Best of the Week
Most Popular
1.What Happened to the Stock Market Crash Experts Were Predicting - Sol_Palha
2.London Housing Market Property Bubble Vulnerable To Crash - GoldCore
3.The Plan to Control ALL Your Money is Now at Advanced Stage
4.Why Gold Is Set For An Epic Rally This Spring - James Burgess
5.MR ROBOT NHS Cyber Attack Hack - Why Israel, NSA, CIA and GCHQ are Culpable - Nadeem_Walayat
6.Emmanuel Macron and Banking Elite Win French Presidential Election 2017 - Nadeem_Walayat
7.Trend Lines Met, Technical's are Set - US Dollar is Ready to Rally (Elliott Wave Analysis) - Enda_Glynn
8.The Student Debt Servitude Sham - Gordon_T_Long
9.Czar Trump Fires Comey, Terminates Deep State FBI, CIA Director Next? - Nadeem_Walayat
10.UK Local Elections 2017 - Labour Blood Bath, UKIP Death, Tory June 8th Landslide - Nadeem_Walayat
Last 7 days
The Stock Market Will Tank Hard - 24th May 17
It’s Better to Buy Gold & Silver When It DOESN’T Feel Good - 24th May 17
Global Warming - Saving Us From Us - 24th May 17
Stock Market Forecast for Next 3 Months - Video - 23rd May 17
Shale Oil & Gas Production Costs Spiral Higher As Monstrous Decline Rates Eat Into Cash Flows - 23rd May 17
The Only Metal Trump Wants More Than Gold - 23rd May 17
America's Southern Heritage is a Threat to the Deep State - 23rd May 17
Manchester Bombing - ISIS Islamic Terrorist Attack Attempt to Influence BrExit Election - 23rd May 17
What an America First Trade Policy Could Mean for the US Dollar - 22nd May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 22nd May - 22nd May 17
Stock Market Volatile C-Wave - 22nd May 17
Stock Market Trend Forecast and Fear Trading - 22nd May 17
US Dollar Cycle : Deep Dive - 21st May 17
Bitcoin Breaks the $2,000 Mark as Cryptocurrencies Continue to Explode Higher - 21st May 17
Stocks, Commodities and Gold Multi-Market Status - 21st May 17
Stock Market Day Trading Strategies and Brief 20th May 2017 - 21st May 17
DOW Needs to Rally Big or Correction is Next - 20th May 17
EURUSD reaches DO or DIE moment! - 20th May 17
How to Get FREE Walkers Crisps Multi-packs! £5 to £28k Pay Packet Promo - 20th May 17
UK BrExit General Election 2017 - Will Opinion Pollsters Finally Get it Right? - 19th May 17
Gold Mining Junior Stocks GDXJ 2017 Fundamentals - 19th May 17
If China Can Fund Infrastructure With Its Own Credit, So Can We - 19th May 17
Evidence That Stocks are More Overvalued than Ever - 19th May 17
Obamacare May Become Zombiecare In 2018 - 19th May 17
The End of Reflation? Implications for Gold - 19th May 17
Gold and Silver Trading Alert: New Important Technical Development - 19th May 17
Subversion And Constructive Synthesis Of Capitalism And Socialism - 18th May 17
Silver: Train Leaving Station Soon! - 18th May 17
Credit and Volatility Signal That Financial Conditions Are Very Overheated - 18th May 17
Another Stock Market "Minsky Moment" or Will the Markets Calm Down? - 18th May 17
WannaCry Ransomware Virus Is a Globalist False Flag Attack On Bitcoin - 18th May 17
Euro, Stocks, Gold Momentum Extremes All Round! - 18th May 17
US Stock Market Slumps on Establishment / CIA Trump Impeachment Coup Plan - 18th May 17
Tory Landslide, Labour Bloodbath - Will Opinion Pollsters Finally Get a UK Election Right? - 17th May 17
The stock market sectors which are breaking out in 2017 - 17th May 17
A ‘Must-See’ Chart for Gold and Silver Aficionados  - 17th May 17
Will the SPX Stock Market Final Surge Fail to Appear? - 16th May 17
Claim your FREE copy of Jim Rickards’ explosive book - 16th May 17
GOP Establishment Elite Plots Trump Removal - 16th May 17
Walkers Crisps Pay Packet Cheats, Shoplifters and Staff Conning Customers - 16th May 17

