Global Economic Crisis

Any doubt that the Eurozone debt crisis is no longer contained, but has now metastasized into a full-blown global calamity, is rapidly being erased by fast-moving events.   With the second bailout of insolvent Greece in the works, followed by a ratings downgrade to junk by Standard & Poor’s, Moody’s has now weighed in with a double whammy. Ireland’s sovereign debt has been downgraded to junk status, with a clear signal that the marketplace expects the Irish Republic to require a second bailout package, as was the case with Greece.  Moody’s has now followed up on its action regarding Ireland with a warning that for the first time in its history, the AAA rating on U.S. government debt is under review for a possible downgrade. This inauspicious development is in connection with the political dysfunctionality that has afflicted Washington policymakers in both the executive and legislative branches over extending the national debt limit.

With ratings collapsing and bond spreads widening throughout the developed world, it now appears that another member of the infamous PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) is descending into fiscal anarchy. Italy is on the verge of requiring a  bailout of its own, one which would exceed what has already been allocated to Greece, Ireland and Portugal. In desperation, the Italian senate has voted in favor of austerity measures. Based on the failure of the austerity measures in Greece to prevent a second bailout being required, the desperate action by Italian decision makers is unlikely to work, and has the look of panic rather than thoughtfulness.

Like a tsunami wave that can travel thousands of miles from the epicenter of a major seismic event,  the cascading sovereign debt crisis, which had its origins in policy responses to the global financial implosion of 2008 and Greek debt crisis of 2010, is now ravaging public finances on both sides of the Atlantic. A point may soon be reached where private investors, Eurozone taxpayers and the IMF can no longer cobble together ever-larger “rescue packages,” all of which, with perverse logic, require even larger levels of public debt to construct. A dark truth may soon permeate this ballooning crisis; the policymakers have no real solutions, and have just about run out of gimmicks and short-term fixes. The global economic crisis that began with the financial collapse of 2008, far from being resolved or a clear path to recovery being underway, is entering a more dangerous phase, in which sovereign debt reaches the level of unsustainability. The result could very well be paralyzing insolvency among the advanced economies, which could destroy the economic future of an entire generation.

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S&P has weighed in on a bizarre scheme by the Eurozone crisis managers and French banks on supposedly enabling debt-stricken Greece to finance its insufferable fiscal burden. In the view of Standard & Poor’s, the French plan for banks to, in effect, roll-over private debt connected with the crisis will be seen by the ratings agency as an actual default.

With virtually every sane economist and observer believing that Greece is already insolvent and will inevitably default on its sovereign debt, it appears that the ratings agencies are now joining the choir. All that are left are the EU and IMF spin-masters preaching the falsehood that the debt crisis in Greece will be resolved without a default. What is tragic is that massive amounts of European taxpayers’ money is being poured down a rat-hole for no good purpose.

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In a piece for Al Jazeera entitled “black swan events and the global economy,” NYU economics professor Nouriel Roubini, the “doctor of doom,” has presented a new dark perspective on the current state of global economics. Roubini integrates a number of negative economic metrics and phenomena, including “black swan” events such as the Japanese earthquake and more mundane though far from rosy economic data that challenges the views of economists who are eternally optimistic. While the optimists believe the current negative economic factors are merely hiccups, and equity growth can resume in full force, Roubini warns that the dangers confronting the global economy are chronic, and may lead to a double-dip recession.

On the current Greek debt crisis, Roubini writes, “Global risk-aversion has also increased, as the option of further ‘extend and pretend’ or ‘delay and pray’ on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely.”

One of the points Nouriel Roubini makes in his article is that  new financial and economic disasters on the scale of 2008 and would leave policymakers empty-handed, as the massive growth in public debt since 2008 leaves them without ammunition in the event of a new series of catastrophes. As Roubini puts it:

“This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. Another round of so-called ‘quantitative easing’ by monetary authorities may not occur as inflation is rising - albeit slowly - in most advanced economies.”

In essence, Roubini offers a portrayal of the current state of the global economy that is laden with doom and gloom.

