Mon, 26th June 2017

Anirudh Sethi Report


Archives of “debt trap” Tag

Soros On Europe: Iceberg Dead Ahead

George Soros has been a busy man the last few days. Appearing at the INET Conference a number of times and penning detailed articles for the FT (and here at Project Syndicate) describing the terrible situation in which Europe finds itself – and furthermore offering a potential solution. Critically, he opines, the European crisis is complex since it is a vicious circle of competing crises: sovereign debt, balance of payments, banking, competitiveness, and structurally defective non-optimal currency union. The fact is ‘we are very far from equilibrium…of the Maastricht criteria’ with his very clear insight that the massive gap, or cognitive dissonance, between the ‘official authorities’ hope and the outside world who see how abnormal the situation is, is troublesome at best. Analogizing the periphery countries as third-world countries that are heavily indebted in a foreign currency (that they cannot print), his initial conclusion ends with the blunt statement that “the euro has really broken down” and the ensuing discussion of just what this means from both an economic and socially devastating perspective: the destruction of the common market and the European Union and how this will end in acrimonious recriminations with worse conflicts between European states than before.

However, he offers some hope and a potential solution to the fact that these nations have implicitly handed their ‘seignorage rights’ to the ECB, in the potential for a balance between fiscal austerity and deflation (or at minimum new rules that would remove to a greater extent the vicious circle of the fiscal compact as deflationary debt trap). The punchline being the creation of an SPV that ‘owns the ECB’s seignorage rights – estimated to be worth $2-3 trillion’ that could explicitly be used to acquire bonds without violating the Lisbon Treaty. The sad truth of this admittedly smart financial engineering (pretend austerity and optically no money printing when exactly that is occurring) is that the Bundesbank will never agree to it (as implicitly it ends up at the foot of the German taxpayer to a greater or lesser extent) even though, as he concludes, the future of the Euro is a political one and thus “beyond the Bundesbank’s competence to decide.” 

A must-watch harsh reality check on Europe and a man trying to find answers when the authorities remain blind to the endgame…

Project Syndicate: Reversing Europe’s Renationalization

George Soros

NEW YORK – Far from abating, the euro crisis has taken a turn for the worse in recent months. The European Central Bank managed to relieve an incipient credit crunch through its long-term refinancing operation (LTRO)…

The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen. The crisis has entered what may be a less volatile but potentially more lethal phase.

At the onset of the crisis, the eurozone’s breakup was inconceivable… Read More 

World leaders slam eurozone foot-dragging

The eurozone’s debt burden hung heavily over Davos on Saturday as global economic leaders turned their fire on EU politicians for failing to come to grips with the crisis.

At the forefront of concerns were write-down talks in Greece, which had dragged into the weekend and now threaten to overshadow an EU summit on Monday designed to showcase the continent’s plans to escape the debt trap.

But senior officials from outside the eurozone also argued Europe has not got on top of the long-term problems undermining the single currency, and needs to move further and faster in integrating eurozone economies.

“The fact that we’re still, at the start of 2012, talking about Greece again is a sign that this problem has not been dealt with,” British finance minister George Osborne told a public panel of senior finance officials.

“The danger here is that the tail wags the dog throughout this crisis, in other words the inability to deal with the specific problems in the periphery causes shockwaves across the whole European economy and the world economy.”

Canada’s central bank chief Mark Carney, who chairs the international bank regulator the Financial Stability Board, said Europe’s woes were holding back the recovery and had effectively cut global growth by one percent.

European and eurozone officials at the World Economic Forum, an annual get-together of the great and the good in global business and politics, have spent the weeks attempting to drum up optimism on the debt talks.

But as the five-day talking shop drew to an end, Greek leaders were still locked in talks with private lenders over the details of a plan to wipe 100 billion euros from their sovereign debt — and thus avoid a messy default.

And another dispute was looming, as European officials said that Germany was pushing for the European Commission to take control of the Greek budget, and Athens sources hit back angrily, dubbing this “out of the question”. Read More 

12 shocking quotes from Insiders

The following are 12 shocking quotes from insiders that are warning about the horrific economic crisis that is almost here….

#1 George Soros: “Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation.”

#2 PIMCO CEO Mohammed El-Erian: “These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy.”

#3 Attila Szalay-Berzeviczy, global head of securities services at UniCredit SpA (Italy’s largest bank): “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”

#4 Stefan Homburg, the head of Germany’s Institute for Public Finance: “The euro is nearing its ugly end. A collapse of monetary union now appears unavoidable.”

