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What a US Debt Default Could Bring

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A US debt default could trigger a nightmare scenario that many economists have been warning about. Eventually this shit pile of debt will have to be dealt with but is this the moment ? One thing is for sure, this can easily be avoided but as usual politicians like to play Russian roulette.

The following are 12 very ominous warnings about what a U.S. debt default would mean for the global economy…

#1Gerald Epstein, a professor of economics at the University of Massachusetts Amherst: “If the US does default, that will make the Lehman Brothers bankruptcy look like a cakewalk”

#2Tim Bitsberger, a former Treasury official under President George W. Bush: “If we miss an interest payment, that would blow Lehman out of the water”

#3Peter Tchir, founder of New York-based TF Market Advisors: “Once the system starts to break down related to settlement and payments, then liquidity disappears, as we saw after Lehman”

#4Bill Isaac, chairman of Cincinnati-based Fifth Third Bancorp: “We can’t even imagine all the things that might happen, just like Henry Paulson couldn’t imagine all the bad things that might happen if he let Lehman go down”

#5Jim Grant, founder of Grant’s Interest Rate Observer: “Financial markets are all confidence-based. If that confidence is shaken, you have disaster.”

#6Richard Bove, VP of research at Rafferty Capital Markets: “If they seriously default on the debt, what we’re really talking about is a depression”

#7Chinese vice finance minister Zhu Guangyao: “The U.S. is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the US to ensure the safety of Chinese investments.”

#8The U.S. Treasury Department: “A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse”

#9Goldman Sachs: “We estimate that the fiscal pull-back would amount to 9pc of GDP. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed quickly”

#10Simon Johnson, former chief economist for the IMF: “It would be insane to default, but it’s no longer a zero-percent probability”

#11Warren Buffett about the potential of a debt default: “It should be like nuclear bombs, basically too horrible to use”

#12Bloomberg: “Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.”

Source: theeconomiccollapseblog.com

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Finally Detroit To Default

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It was a sad day for Detroit, a once proud American city but the writing has been on the wall for quite some time. Eventually on Friday it was announced that it would stop making payments on $2.5 billion of its total $17 billion dollars of outstanding debt. Kevyn Orr, the Emergency Manager for the City of Detroit, presented to the City’s creditors the plan ahead for Detroit’s future.

DetroitHBFDetroit said Friday

it would stop making payments on about $2.5 billion in unsecured debt and ask creditors to take about 10 cents on the dollar of what the city owes them in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.

Detroit Emergency Manager Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors outlining his plan for the city’s financial future, which includes a moratorium on some principal and interest payments, Reuters reported.

Under his proposal, underfunded pension claims likely would get less than the 10 cents on the dollar.

An assessment of the plan’s progress will come in the next 30 days or so.

Orr also announced that Detroit stopped paying on its unsecured debt Friday to “conserve cash” for police, fire and other services in the city of 700,000 people. The debt not being paid includes $39 million owed to a certificate of participation.

“We will not pay that today,” Orr told reporters after the meeting with creditors at a hotel at Detroit Metropolitan Airport in Romulus.

More than 42 percent of Detroit’s 2013 revenues went to required bond, pension, health care and other payments. If the city continues operating the way it had before Orr arrived, those costs would take up nearly 65 percent of city spending by 2017, Orr’s team said.

The team also said the proposal presented Friday is the one shot to permanently fix fiscal problems that have made the city insolvent.

“We’re tapped out,” Orr was quoted by WWJ-TV as saying. “We need to come up with a plan to restructure our debt obligations and our legacy obligations going forward — that is: pension, other employee benefits, health care, so on and so forth.”

Orr said everyone involved needs to come to grips with Detroit’s dire financial situation that has been worsened by years of procrastination and denial. He said his team is prepared for potential lawsuits from creditors not pleased with the arrangements under the plan.

“If people are sincere and look at this data, you would think a rational person will step back and say, ‘This is not normal … but what choice do we have?'” Orr said.

James McTevia, president of the Detroit-area turnaround firm McTevia and Associates, said once Orr had creditors’ attention Friday, he “drew a line in the sand and said everything behind here is frozen.”

“And going forward he is positioning the city of Detroit in a place where it can pay for goods and services without going into debt,” McTevia said.

Detroit’s fiscal nightmare didn’t occur overnight. It’s been decades in the making as city leaders took out bonds at high interest rates to pay bills Detroit’s general fund couldn’t cover.

