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Old May 28th, 2010, 04:37 PM   #1
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Unhappy I have the horrid feeling this guy is very correct

Quote:
Greece could set off bigger debt bomb

Pensioners chant slogan, during a march organized by a Communist-backed labor union, in central Athens, Thursday, May 20, 2010. Labor unions are staging a general strike Thursday to protest austerity measures. (AP Photo/Petros Giannakouris)

When debt bubbles surpass a threshold, governments can’t shrink them any more
Eric Reguly
From Friday's Globe and Mail Published on Thursday, May. 27, 2010 9:38PM EDT Last updated on Friday, May. 28, 2010 1:16PM EDT

Let’s play a little game called Disaster. Imagine an event that could trigger a genuine, knock ’em down, worldwide catastrophe. Think of Pearl Harbor, multiplied by 10, or even 100.
We’ll limit the options to man-made events, but eliminate traditional candidates like nuclear war or co-ordinated terrorist attacks. Climate change scientists might put their money on a massive greenhouse gas-induced drought that triggers uncontrollable emigration—entire countries emptying out, their citizens swelling the populations of Europe and North America. Doomsday economists, on the other hand, could raise the spectre of a global debt bomb: When industrial and emerging economies all exceed debt thresholds, a sovereign default by one country spreads like a firestorm, and triggers a global depression.
There’s no telling when, or if, the climate-change scenario could take place. Unfortunately, that’s not true of the second one. Debt bomblets have already exploded. And the big one—the Daisy Cutter—is being primed for action.

Greece is ground zero. Look at the damage the country inflicted on European debt, equity and currency markets this spring. How could a nation that accounts for less than 3% of the European Union’s gross domestic product (GDP) be so destructive?
There are two possible explanations. The first is that Greece’s fiscal problems belied its size. When Argentina, a country much wealthier than Greece, defaulted on its debt in 2001, the country’s annual budget deficit was the equivalent of 3% of its annual GDP. Its total accumulated public debt was 50% and its yearly international current-account deficit was 2%. And Greece? Its budget deficit last year was a whopping 13.6% of GDP, its public debt was 115% and its current-account deficit was 10%.
The second is that Greece is not a special case. Some of the world’s largest developed countries have budget deficits almost as large, relative to the size of their economies. The United Kingdom’s deficit weighs in at 11.4% of GDP, Spain at 11.2% and the United States at 9.9%. As deficits climb, so do national debts. Federal debt in the United States has climbed by half since 2006, to $12.3 trillion (U.S.) at the end of last year, swelling the debt-to-GDP ratio to 84%. Japan and Italy have debt ratios well beyond 100%. Almost every other country in the 30-nation Organization for Economic Co-operation and Development is watching its debt ratio climb relentlessly toward triple digits. Enormous debt loads used to be a problem for emerging economies. Today those burdens are also a problem for the allegedly wealthy countries.
National debt loads in the West will continue to climb as economies struggle to recover. The debts are only affordable now because central bankers have kept interest rates near zero. Watch what happens when interest rates rise. Economic growth isn’t rapid enough to stabilize debt-to-GDP ratios. Tax revenues have yet to recover, and no politician dares to take an axe to stimulus spending if it means plunging the economy back into recession. With governments, businesses and consumers still carrying such heavy debt loads, another major banking disaster could trigger another round of costly bailouts or nationalizations. Oh yes, aging populations will also inevitably create a pension crisis.
Economists Kenneth Rogoff and Carmen Reinhart, authors of the 2009 book This Time Is Different: Eight Centuries Of Financial Folly, calculated that, on average, countries add 86% to their debt loads within three years of a credit crisis. Governments of mature economies will issue an estimated $4.5 trillion (U.S.) worth of bonds this year.
The upshot is that some major countries face debt restructurings, debt defaults or both. High debt-to-GDP ratios alone can kill growth, as governments soak up private savings to pay interest charges and borrow more. Since 1980, Mexico, Russia and Argentina have all defaulted on their debt. The same thing could happen in bigger Western countries—the Daisy Cutter event.
Sovereign defaults can wreck economies. Banks can go bust as the prices of government bonds they hold plunge to cents on the dollar of face value. They can’t lend any more, which paralyzes businesses big and small. Currency devaluations destroy consumers’ buying power. Yes, eventually a mess can sort itself out, but that could take years, even decades. The Mexican peso crisis of 1994 walloped the rest of Latin America, and as late as 2002, some Brazilian bonds traded as low as 40 cents on the dollar.

