Sovereign debt is the new sub-prime.

April 28^th 2010

Just attended a Lecture at the London School of Economics the topic was the Greece Fiscal Crisis.

What’s happening in Greece? As the country teeters on the brink of default speculators and markets see Greece as to much of a risk. Greece at the moment cannot borrow money so need a bailout from the EU and the IMF, however the Germans are at the centre of the crisis in refusing to bail out Greece unless it reforms its markets and sticks to strict budgetary controls. Time is running out and the Greece government needs to show that it make the difficult choices. Devaluation is not a choice as Greece cannot print Euros, what the country needs is a huge external stimulus, but exports only account for 20% of GDP. The worry for the Euro zone is that like a virus this crisis is spreading already today Spain and Portugal were served notice as they found it expensive to borrow money as credit ratings take a beating, the concern now is the “No bail out” clause will be challenged as Greece waits for a handout but with Portugal and Spain to follow I see a managed dis-mantling of the euro zone. The Greeks have to be honest and take membership of the EU seriously that means balanced budgets, reforming the work force, slashing the sky high salaries and generally becoming more competitive, added into the mix is what role did Goldman Sachs play in 2001 in helping the Greeks meeting EU budget criteria for entry in the EU. Now you have possible IMF intervention and we all know about the IMF don’t we?

Sovereign debt is the new sub-prime so with the down grading and fiscal crisis in Greece expect this crisis to spread. The credit crunch back in 2007 has spread –from households, to banks to countries. Entire regions are at risk.

Now turning to Jamaica and the refusal of the Golding administration to hand over Mr Coke. The International press have now started to report on this matter not only US papers but the highly respected British Economist Magazine. In a nutshell it does not matter what Bruce Golding does now as he has lost all credibility in Washington. He is not alone but politicians from both parties have tarnished the reputation of the country, our reputation and credibility are in tatters and it will take some time to repair probably long after Golding and the rabble that call themselves members of parliament are long out of office.

Peace.

E-Money

Debt, debt and more debt

If like me you are fed up with the bits of useless information and excuses that permeate from Wall Street well you are in the right place. I won’t waffle on how life is hard and the derivatives sold are complex and that whatever happens I expect a bonus. The truth is this near collapse in our financial system is all about debt, Government debt, company debt and personal debt. We have all taken on huge amounts of obligations as easy credit was thrown around with no regard to when it would be paid back for after all let the good times role. We could always max out the credit cards and at some stage look at re-financing the house because it always goes up in value and the bank and finance houses are falling over themselves to lend, even if I don’t have a job I could always get one of those liar loans no job no income loans, interest rate may be a bit higher but some how I will get by. Then in summer 2007 the roof caved in the credit crunch began and the rest we know is history.

But let’s look at the fact in the United Kingdom we are more indebted than our American cousins mainly because we were fed the line that house prices never fall they always rise. So with no deposit some of us bought 110% mortgages because the lenders factored in that the house would rise in value, never mind if you can’t pay back the mortgage. So the fallout in credit lending in the UK shows we are in debt to the tune of £1.46 billion pounds that’s £32k owed by every adult in the UK no wonder that so many of us are filing for bankruptcy and IVA’s it’s a real worry and we should all be concerned for as unemployment rises so do the debts.

Our governments are bailing out the banks and allowing them to reward failure by paying out record bonuses, but the real problems we are seeing is sovereign debt by governments are not being paid as in the case of Greece the country is bankrupt it has lost its AAA credit rating and has asked the rest of Europe to bail it out. If you looked at the crisis as it unfolded we saw that Iceland had in fact become the first nation to be hit by bad debts and the subprime fallout but Iceland had been sold billions of dollars of worthless CDO’s by Wall Street banks, Greece on the other hand was advised by Goldman Sachs and others how to defer big state deficits for later years to satisfy EU rules, it was business as usual whilst the debts built up in the investment vehicle set up by the banks. However the advisors mis-read the markets and as the World’s economy soured so did the investment, the Euro came under pressure and Greece was forced to admit its debt but also had no money to govern and run the state. Civil disobedience is now the norm in Athens as millions of people see pay frozen, pensions not keeping pace with day to day life, also urgent government programs are now cancelled as the government is forced to austere plans for survival. Greece is not alone rumour has it that Spain and Portugal are next. But have we thought just how our governments would survive once credit ratings are reduced from AAA to junk? The US and UK would be in dire straits with no one to borrow from as the Chinese dump US and UK holdings it would be chaos. The US government has already drawn up plans how to deal with civil disobedience in the streets as they face up to grim reality it could be coming to a main street in America real soon.

