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  • Soverign Debt - Impending Earthquake? 6 comments
    Dec 11, 2009 5:51 AM

    In an essay entitled "The Quiet Coup" (May 2009) by Simon Johnson, which was published in 'the Atlantic' professor Johnson puts forth a sobering and insightful economic scenario;

    "The global economy continues to deteriorate, the banking system in east-central Europe collapses, and - because eastern Europe's banks are mostly owned by western European banks - justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees."

    Three months ago, on September 18, Elliot Wave International's Jason Farkas published "Baltics Ready to Blow."
    Here is an excerpt:

    "Since 90% of Latvian loans are denominated in foreign currency, devaluation would make debt repayment impossible. Swedbank, the largest lender in Latvia, recently noted that 54% of it's mortgage loans are underwater. These are problems for the lender as much as the borrower, and devaluation would force banks to curtail loans as a replay of the 1930 Great Depression European banking crises begins. The OMX-Baltic Benchmark Index tracks stocks from Latvia, Eastonia and Lithuania. All three countries are on the brink of devaluation as a result of economic turmoil, and devaluation in one would quickly spread to the others and throughout the region." 

    The recent Dubai World debt default did not cause any economic earthquakes to occur - not big enough, it doesn't matter, just an isolated incident - then on December 8th, Fitch Ratings cuts Greece's rating score to BBB+ the third lowest investment grade available. While the previous day, December 7th, Standard & Poor's put Greece's A - rating 'on watch' for a possible downgrade. As North Korea devalues it's currency at 100:1, instantly impoverishing it's citizens. The economic earth tremors are starting to grow in intensity and to fan out. 

    Economist Willem Buiter said, " From Dubai to Iceland, Ireland, Greece, Hungary, Italy, Portugal, Spain, Japan, France, the UK and the USA, sovereign debt burdens have been at current levels during peacetime only on the way down from even higher public debt burdens incurred during wars. Watching public debt/GDP ratios rise to levels likely to reach or exceed 100% of GDP by 2014 is deeply worrying."   

    Disclosure: No Position.

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Comments (6)
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  • Michael Clark
    , contributor
    Comments (11984) | Send Message
    Very good article. This is tomorrow's story beginning to become visible today.
    11 Dec 2009, 06:05 AM Reply Like
  • Donald Ingram
    , contributor
    Comments (3481) | Send Message
    Author’s reply » Michael - Thank you for your comment. Agreed, this is the one big danger facing the global economy in the coming year. May we live in interesting times indeed! VERY interesting!


    On Dec 11 06:05 AM Michael Clark wrote:


    > Very good article. This is tomorrow's story beginning to become visible
    > today.
    11 Dec 2009, 02:04 PM Reply Like
  • Jason Farkas
    , contributor
    Comments (81) | Send Message


    Nothing has changed with respect to my opinion on the Baltics: They are still ready to blow. By the way, I've now started to post some of my other articles on SA.


    Thank you, and I'm glad you could use my quote above. 2010 should be very interesting for pegged currencies. Many will likely not survive.


    Jason Farkas, CMT
    28 Feb 2010, 03:09 PM Reply Like
  • Old Trader
    , contributor
    Comments (5732) | Send Message


    While, as you correctly point out, Dubai, in and of itself, is not big enough to cause problems, problems there can cause a shift in perceptions, causing everybody to start looking over their respective shoulders. Some pretty big banks (HSBC, Standard Chartered, RBS, and Lloyds) are in line for a haircut on their holdings.
    28 Mar 2010, 06:00 PM Reply Like
  • Donald Ingram
    , contributor
    Comments (3481) | Send Message
    Author’s reply » Agreed. Since I wrote that post Greece and now Portugal, along with Spain, Ireland and Italy, are having their share of sovereign debt woes. Most think that Germany is insulated because of their strong economy. Not so fast - I just posted an instablog about the German shipping industry and financing. Nothing is as it seems. There is a link within the article that is well worth your time. Not too long.
    28 Mar 2010, 06:15 PM Reply Like
  • Old Trader
    , contributor
    Comments (5732) | Send Message


    Thanks...I'd just read your post on shipping, which is how I ended up here, LOL.


    I think that sometimes people get too impatient, when trying to time when the market notes what seems to be evident. I know that I'm often guilty of that.
    28 Mar 2010, 06:42 PM Reply Like
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