Daily Archives: November 8, 2014

The day after (II).

One way or another, sooner or later, it’s going to be “Back to Mesopotamia”. More than three years ago, the Boston Consulting Group came out with a first class report that used the following words as a subtitle: “the looming threat of debt restructuring” (please translate as “the risk of massive defaulting”).

Needless to say, the BCG has been ridiculed by the Central Bank coordinated policy. Another POMO desk war casualty. That company makes a living on it’s reputation and it’s highly unlikely they are being hired by any central bank as an external consultant. I feel sorry for them because they were clear, and they were brave to say what they said. In a pre-whatever-it-takes world, it was a truism. In fact, we are long overdue for that euphemistic “restructuring”, another word that has been greatly abused.

We should try and give Cristina Kirshner a call, she’s sure to find some new extravagant term for a default. They excel at that. Defaulting is becoming a country tradition that goes deeper for nearly longer than the “asado argentino”. In point of fact, they are the front-runner for something that will spread faster than Ebola.

The “Back to Mesopotamia” report by the BCG said:

Promissory-note-tablet-Mesopotamia

Promissory-note-tablet-Mesopotamia

“It is likely that wiping out the debt overhang will be at the heart of any solution.

Such a course of action would not be new. In ancient Mesopotamia, debt was commonplace; individual debts were recorded on clay tablets. Periodically, on the ascendancy of a new monarch, debts would be forgiven.

In other words, the slate would be wiped clean. The challenge… is how clean to wipe the slates… Western economies … have to address the significant debt load accumulated over 25 years of credit-financed economic expansion… Writing off more than six trillion euros (in Europe) would have significant implications for lenders… Total debt overhang in the US equals 11.5 trillion dollars or 77% of GDP”

Forget the 2011 debt numbers they suggested at the time of the report  (and the implied suggested haircut). As a rule of thumb for the global village, the situation is much worse now (see latest BIS report), after three more years of “extend and pretend”. Public debt has increased exponentially, even if private debt has been trimmed moderately in some countries, offsetting some of the increase. No substantial deleveraging has taken place, and numbers are big enough for a nightmare scenario. The Geneva Report on the World Economy (published in September of this year by the Center for Economic Policy Research) says that the total burden of global non-financial debt, private and public, has risen from 60% of national income in 2001 to almost 200% after the crisis in 2009 and to 215% in 2013. Bloated Balance sheets of individuals, banks and NFC’s will be cut by at least 25% with the inevitable “restructuring” fad. More likely by a third or more. Creditors will be massacred.

You may consider this bizarre thinking, but it is not. There is no other way out. I wish there was. If you have the time, you can read this interesting post on debt cancellation in Mesopotamia and Egypt. Rome was no better (see picture below). I have selected the following paragraphs:

Health warning: Creditors, and junk bond holders, please check with your cardiologist before reading further. Continue reading