The most important news of this week was connected with the US and the debt ceiling debate. But let´s start as usual with Europe. Austerity measures are more and more unpopular. One of the examples today is Ireland. Its budget proposal is not the kind of austerity budget that it should be. Ireland will drain a further 1.5pc of GDP from the economy in fiscal cuts and taxes over the next year, but against the plan of 1.8pc. Finance minister, Michael Noonan, has said this week that the nation can take no more. Ireland took €60bn liabilities of the Irish banking sector in 2008 so as not to cause a chain reaction within Europe. But this step brought a total disaster to the country and its public finances. Today´s public debt is 123pc of GDP and budget deficit is running up to 7.3 pc of GDP.
Ireland is not alone. We still emphasize that Europe’s next problem will most probably be Spain. Their 10 Y treasury rates are still at sustainable levels, actually, they have almost hit the year lows, but there are a lot of problems within Spanish banking system. Bad loans in the country amounted to $247 billion in August, which is a new record-breaking 12.12% of all outstanding loans, and that is 30% higher than in previous years. This could end only with the help of the ESM, or direct interventions from the ECB. So, be prepared.
Italy is another sinner. It must introduce new austerity measures. Italian politicians have decided to sell some state assets. If you are interested, you can buy more than 50 historic sites, among others, Grand Inquisitor’s villa, Orsini Castle near Rome, which was built for Pope Nicholas III in the 1270s, Villa Mirabello near Milan, built in the 18th century by Cardinal Durini, the Grand Inquisitor of Malta. The plan is to raise more than 500 million euros, and Italians hope that castles and villas will be converted into tourist facilities, creating the much-needed jobs for the country’s struggling economy.
There is no help for hopelessness. We know how any asset bubble ends – it bursts. And we all know what the reasons behind the last bubble in the US were – easy money and enforcement of regulations supporting non-credible owners to borrow. A similar situation is happening in the UK today. UK house prices rose to a record high last month, and this week the government has introduced a new program providing government-guaranteed mortgages to buyers with smaller deposits. The Bank of England is easing and leaving basic rates at low levels. Doesn’t it seem to you at least a little bit similar to the US before 2008?
China has declared this week that the dollar regime as reserve currency is unsustainable. China’s official Press Agency released news concerning the US debate about the debt ceiling, that it is time to start considering building a ‘de-Americanized world’, which would not be based on US good or bad news. Does China want to lead the movement? Not so fast. We have to realize that China is one of the biggest US debt holders. Another interesting point is that it seems to be very probable that during this political turmoil they were buying nothing else but US treasuries. China’s foreign-exchange reserves last quarter have risen the most in more than two years, and hit a record $3.66 trillion at the end of September. We won’t know for a while where the money went, but a big chunk must have gone into US Treasuries. So, as any other super political power these days, China is declaring the opposite of what it is actually doing. But this is a new normal world. We have to get accustomed to it.
During the last week, we had the most news concerning the situation in the US. As the new normal triple “A” rating of the US was placed on rating watch negative by Fitch Ratings, which was connected with the fact that the government is not able to negotiate to raise its borrowing limit. So, more debt means better rating; at least for now. Finally the Senate passed the bill to reopen the government and to allow to fund new spending till January 15th 2014, and to make room for negotiations about the extending of the debt ceiling. It is estimated that the debt ceiling should have been raised at least for another $ 1.1 trillion. Politicians allow themselves time till December 13th as a target date for budget negotiations. In other words, at the beginning of next year, we will see the same situation as today. What was quite interesting was the reaction of the official China’s credit rating agency, Dagong, which has downgraded the US rating from A to A- due to the fact that the debt growth rate significantly outpaces that of fiscal income and GDP. This is correct. But Dagong is not recognized by the SEC, and it does not have the same influence as the big three: S&P, Moody’s, and Fitch. Another fact is that China itself is in the very same situation as the US, and this statement was more or less a political one, and concerned the above mentioned fact of op-ed calling for a ‘de-Americanized’ world. And what else should we be afraid of? FED. Fed’s balance sheet increased by over $50 billion in one week, by $100 billion in the past month, and by just a shy $1 trillion in the past year. That is what we should beware of more. The US debt is on the second place.