The ECB Has a Huge Dilemma: Price stability or Bail Out Nations

Link: https://mishtalk.com/economics/the-ecb-has-a-huge-dilemma-price-stability-or-bail-out-nations

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The spreads between German government bonds and those of the PIGS (Portugal, Italy, Greece, and Spain) have skyrocketed in recent weeks. 

This comes while Eurozone inflation is at a record high 8.1 percent. 

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On June 16, Bloomberg reported Lagarde Tells Ministers ECB Plans for Limit on Bond Spreads

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There is no single interest rate that makes any sense for Germany, Greece, Spain, Italy, and Portugal. 

The Fed is struggling to find the neutral rate, and I believe will overshoot, but at least there is a neutral rate. 

Lagarde is on Mission Impossible with 19 countries in the Eurozone, all with a different neutral. 

In theory, the sovereign bonds of Germany and Greece are the same. Default risks are the same.

In practice this is total nonsense, and for the third time the idea is being tested. 

Author(s): Mike Shedlock

Publication Date: 20 Jun 2022

Publication Site: Mish Talk

Private Overborrowing Under Sovereign Risk

Link: https://www.chicagofed.org/publications/working-papers/2022/2022-17

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This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.

Author(s): Fernando Arce

Publication Date: May 2022

Publication Site: Chicago Fed

Global government debt set to soar to record $71 trillion this year, new research says

Link: https://www.cnbc.com/2022/04/06/global-government-debt-set-to-soar-to-record-71-trillion-this-year-research.html

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Global sovereign debt is expected to climb by 9.5% to a record $71.6 trillion in 2022, according to a new report, while fresh borrowing is also broadly set to remain elevated.

In its second annual Sovereign Debt Index, published Wednesday, British asset manager Janus Henderson projected a 9.5% rise in global government debt, driven primarily by the U.S., Japan and China but with the vast majority of countries expected to increase borrowing.

Global government debt jumped 7.8% in 2021 to $65.4 trillion as every country assessed saw borrowing increase, while debt servicing costs dropped to a record low of $1.01 trillion, an effective interest rate of just 1.6%, the report said.

However, debt servicing costs are set to rise significantly in 2022, climbing around 14.5% on a constant-currency basis to $1.16 trillion.

Author(s): Elliot Smith

Publication Date: 6 Apr 2022

Publication Site: CNBC

U.S. Insurer Exposure to Russia, Ukraine, and Oil/Gas Companies Declines from 2020 to 2021

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-Russia-Ukraine-Oil-Gas-YE2021.pdf

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Total Russian and Ukraine sovereign and corporate debt was $813.3 million at year-end 2021,
representing 97% of total exposure; the remainder comprised $28.8 million in stocks (see Table 2).
While life companies accounted for the majority of the bond exposure at $683.9 million (or 84% of total
Russia and Ukraine bonds), property/casualty (P/C) companies accounted for almost all the Russia and
Ukraine stock exposure at $28 million. About 90% of U.S. insurers’ exposure to Russia and Ukraine
bonds and stocks was held by large companies, or those with more than $10 billion assets under
management.

Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus

Publication Date: 14 Apr 2022

Publication Site: NAIC Capital Markets Special Reports

No, the United States Has Not Always Paid Its Debts

Link:https://reason.com/2021/11/19/no-the-united-states-has-not-always-paid-its-debts/

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Most recently, the U.S. defaulted on Treasury bill payments in 1979 shortly after Congress raised the debt ceiling. According to the Congressional Research Service analysis: “In late April and early May 1979, about 4,000 Treasury checks for interest payments and for the redemption of maturing securities held by individual investors worth an estimated $122 million were not sent on time. Foregone interest due to the delays was estimated at $125,000.” The default was due to technical problems and was cured within a short period of time.

The claim that the United States has never defaulted, despite its frequent repetition, is not strictly true. Officials could make more modest and qualified claims such as “aside from a relatively minor operational snafu, the United States has not defaulted in the post-World War II era.” Such a claim lacks the power of a more sweeping generalization, but at least it’s accurate. If President Joe Biden and Treasury Secretary Janet Yellen want to seem credible, they should avoid making historic statements that are easily refuted by a small amount of Googling. If they cannot be believed about the basic reality of the federal government’s credit history, how can we believe what they say about current policy choices?

Author(s): MARC JOFFE AND JEFFREY ROGERS HUMMEL

Publication Date: 19 Nov 2021

Publication Site: Reason

Sovereign Defaults Hit Record in 2020; More Are Possible

Link: https://www.fitchratings.com/research/sovereigns/sovereign-defaults-hit-record-in-2020-more-are-possible-08-06-2021

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The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the Covid-19 pandemic, Fitch Ratings says. Downgrade pressures have eased this year, but our ratings indicate that more defaults are possible.

Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017.

Publication Date: 8 June 2021

Publication Site: Fitch Ratings

Bidenomics Takes Root in Europe’s Economically Fragile South

Link: https://www.wsj.com/articles/bidenomics-takes-root-in-europes-economically-fragile-south-11620039617

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Since the 1990s, Italian leaders have tried to overhaul the sclerotic economy while also running tight budgets. Mr. Draghi is the first in decades who can deploy massive fiscal firepower to help.

