Tag Archives: sovereign default

Labor Less ‘Creative’ Than Greece

19 Mar

From the Korea Times:

The Greek crisis is a textbook example of the interconnectedness of the global economy and the foreign policy environment.

For most of the last decade, the Greek economy grew faster than others in the euro area. Yet, the country’s balance sheets worsened.

(Sound familiar?)

So, when the global recession hit, and the Greek economy contracted by 2 percent in 2009, international bond markets panicked, fearing that Athens was going to have trouble meeting its obligations. By mid-February the Greek government was paying three percentage points more to borrow money than the interest rate charged Germany, worsening the mismatch between Greek revenues and expenditures.

Wall Street bears some of the blame for this mess. Goldman Sachs and possibly other American financial institutions reportedly helped Athens understate its true indebtedness through the creation of innovative financial instruments.

The Rudd Government has used a more traditional way to understate our true indebtedness. ‘Creative accounting’. Or ‘cooking the books’.

First, Rudd Labor has made changes to the ‘methodology’ used for reporting Gross Domestic Product (GDP).  And they have applied those changes to all the previously reported Budget numbers too.  The result?  A “substantial increase” in Australia’s GDP.  As much as (eg) 4.5% per annum added to the real, inflation-adjusted GDP that was originally reported in the Howard Government’s 2006-07 Final Budget Outcome.

The benefit to Rudd Labor in making this “substantial increase” to GDP in the historical data, is that their spending (as a percentage of that GDP) looks lower.  Their annual spending growth (as a percentage of GDP) looks lower. Their debt (as a percentage of GDP) looks lower. And, their Interest-on-debt (as a percentage of GDP) looks lower too. This explains why Rudd Labor politicians always love to quote everything in percentages. “As a percentage of GDP”.

Second, Rudd Labor has also changed the ‘methodology’ used to calculate the inflation-adjusted value of ‘real’ spending growth.  This was a sudden decision, for the November 2009 MYEFO budget update. The result? The Rudd Government’s reported ‘real spending growth’ is a whopping 30.1% lower under their new calculation method.

Finally, Rudd Labor lies about the GFC whenever it needs to defend its massive spending spree. They have repeatedly told the public that “the GFC punched a huge hole in our projected revenues”.  But the official Budget documents show that this is a lie.  In the May 2009 Budget, the estimated government “Receipts” were only 2.7% lower than for the previous year.  And by the November MYEFO update, government revenues were expected to be slightly higher than for the previous year.

Please follow those links. View for yourself the actual Budget documents that show how Rudd Labor have ‘cooked the books’.

You will see that, unlike Greece, our Labor Government does not need to hide our true state of indebtness through the use of creative financial instruments.

They use good old-fashioned ‘creative accounting’ instead.

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ECB: Stark Warning of Eurozone Debt Crisis

17 Mar

From BusinessWeek:

European Central Bank Executive Board member Juergen Stark said the euro region may face a sovereign debt crisis unless governments reduce budget deficits.

There is “a clear risk that we will enter a third wave,” which is “a sovereign debt crisis in most advanced economies,” Stark told lawmakers in the European Parliament in Brussels today.

In Australia, our government is continuing to increase our budget deficit, by refusing to withdraw its woefully incompetent and wasteful “stimulus” spending.

Even though we had no recession, and RBA Governor Glenn Stevens recently referred to 2008-09 as “the mildest downturn” we have had since WW2.

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Batten The Hatches

16 Mar

From the Sydney Morning Herald:

The ominous word ”boom” appeared last week, in large type, on the front page of the local newspaper. Given the nature of this paper, the word could only refer to one thing: property. While the signals from the property market are mixed, it appears we are springing back to normalcy without absorbing the reality: the global financial crisis is far from over. All the elements are in place for a second crash.

The world has become an economically unstable place, with enormous unresolved issues. Australia’s economy is fundamentally sound, but the global economy is fundamentally unsound. Even a good boat can be swamped by a bad sea and Australia, as a middling economy, will be buffeted by forces beyond its control unfolding in the United States, the European Community and Asia.