“The average Detroiter has to understand this is a culmination of years and years of kicking the can down the road,” Orr said. “We can’t borrow any more money. We started borrowing from our own pension funds.”

The city’s budget deficit could top $380 million by July 1. Orr believes Detroit’s long-term debt is more than $17 billion.

The Washington-based bankruptcy attorney hired by Michigan in March reiterated that the chances of bankruptcy are 50-50 for Detroit, the largest U.S. city placed under state oversight.

Orr is nearly three months into the 18-month job. With little time remaining on his contract, there is no time to lose. The plan creditors received in the closed-door meeting may be the only one they get.

“There may be some room for negotiations, but not a lot,” Orr told reporters. “They need to have some time to digest what they have.”

Swallowing the proposal will be tough, especially for current and retired city workers whose health care and other benefits, as well as pensions, would be cut back.

“The firefighters are going to do what we can to keep the city stable now,” Detroit Fire Fighters Association President Dan McNamara told reporters after Friday’s meeting with Orr.

McNamara said creditors were told by Orr that “we’re in a death spiral.”

The city will not be able to back up some promises related to pension and post-employment health care and benefits. Orr is proposing a $27 million to $40 million health care replacement program that will partially rely on the federal Affordable Health Care Act, health exchanges and Medicare.

He also said $1.25 billion will be set aside from concession savings over 10 years for public safety, lighting and eliminating neighborhood blight. Improving the quality of life in the city will help attract more residents and businesses, which Orr’s team says would bring more tax revenue and increase the potential for creditors to recover more of what they are owed.

Creditors were told about plans to possibly change management of Detroit’s revenue-generating Water and Sewerage Department. A separate, freestanding authority would control the department, with some annual payments coming to Detroit and the city maintaining ownership of the system.

On Friday, Moody’s Investors Service downgraded a number of Detroit bonds, including its general obligation unlimited bonds. As a result, all Detroit bonds are now below investment grade.

Hetty Chang, a vice president with Moody’s, said “the emergency manager’s proposal to creditors indicates further debt restructuring.”

“We also believe the city’s risk of bankruptcy has increased over the last six months,” she said in a statement.

Read more: Fox News

Swiss Bank Refused To Hand Over Gold

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As a consequence of the gold takedown last week, there has been a huge interest in physical gold. Many gold dealers have had to increase premium over spot or have simply had to wait for further supplies. Jim Sinclair reports of a friend being denied his gold in an allocated Swiss account.

Today legendary trader Jim Sinclair stunned King World News when he revealed that a dear friend of his who is very affluent just had a Swiss bank refuse to return his large hoard of gold when he asked for it out of an allocated account. Below is what Sinclair, who was once called on by former Fed Chairman Paul Volcker to assist during a Wall Street crisis, had to say in this remarkable and candid interview.

Eric King: “Maguire spoke on KWN yesterday about the fact that one of his clients went to the LBMA to get the metal from them and could not get it. They told him he would be cash settled. This is what you have been talking about is the failure of the physical markets.”

Sinclair: “A person that I know with significant deposits in one of the primary Swiss banks, in allocated gold, wanted to take out his gold and was just refused on the basis of directives from the central bank….

“They told him the amount was in excess of 200,000 Swiss francs and the central bank had instructed them not to do it because it has to do with anti-terrorism and anti-money laundering precautions.

I really wonder whether those are precautions or whether the gold simply isn’t there. Now you tell me that a London delivery has basically failed. It has to raise our suspicions that the lack of physical gold behind the paper gold is literally so severe that we are coming to understand that it is in fact not there.

The gold that people think is stored is not stored, and the inventory of the warehouses for exchanges may not be holding deliverable gold. There has always been speculation about whether or not the physical gold the US claims to store is in fact in those vaults.

The greatest train robbery in history might be all of the gold, and it would only be something like we have described above that would happen right before gold makes historic highs.

There simply is no gold behind the paper. One example is AMRO, a second is your example with Maguire, and a third is my dear friend who was refused his gold on the basis that its value was too high. Remember this friend of mine had his gold in an allocated account in storage at a major Swiss bank. I repeat, there is no gold.”

Eric King: “Jim, when I listen to what you are saying, to what Maguire is saying, it really does tell me we are at the end game in terms of the paper market. It’s collapsing right now as you have been warning.”

Sinclair: “The vicious and blatant manipulation of the gold price (lower) via paper, on Friday and on Monday, may very well be the biggest mistake that the manipulators ever conceived of. I firmly believe it revealed that the price of gold has nothing to do with gold itself.

