The coming debt and population problem

Death and taxes

Debt levels are set to rise to unprecedented levels. According to the International Monetary Fund in June the public debt, as a share of GDP in advanced economies, is set to come in at over 130% for this year and next. To put that into perspective that surpasses the debt levels from the second world war.If you look at the chart below you can see that the double whammy of the Global Financial Crisis, followed by the present pandemic is pushing debt to record levels.

Death and taxes


The population problem

The general thinking now is that the present crisis is a one in a hundred years kind of event (what if it isn’t) and that future generations will be able to claw back the debt levels over time. However, a publication from the Lancet in the UK suggests that there is a falling population that could fall by 9% at the end of the century. So, this means that there will be a large decline in numbers of working age adults. There are some countries which are projected to be particularly badly hit. Japan, Spain, Portugal, and Thailand are expected to see their populations halve by the end of the century. The countries which are projected to see 25% population declines are also projected to see a higher ration of older to younger people. So, more of this debt is going to be shouldered by fewer as an ageing population raises further spending considerations.

What will happen next?

There will be moves by governments to start to cap this debt problem. It will not be allowed to continue unless we get into worst disasters than we presently are in. The main concern is that of default. As long as willingness to repay remains, then the debt pile can be reduced. The main risk is if the debt becomes too great and the easiest solution is to just walk away…

Fitch downgrades Italy to BBB-, stable outlook

Fitch Ratings agency says the downgrade reflects the significant impact of the COVID-19 pandemic on Italy’s economy and fiscal position

  • expects Italy’s govmt debt to GDP ratio to increase this year, by around 20%
  • Fitch forecasts an 8% GDP contraction in 2020
  • says Italy’s gross general government debt to GDP ratio will increase by around 20pp this year
  • stable outlook partly reflects view that ECB’s net asset purchases will facilitate Italy’s substantial fiscal response to covid-19 pandemic
  • downward pressure on Italy’s rating could resume if government does not implement credible economic growth & fiscal strategy
  •  says recession & economic policy response to covid-19 pandemic will result in sizeable deterioration of Italy’s budget balance this year
This is a negative input for euro
Link to Fitch for more … note this:
  • In accordance with Fitch’s policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
Huh … reading between the lines on this it could have been a worse outcome for Italy?
Note – S&P recently affirmed Italy at BBB/A-2 with an outlook negative.
And – the ECB will still accept Italy debt as collateral given their recent changes to accept debt which was eligible on April 7th.

India has limited room to ease fiscal policy due to high debt: Fitch

Fitch Ratings on Tuesday forecasted India’s economic growth at 6.6 per cent during the current year, down from 6.8 per cent in the previous year, and said the government has only limited room to ease fiscal policy because of high debt.

It said GDP (gross domestic product) growth is likely to rebound to 7.1 per cent next year.

Keeping India’s rating unchanged at BBB- with a stable outlook, it said the rating balances a strong medium-term growth outlook and relative external resilience with sturdy foreign reserve buffers, against high public debt, financial sector fragilities and some lagging structural factors.

In its Asia-Pacific Sovereign Credit Overview, Fitch said India’s GDP growth decreased for a fifth consecutive quarter in the April-June quarter to 5 per cent, the lowest in six years.

“Domestic demand is faltering, with both private consumption and investment proving lackluster, while the global trade environment is also weak,” it said.

The contribution of gross fixed capital formation (1.3 per cent) remained weak at the same level of the January-March quarter, when it dropped sharply, while the contribution of private consumption fell to 1.8 per cent in the April-June from an average of 4.6 per cent in the preceding four quarters.

Manufacturing grew by only 0.6 per cent, it said.

The government’s policy measures to stimulate the economy include support for the automobile sector, a reduction in capital gains tax, and additional liquidity support for “shadow” banks. Accompanying structural reforms include a further easing of the foreign direct investment (FDI) regime and consolidation of the public banking sector. (more…)

Will Japan Be the Next Debt Crisis?

Japan may spark the next global debt crisis unless the nation’s new leader addresses its widening fiscal deficit, Kusano Global Frontier Co. said.

What is bothering foreign investors the most is Japan’s debt issue and the related risk of Japan triggering the next sovereign debt crisis,” Kusano said in an interview.