The Bank for International Settlements, the central bank for central banks, is warning of ”unstable dynamics”. Ominous language. The International Monetary Fund estimates the world’s 20 largest economies, the G20, will have a combined debt equal to 118 per cent of their combined gross domestic product by 2014, meaning debt will have exploded by 50 per cent in just seven years. To fund what? In Australia, debt is being used for expansion of the mining sector, which is good, but also for the ill-disciplined spending of the Rudd government and the chronically overpriced housing sector. As a result, Australia’s economy is more vulnerable to economic stress from abroad…

While the obvious and prudent response of government in a financial crisis is to provide social and economic shock absorbers by increased spending and borrowing, it is also important not to overreact. If you believe the global financial crisis is still unfolding, the key is not to overshoot, but to conserve resources and policy options.

The Rudd government, as it has proved in every area of major policy, overspent. It threw money around with undisciplined panic when faced with the global economic crisis.

A must read article.

Perhaps Mr Sheehan might like to point all this out to the overpaid, short-sighted, know-it-all idiots in the Treasury department, and at the Reserve Bank of Australia.

They all failed to see and forewarn of the GFC.  So, thanks to their incompetence, millions of Australian citizens lost literally billions in retirement savings and investments during late 2007 through to early 2009.

Now they are saying that the GFC is “over”, and that we are set for a multi-decade China-fueled mining boom that will provide a “period of unprecedented prosperity”.

Sack Ken Henry. Sack Glenn Stevens.

And abolish the RBA.

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Eurozone Faces ‘Sovereign Debt Explosion’

15 Mar

From the UK’s Telegraph:

Europe’s governments are at increasing risk of an interest rate shock this year as the lingering effects of the Great Recession drive debt issuance to record levels and saturate bond markets, according to Standard & Poor’s.

The warning comes as bond giant PIMCO spoke of a “sovereign debt explosion” that has taken the world into uncharted waters and poses a major threat to economic stability. “Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,” said Mohamed El-Erian, the group’s chief executive.

Mr El-Erian said most analysts are still using “backward-looking models” that fail to grasp the full magnitude of what has taken place in world affairs since the crisis. Some 40pc of the global economy is in countries where governments are running deficits above 10pc of GDP, with no easy way out.

Australia too, is issuing government debt at record levels – $1.6bn last week, another $2.1bn scheduled for this week.

See the Australian Office of Financial Management’s website.

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Europe’s Banks Brace For UK Debt Crisis

14 Mar

From the UK’s Telegraph:

UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece.

“I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors,” said Kornelius Purps, Unicredit’s fixed income director and a leading analyst in Germany.

Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance.

Sound familiar?

Our economy too, was once cushioned by low debt levels. Not any more.

In my view, the only really fundamental difference between the UK’s dire economic situation and Australia’s, is this: as happens so often, with so much in Australia, we are simply running a couple of years behind on the major international trend.

The UK property bubble has already burst. Ours hasn’t … yet.  Only because the Government had cash in the bank to prop up our property bubble – and thus, our banking sector – by doubling the First Home Owners Boost.

When another wave of the GFC rolls in, we no longer have a “low debt” position to cushion the blow.

The only question seems to be, from which direction will the next wave come?  From Europe?  From the UK? From the USA? Or, from China?

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Is Barnaby Really An Idiot?

13 Mar

Take a look at this chart, and then think very carefully about your answer (click to enlarge) –

USA - Federal Surplus / Deficit since 1901

That chart is from the US Federal Reserve, St Louis branch.  For the last 108 years.

And it’s not bang up to date.  It only goes up to end September 2009. Hard to believe, but the US government has gone much, much deeper into the negative in the 5.5 months since then. In February alone, the US went another US$221bn into the hole. That’s a one month record.

Do you remember how the Rudd Labor and mainstream media’s assault on Barnaby Joyce’s economic credibility began?  When he publicly questioned whether the US could default on its debt.

Well… what do you reckon?  Look at that chart.  Think about it.  Use your own commonsense.

Barnaby is right.

And there are plenty of esteemed international economists … including the current chairman of the US Federal Reserve… who agree.

As does US Secretary of State, Hillary Clinton, who called the US deficit a ‘national security risk’ just 2 weeks ago.

