Tag Archives: sovereign debt

OECD: Greek Crisis ‘Like Ebola’

29 Apr

From Bloomberg:

European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.

With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.

As OECD head Angel Gurria likens the crisis to the Ebola virus, Europe may need to come up with a plan equivalent to the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers Holdings Inc. “It is perhaps time to think of policy options of the last resort in the current sovereign crisis,” said David Mackie, chief European economist at JPMorgan in London.

“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television yesterday. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”

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‘Shock And Awe’ Needed To Save Eurozone

29 Apr

Following close on the heels of the extraordinary revelation by Ben Bernanke that the US Federal Reserve has printed $1.3 Trillion out of thin air to buy toxic Mortgage Backed Securities and prop up the US economy, now the European Central Bank may have to invoke emergency powers in order to engage in massive money printing to prop up the collapsing European bond markets.

From the UK’s Telegraph:

The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.

But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.

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Labor Can’t Balance Fiddled Books

28 Apr

It seems Rudd Labor’s massive, panicked, and bungled response to the first wave of the GFC – roof insulation, the horrendously wasteful school buildings rort – is now making it difficult for them to keep yet another promise, to keep spending growth below 2% of GDP.

From The Australian:

The government is facing a battle to keep costs under its self-imposed 2 per cent growth cap, with blowouts in some programs and higher interest payments adding to the deficit.

Spending in the federal budget, to be released in two weeks, could be at least $10 billion higher in 2010-11 than was forecast when Treasury updated the government’s accounts last November.

Government officials confirm that the budget will forecast economic growth in excess of 3 per cent, which will trigger the rules devised by Treasury for returning the budget to surplus.

These rules dictate that once growth returns to normal, the government will keep spending growth below 2 per cent after allowing for inflation. They also require it to cover the cost of new spending with savings elsewhere in the budget and to bank any increase in tax revenue.

When the mid-year budget update was released six months ago, it looked as though the spending growth target would be easy to reach in 2010-11 because spending on the stimulus program was expected to fall by about $9bn in that year.

In one of the most popular articles I’ve written – “Labor Fakes GDP By 4.5%” – I showed from the government’s own budget documents how Rudd Labor have “revised” the historical data to artificially increase Australia’s GDP figures. Why is that important?

Because it has allowed the government to hoodwink the public and the lazy “we-check-nothing” media that they can keep spending growth below 2% of GDP.  That seems like an easy promise to make, when you’ve simply faked the GDP numbers upwards.

I also showed in “Labor: Hide The Increase” that, according to the government’s own “adjustments”, if they were required to abide by the previous traditional deflator method for calculating the effect of inflation on government spending, they would fail to meet their own 2% spending cap.

Now, we see from today’s article in The Australian, that even with all their massive fiddling of the nation’s accounts and historical records, the government is still struggling to balance their books.

Perhaps they might ask for the assistance of a qualified, experienced, and honest Accountant?

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Greece Downgraded To Junk Status

28 Apr

Readers will be aware that I’ve been highlighting news about the Greek debt situation for some months. As a member of the European Monetary Union, and the Eurozone country with the gravest debt situation, it was always likely to be the first domino to fall.  Now it has.

From AAP:

Greece’s debt has been downgraded to junk status by Standard & Poor’s amid mounting fears that the debt crisis in Europe is spiralling out of control.

In a statement on Tuesday, the agency says that it is lowering its rating on Greece’s debt to BB+ from BBB- – that means that the country’s debt does not carry the investment grade tag.

The agency is also warning debtholders that they only have an average chance of between 30 to 50 per cent of getting their money back in the event of a debt restructuring or default.

European stock markets and the euro sank on Tuesday amid growing fears that the Greek debt crisis will spread to other weak eurozone countries, with Portugal now in the firing line.

“It can really be summed up in one word – contagion,” said CMC Markets analyst Michael Hewson.

The markets fell after Standard & Poor’s, a leading international ratings agency, downgraded Greek sovereign debt to junk status and cut Portugal’s long-term credit score by two notches.

The London stock market dived 2.61 per cent, the Frankfurt DAX sank 2.73 per cent and the CAC 40 in Paris plunged by 3.82 per cent. The Lisbon stock market sank by 5.36 per cent and Athens plunged six per cent.

The euro, which has been rocked for months over the debt drama in Greece, plunged again against the US and Japanese currencies, falling to $1.3250 from $1.3378 a day earlier and to Y123.46 yen from Y125.72 on Monday.

….

“Greece’s fiscal problems, and the market’s lack of confidence in dealing with them, are spilling over to other countries seen as having a kindred fiscal spirit,” said Patrick O’Hare at Briefing.com.

