Tag Archives: sovereign default

The GFC Is ‘Over’, Ken?

8 May

From The Australian:

Debt and taxes a recipe for economic chaos

The Australian sharemarket lost a massive $95 billion in a five-session horror streak this week, as the European debt crisis and the proposed resources super profits tax severely dented investor confidence.

It was the worst run for local equities since the peak of the global financial crisis, and the meltdown appears far from over, as the second phase of the global financial crisis takes hold.

Wait a minute?!  A “second phase”?  As recently as February this year, the Treasury secretary Ken Henry – architect of Rudd Labor’s massive “economic stimulus” spending, and the Henry Review with its resources super-profits tax that this week resulted in billions wiped off the value of Australian mining companies – publicly declared that the GFC was ‘over’:

“What people have called the global financial crisis, that has passed, I think it’s safe to say,” Dr Henry said. “But that isn’t to say that there will not be further adverse shocks for financial markets down the track and some of those shocks … could be of some significance for individual countries, but I don’t imagine (they would be) shocks of the sort that would be globally significant.”

Really Ken? You clearly do have a disturbing lack of “imagination”:

The local market tumbled a further 2 per cent yesterday, taking its loss for the week to 6.8 per cent, leaving the benchmark S&P ASX 200 index at its lowest point in 17 months.

Yesterday’s sell-off came after an extraordinary lead from Wall Street, where the Dow Jones sent shudders through the world, experiencing its biggest intraday move in history after another drubbing on European markets.

Asian markets also tumbled, with Tokyo’s Nikkei falling another 3 per cent, forcing the Bank of Japan to mount its biggest one-day injection of cash since 2008.

There was no sign of a let-up in Europe last night, with major markets opening as much as 2 per cent lower.

CMC Markets analyst David Taylor said markets were fearful the Greek debt crisis would spread globally and jeopardise growth.

“The sheer fact there is a possibility of a second global financial crisis or a second massive credit crunch inspired by a sovereign debt default, markets are . . . terrified about that,” he said.

Ken Henry completely and utterly failed to foresee the onrushing first wave of the GFC in 2007-08.

His “go early, go hard, go households” economic stimulus advice to Rudd Labor has resulted in massive wasteful spending, rorts, fraud, house fires, deaths, and a Budget thrown into an unprecedentedly huge hole.

He preemptively declared that the GFC is ‘over’.

And as recently as February, he could not even imagine any further “shocks of the sort that would be globally significant”.

How much is this arrogant, demonstrably incompetent clown receiving from MY taxes?

Sack Ken Henry now!

Tags: , , , , , , ,

Cracks Multiply In Europe

7 May

From Business Spectator:

Global share markets plunged overnight as panicked investors worried that the eurozone could fragment as a result of the escalating European financial crisis.

The European banking system is under huge strain* as banks are increasingly reluctant to lend to each other. The European banks are worried about how much other banks have lent to the weaker eurozone countries – the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) – and the catastrophic losses that could ensue if any of these countries defaulted on their debt.

At the same time, there’s been a flight of capital out of the eurozone as investors have worried the common currency might crumble as a result of the problems in the vulnerable economies of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

…

The huge question mark over the eurozone’s survival is causing the euro to plummet. Increasingly, market analysts are predicting that the currency, which broke through the $US1.30 earlier this week for the first tine since April 2009, is set to hit parity with the US dollar.

There is an increasing consensus that the $US145 billion European Union-IMF rescue package for Greece is not sufficient to solve Greece’s basic problem – that it is simply unable to service its colossal debts. There are also questions as to whether Greece will be able to implement the punitive austerity measures it is being forced to adopt in exchange for the bailout.

At the same time, there are increasing signs that even if it bails out Greece, Germany will not be prepared to write the huge cheques required to help other vulnerable PIIGS.

German taxpayers are already outraged at having to pick up a large chunk of the cost of the Greek bail-out, and Germany’s largest opposition party, the centre-left SPD, has said that it will not vote in favour of the bill.

