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Albert Edwards: At 500% Net Liabilities To GDP, It Is Too Late To Prevent The Collapse Of The G-7; Greece Is Irrelevant, We Are All Now Insolvent
February 12th, 2010 | 
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Submitted by Tyler Durden
For Greece, with on and off balance sheet liabilities at over 800%, it’s game over. For the Eurozone, with the same ratio at about 500%, it is also game over. For the US, at 500%+, it is, you guessed it (sorry Joseph Stiglitz), game over, but since we have the printers, it will simply take a little longer. Following up on yesterday’s popular post on prevailing delusions as captured by Albert Edwards’ colleague Dylan Grice, we present Albert’s latest outlook. Please don’t read this if you want to keep believing there is any hope left for the (developed) world.
But first some aeral photography from Dylan Grice, indicating just how far the US government is willing to go to get the population stoked about owning fixed (shouldn’t it be called broken really?) income. With British QE over, and the country still to implement the same criminal annuitizing of 401(k)s that Uncle Sam is contempltating in order to make “Buy Bonds” a “voluntary” option one can’t really decline, maybe letters on modern architecture building blocks is all that would works. As Edwards says: “I’m not sure leaving man-sized building blocks around the City of London is really going to make an awful lot of difference, but I suppose when your public sector deficit is around 13% of GDP, every little bit helps!”
So back to Greece, the Eurozone, and policy response in general, Edwards places the causes (and “solutions”) of the escalating problem precisely where it belongs: at the core of the Keynesian systemic outlook flaw.
A major divergence of views in the market at the moment concerns what governments should be doing with their outsized fiscal deficits. Economists seem to be polarised between those who think governments should be rapidly cutting fiscal deficits to avoid impending insolvency and/or a surge in bond yields, and those who believe this will be totally counterproductive and that deficits should stay very large. Behind this controversy probably lies the key to the economic outlook.
To Edwards, and to ever more hedge fund investors judging by the jump back in Greece Bund spreads which just broke the most recent technical resistance level of 300 bps, Greece is nothing more than Russia and LTCM (or Bear Stearns as the case may be).
The situation in Greece following hard on the heels of similar solvency issues in Dubai feels to me very much like the Russian default and LTCM blow-up in 1998. For the blow-ups that year were a direct follow-on from the Asian crisis a year earlier a different chapter in the same book. There will be more crises to follow Greece, both inside and outside of the eurozone.
The outcome of broken Keynesian policy (by definition) will be ugly, and will destroy the eurozone. We said it some time ago, and SocGen has now also confirmed this bearish perspective.
My own view of developments, for what it is worth, is that any “help” given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain – we deliberately exclude Italy).
The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.
As noted earlier on Zero Hedge, in Europe the population is a little less brainwashed by the moronic happenings on prime time TV, so while in America the destruction of the economic system, as trillions are transferred to the kleptocracy which knows fully well the end game is nigh, results in some sighs of desperation at best, in Europe the outcome will be somewhat more violent.
In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political “consensus” within the PIGS to remain in the eurozone could falter in the face of another of Europe’s unfortunate tendencies -the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little “help” that can be offered by the other eurozone nations other than temporary confidence-giving “sticking plasters” before the ultimate denouement: the break-up of the eurozone.
And in case you were wondering why all European leaders are powerless to provide a bailout proposal that actually has a snowball’s chance in hell of doing something/anything to help Greece, read on. Alternatively, if you want to find out why any plan suggested on Monday will be thoroughly useless and once digested by the market will cause another major crash, read on as well.
The pressure to tighten fiscal policy from current nose-bleed levels of deficits is not just an issue for crisis hit Greece. It is an issue for virtually all economies. It is a particular issue for the US and UK with structural (cyclically adjusted) general government deficits of almost 10% of GDP (according to the OECD)! There is a ferocious debate ongoing between those who believe there needs to be a rapid reduction in these deficits to avoid some combination of insolvency/default/rapid inflation and those who believe that there should be even more fiscal stimulus. The debate is loud and opinions are tending to be polarised.
My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval. Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt.GDP has simply been brought forward from the future and now it’s payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its “correct” level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity.
And here is the topic that will dominate over all pundit round table discussions in the next weeks: the entire world is insolvent, although some are more insolvent than others. Greek total net liabilities (on and off balance sheet) to GDP are 800%! EU: at 470%, the US, at over 500%. There is no way out but default.
Edwards’ poignant summation.
