CORRECTED: Central Bankers Will Print More Money to Save Greece - What Will They Do With Portugal, Spain, UK, Italy, Ireland, Austria, CEE, Baltics???

Monday, February 08, 2010

An emergency meeting of 24 central bankers in Sydney at the 50 year anniversary of the Reserve Bank of Australia on Sunday and Monday (corrects location and duration) has so far yielded no news information, intensifying this blogger's fears that the global default Tsunami has already begun.
The waves of bad news get higher from day to day.
Here are a few figures to acclimatize to the financial storm engulfing Europe from The Telegraph:
Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe's bubble and foreign debts top €2 trillion.
Let's add in the same cheat factor Greece displayed last week when it "suddenly" discovered another €40 billion in debts for a few other countries and attempting to get a grasp on the global debt picture leads to the same amount I arrived at half a year ago: It is simply too much once we are in the Trillions.
Don't forget that national debts are only one part of the picture. In my home country Austria 300 of 1,300 communities are sitting on mountains of debt and this picture is representative for Europe as a whole. Include the fact that Eurozone governments have been very creative in shifting debt from the national ledger to public companies with a state guaranty and the final figure of debts climbs from stratospheric levels halfway to the moon.

Landmark Shift
Tired of listening to central bankers who are not exactly the guardians of truth when proclaiming that they have been containing the crisis since its onset in August 2007 it is safe to say that this weekend's meeting in Sydney shows a landmark shift.
It is no longer Asian creditors flying around half the globe but panicking Western debtor nations who will try to reassure the holders of all this debt that the crisis is still manageable.
The Asians are smart people. Sydney is a face saving neutral location for all participants. And why travel 18 hours when one can see the burning Western house of fiat money on a Bloomberg 24/7?
Eastern creditors may use the meeting to remember that the one-way policy of papering over all financial crises has historically always ended in a dead-end-street.

No Other Idea than Printing
Western debtors of course shy away from an end to excessive money printing as it is so comfortable - for the time being.
But they have yet to leave Wonderland and acknowledge an economic reality where we will see countries competing with higher yields for investor funds. Recent roller coaster rides of the Club Med yield spreads are only so shocking because the world has become accustomed to the lowest interest rates in history, thanks to irresponsible central banks who contorted risk premiums with their easy money policy for a decade.
Referring to this chart of US debt to GDP here I am highly confident that this debt surge will come to an end within the next 24 months. There is still the mother of bubbles that waits to be bursting aka US Treasuries.
Europe may have less time as the run on Greece has already begun according to Zerohedge who reports that €10 billion fled the country in a matter of days.
The troubles do not stop at the countries already mentioned. While European governments want to raise a record €2.2 Trillion in new debt issues this year, chances are slimming they will get a good deal.
Last week Portugal cancelled a €500 million government bond issue and one wonders if Greece will be able to get new debt at all. France's intentions to raise €454 billion this year show that the government of Nicolas Sarkozy wants to paper over all problems as it was done in the last 40 years. Who will be going to compete for these truckloads of government debt that come from all directions?

Market chatter about a "Eurobond" runs into a roadblock when taking a closer look. Who should issue it? The EU? The European Central Bank? This would not be a bond but an option on optimism for the future of Greece as neither the EU nor the ECB have a Treasury standing behind it, guaranteeing repayment with future tax income. And it would open the floodgates by creating a precedent for other ailing Eurozone economies.

1 comment

vlc said...

Question: In a fiat currency system, isn't it correct to assume that insolvency is not really possible? The only real limit is to ensure that inflation does not become a problem. No? And if it does, a government just needs to increase taxes and/or interest-rates in order to destroy the excess demand. Is this not correct?
And if that's correct the main problem Grease and the other PIGS have is that they don't have the right to print their own money... they have to hope that the ECB will do it for them. A problem which the UK does not have.

10 June, 2010 11:25

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