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Eurozone debt: Good money after bad?

Robert Peston | 17:45 UK time, Tuesday, 13 July 2010

Stephanie Flanders and I have written four short essays on the eurozone's financial and economic woes for Radio 4's PM. Here's the first of mine.
____

The great fear of any sovereign borrower - that's a government trying to borrow - is that one day its request for money will be turned down.

Euro sign outside the European Central BankWhich would be a disaster. Because like the rest of us, when a government can't borrow, it can't meet its financial obligations, such as paying civil servants' and teachers' wages.

So why would investors - such as banks, pension funds or ordinary savers - stop lending to a government? Well (to state the obvious) they might come to the harsh realisation that said government has already borrowed more than it can afford to repay.

Earlier this year, Greece came within a whisker of suffering just such a strike by its lenders - which would have bankrupted the country if other eurozone governments hadn't agreed a 110bn euro rescue package.

What made Greece particularly vulnerable was partly its huge hunger for new funds - its annual deficit - equivalent to around 10% of its GDP on average every year from 2009 to 2011.

Also it has to repay big existing debts, worth more than 13% of its annual GDP, its output, both next year and the year after.

So - perhaps understandably - investors increasingly worried they wouldn't get their old loans back, and were reluctant to provide even more debt. They saw Greece as the equivalent of a family whose main bread winner has lost its job but which maintains its lifestyle by borrowing, in the hope that something will turn up.

One consequence was that the price of Greek government debt or bonds plummeted, such that the implied interest rate on this debt soared to a punitively high 40%.

That was the moment when Greece was more-or-less bust - and had to be rescued by the rest of the eurozone.

But what about other European countries? Are any others at serious risk of being shunned by investors.

Well those with the biggest deficits are Spain, Portugal and Ireland - and they're certainly the countries viewed by analysts as most financially fragile.

But a slightly different picture emerges when old debt due for repayment is added to the requirement for new borrowing.

On this basis, Belgium, Spain and France all face serious financing challenges - they all have to raise money equivalent to about 19% of their GDP this year. And Italy has to find a similar amount both this year and next.

As for Portugal, it faces its biggest financing test in 2011.

By contrast Ireland looks much better placed, because it has very little old debt due for immediate repayment.

However, before you get carried away with the idea that these eurozone countries are kaput, it's as well to provide a bit of international context.

As it happens, both Japan and the US are this year financing and refinancing much more debt relative to the size of their respective economies than any eurozone country.

And yet they're perceived to be much less likely to face an imminent financial crisis.

How so?

Well Japan has a vast captive population of small savers, all keen to lend to their government, intermediated traditionally by the postal system (as it happens, Italy looks like the Japan of Europe, with a substantial national debt financed by indigenous savers, via the banks).

And at a time of global uncertainty, the US is still the place where risk-averse investors place their money - even if that's not especially rational.

The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries.

Comments

  • Comment number 1.

    Debt crisis? What debt crisis?

    Personally I thought that Japan was heading into stormy waters themselves with their ridiculous borring to GDP figure. Admitedly financed by their population but as I read a short time back they will need to go to market soon for some lovely market based debt (we love the smell of debt) and that's going to hurt them...

    Anyway, when the world realises that the good old greenback has been overprinted and that the good old US of A cannot possibly ever repay their debt obligations we'll watch those dollar bills fly back to the federal reserve and watch as the great supepower they claim to be goes bankrupt taking the worlds financial system with it...

    Well, I can hope ;-)

  • Comment number 2.

    For those interested in how the dynamics of debt affect the economy I recommend Steve Keen's Debtwatch blog http://www.debtdeflation.com/blogs/

  • Comment number 3.

    Could always try printing money, I mean quantitative easing, again...

  • Comment number 4.

    "As it happens, both Japan and the US are this year financing and refinancing much more debt relative to the size of their respective economies than any eurozone country."

    Would this be the same Japan who suffered a 'lost decade' - and the same US with real unemployment of over 20% (because the statisticians don't count forced part time workers or those who have fallen off the benefits system....oh and nor do they count census workers)

    "And yet they're perceived to be much less likely to face an imminent financial crisis."

    Really? - by who?
    Don't be confused Robert, there is a very good reason for there not being the same collapse in Japanese and US Government bonds - the ratings

    You see despite the ratings agencies being pilloried and talk of them being ignored - most fixed income funds will be classified by ratings. AAA for example - which means you can happily buy US, UK or Japanese bonds for your fund.
    However when (or if) that changes you get a huge sell off - as Greece discovered and portugal are discovering now. This depreciates the price of your bond and pushes the yield up - making it more expensive for you to borrow.
    The US is benefitting from the fact that "if the US isn't safe - who the hell is!", but this won't last for long - especially as their whole 'safeness' is dictated by the very large bond holders they are currently waging a war of words with about their currency (China) - who are already offloading their holdings on the sly, so as not to cause panic.

    It was interesting to note that you cited japan and Italy as being supported by their savers (which was true in Japan until recently when savings started to decline) - but where does that leave the UK Robert? - I mean we have big debts publicly and quite the reverse of Japan in that our private debt actually dwarfs the public debt. Who's going to support the UK? - whoops, another cat let out of the bag....

    Never mind, most of the public have 'got bored' of the sovereign debt crisis - and certainly in Spain they've been distracted by the world cup. Well unless they plan to meltdown the world cup and sell the gold for foreign exchange currency then it's not going to help at all.

    "The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries."

    ...which is just like saying - "strange that those poor people keep moaning about how unfair the lending system is when it's them who are so keen to use it"

    P.s. - I don't think anyone (except the Americans and Japanese) are claiming that Europe is kaput - most of us realise the world is kaput and all these countries are doing it pointing to each other at the bottom of the sewer laughing at who is 'most in it' - the truth is they all are.

  • Comment number 5.

    I'd have thought that your explanation of borrowing money was so easy to understand.

    However even though you can explain cause and consequences in the simplest way it seems that those who don't want to understand won't understand.