Greece has asked the European Union and International Monetary Fund to activate a three-year rescue package worth up to E45 billion ($A64.98 billion) in the first year.

However, the bailout is shrouded in uncertainty, with Germany insisting that Athens must first demonstrate how it plans to get its public finances in order before it gets the money.

“It is still the uncertainty surrounding this Greece bailout,” added Spreadex trader David Rees.

To compound matters, the EU/IMF rescue package may not be enough to resolve the wider problem of debt, according to VTB Capital economist Neil MacKinnon.

“The markets are worried that any fresh EU/IMF package to cover Greece’s funding needs in the short term are not enough to resolve the problem of worsening debt sustainability,” MacKinnon told AFP.

“Double digit interest rates and triple-digit debt levels are a recipe for debt restructuring and eventual default.”

The Greek debt crisis also unnerved Wall Street, with the Dow Jones Industrial Average sliding 1.24 per cent, Nasdaq shedding 1.44 per cent and the Standard & Poor’s 500 index declining 1.57 per cent.

The first domino has fallen. Who will be next? And just how far will the contagion spread?

Barnaby Joyce began speaking out about the risks to our economy from excessive debt both here and in other countries as early as October last year. For this, he was ridiculed and smeared by our know-nothing media and “expert” economic commentariat, and by the pompous “authorities” in government, the Treasury, and the RBA.

All of these utterly failed the Australian public, by their complete failure to foresee the on-rushing first wave of the GFC in 2008.

Now they are failing us all over again, by their naïve and arrogant dismissal of the potential global impacts of the rapidly spreading Eurozone debt crisis.  They seem to believe that because our island “escaped” the first wave, that somehow means we will miss the next (bigger) one as well.

Barnaby Is Right.

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Greek Debt Woes Rising

8 Apr

From the Associated Press:

European stock markets fell Wednesday amid mounting concerns about Greece’s debt crisis while U.S. shares drifted lower as the Dow Jones industrial average fell short of breaking above 11,000.

Once again, Greece took center stage as investors continued to fret about the country’s ability to pay off its debts — the ten-year spread between Greek and Germany bond yields stood at 4 percentage points, having earlier hit 4.12 percent, its highest level since the euro was introduced in 1999. The spread is also way up on the 3 percent level when the EU agreed on an aid program that would involve the International Monetary Fund.

“All of this puts a question mark over longer term debt sustainability as well as the threat of contagion elsewhere in the eurozone,” said Neil Mackinnon, global macro strategist at VTB Capital.

With fiscal retrenchment due in Greece, as well as Portugal and Spain, there are also mounting concerns that the debt crisis will weigh on eurozone economic growth for a long time yet, particularly as lower demand for German goods could squeeze the eurozone’s biggest economy.

“This does not look like a sensible strategy and will likely end up in economic slump for the eurozone generally alongside the risk of deflation,” said Mackinnon.

Worries about the strength of the eurozone economy were stoked further on Wednesday with the news that economic growth ground to a halt in the last three months of 2009 as output stagnated in Germany and contracted once again in Italy.

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Yields On Aussie Bonds Rising

8 Apr

And so it begins.

Have we just heard the ‘canary in the coalmine’ of government debt pause its happy singing?  When the government finds it has to start offering higher yields in order to sell its longer-dated sovereign bonds, you know that the market is beginning to smell inflation… and/or, losing faith in the government’s ability to pay up on maturity.

From The Australian:

The federal government drew solid demand today for an auction of new July 2022 bonds, its longest nominal debt on issue, but had to pay an attractive premium to sell the bonds.

In the latest extension of its yield curve, the Australian Office of Financial Management sold $1.0 billion of 5.75 per cent July 2022 bonds with a weighted average yield of 5.9642 per cent.

“The Commonwealth had to pay up to get good demand,” Westpac strategist Damien McColough said, noting good interest from buyers on yields closer to the 6.0 per cent level.

Over the past two months, the yield on the more common 10-year Australian Government bonds has risen from 5.48% to 5.85%.

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China’s Debt Bubble: When Will The Ponzi Unravel?

6 Apr

From Naked Capitalism via Roubini Global Economics:

Independent Strategy’s latest report, “China’s credit bubble: the missing piece in the jigsaw” makes a persuasive case that China’s debt fueled growth model is due for a hard landing, but the timing is uncertain, since the debt is funded internally.

