Mark these words: Sovereign Default
Not many people are exposed to these words (ummm... ok, me at least). But this will be the catch phrase for 2010. Forget 'sub-prime'. The new lingo is sovereign default. And this 2 big words will bring the entire world down to it's knees.
I am a believer that there will be a double dip in the world recession simply because I do not believe that the current pump priming of economies globally is going to be able to pull us out of the on-going financial crisis. Apparently the world economy is on some kind of a rebound now. Green shoots sprouting everywhere. Is it? Personally I don't think so.
The Dubai fiasco had started the double dip. US$50 to $60 billion may seem like chicken feet compared to what the US government had to deal with (read: hundreds of billions). But is the Dubai case isolated? That will be the most important question.
What are the unfolding effects? For starters, we are now being told that a large portion of the Dubai debts is owned by British banks. The Brits are at the end of their wits and this will not go down well with their already very ill economy. And if the Brits get kicked, the Frenchies will get their knickers twisted. And the Germans then hammered. You get what I mean.
And amidst all this, a new form of disaster has emerged. Sovereign debt. The Greeks are, pardon my language; in deep shit. Sort of knee high. So that's quite a lot of shit. Their government is unable to repay their bonds. Sovereign bonds are government bonds which are issued and denominated in foreign currency. So upon maturity, the issuing government will have to repay the bond holders in the denominated foreign currency. If the said government is unable to purchase the said foreign currency for repayment of debt, they are screwed.
And this is what we are facing now. We in Malaysia are not getting a lot of coverage on this, yet. Just like the beginning of the sub-prime crisis in the States. We are after all frogs living under coconut shells.
Your next question will be: Greece? So what? Not that big economy aren't they? And it is such questions which show the naivety of Malaysians. It is only in Malaysia where we 'live on our very own island'. Everyone else in the world live dependently upon one another.
The Greeks' default will pull with them their business partners and the European Union. Portugal is already on the radar right now and all is not well with Christiano-Ronaldo-land. Their credit default risk has just reached the ceiling. Not very good signs if you ask me. So, who else are going down? One by one, other related nations will get pulled down together - and drown.
What is causing this mayhem? Budget deficit. Government pump priming their nation out of the credit crisis started by Wall Street. A budget deficit means that the nation budgeted expenditure exceeds its income. In our lay man term, spending in excess of your means. When we need to spend more than our paycheck, we have the credit card(s). For governments, they issue bonds. Get the dough now, pay in the future. The Greeks and Portuguese are in their 'future' now, and they don't have money to pay. So, that's the basics of it - at least from my understanding.
So, if this default disease proves more lethal than AH1N1, guess where the virus is going to spread to? Everywhere. Including the Americans who are borrowing money from their descendants of 2098. Will this spark another round of major credit crisis when the 1st of 2 years ago is still not solved yet. The likely answer is a yes. And this time there will be no more trillion dollars printed to rescue the Americans. Not that their money printing machine is broken, they simply do not have the means to do it anymore. So, come the double dip, the Americans will perish. Millions of Americans will be living on streets or huddling up under flyovers.
And the same shit is going to hit Malaysia this time. There is not going to be any money for Najib to spend his way out this time around. PNB can't even sell a quarter of its recent RM10 billion bond. The country is already as dry as a salted fish.
And rumours have it that Singapore is high on the potential sovereign default list. Their budget deficit is also crazy ass high. This is very worrying. Everytime Singapore sneezes, we shit in our pants. We do trade with them, like, a lot. Really really a lot. Back in the Asian Financial Crisis of 1997, Thailand brought the entire South East Asia down with it. And we aren't even that economically active with them as compared to Singapore. And to make matters worse, Singapore is a mini US. Only geographically distanced. If the Americans die, the Singaporeans die. If the Singaporeans die, we die!
So folks, pray that the world does not end on 10 December 2012. Pray Nibiru comes quicker, much quicker. At least we don't have to see Najib and gang make life a living hell for us ordinary Malaysians in the coming very desperate times. Plus we know they are not smart enough to prepare Malaysia for rainy days.
The world is crumbling and all Malaysia is concerned of is who buggered whom. Dumb fucks!
