A fiscal crisis is brewing in the US, UK, Greece, Ireland, Spain, Japan, as well as the highly touted wunderkind, China. Please consider the latest reports from some key countries.


Bloomberg is reporting Greek Markets Rattled as EU Says Deficit Forecasts ‘Unreliable’.

Greek stocks and bonds tumbled after the European Commission said “severe irregularities” in the nation’s statistical data leave the accuracy of the European Union’s largest budget deficit in doubt. Papandreou’s government raised the deficit forecast for last year to more than 12 percent soon after winning elections in October, from a previous forecast of 3.7 percent, the commission said in its report.

The declines in Greek bonds drove up the extra yield investors demand to hold the country’s 10-year notes instead of similar-maturity German bonds, the benchmark European securities, by 16 basis points to 234, the highest since Jan. 1. The difference averaged 55 basis points over the past 10 years.

Today’s report marks the EU’s latest challenge to Greek statistical data, after revisions in 2004 indicated the country shouldn’t have qualified to join the euro.

United Kingdom

The Times Online is reporting Britain’s recession the steepest for 88 years

Britain’s economy fell last year at the sharpest rate since 1921, despite hopes that it finally emerged from recession in the last three months of the year, according to a respected economics forecaster.

For the year as a whole, the economy contracted by 4.8 per cent, a bigger fall than in any year of the Great Depression and the biggest contraction for 88 years.


The New York Times is reporting German Economy Contracts 5 Percent in 2009.

Germany’s economy contracted 5 percent in 2009 amid the global economic downturn, by far its worst performance since World War II, official data showed Wednesday.

”What was striking in 2009 is that both exports and capital formation in machinery and equipment slumped heavily,” the office said in a statement. ”Foreign trade, which in previous years had been a major driving force for growth in the German economy, slowed down economic development in 2009.”

Doctor Doom On The Coming Crisis

The above articles are but a tip of the iceberg in reports on countries struggling to find a self-sustaining recovery. I highly doubt it, and so does Nouriel Roubini.

Indeed, Nouriel Roubini, often referred to as “Doctor Doom” is warning about The Coming Sovereign Debt Crisis.

In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were a stark reminder that unless advanced economies begin to put their fiscal houses in order, investors and rating agencies will likely turn from friends to foes.

Going forward, a weak economic recovery and an aging population is likely to increase the debt burden of many advanced economies, including the U.S., Britain, Japan and several eurozone countries.

In 2008 and 2009, the decisions by these governments to do “whatever it takes” to backstop their financial systems and keep their economies afloat soothed investor concerns. But if countries remain biased toward continuing with loose fiscal and monetary policies to support growth, rather than focusing on fiscal consolidation, investors will become increasingly concerned about fiscal sustainability and gradually move out of debt markets they have long considered “safe havens.”

The UK, Spain, Greece and Ireland will face sovereign risk pressures, especially if their fiscal imbalances are not addressed immediately. Some eurozone members are quickly approaching their debt sustainability limits as deleveraging through devaluation is not an option for these countries. Countries like Germany—whose fiscal imbalances have deteriorated largely due to the economic and financial downturn—might have a greater capacity to stabilize their debt ratio. The U.S. and Japan might be among the last to face investor aversion—the dollar is the global reserve currency and the U.S. has the deepest and most liquid debt markets, while Japan is a net creditor and largely finances its debt domestically.

States In Serious Trouble

In the United States, a fiscal crisis is hitting states like Arizona, Illinois, Kentucky, California, Virginia, and Illinois. California has a whopping 56% deficit as a percent of its General Fund Budget according to the Center on Budget and Policy Priorities.

California Cash Crunch

Yahoo!News is reporting California debt rating cut as cash crunch looms.

California’s main debt rating was cut on Wednesday by Standard & Poor’s, which said the government of the most populous U.S. state could nearly run out of cash in March — and another rating cut might follow.

“The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell … that’s where I think it would get interesting or hairy,” said Eaton Vance portfolio manager Evan Rourke.

S&P;’s downgrade was overdue because the state’s revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J. Sims Co Inc in Iselin, New Jersey. “Frankly I can’t understand why it took S&P; so long,” he said. “They could have made that decision back in September.”

Larkin said the three major rating agencies will hold off on more downgrades to California’s credit rating to avoid roiling the municipal debt market, even in the event budget talks between Schwarzenegger and lawmakers drag on.

“They’ll give the state an awful lot of rope,” Larkin said. “For a state to go below investment grade would cast a pall on every state and local issuer out there.”

Rating Game Scam

There is little doubt California should be rated as junk already. Dick Larkin notes they give the states a lot of rope and wonders: “Frankly I can’t understood why it took S&P; so long.”

What takes so long is one of two things, perhaps both.

1. Sheer incompetence by Moody’s, Fitch,and the S&P;
2. The ratings model itself, encourages ridiculously optimistic ratings

The big three rating agencies get paid on the quantity of debt they rate not the quality of their ratings. The higher they rate, the more business they get. For more on the problem as well as what to do about it, please see Time To Break Up The Credit Rating Cartel.

The big three did not downgrade Enron until after it blew up, and held of on downgrades of GM, Ambac, MBIA and others with share prices hovering just above zero.

Until the model changes, we will continue to see this kind of corruption and incompetence, for the simple reason the model is designed to reward corruption and incompetence.

Thus, California will not get downgraded to junk no matter what California does, short of default. None of the big three will risk roiling the municipal debt market because it would hurt their own profits to do so.

My prediction is the municipal market will suffer the consequences regardless of what the big three do.

Markets Will Sort This Out

The market will eventually sort this all out. In the meantime, market participants are getting wildly bullish on recovery prospects when it nothing more than a mirage, fueled by unsustainable amounts of spending in China, the US, UK, and literally everywhere one looks. Money supply in China is growing rampant at 30% a year. China is overheating, producing goods destined for nowhere and houses no one can afford.

In the US, there are 27 Million People who want full time employment and do not have it.

Spending money we do not have, borrowed into existence on the backs of future taxpayers, can never produce a recovery. The current improvement in economic conditions is simply an illusion. It’s a Swiss Cheese Recovery Without The Cheese. Take away the stimulus cheese all you have is holes. That unfortunately is the true state of this recovery.

Meanwhile the Fed H.6 Money Release shows Real 3-month and 6-month M2 is contracting, with real M2 yoy at effectively 0%.

Combined with the yoy increase in the price of oil, the risk is rising for a double dip.

M1 is rising at no more than the ongoing increase in government spending/GDP, implying that there is little or no underlying private sector investment and spending growth.

Eventually this will matter. Today was not the day.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List