Predictions that the cascading PIIGS debt crisis will cause the eurozone to collapse are becoming more widespread.

* That the European banking system is “under huge strain” and is beginning to freeze up (again) has profound implications for our economy. Why?

As explained in this post a few days ago, even the heads of our major banks quietly admit that our banking system has an “achilles heel” – it is desperately dependent on the international wholesale capital markets for funding.  If/when the banking system abroad seizes up again, our banks will be in deep trouble.

Watch out for the emergency reinstalment of the government’s Bank Guarantee, hoping to again prop up international confidence in our banks so that they can continue to attract funding in a second credit crunch.

Watch out also for higher interest rates charged by the banks – irrespective of the RBA cash rate – due to their having to pay ever higher interest rates in order to get that international funding in the first place.

Tags: , , , , , , , , , ,

GFC Wave II Coming?

7 May

From headline news around the globe (in this case, The Australian):

Wall Street Plunges On Eurozone Contagion Fears

US stocks plunged today in a flashback to the panicked trading of 2008 and at one stage the Dow was down almost 1000 points — its biggest intraday fall in history.

Investors fled everything from stocks and risky corporate bonds to commodities and poured money into safe assets such as US Treasuries and gold.

The US stockmarket fell for a third-straight session, as jittery investors grew even more restless over southern Europe’s festering sovereign-debt woes.

The sell-off turned ugly quickly, with Bank of America, Procter & Gamble and 3M among the big decliners, as potentially erroneous trades accelerated the drop.

The Dow Jones Industrial Average ended the session down 347.80 points, or 3.20 per cent, to 10,520.32, its biggest point drop since February 2009. The average at one point fell as much as 998.50 points, or 9.2 per cent, the biggest intraday drop in its history.

Tags: , , , , , , ,

History Repeating

5 May

From the Chicago Tribune, 1934:

Note carefully the title at top, and the ‘plan of action’ in the lower left corner.

Rudd’s borrow-and-spendathon – playing straight from the old Marxist playbook.

Tags: , , , , , , , ,

Don’t Bet The House On China

4 May

An excellent and timely article by Karen Maley in today’s Business Spectator (reproduced here in full):

Kevin Rudd’s resource super profits tax has one massive risk – that commodity prices collapse before he gets to collect one cent of it.

Yesterday, the influential forecaster, Marc Faber joined those warning of problems ahead in China. “The market is telling you that something is not quite right”, he said in an interview on Bloomberg television. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

On Sunday – as Kevin Rudd and Wayne Swan were announcing their new resources tax – China’s central bank made another attempt to dampen property market speculation. It lifted its reserve requirement ratio by a further half a percentage point, so that most Chinese banks will now have to hold 17 per cent of their deposits on reserve.

But this latest increase in the reserve ratio will likely prove as ineffective as the two previous rises in January and February this year. Many believe the Chinese property bubble will continue to expand for as long as the Chinese government maintains interest rates below the rate of inflation.

And that’s the core of the problem. The Chinese government is reluctant to increase interest rates because it risks exposing the huge fault lines that exist in the economy.

Over the past decade, China has built factories and expanded its manufacturing capacity in the expectation that the United States and Europe would continue to demonstrate a robust appetite for Chinese-produced goods. But western demand for Chinese products slowed in the wake of the financial crisis, leaving the Chinese economy with substantial overcapacity in manufacturing.

The problem was exacerbated during the financial crisis. With Chinese exports plunging, the Chinese government launched a massive economic stimulus program, equivalent to around 14 per cent of the country’s GDP. It also ordered Chinese banks to lend, and instructed Chinese state-owned companies to borrow.

The program had the desired result. The Chinese economy grew at an 11.9 per cent annual clip in the first three months of the year, the fastest pace since 2007. And we benefited too, because this strong Chinese growth pushed up the prices of our commodity exports, such as iron ore and coal.

