Choose Your Crisis: Russia Deploys Missiles, Turkish Lira Tanks, and Italy’s Banks Teeter on the Brink
If you needed more reasons to stockpile gold retirement holdings, this past week saw two new crises and an old one reappear to threaten current global geopolitical stability. Russia has reared its ugly head once again by deploying continent threatening missiles along the border with NATO and the European Union. Turkey's is desperately trying to stem the collapse of its significant Lira currency. Italy's third largest lender crawled toward its last life line and the hoped for shareholder approval that will determine so much more than simply whether Italy's oldest lender lives to fight on another day or finally dies a tragic death.
New Russian Missile Deployment Threatens European Stability
With the recent stunning election of Donald Trump as new U.S. President and the warm phone calls which he and Russian President Vladimir Putin engaged in, you might reasonably be expected to believe that the Russians would make a conciliatory gesture in hopes for better relations between the two strained nations. Instead, Russia has deployed its infamous S-400 air missile defense system along with the feared ballistic Iskander nuclear missile system within the Russian enclave of Kaliningrad in a further effort to destabilize the NATO and EU countries. The U.S. State Department weighed in on the move last Monday by calling this an action that is “destabilizing to European security.”
John Kirby the spokesman for the State Department explained, “Russia has made threats to move its Iskander missiles to Kaliningrad for the past decade in response to a variety of developments in Europe, none of which demand such a military response. We call on Russia to refrain from words or deeds that are inconsistent with the goal of promoting security and stability.”
Kaliningrad proves to be a Russian province which lies between Poland and Lithuania. President Elect Donald Trump has labeled President Putin a great leader and announced that he hopes for better relations with the Kremlin. He has also called into question the expense of protecting the NATO alliance. This has led some analysts to predict that Putin might become more aggressive in Eastern Europe. The Russians actually claim that they are only reacting to the planned American missile shield to be located within Eastern Europe. Russian Parliament leader Ozerov claimed, “As response measures to such threats we will have… to deploy additional forces… This reinforcement includes deployment of S-400 and Iskander systems in Kaliningrad.”
Turkey Raises Rates in Efforts to Stem Lira Crash Crisis
After three years of no rate increases, Turkey's central bank defied the wishes of strongman President Erdogan this past week and raised the developing nation's benchmark interest rates by half a percentage point on Thursday. The U.S. dollar's recent surge coupled with increasing worries about Turkish domestic security has caused the Lira to be beaten up badly and also raised fears of impending inflation in the country. President Erdogan has constantly trumpeted his demands for less expensive credit since the failed coup this past summer. Despite this, the central bank bumped up its one week repo rate to a hefty eight percent. The overnight lending rate also rose to eight and a half percent at the same time.
Analysts had looked for at maximum a quarter point increase, according to 12 out of 19 Reuters' polled economists. This first incidence of tighter policy since January of 2014 flew right in the face of President Erdogan, a self-described foe of interest rates. Erdogan correctly believes that higher rates reduce economic growth. Erdogan opined, “I have nothing against the independence of the central bank, but I cannot allow my people's will and rights to be taken away with high interest rates.” Something had to be done, the central bank felt, as the Lira has collapsed around 14 percent of its total value versus the U.S. dollar this year alone. It has been battered by both reciprocal dollar strength and investor edginess since the failed July Turkish coup destabilized the country both economically and politically.
Italy's Third Largest Lender Almost Out of Time At Crucial Moment for the Country
It is a scary moment when you hear analysts saying that Italy's third largest lender and oldest bank the Banco Monte dei Paschi di Siena may have finally reached its end game. Italy's entire banking sector is hanging in the balance pending the outcome of this particular Greek tragedy. For seven long years now, this oldest bank in the world has continuously skirted the edge of total collapse. It has repeatedly received either government or investor bailouts in the nick of time heretofore. The CEO Marco Morelli has only through the end of the year to bring in five billion euros of fresh capital. This amount of money now represents seven times the present market value of the bank. It must also offload a staggering 28 billion in loans gone south, if the venerable Italian bank is to be saved. Stefano Girola of Syz Asset Management in Lugano, Switzerland claimed that “Time is running out. It's like a huge puzzle, and one missing piece will doom the whole project.”
Monte Paschi's plan involves a voluntary exchange of 4.3 billion euros worth of subordinated bonds in order to decrease the number of shares it has to otherwise successfully sell. Shareholders will have to approve the overall plan as well as the offer, though they are dangerously frustrated with Monte Paschi's never-ending crises. Even if there is no revolt of the present shareholders, new investors must be cajoled into ponying up money to a bank that has watched impotently as its share value collapsed by an unprecedented 99 percent since 2009, that has been labeled the least solid bank by European regulators, and that has helplessly booked an eye-watering 15 billion total euros in losses. The CEO will not be able to rely on Italy to come riding to the rescue if this deal falls through. This is because of a new set of EU rules that insist on stock and bond holders absorbing losses if a bailout occurs. This would lead to a veritable firestorm in Italian politics at the moment.
The true danger is to the entire Italian banking system and the EU banks beyond this. Should the bank not stop listing in time, the resulting collapse shock wave would reverberate not just around the fragile Italian financial system but also the entire Eurozone. Italy remains the third largest economy in the shared currency zone, and it is still reeling from more than 360 billion euros in bad loans. This amounts to a stunning one-fifth of the nation's entire GDP. This past July, even the American Federal Reserve weighed in on the Italian bank's deteriorating situation, tanking share prices, failing loan books, and shrinking profit margins.
Even if Monte Paschi manages to convince present and new investors to hang on to the still sinking ship, they may still be upended by the results of the imminent December 4th Italian Constitutional Reforms referendum on which Prime Minister Matteo Renzi has staked everything in order to attempt to revitalize the paralyzed Italian governmental system. He has promised to resign if he loses the vote, which all polls show that he will. This has only increased the environment of uncertainty. Do not let anyone talk you out of your retirement gold holdings just because gold prices have momentarily retreated in the short run. The world is as geopolitically unstable now as ever.