Real Fools Don't Eat Pork
Everybody is fixated on Europe's so-called PIGS, which is a most unfortunate acronym. Those quick to sling such derogatory acronyms at the southern European economies might first wish to take a close look at the state of affairs here at home. I know Fools know better, which is why they're placing southern Europe's debt woes into a proper context as just one unsavory slice of a toxic global debt pie called OTC derivatives.
Money Week has its eye on a future and much bigger debt crisis on the way. Its headline earlier this week says, “Forget Greece – the real debt crisis is still to come.” The story says, in part, “Sure, financial markets are fretting that within two years, Greecewill have racked up public borrowings equal to more than 120% of GDP. But that’s nothing compared to the global picture. Dylan Grice, at Société Générale, has crunched the numbers for the whole of the EU, the UK and the US. He’s found that the average total net liabilities – including unfunded pensions, social security and healthcare – of these countries’ governments emerged at a terrifying 400% of GDP.” (Click here for the full story)
Meanwhile, here in America, we have our own “PIGS”; only the U.S. has many more, and they are much fatter with debt. According to the Center on Budget and Policy Priorities, a group that looks out for the poor, says, “The worst recession since the 1930s has caused the steepest decline in state tax receipts on record.” As a result, 48 states are facing shortfalls of nearly $200 billion in 2010. A recent report goes on to say, “Total shortfalls for 2010 and 2011 are likely to exceed $350 billion.” (Click here for the full report) Just California, New York and Illinois alone project a nearly $41 billion shortfall for 2010.
According to a recent Business Week article, America has a big debt problem that Congress needs to address now. It says, “The mire facing California, for example, makes Greece’s woes look somewhat manageable. California, staring at a $20 billion budget gap over the next 17 months, accounts for about 13 percent of the U.S. economy. Greece accounts for just 3 percent of the economy of countries that use the euro.” (Click here for the full story)
Yesterday, the President said, once again, that we must reduce our “soaring deficits.” The President took questions from reporters at a White House briefing. Not a single reporter asked about the probable bailouts of states facing severe budget shortfalls. Also, there was not a single question about the government taking on all the liabilities of failed mortgage giants Fannie Mae and Freddie Mac. The $400 billion in spending caps were lifted for the next 3 years, and that totals more than $6.2 trillion in liability on mortgage backed securities. (The Fed has bought at least $1.25 trillion in this debt.) Fannie and Freddie aren’t just “pigs” but giant budget “hogs” that will scarf every spare dollar in sight. And, can anyone tell me how we are going to reduce our deficit when the debt ceiling was just raised $1.9 trillion to $14.3 trillion? This is another real oink-er!
This is a re-blog from USAWatchdog, but I thought Fools might appreciate the links.
Oh, and you can't miss this piece from Spiegel:
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.
"Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products. But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.