Japan’s 10-year yields have stayed mostly below 2 percent in the past decade partly because domestic investors hold over 90 percent of government debt, according to Kusano. Overseas investors will start avoiding Japanese bonds as the supply of the securities exceeds local demand, Kusano said.

Japan’s inability to finance its debt sales domestically is approaching,” Kusano said. “And when that time comes, you can’t expect foreign investors to accept Japanese debt with such a low coupon

Citi forecasts Greek devastation, unstoppable debt spirals in Italy and Portugal

If Citigroup is right, the slight rebound in Europe over the summer will not be enough to stop Club Med going from bad to worse, with a string of soft defaults/restructurings.

I pass their latest forecasts on to readers. I do not endorse them.

Italy will bounce along in near-permanent recession with growth of 0.1pc in 2014, zero in 2015, and 0.2pc in 2016. The debt will punch above 140pc of GDP, beyond the point of no return for a country with no economic growth or sovereign currency.

“We do not expect the public debt ratio will enter a downtrend in coming years, and we suspect that some form of debt restructuring (maturity lengthening and/or coupon reductions) may be likely eventually,” said the bank.

Portugal is in an even worse state, with growth of: 0.6pc, 0.0pc, 1.0pc, over the next three years, with debt hitting 149pc of GDP by 2015, and unemployment rising again to 18.3pc:

Given the fiscal tightening still to come, ongoing private deleveraging and ensuing poor nominal GDP growth prospects, doubts still exist about the sustainability of the Portuguese public debt in our view.”
A second full bail-out programme remains a clear risk in the event of market sentiment deteriorating. In any case, we think a Greek-style public debt restructuring unlikely in the near future, but a restructuring of some government contingent liabilities is still possible. (more…)

Indian Economy :Unknown Facts

Unknown Fact

India’s long-term local currency debt is rated at Ba2 by Moody’s, two levels below the investment grade and at par with Armenia and Turkey. Indian government debt accounts for about 80 percent of GDP. Standard & Poor’s and Fitch Ratings have a rating of BBB-, the lowest investment grade.

The government’s annual debt repayments will rise to 1.14 trillion rupees in the next fiscal year from 531 billion rupees.

The 10-year yield has risen 62 basis points in the past year, the worst performer during that period among the 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holding Plc. It fell 95 basis points in the previous 12 months.

China to increase budget deficit in 2016 -More Fiscal Stimulus ?

China Daily reports that fiscal policy in China will become ‘more forceful’ in 2016

An official statement (issued after a national fiscal work conference) from China says

  • China will increase its budget deficit next year
  • Will gradually raise its fiscal deficit ratio
  • Increase government debt issuance and set a limit for newly increased local government debt
  • Will continue to cut taxes

Expectations are that the budget deficit will rise to 3% of GDP

  • Compared with 2.3% for 2015
  • And 2.1% in 2014-

Note – the official statement the China Daily is reporting on was out on Monday, and its impact may well have already flowed through to the AUD, which was up during European and US trade overnight.

China on ‘Treadmill to Hell’ Amid Bubble, Chanos Says

April 8 (Bloomberg) — China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.

The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.

China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.

Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market. (more…)

Greece 10-Year Bond Oversubscribed

LONDON—The Greek government’s offering for a 10-year bond attracted around €14.5 billion ($19.86 billion) in bids and the books have closed, the head of the country’s debt-management agency said Thursday.

“We are very happy with the bid because the re-entry into the market is always challenging. It went very well,” Petros Christodoulou said. The government aimed to raise €5 billion from the offering but it was heavily oversubscribed.

The offering—timed to coincide with an improving market for Greek government debt in the wake of tough budget cuts announced a day earlier—is a move to help cover short-term funding gaps.

Lead managers are Barclays Capital, HSBC Holdings, National Bank of Greece, Nomura and Piraeus Bank SA, one of the lead managers on the deal said.

Adjusted price guidance for the new issue is now 3.00 percentage points over the benchmark risk-free mid-swaps rate, reflecting the market’s demand for a premium.

An issue size of €5 billion for Greece’s new 10-year bond “would be a good result” but not enough to fully cover Greece’s near-term funding needs, said UniCredit strategist Luca Cazzulani.

