Where will the sovereign debt crisis go in 2012?
There has been no shortage of somber faced pundits and politicians competing against each other to make the direst predictions for the coming year. It is a bit like watching the Monty Python Four Yorkshiremen sketch in reverse. Thankfully, these people are hardly ever right about anything, and if they are all so gloomy, then perhaps we have significant grounds for optimism after all.
However, it does seem safe to assume that the sovereign debt crisis in Europe will get worse in 2012. I read somewhere that it´s not the debt that gets you, but your ability to service it. That strikes me as being very true.
Just look at the UK & USA: their debts are equally (if not more) scary than those of Spain & Italy and yet it is safe to assume that the markets will happily lend to both in 2012. Spain & Italy on the other hand, have to raise at least €500 billion between them this year, and I´m not convinced they´re going to get it from the private sector.
If that happens, then much bigger rescues than the ones handed out to Ireland, Greece and Portugal will be required. Between Germany, the IMF and the ECB, the economic firepower is certainly there to do it, but politically, it will very difficult.
Banking Vs Sovereign Debt Crisis
In 2008, governments spent billions bailing out banks that couldn´t borrow the money they needed on the open market. In 2011, the sovereign and banking crisis became one and the same because if a small country like Greece defaults, then banks in many countries could go under.
As has happened many times before, EU institutions can perform all manner of contortions to avoid crossing a line they´ve drawn for themselves. At the moment, one of those lines is that the European Central Bank will not directly purchase eurozone government bonds.
With a wink and a nod, the ECB is therefore lending huge amounts of money to eurozone banks, who then buy eurozone government bonds. These eurozone bonds are then used as collateral to borrow even more ECB money. Very clever isn´t it? Everyone´s a winner and we all live to survive another weekend, except that these multi billion euro shenanigans do not address the true underlying problems.
The major issue facing so many western economies is that too much debt has been accumulated and they will need to spend less than they earn for many years in order to reduce it. That´s logic a five year could follow, but life is never that simple. If you reduce spending too fast, then an economy can grind to a halt.
What makes sense from a personal perspective (cut down debt, don´t buy things you don´t need) is very bad for economies balanced towards consumption rather than production. You can´t export consumerism and you can´t easily transform a country into a net producer.
These are all huge macro economic issues that will take decades to play out. There is no politician or banker alive today who has previously faced a situation like this and no matter how overpaid they might be, I would not want to be saddled with their responsibilities.
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