    This certainly applies to the defunct labour government who persist in trying to pursuede the doubters that all of these cutbacks are unnecessary and if you can't borrow you just print money and it will be alright sometime in the future.

    Once you get through that the inability to borrow could mean no benefits or pensions I'm sure it will eventually sink in to the most cynical.

  • Comment number 6.

    Can Rob Peston ever write a positive article or is he paid to spread doom and gloom ? I remember some articles last year where Robert was predicting the recession could be as bad, if not worse than, that in the 30's.

    Time an again he has predicted wrong. Perhaps he should write more balanced articles giving both the possible risks AND benefits. For example a weak euro could actually benefit the Eurozone in the long term by making their exports cheaper and stimulating manufacturing growth. Certainly EADS would not be complaining too much about a weak euro. So Robert if you paint the worse possible picture and perhaps you should also paint the alternative rosiest picture and let the readers decide.

  • Comment number 7.

    No. 4.

    "P.s. - I don't think anyone (except the Americans and Japanese) are claiming that Europe is kaput - most of us realise the world is kaput and all these countries are doing it pointing to each other at the bottom of the sewer laughing at who is 'most in it' - the truth is they all are."

    Europe may not be kaput but it's surely the most debt-ridden zone and we need to ask why. Whatever happened to all those promises of greater riches which were used as a carrot to draw us all into its corrupt and, in my opinion, massively incompetent mesh?

  • Comment number 8.

    We need to go back before we go forward. The nations were borrowing from the banks for a decade based on the tax revenues generated by the housing bubble created by the banks. The banks didn't want to tell the governments that it was all a sham so they accepted the projected revenues and made the loans based on a model that would crash and stall the entire global economy, reducing tax revenue even more. The governments, in an act of extreme stupidity, assumed all the bad loans the banks had made and gave them billions to supposedly loan to businesses and keep the economies moving, which the banks have failed to do. Now the banks question the level of national debt, primarily created by them. The bankers now want to justify their obscene salaries and charge interest for governmental loans that will continue to stall national economic growth. Something has to change for things to get better and what needs to change is that the governments need to return the bad loans assumed for the taxpayers back to the banks and the national debts reduced by those amounts. The opposite of what has been policy needs implementation. Put money in the hands of the middle class and things will get better. Keep giving the money to wealthly bankers and investors and taxing the people and things will only get worse. Only after everything else has been tried do governments do the right thing.

  • Comment number 9.

    I can see no reason that any Euro sovereign debt should be reneged upon. In much the same way as the US govenrment stands behind California. What troubles me most is that the media are being led on by the bankers to generate unnecessary panic so that the bankers can make even more money. Dupes....

    UK government debt has no such strength. Can you imagine the Germans standing behind our debt? No, particularly after the way that we have acted in recent years.

    We have broken the last paddle and our really quite fragile canoe is being swept up in the out-wash of untreated sewage that is the City of London! Yet all the journos can do is the try to switch attention to someone else. Get a grip and concentrate on removing the beam from our eye before the mote from anyone else's. (Matthew 7:5 apparently!)

    When will we be allowed to get the real state of the UK debt mountain?

    The Government debt is about £2 tn and private domestic debt must be at least £1.5 tn so we are in up to our necks to the tune of £3.5tn - almost £150,000 each household - up from about £80,000 before the bubble and bailing out the banks (I have left out RBS and Lloyds another £2 tn) or £5.5tn £220,000 each household.) It is not just repaying this, but also paying the interest on financing it that will cripple us.

    Every UK household is paying over £1,000 each and every year (or £20 per week) in interest (at 0.5%) this will rise to £10,000 a year (£200 a week) when (and not if!) interest rates rise to 5%, and heaven help us if rates rise above 5%. The essence is that these debt levels are completely unaffordable, but the economic journalists just ignore the problem! Why? It will not go away, and if it is not handled well we are done for! (Is it that economic journalists can't do sums?, Politicians, Civil Servants and the Bank of England certainly can't.)

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    "The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries."

    It's no paradox - it's just politicians doing what they do best.

    It always makes me laugh when politicians castigate the evil market - and then promptly hold up the begging bowl for yet another dollop of cash from the self-same market.

    I suppose the real problem is the hopelessly economically illiterate populace who swallow the spin whole - we get the politicians we deserve, and they live down to expectations.

    Debt destroys lives - private or public debt, it's all the same. As long as we have politicians who borrow to keep us (temporarily) happy, we will continue to suffer from the blight debt brings to peoples lives.



  • Comment number 12.

    Luckily the UK government debt is significantly lower than the countries Robert is talking about. In fact during the first ten Labour years, 1997-2007 it fell from 42 to 36% of GDP (see http://www.statistics.gov.uk/cci/nugget.asp?id=206). Recently it spiked upwards as the government used the money saved up in the boom years to tide us over the recession. And very well done it was too.

    One might even argue that the government debt was excessively low. After all, a public surplus is a private deficit, and didn't the private side of the economy get into trouble because it borrowed too much? So the upward correction was in fact overdue. One should not get into the trap of worrying about "paying it off". Government debt is part of the money supply and an essential investment for pension funds and bank capital. There's no indication that the government debt is currently too high. On the contrary, by all international comparisons it still looks low. The cost of servicing it is also low by historical standards and most of it has a long maturity. No reason to worry.

    The current government's fixation with deficit reduction is a political ploy. They want a smaller state for ideological reasons. Their policy is designed to pass the bills for the banking crisis on to the public sector and the poor. Taxing the rich would be a more appropriate response if and when fiscal balance is required.

  • Comment number 13.

    For light relief (I think), the Chinese have just down-rated the credit ratings of several Eurozone countries: Germany to AA+, France to AA-, and Belgium, Spain & Italy to A-.

    http://cityunslicker.blogspot.com/2010/07/uk-loses-aaa-rating.html

    UK is AA-, according to them. Ooo-err

  • Comment number 14.