Here’s a guess: Governments will take the cowardly option and try to inflate their debts away. They won’t stop spending, and the currency printing presses will run flat out. But that strategy often backfires, and the threat of default grows ever larger. Gold and productive real estate, like wheat farms, may be the defensive investor’s only remaining assets of choice.

Have a nice day.

ouch....

Greece could set off bigger debt bomb - The Globe and Mail



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Old May 28th, 2010, 05:32 PM   #2
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MacDoc, Greece is just the very model of the kind of country that believes in big government projects and public housing as you do. Your beloved Barack Obama is taking the U.S. there shortly. Why worry now?

Greece has an economy the size of Michigan. I'd be much more worried about the enviro-wacko states like California that are ready to default.
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Old May 29th, 2010, 04:20 AM   #3
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We're long overdue for a correction.

Besides investing in gold and wheat farms I'd suggest investing in nets. You know, like the ones that were proposed to be placed around the factory in Taiwan were the iPad is being assembled.
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Old May 29th, 2010, 07:12 AM   #4
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Some grim humour there, Macinstein. I was reading about those anti-suicide nets yesterday. Those are the first measures the spokesthingie mentioned as part of a response to the problem! Sounds like a band-aid for cancer, doesn't it? Ugh. The implications of the situation are certainly disturbing. I guess building those shiny new iPads is not nearly as nice as owning and using one, eh? Hmmmmm..

The thing about Greece is that, on its own, it's bad enough. Though it can be contained if everyone just stays the course, it's the ripple effects of that one-two punch - panic and loss of confidence - that could wreak severe damage throughout the world.

Well, it won't have been the first time.
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Old May 29th, 2010, 10:46 AM   #5
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The thing about Greece is that, on its own, it's bad enough. Though it can be contained if everyone just stays the course, it's the ripple effects of that one-two punch - panic and loss of confidence - that could wreak severe damage throughout the world.
I don't believe it would be the ripple effect but the collective effect. If Spain gets caught with its pants down it's game over for a successful Euro. Unfortunately, Madrid already has a severe case of plumber's butt.

The whole notion of the Euro is another example of the failure of collectivism. In the pre-EU, the Drachma would have been devalued and interest rates would have adjusted themselves. Instead, the only option now is to either kick Greece out of the EU, or feed its crack habit.
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Old May 29th, 2010, 11:15 AM   #6
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...the only option now is to either kick Greece out of the EU, or feed its crack habit.
Or Germany withdrawing from the Euro-zone. Germans' dissatisfaction with the current state of affairs; their view that they are essentially propping up mismanaged economies is well known (the Alberta/Ontario of Europe, as it were), and increasingly reported on at the moment. Perhaps some crisis precipitated dismantling of the common currency could ultimately prove to be beneficial.
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Old May 29th, 2010, 11:28 AM   #7
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Or Germany withdrawing from the Euro-zone. Germans' dissatisfaction with the current state of affairs; their view that they are essentially propping up mismanaged economies is well known (the Alberta/Ontario of Europe, as it were), and increasingly reported on at the moment. Perhaps some crisis precipitated dismantling of the common currency could ultimately prove to be beneficial.
The whole idea of the Euro is a joke. Germany would do well to pull out of that confederacy of clowns.
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Old May 29th, 2010, 11:33 AM   #8
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The whole idea of the Euro is a joke. Germany would do well to pull out of that confederacy of clowns.
Or rather crassly: Europe is too big to fail, Germany is too big to fail; the Med states not so much. Otherwise, such are the trials of confederation of sorts; get used to it.
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Old May 29th, 2010, 11:37 AM   #9
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The thing that scares me is that many of the U.S. Blue States--with economies larger than some European countries--are going meekly, cap in hand, to the U.S. federal government to bail them out. The only power the feds have is to borrow more cash or to print it. Obamanomics is a bummer.
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Old May 29th, 2010, 12:17 PM   #10
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