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14 January 2012


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Norbert Salamon


The following is public dept as per EU and CIA for 2010, sortable by %GDP a sper Eurostat/CIA, or by % per IMF


I am not up to analyse political based ratings Chinese, USA, France, and various non well known US raters, nor am I up to including in above table the financial debt of various nations, where the UK is the worst by a long shot. It is dubitable that the UK figures in public debt cover the toxic shares of all the rescued banks - as far as I am aware the Exchecker thinks they are marked to value!!! and as such are a national asset.



I am not European so cannot provide the perspective that you desire. However, as a former macro-oriented money manager, I believe the credit rating downgrades don't mean much. The ratings agencies are as usual behind the eighth ball. They are only affirming what the credit markets have believed for some time. Note that Treasury yields have trended down even after the rating change by S&P.

I think it would make most sense to keep a close eye on the ECB balance sheet (note that their LTROs are their current method of money printing) and the TARGET balances of the Bundesbank; Euro credit markets (specially bank debt rollovers); and the Euro in forex markets.

Norbert Salamon

I wholly subscribe to the notion that the 3 largest rating againcies are behind the eigth ball.

I am tempted to disagree with the effect of the market on US Treasury % rate [various machinations by the Federal Reserve have a lot to do with this].

It is notable from the CIA/Eurostat database that the US Public debt is over 100% - soon to be 108%+ as the President requested a rise in the Federal Public Debt ceiling of some $1.2 trillion - at present, even when excluding various State and Muni issues, all of which are included in Eurostat data for European nations.

IMHO no nation can ever make a major dent in debt after that surpasses 100% of GDP - there has to be a default or a serious debasement of the currency vis-a-vis others [or Gold]. Similarly it is almost impossible after 100%+ GDP debt ratio to have any meaningful growthin the economy as interest expenses eat up the tax-base.


I'm European but way under qualified to to offer authoritative opinions on these matters, though I do read widely and have strong opinions on this subject.

For now I'll simply point out that Europe's downward rating is brought to you by the same dishonest bastards that told the world Goldman Sachs et al were selling triple A investments knowing full well they were toxic sub prime mortgages.


Haralambos wrote from Europe with this. pl


"Dear Col. Lang,

I am writing in response to your request that a European weigh in on the implications of the recent downgrade of France’s rating. I am not sure this is what you had in mind. I am not a European; I am an American who has lived in Europe for more than 30 years working in both Greece and Portugal, two of the countries suffering among several more that are being crushed under the austerity programs imposed by the so-called troika of the IMF, the ECB, and the EU. I also have numerous friends, relatives and former-colleagues in Ireland and the UK as well as France. I am not an economist, but I do follow economics at the international level pretty closely.

Among the implications I see in this entire mess, the most moving are the human toll and the anger and outrage among those suffering. The recent downgrade of France has produced a firestorm in the French media and among much of the French populace if media reports are to be believed. It has also re-ignited much anger at the ratings agencies due to the view on the street that they have been hand-in-glove with the big money folks—banks and investment advisors, and hedge funds that are perceived to be mere vultures in that they offer advice to governments and their clients then bet against the rates by various hedges, re-insurance schemes, and government bailouts of the financial interests. Many of your readers will know more about this than I do. On the situation in Greece in particular and in Europe as well as globally, I would point folks to Yanis Varoufakis’ blog: http://www.nytimes.com/2012/01/14/education/early-admission-applications-rise-as-do-rejections.html?ref=general&src=me&pagewanted=all and his recent book. He is a Greek economist and a professor at the University of Athens.

For those interested in the human toll in Greece, I would suggest http://www.guardian.co.uk/world/2011/dec/18/greek-woes-suicide-rate-highest
and http://finance.ninemsn.com.au/newsbusiness/8401306/families-abandon-kids-in-greek-debt-crisis

As you and many of your readers know, Greece has one of the highest per-capita expenditures on military armament in the world: http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures_per_capita
Much of this has gone and does go to the US, France, and Germany.

As something of an aside, but perhaps one of the most important consequences, and something that I know more about than anything and something that I think is very important, the economic problems in Europe are producing a massive brain-drain of the young—the best and brightest from Greece, Portugal, Ireland and further afield. I work helping them emigrate to studies at all levels and to jobs, usually in academe or technology. These are very well-educated folks; they are truly economic refugees; but they are not what our Statue of Liberty implores in Emma Lazarus’s: "Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"

Thus, I think the recent downgrade of the French rating has many short-term implications for not only Greece but for the future of the euro, the future of Europe, and for the populations. In the medium-term, I think it might be useful to read the thoughts of others, country by country, region by region and across sectors of the economy, military, and educated future of our challenging world.



