8/3/20: Global Economy's Titanic: Meet Your Iceberg

Here's that iceberg that is drifting toward our economy's Titanic... and no, it ain't a virus, but it is our choice:

Via: @Schuldensuehner

Years of easy credit, easy money. The pile of debt from Baa to lower ratings is the real threat here, for its sustainability is heavily contingent on two highly correlated factors: cost of debt (interest rates) and availability of liquidity. The two factors are closely correlated, but are also somewhat distinct. And both are linked to the state of the global economy.

There are additional problems hidden within A and even Aa rated debt, since these ratings are vulnerable to downgrades, and current Aa rating shifting to Baa or Ba will entail a discrete jump in the cost of debt refinancing and carry.

16/10/2019:Corporate Bond Markets are Primed for a Blowout

My this week's column for The Currency is covering the build up of systemic risks in the global corporate bond markets: https://www.thecurrency.news/articles/1962/constantin-gurdgiev-corporate-bond-markets-are-primed-for-a-blowout.

Synopsis: "Individual firms can be sensitive to the periodic repricing of risk by the investors. But collectively, the entire global corporate bond market is sitting on a powder keg of ultra-low government bond yields, with a risk-off fuse lit by the strengthening worries about global economic growth prospects. Currently, over USD 16 trillion worth of government bonds are traded at negative yields. This implies that in the longer run, market pricing is forcing accumulation of significant losses on balance sheets of all institutional investors holding government securities. Even a small correction in these markets can trigger investors to start offloading higher-risk corporate debt to pre-empt contagion from sovereign bonds markets and liquidate liquidity risk exposures."

22/4/19: At the end of QE line... there is nothing but QE left...

Monetary policy 'normalization' is over, folks. The idea that the Central Banks can end - cautiously or not - the spread of negative or ultra-low (near-zero) interest rates is about as balmy as the idea that the said negative or near-zero rates do anything materially distinct from simply inflating the assets bubbles.

Behold the numbers: the stock of negative yielding Government bonds traded in the markets is now in excess of USD10 trillion, once again, for the first time since September 2017

Over the last three months, the number of European economies with negative Government yields out to 2 years maturity has ranged between 15 and 16:

More than 20 percent of total outstanding Sovereign debt traded on the global Government bond markets is now yielding less than zero.

I have covered the signals that are being sent to us by the bond markets in my most recent column at the Cayman Financial Review (https://www.caymanfinancialreview.com/2019/02/04/leveraging-up-the-global-economy/).

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble

Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

• Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
• The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
• Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
• As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.

As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".

Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

9/8/17: Global Debt Bubble 2002-2017

A nice chart showing evolution of global debt levels since 2002 via Reuters:

Source: https://uk.reuters.com/article/uk-global-markets-creditcrunch-idUKKBN1AO2MT?il=0

19/5/17: A Reminder: Social Security is Only Getting More Insolvent...

On foot of my earlier post on U.S. household debt, it is worth mentioning another, much-overlooked in the media, fact concerning U.S. real economic debt crisis. This fact is a staggering one, even though it has been published a year ago, back in April 2016.

Based on the 2016 OASDI Trustees Report, officially called "The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds" (see link here: https://www.ssa.gov/oact/TR/2016/index.html).

• U.S. Social Security's total income will exceed total cost of Social Security payouts through 2019. However, beyond 2019, interest income and money taken out of reserves will have to cover the funds required to offset Social Security's annual deficits until 2034.
• Assuming the U.S. Presidential Administrations and the Congress continue business as usual approach to Social Security, the federal government payroll taxes will only be able to cover roughly 75% of scheduled retirement benefits until 2090
• As the result, the Social Security Administration now projects that unfunded obligations will reach USD 11.4 trillion by 2090 or some $700 billion higher than the USD 10.7 trillion shortfall projected a year ago
• Worse:  on an "infinite horizon" basis (netting Social Security expected future liabilities from forecast revenues) Social Security will face a USD 32.1 trillion in unfunded liabilities by 2090, or staggering USD 6.3 trillion more than 2015 projection

Chart below plots forecast Social Security unfunded liabilities corresponding to each forecast year:

The above clearly shows that the Social Security 'stabilisation' achieved in 2014-2015 is now not only erased, but is set back to what appears to be a rapid acceleration in liabilities back to 2008-2014 trend.

