February, 2009

...now browsing by month


Failure to save East Europe will lead to worldwide meltdown

Thursday, February 19th, 2009

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.

By Ambrose Evans-Pritchard  – Telegraph Journal

If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.

Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.

“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a “monetary Stalingrad” in the East.

Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany’s Peer Steinbrück. Not our problem, he said. We’ll see about that.

Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

“This is the largest run on a currency in history,” said Mr Jen.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico’s car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.

Under a “Taylor Rule” analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD’s chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system.

Europe’s governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.

Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia’s central bank governor has declared his economy “clinically dead” after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

“This is much worse than the East Asia crisis in the 1990s,” said Lars Christensen, at Danske Bank.

“There are accidents waiting to happen across the region, but the EU institutions don’t have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.”

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter.

If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt.

The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU “union bonds” should the debt markets take fright at the rocketing trajectory of Italy’s public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

So we watch and wait as the lethal brush fires move closer.

If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?

Tungsten Commercial Currently Running

Wednesday, February 18th, 2009

Tungsten BNN Anderson

A Short History of the National Debt

Wednesday, February 18th, 2009

Deficits are nothing new. It’s the trend that should worry us.

When President Barack Obama signed the American Recovery and Reinvestment Act of 2009 into law yesterday, he was adding to what is already almost guaranteed to be the largest deficit in American history. In January, the Congressional Budget Office projected that the deficit this year would be $1.2 trillion before the stimulus package. That’s more than twice the deficit in fiscal 2008, more than the entire GDP of all but a handful of countries, and more, in nominal dollars, than the entire United States national debt in 1982.

gordon1Andrew Jackson: deficit hawk.

But while the sum is huge, it is not in and of itself threatening to the solvency of the Republic. At 8.3% of GDP, this year’s deficit is by far the largest since World War II. But the total debt is, as of now, still under 75% of GDP. It was almost 130% following World War II. (Japan’s national debt right now is not far from 180% of that nation’s GDP.)

Still, it’s the trend that is worrisome, to put it mildly. There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.

It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) — no deficit hawk when his party is in the majority — called it “porky.”

It was not ever thus. Before the Great Depression, balancing the budget and paying down the debt were considered second only to the defense of the country as an obligation of the federal government. Before 1930, the government ran surpluses in two years out of three. In 1865, the vast debt run up in the Civil War amounted to about 30% of GDP; by 1916 it was less than a tenth of that.

There even was a time when the U.S. made it a deliberate policy to pay off the national debt entirely — and succeeded in doing so. It remains to this day the only time in history a major country has been debt free. Ironically, the president who achieved this was the founder of the modern Democratic Party, Andrew Jackson.

Jackson was a Jeffersonian through and through. The smaller the federal government, the more he liked it. And, like Jefferson, he hated banks, speculation and the “money interest.” Unlike Jefferson, however, he was born poor and made his own fortune. An early personal encounter with debt had taught him to fear it. When the notes of someone who had bought land from him proved worthless, he became liable for the debts he had secured with those notes, and it took him years to pay them off.

When he ran for president the first time, in 1824, Jackson called the debt a “national curse.” He vowed to “pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend to its views, and ultimately destroy the liberty of our country.”

“How gratifying,” he wrote in 1829 as he began his presidency, “the effect of presenting to the world the sublime spectacle of a Republic of more than 12 million happy people, in the 54th year of her existence . . . free from debt and with all . . . [her] immense resources unfettered!”

When Jackson entered the White House, the national debt, which had reached $125 million at the end of the War of 1812, had already been reduced to $48 million. To get it to zero he was perfectly willing to forego what were then called “internal improvements” and are now known as infrastructure projects. One Kentucky congressman, after a trip to the White House to beg Jackson to sign one such bill, reported to his allies that “nothing less than a voice from Heaven would prevent the old man from vetoing the Bill, and [I doubt] whether that would!”

At the end of 1834, Jackson reported in the State of the Union message that the country would be debt free as of Jan. 1, 1835, with a Treasury balance of $440,000. Government revenues that year would be twice expenses.

It didn’t last long, to be sure. The great prosperity of the early 1830s broke in the summer of 1836 when a bubble in land speculation, fueled by easy credit, abruptly ended. The bubble burst, ironically enough, thanks to Andrew Jackson’s issuance of the “specie circular,” which required that all land bought from the government, except that actually settled on, be paid for in gold or silver.

By the next spring, just as Jackson left the White House, the longest contraction in American history — six years — had begun. As one Wall Streeter put it, “The fortunes we have heard so much about in the days of speculation, have melted like the snows before an April sun.” Federal revenues fell by half that year and the national debt was back, this time for good.

While today there is no hope of balancing the budget — or wisdom in trying to — until the economy substantially improves, we could make a sort of down payment on reforming Washington’s porky ways by simply starting to tell the truth.

It has been widely noted that 2009 will have the first “trillion-dollar deficit” in American history. Actually it’s the second. In fiscal 2008, the national debt increased from $9 trillion to slightly over $10 trillion. Yet the budget deficit in the last fiscal year was officially reported as being $455 billion. How could the national debt have increased by considerably more than twice the “deficit”? Simple. Just call the money borrowed from the Social Security trust fund an “intragovernmental transfer” and exclude it from the calculation of the deficit.

Corporate managers have gone to jail for less book cooking than that.

Mr. Gordon is the author of “Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt” (Walker, 1997).