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I was not alone in being skeptical as the first European/IMF bailout package was cobbled together last year when the Greek sovereign debt crisis first exploded. At that time, the European politicians assured their constituents that the 110 billion euro bailout for Greece would absolutely stabilize the situation for Athens, and prevent a sovereign debt contagion metastasizing throughout the rest of Europe, especially to the so-called PIIGS nations on the southern periphery  of Europe (Italy, Spain Portugal as well as Greece) and Ireland. Now, after Portugal and Ireland have joined Greece in begging for a bailout from European taxpayers and the IMF, Greece is back with its cup in hand.

After a year of crippling austerity measures that have thrown the Greek economy into recession,  Prime Minister Papandreou has told the Greek parliament that even more severe stringent cutbacks and tax increases are required. The reason; last year’s bailout was insufficient to enable Greece to continue to pay creditors for her massive (and until the crisis surfaced, largely hidden) public debt. The news from Papandreou is dire; another massive injection of European and IMF loans are needed, equaling  the already staggering previous bailout package of 110 billion euros  (approximately $150 billion in U.S. currency), or else Athens will default on its sovereign debt. It must be pointed out that the second bailout  package, as with the first, will necessitate other European nations themselves going further into debt to provide Greece with the bailout, including countries such as Spain and Italy which are considered only slightly less vulnerable to a sovereign debt implosion than  Greece, Ireland and Portugal.

Anyone who though that the global economic and financial crisis that began in 2008 ended due to the “brilliant” expansion of public debt engineered by the policymakers is now getting their wakeup call. As I predicted in my book, “Global Economic Forecast 2010-2015:Recession Into Depression,” a global sovereign debt crisis will precipitate a worsening of the global economic crisis. Furthermore, solving a debt crisis with more debt, tied to fiscal policies that retard economic growth, is not a solution but rather an exhibition of economic and financial insanity.

 With policymaking of this “quality,” it bewilders the human intellect  that anyone still  thinks an economic recovery is just around the corner. There is in fact something just ahead for the global economy, but it won’t be pretty.

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No matter how the EU and IMF policymakers try to spin truth, the reality is that Greece (and not only Greece) is functionally insolvent. The spread on Greek debt is a clear sign as any can be that markets have thumbed their noses at Greek sovereign debt. The European/IMF bailout, at the price of severe austerity by Athens, is life support for what is already a fiscal corpse. Now that Standard & Poor’s has cut its ratings on four of the largest Greek banks to CCC, the politicians in Athens and throughout the Eurozone are even more desperate.

How bad things are in Athens can be observed by the latest machinations by Greek politicians. George Papandreou, the current Prime Minister of Greece, is supposedly offering to step down as the price to pay for a broad-based coalition government. It is said only a coalition government can adopt the severe austerity measures the IMF is demanding for more of the loans that alone keep Greece afloat. In the meantime, there are riots on the streets of Greek cities, as the population rebels against paying the price for sins it did not commit.

I think the smart money is on Greece defaulting on its sovereign debt, either outright or stealthily through restructuring. Of course, Greece will not be the last casualty of the rapidly evolving global sovereign debt crisis. In looking at Greece today, perhaps followed soon by Ireland and Portugal, we are also catching a glimpse of what is in store for the greatest sovereign debtor of them all; the United States of America.

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As a new year is about to dawn,  despite (and perhaps because of) massive government and central bank intervention in advanced and major economies, worrying signs are proliferating along with the contrived optimism about a supposed rebound  in global economic growth. Among the many clouds on the horizon regarding the global economic outlook for 2011, here are three:

1. Greek sovereign debt crisis not cured by the massive Eurozone and IMF bailout. Knowledgeable observers have pointed out that mathematically, it is not possible for the Greek state to deflate its economy in line with deficit reduction commitments required under terms of the bailout package, while simultaneously engineering a miraculous return to robust economic growth at a level sufficient to service the exploding public debt. There is already word being leaked to the Greek press by government officials that after the current bailout package expires in 2013, Athens will seek to restructure its sovereign debt.

