While Financial Markets Continue to Crumble, G-8 Leaders Simply Acknowledge the Need for Global Growth and Jobs

“As all the leaders here today agreed, growth and jobs must be our top priority,” Obama said. “A stable, growing European economy is in everybody’s best interest, including America’s.”

The president said economic progress is “threatened once again by the serious situation in the Eurozone” but he said “the direction the debate has taken lately should give us confidence.”

“There’s now an emerging consensus that more must be done to promote growth and job creation right now in the context of these fiscal and structural reforms,” Obama said. “That consensus for progress was strengthened at Camp David. Today we agreed that we must take steps to boost confidence and promote growth and demand while getting our fiscal houses in order. We agreed upon the importance of a strong and cohesive Eurozone and reaffirmed our interest in Greece staying in the Eurozone while respecting its commitments.”

While there is a real threat of a bank run in Greece and Spain and as global stock markets have lost more than $4 trillion, these leaders all seemed to agree that Greece should remain within the Eurozone. A study by Barclays last week suggested that the immediate costs of a Grexit would be $371.5 billion for the Eurozone members, of which Germany would be liable for around $108 billion, France for $80.8 billion, Italy for $71.5 billion and Spain for $47 billion. Now you know why they want Greece to remain in the Eurozone. But, the problem is, Greece is collapsing financially.

Basically Greek banks are insolvent and are been kept alive by the European Central Bank which is providing them emergency assistance even though urgently needed banking reforms have been put on hold in the election campaigns. In the meantime while most of the Greece’s wealthiest people have already moved their cash to traditional havens, such as Cyprus and Switzerland, withdrawals from banks seem to be escalating.

Recently, Greece’s central bank president, George Provopoulos, mentioned that his fellow Greeks had withdrawn €800 million ($1.022 million) from their bank accounts, within just a few days. Consequently, at a meeting of the Governing Council of the European Central Bank (ECB) last Tuesday, Provopoulos had to ask for money — once again.

Most Greek banks are currently cut off from the usual ECB lines of credit. They no longer have sufficient collateral. A number of banks are even currently operating without sufficient capital as a risk buffer for their activities. These banks are on life support with help from the so-called Emergency Liquidity Assistance (ELA) — a rescue aid program managed by Provopoulos.

Since the end of 2009, depositors have withdrawn cash from banks at a steady pace of about $2.5 billion a month, draining deposits to a record low of $209 billion in March, a decline of 40% from $347 billion just before the crisis. If the pace of withdrawals accelerates, then we may even see a panic. Civil servants and retirees have already seen their salaries and pensions cut by as much as 40%, while new or increased taxes erode their remaining funds.

While the crisis continues there are many Greeks who still believe that their savings will be protected as leaders will choose to remain in the Eurozone. Sadly, if the country does exit from the Eurozone and the drachma is reintroduced you can be sure it will be these individuals that will suffer the most as what they have will become worth even less.

Late last Thursday, Moody’s slashed the ratings of 16 Spanish banks, citing the reduced ability of the Spanish government to provide support to the sector, as well as the “adverse operating conditions” characterised by a renewed recession. Banco Santander (SAN) SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest lenders, were cut three levels by Moody’s Investors Service, which cited a recession and mounting loan losses in downgrading 16 of the nation’s banks.

Earlier in the day, shares in Bankia, the country’s fourth biggest bank, plunged by as much as 30% after a report in El Mundo that customers had withdrawn €1 billion from the bank over the past week. As to be expected the bank published a statement to say that the “BFA-Bankia is a solvent entity that continues to function quite normally and customers and depositors should have no concern.” Then, on Friday shares jumped by 20% due to a report that Spanish banks are calling for a reintroduction of a ban on short selling on financial stocks.

According to Moody’s the downgrade was mainly due to a surge of bad loans, the recession, restricted funding access and the reduced ability of the government to support lenders as its own creditworthiness diminishes. “Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness,” the ratings firm said. “The Spanish economy has fallen back into recession in first-quarter 2012, and Moody’s does not expect conditions to improve” this year.

Evidentally, the amount required to refinance Portuguese, Spanish and Italian and possibly French debts as they come due is probably a lot more than $1.27 trillion. At the same time, the Eurozone’s national governments need to find new money to bail out their stricken commercial banks, and they would have to find it from the European Central Bank. That sends the demands on the ECB heading north to $2.5 trillion. On top of all this, governments have to finance national budget deficits. And, in order to provide the necessary funding, the ECB is now looking at something more than $3.8 trillion plus. And Angela Merkel could forget any prospect of re-election next year.

Despite the on-going crisis in Europe and the ever increasing level in of debt in the USA, both the US Fed and the ECB will resort to printing massive amounts of money to prevent this crisis from spreading and in order to prevent a run on banks. This action will save the banks and allow the monetary system to continue as it exists today, but surging inflation would be just one result.

In the coming years, an inflationary cycle is going to have a disastrous impact on the global economy and the value of money. The endgame has begun, and how it will finish I do not know, but one thing sure I will put more trust in sound money like gold than I will in a paper currency that depends on our current financial and political leaders.