This New ECB Scheme Is Like 2011 All Over Again

You probably haven’t heard about the bond crisis in Europe.

That’s OK. The media won’t cover it until it makes headlines. And most analysts don’t want to talk about it because it’s what’s called a “tail-risk.”

Tail-risk is statistical jargon for something that could happen but most likely won’t happen. The problem is: When a tail-risk goes bad, all heck breaks loose.

Now, as editor of Safe Money Report, I consider it my responsibility to track ALL the risks – especially tail-risks – to make sure my members don’t get caught in a meltdown.

And, I just saw something that should send shivers down your spine. Here’s what it’s telling me…

The global bond markets are teetering on the brink of collapse … threatening a worldwide financial meltdown.

The looming debt crisis would dwarf the subprime mortgage debacle that destroyed so many millions of people’s fortunes just a decade ago.

Now, here’s what I’m talking about.

As you can see from the chart below, the European bond crisis topped the list of the worst tail-risks for assets, according to a respected survey of fund managers. Plus, the disintegration of the European Union ranked No. 1 overall.

Yep, all Europe. Going to heck in a handbasket. All at once.

Don’t expect the U.S. government to rescue us as the international dominoes fall. It’s drowning in red ink. Besides, the crash begins in Europe. By the time Uncle Sam notices, it’ll be too late.

And the threat isn’t even on the radar of financial pundits in the mainstream media. So, they don’t have any good advice. And when they do, it’ll be too late.

“Alarm bells are starting to ring again,” said Simon Derrick, a managing director and head of marketing strategy at global banking giant BNY Mellon.

Fortunately, you still have time to prepare for this financial hurricane.

But you have to hurry. And here’s why.

While no one has been watching, the European Central Bank (ECB) – led by “Super” Mario Draghi — has been quietly switching vast liabilities from European private banks and investment funds onto the shoulders of unsuspecting citizens across northern Europe.

Worse yet, there has been no democratic decision by any European citizen to take on these uncollectible debts that currently total more than 1 trillion euros … and grow every day.

This transfer is the unintended side effect of Europe’s own quantitative easing policies (QE) implemented by Draghi and his merry men at the ECB.

The policies have degenerated into a flight of capital from the Club Med bloc of southern European countries to the more prudent countries like Germany, Luxembourg and The Netherlands.

This stealth “socialization of risk” in Europe is a knock-on effect of the ECB’s newest experimental QE scheme: The TARGET 2 Payments System.

Yes, TARGET is really an acronym. It stands for Trans-European Automated Real-time Gross Settlement Express Transfer System. The system allows large, cross-border, interbank payments in real time.

And if things go really wrong, say experts, the system could trigger a euro crisis so enormous that it will force all the Eurozone’s debtor and creditor countries to recognize — to their horror — what Super Mario has done to them.

Critics have branded the system as a “secret bailout” for cash-strapped countries because it allows banks to spread their debts across other countries.

As always, the debt markets are the best and most accurate barometer of market stress. In fact, real yields in Germany and in the U.K. are negative as shown in the chart below.

Yes, negative! That’s because Europe’s extraordinary central bank policies discourage banks from hoarding cash.

Yes, that’s NEGATIVE. That means investors are willing to accept a NEGATIVE return in exchange for the safety of holding German and British government securities. That’s shocking!

“Our flow data is picking up serious capital flight into German safe-haven assets. It feels like the buildup to the Eurozone crisis in 2011,” said Derrick, of BNY Mellon.

And negative interest rates aren’t the only sign that something uniquely unusual is going on in Europe. You can find people in a panic over other European debt markets.

It’s obvious that Greece’s debt crisis is spiraling out of control. We’ve got Athens, the eurozone and the International Monetary Fund all bickering over how to solve the issue.

Amid this deluge of risks, Draghi has signaled he would extend his central bank’s huge money-printing program if worries become much worse. Remember, this is the guy who five years ago said he’d do “whatever it takes” to save the euro. A promise that resulted in the ECB’s balance sheet expanding by 1.2 trillion euros ($1.4 trillion).

But the issues for the banks in Europe are particularly acute. Eurozone banks are crumbling under approximately 1.06 trillion GBP ($1.3 trillion) of bad loans. That’s according to an independent European regulator.

This means that 1-in-20 loans across Europe are in trouble. But when you dig deeper, it gets even worse. That’s because there are 10 EU countries that have an average bad-loan rate of 1-out-of-10, which means 10% of their loans are underwater.

That’s why I have hedges on in the Safe Money Report portfolio. I think it’s the perfect mix of safety and growth for the current environment.

With hedges, my members can participate whether the bond market melts down or if markets move higher — as I have predicted they will.

As I’ve said before, it’s a powerful 1-2 combination for the current environment. I credit the strategy for the newsletter’s 9.29% gain year-to-date.

And come back here next week, when I’ll reveal how it will play out if the EU does indeed fracture. We’ll also look at what’s been happening across Asia as their banking sector has been on a lending tear — one that’s left the region swimming in debt.

Best wishes,

Bill Hall

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Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.