    Instead of feeding the problem by staging bail outs, quantitative easing, IMF loans and other liquidity boosting financial trickery perhaps it would be better to reduce liquidity in the global financial system thus cutting off the food supply for the gamers who enjoy playing with ordinary peoples well being.If banks and financial organizations were forced to seek funding in a heavily oversubscribed marketplace in competition with everyone else then maybe their business models would come under proper scrutiny and yes,instead of enjoying limitless cheap funds fed to them directly from governments who milk them by proxy from taxpayers, they would be forced to pay proper market rate interest like the rest of us.Should put a stop to the disruptive gambling that goes on quite quickly! John from Hendon has been right about interest rates all along - until they are back to an optimal base rate of between 5 to 7% progress will not be made. Good post by the Ghostofsichuan as well who hits the nail on the head more often than not. Time to get real and have a global system that is boring and predictable and ringfenced from the gambling addicted social psychopaths that clearly do it - economic terrorism - jut for fun and because they can get away with it(they probably already have more money than they know what to reasonably do with).Time for change I think.

  • Comment number 15.

    Forgive my ignorance but who do we borrow from.
    A table of both absolute figures and percentages showing how much we have borrowed and from whom we have borrowed would be useful.
    Also a table of lenders i.e. who has the biggest savings to lend would be useful.

    "So why would investors - such as banks, pension funds or ordinary savers - stop lending to a government?"

    Our government owns most of the banks so I do not see how they will stop lending.

  • Comment number 16.

    6. At 6:44pm on 13 Jul 2010, sarbloh wrote:
    For example a weak euro could actually benefit the Eurozone in the long term by making their exports cheaper and stimulating manufacturing growth. Certainly EADS would not be complaining too much about a weak euro.

    __________________________________________________________________________

    EADS sells in dollars, but produces in euros - a weak euro is bad news for them.

  • Comment number 17.

    "The current government's fixation with deficit reduction is a political ploy. They want a smaller state for ideological reasons. Their policy is designed to pass the bills for the banking crisis on to the public sector and the poor. Taxing the rich would be a more appropriate response if and when fiscal balance is required." [#12 goodthinginggeorge]

    I coudn't agree more. We also need all political parties (Labour, take note!) to promise a return to near full employment (as per Article 55(?) of the UN Charter), by not just re-instating their Job Guarantee, but by creating a proper 'Full Employment Guarantee'. This would promise a government paid job, at a reasonable minimum wage, for anyone who wants one. The FEG would also allow anyone working part-time to do extra hours through FEG if they want.

    FEG would also provide supported working environments for those with reduced capacity for work.

    What do you think?

    Kind Regards
    Charlie

  • Comment number 18.

    writingsonthewall mentioned Japan's lost decade. Surely we should now be talking about "two lost decades". There seems no end to this financial spiral of doom. In spite of everybody's best efforts (excl US bankers) the collective wealth of the western world just gets worse and worse and worse and ...

  • Comment number 19.

    16. At 9:08pm on 13 Jul 2010, Spacey79 wrote:
    EADS sells in dollars, but produces in euros - a weak euro is bad news for them.

    Umm, so a strong dollar/weak euro means their costs are lower and their revenue higher. How is that bad news for them? For every plane they sell they can afford to build twice as many as before!

  • Comment number 20.

    17. At 9:15pm on 13 Jul 2010, Charles Jurcich

    Agreed, though I'd insist the going rate for the job was paid rather than the minimum otherwise we'll have electricians, teachers, whoever all working for a fiver (there are unemployed teachers in this part of the world).

    I suspect Cameron et al are planning changes in the law to ensure they are not faced with human rights rulings that favour the poor in this country - a handful of cases used to whip up the hysteria-papers are sufficient cover for all sorts of agendas!

  • Comment number 21.

    factfind at comment 15 raises an aspect of economics too little explored within this blog. Many comments, such as those from John from Hendon at # 9, raise alarm by considering issues in isolation. Worldwide debt is at historically high levels but so of course is worldwide lending. We do need to know the balance between the two and the specifics of which countries and institutions suffer in the event of defaults.
    As to the high ratio of personal debt to GDP in the uk, we need to view this in the context of personal wealth which is relatively high for the uk, because of a high level of home ownership. For instance, a household may seem to be excessively in debt at £100,000 but if we find that this is a mortgage on a £200,000 house and there are two wage earners in the house then it can be seen as a reasonably normal situation. Before anyone retorts with the consequences of house price collapse, lets remember there is still a lack of quality houses in the uk. Unlike Spain the uk house market is robust for both owners and landlords. This economy is not as far out of balance as many narrowly focussed opinions imply. Some corrections and shifts in the balances of personal and government finance are needed but we have time to make the adjustments without a continual atmosphere of crisis.

  • Comment number 22.

    Cant we just let inflation run at 5% for a few years and vanish it all away? Or do the same by letting the pound decline to do the same? What penalty is there to pay for doing this?

  • Comment number 23.

    A major problem with Greece is that it has become an unproductive economy. The advantage we have in the UK is that although I suspect productivity (product per hour of labour) has declined lately, we are still a relatively productive and flexible economy. That is one reason why our credit rating has stayed good and Greece's is poor (junk status last time I checked). Another reason is that we have a sensible government (at least in this regard) which understands that the only way to maintain and improve Britain's (that's yours and mine and every person in the UK)'s medium to long term financial well-being is to put measures in place as best it can to generate wealth - not to dish out more money which it doesn't have.

  • Comment number 24.

    Robert Peston.

    "And at a time of global uncertainty, the US is still the place where risk-averse investors place their money - even if that's not especially rational."

    perverse, isn't it?!

  • Comment number 25.

    9. At 7:18pm on 13 Jul 2010, John_from_Hendon wrote:

    ====================================

    Another excellent post, and still room to factor in new and growing debt...

    -So why are we pretending we can all pay this - when obviously we can't?





  • Comment number 26.

    "Agreed, though I'd insist the going rate for the job was paid rather than the minimum otherwise we'll have electricians, teachers, whoever all working for a fiver (there are unemployed teachers in this part of the world)." [copperDolomite 20]

    As all sane people should already know, there should be no reason for teachers to be laid off at the moment - we should be investing.

