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Solvency and Liquidity - Two Different Numbers
I wrote an article recently and quoted a CIA report on Spain’s External
Debt as being $2.4 Trillion. A reader commented that I was full of crap
and spreading false information. The reader made clear that the
external debt of Spain was $1.25T (Euro 900b). The following graph from
the Bank of Spain was sent to me to prove the point.
Here’s the data I relied on from the CIA World Fact Book.
I think of the difference in these numbers ($1.15T) as a gross and net
calculation. Spain has 2.4t of external debt, but the financial
institutions in the country have ~$1T in foreign assets. (It is much
more complex than this simple arithmetic).
Many economists, (notably Stieglitz) have used the net
number and multiplied it by ‘real’ interest rates and have concluded
that the resulting debt service number, as a percent of annual GDP, is
manageable. The conclusion from that camp is that there is a necessity
for some budgetary action, but there is certainly no cause for alarm
or, heaven forbid, panic.
In the early 80’s damn near every country South of Texas went belly up.
I know. I ran part of Citi’s FX biz during that period. All my public
and private sector Latin American customers were shut out of the
capital markets. Their existing debts traded for pennies on the dollar.
From my seat I saw that the problems always started with the domestic
banks. Their offshore funding lines were canceled one by one. They
could not reduce their balance sheets fast enough; they went to the
local Central Bank who said “No Mas” and the next day all the lights
went out.
Things are much different today than 30 years ago. But there are some
similarities. Financial institutions in every country have enormous
cross border exposure. If you want to measure solvency it is
appropriate to base the calculation on a country’s net external debt number. But if you want to measure a country’s liquidity risk you have to look at the gross number.
Every financial institution sets a country risk limit for its own
foreign investment activity. This limit is further divided into
exposure to the Public and the Private sectors. At the first whiff of
trouble these lenders/investors try to pare back their risk to a
country. The first place they go is to the private sector banks. They
pull lines and deposits.
In the case of Spain, Banco X will record foreign liabilities; they
will also have foreign assets offsetting it. If the market were to turn
on “Spanish” sovereign risk and the availability or the cost of
external borrowed capital were to become prohibitive, Banco X can
simply reduce its balance sheet of the external assets. But think of
the market conditions that would exist if this were to evolve. There
would be trillions of assets looking to go through a very small hole.
The CIA data points to both the strength and weakness of our global
system. The strength is the diversity, the weakness is the
codependency. The External Debt of all countries was estimated by the
CIA to be $57Trillion as of 12/31/09. It was $61T in 2008. An
interesting YoY drop of $4T. In 2009 there was an explosion of global
debt. The US alone added a few trillion. The drop in cross border
holdings is therefore even more significant. It suggests that the
willingness of the global system to absorb more and more external debt
is in substantial decline. 10% is a reasonable estimate. This makes
sense, given the global economic conditions. But it is a very troubling
direction.
Also of interest is that in 2008 world GDP was $60T, almost exactly the
same as the $60.7T of cross border debt. As this declined in 2009, so
did Global GDP. Does this confirm the statement: Debt=Wealth?
We owe each other $60T. So long as all of these IOU’s keep changing
hands in an orderly way there should be no problem. But unfortunately
there is a problem. It is currently playing itself out in the second
tier European countries. The global deleveraging is continuing. Today
it is Spain and Ireland. As of now only a small percentage of the $60T
is moving around. But there is every reason to believe that this
movement of the deck chairs is going to accelerate. Deleveraging is
never pretty. We went through that in 08-09.
The economists like Stieglitz are wrong. There is a reason to be
worried. Bernanke’s weapons are spent. Treasury has no chance for a
TARP II. Yet we are looking at a very deflationary outcome if the
present trends continue.
We have seen credit spreads and CDS pricing widen out significantly for
the PIIGS. A reasonable market reaction. If this trend extends to other
classes of debt including high grade corporate, Agency MBS, or other
higher quality sovereign names, look out. That will be the sign that
the unwind of the 60T is accelerating. With it will go wealth and GDP.
