IMF Warns of “Perverse Feedback Loop”! Greece! Banks! US!

I’m doing everything I can to keep my family safe from what could be the worst financial storm of our lifetime, and I hope you’re doing the same.

Indeed, in three damning reports issued just this past Friday, the International Monetary Fund (IMF) is now warning of the same climactic calamity we’ve long been warning you about here in Money and Markets. Specifically …

The IMF now warns that the global economy is on shakier ground with increased risk of a decline — the double-dip recession that we’ve been warning about week after week. (See The “Forgotten Crisis.”)

The IMF now warns that the debt crisis in Europe could lead to a global contagion, even threatening countries like the United States — a key reason we gave U.S. sovereign debt a rating of C two months ago. (See “Major press release: Weiss Ratings rates U.S. credit!”)

And most surprisingly, the IMF now warns of …

“A Perverse Feedback Loop Between
Sovereign Risk and Financial Risk”

They see a vicious cycle scenario in which …

•  Sovereign governments like Greece, Ireland, or Portugal come to the brink of bankruptcy.

•  Major banks, knee-deep in loans to bankrupt countries, suffer crippling losses and are themselves threatened with failure. In self-defense, they refuse to lend the countries a penny or they charge exorbitant interest rates.

•  Borrowing costs skyrocket. Suddenly, it’s impossible for governments to raise the funds they need to survive. They can’t borrow new money to fund their bulging deficits. They can’t even borrow enough to roll over old debts coming due.

Ultimately, both the governments AND the banks collapse in a heap of rubble.

Shocking? Hard to Believe?

Perhaps. But this is the scenario that leaps from the pages of the IMF’s new reports issued less than 72 hours ago.

And to me, what’s equally shocking is that the IMF has taken so long to begin telling the obvious truth.

•  Three sovereign governments — Greece, Ireland, and Portugal — have already gone bankrupt. That’s why they needed a trillion-dollar bailout. And that’s why, despite the mega-bailouts, Greece and others are now even closer to default than they were before the bailouts.

•  At least a dozen major banks have already suffered massive losses in their loans to bankrupt countries — on top of their losses in real estate and mortgage loans. And we find that in the U.S., more than 5,000 banks, S&Ls, and credit unions are vulnerable. (See my warning issued April 18.)

•  The borrowing costs of many countries have already skyrocketed! Last week, the yield on Spanish euro bonds hit the highest level in history. Portugal’s surged to 12%. And in Greece, even with the promise of more bailout money in the works, rates jumped to as much as 20%.

The Grand Fiction

So how do sovereign governments tell the world they’re still solvent when they’re already bankrupt?

And how do global megabanks continually report earnings, while holding trillions in debts that are already plunging in value?

Simple: It’s a grand fiction — a complex, convoluted conglomeration of cover-ups, conspiracies, and …

Plain, Ordinary LIES!

Sure, if you examine the financials of a particular government or a particular bank IN ISOLATION, the fiction may be harder to see.

The assets are assets. The balance sheets balance. And to the lay observer — even to the top rating agencies — everything seems to be in order.

But if you step back from the trees, you get a different picture entirely:

The bankrupt banks can say they’re solvent only because they get huge infusions of government cash. Meanwhile …

The bankrupt governments can say they’re solvent only because the bankrupt banks are still willing to loan them money. And …

BOTH the bankrupt banks AND the bankrupt governments can say their bad assets are “good” because they agree NOT to mark them to market. They agree to book them as if their value had never collapsed and nothing had ever gone wrong.

Like two colluding con artists, their mutual agreement boils down to …

“I’ll Believe Your Lies
If You’ll Believe Mine”

Prime ministers, presidents, bankers, and brokers meet behind closed doors.

They agree not to say that a bankrupt institution has failed and not to call a loss a loss.

They solemnly swear that the naked emperor is clothed; the kingdom, secure.

And they vow to maintain these surreal fictions until they can somehow come up with the money from revenue predictions.

But despite all their closed-door agreements and despite their solemn vows, they deflect and neglect the most basic element of all:

The People

I’m talking about the people whose salaries are slashed, careers crushed, and old-age benefits obliterated — the people who rioted on the streets of Greece last week are joining general strikes all across Europe, and they’re voting out any government that thinks it can continue to lie with impunity.

That’s where this particular story ultimately ends — not in the world of complex mega-bailouts or sophisticated derivative transactions.

It ends in the streets.

Grudgingly at first — and then with growing momentum as the crisis unfolds — organizations like the IMF ultimately recognize that their fantasies are fading and their fiction is failing.

But you can’t wait for them — or any other authority — to admit the truth. By then, it will be too late. Instead, you must move pro-actively and get to safety before a stampede.

Here’s What to Do …

Begin by checking our Financial Strength Rating of your bank, credit union, or insurance company. If you go to www.weisswatchdog.com, sign up, and add your institution to your watchlist, you’ll get our Weiss Financial Strength rating immediately.

If it’s rated D+ or lower, seriously consider shifting all — or almost all — your money elsewhere. And if you have a choice, stick with institutions that are rated B+ or higher.

While you’re at our Weiss Watchdog site, also be sure to search for the Investment Ratings on your stocks, mutual funds, and ETFs.

Next, be sure to stay informed. This crisis is unfolding very quickly, and we are using every vehicle at our disposal to keep you up to date — so you can make the most prudent decisions possible.

We’re not perfect. We make forecast errors.

But there’s one thing we never do or even think of doing: We never let conflicts of interest affect our conclusions or recommendations. We never accept a dime of compensation from the companies we cover or rate. We refuse their free lunches, reject their gifts, and ship back their holiday fruit baskets.

We are here for you and you only. So take full advantage of all the free information and empowerment tools we make available to you. If you haven’t done so already …

•  Sign up to get this daily publication — Money and Markets — in your email inbox each day.

•  Be sure to also sign up for our sister publication — Uncommon Wisdom — focused more on natural resources and emerging markets.

•  Watch our daily videos at the Weiss Money Network.

•  And join me on my Facebook page, where I post comments and answers to questions daily.

With all that’s happening, please be sure to stay out of harm’s way!

Good luck and God bless!

Martin