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Worrier Joyce Gains Traction

13 Mar

A must read article in today’s Sydney Morning Herald:

Why Our Foreign Debt Is A Taboo Subject

It’s become deeply unfashionable to talk about Australia’s foreign debt. Neither the government nor the opposition wants to mention it and the same goes for most economists. In the Reserve Bank’s 60-page quarterly review of the economy it doesn’t crack a mention.

Predictably, however, the subject holds no terror for Barnaby Joyce. As best I can make out, his celebrated mention of ”our net debt gross public and private” was a reference to our foreign debt.

What’s that you say? You thought the pollies had done little else but spar about deficits and debt? Sorry, different debt. They’ve been arguing about the public debt – the amount the federal government owes (mainly to Australians).

On the latest estimates (which are probably too high), the federal budget’s return to deficit is projected to cause the net public debt to peak at $153 billion in June 2014, before falling back.

But as Crocodile Dundee might say, that’s not a debt, this is a debt: according to figures we got from the Bureau of Statistics last week, in December Australia’s net foreign debt reached $648 billion.

And if you enjoy a good worry, as Joyce clearly does, why not quote the gross foreign debt? It stands at a cool $1219 billion.

How on earth did we get to owe all that money? Just who owes it? What’s the difference between gross and net? And why does no one but Bushwhacked Barnaby think there’s much to get excited about?

Perhaps it’s because Barnaby is the only politician in Australia who truly cares about protecting Australians.  And not just his own taxpayer-funded lurks and perks.

There is one serious quibble I have with Ross Gittins’ column. He writes:

Since we’ve run a deficit on the current account almost every year since the year dot, and since we also have to borrow to cover the interest we pay on earlier debt, our total debt to foreigners stands at $1219 billion.

Fortunately, it’s not quite that bad. That’s the gross amount we owe. But while some Australians were borrowing from foreigners, others (mainly our super funds) were lending money to foreigners. As at December, foreigners owed us $571 billion.

So that’s why the net amount we owe to foreigners is $648 billion and that’s the more meaningful figure to focus on.

I disagree completely. With so much evidence emerging almost daily about the growing debt crises in countries all over the world – just see the dozens of articles referenced and linked in this blog –  why should we sit back comfortably and count our chickens before they’re hatched?

If foreigners owe us $571 billion, what makes us think that they can pay us back? What good reason is there to believe we can count on that $571 billion owed back to us?

I applaud Mr Gittins’ story overall. At least he’s bringing attention to the great taboo subject of foreign debt. But I fear that, like so many mainstream economists, he fails to see these simple, logical flaws in the “popular” wisdom.

The exact same flawed argument is made by the government, Treasury, the RBA, and all their many cheerleaders in the mainstream media, when it comes to Gross vs Net public debt.  And, gross vs net Interest on Debt.  Again, they always argue that it is only the Net figure that matters. Because they believe that we can count on the amounts owed back to us as a sure thing.

Morons. Blinded by “conventional wisdom”, and too much time staring into the crystal balls of economic “theory”. Even Gittins manages to concede as much, in a butt-covering final paragraph:

Of course, the conventional wisdom among economists could be wrong. It has been known.

Indeed.

Not one “conventional” economist predicted the GFC.  Many – like the Rudd Labor team of economic illiterates – were still shrieking about “the inflation genie” in the middle of 2008.  Even though the GFC tsunami had already started to wash over the USA back in the middle of 2007!

The “conventional wisdom” is BS.

Barnaby is right.

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France Next On Debt Watch

13 Mar

From the Globe and Mail (UK), via Reuters:

French debt looks set to come under pressure in the near future with investors battered by the Greek crisis arguing it is pricey and does not reflect France’s growing indebtedness.

As a result, other euro zone paper, including Germany’s and — perhaps surprisingly — Italy’s, could be in for a filip.

The gist is not that France’s economy is under any immediate Greece-like default stress, but the cost of its bonds — and the cost of insuring them — does not properly reflect what stress is actually there.

“France has been lumped as a core euro zone economy. To our mind the budgetary situation is not as good as the pricing suggests,” said Richard Batty, an investment director at Britain’s Standard Life Investments.

“It is being priced as though there isn’t a budget problem,” he said.