    There is no structural deficit. The structural deficit refers to over-spend when the economy is at full capacity. Even in the good times we could not get unemployment below 4%, so we haven't had full capacity at least since the 1970s - we almost-certainly have a structural surplus - hence more investment needed - hence no teachers should be unemployed.

    If we had had a proper 'Full Employment Guarantee[FEG]' before the recession, peak unemployment(excluding FEG) would have been closer to 2.2M not 2.5M as it is now, and we would have recovered by now.

    No cuts are necessary - more jobs are needed to create higher aggregate demand.

    I'm sure you know this already, but others here don't.

    Kind Regards
    Charlie

  • Comment number 27.

    Robert...I always find your work fascinating.

    Please explain how the US has been able to run a trade deficit since 1976...

    And the UK...When last did it export more than it imported?

    I'm not an economist, and I am confounded at how the world got into this mess...

    Surely, to remain viable a nation must balance imports and exports...

    As must a business, or an individual...
    '
    And why don't these governments just default? After all, lenders knew the gearing levels, and the risks...

    Neutralising the debts, taking the losses onto the balance sheets...

    Surely there is an argument for just letting the edifice collapse...and rebuilding a new, solid structure...With proper fundamentals...

    And proper regulations to bring sense, order and transparency into the financial system.

    What do you think?

  • Comment number 28.

    Another good post WOTW.

    Wrt "At 6:44pm on 13 Jul 2010, sarbloh wrote:

    Can Rob Peston ever write a positive article or is he paid to spread doom and gloom ? I remember some articles last year where Robert was predicting the recession could be as bad, if not worse than, that in the 30's."
    I'm sorry to say sarbloh but Mr Peston is correct based on figures from ONS that the economy contracted 6.4% which is the deepest recession that we have had since 1930's.

    The posts here today are remarkably optimistic and try to ignore the facts of the last two years.
    I marvelled at the column in The Times today from that nice Mr Hester(RBS) where he tries to put the case that investment banks are good for us because they "protect our farmers and help us buy our homes"!
    Well Mr Hester, I have an account at RBS and I can tell you from the heart that the service that your company provides has worstened considerably since you took over.
    The banks in the EU and the UK want to get back to business as usual so that they can continue to pay themselves obscene wages and bonuses.
    Sorry guys, but you still haven't come to terms with the peril that you created (aided and abetted by the Government, Treasury, FSA). There is no way out of this, simply a damage limitation exercise. There were 50,000 homes repossessed last year (when restraint was urged by the Government). How many will lose their homes this year?
    The former chairman of the Anglo Irish Bank was declared bankrupt on Monday owing the bank more than 100 million euros. These are large debts owed to the banks by our captains of industry and they will not be paid. What do the banks propose to do about all of these toxic loans? They have ignored them for two years so as not to crystallise their real positions. When will this Government make the banks come clean about their real positions? During the current stress tests from the EU (I don't think so).
    The banks are not making any profits at all, they are just losing less than they feared and all of their positions will be unwound by 2013 when they will have to repay the short term loans from the BOE. Their response is "why should we worry about debts to be repaid in 30 months time?". Is that what is termed fiscal responsibility?
    The Government, as a matter of urgency, needs to nationalise fully, RBS and LLoyds, pool their assets and write off their liabilities as Sovereign debt and start both banks again as domestic deposit takers only. If they don't (and for political rather than economic reasons I'm not holding my breath) then the disaster of 2008 will happen again and then what?
    The recent moves to form GOM bank must tell you all you need to know about banking in the UK. They (and their investors) are hoping to make a quick buck by buying distressed assets. Santander continue to buy up distressed assets in the UK and are gaining a dominant position in the UK. Do these facts not give anyone concerns in the UK or EU?

  • Comment number 29.

    Robert, for once I am confused (doesn't take much).

    Why would any bank refuse to lend to a Government?

    Credit Ratings are now meaningless/worthless, as most contributors indicate.

    And as Governments have bailed the banks, without which they would be BANKRUPT (cf LEHMANS), the said Banks credit ratings are ALSO meaningless.

    So who has the true measure of what a Country can afford to borrow, or indeed repay?

    Clearly the system needs to be PURGED of the Credit Ratings Agencies and the rather facile way they have been allowed to be influence by their paymasters the Banks!

  • Comment number 30.

    "The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries"

    So, they're more likely to be pillaged, and inexplicably this makes them less enthusiastic about pillaging?

  • Comment number 31.

    15. At 9:00pm on 13 Jul 2010, factfind wrote:

    "Our government owns most of the banks so I do not see how they will stop lending."

    Governments bailout banks, banks lend to Government - where is the added value?

    It can go on forever, but it's pointless.

  • Comment number 32.

    I read about the Japanese approach - using small investors - elsewhere a while back.

    Something we should do more of here?

    It would be a positive thing if the government could reduce it's dependence on the spivs in the city - not just as an economic issue. I don't like the idea of a (sort of) elected government having a relationship with these people that is a bit like my relationship with a bank manager when I am desperate for a loan.

    Perhaps if the government was less dependent on the spivs then they would be in a position to take firmer action to bring them under control.

  • Comment number 33.

    The old adage that credit is the enemy of the working man could not be more true.

    The working man or woman for that matter draws an income from selling their labour for better or for worse. By and large the income remains the same unless wages rise or some other beneficial change in circumstance applies. So traditionally the working man or woman never borrowed but saved their extra pennies for rainy days when incomes goes down or for those little extras which bring some satisfaction to life.

    However, no matter how the working man or woman behaves there are those soft siren voices who say to the politician or those deluded by perceived improvements in their social status - we are all middle class now (ha-ha, Jack, I suppose we are all peers now) - that if you borrow money now, you can spend it now but then you can pay it off later when you are getting a bigger income and the money is worth less. In other words take the waiting out of wanting.