Yes, Social Security is a system in which people pay in taxes for an 'allegedly' ringfenced program that is supposed to supplement retirement. No, Social Security is not a program that is actually contractually ringfenced to provide anything whatsoever to those who pay into it. Which, really, means that the default on Social Security is looming large for the millennials and subsequent generations. And this raises the issue of what will happen to pensions provision across the entire U.S. Currently, even public sector pensions (across states and municipalities) are facing severe uncertainty and, in an increasing number of cases, actual cuts. Which raises public reliance on Social Security just at the time that the Social Security system is facing higher threats of insolvency. 

Meanwhile, household debt situation is getting from bad to awful (see this post: http://trueeconomics.blogspot.com/2017/05/19517-us-household-debt-things-are-much.html). 

The status quo is a prescription for a social, economic and political disaster. No medals for guessing what the Congress is doing about it all.

4/5/16: Canaries of Growth are Off to Disneyland of Debt

Kids and kiddies, the train has arrived. Next stop: that Disneyland of Financialized Growth Model where debt is free and debt is never too high…

Courtesy of Fitch:

Source: @soberlook

The above in the week when ECB’s balancehseet reached EUR3 trillion marker and the buying is still going on. And in the month when estimates for Japan’s debt/GDP ratio will hit 249.3% of GDP by year end

Source: IMF

And now we have big investors panicking about debt: http://www.businessinsider.com/druckenmiller-thinks-fed-is-setting-world-up-for-disaster-2016-5. So Stanley Druckenmiller, head of Duquesne Capital, thinks that “leverage is far too high, saying that central banks and China have allowed for these excesses to continue and it's setting us up for danger.”

What all of the above really is missing is one simple catalyst to tie it all together. That catalysts is the realisation that not only the Central Banks are to be blamed for ‘allowing the excesses of leverage’ to run amok, but that the entire economic policy space in the advanced economies - from the central banks to fiscal policy to financial regulation - has been one-track pony hell-bent on actively increasing leverage, not just allowing it.

Take Europe. In the EU, predominant source of funding for companies and entrepreneurs is debt - especially banks debt. And predominant source of funding for Government deficits is the banking and investment system. And in the EU everyone pays lip service to the need for less debt-fuelled growth. But, in the end, it is not the words, but the deeds that matter. So take EU’s Capital Markets Union - an idea that is centred on… debt. Here we have it: a policy directive that says ‘capital markets’ in the title and literally predominantly occupies itself with how the system of banks and bond markets can issue more debt and securitise more debt to issue yet more debt.

That Europe and the U.S. are not Japan is a legacy of past policies and institutions and a matter of the proverbial ‘yet’, given the path we are taking today.

So it’s Disneyland of Debt next, folks, where in a classic junkie-style we can get more loans and more assets and more loans backed by assets to buy more assets. Public, private, financial, financialised, instrumented, digitalised, intellectual, physical, dumb, smart, new economy, old economy, new normal, old normal etc etc etc. And in this world, stashing more cash into safes (as Japanese ‘investors’ are doing increasingly) or into banks vaults (as Munich Re and other insurers and pension funds have been doing increasingly) is now the latest form of insurance against the coming debt markets Disneyland-styled ‘investments’.

12/1/16: That Savage Deleveraging: Global Debt 2000-2015

Here's a neat summary chart based on data from BIS through June 2015, covering total global credit (debt) outstanding (excluding IMF debt), issued in three main currencies:

That savage deleveraging... it has been truly epically... unnoticeable... Oh, and one more thingy: the unsustainable build up of debt prior to the onset of the Global Financial Crisis (GFC) was just about the same as the increase in debt during the so-called deleveraging period since the onset of the GFC.

6/1/16: Debt Pile: BRICS v BRIS

When it comes to debt pile for the real economic debt (Government, private non-financial corporates and households), China seems to be in the league of its own:

Per chart above, China’s debt is approaching 250 percent of GDP, with second-worst BRICS performer - Brazil - sitting on a smaller pile of debt closer to 140 percent of GDP. The distance between Brazil and the less indebted economies of South Africa and India is smaller yet - at around 12-14 percentage points. Meanwhile, the least indebted (as of 1Q 2015) BRICS economy - Russia - is nursing a debt pile of just over 90 percent of GDP, and, it is worth mention - the one that is shrinking due to financial markets sanctions.

