Archive

Posts Tagged ‘sovereign debt crisis’

Sovereign Debt Crisis Warning Issued By European Commission President

August 4th, 2011 Comments off

Jose Manuel Barroso, president of the European Commission, has hit the panic button. As the Eurozone debt crisis worsened, he remained among the most optimistic of EU officials, repeating his faith in the ability of the myriad of rescue packages to prevent further contagion from affecting larger European economies. But no longer.

Barroso has issued a clear warning to the policymakers in Europe that has a strong note of dire panic. He no longer pretends that the debt-financed rescue stratagems cobbled together by the inept politicians of the European Community are safeguarding larger economies such as Spain and Italy being exposed to the rapidly metastasizing debt crisis.  He admits with brutal frankness that the markets “remain to be convinced that we are taking appropriate steps to resolve the crisis.”

The panicky communication from the European Commission president has sparked a wave of frantic selling among stock markets across the globe, while leading gold to ascend to  ever higher prices. Is the handwriting on the wall? It is becoming ever more obvious, even to the formerly sanguine politicians, that the global economic crisis never ended, and that its current phase, the sovereign debt crisis, is getting more dangerous, while the inept policymakers run out of options.

 

 

Sovereign Debt Crisis Is Now Global

July 15th, 2011 Comments off

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.

Greek Debt Crisis Worsens; Prime Minister George Papandreou Admits Another €110 Billion Urgently Needed To Prevent Default

June 20th, 2011 Comments off

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.

Greece In Economic Crisis: Is Athens Crumbling?

June 15th, 2011 Comments off

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.

Oil Price Spike Threatens Global Economy

April 22nd, 2011 Comments off

History may not exactly repeat itself, but it often rhymes. The recent spike in oil prices, now above $100 per barrel, mirrors a development that occurred in the middle of 2008. Then, oil prices hit more than $140 per barrel.  Earlier in 2008, the U.S. Congress passed a major stimulus spending bill, financed with borrowed money,  with the promise that this step would ensure America did not slide into a recession due to falling house prices. We all know what happened afterwards; the oil spike trashed the global economy, after which the world’s financial system was brought literally to its knees. The subsequent global economic and financial crisis brought on the worst recession since the Great Depression of the 1930s.

While supposed experts maintain that the global economy is undergoing a recovery, it is fragile at best, and totally dependent on massive sovereign indebtedness, which is now bringing on a sovereign debt crisis. Just days ago, the ratings agency Standard & Poor’s turned negative on the future credit worthiness of the U.S. government.  If, on top of all these developments, oil prices return to the highs of the summer of 2008, the largely state-subsidized economic recovery underway in many advanced economies is likely to  falter, precipitating a double-dip recession.

Oil prices are not the only metric to watch in the months ahead. It  is, however, a leading indicator of  what is likely to occur to the global economy. If oil price inflation causes enough economic downturn to further depress government revenues, the accelerating sovereign debt crisis will inevitably get much worse.

 

U.S. Fiscal Crisis Worsens: Standard & Poor’s Changes Outlook on American Sovereign Debt to “Negative”

April 19th, 2011 Comments off

It is the rating agency statement heard across the world, like the first cannon ball fired at Fort Sumter. One of the three iconic ratings agencies, Standard & Poor’s, sent panic waves through global financial market when it issued a statement on the U.S. fiscal situation, changing its previous outlook on the U.S. government’s finances from “stable” to “negative.” However one interprets the latest statement from Standard & Poor’s ( and many Washington cheerleaders claim that the statement is meaningless and America will never default on its debts), the reality is quite clear: not even the “late to the party” rating agencies that previously classified subprime mortgage-backed securities as AAA grade investments can ignore any longer the catastrophic fiscal trajectory of the United States.

In its statement, S&P indicates that if the fiscal crisis in the U.S. remain unresolved, within two years U.S. Treasuries will be downgraded. The statement acknowledges that the American political system is totally dysfunctional, and appears unable to craft a viable plan to restore fiscal sanity to America’s out of control federal government budget. Reading between the lines, and adding my own perspective ( see my report “Global Economic Forecast 2010-2015: Recession Into Depression”) it seems increasingly obvious that save for a miracle, the United States is headed for a fiscal train wreck of calamitous proportion, probably sooner rather than later.

 

 

Portugal Faces Severe Fiscal and Economic Crisis as Eurozone Sovereign Debt Fears Grow

March 28th, 2011 Comments off

The weakest links in the Eurozone chain are known as the PIIGS. This acronym represents five fiscally vulnerable members of the European monetary union: Portugal, Ireland, Italy, Greece and Spain. Already, two of the five members of this august club have capitulated to the dismal reality of their public finances and are receiving a Eurozone bailout, which comes from a fund consisting of borrowed money, borrowed that is by slightly less indebted Eurozone partners. Now, it would appear, Portugal is likely to be the third affiliate of the PIIGS to get a bailout.  Portugal’s Prime Minister Jose Socrates has resigned after Lisbon’s parliament rejected his proposed austerity package. Socrates claimed that Portugal did not need financial aid, and could resolve its fiscal problems through its own austerity measures. That hope appears now to have been abandoned, and the expectation is that Lisbon will soon come crawling for a bailout, as the spread on its bonds gets ever wider.

