I use to think the next debt crisis was going to be a sovereign debt crisis, but I think it may be much bigger and much worse - a combination sovereign, corporate, consumer debt crisis. Sovereign balance sheets have exploded in a countercyclical move to cover for reduced aggregate demand in the wake of the GFC. Now corporate balance sheets are exploding as the false veneer of higher profits and higher share prices allows companies to gorge themselves at the trough of low interest rates and an eager demand for higher yielding paper. This will come back to bite when the economy experiences its next cyclical downturn. The poor consumer, overstuffed as he is but hanging on, will simply be collateral damage as everything goes to hell in a handbasket.
The margin for error is diminishing.
Showing posts with label debt crisis. Show all posts
Showing posts with label debt crisis. Show all posts
Wednesday, August 13, 2014
Thursday, November 10, 2011
Sovereign Debt Crises Have A Long Fuse
About the only thing Greece* has shown us is that sovereign debt "crises" have a long fuse. The Greek crisis erupted in early 2010 and has yet to reach its ultimate zenith.
In recent days, Italian bond yields have risen above 7%, throwing into question the sustainability of Italy's fiscal position, and the potential collapse of efforts to bailout the eurozone.
Equity markets have appeared to ignore the current "crisis." I suspect it is because they see it as a long term problem, with only a small likelihood of a catastrophic collapse any time soon. With Greece as the blueprint for this thinking. This may, or may not, prove correct, but it has frustrated the bears no end. They have been betting upon a rapid conflagration, and are perplexed by the market going up in the face of supposedly rising risks. The greater possibility is for more "can kicking" and the prospect of a long dripfed erosion in confidence. Periodic fires (aka crisis of confidence) are likely break out, but the system can go on for a long period of time before the piper ultimately comes calling.
The real problem in this whole equation is structural fiscal/current account imbalances co-mingled with massive long term contingent liabilities due to generous promises made at various points in the past. In the absence of any serious address of those problems, we know how this story will end. Even when the market is signalling the ultimate end, a bankrupt country can make interest payments on its debt for a long period of time before it eventually calls it quits.
*And let's not forget Japan.
In recent days, Italian bond yields have risen above 7%, throwing into question the sustainability of Italy's fiscal position, and the potential collapse of efforts to bailout the eurozone.
Equity markets have appeared to ignore the current "crisis." I suspect it is because they see it as a long term problem, with only a small likelihood of a catastrophic collapse any time soon. With Greece as the blueprint for this thinking. This may, or may not, prove correct, but it has frustrated the bears no end. They have been betting upon a rapid conflagration, and are perplexed by the market going up in the face of supposedly rising risks. The greater possibility is for more "can kicking" and the prospect of a long dripfed erosion in confidence. Periodic fires (aka crisis of confidence) are likely break out, but the system can go on for a long period of time before the piper ultimately comes calling.
The real problem in this whole equation is structural fiscal/current account imbalances co-mingled with massive long term contingent liabilities due to generous promises made at various points in the past. In the absence of any serious address of those problems, we know how this story will end. Even when the market is signalling the ultimate end, a bankrupt country can make interest payments on its debt for a long period of time before it eventually calls it quits.
*And let's not forget Japan.
Subscribe to:
Posts (Atom)