I am persuaded by my colleague Dylan Grice’s analysis that, including unfunded liabilities, most governments are already insolvent with debt to GDP ratios closer to 500% of GDP instead of around 100% for most G7 countries . It is too late.
Nor were Dylan and I persuaded by recent comments from Nobel Prize Winner Joseph Stiglitz that it is absurd to suggest that the US and UK governments might default on their debts as they could just print money. Indeed. But a client pointed out to us that Weimar Germany did not default on its debts during its hyper-inflation. How reassuring!
I am persuaded though by Richard Koo’s book about the lessons from Japan’s balance sheet recession. The crux of his analysis is that governments have no option but to stimulate aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery – and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.
The take home is very, very simple: we can delude ourselves that the game can be won (it can’t), or we can prepare for the imminent collapse when delusion finally fails.
Posted in Albert Edwards, Balance Sheet, Banking System, Bear Stearns, Budget Deficit, Corruption, Debt, Economic Crisis, Economy, Eurozone, Financial System, Germany, Greece, Gross Domestic Product, Ireland, Italy, Japan, Joseph Stiglitz, Money, Portugal, QE, United Kingdom, bailouts, bonds, quantitative easing | 
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The Consequences Of ‘The Big Lie’
The Consequences Of “The Big Lie”
It may be “politics as usual” to never talk about how bad the economy really is – never talk about the budget deficit in honest terms – and never talk about how revenues are and have been cratering across the board for governments.
But when you are facing a truly horrific situation in this regard, and you need everyone on board to make sacrifices – especially government positions where employees feel especially entitled - ”politics as usual” is particularly dangerous.
This weekend Ireland’s largest public sector union has called the situation “explosive”:
Speaking today Peter McLoone, the general secretary of Impact and the chairman of the Public Services Committee of the Irish Congress of Trade Unions said that trust had effectively broken down between unions and the Government and that there was no basis that the parties would be able to go back into discussions in the short term.
Mr McLoone told RTE’s “This Week” programme that he could not rule out the possibility of all-out strikes as the reaction from members to the pay cuts was very strong.
He also indicated that public sector workers would no longer be prepared to engage with the Government on reforms along the lines of those proposed in the talks on an alternative for reducing the public sector pay bill without cutting pay rates.
And by the way, what’s “especially dangerous” mean? Strikes? Many government workers would do us all a favor if they went on strike. That would solve budget problems, you see – you don’t pay people who don’t work voluntarily, and a strike is voluntary! To that I say: Go ahead and strike as it will HELP the budget situation.
If this is a thinly-veiled threat of violence, well, we’re already seeing that in Greece. I guess we can add Ireland to the mix without too much trouble eh? Or shall we talk about Italy, where it appears Berlusconi was punched – that is, literally assaulted:
OME (AP) — Italian Premier Silvio Berlusconi was punched in the face at the end of a rally on Sunday by a man holding a small statue in his hand, leaving the 73-year-old media mogul with a bloodied mouth and looking stunned, police said. The 42-year-old man accused of attacking Berlusconi in Milan as he signed autographs was immediately taken into custody.
How far are we away from boiled rope and lamp posts folks?
The problem here, like in New York and other US States, is that Ireland, like The United States, refuses to confess to the full extent of the economic damage – nor will they confess to the fact that it is not getting better at any material rate.
Instead, we have the litany of “pumpers” and misleading (if not outright false) so-called “economic indicators” that are put forward with a smug smile, claiming that “we are out of recession.”
Oh really?
Then why is New York’s financial situation so bad that Governor Paterson has felt the need to do this?
ALBANY – Gov. Paterson will announce Sunday that he is taking the dramatic step of unilaterally withholding 10% in scheduled payments this month to schools and local governments, including New York City, the Daily News has learned.
“He’s basically paying out 90 cents on the dollar,” one source said.
This of course is going to provoke some pretty strong responses – including lawsuits. Not that it matters; you can’t get what doesn’t exist, no matter how much you want to complain about it.
This is not limited to New York and Ireland. Indeed, it is pretty much “pick your state” in the US, and among other nations, the list is long and distinguished – especially in Eastern Europe.
The distortions that governments (and traders acting on the “free money” paradigm) have applied to the markets in the last two years are unprecedented. Oil, for example, is trading around $70 – but why? Cushing (the main oil terminal in the US) is full to overflowing, banks are literally parking tankers full of oil at anchor rather than selling it, and every place you can buy and cram a barrel, it has been bought and crammed. This has “created demand” for that oil, but since the oil has not been actually consumed it is false demand – and that supply must, at some point, go to the market.