Market Oracle FREE Newsletter

Trading Commodity Markets

E.U. Greece Bailout Fails to Defuse the Ticking Global Debt Bomb

Interest-Rates / Global Debt Crisis May 11, 2010 - 06:21 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleThe ticking global debt bomb is in the in the spotlight again. Or, at least, it should be.

Greece's woes draw attention to the looming financing problems of other countries with a lot of debt. The strain of funding these requirements - the global debt bomb - is the greatest threat to global growth prospects. This is why central banks have flooded the financial system with money. It's the biggest and most critical financial battle of our time.


The Bank for International Settlements - essentially the central bank of the central bankers - said as much in a recent research paper, noting that governments around the world are overspending in an effort to make up for the lack of activity from cash-strapped consumers and companies. To maintain those high spending levels at a time when tax-receipts are down, however, governments have no choice but to borrow - a strategy that they cannot follow forever, BIS researchers said.

"Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable," the researchers said. "Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."

A Weak Greek Week
Outside of Manhattan - where a stock-market panic sent U.S. shares into a virtual nose-dive late Thursday - riots in Greece were the headline story of last week, since images of the heirs of Socrates throwing Molotov cocktails at police made for great theater. The $962 billion "stabilization mechanism" (rescue plan) unveiled after an emergency meeting in Brussels, Belgium, on Sunday will return the focus to the financial part of the crisis. The package is designed to prevent Greece's debt crisis from turning into a contagion that infects other EU-member countries.

Will this help? Prior to Sunday's deal, I contacted the ace credit analyst Satyajit Das at his office in Australia for his views. According to Das, Greece is a hazard that exceeds its small size. In response to my email, he sent a very long, helpful answer.

Indeed, the detail is so interesting that I've reproduced sections of his response in full:

"Greece's immediate problem is solvency, but also liquidity - it must find cash to roll over existing debt. Greece needs around 50 billion euros ($64.2 billion USD) in 2010, of which around E25 billion ($32.1 billion) was needed by June. In early April 2010, with characteristic insouciance, Greek officials assured creditors that they were fine till end the end of the month! The market called their bluff.

"Unfortunately, the Greek financing problems run far deeper. From now through 2014, Greece needs to refinance borrowings of around 10% of its GDP each year, with major maturities occurring in 2011 and 2012. In addition, Greece is currently running a budget deficit of over 12% that must be financed.

"Greece's total borrowing, currently around E270 billion ($346.5 billion), is forecast to increase to around E340 billion ($436.4 billion, or 150% of gross domestic product) by 2014. So in all probability, Greece will need E30 billion to E50 billion ($38.5 billion to $64.2 billion) each year for the next five years to meet maturing obligations."

According to Das - and this is important - Greece's problems were inevitable. Like many of the economically weaker European Union members, Greece manipulated ("fudged") its numbers in order to meet the requirements for entry into the euro community.

The sharply lower euro interest rates set off a credit-driven real-estate boom and fueled chronic over-borrowing. Furthermore, Greece lost both its cost competitiveness and its ability to manage its own economy. It lost the ability to use its currency, via devaluations, to improve its competitiveness and stimulate its exports.

And that's not all. Greece lost the ability to set interest rates (now set by the European Central Bank, or ECB). It also cannot print its own currency to fund sovereign borrowing. That's a problem since the country's low levels of domestic savings make it heavily reliant on international capital flows.

That brings us to March 2010, where credit analyst Das picks the story up again.