    What a delusion! What a stupid proposition! It is quite absurd! Yet it has been the way western Europe has been running its affairs for decades now. I have spoken before about the end of social democracy but perhaps it is the bankruptcy of social democracy that is really in play.

    The problem the working man or woman has now is that however austere they have been in their own affairs they are to be saddled by force of government fiat with the debts of everyone else who has been folled into taking credit. So what is the price of personal austerity? Does it have its own rewards or is that too just a delusion? This has now become a moral issue.

    We need the debts quantified, we need the banking system reformed so that the casinos can go bust without taking us all with them, and we need to see the responsible or rather the irresponsible bankers brought to a fitting judgement at the Old Bailey. The coalition seems to think there is time before such judgements need be made: I hope they are right but I fear they may be responding too slowly.

    We need to see some real austerity: a severe and harsh assertion of moral justice! The snake-oil salesmen, the dissimulators, the cheats, the rogues and the money-changers must be called to account in every manner possible for the simple reason they have stolen our birth-right and those of our children and our children's children.

  • Comment number 34.

    Er, just because someone borrows money doesn't mean they have run out of cash. That is a confusion of revenue and capital. Look at a mortgage for example - I can pay current bills but don't have enough to pay for a major capital purchase , hence I borrow. The lender considers my credit risk and what might happen if I default (the principle behind ratings, which makes them very helpful. They are not barometers of price) It is therefore a fundamentally different issue to ability to repay or the perception of ability to repay.
    The level of economic understanding on here is shockingly low.

  • Comment number 35.

    31. At 10:04am on 14 Jul 2010, writingsonthewall wrote:
    It can go on forever, but it's pointless.
    --------------------

    Pointless it is not, it is the new form of colonialism, here and abroad.

    WOTW, are you familiar with the work of Lyndon Larouche? If not, look him up on Google.

  • Comment number 36.

    The great paradox is that eurozone governments are typically the most sceptical about the benefits of global financial capitalism - and yet they tend to be more at the mercy of international investors than other rich countries.

    WOTW is right. The world of finance/politics is run by people who studied humanities at Uni.

    None of or so-called betters seem to 'do' evidence! The earth is flat, there is no such thing as gravity, the dinosaurs roamed the earth, chasing us about to steal our lettuce and the earth is only 6000 years old, sugar pills work, etc, etc! It all must be true!

    And these people make laws, could sit on a jury judging any of us if we were accused of a crime....

    Are we really giving up on the Enlightenment? Will I have to study the Sun's horoscope to see what day is a good day for the lab?

  • Comment number 37.

    33. At 10:47am on 14 Jul 2010, stanilic

    I grew up literally terrified of debt for a reason. When I went up to Univerisity (in the days when we were given grants to go and you'd be out on your ear if you took a part-time job), all the people from the 'nice' families in the better part of town just didn't care about how much debt they generated! I remember well one girl, the daughter of a doctor and a company director insisting I could have my family give you a credit card, you can use that to spend travelling around during the summer, but you won't have to worry about the bill because it will be your family credit card account they'll pay. That was the day I finally realised my so-called betters were not better, they were irresponsible, spoiled, insulated and as thick as a plate of mince!

    Now debt, lots of it, is a requirement for students. From where I am sitting, the world went mad long before the banks staggered a bit. This nightmare was allowed to begin building a long, long time ago.

  • Comment number 38.

    Guy, post 27 the issue re the US is relatively straightforward.

    The USA is able to continue to borrow as it does because it does so in US Dollars, which has been for many years the de facto global currency. As the largest economy and with the largest stock markets and huge producers and consumers of pretty much everything there is an in-built demand for US dollars.

    The point being if you hold US dollars or US government then it is an incredibly liquid asset. In other words you can use it as security for pretty much anything ot to pay for pretty much anything. Its wide acceptance encourages people to buy and hold it. Also its relative stability means that it is often used as a base for trades between other countries.

    In the 1990's I underwrote a huge amount of very large industrial and power insurance risks in both South America and South East Asia. In both areas many risks were insured in US dollars as a hedge against local inflation and also currency fluctuations. Their raw material generally crude oil or its derivatives werer traded in dollars and the US dollar was also the currency by which many global conglomeerates such as General Electric and large European companies such as Siemens, ABB, Phillips traded in before the Euro. All of these encouraged people to hold US dollars or American treasury bills.

    The current ability of the US to continue to live beyond its means is largely financed by Japanese and especially Chinese savings and their needs to maintain foreign reserves. Also the gulf oil states are tied to the US dollar as their main income comes in US dollars and as such it makes sense for them to hold debt in the same currency as a hedge against currency fluctuations.

    I could go on for hours but I hope you get the gist.

  • Comment number 39.

    "The working man or woman for that matter draws an income from selling their labour for better or for worse. By and large the income remains the same unless wages rise or some other beneficial change in circumstance applies."
    Wages have been dropping in real terms, due to companies reducing costs in pursuit of profit, and inflation. To maintain a standard of living workers have to borrow more and more to stand still. Eventually they can borrow no more, and no longer have the ability to buy the products they are producing. Result, collapse of the system.

  • Comment number 40.

    21. At 11:04pm on 13 Jul 2010, trevst wrote:

    "Worldwide debt is at historically high levels but so of course is worldwide lending."

    yes, but when that lending is merely 'paper money' and the underlying value is no longer relative to that lending - then all you're doing is stirring the paper round and round until the world realises it's actually worthless (or didn't anyone mention that the dollars, pounds and Euros' being lent are no longer transferable for anything of tangebile value - i.e. Gold).

    The lending is only constructive when there is a sacrifice made on the part of the lender (the loan) - I mean if you want I can lend you bags of air all day at a very reasonable rate - but I have made no sacrifice to obtain it and you cannot generate anymore wealth from that loan.

