Collapse of the European Central Bank (ECB) sends tidal-force shockwaves of debt rippling through the US.
The image above may look like a scene from the latest summer Hollywood Blockbuster where humans stream through city streets to flee impending doom from an alien attack. Unfortunately this is not a set, but a very real threat the citizens of Greece are facing while they struggle with an overwhelming national debt crisis. Some fear that the nearly inevitable exit of Greece from the Euro will lead to Spain, Portugal, Italy, Ireland and other Euro nations mired in debt to follow suit.
Estimates state that nearly $900 billion have already been pulled from the Greek banking system in one week leaving them critically under-capitalized. Normally this is when the ECB would loan money to the banks in order to cover any “Run” on them, but confidence in Greece has significantly deteriorated and most loans from the ECB to Greek have been halted. With Greece on the brink of collapse, fear of the same fate has caused a run on Spain’s Bankia SA, the fourth largest in the country. As fears of an impending collapse become more evident, the slow siphoning of capital from the banks begins.
If Greece is any indication of a workable solution to a nations debt crisis, then Spain could very well be next with the other nations in short order to default on its debt obligations and exiting the Euro. This domino effect of debt default ultimately has the potential to collapse the Euro and send another shockwave of bank failures through the US financial system. While most US banks don’t have direct exposure to Greek Debt, they are directly invested in the International Monetary Fund (IMF) which currently holds 5% ($6 Billion) of Greek Debt. The way it looks now we can already assume that the $6 Billion is already a loss to us, but what then happens if Spain, Portugal, Italy, Ireland, and other European Nations fall into the same abyss.
Recent stress tests conducted in 2011 as a result of a possible Euro Collapse revealed that only 15 of 19 US banks will pass. Banks that failed the then “Hypothetical Collapse” were Citigroup, Ally Financial, SunTrust & MetLife. And although JPMorgan Chase, Bank of America, Wells Fargo passed the stress test in 2011, recent losses from the “Robo-Sign Foreclosure Settlement: $25 Billion” & “JPMorgan CHASE Trading Loss: $3 Billion” makes it questionable where some of these mortgage servicers now stand and if they would pass another test?
The moral of this story is that if you are currently still fighting with your mortgage servicer for a loan modification, consider all of the above and understand why banks are so unwilling to grant principle reductions or permanent modification as long as they can continue to milk payments out of you. And if you haven’t already received your notice of default, you should be aware that since the Robo-Signing Foreclosure Scandal and subsequent settlement this year 1.5 Million home foreclosures that were scheduled in 2011 will proceed this year.
There are many Americans faced with the Short Sale dilemma, families that are barely making their mortgage payment (on a home that is severely underwater) and putting food on the table hoping their banks will grant a reasonable principle reduction. The sooner homeowners can cut their losses on an investment that has a bleak future the sooner they can rebuild and jump back in when the market can offer houses and mortgage rates after fire-sale lows.
As foreclosures flood the market this year, this will only drive home prices further south and those who wait loose more potentially with every day that passes by. Although the US economic outlook has improved albeit slightly and at a snail’s pace, there is a sobering reality on the very near horizon if the collapse of the Euro brings down more US banks, then all bets are off!
Contributor, designer & admin for JohnHart Gazette.
With hedge funds and other investors aggresively bidding up the prices of low end properties to rent, I don’t think we will see another decline in pricing even with the acceleration of foreclosures. Being a small investor, my margins have shrunk dramatically the past 6 months.
Very interesting point Jim! Thanks for the feedback!