Global Economic Crisis

While bankrupt Eurozone nations are forced to sink deeper in debt to bailout Greece and other countries using the euro that are in even worse fiscal difficulty, a similar absurdity is becoming ever more likely in America. The virtually insolvent U.S. federal government may be forced, sooner rather than later, to bailout its most populous state. California is fast descending into a fiscal sinkhole, with no resolution in site.

In 2009, California “solved” its massive $26.3 billion state budget deficit through a combination of budgetary cuts and accounting gimmicks and other games, the only “solution” offered by  Governor Arnold Schwarzenegger and the dysfunctional state legislature.

In 2010, California’s fiscal woes are back with a vengeance. Even after the budget cuts of 2009, the state is now faced with a $19 billion deficit. While contemplating savage cuts in  public services, the state is faced with the absurdity of being compelled to add another $600 million to its extravagant pension program for its public workers. The state employees pension fund lost more than $55 billion during the financial implosion that erupted in the fall of 2008, and expects California taxpayers to make up for the shortfall.

At some point, California will be unable to borrow funds  at sustainable rates, replicating the ordeal Greece recently endured. At that point, it is likely that a California delegation will be speeding on its way to Washington DC, demanding that all the taxpayers in the other 49 states assume responsibility for bailing out Sacramento. The problem with this stratagem is that most of America’s states are facing immense fiscal challenges.

How do in fact the bankrupt bailout the insolvent? In the near future, this will become a far from academic exercise confronting policymakers in Washington.

global economic crisis california budget crisis, California debt crisis, california fiscal crisis, Governor Arnold Schwarzenegger

In an interview with CNBC, the renowned NYU economics professor Nouriel Roubini reverted to his apocalyptic mantle of “Dr. Doom.” He said without equivocation that equities were likely to lose 20% of their current valuation. He pointed out that the Eurozone debt crisis and general weakness in the global economy will create severe challenges for investors.

Regarding the Greek sovereign debt crisis, Roubini described efforts to bail out Athens and other highly indebted Eurozone countries as “mission impossible.” He went on to provide a dire overview of the fiscal crisis gripping many advanced economies.

“What needs to be done is clear. We need to raise taxes and cut spending. Otherwise we’re going to get a fiscal train wreck,” warned Roubini. Readers of my book, “Global Economic Forecast 2010-2015: Recession Into Depression” are aware that my own projection is that the growing sovereign debt problem will mark the next phase of the global economic crisis, sparking a synchronized global depression.

global economic crisis eurozone debt crisis, greek debt crisis, nouriel roubini, sovereign debt crisis

We all exist in an interconnected global economy, meaning a major financial crisis in one country is virtually impossible to contain before it has metastasized abroad. The financial implosion that began with the collapse of Lehman Brothers in September 2008 was an object lesson in this aggregation of global financial fragility, as credit markets worldwide froze solid. We are now seeing a similar though far more dangerous phenomenon unfold, this time involving sovereign debt in Europe as opposed to private investment banks on Wall Street. The United States is far from immune to the long-term consequences of the Eurozone’s public debt and currency crisis.

We all recall the state of petrified panic that engulfed key political actors in major economies throughout the world as LIBOR and Ted spreads soared to the heavens in the fall of 2008. Policymakers made the fateful decision to dump the impediment of moral hazard, bailout Wall Street at taxpayers’ expense, and to transfer private toxic debt into public debt. This policy measure was further exacerbated by massive increases in deficit-driven stimulus spending to offset the economic contraction that resulted from this same credit crisis.

Ever since, policymakers have engaged in an orgy of self-congratulation, praising themselves for “saving the world” from another great depression. However, not so clever. The massive increase in public debt in virtually every advanced economy has now given rise to the next phase of the global economic crisis. We are in the midst of the initial stages of a full-blown sovereign debt crisis that potentially may inflict far more havoc on the global financial system than the turmoil that erupted less than two years ago.

A few months ago, the Eurozone politicians claimed that there existed a sovereign debt crisis only in Greece, that it was contained and would not even require an actual bailout, only the possibility of aid if it was needed, the implication being that this reassurance would be sufficient to calm the bond markets without any Eurozone rescue money actually flowing to Athens. Then, as the situation deteriorated further, we were assured that only a few tens of billions of Euros would put Greece back on its feet. When the markets weren’t fooled, the increasingly frantic Eurozone politicos offered a vastly higher level of bailout cash for Greece, translating into more than $140 billion. However, even that princely sum didn’t stop the spreads on Greek public debt from expanding, while Spain, Portugal and Italy came under increasingly harsh scrutiny from the bond vigilantes.  The result is a joint Eurozone and IMF bailout package for all the so-called PIIGS nations in the Eurozone (Portugal, Ireland, Italy, Greece and Spain) totalling a cool $1 trillion.