The English Premier Soccer league the richest in the world? But how many of the teams are on borrowed time. Chelsea have announced that the hunt for a new home has been postponed as the recession hits fans and revenues. Portsmouth Football is in the process of being wound up for unpaid tax bills and perhaps the biggest name in world football Manchester United is £715 million pounds in debt. I find this hard to stomach with so many people trying to make a decent wage and a footballer can pick up £100k per a week for kicking a ball and yet they want more despite clubs being mortgaged to the hilt. Portsmouth has shown that not even the mighty premier league can continue paying huge salaries based on some flawed business model.

Figures for 2007-2008 show the total debt of premier league clubs as being £3.4bn – 56 % of the total across Europe. I believe the clubs are at a crossroads and simply cannot continue banking on TV and Champions League money, you cannot pay over 50 per cent of your turnover on player salaries something has to give and as in Portsmouth’s case its survival in the premier league. They have been docked nine points for going into administration and surely must start the 2010 season in the Coca –Cola Championship. The other clubs you have been warned.

And by the way did I say the Banks are still not lending!!!

Commercial Real Estate REALLY Is The Next Big Crisis

Banks are feeling quite cosy at the moment, record profits, bumper bonuses and it seems that the “Volcker Rule” may be some time off before sweeping regulation takes affect. The spoiler now and it’s a real threat is the $1.4 trillion dollars of commercial real estate loans that have to be refinanced now in 2010 -2014. The scary thing is that nearly half of these loans are “underwater” in other words the properties are worth less than the borrowers owe. But we have had major hiccup in 2010 and that was the Dubai property debt debacle what is probably going to be worse is that as the due dates for these loans near to be re-written banks should brace for major delinquencies and billions of dollars in losses.

This week we learned that Simon Property Group (One of the largest US shopping mall owners) has just offered $10 billion to buy rival General Growth Properties good news you think, wrong GGP are bankrupt last April they were forced to submit the biggest ever commercial real estate bankruptcy in American history a staggering $27.3 billion dollars. The cause of GGP seeking chapter 11, Mortgages they simply could not get the financing and missed a deadline to pay $900 million on some Vegas retail properties. So the proposed offer by the Simon Group really equates to a fire sale of assets and might bring in other players seeking to gain from GGP’s situation.

So the 192 page US congressional oversight panels’ February report makes grim reading the commercial real estate losses will pose a risk to financial stability. The largest losses are forecast for 2011 and being conservative could be between $200 billion - $300 billion. The worry is that 161 banks have failed in the US since 2009 so these types of losses could lead to more bank failures particularly among the mid sized and smaller banks, but the larger well known banks are not immune. Go back to early 2009 and Secretary Tim Geithner’s stress tests, you know the 19 major banks had to prove they had enough capital in the event of another financial crisis. Well the tests only looked as far forward as the end of 2010. So 2011 will be unknown territory, and it could be carnage. Check this scenario apartment blocks with families renting could be evicted if the property owners don’t pay mortgages on time or miss payments. And the lender of last resort The Federal Reserve simply won’t be able to bail out the banks next time around they simply won’t have the money. It’s a grim picture but it could happen the commercial real estate crunch would touch the lives of every American with the US economy still showing weakness and banks reluctant to lend there’s no easy answer or solution to the problems ahead. This financial crisis did not only impact the residential housing market it’s impacted our entire commercial system for years to come.

Things to think about:

$750 billion to $2.2 trillion in cheap financing will come due within the next three years in the US commercial market.

Analysts are warning that the commercial real estate sector in the US seems to be in ‘free fall’.

Values are down about 40% from a year ago, recent market studies show.Real estate deals aren’t happening because banks aren’t making commercial real estate loans because they’re under pressure from regulators to reduce their loan exposure.

During the boom, everything doubled in value when it shouldn’t have, and all of that was facilitated by credit, not by an increase in real value,’

The real worry is the fallout could be Global.

Check these links:

http://www.youtube.com/watch?v=kq3rH1ZJnrc

http://www.youtube.com/watch?v=BSA7xVNVJa4&feature=related

http://www.youtube.com/watch?v=o4IfeXLl2TU&feature=related

http://www.youtube.com/watch?v=3NMgckkZMQs&feature=related