Standard & Poor’s, S & P and Fitch have all severely downgraded their ratings on Portuguese government debt. In the meantime, a new government in Ireland is stating that it wants to negotiate a less severe austerity package than the one accepted by the previous Dublin government in exchange for a Eurozone and IMF bailout. As Portugal wobbles, Ireland confounds while continuing to bankrupt its citizens as the price for bailing out its reckless banks. In the meantime, the Greek economy is deflating, making it ever more likely that Athens will eventually default on its public debt. That still leaves the two biggest PIIGS without a bailout.

After Portugal, Spain is the next likely candidate for the bond vigilantes. The most significant problem with Spain is that it is so much larger an economy than the previous candidates for a bailout, it is unlikely that the Eurozone and its already indebted taxpayers could sustain the massive public borrowing required to rescue Madrid from its own fiscal follies.

The sovereign debt crisis in the Eurozone is spinning out of control. And not far behind in entering  this vortex of doom is the United Kingdom, which despite massive public spending cuts retains an unsustainable deficit as its economy contracts. And then there is the United States, with a national debt now virtually at parity with its annual GDP, and projected  to have a record deficit in the current fiscal year, exceeding ten percent of its annual GDP.

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I predict that by 2012 a massive sovereign debt crisis in the major advanced economies will plunge the world into a global economic depression. All the recent developments regarding fiscal issues in the Eurozone, UK and U.S. do not give me any reason to alter my forecast.

 

 

IMF Warns That Sovereign Debt in Advanced Economies is Unsustainable

March 21st, 2011 Comments off

At a conference in Beijing, the International Monetary Fund’s first deputy managing director, John Lipsy, spoke with alarm over his forecast that average public debt to GDP ratios in all advanced economies would exceed 100 percent during 2011. Lipsky and the IMF issued a blunt warning; these ratios, set for continued expansion with public deficits spiraling out of control, are unsustainable and will lead to critical economic consequences. His views were in opposition to those who supported continued government deficits as vital for stimulating advanced economies, which continue to be plagued by low or negative growth.

The IMF official also said that current low interest rates on sovereign debt cannot be sustained for much longer. Higher interest rates are inevitable, Lipsky indicated. The IMF is clearly worried that a sovereign debt crisis of massive proportions is about to metastasize throughout all advanced economies, having already ravaged Greece and Ireland.

 

 

 

Japan’s Worsening Economic and Fiscal Crisis

February 23rd, 2011 Comments off

Japan, now the third largest economy in the world (China has recently assumed the spot of number two) is continuing to accrue worrying economic metrics.  For the first time in nearly two years, export-dependent Japan incurred a trade deficit. According to Tokyo, the nation incurred a $5.7 billion negative trade balance in January. The trade figures, however, were not the only troubling development on  Japan’s economic front.

Moody’s has just lowered Japan’s debt rating from stable to negative. This comes in the wake of Standard & Poor’s downgrading Japanese public debt from AA to AA-.  Japan has the developed world’s highest  ratio of public debt to GDP, a figure approaching 200 percent. These recent developments portend the growing risk of a sovereign debt crisis confronting Tokyo.  A growing number of investment fund managers are warning that the current trajectory of Japan’s public debt and annual government deficits is unsustainable. Could Japan become the Greece and Ireland of the Far East? These negative metrics, in conjunction with Japan’s aging  and declining population, point to a deepening economic and fiscal crisis for the land of the rising sun.

Obama Proposing Record Budget Deficits; Is America Doomed To Follow Greece?

February 15th, 2011 Comments off

As the United States national debt reaches parity with total annual GDP, President Barack Obama continues to preside over a record level of deficit spending by the federal government. He has just sent to Congress a proposed $3.73 trillion budget for FY 2012, while forecasting a record $1.65 trillion deficit for the current fiscal year. Earlier, the Congressional Budget Office projected that the current deficit would reach at least $1.5 trillion. These figures mean that America remains trapped with unsustainable structural mega-deficits,  and that more than 40 percent of everything the U.S. federal government spends is financed with borrowed money.

As I have commented on before, this level of government indebtedness just cannot be sustained, and will lead to catastrophic repercussions. While the politicians in Washington, particularly in the Obama administration, pay lip service to the need to “rein in” this profligate public spending, nobody believes that they are serious. The president’s claim that he “plans” to reduce the deficit cumulatively over ten years by just over a trillion dollars is an utter farce, since even by the most optimistic forecasts this would leave a combined deficit over the decade of more than ten trillion dollars.

The problem, however, is not uniquely one of the Obama administration and the Democratic Party. The Republicans, who left for Obama as an inaugural present in 2009 a first-ever annual deficit to exceed a trillion dollars, are as intellectually bankrupt as are their adversaries on the other side of the aisle. The GOP is equally bereft of ideas on how to control this raging fiscal train wreck, offering little more than worn-out cliches such as reducing taxes, as though that would not further exacerbate the federal government’s structural mega-deficit.

What we are witnessing is not only an economic and fiscal calamity in the making. It is as much a display of political dysfunctionality and moral cowardice as it is of inept fiscal policy. Which leads to the melancholy conclusion that it will not be the political echelon in Washington that ultimately  imposes budgetary discipline on public spending. Increasingly likely is a doomsday scenario, in which the bond vigilantes, well practiced already with their punishing assaults on the credit ratings of Greece, Ireland and now Portugal, unleash the full fury of the market place on Uncle Sam. When that fiscally apocalyptic moment arrives, not even the impressive weight of political inertia that resides in Washington DC will be able to impede a sovereign debt crisis in the United States that will not only cripple the nation’s economy with devastating effect; it will likely dispossess the next generation of Americans  of their future.