Ambrose Evans-Pritchard wrote:
> The capital well is running dry and some economies will wither
> The world is running out of capital. We cannot take it for
> granted that the global bond markets will prove deep enough to
> fund the $6 trillion or so needed for the Obama fiscal package,
> US-European bank bail-outs, and ballooning deficits almost
> Last Updated: 7:55PM BST 25 Apr 2009
> Unless this capital is forthcoming, a clutch of countries will
> prove unable to roll over their debts at a bearable cost. Those
> that cannot print money to tide them through, either because they
> no longer have a national currency (Ireland, Club Med), or because
> they borrowed abroad (East Europe), run the biggest risk of
> Traders already whisper that some governments are buying their
> own debt through proxies at bond auctions to keep up illusions –
> not to be confused with transparent buying by central banks under
> quantitative easing. This cannot continue for long.
> Commerzbank said every European bond auction is turning into an
> "event risk". Britain too finds itself some way down the AAA
> pecking order as it tries to sell £220bn of Gilts this year to
> irascible investors, astonished by 5pc deficits into the middle of
> the next decade.
> US hedge fund Hayman Advisers is betting on the biggest wave of
> state bankruptcies and restructurings since 1934. The worst
> profiles are almost all in Europe – the epicentre of leverage, and
> denial. As the IMF said last week, Europe's banks have written
> down 17pc of their losses – American banks have swallowed half.
> "We have spent a good part of six months combing through the
> world's sovereign balance sheets to understand how much leverage
> we are dealing with. The results are shocking," said Hayman's Kyle
> It looked easy for Western governments during the credit bubble,
> when China, Russia, emerging Asia, and petro-powers were
> accumulating $1.3 trillion a year in reserves, recycling this
> wealth back into US Treasuries and agency debt, or European
> The tap has been turned off. These countries have become net
> sellers. Central bank holdings have fallen by $248bn to $6.7
> trillion over the last six months. The oil crash has forced both
> Russia and Venezuela to slash reserves by a third. China let slip
> last week that it would use more of its $40bn monthly surplus to
> shore up growth at home and invest in harder assets – perhaps
> mining companies.
> The National Institute for Economic and Social Research (NIESR)
> said last week that since UK debt topped 200pc of GDP after the
> Second World War, we can comfortably manage the debt-load in this
> debacle (80pc to 100pc). Variants of this argument are often made
> for the rest of the OECD club.
> But our world is nothing like the late 1940s, when large families
> were rearing the workforce that would master the debt. Today we
> face demographic retreat. West and East are both tipping into
> old-aged atrophy (though the US is in best shape, nota bene).
> Japan's $1.5 trillion state pension fund – the world's biggest –
> dropped a bombshell this month. It will start selling holdings of
> Japanese state bonds this year to cover a $40bn shortfall on its
> books. So how is the Ministry of Finance going to fund a
> sovereign debt expected to reach 200pc of GDP by 2010 – also the
> world's biggest – even assuming that Japan's industry recovers
> from its 38pc crash?
> Japan is the first country to face a shrinking workforce in
> absolute terms, crossing the dreaded line in 2005. Its army of
> pensioners is dipping into the collective coffers. Japan's savings
> rate has fallen from 14pc of GDP to 2pc since 1990. Such a fate
> looms for Germany, Italy, Korea, Eastern Europe, and eventually
> China as well.
> So where is the $6 trillion going to come from this year, and
> beyond? For now we must fall back on the Fed, the Bank of
> England, and fellow central banks, relying on QE (printing money)
> to pay for our schools, roads, and administration. It is
> necessary, alas, to stave off debt deflation. But it is also a
> slippery slope, as Fed hawks keep reminding their chairman Ben
> Threadneedle Street may soon have to double its dose to £150bn,
> increasing the Gilt load that must eventually be fed back onto
> the market. The longer this goes on, the bigger the headache
> later. The Fed is in much the same bind. One wonders if Mr
> Bernanke regrets saying so blithely that Washington can create
> unlimited dollars "at essentially no cost".
> Hayman Advisers says the default threat lies in the cocktail of
> spiralling public debt and the liabilities of banks – like RBS,
> Fortis, or Hypo Real – that are landing on sovereign ledger
> "The crux of the problem is not sub-prime, or Alt-A mortgage
> loans, or this or that bank. Governments around the world allowed
> their banking systems to grow unchecked, in some cases growing
> into an untenable liability for the host country," said Mr Bass.
> A disturbing number of states look like Iceland once you dig into
> the entrails, and most are in Europe where liabilities average 4.2
> times GDP, compared with 2pc for the US. "There could be a cluster
> of defaults over the next three years, possibly sooner," he said.
> Research by former IMF chief economist Ken Rogoff and professor
> Carmen Reinhart found that spasms of default occur every couple
> of generations, each time shattering the illusions of bondholders.
> Half the world succumbed in the 1830s and again in the 1930s.
> The G20 deal to triple the IMF's fire-fighting fund to $750bn
> buys time for the likes of Ukraine and Argentina. But the deeper
> malaise is that so many of the IMF's backers are themselves
> exhausting their credit lines and cultural reserves.
> Great bankruptcies change the world. Spain's defaults under Philip
> II ruined the Catholic banking dynasties of Italy and south
> Germany, shifting the locus of financial power to Amsterdam.
> Anglo-Dutch forces were able to halt the Counter-Reformation, free
> northern Europe from absolutism, and break into North America.
> Who knows what revolution may come from this crisis if it ever
> reaches defaults. My hunch is that it would expose Europe's deep
> fatigue – brutally so – reducing the Old World to a backwater.
> Whether US hegemony remains intact is an open question. I would
> bet on US-China condominium for a quarter century, or just G2 for
> http://www.telegraph.co.uk/finance/comm ... ither.html