5/1/16: Debt Pile: Advanced Economies Lead

After some 8 years of crisis and post-crisis deleveraging, one would have expected a significant progress to be achieved in terms of reducing the overall debt piles carried by the world’s most indebted economies.

Alas, the case cannot be made for such improvements. Here is a chart based on the latest BIS data (through 1Q 2015) plotting the distribution of total real economic debt (Government, private non-financial corporates and households) across the main economies:

As the chart above indicates, there are at least 23 economies with debt/GDP ratio in excess of 200 percent, seven economies with debt to GDP ratio close to or above 300 percent and 3 economies with debt to GDP ratio in excess of 300 percent. But the true champs of the debt world are Japan and Ireland, where based on BIS data, debt to GDP ratio is in excess of 375 percent. 

It is worth noting that Germany is the only advanced economy in the chart that has debt/GDP ratio below 200 percent. Of all original Euro area 12 economies, Germany, Austria and Finland are the only three economies with debt/GDP ratio below 250 percent. Six out of top 10 most indebted economies in the chart are Euro area members.

Do note that the above omits local authorities and state bodies debts, so the true extent of debt pile up around the world is significantly larger than that presented in this figure.

3/12/15: Of Debt, Central Banks and History Repeats

Couple of facts via Goldman Sachs' recent research note:

1. Since the start of 2008, U.S. corporate debt has doubled and the interest burden rose 40 percent. Even as a share of EBITDA, debt servicing costs are up 30 percent, so U.S. corporations’ ability to service debt has declined despite the average interest rate paid by the U.S. corporate currently stands at around 4 percent, as opposed to 6 percent in 2008.
2. Much of this debt mountain has gone not to productive activities, but into shares buybacks and M&As. Per Goldman’s note: “…the changing nature of corporate balance sheets does raise the question, again, about the lack of organic growth and reinvestment post the crisis.”

And the net conclusion? “…the spectre of rising rates, potential global disinflation, declining operating profits and wider credit spreads continues to create near-term consternation for weak balance sheet stocks.”

Source: Business Insider

Oh dear… paging the Fed…

• Meanwhile, per IMF September 2015 Fiscal Monitor, Emerging Markets’ corporate debt rose from USD4 trillion in 2004 to USD18 trillion in 2014. Much of this debt is directly or indirectly linked to the U.S. dollar and, thus, Fed policy.

Oh dear… paging the Fed again…

And just in case you think these risks don’t matter, a quick reminder of what Jaime Caruana, head of the Bank for International Settlements, said back in July 2014 (emphasis mine):

• "Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give… If we were concerned by excessive leverage in 2007, we cannot be more relaxed today… It may be the case that the debt is better distributed because some highly-indebted countries have deleveraged, like the private sector in the US or Spain, and banks are better capitalized. But there is also now more sensitivity to interest rate movements."

All of which translates, in his own words into

• "Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally."

And as per current QE policies?

• "There is something strange about fighting debt by incentivizing more debt."

Which, of course, is the entire point of all QE and, thus, brings us to yet another ‘paging Fed moment’:

• "Policy does not lean against the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap. …Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent."

Now, take a look at the lengths to which ECB has played the Russian roulette with monetary policy so far: http://trueeconomics.blogspot.ie/2015/12/31215-85-v-52-of-duration-of-risk.html

4/10/15: CFR: Global Debt Bubble

My recent column for the Cayman Financial Review on the Global Debt Bubble: http://www.compasscayman.com/cfr/2015/08/19/The-global-debt-bubble-/.

16/9/2013: A Liquidity Slush or an Equity Switch?

Three more charts from BIS Quarterly (http://www.bis.org/publ/qtrpdf/r_qt1309a.pdf), showing the switch of liquidity out of the Emerging Markets into Advanced Economies...

 And then from the Advanced Economies bonds into Advanced Economies equities with a small bounce up on Emerging Markets equities side too...

Two thoughts:

1. There is no yield-driven bounce anymore, so pricing is not a huge help in this process; and
2. Is this the end of the debt bubble and the start of the equities rise (structural, not nominal rise, driven by shift in corporate funding models) or is this a temporary slush of liquidity?

Economics 27/06/2010: G20 - real stats and real issues

As G20 leaders undertake another attempt at injecting some balance into global economic order - with last meeting in Pittsburgh focused on stimulus strategies, while the current one in Toronto focusing on austerity - it is worth taking a look at the stakes.

