A Devastating Assessment by the BIS

Ambrose Evans-Pritchard (AEP) reports on the newest BIS report on global banking and the global debt situation, noting that its former chief economist William White (now with the OECD), is once again issuing a stark warning. Note that Mr. White was one of the few officials in the central banking world to have predicted the 2008 crisis. Not that it was particularly difficult to predict it, but similar to the story about the egg of Columbus,  almost no-one in an official capacity did. 99% of the world's central bankers insisted the crisis was 'well contained' up until the very last minute, and then panicked along with the  markets.


“The Swiss-based `bank of central banks’ said a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”.

This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.

“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.

“All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle,” said Mr White, now chairman of the OECD’s Economic Development and Review Committee.

The BIS said in its quarterly review that the issuance of subordinated debt — which leaves lenders exposed to bigger losses if things go wrong — has jumped more than threefold over the last year to $52bn in Europe, and jumped tenfold to $22bn in the US.”


(emphasis added)

None of this should be news to our readers of course, but it is quite funny how AEP reports this in a fairly dry manner, without adding any comments of his own. After all, the things criticized by the BIS and Mr. White are a direct result of the policies AEP sotto voce supports, as he is incessantly calling for more monetary pumping. It is a surprise that he isn't denouncing the BIS and its former chief economist as 'Austrian liquidationists' for pointing out what the policies he supports have wrought.


European Sovereign Debt Developments

We will look at the BIS report in more detail in an upcoming post, but in the meantime, here is what euro-stat reported with regard to the state of sovereign debt in the euro area and the European Community as of Q1 2013.

Not surprisingly, sovereign debt in Europe is at a new record high, both in relative and absolute terms. There are a few exceptions, a handful of smaller countries that have exercised a modicum of fiscal discipline, but other than that the spending just continues, hand over fist. Note that Germany has benefited from the relatively strong performance of its economy, which has helped to hold its debt-to-GDP ratio at roughly the same level as last year, but this of course means that spending has continued to increase in absolute terms. Since the Maastricht treaty as well as the new 'fiscal compact' insist on comparing stocks to flows, euro-stat issues debt-to-GDP ratios. The maximum allowed under Maastricht is 60%. The euro area's member nations collectively however sport a new record high public debt-to-GDP ratio of 92.2%:



EU government debt data-1European public debt to GDP ratios: still growing, and miles away from the treaty limits – click to enlarge.



The most noteworthy worsening quarter-on-quarter was recorded by Ireland (the much hailed 'success story'), Spain and Belgium. The latter has recently fallen off the radar of the markets, but we feel quite sure it will receive their attention again in the not-too-distant future.

According to euro-stat:


“The highest ratios of government debt to GDP at the end of the first quarter of 2013 were recorded in Greece (160.5%), Italy (130.3%), Portugal (127.2%) and Ireland (125.1%), and the lowest in Estonia (10.0%), Bulgaria (18.0%) and Luxembourg (22.4%).


Compared with the fourth quarter of 2012, twenty-one Member States registered an increase in their debt to GDP ratio at the end of the first quarter of 2013, and six a decrease. The highest increases in the ratio were recorded in Ireland (+7.7 percentage points – pp), Belgium (+4.7 pp) and Spain (+4.0 pp), and the largest decreases in Latvia (-1.5 pp), Denmark (-0.8 pp) and Germany (-0.7 pp).”


Keep in mind that these are merely quarter-on-quarter changes.



EU government debt data-2,changesQuarter-on-quarter changes in European public debt to GDP ratios: Ireland, Belgium and Spain are the biggest standouts – click to enlarge.



The changes compared to Q1 of 2012 are of course a great deal worse. As euro-stat reports:


Compared with the first quarter of 2012, twenty-four Member States registered an increase in their debt to GDP ratio at the end of the first quarter of 2013, and three a decrease. The highest increases in the ratio were recorded in Greece (+24.1 pp), Ireland (+18.3 pp), Spain (+15.2 pp), Portugal (+14.9 pp) and Cyprus (+12.6 pp), while the decreases were recorded in Latvia (-5.1 pp), Lithuania (-1.9 pp) and Denmark (-0.2 pp).”


(emphasis added)

It should be noted that none of the three countries recording the largest decreases are members of the euro area, although Latvia plans to join in 2014 (hence the large decrease – this always happens just before a country joins. Quite miraculous decreases in public debt were seen in countries like Italy and Greece prior to their accession to the euro area). The speed at which debt to GDP ratios continue to increase in the 'PIIGS' is rather breathtaking.



EU government debt data-3,changes-y-o-yYear-on-year changes in European public debt to GDP ratios. Note that 'model student' Ireland has recorded the second largest increase with 18.3% – click to enlarge.



