Global markets slide on fears of debt default spreading to Italy, Spain; warning signals were available some months ago

Global markets today suffered one of their worst beatings in recent months on mounting fears of a likely default by Greece and that the debt crisis is spreading to Italy and Spain. Shares across Europe dropped nearly 3% to two-year lows, Asian markets were also hit earlier in the day, and it appeared likely that the story would be repeated in the US markets too.

While to some the IMF has been surprisingly silent on bailouts for these debt-ridden European economies and Euro zone finance ministers are now talking about a rescue fund to help Greece but have fixed no timing, it seems that early warnings about this developing situation that could devastate financial markets all over again have been ignored.

Over a month ago, Porter Stansberry, financial advisor, warned that Italy was the next big global problem. In an article headlined "This is the biggest threat to your financial future" published on The Daily Crux web site, Mr Stansberry wrote, "Credit default swaps on Italian sovereign debt are at record levels and moving higher. Currently it costs €250,000 per year to insure €10 million worth of Italian bonds. I expect these prices to continue to increase, making it much harder for Italy to get the estimated €250 billion it needs to finance its annual deficit and roll over the €170 billion in principal that will come due in the second half of this year."

"And... none of these debt estimates includes the growing likelihood of a major bailout for UniCredit, Italy's largest bank. UniCredit is Europe's largest lender to Eastern Europe, where JPMorgan estimates credit losses will total €40 billion this year. When you see in the news that Hungary's currency is plummeting, you can bet UniCredit's losses are growing," Mr Stansberry elaborated.

Today, on the Italian bourses, UniCredit fell by over 7% before turning higher aided by a ban on short-selling by Italy's regulator and news that the government had sold its targeted €6.75 billion of 12-month bills in a bond auction.

UniCredit is the successor bank of Kredit-Anstalt, whose failure in 1931 overwhelmed European governments, forcing Austria, Germany, and England off the gold standard.

Mr Stansberry stated emphatically: "As I told my subscribers in March, I think history is about to repeat itself: Roughly 75 years after its collapse set off the banking crisis that ended the gold standard and destroyed the world's financial system, Kredit-Anstalt (now known as UniCredit) is once again the largest bank in Eastern Europe. I believe it will soon fail again, setting off another global banking crisis."

The investment advisor explained that one aspect about European sovereign debt that most investors around the world failed to understand is that Europe's banking regulators have allowed the banks to own European sovereign debt with zero reserves because the banks argued these were "risk-free" assets. The easiest way for European banks to "lever up" and increase their returns on equity was to borrow large amounts of slightly higher-yielding sovereign debt, from places like Greece, Spain, Portugal, and Italy. This allowed nations privileged access to credit, and it also allowed banks to take on much more leverage than they could have otherwise afforded. "Now, with credit default swap prices rising on these sovereign credits, the truth of these credit risks is coming out," he wrote.

In another note to investors on 20th June, Mr Stansberry wrote that he expected the Spanish and Italian economies to collapse in the next six months. "I expect this next 'down leg' in the world's markets to be more severe than the crisis of 2008, because the balance sheets of the Western democracies are now less prepared to manage the losses.

Describing the history of UniCredit again, and how the failure of its predecessor Oesterreichische Credit-Anstalt—the largest bank in Eastern Europe before World War II—was responsible for kicking off the Great Depression, Mr Stansberry said he was convinced that the failure of UniCredit now would presage the next global monetary collapse.

Today, as the UniCredit stock continues to weaken, there could be a run on the bank and the losses would be too large for Italy to manage without a huge international bailout. "UniCredit has borrowed $300 billion from other European banks. And Italy's government already owes creditors more than 120% of GDP. There aren't any easy solutions to this problem," the investment advisor wrote.