    "Before anyone retorts with the consequences of house price collapse, lets remember there is still a lack of quality houses in the uk"

    Except there isn't - there are 1 million unoccupied homes in Britain and 500,000 homeless. What's the chances that 1 in 2 of these houses are un-livable. I certainly don't think the Keen's place looks uninhabitable to me....none too shabby by my standards.
    http://news.bbc.co.uk/1/hi/uk/8124763.stm

    No the truth is we're not running out of space, nor are we running out of homes - but this impression is given in order to create an environment of 'scarcity' - on which Economics is based. Without scarcity there is no economics and all those economist will be on the dole queue!

    "This economy is not as far out of balance as many narrowly focussed opinions imply. Some corrections and shifts in the balances of personal and government finance are needed but we have time to make the adjustments without a continual atmosphere of crisis."

    I disagree - this table shows the level of private and public debt. If your household debt was 222% of your annual income and you knew that you we're likely to get a pay rise for the next 5 years and possibly facing a pay cut - would you lend to you?
    It's no comfort that everyone else in your street is going bankrupt as well as you - it just means the people available to borrow from has diminished.

    http://av.r.ftdata.co.uk/files/2010/02/ScreenShot316-e1265818409657.jpg

    "For instance, a household may seem to be excessively in debt at £100,000 but if we find that this is a mortgage on a £200,000 house and there are two wage earners in the house then it can be seen as a reasonably normal situation"

    In this example your joint household income would have to be £30k in order for the £100k debt to be at the same levels as our current private vs GDP ratio.
    The real difference is that the loan on a mortage is secured - Government loans are not, you cannot force a Government to sell it's assets to pay back the money it owes.

    Your optimism does not have any sound financial basis, if the Government was a person then you wouldn't dream of lending them an unsecured penny.

  • Comment number 41.

    22. At 11:26pm on 13 Jul 2010, drbobbeattie wrote:

    "Cant we just let inflation run at 5% for a few years and vanish it all away? Or do the same by letting the pound decline to do the same? What penalty is there to pay for doing this?"

    The penalty is petrol rising to £10 a litre all the inflation that causes to essentials - i.e. bread.

  • Comment number 42.

    "22. At 11:26pm on 13 Jul 2010, drbobbeattie wrote:
    Cant we just let inflation run at 5% for a few years and vanish it all away? Or do the same by letting the pound decline to do the same? What penalty is there to pay for doing this?"
    Yes we all become poorer and those at the bottom suffer the most. There is also the risk of hyperinflation, social unrest as people fight for pay rises that keep pace etc. etc.

  • Comment number 43.

    The FSA is quitely drubbing up demand for Sovereign debt, by requiring the banks hold high grade unencumbered assets. So banks can now longer hold capital in the form of a toxic CDO that has been valued by a model which bears no correlation to the market value of the asset.

    Governments need not worry about rolling over their debt, plenty of banks will be lapping it up to maintain their capital ratios. The pyramid scheme (i.e. global banking sytem) lives to see another day!

  • Comment number 44.

    Robert wrote

    "The great fear of any sovereign borrower - that's a government trying to borrow - is that one day its request for money will be turned down."

    If unlike the Greek government, it owns a central bank, a government can always borrow from that bank. This does mean an increase in the money supply, which is not necessarily a bad thing during a recession. This is the reason why it is impossible for the UK to get into the same position as Greece.

    Actually, borrowing from a central bank is rather like taxing cash and savings denominated in the currency, since it dilutes the total amount of money in circulation, and reduces its value. Like all taxes it can be bad, but it can be argued that it is better than increasing VAT, because it is progressive in that every individual and company pays in proportion to their holdings of liquid assets.

  • Comment number 45.

    32. At 10:44am on 14 Jul 2010, jon112uk wrote:
    I read about the Japanese approach - using small investors - elsewhere a while back.

    Something we should do more of here?

    It would be a positive thing if the government could reduce it's dependence on the spivs in the city - not just as an economic issue. I don't like the idea of a (sort of) elected government having a relationship with these people that is a bit like my relationship with a bank manager when I am desperate for a loan.

    Perhaps if the government was less dependent on the spivs then they would be in a position to take firmer action to bring them under control.

    -------------------------------------------------------------------------

    The joe public has enough exposure to the shoddy government as it is! Our pension funds, our insurance funds, our savings are all exposed to the UK government. Thats exactly what the government wants, a ready source of liquidity to tap into.

  • Comment number 46.

    Eurozone debt - It wont go away in any normal or even rational way. This is not about money. It is about national survival. We are entering a major historical period of social and economic change. We just cant pay for our debts and grow. If we try to pay then we will not be able to pay for the energy needed to grow. Energy prices will probably double every 5 years for about the next 20 years and then the curve hits the bend in the hockey stick shaped graph where exponential price increases happen. In 5 to 10 years transportation of any kind, including personal, will be almost financially prohibitive. If you want an early signal to all of this then kook out for national abolishment of CO2 capture programmes. These just wont happen. They use to much energy and what fuel is left wont make that much difference anyway. The USA knows this and hence its stance. It has always been a grown up country. It is making the tough decisions for its people in ensuring it has control of major oil fields outside of its borders. The UK really should wake up and gear up for the road ahead. We can be leaders or followers. We have at present a small window of hope with our talent for inventiveness and our dense multi faceted infrastructure to pull off some big game changing moves. Tighten your belts, roll up your sleeves, start thinking big and start preparing for the future that will happen. Time to grow up kids.

  • Comment number 47.

    Ah the lunch time pleasure of reading the doom sayers and left wing posters who still cannot believe the world has not collapse and embraced the utopia that is their particular version of cuddly socialism.

    Points I particularly liked as displaying no end of inventiveness to make "facts" fit include:

    WOTW: "US with real unemployment of over 20% (because the statisticians don't count forced part time workers or those who have fallen off the benefits system....oh and nor do they count census workers)"

    Well part time work still counts as employment in the real world. Unemployed means no work, part time means some work, maybe not as much as the worker would want but still work. There is economically an enormous difference between unemployed and under utilised. Census workers have a real job. Mind you I do agree with you on the dropping off benefits, UK does similar with JSA and it is solely to make the numbers look good.

