"I am just not sure that investors understand the risks. Nor do they seem to understand the implications of recent EU legislation establishing a new pecking order of who pays how much and in what order when a bank fails. When the house of debt collapses, it is they, not the taxpayers, who come first."
De wolfgang Münchau, en "Europe faces the Horrors in its own House of Debt"
But according to Mr Mian and Mr Sufi, none of this may matter as much as we think. Moritz Kraemer of Standard & Poor’s came up with corroborating evidence last week, when he did the maths on private sector debt in Europe. His analysis reads like a European version of House of Debt – only more scary. Mr Mian and Mr Sufi at least described the past; Mr Kraemer explains the future. The Europeans have barely begun to deleverage. In Spain and Ireland the process has at least started. But it will take years, maybe decades, until it is completed.
Take Portugal, which is about to exit its support programme from the European Stability Mechanism and the International Monetary Fund. Its private sector debt reached a peak of 226.7 per cent of gross domestic product in 2009. It was still 220.4 per cent at the end of 2013. S&P has run a simulation under which Portugal’s private debt could fall to 178 per cent of GDP by 2020.
That is still a big number. But it may be too optimistic. Portugal and other peripheral eurozone countries will need to deleverage and simultaneously deflate their prices to become more competitive. What makes it even harder is that inflation in the eurozone has been falling. Low inflation raises the real value of future debt, and reduces the ability to cut prices.
Is it feasible? Today’s market consensus says yes: the eurozone crisis is over. Yes, there was some upheaval at last month’s European parliament elections, but we will muddle through politically. Surveys tell us that European businesses are becoming optimistic. Investors are exuberant. I am often hearing how great the mood in Spain seems to be. All’s well that ends well.
The implication of House of Debt and the S&P study is that the conventional market view of the post-crisis environment is dead wrong. The most likely trajectory is a long period of slow growth, low inflation, and a constant threat of insolvency and political insurrection. If the private sector were to reduce debt in such an environment, certainly on the scale as suggested by S&P, it would be a lot harder and possibly bloodier than any of the adjustment we have seen so far...
... In such an environment I would expect the political backlash to get more serious. More people in more countries will question the benefits of the EU and the euro in particular. Even if deleveraging could work economically – which is not clear – it may not work politically. My guess is that if the Europeans had to choose between deleveraging and default, they will pretend to do the former and end up with the latter. By reducing political instability, they will end up increasing financial instability.
I am just not sure that investors understand the risks. Nor do they seem to understand the implications of recent EU legislation establishing a new pecking order of who pays how much and in what order when a bank fails. When the house of debt collapses, it is they, not the taxpayers, who come first.
Como recordatorio, el gráfico de hace dos días.
De wolfgang Münchau, en "Europe faces the Horrors in its own House of Debt"
But according to Mr Mian and Mr Sufi, none of this may matter as much as we think. Moritz Kraemer of Standard & Poor’s came up with corroborating evidence last week, when he did the maths on private sector debt in Europe. His analysis reads like a European version of House of Debt – only more scary. Mr Mian and Mr Sufi at least described the past; Mr Kraemer explains the future. The Europeans have barely begun to deleverage. In Spain and Ireland the process has at least started. But it will take years, maybe decades, until it is completed.
Take Portugal, which is about to exit its support programme from the European Stability Mechanism and the International Monetary Fund. Its private sector debt reached a peak of 226.7 per cent of gross domestic product in 2009. It was still 220.4 per cent at the end of 2013. S&P has run a simulation under which Portugal’s private debt could fall to 178 per cent of GDP by 2020.
That is still a big number. But it may be too optimistic. Portugal and other peripheral eurozone countries will need to deleverage and simultaneously deflate their prices to become more competitive. What makes it even harder is that inflation in the eurozone has been falling. Low inflation raises the real value of future debt, and reduces the ability to cut prices.
Is it feasible? Today’s market consensus says yes: the eurozone crisis is over. Yes, there was some upheaval at last month’s European parliament elections, but we will muddle through politically. Surveys tell us that European businesses are becoming optimistic. Investors are exuberant. I am often hearing how great the mood in Spain seems to be. All’s well that ends well.
The implication of House of Debt and the S&P study is that the conventional market view of the post-crisis environment is dead wrong. The most likely trajectory is a long period of slow growth, low inflation, and a constant threat of insolvency and political insurrection. If the private sector were to reduce debt in such an environment, certainly on the scale as suggested by S&P, it would be a lot harder and possibly bloodier than any of the adjustment we have seen so far...
... In such an environment I would expect the political backlash to get more serious. More people in more countries will question the benefits of the EU and the euro in particular. Even if deleveraging could work economically – which is not clear – it may not work politically. My guess is that if the Europeans had to choose between deleveraging and default, they will pretend to do the former and end up with the latter. By reducing political instability, they will end up increasing financial instability.
I am just not sure that investors understand the risks. Nor do they seem to understand the implications of recent EU legislation establishing a new pecking order of who pays how much and in what order when a bank fails. When the house of debt collapses, it is they, not the taxpayers, who come first.
Como recordatorio, el gráfico de hace dos días.
No hay comentarios:
Publicar un comentario