2.  Irish banking crisis far from over. After receiving a staggering level of bailout assistance from the EU and IMF to cover the country’s insolvency due to guaranteeing the obligations of Anglo Irish Bank ( along with all other banking institutions in Ireland), the Dublin authorities were forced to inject nearly $5 billion into Allied Irish Banks, another bankrupt institution. As with Greece, it seems almost a certainty that Ireland will eventually seek to restructure its public debt.

3.  China, the one ray of hope in the global economy due to massive government injections of liquidity that have led to high levels of supposed growth during the global economic crisis, is now beginning to raise interest rates in a frantic effort aimed at reining in  burgeoning levels of price inflation. This could lead to a tightening in the Chinese economy, combined with a catastrophic deflation in the Chinese real estate market. Any downturn in China will reverberate with dire impact on the overall global economy.

Other than these three items, no need to worry, as Fed Chairman Ben Bernanke and a horde of policymakers assure us that their bouts of quantitative easing  and unprecedented levels of sovereign debt will somehow usher in a nirvana of good economic times. Unless, of course, you like I have no confidence in those who currently are the masters of our economic destiny.

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From Ireland to Portugal and back to Greece, the catastrophic public finances in the weaker Eurozone economies continue to throw off further nasty surprises, despite the massive debt-based stabilization fund the stronger economies in the Eurozone cobbled together to bailout their weaker partners. An example is found in ground zero of the European sovereign debt crisis, Greece. Fraudulent bookkeeping in Athens hid a massive and unsustainable government deficit. Once exposed, the official word was that the true size of the Greek deficit was now revealed, until that “final” figure was revised upward, then revised at a still higher figure again. Now we are informed that the last “final” upward revision was itself too low, and the latest figure from Eurostat is that the actual Greek public deficit for 2009 was an eye-popping 15.4 percent of national GDP.

The latest news on the Greek deficit, combined with bond spreads widening on Irish and Portuguese debt, are the latest markers pointing to sovereign fiscal doom in the Eurozone.

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When  the Obama Administration assumed office in early January 2009, the President’s chosen Secretary of the Treasury, Timothy Geithner, was already on record as estimating that the United States banking sector was in such dire straits resulting from the global financial and economic crisis triggered by the collapse of leading investment banks on Wall Street, it would require $2 trillion in government bailouts to repair the damage. However, once in power, President Obama and Secretary Geithner were reluctant to ask American taxpayers for another handout for Wall Street after the highly unpopular $700 billion TARP bailout. Their response was to rig a series of so-called banking stress tests,  which were completed in the spring of 2009. Only months after the near implosion of the global financial system, Geithner’s stress tests supposedly showed that the U.S. banks were in such excellent shape, only a handful required a measly $75 billion in recapitalization, a sum that could be easily raised through private investors. Never mind that Geithner’s stress tests  incorporated “worst case” unemployment rates that were already eclipsed by the summer of 2009 and other less-than-rigid assumptions. The market seemed to be charmed by Geithner’s charade, attested to by rising equity values of financial firms. Now the Europeans hope they can pull off the same performance.

With much fanfare, the Committee of European Banking Supervisors has announced the results of their own engineered bank stress tests, involving 91 banking institutions in 20 European countries. The architects of this banking Eurofest knew they could not show that all 91 had “passed” the stress tests, as this would simply not be credible even to the most gullible. For that reason, seven banks were selected as sacrificial lambs, and revealed as having failed the stress test, including five relatively minor Spanish banks, as well as the much larger state-owned German property and municipal funding specialist, Hypo Real Estate. This latter financial institution was so heavily weighted with toxic real estate assets, providing it with a passing grade would clearly have given the game away. However, despite the not unclever manipulation engaged in by the Committee of European Banking Supervisors, a growing number of observers and investors have begun to see through this farcical exercise.

Consider this; how valid can a stress test of European banks saturated with government bonds and other long-term public debt instruments really be if the supposed “worst case scenario” envisions no possibility of sovereign debt default in Europe? Only months after Greece was on the verge of public debt default without a massive Eurozone financial bailout, in turn funded by European countries that are themselves becoming increasingly mired in a profound sovereign debt crisis? Neither did the tests consider the possibility of a real estate or commodities crash, despite warnings that, among other dire possibilities, a global commercial real estate crash is increasingly likely.