    Charles Jurcich: "There is no structural deficit. The structural deficit refers to over-spend when the economy is at full capacity. "

    Really? Maybe you could explain to me then how in 2007 before the credit crunch with low inflation, very low (according to govt statistic) unemployment, govt spent 44% of GDP but only raised 37% of GDP in taxes. That is a real deficit run in good times which looks pretty structural to me.

    John-form-Hendon: "I can see no reason that any Euro sovereign debt should be reneged upon. In much the same way as the US govenrment stands behind California"

    Only one problem. US govt does not stand behind California. At lower govt tiers (counties and cities) US has allowed them to go bust, New York has been on the edge of bankruptcy several times. There is no federal responsibility to bail out a failed state. There are lots of reasons why several Euro countries may renege on their debt but for political reasons I doubt any will unless it is one of the very small East European states when the politicians can blame, with some justification, the legacy of communism.

    Please keep posting you bring a great deal of humour to my lunch time

  • Comment number 48.

    39 Averagejoe

    Very good point. It must be getting on for fifty years now since the Situationists argued that in the end consumerism would finally consume itself.

  • Comment number 49.

    My view is that you need to see growth first, then reduce spending gradually, and then pay off deficits.

    There is absolutely no evidence that investors aren't going to invest and that governments won't be able to borrow anything.

    The situation is not like Greece, because unlike Greece, these central banks do have a real sense of fiscal policy in place to generate growth and keep revenues rising.

    Further we've just had an announcement about stress testing more banks in Europe, so the question of whether the banks are fixed is still clearly waiting to be answered.

    The banks are still not lending yet, so it's important that the banks are fixed, that they do get their balance sheets back in order, and then it's important to get them lending again.

    Then, and only then in my view, will you start to see real growth.

  • Comment number 50.

    34. At 10:54am on 14 Jul 2010, Peter Bench wrote:

    'Er, just because someone borrows money doesn't mean they have run out of cash. '

    Oh yes it does if they are borrowing more and more everyday!

    Don't confuse debt with deficit.

  • Comment number 51.

    "And at a time of global uncertainty, the US is still the place where risk-averse investors place their money - even if that's not especially rational."

    Rationality in a free market? Who ever heard of such nonsense - lets hope that the whole of free market ideology isn't based on the rationality of participants - whoops!

    Don't worry, I'm sure the Chicago boys and their followers will be lining up to blame the 'irrational market participant' for screwing up their ideology. What a shame in their world of 'self responsibility' they couldn't take responsibility for their own failings.

  • Comment number 52.

    "6. At 6:44pm on 13 Jul 2010, sarbloh wrote:
    Can Rob Peston ever write a positive article or is he paid to spread doom and gloom ? I remember some articles last year where Robert was predicting the recession could be as bad, if not worse than, that in the 30's."

    That's what the press do. They're so full of their inflated sense of self-importance that they don't realise that they are, in fact, responsible for the fact that everyone's so miserable these days. At least, I /hope/ they don't realise it. Sometimes, it seems like a competition who can come up with the most depressing coverage. Time for a little balance, please.

  • Comment number 53.

    33. At 10:47am on 14 Jul 2010, stanilic

    Very good - I never grow tired of people who claim they are 'middle class' when in fact they sell their labour like the rest of us.

    I think the sheepole of Britain got confused with some of the following concepts.
    1) You don't actually 'own' a house until the mortgage is paid, until then the bank 'owns' the house and lets you use it (for a price)

    2) 'Owning' (in the terms above) does not mean you are ruling class. If you're going to work each day to pay the mortgage then you are still working class. If your Daddy's inheritance paid for your house outright then I think it's safe to say you're ruling class.

    3) Politicans may be elected by you - but they certainly don't work for you - or in your interests.

    4) You can never 'win' against the banks. Although some people claim to have 'won' because they did better than their peers - in a system of Capital accumulation it's much easier to make money when you have money - than when you don't. (see millionaires favourite phrase "your first million is the hardest").
    Every ordinary person has already lost the game before they have begun - it's a rigged casino, not a free market.

  • Comment number 54.

    @ 22. At 11:26pm on 13 Jul 2010, drbobbeattie wrote:

    > Cant we just let inflation run at 5% for a few years and vanish
    > it all away? What penalty is there to pay for doing this?

    The Germans paid that penalty - inflation contributed to Adolf Hitler's rise to power. Look, you borrowed proper money, and now you have to pay people back with proper money. Unless they are the bankers themselves - they get paid nothing from now on!

  • Comment number 55.

    34. At 10:54am on 14 Jul 2010, Peter Bench wrote:

    "Er, just because someone borrows money doesn't mean they have run out of cash. That is a confusion of revenue and capital. Look at a mortgage for example - I can pay current bills but don't have enough to pay for a major capital purchase , hence I borrow."

    ...or you could save up first - I know it's old fashioned but that's how it used to work.

    "The lender considers my credit risk and what might happen if I default (the principle behind ratings, which makes them very helpful. They are not barometers of price)"

    When does the purchaser of a sub-prime packaged debt obligation 'consider the credit risk'?
    When did the mortgage advisor - who gets paid by the number of mortgages sold - 'consider the risk' of a self-assessment application?
    When the responsibility (and penalty) of default is distributed across banks, people and lenders - who can realistically assess the risk?

    "It is therefore a fundamentally different issue to ability to repay or the perception of ability to repay."

    All that matters is their ability to pay - your perception is merely to pre-empt the event. However regardless of this if you do not have the facts then you cannot make such an assessment. The facts have been missing for some time now. If they had of been present then half the people with mortgages today would have been turned down!

    "The level of economic understanding on here is shockingly low."

    In your case - yes it is.

  • Comment number 56.

    When paper money is worthless, this is the result.

    When the wealth of a nation is usurped by those in power the misery left, is borne by the people on whom the trick is perpetrated.

    Paper money needs to be tied to real value and not just a hollow promise.

