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World View: Global Financial Crisis — Greece, China, Puerto Rico Teetering on the Brink

This morning’s key headlines from GenerationalDynamics.com

  • China makes desperate move to prevent stock market crash
  • Puerto Rico’s governor says the island’s debts are ‘not payable’
  • Greece’s Tsipras appeals for calm after banks are forced to close
  • How complex systems fail

China makes desperate move to prevent stock market crash

People's Bank of China
People’s Bank of China

As we’ve been reporting, China’s stock markets have been in free fall since June 12, falling almost 20 percent in a couple of weeks.

Desperate Chinese officials are scrambling to stop the implosion and restore the bubble, and so the People’s Bank of China (PBOC) made a major move, cutting interest rates sharply, to a record low. This makes more money available to banks, which officials hope will flow into the stock markets and prop up stock prices.

According to a Nomura analyst quoted by ZeroHedge:

“The policy easing should be viewed as a measure to contain the risk of a hard landing or systemic crisis rather than one to achieve faster growth. In this case, the stronger-than-expected monetary easing may help stem the decline in the equity market following a 10.6 percent drop over the past two trading days. The positive wealth effect of the equity market on consumption or aggregate demand is limited in China, but an equity market collapse would hurt millions of mid-class households and pose great danger to the economy and social stability.”

In other words, the purpose of the policy measure is to prop up the stock market, but it will have little effect on growth, which is the “normal” purpose of interest rate easing. Whether it will even succeed in propping up the stock market and preventing “an equity market collapse” remains to be seen in the next few days.

As of this writing on Sunday evening ET (Monday morning in Shanghai), stocks are up two percent, though it’s been bouncing in and out of negative territory. (Bloomberg and ZeroHedge and Reuters)

Puerto Rico’s governor says the island’s debts are ‘not payable’

In an admission that will have wide-ranging financial repercussions, Puerto Rico’s governor Alejandro García Padilla has announced that the island territory will be unable to pay off its $72 billion in debts. According to Padilla:

“The debt is not payable. There is no other option. I would love to have an easier option. This is not politics; this is math.”

This was not a surprise. As I wrote in March, a bankruptcy was a virtual bankruptcy, probably as early in July.

Many people have invested in Puerto Rico bonds because they pay 10 percent interest (yields) and because under federal law they’re “triple-tax free,” meaning that you can earn 10 percent interest every year and not have to pay federal, state or municipal tax on the interest you collect. It’s a sweet deal, provided that Puerto Rico doesn’t go bankrupt, because if it does, then you lose most or all of your initial investment.

The unemployment rate is 13.7 percent. Only 700,000 of the 3.5 million people, or 20 percent, work in the private sector. The other 80 percent either are on welfare, or they receive unemployment or other aid, or they work for the government. Year after year, Puerto Rico sells more and more bonds, and investors eat them up because of the high tax-free yields. But now their string has run out. (NY Times and Reuters)

Greece’s Tsipras appeals for calm after banks are forced to close

Greece’s banks will be closed indefinitely, starting on Monday, after the European Central Bank (ECB) announced that it will end liquidity funding that was being used to prevent a Greek banking collapse.

As we reported yesterday, Greece’s prime minister Alexis Tsipras suddenly terminated negotiations with the European lending institutions, surprising everyone, and called for a referendum of the Greek people on July 5. The Eurogroup of eurozone finance ministers met without Greece present, to take steps for the protection of the eurozone.

They announced the termination of Greece’s bailout program, but left open the question of whether the European Central Bank (ECB) would continue the Emergency Liquidity Assistance (ELA) program. Greeks have been withdrawing billions of euros from their savings accounts in recent weeks, as much as a billion euros each day in the last week. This has been made possible by the ECB’s ELA program, which provided liquidity to the Greek banks so that withdrawals were possible.

On Sunday, the ECB announced that the ELA would be terminated immediately. Tsipras went on nationwide tv and appealed for calm, saying that everyone’s savings, salaries and pensions were safe. He announced that the banks and stock markets would not open on Monday, and would remain closed at least until July 7.

Tsipras also announced that capital controls would be imposed. ATMs will be open on Monday, but bank withdrawals will be sharply limited, to as little as 60 euros per person per day.

On July 5 there is supposed to be a national referendum in Greece. The referendum will be a vote on a bailout proposal that has already been terminated, and will no longer exist. There’s a lot of hopin’ and prayin’ going on, but no matter what analysts say, no one has any clue what will happen. Kathimerini and Market Watch

How complex systems fail

When complex systems fail, it’s seldom because of one problem, because each potential problem has usually been foreseen and a workaround developed.

Catastrophic system failures when several problems occur at once, and interact in a way that was not predictable.

Today we have major financial crises in China, in Europe and in Puerto Rico. In each case, officials have made some preparations. But can the global financial system handle all three simultaneously?

As I’ve been reporting regularly, the S&P 500 price/earnings ratio is far above historical norms, indicating that Wall Street stocks are deeply into bubble territory. That bubble is going to burst. There’s no way to predict whether the current group of problems will be the catalyst, but sooner or later it will happen.

It’s well to remember that we don’t know to this day what triggered the 1929 panic and crash, and so we have no way of knowing what will trigger the next panic, but we can be sure it’s coming.

At this writing on Sunday evening ET, Asian stocks are mostly falling, and Wall Street futures are down 1-1.5%.

KEYS: Generational Dynamics, China, People’s Bank of China, PBOC, Nomura, Puerto Rico, Alejandro García Padilla, Greece, Alexis Tsipras, European Central Bank, ECB
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