What The End Of The Game Looks Like
Readers suggested a topic on housing bubble fallout. “So, what inning is it? Per MSNBC, it is the half-way point of the foreclosure boom, which will go on for four more years.”
A reply, “You can’t know what inning it is unless you define when the game started and what the end of the game looks like.”
To which was was said. “A simple chartists view shows on big leg down and a stall/weak rise in response. Poised for second leg down. I believe there will be a series of stair-steps. Describe the end of the game? LOL.”
Another said, “The word from economists is that housing won’t bottom out until 2015. Not recovery, bottoming out. This is part of an excellent (as always) story on PBS Tuesday about the Fannie and Freddie bonuses. Fannie and Freddie control the market because banks aren’t securitizing anything on their own. Housing won’t bottom until 2015. Fannie and Freddie are being blamed for everything, but they can’t do much for another year.”
“And yet, there they are with the ‘modifications’ again, with no details on what they will modify to.”
One had this, “Did the article mention longstanding plans to disconnect the zombie GSEs’ feeding tubes?”
One looked at Europe, “I believe it is the top of the third inning. The Greek default (that cannot be called a default) is the first line drive.”
And finally, “Don’t call it a default — it’s just a haircut. Is this euro breakup by Thanksgiving scenario unduly pessimistic, or am I just an eternal optimist?”
From NASDAQ.com. “Think Tank Exclusive Analysis just released a grim set of predictions in which they believe there is a 65% chance of a banking crisis between November 23-26 that involves a Greek default and Euro exit, as well as a run on the Italian banking system. Under their most likely outcome (via CNBC), the governments of Greece and Portugal will both soon collapse because of inability to handle the debt crisis. Germany will become opposed to handing out more funds to the EFSF and parliament will actually reduce the money available to the fund.”
“As a result, China and the other BRICs will signal that they won’t support the bailout fund. The US and the UK will refuse to provide funding via the IMF. The EFSF will then turn to the ECB to print the necessary bailout money, which they’ll refuse to do. This failure will cause European banks to refuse the 50% haircut on Greek debt. The IMF and ECB will suspend payments to Greece.”
“Depositors in Spain and Italy will create bank runs in fear of banking crises in their own countries, causing ‘a collapse of the interbank credit market as banks know that most of their counterparts are at risk.’ At which point Greece defaults.”
From Foreign Affairs. “For Europe, it turns out that November is the cruelest month: The debt crisis will claim at least three eurozone governments before it is over. Yet, unlike in Greece and in Italy, the political crisis upending Spain is toppling the government in slow motion. Facing dwindling public support, an unemployment rate of more than 20 percent, and the increasing cost of Spanish debt, the country’s Socialist Prime Minister José Luis Rodríguez Zapatero threw in the towel last July and called for early elections to be held on November 20, four months ahead of schedule.”
“This is a so-called punishment vote against the ruling PSOE for presiding over Spain’s decade-long boom and, now, its bust. Those punished, however, will actually be the Spanish people and, more so, the rest of the eurozone. Due to huge private debt, a less than fully deflated real estate bubble, and astonishingly high unemployment, Spain’s financial crisis is as bad, if not worse, than Italy’s. So despite the PP’s good intentions, implementing severe austerity measures in the name of ‘fiscal responsibility’ and ‘restoring market confidence’ — as Germany, the European Central Bank (ECB), and global investors are urging — would sink the Spanish economy and push Europe’s experiment with a common currency closer to its end.”
“The problem, however, is not public debt. The problem is Spain’s private debt. Years of historically low interest rates allowed individuals and corporations to borrow too much and invest it poorly. The average level of Spanish household debt tripled in less than a decade. Corporate borrowing has soared as well. Its private debt is close to 200 percent of GDP, whereas Italy’s and Greece’s are around 110 percent. According to a 2010 report from the McKinsey Global Institute, among the 20 most developed countries in the world, Spain has the third-highest level of total debt (government, business, and household), after Japan and the United Kingdom. In total, Spain’s debt-to-GDP ratio is 366 percent.”
“Where exactly did all that money go? Much of the money was ill spent on construction and real estate. Spain’s property bubble has become almost as famous as its sunny beaches. According to the Spanish Ministry of Housing, the country saw real estate prices rise 201 percent from 1985 to 2007, with the vast majority of those gains occurring in the last decade. At the beginning of 2008, the construction industry represented 16 percent of GDP and 12 percent of employment.”
“The building craze and ensuing housing bubble pushed home ownership above 80 percent; it has left more than $820 billion in mortgages outstanding. Real estate prices in Madrid and other major cities still remain high: On average, prices have dropped 18 percent since 2007, compared to 40 percent in Ireland and 32 percent in the United States. Defaults on construction loans and mortgages are likely to rise as prices continue to fall. Oversupply is almost guaranteed for years to come, with approximately one million vacant properties (30 percent of the housing supply) spread out across the country.”
“More than 90 percent of all Spanish mortgages have variable-interest rates and are pegged to the one-year Euribor money-market rate, which has been on the rise this year. But unlike in the United States, laws in Spain prevent mortgage holders from walking away from their homes if they hold other assets. In Spain, the deleveraging process has only just begun.”
“A European bailout of the Spanish economy is an impossibility. Spain’s debt is simply too big, especially given the ECB’s other obligations, not to mention its unwillingness so far to step in even as a lender of last resort. Nor can Spain’s current private-debt problem be solved by any rescue package from the outside. In fact, it is arguably more difficult to save individual mortgage holders and corporate borrowers than it is to rescue a single government.”
“In the end, Spain’s massive total debt will have to be either written down or inflated away. Investors, both foreign and domestic, are loathe to do the former, and the German government will do everything it can to prevent the latter. Within the confines of Europe’s current monetary system, someone has to lose. In this context of conflicting interests, resurgent national chauvinism will eventually win out. But that means the only endgame is the end of the euro.”
