|
If the implications of the recent
Greek tragedy were not so serious it would have been seen more as a Greek
comedy (of fiscal errors). In fact, however, to deploy another metaphor,
Greece's sovereign debt is seen as the proverbial canary in
the coal mine - a microcosm of the relentlessly growing sovereign
debt that has taken much of Europe by storm and is threatening to spread to
the U.S.
Fifteen other member nations
comprising the Euro currency club have recently saved colleague Greece from
defaulting on its debt...for now. This comes after an elongated period of tug
and push during which Euro nations demonstrated their inability to agree on a
concerted course of action. That has recently changed and Greece will now
get$40 Billion in a 3 year loanat 5% interest
(which is much lower than the prevailing interest rate) to help pay down
their existing and ever increasing debt and the International Monetary Fund
will back-stop a further $20 Billion should it be needed.
On the surface, this solution is
just what any Keynesian economist, in good standing with his fraternity
brethren, would advocate because, as part of the bargain, Greece has agreed
to implement a variety of painful spending constraints which will result in a
much reduced standard of living for its people. In spite of such
action, however, Greek debt will continue to grow to 150 percent of GDP by 2012.
Unfortunately, however, this new
bailout provokes and perpetuates a series of errors because Greece
cannot, and will not, be extricated from its debt tomb. According to the UK
Telegraph, Greece will now be doomed to transferring to foreign creditors an
amount equal to 8 percent of its GDP in perpetuity...much more than German
reparations to foreign creditors after WWI. It cannot, and will never,
be repaid.
Further proof that these loans
will provide only temporary relief is recent research by economists Carmen
Reinhart and Kenneth Rogoff in their new book
“This Time is Different: Eight Centuries of Financial
Folly.” They concluded that when sovereign debt exceeds a level
of over 80 percent of its GDP, that debt grows ever more rapidly invariably
pushing the country into financial default.
If we are to take the Reinhart/Rogoff research at face value then all that this recent
bailout of Greece has done is buy it sometime before its inevitable financial
default. It also allows Euro countries, the IMF and other agencies and
persons with responsibilities for debt issues to work their magic. Moreover,
it conveys hope to other countries on the brink of financial collapse. It
defers the calamity and appeals to the overwhelming need of politicians
everywhere to avoid and escape responsibility, if only to have the debt
implosion occur on someone else’s watch.
While the temporary hiatus given
to Greece should be characterized as default deferral, it also,
unfortunately, sets a highly dangerous precedent. Each of the next Euro
default candidates - Portugal, Spain and Italy - comprise of much larger
economies which will therefore require substantially greater levels
of assistance. Of course, fairness willdemand
that they too receive an equivalent boost from their Euro partners and
backstopping by the IMF.
A closer look at bailout details
brings to light something else which should raise serious concern. Who are
the foreign creditors which Greece is having difficulty paying? While the
current bailout originates among the taxpayers of the sixteen member nations
of the Euro group, the existing debt which is in danger of default is held by
foreign banks...not foreign nations. These foreign banks are headquartered in
France, Germany, Switzerland, the UK and elsewhere. A short list includes
Credit Agricole and Germany’s Landesbanken.
This begs a few unanswered
questions:
- Is this agreement a Greek government bailout or
is it an indirect bailout of foreign banks by their own governments under
the guise of loans to the government of Greece?
- Will this Greek script be played out on the
stages of other Euro nations?
- Will it spread to the United States?
US national debt now stands at
$12.78 Trillion, more than twice as large as it was in the year 2000. Even
the President Obama’s budget director admits
that the on-budget debt level will reach close to $20 Trillion by 2020,
almost double over what it was just over one year ago. The non-partisan
Congressional Budget Office says it will be even higher.
As major as those debts are,
however, the genuinely mind-boggling debt projections are the future
commitments to citizens for such services as Social Security and Medicare, as
well as a myriad of additional federal government obligations. These Unfunded
Contingent Liabilities are now well beyond the $100 Trillion level. Some
calculate the number is closer to $137 Trillion. Remember that these pending
expenditures are the unfunded portions. No money has been set aside, just
another promise.
It has been calculated that the
net present value of these future budget needs is in the neighbourhood
of $35 Trillion. What that means is that $35 Trillion of 2010 dollars would
be required today in order to invest to meet the $137 Trillion United States
government responsibilities to its citizens in the years ahead.
Combine the current budget debt of
$12.78 Trillion with the $35 Trillion net present value for future
obligations, then add in $1.5 Trillion of continuing annual deficits for as
far as the eye can see and factor in future rising interest rates from their
current multi-generational lows and it is clearly evident that America's
debt picture is truly astronomical and, like the situation with Greece, the
debt cannot, and never will, be repaid. Indeed, any way you look at it, the
consequences for the United States, let alone the many other haunted
economies, are grim, dismal - even disastrous.
As long as bond creditors retain a
modicum of confidence in the respective debtor nations, the play - the 'Greek'
tragedy - can continue for awhile longer, maybe even indefinitely.
However, should interest rates spike northward or external events affect
regional economies or the entire global financial system, it is highly likely
we will witness a sudden unscripted end. On the other hand, creditor
confidence supplemented by modest economic gains, strengthened by politicians
who exhibit vision and serve tough love to their respective electorates, just
might allow a muddle through scenario to take root.
Given the magnitude of existing
debt and projected future growth in debt worldwide, it is entirely reasonable
to conclude that we will experience a plethora of game-ending debt defaults
in the not too distant future. This 'Greek' tragedy will likely open first in
Athens, Greece and then play in many of the capitals throughout Europe
before a joint grand finale in New York and Washington. Readers are
reminded to consult the financial pages for the specific location and time of
this major event.
What do individuals do to protect
themselves from sovereign debt defaults, rampant growth in the money
supply and currency devaluation stemming from inflation or
hyperinflation? Quite simply, anyone's priority safe haven
protection is precious metals. Gold and silver in the form
of bullion and select precious metals mining stocks should be
the go to investment of choice. There is no better protection
available.
Arnold Bock
Arnold Bock is a Canadian living abroad retired from a career in
government. He has a substantial
background in partisan politics and public policy development as well as in
project and program management within the public sector.
|
