Government Debt Is The Boogie Man In The Closet

IMF Says Government Debt Poses Biggest Risk to Growth (Update1)

April 20 (Bloomberg) -- The International Monetary Fund cautioned that rising government debt has replaced financial industry stress as the biggest threat to the global economy and cut its estimate for asset writedowns by 19 percent.

Banks reduced the value of loans and securities by $2.28 trillion since 2007, two-thirds of which had been realized by the end of 2009, down from the IMF’s October estimate of $2.81 trillion, the fund said today in its Global Financial Stability Report. About 39 percent of the writedowns were in U.S. banks, 29 percent in the euro area and 20 percent in the U.K., the IMF said.

While the global economic recovery has “gained steam” and risks to the financial system have subsided, concerns are rising for sovereign debt issued by advanced countries that bailed out banks, the IMF report said. Governments need “credible, medium- term” plans to reduce deficits and some nations need to do more to revive the flow of credit and boost growth.

“The deterioration of fiscal balances and the rapid accumulation of public debt have altered the global risk profile,” the IMF said. “Vulnerabilities now increasingly emanate from concerns over the sustainability of governments’ balance sheets.”

Pacific Investment Management Co., manager of the world’s largest bond fund, earlier this year identified the U.S., Italy, France, Greece, Japan and the U.K. as economies sitting in a “ring of fire.” Each has debt above 90 percent of gross domestic product or the potential for it to rise there soon, slowing economic growth, Pimco said.

Greek Crisis

The cost of insuring Greek sovereign debt against default surged to a record yesterday and the premium investors demand to buy 10-year Greek government debt over benchmark German bunds rose to the most since before the euro’s debut.

“Longer-run solvency concerns could translate into short- term strains in funding markets as investors require higher yields to compensate for future risks,” the IMF said.

Greece is a wake-up call,” Jose Vinals, director of the IMF’s monetary and capital markets department, told reporters at a briefing in Washington yesterday.

The spread of sovereign risk to banks and “through the real economy threatens to undermine global financial stability,” the report said.

“The overall credit recovery will likely be slow, shallow, and uneven,” it said.

In Asia, a “booming” real estate market poses “risks to financial stability as banks are increasingly vulnerable to a price correction,” the report said. Most mortgage loans in Asia have floating rates, a factor the IMF said may mean “the widely anticipated rate hikes in the region will increase the burden on household balance sheets.”

“Moreover, as many municipal budgets in China tend to rely heavily on revenue from land sales, a real estate market downturn may put their fiscal situation into question,” the report said.


The Ponzi scheme that is central banking and socialist large government with its appetite for spending the income of future generations is rapidly unwinding. 
All the public borrowing that has occurred to fund private losses has simply moved the risk to the public balance sheet. 

There is no escape from the risk and malinvestments. 

To date, the crisis has been delayed, not resolved. 

We have signals from China (SSE) that the economy is not as healthy as advertised, and huge concerns that the double digit growth rates will come crashing down to earth once the property bubble bursts, bringing down municipal revenues with it.

We also note that the UK is in a very poor fiscal state. With the political uncertainty of the upcoming election and the new fiscal policy that will result, we would not be surprised to see a negative reaction in the bond market.

Over the next week or so we will examine the balance sheets of some nations that are in this bloggers opinion, vulnerable or insolvent.