#5 EU Parliament Member Nigel Farage: “I think the worst in the financial system is yet to come, a possible cataclysm and if that happens the gold price could go (higher) to a number that we simply cannot, at this moment, even imagine.”

#6 Carl Weinberg, the chief economist at High Frequency Economics: “At this point, our base case is that Greece will default within weeks.” Read More 

A world of debt

Every human being on earth currently carries a debt burden of nearly $22,733 on average, if the latest reports are to be believed.

Every child is sharing the same debt burden at birth, as debt growth rates beat the global population growth rate. In fact, debt liabilities are growing faster than GDP expansion rates.

Overall outstanding debt worldwide has more than doubled in the past ten years to $158 trillion (Dh580 trillion) in 2010, up from $78 trillion in 2000, according to a recent report by global consultancy McKinsey.

The global population is currently estimated at 6.95 billion, whereas worldwide gross domestic product (GDP) reached $74.54 trillion last year.

This translates to a per capita GDP of $10,500, which is less than half of the per capita debt burden of $22,733.

In theory, this makes the human population a ‘bankrupt’ race and financially the most dangerously exposed and vulnerable in its history.

If you think this is bad, then wait for the worst news: The debt toll is rising and it will be higher next year.

The global debt trap

The global debt of $158 trillion includes $41.1 trillion incurred by governments worldwide up to last year, accounting for 69 per cent of global GDP. This is expected to rise to $46.12 trillion in 2012, according to the Economist Intelligence Unit (EIU).

“Debt also grew faster than GDP over this period, with the ratio of global debt to world GDP increasing from 218 per cent in 2000 to 266 per cent in 2010,” McKinsey said.

Around $48 trillion of the total debt outstanding was that of governments and financial institutions. In both the US and Western Europe in 2010, the ratio of public debt stood at more than 70 per cent of the GDP, McKinsey said.

“Developed countries may need to undergo years of spending cuts and higher taxes in order to get their fiscal houses in order,” it added.

Many governments in the developed world have resorted to massive stimulus measures to bolster their economies since the 2008 global financial meltdown.

“Public debt outstanding [measured as marketable government debt securities] stood at $41.1 trillion at the end of 2010, an increase of nearly $25 trillion since 2000. This was equivalent to 69 per cent of global GDP, or 23 percentage points higher than in 2000. In just the past two years, public debt has grown by $9.4 trillion — or 13 percentage points of GDP,” McKinsey said.

The government debt worldwide was $31.7 trillion in 2008. Last year alone, government debt accounted for about 80 per cent of the overall growth in total outstanding debt.

World governments owe the money to their own citizens and lenders. The rising total debt is important for two reasons.

First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future, EIU explains in its global debt clock — which is ticking every second.

“Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week,” it says.

“Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.”

Greece, Ireland, Portugal, Spain, the UK and the US are caught in a debt trap. For some governments, the only escape is to do the same things that an average household must do when it can’t make ends meet — sell off assets, slash spending, scrape for extra earnings, downsize, and make sacrifices.

They are cutting healthcare and pensions for millions of citizens, laying off hundreds of thousands of government employees, or worse. For others, like the US, the primary response so far has been to run the money printing presses — all with untold consequences.

The national debt of the United States — the world’s biggest economy — reached $14.62 trillion in recent months — close to its GDP.

According to the IMF, US public debt will reach 99 per cent of its $14.65 trillion GDP in 2011 and 103 per cent in 2012. Read More 

Crisis brewing in India’s Maharashtra state

The state, which was once seen to be the most progressive in the country, is today rapidly sliding downwards on the development index.

Maharashtra is a state of contrasts.

It has the world’s most expensive home – a US$1 billion mansion built by Reliance Industries Chairman Mukesh Ambani, in the capital Mumbai.

The state has also witnessed massive investments in industrial and development projects.

Yet, according to government estimates, nearly 31 per cent of its population lives below the poverty line.

Its eastern region – known as Vidarbha – registers the highest cases of farmers’ suicides in the country.

The region is trapped in an agrarian crisis that drives debt-ridden cotton farmers to commit suicide.

Mansingh Pawar, president of the Maharashtra Chambers of Commerce and Agriculture, said: “We see a lot of agriculture produce rotting in warehouses. So the distribution is not effective.

“The transportation costs are high in commodities; our rail networks and road networks have to improve dramatically. The third thing that needs to improve is agro-processing, because if you want to increase the shelf life of the produce, you need to process it so that its shelf life is higher and you can transport it.”

Like its farmers, the state too is trapped in a debt burden.

Till a decade ago, Maharashtra had a budget surplus, but now its debt exceeds US$40 billion.

The state still attracts a fifth of all foreign investments in India. Read More