Wednesday, February 28, 2024
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group
"The latest rescue of Greece has been greeted again with some relief."

Games of distraction

The latest rescue of Greece has been greeted again with some relief.

But firstly, one should note this is just another temporary fix that does nothing to address the underlying problem of the country's still unpayable debt load along with its international non-competitiveness.

Secondly, you have to remember it is probably Spain, Italy and France we should be worried about a lot more than Greece.

Spain's unemployment rate exceeds even those of Greece and Italy.

Industrial orders numbers in October plunged 12.8 percent year-on-year and the country is sitting on a sovereign debt bomb of 2 trillion euros (HK$20.13 trillion). Not even Germany can pay for that.

The French economy is also stuttering as the country has now officially lost its AAA rating. Earlier this year, Moody's Investors Service followed Standard & Poor's to downgrade France.

And, talking about France's credit rating, isn't it interesting to look at the hypothetical sovereign ratings projection that S&P published in March of 2005?

In the chart, the rating agency projected that all major Western countries were heading towards not just a weakening economy or slightly higher debt, but national bankruptcy, Greek-style.

The projection is now starting to turn into reality ever more eerily, as France was originally projected to hit junk status first.

Indeed. France now turns out to be the first country to have been downgraded below AAA status by both S&P and Moody's.

The United States lost its AAA status in 2011, about five years earlier than Moody's had projected.

Standard & Poor's drafted the chart in 2005. We had the global financial crisis in 2008. Now, we are in the middle of the euro zone crisis.

In between, the economy of these developed countries have worsened.

After all, they are the same nations that have funded bailouts of major banks in 2008, and the bailouts of major íV mostly euro zone íV countries starting from 2010.

And like the discussion on Greece, it is really a distraction from the real issue of a debt crisis and economic depression in Spain, Italy and France.

In the United States, isn't the debate about the fiscal cliff all but a distraction from the real problem: the country's fiscal gap?

This is the figure derived from dividing total unfunded liabilities of a nation over its total financial shortfall.

This fiscal gap of the United States now stands at about a staggering US$202 trillion, according to Laurence J. Kotlikoff, a professor of economics at Boston University. Kotlikoff is also a frequent contributor to publications of the International Monetary Fund as well as the Federal Reserve Bank.

When analyzing the US debt related financial problems, we must look at the fiscal gap because, unlike the official US$16 trillion (HK$124.48 trillion) national debt, it measures a wider portion of the government's total liabilities.

This is because it includes for example, the obligation to pay tens of trillions of dollars in Social Security and Medicare benefits.

Based on these figures, it was actually suggested earlier this year by the former Comptroller General of the United States íV the person officially in charge of ensuring the fiscal and managerial accountability of the US government from 1998 to 2008 íV David M. Walker íV that the United States was about two years away from where Greece was when it plunged into its debt crisis.

Walker made the comments to the Worcester Telegram & Gazette, So, regardless of whether it is helping the economy, both the United States and Europe may require massively expanded quantitative easing íV money printing íV programs in the near future.

They will be compelled to do this, simply to escape the debt trap and avoid national bankruptcy.

Therefore, the reduction of the unsustainable debt/unfunded liabilities burden will be carried out íV in real terms íV via massive inflation and currency devaluation.

Investors now should watch out for risks in bonds and bond funds as many of them have already been bid up to bubble levels.

Yet, they are fully exposed to inflation and interest rates risks (especially long-term sovereign bonds of the major Western countries as well as those of Japan).

So, do not buy them blindly at any price for perceived security and for their nice performance achieved over the past years when interest rates were declining. How much lower can rates fall from here? Instead, other investment alternatives should be considered that offer better inflation protection and accordingly has more attractive risk-return profiles.

These include precious metals, selected other commodities as well as stocks and convertible bonds, where good value and less debt risks can be identified.

Other articles:
Land of the rising debt - 28/07/2014
Hong Kong property - the cheapest in the world? - 12/05/2014
Ukraine-Russia tiff: turning crisis into opportunity - 31/03/2014
Emerging markets mayhem can offer rich pickings - 10/02/2014
Specter of default dogs West as forecasts come true - 18/11/2013
China equities trumpeted for second glance - 21/10/2013
It ain't over till the fat ladies sing - 17/06/2013
Golden time to load up - 04/03/2013
Shale gas unlikely to wipe sheen off Russian shares - 18/02/2013
>> Games of distraction - 03/12/2012
More Article ...

Other Columnists
Register  Forget Password
Advanced Search
© 2024 The Standard, The Standard Newspapers Publishing Ltd.
Home | Business | Metro | Focus | Opinion | Markets | World | Sports | Entertainment | Monday Money | Property | Macau | Weekend