Bank of Canada estimates that disorderly (or uncoordinated) exit from global stimulus phase of the recession can lead to a loss of up to USD7 trillion worth of output, primarily concentrated in the advanced economies.

However, the story is more complex than the simple issue of whether G20 nations should opt for a fiscal solvency or for a continued monetary and fiscal priming of the pump. Here are the key stats on the leading global economic blocks, revealing the structural imbalances that suggest the real problem faced by the advanced economies is the debt-driven nature of their fiscal and private sector financing.
First chart above shows Current Accounts for the main blocks, including the G20. Two things are self-evident from the chart. Firstly, the crises had a crippling effect on the overall trade flows from the emerging economies to the advanced economies, though this came about mostly at the expense of countries outside Asia Pacific. Second, crisis notwithstanding, IMF forecasts (data is from IMF April 2010 update to WEO database) the trend remains for unsustainable trade deficits for the Advanced Economies. European (read: German) surpluses of the last two decades are going to be wiped out in the post-crisis scenario, but it is clear that the US, as well as other advanced economies, will have to face a much more severe adjustment toward more balanced current account policies in years to come.

These adjustments will have to involve government finances:
Chart above shows government deficits, highlighting the gargantuan size of the fiscal measures deployed by the US and European countries, as well as a massive stimuli used in some 'Tiger' economies and China, over the latest crisis. This puts into perspective the size of the austerity effort that has to be undertaken to bring fiscal policies back to their more sustainable path. You can also see the relative distribution of these adjustments - the gap between the red line and the blue line. This gap is accounted for, primarily, by the UK, Japan and US and is much smaller than the overall Euro area contribution to G7 deficits.

But there is more to the deficits picture than what is shown above. Expressed in terms of percentages of GDP, the figure above obscures the true extent of the problem. So let's look at it in absolute dollar terms:
Now you can clearly see the mountain of debt (deficit financing) deployed in the crisis. Someone, someday will have to pay for this. It will be you, me, our children and grandchildren. Can anyone imagine that things will get back to pre-crisis 'normal' any time soon with this level of deficit overhang on the side of Governments alone?

What is even more disturbing in the picture is the position of Advanced Economies in the period between the two recessions. It is absolutely clear that Advanced Economies have lived beyond their fiscal means, even at the times of plenty, running up massive deficits in the years of the boom.

This puts to the test our leaders (EU and US) claims that the banking system reckless lending was a problem. The banks were not shoving cash at the Clinton-Bush-Obama administrations, or at European Governments. Instead, just as the banks were hosing their domestic economies down with cheap cash, courtesy of low interest rates, Western governments were hosing down their friends and cronies with deficit financing. The two crises might have been inter-related, but both fiscal profligacy and banks reckless risk-taking are to be blamed for our current woes.

Irony has it, neither the banks, nor the political profligates have paid the price for this recklessness.
Hence, the dire state of the governments' structural balances. As chart above shows, in the entire period of 20 years there was not a single year in which advanced economies (G7 or G20 or the Euro zone) have managed to post a structural surplus. Living beyond ones means is the real modus operandi for the advanced economies' sovereigns. Expressed in pure dollar terms:

Now, on to the levels of economic activity:
As I remarked on a number of occasions before, the whole idea of the Advanced Economies decoupling from the world is really a problem for the Euro area first and foremost. want to see this a bit more clearly?
Look at G7 plotted above against the Euro area and ask yourself the following question. G7 includes Japan - a country that is shrinking in its overall importance in the global economy. This contributes significantly to the widening gap between the world income and G7 income. But the region in real trouble is the Euro zone. Again, this puts Euro area problems into perspective:

• Anemic growth
• Poor relative performance in terms of absolute levels of activity

In short - decay? or put more mildly - Japanese-styled obsolescence? Whatever you might call it, the likelihood of the Euro area being able to cover its debts and reduce its deficits is low. Much lower than that for the US and the rest of G7 (ex-Japan).

Some revealing stats on savings and investment:
Clearly, chart above shows the opening of the gap between the need for demographically-driven savings growth in the advanced economies, where ageing population is desperately trying to secure some sort of living for the future, and the lack of real savings achieved. It also shows the downward convergence trend in rapidly developing economies, where younger population is finally starting to demand better standard of living in exchange for years of breaking their backs in exports-focused factories.