    "The system of banking we have both equally and ever reprobated. I contemplate it as a blot left in all our constitutions, which, if not covered, will end in their destruction, which is already hit by the gamblers in corruption, and is sweeping away in its progress the fortunes and morals of our citizens. Funding I consider as limited, rightfully, to a redemption of the debt within the lives of a majority of the generation contracting it; every generation coming equally, by the laws of the Creator of the world, to the free possession of the earth he made for their subsistence, unincumbered by their predecessors, who, like them, were but tenants for life."
    ~ Thomas Jefferson.

  • Comment number 57.

    # 47. At 1:05pm on 14 Jul 2010, Justin150 wrote:

    "Ah the lunch time pleasure of reading the doom sayers and left wing posters who still cannot believe the world has not collapse and embraced the utopia that is their particular version of cuddly socialism."

    Glad you enjoy it - maybe the end will hurry up for you soon. You do realise you're setting yourself up for a huge "I told you so" - where are all your like minded friends? - ah yes, all drifted away when the V shape turned out to be a square root shape.

    "Well part time work still counts as employment in the real world. Unemployed means no work, part time means some work, maybe not as much
    as the worker would want but still work."

    Really - so when are you quitting your full time position to go and stack shelves part time in the local supermarket. I'm sure the 80% reduction in your wages won't affect your spending, and consequently the Economy!!!

    "There is economically an enormous difference between unemployed and under utilised."

    I didn't say there wasn't - but economically it's worse as you get a long drawn out slowdown as once people get into part time work they often stay there.

    "Census workers have a real job."

    Really? - and who is funding it? The Government is using census employment to reduce unemployment, however this can only be sustained as long as the Government can borrow in order to fund it.

    "Mind you I do agree with you on the dropping off benefits, UK does similar with JSA and it is solely to make the numbers look good."

    Always have, always will.

  • Comment number 58.

    writingsonthewall - bravo, you have been on top form today. Nice to see someone can see through the garbage economic theories and models that have lead us to this mess!

  • Comment number 59.

    Charles Jurcich: "There is no structural deficit. The structural deficit refers to over-spend when the economy is at full capacity. "

    Really? Maybe you could explain to me then how in 2007 before the credit crunch with low inflation, very low (according to govt statistic) unemployment, govt spent 44% of GDP but only raised 37% of GDP in taxes. That is a real deficit run in good times which looks pretty structural to me."
    [47 - justin150]

    I think you've got this wrong. Our position in 2007 was not 'full capacity' as, although unemployment seemed low compared to other countries, it was still high by post-war standards. Full employment is defined as the 'frictional rate of unemplyment' which is usually about 2% (not the 4-8% we have had for 30+ years).

    Secondly, any high output was being artificially stimulated by consumer credit and mortgages - not sustainable levels of real wages - therefore this depression was inevitable. For more information about structural deficts see:

    'Structural deficits - the great con job'
    http://bilbo.economicoutlook.net/blog/?p=2326

    Kind Regards
    Charlie

  • Comment number 60.

    Further to #59 above,
    When I use the term 'over-spend' I am not talking about running a budget deficit, I am talking about spending which causes sustained high levels of domestic inflation, and is unrelated to whether their is a budget deficit or not. Sustained high levels of domestic inflation (we do not have this at the moment - deflation is the risk) is caused when at any given point in time there is 'too much money chasing too few goods', and this can happen when the government spends too much when the economy is at full capacity - as I say we are nowhere near full capacity, and haven't been since at least the 70's.

    Kind Regards
    Charlie

  • Comment number 61.

    The reason why the EU and Euro will not go bankrupt is because the dictators in Brussels will not let it. They will end yo passing legeslation, based on the Lisbon constitution which we should have had a referendum on, to forse all the countries not using the Euro to contribute. The EU politicians and Europrats do not care about anything except the EU project and forming the USE.

  • Comment number 62.

    Robert,

    It seems to me, that the core reason of our current economic situation is that basically we have lost our way in terms of Industrial Manufacture, Associated Industries, and the ability to compete within our ever agressive World.

    We have systematically closed, sold off and divested ourselves of our foundation strength in industrial manufacture, we have systematically destroyed our agriculture, fishing and farming interests in favour of imports and vast carbon miles to boot.

    We have adopted a subservient attitude on the World's industrial stage, and are restricted, regulated and controlled by the ridiculuos European Common Market, which does not one jot of good for us but takes our money !.

    What have we become, or are becoming - Our current policies have totally removed our respect to work. to provide and to find security in a job for life !

    We are travelling down a road of terminal decline as is clearly evident when we charge for education and saddle our young population with a debt burden and culture , what will be next charged to stay in hospital, charged to see a doctor, charged to see a dentist ???

    Our Government(s), should be ashamed, are they blind or something - What are we becoming ????

    Common sense is not Rocket-Science.

  • Comment number 63.

    Aha, so Mr Government, why not do more to promote National Savings via Post Office and/or nationalised banks, so that Joe Public gets a better savings rate and Mr Government gets access to Joe's savings without having to pay the middle man (retail banks)his lending fee. That's what Japan and Italy does successfully and what UK used to do, before we started to kill off the post office. To make it work, get a nationalised bank to run it on the internet...there must be enough shareholder voice to make it happen! I do not see National Savings truly competing for funds in the market.

  • Comment number 64.

    63. At 1:09pm on 15 Jul 2010, Alan wrote:
    Aha, so Mr Government, why not do more to promote National Savings via Post Office and/or nationalised banks, so that Joe Public gets a better savings rate and Mr Government gets access to Joe's savings without having to pay the middle man (retail banks)his lending fee. That's what Japan and Italy does successfully and what UK used to do, before we started to kill off the post office. To make it work, get a nationalised bank to run it on the internet...there must be enough shareholder voice to make it happen! I do not see National Savings truly competing for funds in the market.
    ------------------------------------------------------------------------
    I agree. They do compete but do it very quietly! These days, if you can get to a Post Office the Government have not closed, you may find that you are approached by one of the counter-staff in the waiting area trying to sell you NS products.

 

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