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Over the weekend, reviewing some material about CRE and the current market status of "extend and pretend," whereby there are comparatively few real honest to goodness "distress" or "bargain" sales to be had, it became clear to me that what is going on in CRE debt is a sort of creeping debt to equity conversion. Once debt is not being paid, but the lender forebears under some new arrangement, the capital "trapped" in asset moves closer to the fuzzy line that can sometimes separate equity from debt (think preferred stock and the most senior tranche). And if you think about it, if that is what is going on, then perhaps all is not lost (looking at CRE itself), as return of capital rather than return on capital becomes the objective. No one is allowing assets to be sold to someone else to allow them to generate a 20% return, to "clean out" the mess and move on - ain't happening except in rare instances. And the FDIC is on board.
However, extend and pretend, and this "de facto" debt to equity conversion, does not work for sovereign debt. Or does it? Extend and pretend as applied to sovereign debt may be next.
wonderful illustration.
valuable post. thank you very much.
Would be interesting to see a graphic that is kind of a hub and spoke of how countries owe debt to each other. Size of lines between countries would be debt and one color would be debt owned and one color would be debt owed.
Take a glance at the CIA info. The graph you are talking about would be the most confused mess you could think of. This paper goes in every direction.
Oh ya mean a graphic proof of the biggest Ponzi scheme in the planet??
You right, it will be extremely interesting..but I would be more interested to see if, net/net, the sum is zero....or else. If the sum is not zero...then project me, in months ,the timeline before we stop believing that the coloured pieces of paper or the pieces of plastic we keep in the pockets will stop to be honoured in the purchase of...anything.
So let's see...
Greece owes German, French, and other banks and might come up short in the next few months when the debt comes due. So who is going to bail out the banks? The governments of the respective debt holders? Why not? Only trouble is those governments are running deficits so would likely have to borrow the money from "someone else" to cover the Greek debt.
But if not them who? The U.S. through the IMF (and others)? Only trouble is the IMF would have to borrow the money. But from whom? The U.S. would either have to print or borrow the money from the Chinese?
But the Chinese are resistant to buying even more U.S. debt.
I'm wondering if the world is simply running out of places to borrow even more money. I know, we need to create the Bank Of Outer Space....
Inquiring Minds...
I recall reading recently that the Chinese have ponied up some money to the IMF but the details are sketchy in my mind....was it 50 billion??? sorry i can't do better than this.
BK: thank you for an excellent article. I definitely learned something from this one and appreciate the edumacation!
These parties holding OTC Derivitive contracts need to just say "No" to them.... this in turn will put more losses on the Banks that wrote them up to steal money... At one time, there was $ 45 + Trillion in OTC Derivitive losses... most of them are still out there..
the 45 trillion became 1.2 quadrillion then because of some magic hokus pockus became 600 trillion
Excellent Bruce. While the government of
Spain has this debt the assets of the banks
may not belong to the government! This is
the same scam that the Argentine government
tried to pull with their banking system which
led to certain resignations etc.
Could somebody explain to me why Luxembourg has such a ridiculous external debt which is not unlike my own country(Ireland) in scale yet is higher per capita.
What sort of activities are going on in this small kingdom ?
This is the 'Money center bank syndrome'. Luxemburg is just a bowl of foreign assets and liabilities.
There is another way to look at these very big numbers. The CIA puts the US external debt at $42,000 per person. By way of comparison the poor bastards in Luxemburg have $3,900,000 on their back.
Obviously this is not the case. But it is in places like Luxemburg where 'things' get moved around.
Dork....howzabout sharing with us some of the local flavor of what is going on in your country (and my primary heritage)? Are the politicians to be believed about getting the Irish deficit/debt under control? What does the man/woman on the street think? Are you guys a target for the next bond bear raid? Thanks for any local color that you are willing to share!
Greece = big crash this week: http://www.thestreet.com/story/10680833/1/europe-remains-a-concern-in-coming-week.html?kval=dontmiss
Again: anything by "artcash" is spam, pure and simple, and should be terminated with extreme prejudice.