Yet, as savings rose during the peak in advanced economies (pre-crisis), investment was much less robust and it even declined in rapidly developing economies:
Why? Because of two things: much of domestic savings in Advanced Economies, especially in Europe, was nothing more than the Government revenue uplift during the boom. In other words, instead of European citizens keeping their cash to finance future pensions, Governments were able to increase expenditure out of booming tax revenues and borrowing against the booming savings rates. Ditto in the USofA (although to a smaller extent). In the mean time, Asia Pacific Tigers started to finance increasingly larger proportion of fiscal imbalances in Advanced Economies, driving down their domestic investment pools and shifting their domestic savings into foreign assets. Which, of course, is an exact replica of the Japanese global investment shopping spree of the 1980s - and we know where that has led Japan in the end...

So the scary chart for the last:
The big question for G20 this time around will be not the stated in official press conferences and statements - but will remain unspoken, although evident to all involved: Given that over the last 20 years, advanced economies financed their purchases of exports from the rapidly developing countries by issuing debt monetized through savings of the developing countries, what can be done about the current twin threat of excessive debt burdens in advanced economies and the shrinking savings in emerging economies?

This is a far bigger question that the USD7 trillion one posited by the Bank of Canada. It is a question that will either see some drastic changes in the ways world economy develops into the next 20 years, or the permanent decline of the advanced economies into Japan-styled economic and geo-political obsolescence.

Economics 03/05/2010: World Debt Wish 6

Final part of the series presents two tables, which are largely self-explanatory.

The first table compares Irish Gross External Debt Liabilities to those of other 36 Most Indebted Countries, reporting these countries' GED as % of Irish GED. No adjustments for GDP etc are taken:
You can judge by yourself if Ireland is really economically mightier than Australia, or Argentina, or Brazil and so on...

The second table does two things:
First I reproduce the raw numbers for Ireland and for the group of 36 Most Indebted Countries across three categories of debt, total debt and GDP/GNP. I then compute the relative weight of Ireland in every one of these categories. Column 4 in the top part of the table shows the results as percentages. Thus, Ireland's General Government Debt accounts for 0.96% of the total General Gov Debt incurred by all 36 countries. Ireland's banks' debt accounts for almost 4% of the total banking sector debt for all 36 countries - a hefty weight for the country that has GDP share of the Group of 36 that is only 0.37% or GNP share that is just 0.30%. You can judge for yourselves if the private sector (other than banks) in Ireland is really that healthy to carry us out of the recession, but the figure of 5.88% representing the share of Irish real economy debt as a percentage of the real economy debt for all 36 countries is scary! Especially realizing that this makes our economy leveraged to the tune of 1960% compared to the rest of the world. Imagine having that level of LTV on your house?!

The second part of the table above shows Irish debt levels as percentage of Irish GDP and GNP. Our headline figure here is the level of absolute (not relative to other nations) level of leverage - that of 1,326% or x13.26 times if we are to continue imagining that MNCs-dominated sectors really do carry all activities billed through Ireland here in Ireland (in other words, if we are to use our GDP as income measure). Alas, were we to step down to earth and use our GNP as a metric for income, our level of leverage is reaching a frightening 1,617% or x16.17 times annual income. Compared to that, world's most indebted 36 nations have leverage of just 119%!

Still feel like sending some foreign aid to the Highly Indebted Poor Countries (HIPCs)? Or, for that matter, to Greece?

Economics 03/05/2010: World Debt Wish 5

This is the fifth post in the series covering world debt issues. In the previous posts I provided analysis of the aggregate debt levels for 36 largest debtor nations (here) and for the Government debt (here), the banks debt (here) and the country level data (here). This post puts things into comparative perspective.

Before we begin, however, let me quote from today's Financial Times: "On my estimate, the total size of a liquidity backstop for Greece, Portugal, Spain, Ireland and possibly Italy could add up to somewhere between €500bn ($665bn, £435bn) and €1,000bn. All those countries are facing increases in interest rates at a time when they are either in recession or just limping out of one. The private sector in some of those countries is simply not viable at those higher rates."

Notice the numbers Wolfgang Munchau quotes above, and the countries he includes in the end-game rescue package. Ireland, figures in marginally - the last in line. Yet, what you are about to witness puts a different order on the potential default scenario within the PIIGS.

