A Devastating Assessment By The BIS
Ambrose Evans-Pritchard (NYSE:AEP) reports on the newest BIS report on global banking and the global debt situation, noting that its former chief economist William White (now with the OECD), is once again issuing a stark warning. Note that Mr. White was one of the few officials in the central banking world to have predicted the 2008 crisis. Not that it was particularly difficult to predict it, but similar to the story about the egg of Columbus, almost no-one in an official capacity did. 99% of the world's central bankers insisted the crisis was 'well contained' up until the very last minute, and then panicked along with the markets.
"The Swiss-based `bank of central banks' said a hunt for yield was luring investors en mass into high-risk instruments, "a phenomenon reminiscent of exuberance prior to the global financial crisis".
This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong. "This looks like to me like 2007 all over again, but even worse," said William White, the BIS's former chief economist, famous for flagging the wild behavior in the debt markets before the global storm hit in 2008.
"All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle," said Mr White, now chairman of the OECD's Economic Development and Review Committee.
The BIS said in its quarterly review that the issuance of subordinated debt — which leaves lenders exposed to bigger losses if things go wrong — has jumped more than threefold over the last year to $52bn in Europe, and jumped tenfold to $22bn in the US."
None of this should be news to our readers of course, but it is quite funny how AEP reports this in a fairly dry manner, without adding any comments of his own. After all, the things criticized by the BIS and Mr. White are a direct result of the policies AEP sotto voce supports, as he is incessantly calling for more monetary pumping. It is a surprise that he isn't denouncing the BIS and its former chief economist as 'Austrian liquidationists' for pointing out what the policies he supports have wrought.
European Sovereign Debt Developments
We will look at the BIS report in more detail in an upcoming post, but in the meantime, here is what euro-stat reported with regard to the state of sovereign debt in the euro area and the European Community as of Q1 2013.
Not surprisingly, sovereign debt in Europe is at a new record high, both in relative and absolute terms. There are a few exceptions, a handful of smaller countries that have exercised a modicum of fiscal discipline, but other than that the spending just continues, hand over fist. Note that Germany has benefited from the relatively strong performance of its economy, which has helped to hold its debt-to-GDP ratio at roughly the same level as last year, but this of course means that spending has continued to increase in absolute terms. Since the Maastrich treaty as well as the new 'fiscal compact' insist on comparing stocks to flows, euro-stat issues debt-to-GDP ratios. The maximum allowed under Maastricht is 60%. The euro area's member nations collectively however sport a new record high public debt-to-GDP ratio of 92.2%:
The most noteworthy worsening quarter-on-quarter was recorded by Ireland (the much hailed 'success story'), Spain and Belgium. The latter has recently fallen off the radar of the markets, but we feel quite sure it will receive their attention again in the not-too-distant future.
According to euro-stat:
"The highest ratios of government debt to GDP at the end of the first quarter of 2013 were recorded in Greece (160.5%), Italy (130.3%), Portugal (127.2%) and Ireland (125.1%), and the lowest in Estonia (10.0%), Bulgaria (18.0%) and Luxembourg (22.4%).
Compared with the fourth quarter of 2012, twenty-one Member States registered an increase in their debt to GDP ratio at the end of the first quarter of 2013, and six a decrease. The highest increases in the ratio were recorded in Ireland (+7.7 percentage points – pp), Belgium (+4.7 pp) and Spain (+4.0 pp), and the largest decreases in Latvia (-1.5 pp), Denmark (-0.8 pp) and Germany (-0.7 pp)."
Keep in mind that these are merely quarter-on-quarter changes.
The changes compared to Q1 of 2012 are of course a great deal worse. As euro-stat reports:
"Compared with the first quarter of 2012, twenty-four Member States registered an increase in their debt to GDP ratio at the end of the first quarter of 2013, and three a decrease. The highest increases in the ratio were recorded in Greece (+24.1 pp), Ireland (+18.3 pp), Spain (+15.2 pp), Portugal (+14.9 pp) and Cyprus (+12.6 pp), while the decreases were recorded in Latvia (-5.1 pp), Lithuania (-1.9 pp) and Denmark (-0.2 pp)."
It should be noted that none of the three countries recording the largest decreases are members of the euro area, although Latvia plans to join in 2014 (hence the large decrease – this always happens just before a country joins. Quite miraculous decreases in public debt were seen in countries like Italy and Greece prior to their accession to the euro area). The speed at which debt to GDP ratios continue to increase in the 'PIIGS' is rather breathtaking.
Finally, here is a table that shows the actual figures as well as the composition of the debt (bonds, bank loans, etc.). Ratios are somewhat abstract, and here we can see that we are talking about real money – and quite a lot of it.
European government debt in millions of national currency. Here it can be seen that although Germany's debt-to-GDP ratio slightly declined quarter-on-quarter, spending has in fact continued to grow – click to enlarge.
It is currently estimated that e.g. Italy's debt to GDP ratio will grow from the 130.3% recorded in Q1 2013 to about 132% by the end of the year. But that is probably overoptimistic, considering the debt growth that has reportedly occurred in the months June to August. The upshot of all of this is: the sovereign debt problem in the euro area remains not only unresolved, it is getting worse.
In spite of the constant stream of proclamations that we must let bygones be bygones, that the 'crisis is over', that 'Europe has shown its willingness and ability to deal with the problem and defend the viability of the euro', the reality is that the mountain of debt has just kept growing, and even faster than before. The only thing that has actually changed between 2011 and 2013 was that by late 2011, true money supply growth in the euro area had decelerated sharply year-on-year to just below 2%, while since then it has re-accelerated to 8%. That is really all there is to it. As soon as money supply growth slows down again, the crisis will be back. It's as simple as that.
In conclusion, let us quote Mr White from AEP's article once more:
"Mr White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines.
"The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks."
Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. "I don't know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel," he said.
What Mr White didn't mention is that once the whole world switches to 'Abenomics' type unbridled inflation, the biggest question will be whether the markets will still have confidence in the ability of central banks to keep things under control.
In a way one could say that faith in central banks is the last bubble that remains to be popped. They were the final barrier fighting off the tide in the 2008 crisis and the subsequent euro crisis. Once faith in the omnipotence of central banks falters, it will be game over for the modern debt-money system.