Debt per se is not a bad thing. Over centuries it has been the necessary lubricant to promote increased global trade and thus global living standards. But rapid debt expansion throughout history has clearly led from one financial disaster to another. Do we now see ourselves at the dawn of another global financial debacle? Arguably, all the auguries point to a disturbingly high risk of such a scenario unfolding and this time Government debt-subsidising policies stand in the dock along with all the other usual suspects.
Debt bubbles, like Stock Markets, are driven by three potent forces: greed, fear and ignorance, sometimes ably supported by corruption, which on this occasion is very much at work, even where you might least expect it. When the credit spree on 2008 finally hit the buffers it was at the end of a benign world of cheap and easy credit fuelled by new financial instruments like CDOs, diced and repackaged for selling on to many financial global investors. Ten years on, and we seem to face a re-run, with the difference that this time it is huge corporate borrowings, often to finance acquisitions.
In America, research shows that of the 50 largest corporate acquisitions over the last five years more than half ended up with debt levels that flirted with junk debt status, and only escaped that ignominy by optimistic assumptions by ratings companies. But some of us here will remember that in the cavalier times debt ratings companies were incestuous, to say the least, and thus highly suspect. If those corporate debt ratings again prove overly optimistic, forcing $1 trillion in debt to be junk labelled, a potential result could cause a freeze, denying many companies their ability to refinance their debts. The US Government's hands in this disturbing scenario are not clean so it seems that they should change tack to withdraw corporate and individual incentives in the form of tax breaks that only worsen the debt problems down the road.
Beyond American shores the picture looks no less bleak. Much alarmism has been spread about the presumed economics Armageddon facing Britain if it fails to secure a mutually acceptable deal. But the fact is that Brussels should be more concerned about its own financial problems which makes Britain's look far more than manageable. Much of the EU's financial travails reflects lack of good governance. Greece has been a recidivist debt welcher of the first magnitude since ancient classical times. This is hardly surprising given that Greeks regard it as their God-given right to evade taxes come hell or high water, forcing Greek Governments to borrow heavily just to pay their huge payroll bills. Much of the multi-billion Euro Greek debts will never be repaid and so investors should prepare themselves for a severe scalping.
Italy, in the tax evasion stakes, is not far behind Greece and one can only look on in dismay over how the Rome-Brussels conflict over Italy's proposed budget expansion will play out. Behind Italy, France and Spain leave much to be desired over sound financial governance.
Even in Germany, the thrifty Germans are not immune to the combination of lousy governance and the corrosive hand of corruption. Many German economists claim that there are overly cosy ties between politicians and the country's 385 public-sector savings banks, known as Sparkhassan, predominantly controlled by people of questionable financial expertise. These banks control Euro 1.2 trillion in assets, making them Germany's second biggest lender after Deutsche Bank, who along with Commerz Bank are themselves struggling. Any rapid rise in interest rates could jeopardize all of these Sparkhassan banks.
Some readers will also be aware of gathering debt storms elsewhere in the world but spare a thought for poor China. This country's peer-to-peer lending (P2P), also known as lightly regulated shadow banking, has attracted 50 million savers who sought returns of 10% or more, double what they would get from a bank, seemingly overlooking the universal adage: "the higher the yield the greater the risk." The total sum outstanding in these P2P banks is put at $200 billion, and a Chinese banking regulatory body has warned investors to be prepared to lose all their money, much of it through corruption and fraud involving Ponzi schemes. One 31-year old woman from Zhejiang province wrote to her parents after losing $40,000 to an online P2P fraudster, saying she could not see any hope. "Don't be sad," she wrote in a note to her parents. "I am leaving but your lives need to continue. I just lost confidence in life in this society. I am not afraid of death, but I am afraid of living." She then hanged herself.
There could be more investor hangings but this time in the logistics sectors of container shipping and ports handling if the real threat of 4D printing flexes its muscles of disruptive technology. The problem here is that the container shipping lines (bulkers are not affected) are ordering huge, 24,000 TEU container ships to be financed by massive loans, which will sharply boost the container supply side in several years time. This could coincide with the potentially hugely disruptive 4D printing technology, which will allow far more manufacturing in countries of consumption, making it cheaper to do so and thus cut down on long container ship voyages, leading to a perfect storm. Container shipping ports may also rue their expansion plans. Only recently much of the container shipping world forced many banks to write off their shipping loans.
END
Friday 2 November 2018
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