find your self in Purgatory..., and cannot get out.
How we found this very interesting article is almost as interesting as what is in it.
First, you DO need to read this one.
Second, what we found the most stunning in the 1st graph was the level of bank debt.
Note, these are the Big Bad Banks, not the local US lenders with all the pending commercial RE defaults. Different people, same type of problem, but, note:
re-financing at such a massive scale is simply not doable
The Second graph shows U.S. twice - no 2 is U.S. in 1929 and no 12 is U.S. today - which suggests that this is much worse than the Great Depression.
But, note, his point at just above that graph -
the main driver of rising government debt
is actually the subsequent collapse of tax income
The Third chart has something we had not seen before. We all have read about The Pigs - Portugul, Italy, & Greece. But, look at where Spain and Ireland were in 2007...!!!Now, explain why Spain is said to be in such trouble, when you see their debt to GDP is almost as low as in Germany & Austria?
Go figure.
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more than $2 trillion of European and U.S. bank debt needs to be re-financed before the end of next year.
re-financing at such a massive scale is simply not doable
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A third problem facing Europe is the sheer scale of the banking crisis. Although this is not just a European problem, European countries are probably worse off than the US because a larger part of European debt has to be financed externally. As you can see from chart 1, more than $2 trillion of European and U.S. bank debt needs to be re-financed before the end of next year. Unless there is a material improvement in market conditions, re-financing at such a massive scale is simply not doable.
Chart 1: Maturing Bank Securities in 2009/10 (USD)
The European approach, at least until now, has been to save the banking system at any cost. It is therefore possible that a significant share of the re-financing cost will find its way to the sovereign balance sheets and hence ultimately to the tax payer. This could further destabilise the currency union.
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Following a banking crisis, asset prices fall more and for longer than most investors realise (see charts 2a and 2b). So do output and unemployment. Most importantly, though, the real value of government debt explodes (see chart 2c) but not for the reasons you might think. Yes, the bailout costs are significant, but the main driver of rising government debt is actually the subsequent collapse of tax income.
Chart 2a: Decline in Real House Prices during Banking Crises
Peak to Trough Decline & Duration
Another issue, which is potentially even more destabilising for the euro longer term, is the massive liabilities facing Europe as its population ages. We have borrowed table 2 below from Goldman Sachs which makes no secret of the challenges facing a number of European countries. Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged. The Greek government is painfully aware of this and have been working on several new initiatives. It was the passing of one of those new laws which caused the riots in Athens before Christmas.
Table 2: Actual Debt & Age Related Contingent Liabilities
Considering the poor record of fiscal discipline, many euro zone members will probably allow their debt to grow much larger before decisive action is taken. The problems are so massive – and the solutions so painful - that most politicians chicken out and pass the problem to the next generation of politicians.
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Euro Doomed to Fail as Governments Pull in Opposite Directionshttp://www.marketoracle.co.uk/
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