The unprecedented scope of the Eurozone  bailout package in its latest form (bereft of a plausible explanation as to how this money would actually be raised),  saved the euro from further deterioration for all of 24 hours. The embattled currency has now resumed its descent into fiscal oblivion, as global markets correctly question how other European nations that are themselves faced with massive structural deficits and ballooning public debts can bailout the PIIGS. There is a growing consensus that Europe is confronting a mounting  and insoluble sovereign debt crisis. In the short run, the U.S. is the beneficiary, as a flight to safety sentiment channels investors towards Treasuries as a safe haven. However, the economic consequences of the crisis in the Eurozone, combined with the public debt crisis in the UK that the new government is committed to resolving through severe budget cuts, will inevitably imperil the U.S. economy’s fragile recovery from the Great Recession, at a time when America itself is faced with structural mega-deficits far into the future.

The International Monetary Fund has now weighed in with its own expression of concern on the looming danger of a sovereign debt crisis impacting all major economies. The IMF’s recent fiscal monitor projects that by 2015, the proportion of public debt to GDP will reach 110% in the U.S., 250% in Japan and 91% in the UK, with comparable figures for most other large economies in Europe.  These numbers do not even recognize unfunded contingent liabilities, which in the United States would add another 400-600% to the debt to GDP ratio.

What began in Greece and now grips the entire Eurozone economy will inevitably impact the United States. When Washington is compelled by the bond market to finally confront the full force of a sovereign debt crisis, it may prove as impotent in the face of global market forces as is the Eurozone. Furthermore, when that day arrives, unlike the Wall Street bailout of 2008, there will be no taxpayers in some far-off magical land that will be able to bailout Uncle Sam.

We are indeed living through interesting times.

global economic crisis Euro Crisis, Great Recession, greek debt crisis, IMF, international monetary fund, sovereign debt crisis

The political masters of the Eurozone delivered their promised “shock and awe” just before Monday’s Asian financial markets opened. If the intention was to create a 24 hour surge in equity prices across the globe, the politicians’ desperate bid to “defend the euro at any price” achieved their transitory objective, at the cost of nearly $1 trillion. However, it is already becoming clear to  investors and analysts globally that this trillion dollar joint Eurozone-IMF boondoggle will utterly fail. Already, the euro has given up almost all of its 24 hour euphoric gains, and is resuming its downward descent.

It is also increasingly clear that key decision makers within the Eurozone played fast and loose with the EMU constitution,  by invoking the “exceptional circumstances” clause of Article 122 of the Lisbon Treaty governing the European Monetary Union. More problematic, it is becoming undeniably obvious that the supposedly independent European Central Bank took orders from the politicians, especially President Sarkozy of France. The ECB president, Jean-Claude Trichet, protests that there was no political interference in the ECB’s decision to start purchasing worthless government bonds from Greece, Portugal and the other insolvent nations that make up the so-called PIIGS. No one believes Jean-Claude Trichet, and Germany in particular will become increasingly alienated from the Eurozone as the ECB engages in the once forbidden monetary sin of quantitative easing.

At the price of one trillion dollars, the Eurozone has just paid the first instalment in what may prove to be the most costly funeral for a currency in modern financial history.

global economic crisis ecb, european central bank, eurozone bailout, Jean Claude Trichet

The doomsday events now unfolding in the Eurozone are in line with the prediction in my book, GLOBAL ECONOMIC FORECAST 2010-2015: RECESSION INTO DEPRESSION (available from the homepage of this website, and on Amazon.com in hard copy or Kindle download).

My forecast is that a profound sovereign debt crisis will mark a far more dangerous phase in the global economic crisis, sparking a synchronized global depression. This weekend, the Eurozone political leaders and  the European Central Bank are conducting emergency consultations, boasting that they will unleash some sort of “surprise” by the time Monday financial markets are open.

When politicians such as Nicolas Sarkozy, president of France, boasts about taking on the speculators while the fiscal edifice of Europe crumbles beneath their feet, I am not exactly reassured that these politicos know what they are doing, or comprehend the turbulent economic and financial forces that have been unleashed by their reckless fiscal mismanagement.

