Published November 10, 2011
The worldwide bond market continues to be an increasingly tight financial pressure cooker, with yields on Italian and Greece bonds spiking higher into technical default territory.
Meanwhile, Europe continues to meet to discuss rescues of previous rescues of prior rescues, indicating the magnitude of the problems in Italy, Greece and elsewhere in the Euro zone are now greater than their leaders’ ability to respond to it.
Debt. This is your brain on debt. Any questions?
Citigroup’s top economist says the European bailout fund needs $3.5 trillion in firepower for the eurozone to get out of its debt mess, backed by the half dozen remaining 'AAA' countries, including France and Germany.
Meanwhile, France, hasn't balanced its budget in the last three decades. The U.S. has balanced its budget just five times in the last half a century. Greece has 12 million people, more than $320 billion in debt and virtually no growth over the last two decades. Italy has 65 million people, $2.6 trillion in debt and virtually no growth over the last decade. The U.S. has 311.8 million people, $14 trillion in debt, not counting unfunded liabilities for Social Security and Medicare, totting up at an estimated $57 trillion. U.S. GDP growth now struggles to stay above an annualized rate of 2% .
Let’s sit back for a second. What happens when a country defaults and devalues its way out of their crises? There have been 74 defaults between 1981 and 1990. The one that parallels what’s happening in Greece is the subprime sovereign debt crisis of Argentina in 1998 to 2002.
Like Greece, Argentina had mostly a tourist industry, it welshed on $81 billion in debt, its currency crashed, it got locked out of credit markets for about a decade, and creditors are still chasing money in litigation. Argentina though went through a brutal restructuring. Argentina gave investors a take it or leave it offer of 35 cents on the dollar. Greece says 50 cents, which will still keep it at 120% debt to GDP. That fifty cent haircut is a gift to bondholders. Other countries that have crashed, burned, then even retrieved their Triple A ratings include Canada and Finland.
But now there’s pressure on the inflation wary central bankers of Germany and the European Central Bank to print money, but these bankers are adverse to that, as they have memories of the hyperinflationary Weimar Republic era still fresh in their memories. Throughout, Germany’s Angela Merkel in the Middle is fighting to keep the 17-member zone intact.
It’s likely instead that this bond debt will become warehoused in off-balance sheet vehicles at emergency rescue facilities, including those overseen by the ECB. Already, an estimated one third of Greece’s debt is held by government institutions. That means taxpayers take the haircut here.
Meanwhile, the Euro zone is hoping China will step in and use its massive foreign reserves to buy junk bonds from Greece and Italy, as investors continue to give Euro zone bonds the cold shoulder—but why should China buy Euro bonds if no one else wants them? At the least, Euro bonds should now come with their own health warnings.
There’s more curious news. The European Commission clearly leaked to the Financial Times a draft of proposals to more tightly-regulate credit ratings companies. European regulators are now moving to approve rating methods, and even ban sovereign credit ratings in “exceptional situations,” such as when a country is getting bailed out. Ed Yardeni, a U.S. economist, doesn’t like the smell of this one.
A day after the last euro rescue was announced, which would use the European Financial Stability Facility, “S&P rushed to confirm its AAA rating for the EFSF,” Yardeni notes, even though the EFSF would be leveraged to the hilt to provide guarantees for distressed countries.
What’s with the timing and the dubious rating reaffirmation here?
Watch whether any U.S. money goes toward rescuing Europe too—the International Monetary Fund has reportedly committed to a euro bailout of about 250 billion Euros. But Americans foot the bill for 17% of the contributions to IMF, which means now the U.S. is paying in $54 billion towards helping Europe. Also, the Administration has already buried expanded U.S. funding for the IMF of about $108 billion, which the IMF could use for a European bailout, in a U.S. troop funding bill.