Tyler & Marla, if possible, please revoke his account and/or implement an anti-spam script to weed out the useless morons like him out of ZH. Thank you.
Ah sure we are having mighty craic here in this brave western bastion of the euro empire.
But seriously Deadhead London and Frankfurt cannot believe how even more foolish the Micks and Paddys have become - when the BBC showers you with faint praise for the sacrifice that you have made in the interests of financial stability you know you are in the slurry pit.
We are prepared to sacrifice our first born on the alter of the international bond markets and we have our own King Herod types in Dublin castle that will do their masters bidding.
Other then that things are looking up.
I will stay tuned.....thank you.
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Money laundering and tax dodging...dork!
Ireland is fundamentally an anglosaxon country, in which those activities are still regarded as basically illegal.
And the fact Ireland is still a sane country is signalled by the fact that they took the bitter pills immediately, they didn't muck around.
History of Greece should teach something...at the end of WWII the Communist Party of Greece was preempted from taking over and bringing Greece the way of Yugoslavia exclusively by the British Army, after bitter fighting.
Greece will NOT take bitter pills, Spain will NOT take bitter pills, Ireland did....Ireland became a tax easy country in the early year of the euro...they never went as far as being a tax heaven focused on recycling money and evading taxes as Luxembourg.
I am still so naive to be convinced Ireland is right...and they will be better off sooner than anyone else for their decisiveness in taking the bitter medicine ASAP.
I have no problem taking bitter pills - but if the surplus of my labour goes exclusively to holders of capital who do not take a haircut for their malinvestments then we are doomed to continue with this crazy world of inefficient investments and insane countries
The US Dollar is the greatest print advertising campaign the world has ever seen.
Stats from the CIA and Bank of Spain? Which is more dubious? Its probably much much worse.
The Fed is infinitely resourceful. Debt has 100% profit margins. Creating and selling it is the best business there is. The banksters and the Fedsters are in a practical sense out of bullets when the barbarians breach the gates and not before.
Contracting world trade and decreased inter-country capital flows are also consistent with price inflation even if we collectively get poorer. 1970s stagflation or some variant thereof.
The IMF Stats are the standard for this matter.
The JEDH Project ("Joint External Debt Hub") gives most recent global stats.
They show at 3q 2009 Spain had (000) $2,525,169 gross external debt
I would examine the Net International Investment Position, however..
a broader and more detailed look at balances and flows both gross and net.
Go to
http://www.imfstatistics.org/imf/
and get Feb 2010 "country table" for Spain.
CIA gets their info from this source, as do rating agencies and central banks, etc.
The NIIP indicate Gross Foreign assets of $1.817 trillion and gross liabilities of $2.975 trillion at 3q 2009 .
The debt breakdown for Spain are at
http://ddp-ext.worldbank.org/ext/ddpreports/ViewSharedReport?REPORT_ID=1...