Colonel, your 'assignment' calls for a free spirit,( not allied with academia, nor politics, nor industry or commerce ) a person with encyclopedic knowledge of economy and politics to write something wise and true... I wish someone will take up your challenge because I am also looking for something understandable, and free of hidden bias.
In meantime I have listened to Fareed Zakharia today - he had Paul Krugman and Ken Rogoff discussing European debt crisis - both recommended that Europe should introduce inflation of 4% or more. Some Europeans want this also, especially the French-Italian dominated Board of the ECB (Coure and Draghi)- but Germans will not like it and it may lead to severe political changes in Germany - in the long run it may lead to re-emergence of nationalisms and chauvinisms on all sides. The US is not an innocent by-stander in this either. The world is so complicated that I come to believe what Russians say : "bez wodki nie rozbieriosz" (without wodka you do not understand).
Halambos' entry is greatly appreciated.


Bavarian state debt and/or local Hamburg debt is included in the figures for the FRG?

In any event, I don't believe the fact that California may issue its own debt has any bearing at all on US fiscal policy or marketability of its own debt. As far as I know, the US doesn't guarantee state or local debt any more than it guarantees debt of any other sovereign.

Ben Hammer

NS points out, "it is almost impossible after 100%+ GDP debt ratio to have any meaningful growth in the economy as interest expenses eat up the tax-base."

If government borrowing is driving up interest rates and bringing borrowing by the private sector to a halt (unable to afford the prohibitively higher interest rates), we'd expect the bellwether rate of 10 year T-notes (bonds) to be sky-high: http://research.stlouisfed.org/fred2/series/DGS10

Instead, we see it's at a record low.

RAISER William

Pat, You probably have better European sources, but here's a shot at responding to your request:
Loss of Triple-A Credit Rating as Viewed from One European Country, France

What does it mean for France to lose its triple-A credit rating? From an economic point of view, not very much. The credit agencies did not notice something new. No asteroid is about to strike France, no missiles are incoming, the plague has not reappeared, the government's not about to default, no dramatic change has occurred or been discovered; so France will continue to receive loans and at about the same rate as in the past.

However, the loss of triple-A rating for France may have political consequences and should shift our attention.

France will have presidential elections in April and May. The loss of triple-A rating reflects poorly on the governance skills of Sarkozy, our current President. Sarkozy, like many other political leaders, has a rather low approval rating. The various opposition parties, we have several in France, will use this rating loss as a campaign issue, as the Republicans will in the US against Obama. Will this be a key issue for the outcome of the presidential race or at least a big enough one to knock a few percentage points off Sarkozy's vote total? The next few months will tell.

The rating agency commented on why they down-graded the triple-A rating of France, and that of many other European countries. Their comment should shift our attention.

Most of the world focuses on the "PIGS" (Portugal, Ireland, Greece and Spain), Greece in particular, and now Italy. The financial crisis in the eurozone has been viewed as a morality play, the result of profligate spending by the PIGS the excesses of which are coming home to roost. There is truth to that in the case of previous Greek administrations, but the pre-crisis economic indicators of for the other countries put them in the class of shining positive examples of how to successfully run a country. The sudden halt of credit as a result of the financial crisis rather than profligacy on their part led to their current crises and made that of Greece worse.

If one focuses on the PIGS+Italy and their "poor governance", we see the obvious solution: mend your ways, accept austerity measures and dig your way out of the hole you created for yourselves. This forms the core of the solution proposed in various guises by the leaders of the eurozone, particularly Germany and France. The rating agencies calls this focus into question.

The rating agencies notes the "lack of competitiveness" in the peripheral countries of the eurozone as a core problem, which the European leaders try to ignore. What does that mean?

The PIGS now run large current account deficits (except for Greece, they didn't prior to the financial crisis), i.e., they import more than they export. Others, notably Germany, can and do "produce more competitively"; so buy German products rather than local products. What's to be done?

If the PIGS had their own currency, which they don't since they are part of the eurozone, they would devalue. Devaluation would make imports more expansive and their exports less expensive. This would result in a decline in imports and an increase in exports leading to a current account balance, but the euro closes that option. The equivalent alternative requires a reduction in wages and prices in the PIGS to "increase their competitivity", possible but VERY difficult to manage. That would require coordinated effort across their entire economies. Imagine doing that for all the businesses in a country: you go first, I'll follow your lead, fat chance. Currency devaluation accomplishes that in one fell swoop by government fiat.

Why is Germany flying high with a current account surplus rather than a deficit? The Germans would have you believe that they are better managers and producers than their counterparts in the PIGS, and there is a grain of truth in that view. The larger truth is that the Germans did devalue, even though they too are in the eurozone, so their product prices are "artificially" low thanks to the euro.

