Banking/Sovereign debt crisis PT II

Wookster

Generali wrote: »

Maybe. I can't see printing hundreds of billions of pounds as being a long term solution either. What sort of interest rates would the market demand in future do you think?

The problem the world faces is that the mistakes have already been made. There isn't a solution.

Don't just do something, stand there should be the politician's motto.

Penal rates. This is what we have seen from Zimbabwe. But this fits into one the 2 solutions - default.

Politicians are very very good at kicking the proverbial can down the road, after all why take a truly unpopular decision if you can leave it for the next fellow.

kabayiri

Generali wrote: »

...
The problem the world faces is that the mistakes have already been made. There isn't a solution.
..

Oh, the rich had their solution provided to them courtesy of a timely set of bail outs.

How would they have been able to close their investment positions off otherwise given the speed at which the crisis occurred ?

gagahouse

Everyone seems to be waking up to the record spread between French bonds and Bunds at the moment. Having risen in July, it’s reached another record eurozone high on Wednesday of 81bps. French yields are low but clearly the debt is under-performing.

Is 100bps too far off?

No — actually the more Italy and Spain worsen and therefore the guarantees they provide to the EFSF look dodgier (especially if it gets used to prop them up and they step out), the more France is sucked in. Divyang Shah of IFR Markets puts it really well:

Italy and Spain have seen their contribution to the EFSF go up from 18% and 12% to 19% and 13%, respectively, without Greece, Ireland and Portugal. For Germany and France the increases have been from 27% and 20.5% to 29% and 22% respectively. But the market pressure on Italy and Spain has seen both enter the spotlight and if they decide they cannot contribute, then the funding required from Germany and France would go up to 43% and 32% respectively. Given the total of 75%, it would be hard to argue that we don’t already have a transfer union for the Eurozone.
The 10-year spread on France/Germany has widened out beyond its July peak to its widest level since mid-1990. The 10-year spread on Belgium/Germany has broken through 200bps and currently at 203bps is close to breaking its record wide level just under 215bps from early 1999. Both are significant, but especially so the moves seen in France. It suggests that investors no longer regard it as part of the core and have been for the last few weeks trimming exposure.
When a country steps out of its guarantee, the shortfall is shared between all the other guarantors – not just France and Germany. The point is though that their shares are huge already. We hate to resurrect the clich!… but this is another single point of failure like Italy itself. Any system that has multiple SPOFs is in trouble.

http://ftalphaville.ft.com/blog/2011/08/03/642076/eventually-french-spreads-fail-e-f-s-f/

It's spreading like a cancer.

Mr_Mumble

The Telegraph's AEP had a short blogpost on the major monetary problems facing Italy a couple of days ago. Generali would probably call it "Deflation Watch: Italian Edition".

Britain has £200bn of QE thanks to its broad money measure (M4) falling to near zero. Italy has its broad money measure (M3) at -3% and the ECB are increasing interest rates because German M3 is at an annualised +8%!

Its implausible for this situation to continue. You have Euro monetary policy which on the one hand gives Italy and Spain the dynamics of 1930s America while at the same time being too lax for Germany.

drc

It definitely feels very ominous at the moment - a bit like the calm before the storm or August 2008.

Ark_Welder

Mr_Mumble wrote: »

You have Euro monetary policy which on the one hand gives Italy and Spain the dynamics of 1930s America while at the same time being too lax for Germany.

This is especially true for Ireland, which as of June had the lowest CPI inflation rate in the EU at 1.1%

Some nice interactive graphics to have a play with here. Click on a country for underlying data.

Ark_Welder

FT Alphaville 05Apr2011: The importance of debt maturity

BBC Stephanie Flanders 12Feb2010: Greek Britain?

According to the Debt Management Office, the average maturity of UK sovereign debt is 14 years. In the US, it's about four years. In France and Germany it's six or seven. Greek debt has an average maturity of just under 8 years. As I mentioned yesterday, they have about 10% of their debt coming due in the next few months.

That makes an enormous difference to the amount of gilts we need to ask the debt markets to buy in a given year. It also means that even fairly large increases in funding costs will only have a gradual effect on the cost of servicing UK debt. That burden is still lower today, as a share of total spending, than it was for most of the 1980s and 1990s.

For Greece, debt servicing costs now account for just under 12% of GDP. In the UK, it's costing less than 3% of GDP.

In some respects, issuing debt at this time does have an advantage: low coupons, due to low interest rates. When rates start to rise then new issues will also have to be at a higher coupon, so servicing those debts will be more of a burdon.

Also, BoE owns almost £200bn of gilts, which have been repurchased - some at below par (info on the BoE web-site but I'm off for my dinner so I haven't time to fetch the relevan links - if you're desperate for them, then let me know ). In effect, this is returning the holders' cash to them early rather than at redemption, so BoE can hold them until redemption and cancel the cash that it receives from HMT at that time, which will be an unwinding of QE in this country.

There is a long way to go, and it isn't going to be easy, but that does not mean that there isn't a workable solution. Verifiable facts and figures - whilst being more boring than speculation and rumour - should show where the path lies.

Mrs_Bones

Wookster wrote: »

The problem Generali is if we have a chain of systemic bankruptcies then we end up with no banking system and collapse of society as we know it.

Iceland was able to preserve their banking system, but if the entire western banking system collapses then we'll be getting dinner from soup kitchens...

Have you seen the road?

Ok I'm going to be the fool and ask, Why would society collapse if the banking system did? OK it would effect society as we know it now with credit here there and everywhere etc but apart from that?

It's only in the last few decades that the banking and credit systems have become such a main stream fact of life, before that people just use their small local branches for savings, such as they were. Goods were paid for in cash, credit was for business or buying your home with a mortgage and then you had to go through a 101 hoops. Wages and most business transactions were paid in cash.

Admittedly it would be a big shock to the system to go back to the old way of doing things, especially for the young who know no different from the current system. Yet if we still have the bank of England and the mint for printing our currency, would it be totally impossible?

luvpump

gagahouse wrote: »

Yep, we're getting close, seeing signs of stresses in Euro interbank market now.

I listened to PM on radio 4 this evening, it was quite scary stuff, it seems to me that once the market smells blood, the whole pack is just waiting for the kill ..

luvpump

Wookster wrote: »

The problem Generali is if we have a chain of systemic bankruptcies then we end up with no banking system and collapse of society as we know it.

Iceland was able to preserve their banking system, but if the entire western banking system collapses then we'll be getting dinner from soup kitchens...

Have you seen the road?

Hey, the world was able to survive ww2 & Europe being devastated, so i kind of think we might be a little bit alarmist ? .. And where would all thoes super rich footballers put there money ? ..