Gross External Debt (mill. US$) 2008Q4 2009Q1 2009Q2 2009Q3 001_T1_General.Government 316,240 314,148 353,722 393,626 002_T1_..Short-term 20,079 21,664 31,948 46,435 003_T1_.....Money.market.instruments 17,160 21,027 30,567 45,401 004_T1_.....Loans 2,919 637 1,381 1,034 005_T1_.....Trade.credits .. .. .. .. 006_T1_.....Other.debt.liabilities.5/ .. .. .. .. 007_T1_........Arrears .. .. .. .. 008_T1_........Other .. .. .. .. 009_T1_Long-term 296,161 292,483 321,774 347,191 010_T1_.....Bonds.and.notes 267,161 263,796 289,734 311,999 011_T1_.....Loans 29,000 28,687 32,041 35,192 012_T1_.....Trade.credits .. .. .. .. 013_T1_.....Other.debt.liabilities.5/ .. .. .. .. 014_T1_Monetary.Authorities 49,033 43,239 50,311 69,611 015_T1_..Short-term 49,033 43,239 50,311 69,611 016_T1_.....Money.market.instruments .. .. .. .. 017_T1_.....Loans .. .. .. .. 018_T1_.....Currency.and.deposits.6/ 49,033 43,239 50,311 69,611 019_T1_.....Other.debt.liabilities.5/ .. .. .. .. 020_T1_........Arrears .. .. .. .. 021_T1_........Other .. .. .. .. 022_T1_..Long-term 0 0 0 0 023_T1_.....Bonds.and.notes .. .. .. .. 024_T1_.....Loans .. .. .. .. 025_T1_.....Currency.and.deposits.6/ .. .. .. .. 026_T1_.....Other.debt.liabilities.5/ .. .. .. .. 027_T1_Banks 1,066,483 1,043,016 1,108,374 1,125,286 028_T1_..Short-term 574,643 567,778 599,128 593,577 029_T1_.....Money.market.instruments 16,999 20,226 20,070 20,855 030_T1_.....Loans .. .. .. .. 031_T1_.....Currency.and.deposits.6/ 557,644 547,552 579,058 572,722 032_T1_.....Other.debt.liabilities.5/ .. .. .. .. 033_T1_........Arrears .. .. .. .. 034_T1_........Other .. .. .. .. 035_T1_..Long-term 491,840 475,239 509,245 531,709 036_T1_.....Bonds.and.notes 346,825 330,585 354,702 375,870 037_T1_.....Loans .. .. .. .. 038_T1_.....Currency.and.deposits.6/ 145,015 144,653 154,543 155,839 039_T1_.....Other.debt.liabilities.5/ .. .. .. .. 040_T1_Other.Sectors.7/ 662,793 630,507 653,451 670,733 041_T1_..Short-term 50,177 53,532 51,815 43,829 042_T1_.....Money.market.instruments 18,029 26,714 26,335 18,908 043_T1_.....Loans 28,729 22,841 22,546 22,075 044_T1_.....Currency.and.deposits.6/ .. .. .. .. 045_T1_.....Trade.credits .. .. .. .. 046_T1_.....Other.debt.liabilities.5/ 3,420 3,978 2,934 2,846 047_T1_........Arrears .. .. .. .. 048_T1_........Other .. .. .. .. 049_T1_..Long-term 612,615 576,975 601,636 626,904 050_T1_.....Bonds.and.notes 422,167 383,425 393,792 409,877 051_T1_.....Loans 188,572 191,078 204,859 213,884 052_T1_.....Currency.and.deposits.6/ .. .. .. .. 053_T1_.....Trade.credits 448 474 493 561 054_T1_.....Other.debt.liabilities.5/ 1,429 1,998 2,492 2,582 055_T1_Direct.investment:.Intercompany.lending 221,812 214,016 256,206 265,914 056_T1_..Debt.liabilities.to.affiliated.enterprises 128,272 118,000 125,373 132,338 057_T1_.....Arrears .. .. .. .. 058_T1_.....Other .. .. .. .. 059_T1_..Debt.liabilities.to.direct.investors 93,540 96,016 130,833 133,576 060_T1_.....Arrears .. .. .. .. 061_T1_.....Other .. .. .. .. 062_T1_Gross.External.Debt.Position 2,316,361 2,244,925 2,422,064 2,525,169If you try to look at the CIA and even the KGB or MI5 as being something seperate to IMF and the banking system you aren't seeing how it all works. All intellegence operations in the western hemisphere are really nothing more than "banking" operations.
I have pondered if war has been waged in the financial system, rather than in the traditional physical military sense.
Has China intelligence chosen to "befriend" America by buying so may Treasuries, and then has Japan fallen in line with them for geo-political reasons?
Was the EU just another way to create an empire and declare winners from losers?
I suppose then that when TSHTF, financial arrows will blot out the sun in way swe have yet to imagine. Perhaps USA martial law will be declared by forcing retirement assets into treasury bonds rather than street curfews.
It's probably got something to do with tactics that had been in use for the last 30 years. First amerca overamped japan built them up imported from them and then threw them under the bus to move on to malaysia. Then it threw them under the bus for korea and china. etc etc. It's a serial screwin over which I guess china saw it for what it was and figured out exactly how to make it stop because it was just going to go from region to region using people as long as possible and then when they reached equality status or financial equilibrium the would then move on to some place else.