The German government used globalization, and the associated threat of delocalization (moving production to Central Europe or other emerging countries), to reduce or eliminate German wage increases and to reduce hours worked. Because of the precarious situation of their workers, like all others in the developed world including those in the US, Germany was able to impose lower wages. At the same time, Germany increased its VAT (value added tax) thereby further reducing the buying power of German workers. This combined to hold the line on price increases, which made German products more attractive on the export market.

The German "economic miracle" is based on exports, a large current account surplus, that enriches management at the expense of workers, a pattern that may be familiar to Americans. The bulk of those exports go to other countries in the eurozone. Therefore, the German solution can not be applied across the eurozone: not all countries, or even a large number of countries, in the eurozone can, at the same time, have a current account surplus with their neighbors. The German solution has been a begger-your-neighbor solution. The rating agencies note that the eurozone leaders are not dealing with that core problem.

Will our attention shift and the eurozone crisis be identified as a current account crisis? Not likely, at least for a while. Major financial actors benefit too much from defining the crisis in terms of profligacy and the solution in terms of austerity. Austerity puts may public assets up for sale to the private sector at bargain-basement prices. Follow the money. Too many advantages accrue to those with money for the feast to be halted prematurely.

Will the eurozone survive? Germany will work VERY hard to ensure that it does. If the euro fails the Deutschmark will rise in value against other currencies, because of the German current account surplus. German exports will become more expansive. Fewer people will buy those exports, and the German economy will go into a recession.

By all accounts, the Greeks are a special case: they can not pay their debts. They will default in some manner. Who will be hurt? European banks, along with those in the US, hold most of that debt. However, the bankers have hedged their bets with CDS (credit default swaps), i.e., insurance against default by Greece. The bad news, the bulk of those CDS are held by US banks. That's why the US Treasury Secretary has been traveling Europe saying, "You can't let Greece default."

The loss of triple-A ratings by several European countries will have little immediate economic impact as this is old, not new, news. The timing, just before the French presidential elections, could impact that election to the detriment of Sarkozy. The comments detailing why the agencies have less confidence in the eurozone points to the heart of the problem that few have been willing to talk about and many hoped would quietly go away in the midst of moralizing against the Greeks in particular and the PIGS+Italy, in general. Will Europe, and the US, confront and find a solution for the "real" problem? The record is not encouraging.

William R. Cumming

PL! Not qualified in any kind of economics or finance but believe that USA and EU and Euro Zone finances largely decimated by the banksters. Impact in long run is uncertain. In short run will be fun watching the candidates try to explain financial future for all. About 10 critical presidential elections world wide this year including USA.

But in Asia, including both East Asia and S.Asia some interesting financial developments. Top of the list for me is Japan falling into negative territory with its trade balances for the first time since 1963. Note that rich nations like Japan can go a long time before this impacts in dire ways. The USA trade balance is an example. Yet exports and imports for Japan a much more critical number than for the USA.

We almost always see trade balances for the EU and EURO zone as aggregation but Germany one of few there with favorable trade balances. This explains German dominance to me more than any other factor.

Perhaps one of your readers can provide a link to those countries with currently favorable trade balances. Probably some surprises.

And beyond trade balances the currency wars are a crucial factor also.

William R. Cumming

Addendum! The currency wars actually started with President Richard Nixon and his no notice Pearl Harbor attacks launched by the USA during his Presidency.

One recent discussion with it flyleaf comments:

Currency Wars: The Making of the Next Global Crisis by James Rickards. It's summarized as follows:

"How the worldwide currency war, already under way, will soon affect us all.

The debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are unmistakable signs that we are experiencing the start of a new currency war. Fought as a series of competitive devaluations of one country's currency against others, currency wars are one of the most destructive and feared outcomes in international economics. Left unchecked, the new currency wars could lead to a crisis worse than the panic of 2008.

Drawing on a mix of economic history, network science, and sociology, Currency Wars provides a rich understanding of the increasing threats to U.S. national security, from dollar devaluation to collapse in the European periphery, failed states in Africa, Chinese neomercantilism, Russian adventurism, and the current scramble for gold.

James Rickards, an expert who has worked at the highest levels of both finance and national security, explains everything we need to know about this growing global standoff. He takes readers around the world and behind closed doors to explain complex financial and political currents with absorbing firsthand anecdotes."


For those who are interested and willing to weigh through some PMI's and the like, www.economonitor.com presents a wide range of blogs on the matter which are not propaganda (IMO), unlike most media coverage.

William R. Cumming

A high level ECB official today declared the S&P downgrade as part of the launch of a currency war by the USA against the Euro! Drudge Report source.

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