Italy’s economy has rarely grown by more than 1% annually over the past quarter-century. The economy has never fully recovered from the global financial crisis and subsequent eurozone crisis, and slumped by another 9% in 2020 amid the pandemic and strict lockdowns.

Germany, France and other EU countries backed the recovery fund mainly for fear that Italy and Southern Europe could get stuck in another deep economic slump that once again tests the cohesion and survival of the eurozone.

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Most of Greece’s debt is in bailout loans from the rest of the eurozone, with no repayments due for many years, making another Greek debt crisis unlikely for a long time.

Author(s): Giovanni Legorano

Publication Date: 3 May 2021

Publication Site: Wall Street Journal

The danger of high public debt is not what you think

Link: https://knowablemagazine.org/article/society/2021/danger-high-public-debt-is-not-what-you-think

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At the start of 2020, the ratio of debt to gross domestic product surpassed 107 percent in the US — before any pandemic spending. In other words, our government debt now exceeds the total annual production of our economy.

The decline in Americans’ trust in government is roughly correlated with the rise in public debt over the same time frame (although data analysis can’t control for all the factors necessary to prove the point). In the mid-’60s, about 75 percent of people in the US said they trusted the government always or most of the time; by 2019 that number was down to 17 percent. 

Author(s): Edgar Kiser

Publication Date: 12 March 2021

Publication Site: Knowable Magazine

In Democrats’ progressive paradise, borrowing is free, spending pays for itself, and interest rates never rise

Link: https://www.washingtonpost.com/business/2021/03/03/democrats-stimulus-spending-inflation/

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To hear it from liberal economists, progressive activists and Democratic politicians, there is no longer any limit to how much money government can borrow and spend and print.

In this new economy, we no longer have to worry that stock prices might climb so high, or companies take on so much debt, that a financial crisis might ensue. In this world without trade-offs, we can shut down the fossil fuel industry and transition to a zero-carbon economy without any risk to employment and economic growth. Nor is there any amount of infrastructure investment that could possibly exceed the capacity of the construction industry to absorb it.

Rest assured that the economy won’t miss a beat no matter how far or fast the minimum wage is raised. And whatever benefits are required by the always struggling middle class can be financed by raising taxes on big corporations and the undeserving rich.

Author(s): Steven Pearlstein

Publication Date: 3 March 2021

Publication Site: Washington Post

Italy Goes Green for the First Time With Inaugural Bond Sale

Link: https://finance.yahoo.com/news/italy-goes-green-first-time-082347375.html?.tsrc=fin-srch

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Italy is making its first foray into the green bond market, the latest major debt issuer to tap into one of the fastest-growing sectors of finance.

The nation is selling debt maturing in 2045 via banks, an unusual tenor that is expected to draw interest from domestic investors as well as specialist environmental funds. European nations are piling into the market as they seek to finance a greener recovery from the pandemic.

Author(s): John Ainger

Publication Date: 3 March 2021

Publication Site: Yahoo Finance

In Search of the New Debt Consensus

Link: https://economics21.org/in-search-of-americas-new-debt-consensus

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When economists like Larry Summers and Olivier Blanchard, who normally support more spending, balked at the size of the Biden stimulus plan, supporters of the plan said there was no reason to worry. Clearly markets are not worried about inflation or sustainable debt, just look at low bond prices and modest inflation expectations.  They argue if markets aren’t worried, maybe none of us should be. 

But we are in uncharted territory. The Debt-to-GDP ratio grew exponentially last year to once unthinkable levels, at least for a time of without a major military conflict.1 Piling on another $1.9 trillion (and possibly more later this year) risks higher rates in the future. The more leverage you carry, the less room you have to spend on the next disaster. 

So why aren’t markets more worried? Perhaps because for the time being there are not better, safer alternatives.  Also, the government has a captive buyer of its debt in the Federal Reserve, whose holdings of US government debt also reached unprecedented levels last year. Debt enthusiasts dismiss worries of an overheating economy by pointing out the Fed could raise rates and stop inflation if it takes off. But that would involve the Fed selling some of its debt and putting even more bonds on the markets, only this time there won’t be a single captive buyer. 

Author(s): Allison Schrager

Publication Date: 10 February 2021

Publication Site: E21

Everybody Says Higher Interest Rates Are Coming … But When and By How Much?

Link: https://www.ai-cio.com/in-focus/market-drilldown/everybody-says-higher-interest-rates-coming-much/

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Absent that nightmare scenario—and most prognosticators believe science can vanquish any of COVID-19’s shape-shifting—the conventional Wall Street wisdom is for better days ahead on both the health and the economics fronts. And since escalating rates are co-dependent on an improving economy, a sunny thesis appears pretty solid.

Historically speaking, low rates like today’s are an aberration. Thus, at some point, it’s reasonable to assume they will return to normal. Or at least to higher than now, to a degree. A new normal that’s hardly towering.

Author(s): Larry Light

Publication Date: 9 February 2021

Publication Site: ai-CIO