Greece = big crash this week: http://www.thestreet.com/story/10680833/1/europe-remains-a-concern-in-coming-week.html?kval=dontmiss
Anything by "artcash" is spam, pure and simple, and should be terminated with extreme prejudice.
Thanks.
Thanks, Bruce.
May I contribute the following statistical release to the discussion:
http://www.bis.org/statistics/provbstats.pdf#page=64
Now, I am not a finance professional, but the engineer in
me sees a serious risk of cascading failures.
Bruce... another high quality post from you. Kudos.
I've quoted the above because I think you're on the mark with your conculsion the globe is working towards a deflationary outcome.
I don't think for a second, however, that Bernanke's bullets are completely spent-- or that Treasury won't try more tricks that will result into something akin to TARP II. On the contrary... they will keep the liquidity spigots at full bore up to the point of dollar collapse. Don't be surprised to see the Fed's balance sheet approaching $4 trillion next year.
"The whole financial system of creating, spending, lending, and owing money just fails to make any sense any more. Simple enough in principle, but it's gone completely to hell. With currencies untied to anything solid like gold, silver, or even a bushel of wheat, money is created out of thin air, yet, it has to be paid back with interest."
Exactly. This is the core problem, hence why this phony system of 'value' has to collapse at some point.
folks should not fear deflation....a depression should be feared but the two are not the same despite common misuse of the term.....
deflation can even be sign of improved economic conditions...let the market sort these things out....the liquidations need to occur so let them proceed with all due haste....
delete
Treasury has no chance for a TARP II.
They won't be stupid enough to call it Tarp II. Instead, they will call it a "jobs bill" or "jobs stimulus" or some BS like that. They will do it or die trying. I'm hoping for the latter.
Stimulate the hell out of those mythical districts in mythical states and report it all on a 200 million dollar website.
Thank you Bruce !
Excellent work BK; thank you for digging down into this. "A reader commented that I was full of crap and spreading false information." Rubbish, no posts I've read by you have ever been false. Keep 'em coming........
The whole financial system of creating, spending, lending, and owing money just fails to make any sense any more. Simple enough in principle, but it's gone completely to hell. With currencies untied to anything solid like gold, silver, or even a bushel of wheat, money is created out of thin air, yet, it has to be paid back with interest.
I'm sure this crap will work itself out over time, but the G20 needs to get into a room and figure out how to mutually wipe most of the sovereign and bank debt off the books so we can start over.
Good read .. what goes around , comes around
p.s. -
"Cohesion and Stability
The Commission doesn't hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency."
http://www.spiegel.de/international/business/0,1518,676507,00.html
"How Brussels Is Trying to Prevent a Collapse of the Euro"
Deleveraging inter-country doesn't necessarily mean deleveraging intra-countries. I believe there will be much more of the former than of the latter. That is globalization in reverse.
However deleveraging intra-country will be much slower in countries that :
A : have strong surpluses : that is the case for China, Japan and Germany,
B : have the ability to reinstate a more autonomous economy through tariff and exchange controls because they are big enough : that is the case for the US, and again, China.
Other countries are going to hell. Small or medium european countries that do not belong to category A want to have the ability to belong to category B thanks to the EU level, and this is the vision they push forward in Brussels. The problem is that the Germans don't see it this way. My guess is that they will pick and choose the ones that can enter in the "solidarity space". Benelux and nordic countries are certainly in, France, Poland, czech, slovacs, balts and Irish are very likely. I believe that they will also take Spain, Portugal Italy and Hungary after huffing and puffing but with strings attached.
I am much more pessimistic for the "orthodox" zone : Serbia/Montenegro, Albania, Greece, Romania, Bulgaria. Once the rest of the EU will make it clear that no more money is available (because of the losses already incurred), they will drop from the Union by themselves. Russians will make a big push there but "reduced" EU won't care, and shouldn't. These places are not strategically important any more.