The most important news of this week was connected with US and debt ceiling debate. But let´s start as usually with Europe. Austerity measures are more and more unpopular. One of the examples is Ireland today. Their budget proposal is not as austerity budget as it should have been. Ireland will drain a further 1.5pc of GDP from the economy in fiscal cuts and taxes over the next year but against the plan of 1.8pc. Finance minister Michael Noonan told this week that the nation can take no more. Ireland took €60 bn. liabilities of Irish banking sector in 2008 not to cause chain reaction within the Europe. But this step brought total disaster for the country and their public finances. Today´s public debt is 123 pc of GDP and budget deficit is running on 7.3 pc GDP.
Ireland is not alone. We still emphasize that the next problem of Europe will be very probably Spain. Their 10 Y treasury rates are still on sustainable levels, actually they are almost on the year lows but there are many problems within Spanish banking system. Bad loans in the country amounted to $247 billion in August what is a new record-breaking 12.12% of all loans outstanding and what is 30% higher than any previous years. This could end only with the help of the ESM or direct interventions from ECB. So be prepared.
Another sinner is Italy. It must introduce new austerity measures. Italian politicians have decided to sell some state assets. If you are interested you can buy more than 50 historic sites among them Grand Inquisitor’s villa, Orsini Castle near Rome, which was built for Pope Nicholas III in the 1270s or Villa Mirabello near Milan, built in the 18th century by Cardinal Durini, the Grand Inquisitor of Malta. The plan is to raise more than 500 million euros and Italians hope that castles and villas will be converted into the touristic facilities, creating much-needed jobs for the country’s struggling economy.
There is no advice for hopeless. We know how any asset bubbles end; by bursting. And we know what reasons behind the last one bubble in the US were – easy money and enforcement of regulations supporting non-credible owners to borrow. Similar situation is happening in the UK today. U.K. house prices rose to a record last month and government introduced this week a new program providing government-guaranteed mortgages to buyers with smaller deposits. Bank of England is easing and leaving basic rates at low levels. Does not seem to you at least a little bit similar to US before 2008?
China was declaring this week that the dollar regime as reserve currency is unsustainable. The China’s official Press Agency released news concerning U.S. debate about the debt ceiling that it is time to start considering building a “de-Americanized world” which would not be based on U.S. good or bad news. Does China want to lead the movement? Not so fast. We have to realize that China is one of the biggest U.S. debt holders. Another interesting point is that it seems to be very probable that during this political turmoil they were buying nothing else as US treasuries. China’s foreign-exchange reserves rose last quarter by the most in more than two years and hit a record $3.66 trillion at the end of September. We won’t know for a while where the money went, but a big chunk very probably must have gone into US Treasuries. So as any other super political power these days China is declaring opposite what it is actually doing. But this is a new normal world. We have to accustom to it.
During the last week we had the most news concerning the situation in the US. As the new normal the triple “A” rating of U.S. was placed on rating watch negative by Fitch Ratings, which was connected with the fact that the government is not able to negotiate to raise its borrowing limit. So, more debt means better rating; at least for now. Finally the Senate passed the bill to reopen the government and allow fund new spending till January 15th 2014 and prepare room for negotiation about the extending of the debt ceiling. It is estimated that the debt ceiling should have been raised at least for another $ 1.1 trillion.
Politicians let themselves time till December 13 th as a target date for budget negotiations. In other words we will see the same situation as today at the beginning of the next year. What was quite interesting was reaction of the official China’s credit rating agency Dagong which has downgraded the U.S. rating from A to A- due to the fact that the fundamental situation that the debt growth rate significantly outpaces that of fiscal income and GDP. This is correct. But Dagong is not recognized by the SEC, and it does not have the influence of the big three: S&P, Moody’s, and Fitch. Other fact is that China itself is in the very same situation as US and this statement was more or less political one concerning the above mentioned fact of op-ed calling for a “De-Americanized” world. And what should we afraid more? FED. The Fed’s balance sheet increased by over $50 billion in one week, by $100 billion in the past month, and by just shy of $1 trillion in the past year. That is what we should be aware more. US debt is on the second place.