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Debt Servicing Costs Exceed Growth Rates



February 18, 2008 – Comments (9)

Mish has a good post, Financial Services Bloodbath.  The article quoted is from the finanical sector, but part of the quote is of particular interest:

"Credit costs are going up, well above underlying earnings growth," said Smith, who joined ANZ from HSBC Holdings Plc last year, in a webcast briefing. The Melbourne-based bank, Australia's third largest, will also take a $200 million charge for derivatives linked to U.S. debt insurer ACA Capital Holdings Inc.

 Many, many, many companies took on wads of debt and it is quite possible that credit costs will exceed earnings growth for a number of these companies.  The rest will see reduced earning growth as debt is repriced to reflect risk.  This is generally a longer term problem as debt is usually paid back over years.  It means the market earnings will not be able to perform as they have in the past few years, and it will take longer than expected to get past this.

Mish's post is about the monolines and financials which will be absolutely crushed by the rising cost of debt.  My comment is pointing out that the rising cost of debt hurts the entire market, and even thought the Fed's reduced the rates, there has been no price reductions in debt because risk is in the process of being repriced in.  

And, if you are wishing from more rate reductions, be careful what you wish for.  Basically tax payers are paying for providing that cheap money and it is about to get a whole lot more costly.  The rest of the world's willingness to buy US debt was weak during the last rounds of auctions, and not quite enough debt was sold.  It doesn't matter what the Fed reduces the central banking rate to, it will have to pay more on treasuries or they will not be sold.

On my reading list this morning:

My comment, the Fed can't prevent a recession.

My comment, in the fall of 2006 when I first learned of these things search as I did I couldn't find any information on what they were and how they worked, but the amount of money they represented was absolutely frightening.  Now the information on how they work is being talked about and Ekkk, what an absolutely bunch of moron regulators are to have done nothing about these things, oh say about 8 years ago.  Greenspan is at the top of the list. 

My comment, for sure income has to grow faster to get out of this mess, but how does it grow when you have layoffs, increased price inputs for commodities, and increased debt servicing costs? 


9 Comments – Post Your Own

#1) On February 18, 2008 at 9:38 AM, dwot (28.81) wrote:

Sometimes other people express my reasons for doing things better than I do...

“If these things do get unwound en masse, the effect on the market will be horrible,” said credit strategist Barnaby Martin at Merrill Lynch. “Between 1 and 2 trillion dollars of synthetic CDOs have been issued over the last four years. Any unwinding will likely be crammed into a much shorter time period.”

My comment - you simply can't have $681 trillion of derivatives and not expect a massive problem.  All you can do when regulators are so negligent in their responsibilities is try and be out of the way.

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#2) On February 18, 2008 at 10:03 AM, dwot (28.81) wrote:

Here's a post with that new $2,500 vehicle Tata is marketing. 

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#3) On February 18, 2008 at 12:09 PM, TDRH (96.66) wrote:

The more I read, and the more I look at the markets, the more I think the fed is dropping rates to support the financial system.  The discount rate and the 30 year mortgage is decoupled as Bent outlined in an earlier blog.   The fed can drop the rate all they want, but the banks/mortgage institutions are still charging the same.   This spread is to cover risk, as you said, as well as to boost the financial sector to try and prevent a collapse.

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#4) On February 18, 2008 at 1:47 PM, GS751 (26.67) wrote:

Yes but we still must purge the effects of US overconsumption.  People are not paying enough attention to UE.  For the past 10 years (on average) US consumption has increased 3.7% while GDP has increased 2.9% annually.  It is a given that the average consumer spens beyond their means.  Bernake is F**ked whatever he does.  Lets assume he keeps lowering rates (most likely scenario in my mind).  We get to 1% rates.  Banks do not lower lending rates, the keep the risk premium or spread. They use this wide spread to make up for bad debt that they took write off's on.  They don't issue anymore bad debt, because they can't package it (nobody is buying anything because of liqudity and people are scared what these MBS, ABS hold).  Hopefully some banks felt the pain enough to not lend to people who can't pay back anymore. Consumers are forced to walk away from their houses and credit cards, what are ur gonna take a bad FICO score or paying off this loan where the interest is compounding like no other and you are not building any equity, or if you are it is tiny.  By the way this loan is on a assett that has lost 25% of its value, and with conditions right now it looks like it will lose more if its value.  I'll take the bad FICO score.  To UE is way more important right now than interest rates, interest rates just affect the spread that the banks are going to get.  If UE rises, that is less people that have jobs (cash coming in) to service their personal debt. 

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#5) On February 18, 2008 at 1:56 PM, GS751 (26.67) wrote:

Not seasonally adjust UE for Jan 2008 was 5.4%

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#6) On February 18, 2008 at 2:24 PM, madcowmonkey (< 20) wrote:

The tada looks like a chew toy for my dogs. The banks made the mistake of loaning money to bad borrowers, they shouldn't pass the buck onto people with good credit and that are willing and able to pay back the loans. Banks are not making as much on these loans right now and the margin is lower, but that is the effect of their doing. I feel that the banks need to make the rates stable and offer incentives, just like student loans do to the borrowers when they make a certain number of payments on time or something of that effect. Not that it is the cure all, but right now much of the unstable feeling with banks needs to be put down. It will never happen with the rates going down .75 one day and then back up 1.25 another. The banks need to start building confidence into the products again and take their medicine. I want stable borrowers, with stable incomes, and banks that offer stability. If the FEDS keep lowering the rates, then who is ultimately affected and who gets the advantage? 

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#7) On February 18, 2008 at 2:28 PM, dwot (28.81) wrote:

TDRH, the fed has also been dropping rates to support its own over consumption...  What do you think happens to budgets when rates go up?

It has been a great scam to make budgets look better than they are by having over 20 years of debt servicing costs go down due to the gradual lowering of interest rates.  It worked when the financial system looked strong and the world trusted US dollars.  Now that the holes in the US dollar are showing up, the debt servicing costs sky rocket as no one is going to loan their money at the given rates with the uncertain they will get it back, or that they will have any buying power with what they do get back.

By selling 30 years treasuries the government has limited liability on debt, but, new debt will have to pay a higher return.  Investors, including pension plans, get left holding the bag when 30 year bond prices collapse.

They likely try and issue more short term debt instead, but can you just see that?  Investors want at least 4% for deposits under a year and the fed is providing money to the banking system at what, 1%?  

I think we are going into the endgame of a 20 odd year ponzi scheme unravelling.

Good points GS. 

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#8) On February 18, 2008 at 3:54 PM, MakeItSeven (31.67) wrote:

The UE in Januarry was an aberation since in normal years a lot of temporary people were hired in Dec and let go in Januarry.  Retails did not hire much last Dec. and therefore the adjusted UE was low.

Also, if you take into account the Labor Participation Rate in 1/2001 when Bush first took  office then the UE should be almost 2% more.

Anyway, those are good links, dwot :). Report this comment
#9) On February 20, 2008 at 9:52 PM, Bupp (27.89) wrote:

Very informative articles.  Lots to think about.

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