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Two days ago, a senior government officer told me that Malaysia will have to ask for IMF's help in 2 years' time. Funds leaving Malaysia is becoming critical, not by foreigners but Malaysians especially those with ill-gotten gains. The rats are leaving a sinking ship.
judging by current situation and previous years of GDP,our country's aim is to be a well developed country in 2020? lol......it will be a dream only,as a lot of workers(or should i say MOST workers their pay is underpaid?)
even the basic needs of the people is not solved,
and with the recent raised of various goods and soon petrol.
do you think normal citizen of malaysia will able to earn more money in this sort of circumstances.
it only speeds up inflation and when that happens, spending power will be low and economy growth will be slow.or even getting worst
Non Partisan said...Indeed. The PIGS or PIIGS (Portugal, Ireland, Italy, Greece, Spain) states are in a mess.
Saying that, look a little closer at the UK and the US. Find out what the newly approved US borrowing limit is - and what it means? The UK paused QE. The ECB and the US Fed plan to end theirs soon. What will happen to markets when these props are removed?
What about China? Why the fiscal tightening? Are they really overheating? If yes, then why are they overheating in the first place? All due to their government's earlier easing measures?
I agree that Malaysians are dumb fucks! Not idiots - but imbeciles!
Are budget deficits bad? As an individual, I prefer my bank account to be in surplus rather than deficit. In the case of Governments, it’s not that clear cut. Conventional economic wisdom holds a neutral view – deficits are neither good nor bad. Instead, it may be more useful to examine how deficits arise in the first place.
In an economic recession, government deficits are common. As economic activity decreases and unemployment rises, tax revenues would correspondingly decrease. Coupled with government “pump priming” or stimulus spending, deficits are almost a given in a recession. Most economists agree that deficits in such a situation are beneficial, as long as funds are invested in “useful” activities like public spending (infrastructure, public education, research etc) that ultimately benefits the economy through “multiplier effects” when the economy improves.
Conversely, deficits could also arise from Governments that pursue a reckless fiscal policy – spending money on wasteful projects, corruption etc.
If you really think about it, there really shouldn’t be any “sovereign risk”. A Government is not like you or me. They have a big advantage that we don’t – they can simply crank the presses and print more money. Unfortunately (or fortunately), that course of action carries severe economic penalties – like hyperinflation. That alone should give most sane governments pause.
So Governments really have 2 alternatives to finance their deficits – either borrow internationally (through the sale of Government bonds e.g. US Treasuries, UK Gilts), or internally (through accumulated reserves i.e. “savings” from budget surpluses from preceding years). They can also raise taxes or reduce Government expenditure (or both), though that is usually not an option except in the direst of circumstances, due to the heavy political cost.
I’m sure some of us overspend from time to time. I know I do. As long as I don’t make it a habit and I have my savings to fall back on, it shouldn’t be a big deal.
In the same vein, there is usually no problem if Governments run the occasional deficit. The problem arises when a Government runs persistent large deficits, year after year. It’s really a confidence issue. There eventually will reach a point where lenders will not lend to it anymore. That’s when fiscally irresponsible Governments get called out (and sparks a crisis).
Which leads me to wonder why Singapore was lumped into the “high sovereign risk” category? It has healthy reserves, negligible foreign debt and a fiscally prudent Government. Although at an historic high, the bulk of the current deficit is financed through past reserves. Heh, it was rumoured that the term “deficit spending” was a dirty word in the Ministry of Finance.
Anonymous (8.2.10),
That must be the longest comment we have ever had on this blog! Good write up.
Are budget deficits bad? No. They are not. But in Malaysia's case, you have already answered yourself in:
"Most economists agree that deficits in such a situation are beneficial, as long as funds are invested in “useful” activities like public spending (infrastructure, public education, research etc) that ultimately benefits the economy through “multiplier effects” when the economy improves."
"Conversely, deficits could also arise from Governments that pursue a reckless fiscal policy – spending money on wasteful projects, corruption etc."
On another question of yours - "Which leads me to wonder why Singapore was lumped into the “high sovereign risk” category?".
There's more than meets the eye, mate. There's more. Not everything about Singapore smell of roses and lilies.
Luckily i learn economic in first year of university, if not I would not understand the multiplier effect. Frankly speaking, I am just a 22 years old guy that believe that normal theories do not work in Malaysia, especially in financial and economic industry. Whatever happened in Malaysia (big issues) are basically being manipulated and yet most of the Malaysian are not aware of it. Some might be due to not well-educated, some of them not well exposed to internet (mainly because mass media is controlled by political parties that brainwash people).
Trust me, everything big issues in Malaysia are manipulated. And the most angry part is, even though we know who did it, implicitly, but no matter how hard we tried, the sucker is not punished. So, is undang-undang still working in Malaysia? I bet, NOT.
Anyone, but BN in GE13. Going to have it in mid 2010.