But there are huge concerns over how the Chinese stimulus money was spent. Provincial governments, under instructions from Beijing to reach specified growth targets, undertook massive construction projects that have resulted in a glut of commercial office space, and huge shopping malls that are near-vacant. And much of the increase in bank lending was funnelled into property market speculation, pushing up housing prices to astronomic levels.

The Chinese government has tinkered with various measures to contain its property bubble – increasing the reserve requirement, lifting the minimum deposit that home buyers must have before they’re allowed to borrow, and urging banks to monitor their risks.

But it is loathe to raise interest rates for fear that it will cause mass defaults among manufacturers and property developers, leading to huge problem loans in the banking system.

Eventually, however, an end-point will be reached. Either the Chinese government will raise interest rates, or the property market bubble will collapse under its own weight. At that point, commodity prices will plummet, slashing the profits of the big mining companies.

And if this happens before 1 July 2012 when the new tax regime for the miners comes into effect, Rudd is unlikely to ever see a cent of his new resource super profits tax.

Betting the house on China is exactly what the numbskulls in the Rudd Labor government, the Treasury, and the RBA are doing.

Please take some time to review some of the many earlier articles in this blog, showing how the likes of Treasury secretary Ken Henry and RBA Governor Glenn Stevens have declared that the GFC is ‘over’, and forecast that (thanks to China) we are all set for a ‘period of unprecedented prosperity’ lasting until 2050.

What is vital to bear in mind always, is that these are the very same incompetents who all completely and utterly failed to foresee the onrushing Global Financial Crisis in 2008… even though its first wave had already broken in the USA and on global share markets during 2007!

Tags: , , , , , , , , , , ,

Roubini: Rising Sovereign Debt Leads to Defaults

30 Apr

Nouriel Roubini, one of just a dozen economists who publicly forecast the GFC, and who recently declared that ‘risky rich’ countries are in greatest danger of default, comments again on the rapidly spreading sovereign debt crisis (from Bloomberg):

Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said sovereign debt from the U.S. to Japan and Greece will lead to higher inflation or government defaults.

“The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,” Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. “Unfortunately in the U.S., the bond-market vigilantes are not walking out.”

“The thing I worry about is the buildup of sovereign debt,” said Roubini, a former adviser to the U.S. Treasury and IMF consultant, who in August 2006 predicted a “painful” U.S. recession that came to fruition in December 2007. If the problem isn’t addressed, he said, nations will either fail to meet obligations or see faster inflation as officials “monetize” their debts, or print money to tackle the shortfalls.

Roubini, who teaches at NYU’s Stern School of Business, told attendees at the Beverly Hilton hotel that “Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems.”

“Eventually, the fiscal problems of the U.S. will also come to the fore,” Roubini said during the panel discussion. “The risk of something serious happening in the U.S. in the next two or three years is going to be significant” because there’s “no willingness in Washington to do anything” unless forced by the bond markets.

Barnaby Joyce began trying to draw attention to the dangers of growing sovereign debt – warning of a coming day of reckoning in the USA and Europe and here in Australia – as far back as October 2009. As I have shown in countless posts on this blog, many leading economists, financiers, and informed commentators in other countries have been raising almost exactly the same concerns as Barnaby.

Few in Australia chose to listen.

Instead, Barnaby was ridiculed by the government and the media for every minor gaffe or slip of the tongue, his every statement misquoted or twisted out of context. With the ultimate result that he lost his position as opposition Finance spokesman thanks to the relentless attacks on his economic credibility. Despite his being better qualified to comment on finance than the entire Rudd Government economic team.

Only weeks later, those who do choose to look and listen can see ever more clearly… Barnaby Is Right.

Tags: , , , , , , , , , , , ,

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.”

Tags: , , , , , , , , ,

‘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.

Tags: , , , , , , , , ,

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.

Tags: , , , , , , , , ,

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.

Tags: , , , , , , , , ,

← Older Entries
Newer Entries →

Design a site like this with WordPress.com
Get started