In it latest note, Mr. Batty’s firm said it was being put off French debt because its fiscal problems and the true cost to euro zone economies of any bailout of peripheral economies are not fully priced in to its debt.

This echoes the view of a number of other fund managers and bank analysts.

Less than a week ago, famous international financier George Soros warned that the Euro currency ‘may not survive’ the Greek debt crisis contagion in the Eurozone.

Others fear that the UK will be the next to fall thanks to its enormous debt levels.

Meanwhile, in Australia our financial authorities remain seemingly oblivious to the dangers from every quarter of the globe. They are still advising the government that we will simply sail out of the Rudd Government’s massive debt, on the back of a multi-decade China-fueled mining boom.

More evidence emerges almost daily, that this new China boom is no more than a hopeful fantasy, that will collapse possibly as soon as 2012.

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Debt Bubble Has To Burst

10 Mar

From Business Spectator:

This week is the one-year anniversary of the historic stock market rally which has seen US shares climb by almost 70 per cent – and we’re getting set to celebrate in style…

After all, what’s to worry about? Governments across the world are continuing to run massive budget deficits and interest rates are close to zero. The markets aren’t worried about the massive explosion in government debt, because they figure it’ll just mean that governments will have to keep interest rates at historic lows while they continue to pour liquidity into the system.

But while the markets continue to party, one dark thought presents itself. What happens if someone looks outside and sees that the real US economy is still in deep trouble? It is plagued by high unemployment, continuing weakness in the housing market, and faces mounting problems in commercial real estate that threaten to further destabilise the banking system.

What happens when the penny drops that massive government spending packages, combined with unprecedented money printing by central banks, have not produced a sustainable economic recovery?

As RBS strategist Bob Janjuah points out in his latest newsletter, the “gap between the fantasy in markets…versus the reality of the real economy/private sector, is already worryingly large, but risks becoming dangerously large.”

Janjuah says that there hasn’t been any sustainable recovery in private sector demand, and there won’t be for some years to come. Furthermore, there is nothing that can be done about it. Major economies can not generate growth by devaluing their currencies and trying to export their way out of trouble, because this is a strategy that everyone is using. All the big economies are trying to devalue and every country is looking to export. The problem is that there’s no obvious candidate to buy all these exports.

Janjuah also takes aim at those who believe that the massive build-up in government debt isn’t a problem because governments can simply erode the value of the debt through higher inflation. This strategy, he says, only works when inflation is unanticipated. When the market is expecting higher inflation, it pre-emptively prices in this risk of inflation in the form of higher interest rates. And already half the market is expecting to see governments try to inflate away their debts.

The other massive delusion that is buoying markets is that governments can keep pumping/printing/borrowing for long enough to compensate for the slump in demand from the private sector as it cuts back spending and tries to pay back debt. According to Janjuah, the time limits on this strategy are drawing nigh. “Those limits are pretty much already with us (Greece), or are soon to be with us, give or take a few months (in the United Kingdom), or at best, give or take a few quarters (in the case of the United States).”

The conclusion is inevitable; the bubble must burst. And Janjuah fervently hopes that that this happens sooner, rather than later. “The longer we are forced to wait, the bigger the bubble will be and the more horribly damaging the bursting process will be. And if we are forced to wait and the bubble gets anywhere like the one that went pop in late 2007 I have zero idea who will credibly be able to bail us all out the next time round. Certainly not our governments.”

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Soros: Euro ‘May Not Survive’

8 Mar

From Bloomberg:

The euro is being “severely tested” and “may not survive” the Greek deficit crisis, billionaire investor George Soros said.

The European currency’s construction is “flawed” because there is “a common central bank, but you don’t have a common treasury,” Soros said on CNN’s “Fareed Zacharia GPS” program.

“The exchange rate is fixed. If a country gets into difficulty, it can’t depreciate its currency, which would be the normal way,” Soros said.

The sovereign debt crisis in the Eurozone is far more serious than Australia’s economic authorities at Treasury and the Reserve Bank are admitting. A collapse of the Euro – and the European Monetary Union – would clearly have huge impacts for the global economy, including Australia.

Barnaby is right.

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