Sovereign Debt Superstorm

‘Perfect Storm’ May Threaten Global Economy

A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.

There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

“We’re still running over a trillion-dollar budget deficit this year, next year and most likely in 2013,” Roubini said in a speech in Singapore on June 11. “The risk is at some point, the bond market vigilantes are going to wake up in the U.S., like they did in Europe, pushing interest rates higher and crowding out the recovery.”

In Europe, officials need to restructure the debt of Greece, Ireland and Portugal, and waiting too long may result in a “more disorderly” process, Roubini also said.


In my view, much of the estimates on the "recovery" of the economy are far too optimistic.

Even notoriously bearish economic Roubini estimates a two-thirds chance of "anemic but OK" recovery or better.

As the debt continues to build since western democracies continue to run large budget deficits, a point of no return first looms, and then passes a tipping point.

Portuguese, Irish Government Bonds Lead Decline on Greek Bailout Concern

Portuguese and Irish 10-year bond yields rose to euro-era records as securities from Europe’s most indebted nations declined on speculation a stalemate is developing over Greece’s second bailout.

German 10-year bund yields fell to a five-month low as investors sought the euro-region’s safest assets. Two-year German yields reached the lowest since March 17, while the spread between Portuguese 10-year bonds and German bunds widened to a record. Luxembourg Prime Minister Jean-Claude Juncker said a bailout for Greece must include “voluntary” investor participation. Costs to insure Greece, Ireland and Portugal’s debt against default reached all-time highs.

“The uncertainty surrounding Greece is weighing on peripherals,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There’s a lot to be sorted in a short space of time. The market is clearly preoccupied with the outcome of the Greek debate.”

The Portuguese 10-year yield climbed 21 basis points to 10.64 percent as of 4:13 p.m. in London. It reached 10.72 percent earlier. The 3.85 percent security due April 2021 dropped 0.87, or 8.7 euros per 1,000-euro ($1,437) face amount, to 59.78. The two-year note yield rose above 12 percent for the first time since May 10, reaching 12.04 percent.

Credit-default swaps on Ireland soared 27 basis points to 740 basis points, Portuguese CDSs climbed 23 to 765 and Greek swaps jumped 21 basis points to an all-time high of 1,598, according to CMA.

A second bailout for Greece in little more than a year must involve the “participation of private creditors,” Juncker, who leads the group of euro-area finance ministers, said in an interview on Radio Berlin-Brandenburg on June 11. “It must be voluntary,” he said.

Please again consider this chart courtesy of The Daily Reckoning:

Note that as government debt passed the 100% of GDP level, the growth rate sank. Also notice as the debt passed this level, interest rates rose gradually, and then soared, crushing the economy.

Unfortunately, this is what is likely in store for most western democracies.

The United States, once state and federal debt is combined, passed the 100% of GDP level in 2010, just as Greece did in 2007. Many other nations are near this level, including Canada, once provincial debt is included.

This does not paint a happy picture for fiat currencies or government bonds in the longer term.

In the short term, I am quite bullish on the US dollar as the Euro weakens from the Greek, Portuguese, Irish, Spanish, and Italian debt problems.

During this period of uncertainty, as Europe struggles and the dollar rebounds, I anticipate gold to remain flat or perhaps drop slightly.  This may be one of the last good buying opportunities to exchange fiat paper for that store of value, gold.

In my view, most government officials, economists, and bloggers are brainwashed by Keynesianism, and unable to perceived the danger we face.  As if the solution to a debt problem could be more debt!

Their solutions of bailout band-aids and chewing gum trying to hold together a centrally managed market economy that desperately wants to correct itself of filth, corruption, dirt and debris, will ultimately fail.

The two big questions are on what time-frame, and how severe with the depth and breadth of the correction be?