Wednesday, August 11, 2010

From Debt to Dust

"Germany's sovereign debt may soon reach 90% of GDP, a level Greece achieved last year. Die Zeit, a weekly newspaper, based this estimate on a recent decision by Eurostat requiring Germany to include the balance sheets of public-owned bad banks--set up to help financial institutions offload toxic and non-strategic assets--into its overall sovereign debt ratio"

This is an enormous and dangerous decision by Eurostat, and here's why. Nearly all modern industrialized nations have "hidden losses".. it's a dirty secret they've actually kept under the rug quite snugly. Here in the US, the US Gov't has taken over Fannie and Freddie.. and their promises to backup over $6 trillion in mortgage debt. The US Government currently owes $13.3 trillion. If the possible debts of Freddie and Fannie are formally added to the books, we overnight become Greece. The UK is in a similar position with RBS and it's $2.2 trillion in outstanding loans.

Why Eurostat did this is unknown to me. Did they do this to other EU nations as well ? It'd be interesting to see if Greece and Spain were subjected to the same rules, because if so, they both become insolvent by the time your morning coffee is finished brewing. If not, why not ? I doubt that any EU nation with the exception of Germany, Holland and Denmark could actually remain solvent under such rules.

While this article has been largely unnoticed (especially here in the States) it could have enormous consequences if these rules are firmly applied EU wide, and if not, would beg the question why Germany was singled out in this. While these hidden debts and obligations are a matter of public record, formally adding trillions in debt to already economically weak nations like Spain and Italy could play hell with bond spreads, sovereign CDS's and bond markets in general. This bond market is what gave way a few months ago in Greece requiring a trillion dollar bailout to calm markets. This news bears watching and I'll be looking for more clarity on this in coming days and posting it in the comments section.

Back here in the States, Bernanke formally recognized the obvious.. deflation's iron headlock around Main Street's neck is beginning to hurt. Bernanke's decision was to use the proceeds from previous MBS sales to purchase yet more US Bonds, notably the 30 year bond. The total program's worth is approximately $300 billion and upwards of $340 billion. My thought here is that first and foremost it's not nearly big enough to make a real difference, and second that bond interest rates are already so low that a further lowering does'nt do much good. The brutal truth here is that Helicopter Ben is running out of options. Neither he, Obama or anybody else can force banks to loan.. and they are absolutely not loaning to anybody, consumer or business. Banks are simply letting this cash gather dust in bank vaults as a cushion against further losses since most are so overleveraged and both consumers and businesses are so overindebted. If bankers truly believed in this recovery, they'd be far more generous with loans. They don't, and today's action confirmed their suspicions. Credit is constricting, and with it our consumer based economy. Deflation's Death Grip is here to stay, folks.. especially if November's elections bring divided government, which I fully expect and which will bring gridlock to Washington DC. Stimulus packages will be a thing of the past. Slowly but surely, by way of deflation, we're going from Debt to Dust.


  1. WOW, I did not know that about Germany! Good read!

  2. "Back here in the States, Bernanke formally recognized the obvious.. deflation's iron headlock around Main Street's neck is beginning to hurt."
    Yep buying bond with worthless MBS paper. That is pretty much par for the course. Why should a trade of debt for debt achieve anything? Has the man gone bonkers?

  3. I forgot to say good article Mr K.

  4. Here's the best answer I've found on the Germany thingy: "As to an answer there are differences between the structures of German banking and the rest of Europe and to add a further layer of complexity the bad banks/asset protection schemes in Europe are different too. I have read Eurostats letter to Germany’s statistics authority and it seems to pose questions of principle which to my mind could apply elsewhere but it is rather obtuse in its language so I will reply more fully when I get a full grip on it.Taking the principle further could hit Ireland’s NAMA or the UK’s Asset Protection Scheme which covered some £282 billion of RBS assets but there are possible get -outs as for example RBS is 68% or 84% taxpayer owned depending on how you count it and does that count as nationalised? In terms of economic effect I would say yes but would a bureaucrat/official? We have seen more than a few fudges this year"