The authors of this banking stress test would have one believe that not a single UK bank is in danger from worsening economic developments, despite a warning issued by analysts at the Royal Bank of Scotland to senior British policymakers in January 2009, entitled “Living on a Prayer,” which stated that almost the entire banking sector of the United Kingdom was “ technically insolvent.”

In February 2009, the European Union’s own executive branch, the European Commission, issued a confidential report, subsequently leaked to the British newspaper, The Daily Telegraph, which warned that European banks collectively held as much as 18.6 trillion euros in toxic assets. In the past 18 months we have witnessed a massive expansion of public debt  across Europe to fund economic stimulus programs, which has produced at best anaemic or stagnant growth figures, at the price of catastrophic levels of sovereign debt, prompting these same countries to now reverse fiscal policy and revert to budget trimming austerity measures. The likely outcome is clear; a double-dip recession in Europe, in conjunction with a lack of financial capacity by European taxpayers to again bail out their banking system to the same profligate degree that was undertaken after the collapse of Lehman Brothers.

As with Timothy Geithner, the architects of the European banking stress tests hope that  investors and the general public will believe their farce, based on totally unrealistic and overly-optimistic scenarios. In the case of Europe, the fervent desire is that the banks which are rightfully worried about counterparty risk will jettison their well-founded anxieties, and resume interbank-lending and credit flows at pre-crisis levels. However, as the American experience reveals, a banking stress test based on public relations requirements rather than realistic financial and economic modeling may boost the stock price of major banks, justifying  massive bonus payments to banking executives. However, as a solution for the continuing credit crunch and economic turmoil, it is no more than a tragic-comedic farce designed by committee.

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Ever since the monetary spigots and fiscal deficit pump primers were set on overload in the wake of the global recession that erupted following the Wall Street calamities of 2008, many economists have warned about the danger of a double dip recession. In other words,  the underlying weakness of the advanced economies most impacted by the recession  is so severe, an anaemic recovery may be shortly followed by a quick return to economic contraction. This is in fact what is increasingly likely to occur.

After incurring a flood tide of debt to cover the losses of the private banking sector, many advanced economies doubled down their bets by unleashing another torrent of debt for economic stimulus activity. The Keynesian policymakers assumed that the massive dose of public debt would quickly restore economic growth, thus ending the global economic crisis.

What has in fact  happened is that unprecedented levels of massive growth in the public debt has, at best, bought a feeble, anaemic and jobless “recovery,” with many economists calling for additional deficits for more stimulus spending. However, the bond markets have begun to react to the increasingly unsustainable levels of public debt. Thus, in short order we saw the Greek debt crisis evolve into the European debt crisis. Sovereigns that once boasted of their deficit spending are now in a panic, desperately trying to find ways of shrinking their structural deficits. The UK is joining with major Eurozone countries such as Germany in warning their citizens that austere times lie ahead, as governments reverse direction and begin to cut spending. These sombre voices are being echoed by the International Monetary Fund (IMF) and G20, as those officials, largely American, who are still calling for more deficit spending are now being drowned out by increasingly desperate European sovereigns, who have caught the scent of public default and national insolvency, and the apocalyptic economic repercussions that would ensue.

Now, what happens to a weak and artificial recovery from the worst economic recession since World War II when the fiscal deficits which alone underpin this so-called recovery are sharply curtailed? The answer is clear except to the politicians; double dip recession lies ahead, which will likely transform the global economic crisis into a full-blown synchronized depression.

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The trillion dollar Eurozone rescue package may have been as recent as almost yesterday, but it is already being forgotten and discarded by investors across the globe, as equity markets tank and financial volatility indexes embark on a steep ascent. It is quite clear that what began as a Greek debt crisis has now morphed into a full-fury European debt crisis.

We are in a most precarious phase of the ongoing global economic crisis. It is inevitable that the European debt crisis will spread to the United States, ushering in a dangerous global sovereign debt crisis. Despite the reassuring words of politicians throughout Europe, including Angela Merkel and Nicolas Sarkozy, as well as their counterparts in the U.S.A., this is a train wreck that cannot be prevented, and will transform a financial crisis and severe recession into a synchronized global depression.

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