Posts Tagged ‘sovereign debt crisis’

Italy In Distress: Italian Debt Crisis Now Center Of Gravity In The Eurozone

November 8th, 2011 Comments off

The Eurozone’s latest Greek debt bailout plan, following previous Greek, as well as Portuguese and Irish bailouts, was supposed to ring-fence the largest PIIGS nations; Spain and Italy. The Spanish economy is highly vulnerable to a raging economic recession and massive unemployment. However, it is Italy, with a two trillion euro public debt and stagnant economic growth, that is now the greatest danger to the Eurozone. The supposed ring-fencing of Italy that was the prime motivation for the Greek debt write-off and bailout is clearly a failure. Only days after the latest Eurozone debt crisis plan, spreads on Italian government bonds are soaring.

The latest yield on ten year bonds issued by Italy is now in excess of 6.6 percent. Should  these yields pass seven percent, it becomes mathematically impossible for Rome to finance its deficits and debt repayments. That would mean that the Italian government would require being bailed out. The problem, however, is that there is not enough resources available in the Eurozone to bail out Italy. The only hope left, and it is a feeble one at best, is that Italian Prime Minister Silvio Berlusconi will resign, and thereby restore some level of market confidence. However, the problems with Italy’s finances go beyond one single bumbling politician. The issues are structural, not personality-based, and so far no real viable solutions have emerged.

A full-fledged Italian sovereign debt crisis will probably be the kiss of death to the Eurozone, at least in its present form.





Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

Severe European Banking Crisis Looms

October 24th, 2011 Comments off

Over the weekend the highest ranking cadre of inept European Union politicians were gathered in solemn deliberations, as they once again promise the world that the growing sovereign debt crisis in the Eurozone will be permanently “solved.” But the issue is no longer only the debt crisis in Greece, or the other PIIGS countries-Portugal, Italy , Ireland and Spain. The unsustainability of the public debts throughout the Eurozone  now have the banking system of Europe on the precipice of disaster. It is likely that many if not most major European banks would fail a real stress tests, not the phony stress tests recently administered.

One of the issues being debated by the European politicians is having the banks accept some degree of loss on their outstanding loans to Greece. The problem is that such a loss would mean transferring the insolvency of Greece to those very banks. The politicians in Europe know that, so they are already discussing how to recapitalize their banks. But with what? The European nations are themselves all heavily indebted. Germany is resisting the call by France to employ the ECB (European Central  Bank) as a printing machine to “lend” euros conjured out of thin air to the European Financial Stability Facility; the EFFS would in turn provide the money to the banks requiring recapitalizing.

While the frenzied talk rages on in Europe, the continent’s banking system is headed for a crisis that may rival the impact that the Lehman Brothers debacle had on the global economy in 2008.


Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.


Global anti-Wall Street Protests, Global Economic Crisis and Global Banking Crisis

October 17th, 2011 Comments off

The architects of globalization never imagined this scenario. A Wall Street banking crisis in the United States creates a global financial crisis, compelling sovereigns across the world to enact a peculiar and paradoxical policy measure; preserve profligate historical profits of masters of the private banking system, while socializing their losses. This policy of saving the banks by moving their losses onto the balance sheets of nation-states creates a global banking crisis, especially in the Eurozone, due to those banks holding loans from countries that went into deep debt to bail out those same banks. Ireland, to take an example, went from budget surplus to catastrophic fiscal deficits solely due to a decision by Dublin’s politicians to guarantee all the liabilities of their formerly privately-owned and relatively unregulated banks.

The latest policy measure is austerity, forcing the taxpayers to cover the costs of the mounting global economic crisis with higher taxes and cutbacks in social services. The paradox is that these measures negate economic growth, ensuring that the public debt cannot be repaid. All these measures are exacerbating the current and worsening global economic crisis.

