Things EFSF Will Not Fix

Expecting a bunch of bureaucrats to fix a decade's worth of accumulated imbalances in a matter of months with some alphabet soup ain't gonna work. What will work? Peripheral countries deflating with respect to core. Not only will it work, but it is the only thing that will work. Pictures follow. Toodles!

Cumulative Inflation relative to Germany. (i.e. Germany CPI would be a flat line at zero)

Balance of Trade (Exports-Imports) for GIIPS

GIIPS Balance of Trade as a % of GDP

Balance of Trade for selected European economies

Balance of Trade for selected European economies as a % of GDP

Is the Elite Liberal Media instigating panic? (UPDATE-2)

The title is just a joke, although the NYT isn't exactly my go-to when it comes to financial reporting. Anyway, Barry Ritholtz ran the following chart from the NYT today.

Which is cool and all, but by my calculations the debt looks quite different. Granted, this data is like 5 weeks old, but the gaps are so large in some cases that something must be wrong because there hasn't been that much activity in sovereign issues/redemptions. I'll pull up the data on Bloomberg some other time and give you an update, but at first glance, there is something deeply wrong with this graph. Either this is not sovereign debt or someone made a mistake. Maybe they are counting bank debt too? I don't know, but comment if you do. Take in mind NYT is reporting the debt in dollars. Considering EURUSD = 1.27 at time of writing, I think someone fucked up.


By my calculations:

• Ireland is closer to EUR 200MMM or US$254MMM
• Italy is more like EUR 1,050MMM or US$1,335MMM
• Spain is EUR 339MMM or US$430MMM
• Portugal is EUR 97.5MMM or US$123MMM
• Greece EUR 260MMM or US$330MMM

UPDATE-1: I got a reply back from Bill Marsh at the NYT. His reply was so prompt and complete, that I feel bad I even make the joke about them. They really are an exemplary organization. They embrace digital media, new content delivery and monetization and are huge supporters of Open Source Software and open data initiatives. Apologies out of the way, here's what he said

the figures come from this report and are for the end of 2009. the data starts on page 74 and covers all countries (note that the numbers for each european country’s debt-holders are spread across pages 74, 78 and 82).

http://www.bis.org/statistics/provbstats.pdf#page=74

these figures include both government and bank debt. hope that helps!

Mystery solved! The data comes from the Bank for International Settlements. Unfortunately, this isn't such good news, and here is why:

• OK, I lied, there is one piece of good news, the weakening Euro reduces the dollar value of these liabilities, so, in that respect, they are overstated.
• There has definitely been increased borrowing in the part of sovereigns since December 2009, particularly the ones in question which have significant budget deficits. Even the data I posted understates this, since there has been debt placements since then.
• The numbers appear to exclude internal debt, which means total liabilities are actually understated
• With widening spreads and downward rating revisions, banks might have to tighten lending to offset changes capital that is marked-to-market. Although, no big deal since all this stuff can be repoed at the ECB.
• The Euro zone could see capital flight, which would widen spreads and put stress on the banks as assets move, forcing them to either finance their assets with debt or liquidate some of them, putting additional downward pressure on the assets
• That Ireland number is SCARY. Not a lot of it is sovereign debt, a lot of it is bank debt, but that's too-big-to-save territory for the Irish government. If they face another banking crisis, they're going to need to go outside for help. It's $206,429 of debt per-capita!

Compare with: (credit: Marc P @ Big Picture)

• Ireland  $206,429
• Portugal  $26,729
• Spain  $27,160
• Italy  $24,096
• Greece  $22,056
• USA $38,737 

By the way, this is why I hate it when they convert figures to dollars from their original currency. Liabilities and assets should be listed in the currency they are denominated in. Exchange rates are only valid for a very brief point in time, making the data kind of useless or hard to use once that piece of information changes.

UPDATE-2: It has been brought to my attention that the Ireland figure is probably vastly inflated by the debt from financial organizations with operations in the IFSC. My apologies for this glaring omission. (MB - 05/17/2010)

More on the PIIGS Debt Coming Due

Yesterday I wondered about whether all of this PIIGS debt panic was warranted. I don't contest that there is debt problems that need to be fixed (and not just in Southern Europe), but I also don't think that there's any reason to be alarmed over the debt coming due in the next couple of months. If you would, however, want to be alarmed by the debt coming due in 2012, I'd completely understand. The reason I'm not alarmed is because those euros have to go *somewhere* once these bonds start coming due and while there may be some movement away from Greece, it's not like liquidity is going to suddenly dry up for sovereign issues and Euro area countries are going to be stuck, unable to refinance their debt. Yeah, they might have to refinance it at higher yields, but they will refinance it. Considering how low interest rates are right now, I wouldn't be surprised if the debt they are retiring is going to be refinanced at lower rates, reducing the debt service expense. I'm working on this last point right now, but it's very labor intensive.

Regardless of how many bad things you hear about these countries in the media, it's still sovereign debt, not corporate junk. It's not low-rated, you can repo it at the ECB and, most importantly, the other European banks are buying it. And you know what? As long as they can be repod for liquidity, the banks will keep buying these bonds and strolling carefree down the meadows of borrow short, lend long. Yields may or may not accurately reflect default risk, I do not know, but barring a huge, sudden jump in interest rates, this is just not that big of a deal. And since I don't see inflation in our near future, I'm not too concerned about that.

In the mean time, a weaker Euro will probably help support tourism and give a boost to manufacturing, buying everyone a little more time.

PIIGS Debt Coming Due: Is it really an issue?

Der Spiegel published the following graph as part as the ongoing Portugal / Greece / Italy / Ireland / Spain crisis porn.

Let's not all just freak out just yet. Let's do our homework:

As of this writing the PIIGS are borrowing ta the following rates (Economist 3/20 -3/26):

• Portugal: ??
• Ireland: ??
• Italy: 3m @ 64bp and 10y @ 390bp
• Greece: 3m @64bp and 10y @594bp
• Spain: 3m @ 66bp and 10y @ 384bp

The economist also tells us that the average maturity of this debt stands as follows

• Portugal: 6.5 years
• Ireland: 6.8 years
  
• Italy: 7.2 years
• Greece: 7.7 years
  
• Spain: 6.7 years

Now, what I'd like to know is when this debt coming due was issued and at what cost to the government. If the yield at issue was higher than their current borrowing rates, well, that's not really a problem. Second, who owns all this debt? The local banks? foreign banks? regular people? If it's mostly local banks that hold this debt, i don't imagine the refinancing is going to be much of an issue, after all, the banks have to do something with that cash. Could rates move up as the supply of debt overwhelms the demand? Yes. Do I think this is as big of a deal as it is being painted to be? Hell no.