Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that Standard and Poor's has put America's AAA credit rating on negative outlook, warning the world's biggest economy may not be able to fix its fiscal problems before 2013.
The US government is currently running a budget deficit of almost 11% of GDP and more than 40% of its spending is funded through borrowing, some of it from the US Federal Reserve through its money printing programme. See more here at Bloomberg.
The Dow fell as much as 1.4% on the ratings outlook. The change was somewhat surprising, given the position of America in the global economy and its ability to use its status as holding the global reserve currency to effectively force growing amounts on of debt on the world's savers. See more here at Reuters.
Meanwhile the Euro fell sharply and the the FTSE 100 and DAX stock market indices in Britain and German slumped after new problems emerged in Greece.
The IMF was reported to have recommended a restructuring of Greek debt, bowing to the inevitable after almost a year of bailouts. Many fear restructuring will force European banks and pension funds to book big losses and seek new capital, again stressing the global financial system.
The Greeks have denied they need a restructure, but financial markets are now pricing in a 65% chance of a default unless a restructure happens. See more here at Bloomberg.
The 2 year Greek bond yield rose to 20% and Spanish bond yields rose, raising fears that the biggest domino in Europe's Sovereign Debt Crisis may fall.
Also, surprising Finnish election results also unnerved markets. The True Finns party, which was against the Greek bailouts, won 19% of the party vote in elections over the weekend. See more here at Bloomberg.
Turmoil on global markets matters for New Zealand because it makes it more difficult and expensive for New Zealand to roll over its short term foreign debts, which are currently running at around 50% of GDP.
The New Zealand dollar fell back towards 79 USc overnight as markets looked to reduce their exposure to 'riskier' currencies and after lower than expected inflation figures here saw wholesale interest rates drop slightly. See Alex Tarrant's article here.
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20 Comments
This piece is perhaps a little counterintuitive.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/8459722/US-and…
If nothing else, S&P's bombshell highlights the hopeless mess the world's largest economy has managed to get itself into.
And GregPytel is back
A rating agency S&P kept America’s credit rating at AAA. However for the first time in its 70 years rating history of the US debt, the agency cut its outlook from “stable” to “negative”. A negative outlook means there is a one-third chance of a downgrade below AAA in the next two years. It is yet another sign that the financial crisis is progressing as expected. This can hardly be called a blow for US debt. It is simply a well result. One can also reasonably expect a US grand finale in some form predicted in an article "A US way out?" two years ago.
http://gregpytel.blogspot.com/2009/04/us-way-out.html
However the current financial crisis does not resemble the 1930’s depression in its root cause. The current crisis is a result of a giant global financial pyramid collapse that left a quadrillions of dollars liquidity hole. Therefore President Obama’s actions may not be modelled on the New Deal, but on some other premise…
Considering the current US debt and its rate of increase, the US borrow and spend solution reminds an insolvent person who keeps on borrowing money, as long as there is anybody “silly” enough prepared to lend him. He knows that at the end of this process he will not pay anything back but simply declare bankruptcy, write off the entire debt and start its financial life anew.
Just found a good article on the subject
http://viableopposition.blogspot.com/2011/04/trigger-point-for-united-s…
The choice made will depend on how the government balances the needs of its constituency versus the needs of its bondholders. A debt crisis will arise when bondholders reach the conclusion that the risk of non-repayment outweighs the benefit of collecting interest payments on their investment. It is very hard to quantify just when bondholders will decide that the risk outweighs the benefit and when governments decide that sovereign debt default is the wisest choice. Fortunately, observations about the point of sovereign debt default do exist and have been thoroughly examined by Carmen Reinhart and Kenneth Roghoff in their book "This Time is Different". Here is a summary of their observations:I have posted about America's options as the current world empire before. My pick is default and a shift from borrowing to keep the world safe for democracy to charging for the service. I am not aguing ideology here, just stating what I believe will transpire. Lets face it the current fiat currency system is broken and something has to give.
But we dont want to end up with governments that are now free to start borrowing or raising taxes. We need to go through the process of delevegaing and huge cost cutting in the state sector. Undisciplined state spending lead to many of our present problems, any fix that leaves the state with total control will just fail again.
Well I have to say that the same behaviour you point out got us into this mess, will see us go deeper. Unfortunate but it is jus the way it goes, we don't actually have democracy and the government will do what ever the hell they want. NZ's being such an apathetic bunch means we will see a crisis before they wake up and smell the roses. Probably a bit of hunger might stir them up eventually. Human behaviour is predicatable in its short memory, which I think is the gist of that Reinhart and Rogoff piece.
You are just along for the ride for now.
Build and Earthship is probably good advice coming from some quarters.
meanwhile a Texas education faclity has asked their mutual fund manger to convert their cash holding into close to a billion us dollars in gold...as gold punches through the roof to record highs..what could this mean..
Government just scored an extra $12m courtesy of Telecom being fined for anti-competitive behaviour.
http://www.stuff.co.nz/business/4904345/Telecom-fined-12m-for-anti-comp…
Fletchers monopoly of the rebuilding of Christchurch is perhaps a better comparison VL.
I have no problem with the DIRA raw milk provision being tagged for domestic consumption only, that is, you cannot use it for export product. Thing is OCC and Synlait etc wouldn't want it then. Nothing stopping them putting competition in to the domestic market, unlike the rebuild of Christchurch.
"Also, surprising Finnish election results also unnerved markets. The True Finns party, which was against the Greek bailouts, won 19% of the party vote in elections over the weekend."
I don't think that there is anything surprising about the Finnish election result. People are getting fed up at having to bail out others who have made poor investment decisions. The Finns are angry about the Greek bailout. NZ'ers are angry about the SCF debacle. Similarly it seems that the banks will be bailed out in the Crafar case by selling the farms to the Chinese because they are the only ones who can afford to pay too much.
I think a lot of countries are going to see more of the "True Finns" nationalist type parties getting a much larger share of election votes.
Interesting:
Western Australia will need 40,000 more workers over the next two years to cope with demand from major resource industry projects.
http://www.skynews.com.au/video/?vId=2341261&cId=Programs&play=true
Also talk of a 'brain drain' in Western Australia as workers go overseas and 'out East'...But high Aussie$ seen as an incentive to bring expat workers back.
Can be applied to NZ?
Does the ratings agency S&P merely react to populist opinion , rather than do their own hard and in depth research ?
....These are the silly feckers , who along with Moodys and with Fitch , signed off mega blocks of CDO's as AAA-rated debt , when in actuality it was toxic , below junk status ....... Without their stupidity , the US housing bubble would've gotten pricked years earlier .......
And now they put the US government on negative credit watch ....... Do these silly arses at S&P watch Fox News or something ?
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