Beware, this is not a European problem. It is merely another marker of a profound systemic crisis afflicting the entire global economy. The sovereign debt crisis may be emerging with radical force in the Eurozone first, however the UK, Japan and the United States are the next dominos that will ultimately fall as destructive financial and economic forces beyond today’s clique of mediocre politicians capacity to control let alone comprehend gain velocity.

global economic crisis european central bank, global economy, Nicolas Sarkozy, sovereign debt crisis

With the markets giving the proverbial “thumbs down” to the deficit-financed Eurozone/IMF bailout of insolvent Greece, the value of the once might euro in relation to a basket of key currencies is sinking at warp speed. It is quite clear that the Eurozone bailout is a panicked-induced  attempt to save the euro from its own contradictions. However, it is a futile attempt that is doomed to failure, in my view.

A monetary union  involving 16 vastly different economies with asymmetrical fiscal policies is nonsensical in the extreme. A common currency may have made sense for a limited number of major European economies, however the current matrix is unsustainable, despite the willingness of European politicians to bankrupt their citizens in a fool’s errand attempt to save what is doomed.

Greece is now convulsed in social unrest, an entirely predictable outcome that is bound to get more serious as the full severity of the IMF and Eurozone austerity measures take full affect on the Greek workers and taxpayers. Supposedly this is all being done to prevent a contagion from infecting other European economies with high deficit to GDP ratios. The painful reality is that the pandemic is already beyond the borders of Greece. It will ultimately savage every nation-state existing in a neo-Keynesian fantasy of  infinitely-expanding sovereign debt. This includes not only the Eurozone, but also the UK, Japan and ultimately the United States.

Greece is a window into the next phase of the global economic crisis. The euro may very well be an early casualty of what is unfolding into the deepest systemic crisis of modern capitalism since the Great Depression of the 1930s.

global economic crisis euro, euro doomed, eurozone, greek debt crisis, IMF, sovereign debt crisis

First it was the supposed citadel of free market capitalism, the United States, insisting that its beleaguered taxpayers must bailout the private sector Wall Street firms and banks, despite the nation’s public finances being  deeply in the red. Now, in macabre replication, all the nations that comprise the European monetary union and employ the euro as their common currency must bailout Greece, now threatened with national insolvency . The concept of moral hazard is therefore confined to the trash heap of history, as it was already disposed of in the U.S.

When the European monetary union was instituted, member states had to guarantee that their annual fiscal deficits would not exceed 3% of GDP. There is also a no-bailout clause in the Eurozone agreement, the implication being that nations utilizing the euro would establish the gold standard for fiscal prudence. Well, we have all witnessed what happened to that supposed gold standard. Successive Greek governments lied about the country’s fiscal problems, and with the help of outside Wall Street “consulting,” constructed stratagems to make it appear that the Eurozone deficit stipulations were being adhered to, when in fact Athens was drowning in a sea of fiscal debt. Even today, it is not known for sure how bad the annual Greek government deficit is, but most recent estimates put it at 14% of GDP, a figure so far in excess of the 3% Eurozone stipulation that it  boggles the mind that European taxpayers are being told by their politicians and the IMF that they should trust the politicos in Athens when they proclaim that their new austerity measures will magically shrink the Greek deficit to the required 3% in only a few years-though the estimate of when that  event will occur keeps being pushed back. In addition, most financial observers concur that the savage austerity plans hatched in Athens and Brussels with the IMF and Eurozone, will condemn the Greek economy to a prolonged and severe recession, making a mockery of claims that future economic growth will eventually improve the Greek fiscal imbalance.

In reality, Greece is insolvent, a point that Professor Nouriel Roubini has recently elaborated on, with a warning that a bailout that does not recognize that the nation is bankrupt will waste an enormous amount of public money. Even more surreal, the very nations being asked to bailout Greece are themselves in deficit, in some cases having a national debt and yearly deficit to GDP ratio as bad as that which brought down Greece’s public finances. Several of the countries that will be contributing public money to prop up Greece are on everyone’s hit list of the next Eurozone nations to be the target of the  unfolding sovereign debt crisis and bond vigilantes. These include Portugal, Spain, Ireland and Italy. We may soon witness the absurdity of nations that are experiencing their own debt crisis but must borrow additional money to bailout Greece, only to soon be in the same predicament as Athens, joining Greece in begging the IMF and their fellow Europeans to grant them a bailout.

Throughout the unfolding Greek debt crisis, politicians in Europe have sought  to pretend that the problem was only one of jittery markets, and things would return to normal. Before pleading for a financial lifeline of $146 billion from the IMF and Eurozone, Greek Prime Minister Papandreou gave numerous assurances that his country would not need a bailout. Now we are being told that countries that are themselves suffering various levels of debt problems should add the massive costs of a Greek bailout to their sovereign credit cards, and somehow this will all work out.

