Archive for the ‘Debt’ Category

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Spain Will Default (or Need a Bailout).

In Debt on April 2, 2011 by CQCA

Spain’s sovereign debt has exploded since the crisis began. Between February, 2010, and February, 2011, Spain’s debt increased 17.5%. Investors fear that the problems in Greece and Ireland will spread into Spain, but Spain’s economy is much larger than Greece, Ireland, and Portugal’s economies, combined.

Spain’s debt-to-GDP ratio has risen from 32.94% in 2008 to 50.88% in 2010. But a much more important indicator is the maturity of that debt.

Spain owes €120 billion by the end of 2011, and 45% of its €557 billion debt by 2013. According to the OECD, the Spanish government spent €482.6 billion in 2009. The central government would have to cut 24.86% of its 2009 budget just to pay debt maturing in 2011. That would involve cutting all the money it spent on defense, public order and safety, environmental protection, housing and community amenities, recreation, culture, religion, and education.

However, instead of making cuts, the Spanish government has been pushing debt further out into the future.

The Spanish government has decreased the issue of treasury bills with a maturity of less than one year. The total amount of 18 month, 3 year, 10 year, and 15 year bonds have all increased by at least 10% since February, 2010.

About 45% of Spain’s debt is held by Spanish banks. According to the Bank of Spain’s February, 2011 Statistical Bulletin, the Spanish financial institutions had €4.6 trillion worth of liabilities in December, 2010. But Spanish banks are not the largest group of holders of Spanish sovereign debt, foreign governments, institutions, and persons are.

France, Germany, and Italy are the largest holders of Spanish debt. If Spain defaults, this could cause contagion to spread into Western and Central European governments.

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Japan’s Debt Monetization.

In Debt on March 26, 2011 by CQCA

As of January, 2011, the government of Japan owed ¥923.606 trillion. Japan’s GDP in 2010 was ¥477.3 trillion, meaning Japan has a debt to GDP ratio of 193.5%, the highest in the world.

Japan simply cannot repay this by cutting spending or raising taxes. Japan will have to default, or expand the money supply, with the second being a much more likely scenario.

The M3 figure for the Yen in January, 2011 stood at ¥1,085.3 trillion. Assuming Japan inflates its money supply to pay its debts, it would have to increase its money supply by 85%.

This would mark the end of one of the most stable currencies in the world.

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Why Just Focus on Government Debt?

In Debt on March 15, 2011 by CQCA Tagged: ,

Are you worried about the Federal debt going over 100% of GDP?  The overall picture is worse than that.

The Federal Reserve’s flow of funds summary statistics for the fourth quarter of 2010 showed that total U.S. debt was $50.5 trillion.  That number includes household (mortgage, consumer), business, state, local, federal, and financial institution debt.[1] If U.S. intragovernmental holdings are included, the total is over $55.1 trillion.[2] The U.S. GDP for the same period was $14.86 trillion.[3]

This means that the debt to GDP ratio of the entire United States is 372%.  For every one dollar made, $3.72 is owed.  Not only is U.S. government debt approaching 100% of gross domestic product, all U.S. debt (public, commercial, and private) is quickly approaching 100% of world GDP.[4]


[1] Federal Reserve data on Flow of Funds Accounts of the United States, Fourth Quarter 2010.

[2] Treasury data on intragovernment holdings, December 31, 2010.

[3] Bureau of Economic Analysis. “National Income and Product Accounts: Gross Domestic Product, 4th Quarter and Annual 2010.” February 25, 2011.

[4] The World GDP figure is from the International Monetary Fund’s data.

 

 

 

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