Greek bond yields in secondary markets moved up on the news. The yield spread between Greek 10-year government bonds over equivalent German government bonds widened to around 3.03 percentage points from Wednesday’s close at 2.92 percentage points.

The cost of insuring Greek sovereign debt against default also rose slightly. The price of Greece’s five-year sovereign credit default swaps increased to 3.05 percentage points, from 2.945 percentage points, representing a €10,500 increase in the annual cost of insuring €10 million of debt for five years.

Greece, the European Union’s most indebted country, will face its biggest challenge in April and May this year, when more than €20 billion of debt comes due for repayment. So far, Greece has raised €13.6 billion via the sale of Treasury bills and an €8 billion bond syndication, the Public Debt Management Agency said. Greece plans to issue a total of €54 billion in debt this year.

While Greece has been encouraged by its ability so far to raise funds from public markets, the cost of issuing new bonds remains high. The yield on 10-year Greek government bonds has risen to as high as 3.40 percentage points over equivalent German bunds, from low-double-digits before the start of the financial crisis.

Greece’s latest set of spending cuts and tax increases aims to cut the country’s gaping budget deficit by €4.8 billion or about 2% of gross domestic product, and follows pressure from the European Commission, the EU’s executive arm, which said last week that Greece’s previously announced measures weren’t tough enough.

Greek officials worry that its budget cuts won’t be enough to restore investor confidence in Greek debt unless the government receives detailed financial backing from the European Union.

Greek Finance Minister George Papaconstantinou said in Athens Wednesday that if Greece can’t rule out turning to the International Monetary Fund for assistance if Greece needs help and euro-zone partners won’t give it.

IMF financing would need approval by European countries on the IMF’s board. Most euro-zone governments have made clear they want a European solution to the Greek crisis rather than IMF intervention, to show the euro zone can handle its own problems.

Greece is rated A2 by Moody’s Investors Service and BBB+ by Standard & Poor’s Corp. and Fitch Ratings Inc.

Biggest Bubble Ever? 2017 Recapped In 15 Bullet Points

Here are his 15 bullet points that show why in 2017 we may have seen the biggest bubble ever (and why we can’t wait to see what 2018 reveals).

  1. Da Vinci’s “Salvator Mundi” sold for staggering record $450mn
  2. Bitcoin soared 677% from $952 to $7890
  3. BoJ and ECB were bull catalysts, buying $2.0tn of financial assets
  4. Number of global interest rate cuts since Lehman hit: 702
  5. Global debt rose to a record $226tn, record 324% of global GDP
  6. US corporates issued record $1.75tn of bonds
  7. Yield of European HY bonds fell below yield of US Treasuries
  8. Argentina (8 debt defaults in past 200 years) issued 100-year bond
  9. Global stock market cap jumped1 $15.5tn to $85.6tn, record 113% of GDP
  10. S&P500 volatility sank to 50-year low; US Treasury volatility to 30-year low
  11. Market cap of FAANG+BAT grew $1.5tn, more than entire German market cap
  12. 7855 ETFs accounted for 70% of global daily equity volume
  13. The first AI/robot-managed ETF was launched (it’s underperforming)
  14. Big performance winners: ACWI, EM equities, China, Tech, European HY, euro
  15. Big performance losers: US$, Russia, Telecoms, UST 2-year, Turkish lira

As Hartnett summarizes, “2017 was a perfect encapsulation of an 8-year QE-led bull market”

  • Positioning was too bearish for either a bear market or a correction in risk assets.
  • Profits were higher than expected (global EPS jumped 13.4%) this time thanks to a synchronized global PMI recovery.
  • Policy was aggressively easy, as the ECB and BoJ bought a massive $2.0tn of financial assets; fiscal policy also easy (e.g., US federal deficit up $81bn to $666bn).
  • Returns were abnormally high in 2017 (Table 3); corporate bonds and equities soared, but the biggest surprise was stubbornly low government bond yields: thematic leadership of scarce “growth” (e.g. tech stocks), “yield” (e.g., HY, EM and peripheral EU bonds) and “volatility” once again remained the core of the bull.

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