stock exchange has partially recovered from the collapse that occurred when the riots occurred in neighboring Bahrain. Officials are hoping that it will recover further, but that may depend on whether the Mideast “Arab revolutions” begin to stabilize. So far, they show no sign of doing so.

Real estate continues its decline from the huge bubble

I saw Robert Shiller, co-author of the S&P/Case-Shiller home price index, on Bloomberg TV a few days ago, and he said that the real estate bubble in 2004-2007 was the “biggest bubble in world history.”

Huh? How is that possible? At the time it was going on, there were a few people (like me) around who were calling it a huge bubble, but if you listened to the journalists and analysts and politicians on CNBC and Bloomberg TV, you were told that there was no real estate bubble at all.

Mainstream financial analysts, economists and journalists would say, “Housing prices can’t go down — people have to live somewhere,” and “Banks won’t foreclose — it’s not in their interest to do so” and “These housing construction firms know what they’re doing, and they wouldn’t be building houses if it were just a bubble.”

What I mean is this: If it was the biggest real estate bubble in history, then it must have been bigger than a tsunami, and we don’t have trouble seeing what a tsunami does. How come we can’t see the biggest bubble in history?

Well, sorry for the rant, but existing home sales fell 9.6% in February from January, much more than expected, according to the National Association of Realtors, the organization which, in 2005-2007, was the most notorious in claiming that there was no real estate bubble.

Prices for existing homes fell 5.2% from February 2010. “Distressed homes” accounted for 39% of the sales. The percentage of all-cash sales was at an all-time record of 33%, because mortgages are generally unavailable to most buyers. That was existing home sales.

Sales of new homes fell a phenomenal 16.9% to a record low in February, the lowest since records began in 1963, according to Reuters.

Bill McBridge at the Calculated Risk blog, has provided the following graph of the “Distressing Gap”:

‘Distressing’ Gap (Calculated Risk)

He describes this graph as follows:

“[T]his graph shows existing home sales (left axis) and new home sales (right axis) through February. This graph starts in 1994, but the relationship has been fairly steady back to the ’60s. Then along came the housing bubble and bust, and the “distressing gap” appeared (due mostly to distressed sales).

The gap is due mostly to the flood of distressed sales. This has kept existing home sales elevated, and depressed new home sales since builders can’t compete with the low prices of all the foreclosed properties.”

On almost every day for the last three years, I’ve been hearing that “real estate has reached a bottom and will start to go up.” The people saying this are the same people who said that there wasn’t a housing bubble in the first place.

From the point of view of Generational Dynamics, the worst of the financial crisis has not yet occurred. There’s no way to know what the trigger will be, but in this report I’ve described three different possibilities — a European debt crisis, stock market crashes in developing nations, and continuing collapse of the real estate market.

The “Arab Revolutions” are destabilizing the Mideast more almost every day. Unless the Mideast begins to stabilize, the financial crisis trigger may be close.