But I would add that if in fact the physical demand remains at these levels or even increases as the price of gold rises, I believe that the warehouses for the exchanges will be so significantly drawn down that it will force cash settlement.

The bottom line here is the paper market for gold may have just lit itself on fire, and served to burn the manipulators’ houses to the ground. You’ve heard of the phrase, ‘The emperor has no clothes.’ Well, this is infinitely worse because it is finally being revealed that the paper market for gold, in fact, has no gold.”

This follows on from Andrew Maguires claim’s yesterday that the LBMA has now defaulted on a client and is settling in cash.

What’s happened now is they are in a position where that leased gold is being asked for and they don’t have it.  I know of a very large client who actually turned up for his bullion, was refused his bullion, and told he would be settled in cash.  I felt I should go public with that (on KWN).

…(ABN AMRO) really was the tip of the iceberg.  What happened was that we saw that first bullion bank create the first visible default of the LBMA fractional reserve system.  I hear of other clients who are now panicking, and what happens?  You get an official intervention.  That’s what it (the takedown in gold and silver) was all about.”

Source: King World News

Was The Gold Smash Making Way For A COMEX Default ?

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The last time we saw a major takedown of gold was in 2008 just before the Lehman default. There is no doubt that the drop in gold price was orchestrated, combined with COMEX hiking its margin rate, but was this all in preparation for a COMEX default ? There seems to be logic in this theory.


Submitted By Bill Holter, Miles Franklin Ltd,:

Last week Barrick Resources announced the postponement of their giant Pascua Lama mine.  This was to be one of the worlds largest mines and is now tied up in litigation over true ownership as it appears to show that Barrick does not have clear title.  The probale reserves were nearly 18 million ounces of Gold and almost 700 million ounces of Silver.  Work on this mine was completely ceased last Wednesday.

“Last Wednesday” was also an important day for the Kennecott copper mine in Utah, the ground started to shift more rapidly prior to this weekend’s landslide.  They knew this was coming as they closed the visitor center on April 1st and had all equipment and personel out of harms way.  This mine produces some 400,000 ounces of Gold and over 3 million ounces of Silver as a by product of copper, this is the largest copper mine on the planet.  Have you heard even a peep out of the mainstream media on this on?  I didn’t think so.
Is it not strange that these two events came to a head last Wednesday?  The same day that out of nowhere Gold reversed from being up and give up $40?  And then of course there was Friday with $85 and another $75 this morning.  Gold is now down $200 per ounce in just over 3 trading days.  Between these two projects, one not coming online and the other going off line, a VERY significant amount of production is not going to happen.  Does this make sense?  Did you not learn in school that “less” supply meant higher prices?  In the real world?
We don’t live in “the real world”, we live in a world where everything financial is manipulated.  Here is what I see happening.  They knew that this mine was going to collapse and the production would stop.  Then the ruling on the Pascua Lama mine was sent down.  Last Thursday president Obama met with 15 heads of the biggest banks and brokers in the country, THIS was discussed as sure as the Sun came up this morning: we have hit the bottom of the barrel!  Reserves that could be fed into the market are and have dried up at the same time that production has dropped and future production delayed.  The paper game is blowing up …RIGHT NOW and the topic of discussion at the White House was about “how it would play out”.
The COMEX will default in the next week or several weeks and people will be “settled” with Dollars, no more metal will be delivered!  So, knowing that “game over” has arrived, they are dumping a massive volume of  paper contracts with impunity to push the metals prices as low as possible before the “default”.  This way the “shorts” do not have to and will not be “covered” when “supply” cannot be obtained because of “an act of God”.  They will be settled in cash (at a profit no less) because these “unforeseen” disruptions in supply.  “Who could have seen it coming?” will be the mantra.  I would suspect that banking stress and “bail ins” will also become prevalent globally.  The pricing structure” will now push any and all physical sellers away from the markets and the “door” to safety is effectively being shut.  Either you own metal or you don’t.
I tried to “be nice” in my piece from last night talking to those who worry about price.  What is now happening is exactly what I spoke of, you must count ounces because “availability” is going away right here and right now!  After the closure of the COMEX and LBMA doors there will be no availability and “price” will be meaningless.  Your ability to protect yourself is right now for all intents and purposes being eliminated. 
We received  a few (very few) angry letters from customers who say that Jim Sinclair, Mr. Sprott and Embry, James Turk and others including myself are and were wrong.  That we should hang our heads in shame and that we are nothing more than charlatans hawking Gold and Silver.  We will soon, very soon see just how right or wrong we really are.  What is happening right now is very clear to me, what I don’t understand is how anyone could miss this as it has all been laid out for you and dropped in your e-box to see (for years now), understand and prepare for.  Life, all of life as we knew it is about to change forever.  Hopefully you understood this and have already prepared for it!
Regards,  Bill H.