I just don’t see the logic of asking a terminally ill patient to provide a blood transfusion to a corpse.

global economic crisis eurozone, greek bailout, Greek Prime Minister Papandreou, international monetary fund

During a panel discussion conducted by the Milken Institute on the Greek debt crisis, as well as in comments to the media, Professor Nouriel Roubini relayed a stark assessment on the situation. His assessment of the planned bailout of Greece by the International Monetary Fund and the Eurozone nations, especially (if reluctantly) Germany, was damning. The bailout will not work, Roubini emphasized, as the problem confronting Greece was not one of illiquidity but rather the far more dire circumstance of insolvency.

Roubini made several references to Argentina’s fiscal crisis at the turn of the current century, which culminated in default on the national debt because of egregious errors made by policymakers. The failure of policymakers in the Eurozone to recognize that Greece is insolvent and requires debt restructuring, rather than a bailout in the hope of calming markets, will make a bad situation far worse, and waste an enormous amount of public money.

“Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,” said Roubini. The disorderly debt default of Greece would spread contagion throughout other highly leveraged economies in the Eurozone, he warned.

global economic crisis greek debt crisis, international monetary fund, Milken Institute, nouriel roubini

The Athenian financial tragedy continues on its inexorable path towards fiscal destruction. The ratings agency Standard & Poor’s has now officially downgraded Greek sovereign debt to junk status. Clearly, without a European Union and IMF bailout, Greece will default on its public debt. However, the terms of the potential saviours of Greece, namely reducing the deficit to GDP ratio of Greek government finances, are politically and socially unachievable without the collapse of the current government in Athens.

Even with a bailout, Greece will only survive on life support until its next fiscal crisis. In the meantime, Portugal is also on the brink, followed by Italy, Ireland and Spain, the so-called Eurozone PIIGS. Since it is mathematically impossible for Europe to bailout itself, it won’t be long before the collective European Union is reduced to junk bond status. In that eventuality, will the equally debt and deficit ridden UK and USA remain bystanders?

global economic crisis greece junk bond, greek debt crisis, sovereign debt crisis, Standard & Poor’s

If you thought the revised Greek government fiscal deficit projection for 2009 was disastrous at 12.3% of GDP, fasten your seat belt and hold onto your hat. As awful as that  figure was when Prime Minster George Papandreou revealed that the previous government in Athens had deliberately lied about the deficit so that Greece would be admitted into the Eurozone, in retrospect the powers that be in Brussels, joined by the IMF, wish to God that 12.3% was the number. Now, we learn, the actual deficit figures are even worse, though nobody can be certain at this point how bad they really are.

Eurostat, the statistical department of the EU, has released its own evaluation of Greece’s fiscal reality, and has concluded that, at a minimum, the actual deficit to GDP accrued by Athens in 2009 was 13.6% and might even be as high as 14.1%. Due to deliberate bookkeeping chicanery by previous Greek governments, apparently facilitated at least in some measure by the unique financial engineering of Goldman Sachs, the true state of Greek fiscal reality is hidden by a thick layer of artfully contrived opacity.

In the light of this latest revelation, courtesy of Eurostat, yields on Greek government bonds continue their upward climb. For example, yields on ten year Greek bonds now exceed 9%, nearly six hundred basis points higher than the equivalent bonds being offered by Germany. Clearly, the sovereign debt market is far from reassured by the latest version of the ever-changing Greek bailout package, which in its latest manifestation was cobbled together by the Euzozone countries and the IMF.

In response to the ever-worsening truth now emerging about how dire the Greek debt crisis really is, the ratings agencies are again weighing in with a downgrade of Greek sovereign debt. Moody’s has lowered its rating on Greece by  another notch, and likely the other ratings agencies will soon weigh in. This will inevitably further expand the spread in bond yields, and only add to the complication of even a short-term bailout.

When Lehman Brothers collapsed in September of 2008, there was an immediate freeze in the global credit market, reflecting acute distrust by counterparties spooked by misleading financial representations by major investment firms, especially with regard to mortgage backed securities. The latest revelations concerning the Greek fiscal crisis point to a similar phenomenon that is increasingly likely. As the sovereign debt crisis currently afflicting Greece not only worsens but spreads to other countries with large deficit to GDP correlations, the risk of a Lehman Brothers type scenario with respect to the sovereign debt market becomes increasingly probable, with one important difference.

When Lehman Bothers collapsed and credit markets froze, sovereigns borrowed massively and bailed out their financial systems. However, if this time sovereigns  are the actors frozen out of the credit market, who bails them out? Answer than one, Ben Bernanke and Timothy Geithner.

global economic crisis eurozone, George Papandreou, greek debt crisis, greek fiscal crisis, IMF Bailout, sovereign debt crisis