The Occupy Wall Street movement, which has now gone global with a rising tide of protests throughout the world, reflects a populace that has seen its economic future being dispossessed. Deprived of hope, and with no confidence in the policymakers in government and oligarchs that largely fund and control political parties in most advanced economies, a growing number of desperate people, especially the younger and emerging generation, see protest as their only option.  All these developments feed into each other, leading to a cascading effect of political instability, growing public indebtedness and economic stagnation and contraction. If nothing else, the anti-Wall Street protests are a barometer of an economic and political system in disarray. And perhaps, they are a harbinger of a new age of political unrest and economic misery of prolonged duration.



Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

Spain’s Credit Rating Lowered By Fitch

October 7th, 2011 Comments off

More developments on the Eurozone sovereign debt credit ratings front. Fitch, one of the big three credit ratings agencies, lowered its rating on Spanish government debt by two notches, from AA plus to AA minus. As recently as 2010, Fitch rating Madrid’s debt at AAA.  This credit rating cut follows on the heels of the decision by Moody’s to drop Italy’s credit rating two levels.

With the sovereign debt crisis in Europe cascading out of control, and a severe Eurozone banking crisis now developing, one has to be obtuse to believe that the global financial and economic crisis that began in 2008 has been “resolved.” Sovereign credit ratings are dropping with monotonous regularity, and a growing cadre of economists are suggesting that the Eurozone, U.K. and U.S. are already in the midst of a double-dip recession.

With negative economic growth and growing public debt to GDP ratios, how are these  nations going to resolve their sovereign debt crisis?







Italy’s Credit Rating Downgraded By Moody’s

October 6th, 2011 Comments off

As the Eurozone sovereign debt crisis worsens (joined by the U.S.A. and U.K.), the ratings agencies are at it again, with their lagging indicator of choice; the credit worthiness downgrade. This time, Italy got hammered. Moody’s cut the Italian credit rating by three levels, from A2 to Aa2. That is a lower rating than Moody’s rates the credit worthiness of the Baltic republic of Estonia.

According to Moody’s, “the negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets.”

The downgrade of Italy’s public debt will translate into widening spreads on Rome’s government bonds, making it even harder to service the multi-trillion dollar public debt accumulated by successive Italian governments. This all happens as the inept European politicians still clamor over another ill-fated effort to “ring-fence” the Greek debt crisis, pretending that is has not yet spread to other PIIGS countries, including Italy. The Moody’s downgrade is more concrete evidence that policymakers in Europe are totally disconnected from economic, financial and fiscal reality.






Former Fed Chairman Paul Volcker Urgently Warns Against “Planned” Inflation

September 19th, 2011 Comments off


In an Op-Ed  piece in The New York Times, Paul Volcker, chairman of the Federal Reserve during 1979- 1987, issued an eloquent warning against economic policymakers deliberately increasing the inflation rate as a way of dealing with escalating economic and fiscal problems that have defied all other policy measures. Volcker’s Op-Ed, entitled, “A Little Inflation Can Be a Dangerous Thing,” warrants serious reading by all concerned with the global economic crisis. Paul Volcker knows what he is talking about; it was he as Fed Chairman during the Reagan administration who squeezed high inflation out of the U.S. economy through a draconian process of high interest rates.


Here are extracts of what Volcker wrote in his Op-Ed piece:


There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

“So now we are beginning to hear murmurings about the possible invigorating effects of ‘just a little inflation.’ Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the ‘animal spirits’ of business, or so the argument goes… Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth… At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.”

In particular, due to the global sovereign debt crisis, economists and policymakers are discussing behind closed doors the desirability of a 5-6 percent annual inflation rate as a way of reducing the burden of national debts in advanced economies. As if the experience of Weimar Germany and Zimbabwe wasn’t enough to show the irrationality of such an approach, Paul Volcker again reminds us of the futility of engineering deliberate inflation as a policy “cure” for our economic woes. One can only hope that the former Fed Chairman’s clear warning is heeded.