First the so-called 'good news' - per our Government's repeated boasting, Ireland is a country with sound public sector debt levels. Oh, really?
Chart above shows General Government Debt as percentage of GDP. Note, I decided to play 'fair' with Brian Lenihan here - he seemingly cannot understand the GDP/GNP gap, so let us not challenge him too much in his job and use GDP as a benchmark. Per chart above, as of Q4 2009 we had a 62% ratio of GGD to GDP. This puts us into a 'sound' fifth position in the group of world's most indebted 36 nations, behind such 'sound' public finance countries as

• Greece (93%)
• Belgium (74%)
• Italy (65% - getting dangerously close to Ireland)
• France (63% - virtually indistinguishable to Ireland)

Note, this is GGD nomenclature of the IMF/BIS/World Bank framework, which is slightly different from the Stability & Growth Pact methodology deployed by the EU, but unlike the EU's methodology, this one is comparative across the world.

Nothing to brag about here, folks. Fifth. And rising faster than France's or Italy's or Belgium's...
Chart above puts us into comparison in terms of banks' debt - need any explanation here? Oh, yes, we are the most indebted nation in the world by that metric. Worse than this. Suppose we chop off the IFSC (roughly 60% of the banks & 'other' credit institutions' debt). We end up being - the 3rd most indebted banking system in the world.

Of course, in the end it will be the real economy of Ireland - including our corporates and households - who will be paying for Brian Cowen's policies (GGD) and for the banks (Gross Banks Debt), so perhaps here Ireland is doing well? There has to be hope somewhere?
Oops, not really. In terms of private (non-banks and non-Exchequer) sectors debt Ireland Inc is actually in worse shape than it is in terms of banks and the Exchequer (which of course begs a questions - what are we doing rescuing banks while the real economy sinks?). Notice that we occupied this dubious first place in the world back in the days of 2003 as well, and part of this is IFSC as well - pension funds and investment funds. But the amount of debt we piled on since then is purely spectacular.

And so now, down to the main figure - the combined external debt liability of Ireland relative to other most indebted nations:
I bet the unions who are calling for more borrowing to finance more growth (the irony of ironies is, of course, that they were so loudly opposing 'growth for growth sake' during the Tiger years) want Mister Lenihan to pull out the state cheque book...

Now let me slightly digress from Ireland and focus on the US. Per above data:

• US public sector debt is only a notch above the 36 countries average;
• US Gross bank's debt is by leagues and bound lower than the 36 countries average;
• US private sector debt is just above the average for the 36 most indebted countries, which implies that
• US total economy debt is below the average for the 36 countries.
  

Now, for all Messrs Lenihan and Cowen talk about how the US caused Irish crisis, somehow the real data shows nothing of the sorts... Instead - the real data paints a picture of Ireland deeply sick by all fiscal and financial standards back in Q4 2003. If you go back to those days, really, there were only few economists who warned about some aspects of this problem - myself, Morgan Kelly inclusive. But there was only one economist who consistently argued back then that the entire picture of the Irish economy was wrong. It was David McWilliams. It turns out - he was right!

Economics 03/05/2010: World Debt Wish 4

This is the fourth post in the series covering world debt issues. In the previous post I provided analysis of the aggregate debt levels for 36 largest debtor nations (here) and for the Government debt (here) and the banks debt (here). The current post looks at the country-level data.
Chart above plots the evolution of the Gross External Debt for top 10 debtor nations. The US, predictably leads the way. Remember - these are absolute debt volumes, not relative to GDP. UK comes in second. While the UK Gross External Debt has actually declined in the duration of the crisis, that of the US remained on the rising path, with current GED levels in the US above the 2007 bubble peak. The same is true of the third (France) and fourth (Germany) countries.

Ireland is a remarkable member of this list, coming in ranked 8th largest debtor nation overall in the world in Q4 2009 - up from the 10th in Q4 2003. This clearly shows that in the Irish case, the debt bubble has been forming in the economy well before 2003. My previous research suggests that Irish debt bubble has started forming back in 1998-1999, the last year when our current account registered positive balance, as chart below illustrates:
What's even more interesting is that in 2009 Ireland held 4.1% of the total debt of the 36 most indebted countries, while producing less that 0.37% of the same group of countries' combined GDP. This implies that our economy's dependence on debt is 11 times greater than that of the group of 36 most indebted nations. Put into household finances perspective, we have managed to borrow ourselves into a complete corner, whereby our indebtedness is systemically important to the world, while our economic existence is not. If not for the euro, folks, we would have bailiffs from the IMF calling in.