Kuwait’s recent announcement that they may pull their deposited funds (custodial funds) from Citibank is more likely due to their government’s knowledge of the book cooking (and oil demand cooking) and radical deterioration in their state finances. Eventually the piper must be paid, and these distortions will disappear. When they do, so will the oil price – and I suspect Kuwait knows this full well.
Never mind the usual government game: When challenged, simply black it out.
Yes, that’s an actual FOIA response. I guess I should go long Sharpie markers?
Don’t even get me started on the financial reform bill. Oh, I’ll have commentary on it – but my first read is that the lobbyists have once again done it to us, cold, dry and hard. The most-blatant example that I found with about 30 seconds of skimming are subtle changes in the so-called derivatives “regulation” section that allows a person to be an alternative “exchange.” That’s right. That would include an artificial person (e.g. Corporation) since it doesn’t say otherwise, which means that our dear old big banksters (represented in their lobbying by ”Do-we Cheatem and How”) have managed to actually remove what little regulation currently exists – while claiming to be for “strong and sound regulation of derivatives.”
That’s right – this “bill” will actually weaken financial supervision of the most dangerous part of the markets, and therefore increase, not decrease, systemic risk.
Pay no attention to Obama’s faux “anger”; he’s lying as well.
If he was actually pissed he would have directed Geithner to refuse to allow TARP repayments. He didn’t and what’s more important, he and Summers are playing kabuki theater with you:
One of the White House’s economic advisors, Larry Summers, also stated his frustration with Wall Street on CNN’s “State of the Union” Program. Summers commented, “Here is what I think they don’t get…It was their irresponsible risk-taking in many cases that brought the economy to collapse.”
That’s why you and Obama have put a stop to that irresponsible risk-taking, right? All derivatives are now on a public exchange, all positions marked to the market nightly with appropriate posted margin, the former 14:1 leverage limit has been re-imposed and Glass-Steagall is being put back together and enforced on the banks.
Oh wait – none of that is actually happening, is it Larry? You’re a liar and so is your boss. You, in particular, were one of the chief architects of this mess with your “deregulate everything” approach to financial institutions.
How long will you sit for this folks?
Will it be before or after you are out in the street, jobless, homeless and hungry when you finally wake up and say “enough damnit!”
Posted in Congress, Corruption, Deflation, Delinquencies, Depression, Ireland, dubai, larry summers |
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Dubai: Floating on an Island of Debt
By Economic Forecasts & Opinions
Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.
Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.
Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.
U.S. Banks Less Exposed
Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.
Dubai World’s largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.
Reminder of Other Risks
As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.” The Dubai debt crisis further reinforces this viewpoint.
As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.
Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession.
Housing Market Mortgage Crisis
Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it’s becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.
According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since the report’s inception, 1972, and up from one in ten at the beginning of the year.
The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.
In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn’t expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.
Negative equity is another outstanding risk hanging over the mortgage market.
Dubai Is No Lehman
The circumstances behind Dubai’s moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai’s own general creditworthiness. UBS cautioned that Dubai’s overall debt “might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.
The current expectation; however, is that there’s a good chance that Dubai’s problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won’t risk tarnishing their images and reputation further, and will come up with a reasonable resolution.
Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year’s Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.
Rational Expectations?
But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis. The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.
The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.
Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.
Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.
Posted in Banks, Bloomberg, CDS, Collapse, Commercial Mortgage-Backed Securities, Commercial Real Estate, Commodities, Corruption, Credit Crisis, Credit Default Swaps, Creditors, Debt, Defaults, Delinquencies, Derivatives, Dollar, Dow Jones, Dow Jones Industrial Average, Dubai World, Economic Recovery, Economy, Financial Crisis, Financial System, Foreclosures, GDP, Gold, Green Shoots, Gross Domestic Product, Iceland, Ireland, Japan, Las Vegas, Lehman, Lehman Brothers, Markets, Money, Moody's, Mortgage Bankers Association, Mortgage-Backed Securities, Mortgages, Nakheel, Oil, Recession, Sovereign Default, Stimulus, Subprime, Subprime Mortgages, Swaps, TREPP, Transparency, UAE, UBS, Unemployment, United Kingdom, United States, Yen, abu dhabi, bonds, chase, dubai, housing market, lending, loans, losses, mortgage, off-balance sheet, prices, recovery, risk, securities, war |
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