"Fast forward to March, 2010. After bitter negotiations, the European Union and International Monetary Fund, or IMF, announced a bailout package. The flowery rhetoric of 'familial' duty and EU 'unity' were taken at face value by gullible investors who assumed that the problem was fixed. When the solution proved not to have solved the market's concerns, a new package was announced in April 2010. In reality, the April package is highly conditional and [did] not address core issues."

The EU's "New Deal"
That brings us to the deal that was hashed out in Brussels over the weekend. Needless to say, both Greek and EU officials proclaim it a winner.

Greek Prime Minister George Papandreou told CNN that the volatility in the financial markets made it impossible for his country to buy the time required to implement the kind of deep reforms that Greece's ailing economy really needed.

"But [then] Europe stepped in order to regulate the markets in a way which would allow us to make these changes," Papandreou said.

With some tough-sounding talk, Olli Rehn, the European commissioner for economic and monetary policy, also gave an upbeat assessment of the financing package, noting that "the fiscal efforts of European Union member states, the financial assistance by the (European Commission) and member states, and the actions taken today by the (European Central Bank) proves that we shall defend the euro whatever it takes."

Given the hugely positive reaction of the global financial markets in early trading yesterday (Monday), investors and analysts are once again buying into the "party line," and apparently see this as a fine solution. Marco Annunziata, chief economist at Italian bank UniCredit Group, told Britain's Telegraph newspaper that "this is Shock and Awe, Part II and in 3-D. This is truly overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion."

Das points out that "Greece's problems are probably incapable of solution and its financial condition is terminal. Temporary emergency funding may help meet immediate liquidity needs but do not solve fundamental problems of excessive debt and a weak economy."

''Greece has limited opportunity to grow or inflate itself out of the problem. Without the ability to devalue the currency, Greece cannot address its fundamental lack of competitiveness quickly. The narrow economic base, primarily agriculture, tourism and construction, further limits options," Das said. "The magnitude of the adjustment is staggering. Greece must cut its budget deficit form it current levels of 12-13% to around 3% over the next few years. This is around twice the reduction required by Argentina in the late 1990s, which that country failed to achieve."

Any deal merely changes the form and ownership of the risk. It doesn't eradicate it.

Warning: Don't Ignore the Global Debt Bomb
For the moment, unfortunately, everyone seems to have forgotten the "global debt bomb."

Everyone, that is, except my colleague Das, the global-credit expert - and, of course, those of us reading this anlysis.

"The current debate misses the fact that the bailouts are mainly about rescuing foreign investors," Das said. "These investors were imprudent in their willingness to lend excessively to Greece, assuming implicit EU support, and are now seeking others to bail out them out of their folly."

Said Das: ''The problems of contagion in highly inter-connected economic and financial systems have not abated. The latest data shows that Greece owed US$276 billion to international banks, of which around US$254 billion was owed to European banks with French, Swiss and German banks having significant exposures. What happens in Greece is unlikely to stay in Greece creating new problems for the fragile global banking."

The bottom line, according to Das, is that "Greece highlights a few new and old truths about the global financial crisis. The level of global debt has not been addressed. Sovereign debt was substituted for private-sector debt. As trillions of dollars of private and government debt matures and must be refinanced, the next stage of the process of de-leveraging will play out. Vulnerable borrowers, such as Greece and earlier Dubai, highlight this risk."

[Editor's Note: As this analysis demonstrates, Money Morning Contributing Writer Jon D. Markman is connected - globally, and in a big way. With uncertainty the watchword and volatility the norm in today's markets, those types of connections have substantial value for the information and insight they deliver.

But connections and information are only part of the profit equation. It takes a shrewd, seasoned and insightful investor to put those resources to their best use.

Jon Markman is that kind of investor.

In the face of what's been the toughest market for investors since the Great Depression, it's time to sweep away the uncertainty and eradicate the worry. That's why investors subscribe to Markman's Strategic Advantage newsletter every week: He can see opportunity when other investors are blinded by worry.

Subscribe to Strategic Advantage and hire Markman to be your guide. For more information, please click here.]

Source : http://moneymorning.com/2010/05/11/global-debt-bomb/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife