Monaco Credit Crisis
So you are wondering "Who cares about Monaco?" and what does this have to do with the economy or financial markets? I bring it up because according to Wikipedia, Monaco has the highest debt to GDP ratio in the world. With a GDP of $1 billion and external debt of $18 billion, this is an astounding figure, higher than even Zimbabwe, which has external debt of only at 220% of GDP (probably because no one is silly enough to loan them money). Now I know that these numbers are unreliable, like much of the information on Wikipedia. And I don't think that if I told you that these figures are actually taken from the CIA World Factbook that you should feel any more confident in the accuracy of these numbers, maybe less so. The World Factbook even states that their figures are rough estimates. Even if both of the figures were off by 100%, that would still paint a bad picture with debt/GDP ration of over 400%. I don't actually think that there is going to be a default on Monaco's debt anytime soon, but it does serve to illustrate some interesting points.
First, some of the oldest and most wealthy states in the world are grossly overleveraged. The debt/GDP ratios of some of the most stable, civilized countries in the world far exceed 100%. Ireland leads the list at 960%, followed by Switzerland at 441%, the UK at 375%, Belgium 349% (a staggering $1.3 T for a small country), the Netherlands 353% (an astounding $2.2T), Denmark 242%, Austria 233%, France 211%, Germany 160% and finally the US at an almost respectable 95% (but gaining rapidly).
Secondly, the economic model of Monaco (if it can be called that) of no income tax and revenue generated by tourism and gambling actually seems to fit the modern economy pretty well. The UK economy is 75% services! The Brits produce some oil and gas (and this is now declining) and tea and scones to generate some cash and the rest of it is exchanged among themselves. Well not really just themselves, but actually the rest of the world, since London is still an important financial centre (as they would spell it). But probably not for long. The US economy is 70% dependent upon the consumer. These are not healthy numbers.
The $13T of external debt the US faces is staggering, but we are still a highly productive people, with companies like Intel, Microsoft, Apple, Cisco, Amgen, Coke and more which produce goods that people all over the world need and want. Of course, that doesn't mean that they won't buy less of them or that they can't find substitues. They actually are with AMD, Linux, Samsung and others providing fierce competition. How much longer before Chinese companies learn to duplicate advanced American technologies? Probably at least a decade or two. So we had better get our house in order by then. But what about the more immediate implications of these debt levels?
It seems unlikely that Britain will be able to maintain its level of debt for much longer for even at an extremely modest level of 3%, the service cost would amount to 11% of GDP! This doesn't account for the assets that were purchased with this debt, but simple arithmetic would imply that these assets would need to provide an income of 11%, just to keep British GDP stagnant. What if the value of these assets dropped 13% or so? That would deliver a hit of 50% against British GDP! It is no wonder that central bankers the world over are scrambling to keep assets prices inflating. With this kind of leverage on such a massive scale, even modest single digit percentage drops in asset values can have monstrous consequences. In Britain's case, there most assuredly will be massive negative consequences. Because their external debt is approximately 1/4 of the entire worlds outstanding debt, it will spill over and affect virtually every part of the world. The countries mentioned above account for 80% of the $54T world total. So they will take the biggest hit. Maybe if everyone cooperates fully, the world can muddle through, but it seems highly unlikely that such perfection can be achieved in human endeavor. It will only take a relatively small actor acting in its own self-interest to start a waterfall of financial destruction the world has never seen before. China and Japan are not big enough to stop it. Besides they have their own problems. With actual costs of carrying this debt likely above 5%, it does not seem plausible that what is basically a global Ponzi scheme can carry on much longer.
When it breaks, the British Pound will likely fall 30-50%. This will have a contagion effect which will make the credit crisis of 2008 look like a stiff breeze. Due to the high leverage of the other Eurozone countries, a rolling currency crisis could develop where the Swiss Franc drops after the Pound, then the Danish Kroner, then the Swedish Kronor, then possibly the Euro itself, leaving only the Yen and the US Dollar to face the storm. At that point, the entire global financial structure could unravel. Because after all, these are just bits and pieces of paper. The Chinese are buying Oil, Gold, Copper, Molybdenum, virtually any hard asset they can get their hands on. And the prices they are paying do not look attractive. But in the case of a global currency meltdown, prices in fiat paper currencies would become dangerously fluid, almost meaningless if confidence is lost. Because without confidence, then a piece of paper is just a piece of paper. And eventually all asset prices return to their true value. It doesn't matter whether it is called a Pound, Euro or a Dollar. Ultimately, a piece of paper is just a piece of paper.
First, some of the oldest and most wealthy states in the world are grossly overleveraged. The debt/GDP ratios of some of the most stable, civilized countries in the world far exceed 100%. Ireland leads the list at 960%, followed by Switzerland at 441%, the UK at 375%, Belgium 349% (a staggering $1.3 T for a small country), the Netherlands 353% (an astounding $2.2T), Denmark 242%, Austria 233%, France 211%, Germany 160% and finally the US at an almost respectable 95% (but gaining rapidly).
Secondly, the economic model of Monaco (if it can be called that) of no income tax and revenue generated by tourism and gambling actually seems to fit the modern economy pretty well. The UK economy is 75% services! The Brits produce some oil and gas (and this is now declining) and tea and scones to generate some cash and the rest of it is exchanged among themselves. Well not really just themselves, but actually the rest of the world, since London is still an important financial centre (as they would spell it). But probably not for long. The US economy is 70% dependent upon the consumer. These are not healthy numbers.
The $13T of external debt the US faces is staggering, but we are still a highly productive people, with companies like Intel, Microsoft, Apple, Cisco, Amgen, Coke and more which produce goods that people all over the world need and want. Of course, that doesn't mean that they won't buy less of them or that they can't find substitues. They actually are with AMD, Linux, Samsung and others providing fierce competition. How much longer before Chinese companies learn to duplicate advanced American technologies? Probably at least a decade or two. So we had better get our house in order by then. But what about the more immediate implications of these debt levels?
It seems unlikely that Britain will be able to maintain its level of debt for much longer for even at an extremely modest level of 3%, the service cost would amount to 11% of GDP! This doesn't account for the assets that were purchased with this debt, but simple arithmetic would imply that these assets would need to provide an income of 11%, just to keep British GDP stagnant. What if the value of these assets dropped 13% or so? That would deliver a hit of 50% against British GDP! It is no wonder that central bankers the world over are scrambling to keep assets prices inflating. With this kind of leverage on such a massive scale, even modest single digit percentage drops in asset values can have monstrous consequences. In Britain's case, there most assuredly will be massive negative consequences. Because their external debt is approximately 1/4 of the entire worlds outstanding debt, it will spill over and affect virtually every part of the world. The countries mentioned above account for 80% of the $54T world total. So they will take the biggest hit. Maybe if everyone cooperates fully, the world can muddle through, but it seems highly unlikely that such perfection can be achieved in human endeavor. It will only take a relatively small actor acting in its own self-interest to start a waterfall of financial destruction the world has never seen before. China and Japan are not big enough to stop it. Besides they have their own problems. With actual costs of carrying this debt likely above 5%, it does not seem plausible that what is basically a global Ponzi scheme can carry on much longer.
When it breaks, the British Pound will likely fall 30-50%. This will have a contagion effect which will make the credit crisis of 2008 look like a stiff breeze. Due to the high leverage of the other Eurozone countries, a rolling currency crisis could develop where the Swiss Franc drops after the Pound, then the Danish Kroner, then the Swedish Kronor, then possibly the Euro itself, leaving only the Yen and the US Dollar to face the storm. At that point, the entire global financial structure could unravel. Because after all, these are just bits and pieces of paper. The Chinese are buying Oil, Gold, Copper, Molybdenum, virtually any hard asset they can get their hands on. And the prices they are paying do not look attractive. But in the case of a global currency meltdown, prices in fiat paper currencies would become dangerously fluid, almost meaningless if confidence is lost. Because without confidence, then a piece of paper is just a piece of paper. And eventually all asset prices return to their true value. It doesn't matter whether it is called a Pound, Euro or a Dollar. Ultimately, a piece of paper is just a piece of paper.
posted by Matt Butler at 9:45 AM
1 Comments:
i am guessing that Monaco has a developed banking system that attracts foreign deposits, hence the large external debt. so,that means it has roughly the same amount of assets abroad (loans that the banks make). otherwise it wouldn't make any sense, because nobody would lend that much money to such a tiny town.
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