Time For Ireland To Default

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David McWilliams writes of Greece’s latest debt deal and how the smart option for Ireland now is to default. Of course when the country is run by school teachers and ex unionists there is no chance, as their only focus is securing funds to pay public sector wages as well as their own.

McWilliams has consistently argued against Irelands odious bank debt which lets face it is just being paid back for bondholders who gambled badly. Now is the time to push for a debt deal. Unfortunately the Presstitutes refuse to debate openly the merits of reneging on payments to bankers. Equally discussion of pulling out of the euro has been muted least it catch on.

ireland toxicbankGreece has defaulted again, and the financial markets have shrugged their shoulders. The euro remained unchanged versus the dollar. The Greek stock market even rallied. What does this tell us? It tells us that, as this column has argued again and again, the markets have no memory. Because it improves the overall position of a country, a debt restructuring will be welcomed since it adheres to the golden rule: a broken balance sheet is made better by less debt not more debt.

The media is reporting this as a “deal” in Greece. It is not, it is yet another default from a country where the economy is destroyed and needs to be nursed back to health rather than punished.

The big news for Greece and for us is that the troika has accepted that the country must be healthy in order to pay debt. This logic applies to Ireland too. Before we focus on the implications of the latest Greek default for us, let’s look at the broader picture. And before you think that I am advocating we follow the Greek route, I am not, I am simply pointing out the reality of the global economy and the realpolitik at the centre of Europe.

Effectively, the troika and the Europa group of Greece’s creditors have “agreed” (rather they have had their hands forced) to restructure their bailout loans. Interest rates will be lowered and even deferred to give Greece breathing room.

The crux of the agreement is that Greece’s debt-to-GDP ratio should reach 175pc in 2016 and 124pc in 2020. So 120pc has become the new sustainability.

It has also calculated that this is how capitalism works. In a crisis, the debtor and the creditor suffer, they both lose out and that’s how the system works. It is called co-responsibility.

The eurozone’s economy is in tatters, carrying too much debt, unable to grow. Italian consumer confidence has fallen to a record low this month. It is now at the lowest level since the series began in 1996. The only countries that seem to be keeping their necks above water in Europe are Bulgaria, Romania and Poland. This is hardly a reassuring picture, is it?

As the great deleveraging continues and unpayable debts can’t be paid, it would be surprising if Athens is the only government to choose to face down its creditors.

This all brings us here to Ireland as we continue to squeeze the economy dry, foisting austerity upon austerity and the local economy falters. Next week will be more of the same. We have been at this for five years now and there is no sign of recovery. It is increasingly clear that the Irish domestic economy will not recover as long as the crushing debt burden on the country’s young workers is not lifted.

And as we all buy and sell to each other in the local economy, your spending is actually my income and my spe- nding is your income. And if we all stop spending at the same time and the Government exacerbates this by slashing spending simultaneously, who is spending? And if no one is spending, who is earning? And if no one is earning, who can possibly be saving without earning?

So you see that what sounds good for the individual, such as “I am saving”, is only good for me if others continue to spend; if we all save at the same time, there is no income.

Now as these macro-economic targets that the Government and the troika set themselves are always debt expressed as a percentage of income, if our income is falling because no one is spending, then debt expressed as a percentage of income will be rising, not falling.

Now is the time to push for a debt deal, instead of the excuses pushed by the government for nearly two years as to why they haven’t.

This is why there has to be a debt deal for these hundreds of thousands of mortgages underwater. We already have 128,000 mortgages in arrears. This figure is rising consistently. There are 400,000 tracker mortgages which will only get more expensive as interest rates eventually rise over the course of the mortgage. These people will face default when this moment arrives and our banks will be bust again.

Now is the opportunity, when the EU is doing deals all over the place, to propose a big bank solution for Ireland’s mortgage debt. Such a deal would aid the Irish recovery, the EU would have the victory it so craves and ordinary Irish people would have the debt relief they so desperately need.

This would allow the economy to breathe again and it could be made the centrepiece of Ireland’s EU Presidency in the next six months. The EU President sets the EU agenda for the period when it has this role. Let’s not miss this chance.