Having borrowed more than Japan and Belgium, we are also leagues ahead of other, much larger economies in terms of GED:
Think of it: Irish debt is

• x2 times greater than Australia,
  
• x2.5 than Canada,
  
• x3 Hong Kong & Denmark,
  
• x5 Greece
  
• x2 the combined debt of Brazil, India & Russia which have combined 2009 GDP more than x44 times that of Ireland!

And we are the 'rich country' that is contributing to international aid and relief for the HIPCs (Highly Indebted Poor Countries) and whose Presidents (current and former) are jet-setting around the world dispersing piles of taxpayers' cash in aid and preaching economic reforms. Comical or farcical, folks?

Couple of scatter plots showing Q4 2003 position against Q4 2009 one:
Predictably, the US and UK are outliers, so let's zoom on the data ex-US & UK:
Majority of the 36 countries which are world's largest debtors locate above the 1-1 line, implying that between 2003 and 2009 total debt levels have risen in these countries. Countries that are above the regression line have above-average propensity to increase indebtedness between 2003 and 2009. Ireland sticks out like a sore thumb - sporting the largest Gross External Debt increase of all comparators, relative to the starting position in Q4 2003. The overall relationship between the starting debt levels and the current ones is extremely strong - something to the tune of 98% of variation in current debt positions is explained by the starting ones, which simply means that all 36 countries are habitual addicts to debt. Again, Ireland is the leading addict in the club.

A caveat, of course is due here - the figures for Ireland do include IFSC, but hey, why shouldn't they - IFSC is our economic miracle, isn't it? It provides jobs in Ireland. It pays taxes in Ireland. It pays rents to Irish developers...

Of course, do recall that GED includes 3 sectors in it - Banks, Government and the rest of the economy. Banks and Government, as I've shown in the previous post, are linked:
But the link is not particularly strong: correlation between GGD & Banks Debt was +0.49 in 2003 - positive, but not exceptional. It rose to +0.55 in 2009, reflecting the crisis measures transferring taxpayers wealth to the banks. But this too is not dramatic. A relatively modest increase in correlation between 2003 and 2009, plus the fact that we already had a positive correlation back in 2003 highlight pro-cyclicality of fiscal policies worldwide.

Now, let's put the GEDs together, for comparatives:
Ireland is the member of USD1 trillion debt club, despite having a substantially smaller income than any of the countries around it. Even removing IFSC out of this equation still leaves us in the club, pushing our total debt to the 12th position worldwide.

In the next post, I will look at the debt levels relative to countries' GDP, so stay tuned.

Economics 02/05/2010: World Debt Wish 3

Having covered the aggregate debt levels (here) and Government debt (here), now its time to move on to Banks. And some surprising stuff the numbers are throwing:
The UK is clearly an outlier in the entire global series. This is, of course, due to two factors - firstly, the international hub position of London, and secondly - the over-reliance of European and other non-US economies on banks lending (as opposed to the much more significant role played by equities and bonds in the US). Irish reliance on banking sector is also formidable. Also notice that

1. Irish banking deleveraging began in 2008, similar to other countries;
2. Recall from the previous post that Governments ramp up of liabilities in most countries, unlike Ireland, has began with a lag to banks deleveraging.
   

These two facts indicate that Irish banks unable to deleverage outside the state aid support, which, of course simply means that instead of writing down their debts, they re-loaded them onto us, the taxpayers.

Taking out the UK, as an influential outlier:
The remarkable part of the above picture is that virtually no banking sector amongst the top 10 debtor nations has managed to deleverage to anywhere near pre 2006 levels. The crisis, folks, has not gone away - it has been covered up with a thick layer of state-issued liquidity. In other words, printing presses, not structural reforms, what has been working over time to 'resolve' the crisis. And this can only mean two possible outcomes: high inflation or renewed crisis. Since the former relies at least on some recovery in consumer ability to take on new debt, the only way we can avoid a double-dip crisis scenario is if consumers have deleveraged more than the banks did during the last two years. I will be moving on to the real economy sector in my later posts, but for now let me give you an idea of the findings - there was virtually no deleveraging of consumers. Instead, the real economy is now deeply in debt itself.