China is barely past an episode of dealing with banks chock full of bad loans (there were debates among Western analysts in 2002 and 2003 as to how bad the damage was and whether the remedies were sufficient). On a more fundamental level, China has copied the Japanese mercantilist development model pretty much wholesale. It arguably hit the wall with the 1985 Plaza accord, when the US found the continued trade deficits unacceptable and succeed in organizing a G5 intervention to drive up the yen (that succeeded too well, the yen overshot, leading to the Louvre accord to push up the greenback). Japan’s central bank lowered interest rates to stoke asset prices in the hopes that the wealth effect would produce higher domestic consumption and offset the effect of the fall in exports.

We all know how that movie ended…

The report forecasts a large decline in growth rates, as well as land and real estate prices, since LGFVs [Local Government Financing Vehicles] will need to liquidate holdings to try to pay off non-performing loans.

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PIMCO Fears UK ‘Debt Trap’

2 Apr

From the UK’s Telegraph:

The US bond fund PIMCO has warned that Britain risks a vicious circle of rising debt costs as global investors demand a penalty fee on gilts to protect against inflation.

Bill Gross, the fund’s chief and emminence grise of bond vigilantes, said the UK was on its list of “must avoid” countries along with Greece and others in eurozone’s Club Med.

The flood of British debt is likely to “lead to inflationary conditions and a depreciating currency”, lowering the return on bonds. “If that view becomes consensus, then at some point the UK may fail to attain escape velocity from its debt trap,” he wrote in his April monthly note.

Mr Gross said the UK is not yet in crisis but gilts are sitting on a “bed of nitroglycerine” and must be handled delicately.

Michael Saunders from Citigroup said the UK has “no credible medium-term path back to fiscal sustainability”.

UPDATE:

From Reuters –

PIMCO Sees UK Downgrade

PIMCO sees Europe’s action on Greece as ineffective in fixing the country’s problems, while Britain’s sovereign debt rating could be downgraded within a year, a top executive of the world’s largest bond fund said.

Scott Mather, head of global portfolio management at Pacific Investment Management Co (PIMCO), told a briefing in Taipei on Thursday that the company was underweighting UK, U.S. and pan-European 10-year sovereign bonds.

“Miracles are needed in the next six months in order to keep economic growth in the developed world,” Mather said.

Last month, PIMCO said it was maintaining its negative stance on British gilts because the amount of debt the country would have to issue in the future should lead to inflation and a depreciating currency.

The country’s record-high debt has caused disquiet among investors, and Standard & Poor’s has put the country’s top-notch triple-A rating on a negative watch.

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Default Possible On ‘Stunningly Small’ Debts

1 Apr

Recently Professor Ken Rogoff, former chief economist for the IMF, warned that ballooning debts could cause “a bunch of sovereign defaults”.

He has also warned that China is in a bubble that will burst within 10 years, sparking a regional crisis.

In 2008 he correctly forewarned of the possibility of large bank failures in the USA.

Now his latest research offers very important insights for all Australians who believe the Rudd Labor “spin”, that our national debts are very low, and no cause for concern.

From the New York Times:

Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default.

One finding was that countries “can default on stunningly small amounts of debt,” he said, perhaps just one-fourth of what stopped Greece in its tracks. “The fact that the states’ debts aren’t as big as Greece’s doesn’t mean it can’t happen.”

Also, officials and their lenders often refused to admit they had a debt problem until too late.

“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded.

Barnaby Joyce has been ridiculed up hill and down dale since late 2009, for daring to raise questions about the unbelievably huge US debt (see chart here), and Australia’s own ever-growing national debts.

Professor Rogoff’s research shows that even a debt that is only one-fourth of Greece’s can be enough to cause a sovereign default.

In December, Greece’s debt was $482bn.

Australia’s public debt is $131.682bn.  And growing at around $2bn per fortnight.

Barnaby is right.

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Treasuries Sell-Off Raises US Debt Fears

31 Mar

From the UK’s Telegraph:

Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets.

The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be “the canary in the coal mine”, a warning to Washington that it can no longer borrow with impunity. He said there is a “huge overhang of federal debt, which we have never seen before”.

David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a “destabilising fashion”…

Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel.

Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.

The rise in US bond yields has set off mayhem in the 10-year US swaps markets. Spreads turned negative last week, touching the lowest level in 20 years.

Barnaby Joyce has been warning of the dangers of sovereign debt levels – and in particular the massive US debts – since October 2009. He has been ceaselessly ridiculed by the Labor government, and the mainstream media, for daring to say so.

Please take the time to browse the dozens of articles on this blog, from all around the world, citing leading economists, financiers, traders, and commentators – some of whom predicted the first round of the GFC. Not one of our economic “authorities” did.

Barnaby Joyce is far from the only one who is questioning our economic future, due to massive (and rising) sovereign debt levels, especially in the USA, UK, and Europe.

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