Finally, here is a table that shows the actual figures as well as the composition of the debt (bonds, bank loans, etc.). Ratios are somewhat abstract, and here we can see that we are talking about real money – and quite a lot of it.



EU government debt data-4,tableEuropean government debt in millions of national currency. Here it can be seen that although Germany's debt-to-GDP ratio slightly declined quarter-on-quarter, spending has in fact continued to grow – click to enlarge.



It is currently estimated that e.g. Italy's debt to GDP ratio will grow from the 130.3% recorded in Q1 2013 to about 132% by the end of the year. But that is probably overoptimistic, considering the debt growth that has reportedly occurred in the months June to August. The upshot of all of this is: the sovereign debt problem in the euro area remains not only unresolved, it is getting worse.

In spite of the constant stream of proclamations that we must let bygones be bygones, that the 'crisis is over', that 'Europe has shown its willingness and ability to deal with the problem and defend the viability of the euro', the reality  is that the mountain of debt has just kept growing, and even faster than before. The only thing that has actually changed between 2011 and 2013 was that by late 2011, true money supply growth in the euro area had decelerated sharply year-on-year to just below 2%, while since then it has re-accelerated to 8%. That is really all there is to it. As soon as money supply growth slows down again, the crisis will be back. It's as simple as that.

In conclusion, let us quote Mr White from AEP's article once more:


“Mr White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines.

“The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks.”

Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. “I don’t know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel,” he said.


(emphasis added)

What Mr White didn't mention is that once the whole world switches to 'Abenomics' type unbridled inflation, the biggest question will be whether the markets will still have confidence in the ability of central banks to keep things under control.

In a way one could say that faith in central banks is the last bubble that remains to be popped. They were the final barrier fighting off the tide in the 2008 crisis and the subsequent euro crisis. Once faith in the omnipotence of central banks falters, it will be game over for the modern debt-money system.



Charts and tables by Euro-Stat



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4 Responses to “The End Game Approaches”

  • timlucas:

    Hello Pater. I have a line of thought that I am wondering about – I wondered if you might have a look?

    Given that the only ways through which new money can be created are through the creation of fed money used to purchase government debt, or through the creation of new commercial bank liabilities through (again) the creation of new credit, doesn’t this mean that while the central banks have an inflation mandate (and we make the assumption that the preference for holding money over other goods remains about constant) that outstanding debt in the economy can only ever go up?

    However, given that this is the case, this also means that the debt purchased by the central banks can never be sold back into the economy while (at least while commercial banks are deleveraging) since this would be deflationary.

    This means that for all purposes of economic analysis, the debt instruments held in the assets of the Federal Reserve have been permenantly monetised and will never be returned back into the economy – these will be rolled forever. Does this not mean that in order to understand the current leverage within the system – the ability of firms and individuals to repay their debts, that one should exclude all debt instruments held at the federal reserve?

    On this basis, the European public debt/GDP ratios are overstated by a lot. I think that 1/3 of the UK gilt market is held by the BoE….

    This is not to say that it is a good thing to monetise in this way – I understand that any injection of money is non-neutral.

    However, more broadly a transfer of assets from commercial banks’ balance sheets to that of the federal reserve, accompanied by an increase the reserve ratio at these commercial banks is one way through which the system heals. It is effectively this mechanism which is the essence of the Jesus De Soto plan, though he would advocate doing it all in one go, targeting deposits rather than leaving it to the choice of the commercial banks which liabilitie they replace, and reducing reserve requirement overnight to 1.

    I think all this makes sense. What do you say?

  • No6:

    Inflate inflate inflate.
    Talk gold down at every opportunity. Smash it when technicals permit.
    Provide bullish forecasts with cherry picked data.
    Keep markets enthrauled with central planners and personalities.
    Inflate some more.

    Its a con game.

  • jimmyjames:

    this always happens just before a country joins. Quite miraculous decreases in public debt were seen in countries like Italy and Greece prior to their accession to the euro area


    The Squid/the high yielding dollar swap/camouflage the debt game continues-

  • JasonEmery:

    BIS “This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets,…..”

    That’s not what they announced today at the conclusion of the fed meet. Just the opposite. Actually, I think they crossed a financial Rubicon in 1994, when a series of interest rate tightening moves had to be aborted when it contributed to the Mexican Tequila Crisis, the Orange County CA bankruptcy, and stock market angst in the USA. The subsequent freeze in rate hikes, implemented way too early, lead to the dotcom bubble, and indirectly to numerous larger bubbles.

    The way gold, silver, oil, and the DOW are reacting, I think we’re going to see outrageous inflation on the charts at Shadowstats soon. Not sure if anyone else will print the truth, but I’ll be reading it there.

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