Back to the banks for now. Chart above shows that the story of banks deleveraging is even worse in the second tier of debtor nations. In fact, with exception of Belgium, no banking system amongst the 11th-20th ranked debtor nations has managed to reduce the levels of debt incurred during the bubble formation.

Chart below once again highlights the nature of the UK banking system
Zooming onto the main group of countries (ex-UK):
All of the banking sectors in top 36 debtor countries are carrying more debt today than they did in Q4 2003. And Ireland once again stands out as the most debt-dependent country in the group when it comes to the rate of growth in banking liabilities since 2003.

So let us summarize the findings so far:

1. Irish Government debt position is by far not the strongest today - in absolute terms, our General Government Debt levels rank 13th highest in the world, up from 19th back in 2003 Q4.
2. Irish Government debt has been rising faster than that of the other 36 most-indebted countries between 2003 and the end of 2009.
   
3. Irish banking sector debt position is 8th highest in the world, up from 10th highest in Q4 2003 - in absolute dollar terms.
4. Irish banks deleveraging has in effect resulted in a swap of private liabilities for public liabilities, with no net reduction in overall economy's debt levels.
   

From the world economy point of view:

1. Global debt levels remain at extremely high levels and deleveraging has not taken place to the extent needed to resolve the crisis.
2. Private (ex-Banks and ex-Government) sectors debt remains at virtually peak level consistent with the bubble.
3. Banks deleveraging also has fallen short of what would be required to bring the debt levels down to more realistic levels.

Next, I will be looking at the data on total debt across 36 economies. Stay tuned.

Economics 02/05/2010: World Debt Wish 2

Continuing with a tour through the world debt numbers, let's take a look at General Government Debt levels:
Chart above shows the dynamics of GGD over the last 7 years. In majority of cases, except for the US, there has been virtually no break in the debt dynamics over the last two years, compared with the past. What does this mean?

1. Firstly, this means that the entire talk about 'massive' Keynesian stimuli around the world is bogus - the governments might have re-directed their spending to new activities in response to the crisis, but the path they chose to expand their spending in the last two years is largely the same they were operating on during the boom.
2. Secondly, this clearly shows that in 9 out of top 10 debtor nations, Governments were operating pro-cyclical fiscal policies during the boom - in other words, to maintain their role in the society, governments required increasingly greater and greater spending - a classic definition of an addiction.
3. Thirdly, the US Republicans were about as eager to burn taxpayers cash as the US Democrats.

The same patterns are not fully present amongst smaller debtors:
In the chart above:

1. With exception of Norway and Turkey, all governments engaged in a much more aggressive ramp up of expenditures during the last two years than before the crisis.
   
2. All governments, with exception of Ireland, that did engage in extensive GGD increases during the crisis did so only starting in 2009.
   
3. Ireland deployed massive increases in GGD back in 2008 - before any other country.
4. Stimulus - in so far as our GGD increases go - in Ireland has been the most dramatic of all other comparator economies.
5. Within a span of 7 years, Irish Government has pushed the country from 19th most indebted in the world in absolute terms to 13th. This is despite the fact that our economy is a minnow compared to the rest of the top 20 debtor nations club.

Ireland's GDP ranked 53rd in the world by the IMF in 2009, 51st by the World Bank and 54th by CIA. Our Government debt ranked 13th... Getting concerned? Or still calling for the Government to borrow more and spend more?
Obviously, it is worth taking a look at the relationship between the starting debt positions and the current levels of government debt. Scatter plot above maps all 36 countries that are the top debtor nations around the world. The US is a significant outlier, so let us zoom closer:
What the chart above illustrates is that Ireland is in the league of its own when it comes to the government reliance on debt financing:

1. Between 2003 and 2009 Irish Government has engaged in the most extreme (relative to peers) debt expansion of all highly indebted nations (compare distance to regression line relative to levels of debt in 2003).
2. While majority of the 36 top debtor nations did run increases in debt levels between 2003 and 2009, Ireland's position is extreme in absolute terms (compare distance to the 1-1 line relative to 2003 debt)
   

In the next post, I will be taking a closer look at the Banks debts, followed by the post analysing total debt levels. The final post of the series will put together debt figures relative to GDP. Stay tuned.