Greece Debt Default Increasingly Certain Outcome

September 12th, 2011 Comments off

What savvy observers have long predicted, a default by Greece on her massive public debt, has  until recently  been refuted by Eurozone politicians as even a possibility. These policymakers have already gone through two massive bailouts, funded by European taxpayers, involving more than 200 billion euros, to keep Greece from tottering over the edge. However, the marketplace, and even below the radar some European politicians, especially in Germany, have now been conceding what is so obvious to almost every other knowledgeable observer. Athens will default on her debt. With an imploding economy, in which ironically the austerity measures imposed on Greece as the price of the bailouts have worsened her public debt to GDP ratio, and no possibility of inflating her way out of default by currency devaluation (the trap of being in a common currency-the euro), mathematical certitude cannot be overcome. Greece is in an unsustainable sovereign debt trajectory.

Two year Greek government bond yields have soared above the 50 percent range. Such yields only exist in a universe where the marketplace prices in the certainty of a sovereign debt default.  And this is only the beginning. There is not only Portugal and Ireland next in line; there is also Italy and Spain. Then there are the French and German banks, highly exposed to a Greek sovereign debt default. In other words, Lehman Brothers on steroids. The doomsday debt crisis scenario I predicted in my book (Global Economic Forecast 2010-2015: Recession Into Depression) is being increasingly vindicated by a fiscal architecture that is unraveling with surreal velocity.



America and Europe on the Brink of Economic Disaster

September 5th, 2011 Comments off

Not much talk anymore about green shoots from U.S. Federal Reserve chairman Ben Bernanke. Despite infinite and very creative attempts by politicians in the U.S., the U.K. and the Eurozone to twist and spin economic statistics to make it appear that the world is indeed recovering from the global economic crisis, the data that is emerging is so bad it can no longer be “massaged.” The latest jobs report from the United States showed that in the month of August, zero jobs were created by the economy. The official news was bad by itself, but it hides an even worse reality. Even with no net new jobs created, the official discounted unemployment rate in America remained at 9.1percent. With approximately 200,000 new adults entering the work force each month, the only way that could have happened with no change in the U3 unemployment rate is if 200,000 discouraged job seekers left the labor market, or were merely eliminated form the ranks of the unemployed by the slick action of a statistician’s pencil.

While America’s jobs crisis worsens, Europe has its own woes to contend with. The sovereign debt crisis is clearly getting more dangerous, with both Spain and Italy increasingly vulnerable to the bond vigilantes. And the U.K. is experiencing sluggish or non-existent economic growth, in the process undermining the objectives of its austerity program. The global economic and fiscal situation is so bad, even the IMF is starting to hit the panic button. I think the happy talk from politicians may just about have run out of steam.




Moody’s Downgrades Japan’s Sovereign Debt

August 25th, 2011 Comments off


Following in the wake of Standard & Poor’s downgrade of U.S. government debt, Moody’s Investors Service lowered its rating of Japan’s debt by a notch, now sitting at Aa3. Japan is the most indebted major advanced economy, with a government debt to GDP ratio in the range of 200 percent. In addition to the severe natural disasters that have hit Japan this year, Moody’s stated that, “over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies.”

Japan is the third largest economy in the world, only recently slightly eclipsed by China, which is now number 2 in terms of GDP. Though Japan also has large external assets that in part offset its massive sovereign debt (including U.S. Treasuries!), its worsening demographic situation along with government paralysis  creates a grim trajectory for its sovereign debt. The Moody’s rating downgrade, on top of S&P lowering its rating on U.S. government debt, tied in with the worsening debt crisis in Europe, points to an escalation in the global sovereign debt crisis, with economic ramifications that can only be highly negative.




World Bank President Warns That Debt and Economic Crisis is Entering “Danger Zone”

August 15th, 2011 Comments off

Speaking at the Asia Society conference in Australia, Robert Zoellick, president of the World Bank, issued a sharp warning on the direction of the global economic and sovereign debt crisis. He told journalists, “I think we are entering a new danger zone and I think that confidence in economic leadership has been slipping and it will be important that the primary economic actors take steps both short and long term to restore that.”

The words of Zoellick reflect unusual candor from a high level policymaker involved in global economic activity.  In essence, he confirms what my blog has been stating for many months; the empirical evidence suggests that the political actors in the major advanced economies are utterly inept when it come to economic and fiscal policy, and their collective incompetence is sending the whole world over a cliff.