Otherwise Ireland will become known as the country that never misses an opportunity to miss an opportunity. The Greek deal is an opportunity; let’s not throw it away.

Source: David McWilliams

Argentina Won’t Repay Bondholders From Default 10 Years Ago Despite US Court Ruling

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Despite US courts ruling that Argentina must pay bondholders who own defaulted bonds (related to $100 billion default 10 years ago), the Argentinian Finance Minister has announced this won’t happen as debt payments are immnue to US laws.

BUENOS AIRES, Nov 18 (Reuters) – Argentina will not pay creditors who own defaulted bonds despite a U.S. federal appeals court ruling in favor of the holdout creditors, the economy minister was quoted as saying in an interview published on Sunday.

The 2nd U.S. Circuit Court of Appeals in New York last month ruled that Argentina discriminated against bondholders who refused to take part in two debt restructurings as the nation tried to recover from a $100 billion default a decade ago. The decision upheld a ruling by U.S. District Judge Thomas Griesa.

The South American country appealed that ruling, and on Friday told Griesa that sovereign debt repayments made outside the United States are immune to U.S. law and seizures by holdout bondholders.

“Argentina is responsible and will fulfill all commitment it has made to its creditors. … Our creditors are all those who participated in the two restructuring proposals in 2005 and 2010,” economy minister Hernan Lorenzino told newspaper Pagina 12.

“We’re going to continue to oppose any alternative that goes beyond that. We’re going to continue presenting and defending our position to each legal entity.”

The judge is expected to give a speedy response, given that Argentina is due to start making $3.3 billion worth of payments to exchange bondholders starting Dec. 2.

Argentina and holdout bondholders that refused to join massive debt swaps in 2005 and 2010 are in a long-running battle over payment, an outgrowth of the country’s roughly $100 billion default nearly 11 years ago.

“Argentina reiterated to judge Griesa that the decision taken about pari passu (equal treatment) cannot prejudice creditors who entered the debt swaps,” Lorenzino was quoted as saying.

Last month’s ruling sparked fears that U.S. courts could ultimately inhibit debt payments to creditors who accepted terms of the restructuring, out of consideration for investors who rejected Argentina’s terms at the time.

“We’re going to continue our legal defense in all areas possible, including in the United States’ Supreme Court,” Lorenzino added.

 

Source: Reuters

Argentina Close To Default

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With protests growing in Argentina against the Government the CDS shows a 60% chance of default in weeks according to ZeroHedge.

Dear Buenos Aires: we have three words of advice – “hide yo’ catamarans” (before Paul Singer comes and collects them all once you default again in what the market now deems is inevitable to occur in the next few weeks). 5Y CDS on Argentina just reverse-Baumgartnered to over 3000bps (49/53% upfront) and short-dated CDS imply a 60% probability of default (assuming a 25% recovery).

The Argentinian government under Cristina Kirchner is deeply unpopular and in recent weeks there has been a growing unrest.

Angry over inflation, crime and corruption, hundreds of thousands of Argentines of all ages flooded the capital’s streets for nearly four hours to protest against President Cristina Fernandez in Argentina’s biggest anti-government demonstration in years.

Protests were reported right across Argentina and beyond its borders.

A spokesman for Buenos Aires’ Justice and Security Ministry estimated the demonstrators in the capital at 700,000 people. Other demonstrations were held on plazas across Argentina, including in major cities such as Cordoba, Mendoza and La Plata, while protesters massed outside Argentine embassies and consulates from Chile to Australia.

In Rome, about 50 protesters, all Argentine expats, held a noisy protest outside the consulate on Via Veneto, one of the city’s landmark streets. Among the slogans being shouted was “Cristina, go away.”

About 200 demonstrators braved rain in Madrid to bang pots outside the Argentine consulate.

Approval ratings plummeting in less than a year.

Fernandez easily won re-election just a year ago with 54 percent of the vote but saw her approval rating fall to 31 percent in a nationwide survey in September by the firm Management & Fit. The poll of 2,259 people, which had an error margin of about two percentage points, also said 65 percent of respondents disapproved of her opponents’ performance.

But it’s when people are hit in the pocket that people react and inflation is biting hard.

Inflation also upsets many. The government’s much-criticized index puts inflation at about 10 percent annually, but private economists say prices are rising about three times faster than that. Real estate transactions have slowed to a standstill because of the difficulty in estimating future values, and unions that won 25 percent pay hikes only a few months ago are threatening to strike again unless the government comes up with more.

Source: ZeroHedge, LasVegasSun

 

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