Outside the Beltway

Outside the Beltway

I’m Sorry, Dave

Dave Schuler
27

Tyler Durden explains why the IMF is unlikely to dig Portugal, Ireland, Italy, Greece, and Spain (the PIIGS) out of the hole they’ve been digging:

Total PIIGS funding needs (defined as the sum of debt maturities and budget deficits) over the next 3 years amount to $2 trillion. Total PIIGS funding needs in 2010 alone amount to $600 billion. Total IMF bail out capacity: around $700 billion. Sorry – it simply does not compute.

Check out the table in his post which details the funding needs of just those five countries.

BTW, in case you were wondering who was on tap to fund nearly 20% of the world bailout, that would be Uncle Sugar.

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27 responses to “I’m Sorry, Dave”

  1. john personna Avatar
    john personna

    Yeah saw that. Seems like just yesterday that financial pundits were saying “you must diversify into Europe, US-only equities and bonds will under-perform.”

    Of course, it was one of Taleb’s lessons that an investment swing into small but stable markets can itself destabilize them and bring a bubble then crash. Perhaps the Eurozone story hid that a bit, but looking back the PIIGS story seems classic.

  2. Bernard Finel Avatar
    Bernard Finel

    I don’t understand this argument. Why would external sources needed to fund all debt maturity and fiscal deficits? This would be the case, I guess, if these countries were to shut down, somehow, and pass along their obligations. But as long as they continue to exist and to have some economic activity and tax base, wouldn’t be bailout amounts be much less?

    I am sure I am missing something. Could someone explain it to me? I went over to Durden’s site, and couldn’t find the answers there either.

    I am genuinely looking to be educated on this, so would welcome an actually response rather than snark if people are willing.

  3. Brett Avatar
    Brett

    Yikes. I suppose the IMF is going to either have to come begging to the US to do a joint bailout, or give up some control to the Chinese for money. Either that, or borrow an immense quantity of money from its better-off members.

    One can only hope that Greece is the worst of it. If the contagion spreads to Spain, the Eurozone is in severe trouble – Italy, and we’re in unknown, highly dangerous territory.

  4. john personna Avatar
    john personna

    Maybe I’m skimming too lightly Bernard, but I think the IMF money has to go to keeping banks with too much PIIGS exposure solvent.

    This is heading toward something that rhymes with Argentina, isn’t it?

  5. PD Shaw Avatar
    PD Shaw

    Bernard, I don’t believe he’s suggesting paying off all debt, but being able to pay the debt maturing in a given year. For example, the Bank of Drew loaned Greece $10 million, payable in $1.5 million installments over ten years. So, I don’t understand Tyler as suggesting that a bailout needs to pay $10 million to the BoD (or whatever the principle is), but at a minimum must keep up the annual payments of $1.5 million to avoid default.

    All of the PIIGS are projected to be deficit spending for several years, so defaulting on these payments is not going to make it any easier or less expensive to continue borrowing money to pay for government services.

  6. PD Shaw Avatar
    PD Shaw

    From the link: “Currently, the one-year [IMF]forward capacity stands at SDR 165 billion, or $248 bilion.”

    The total fiscal deficit for the PIIGS for 2010 is projected to be just over $244 billion. So without paying off any pre-existing debt, there is only just enough money to keep these countries in the style to which they have become accustomed.

  7. Bernard Finel Avatar
    Bernard Finel

    But he’s also list fiscal deficits. So, if I understand it correctly, this would be the bailout required in order to reduce debt burden on these countries by the amount of their debt that reaches maturity in any given year, since the international community would be both paying off the matured bonds and also making up all the budget deficits.

    Nice deal if they can get it… but, and I am not an expert, I don’t think this is common practice is it? To fund continued deficit spending while buying down debt?

    That said, if their ability to sell bonds is poor enough, I guess this might be the only way to avoid a death spiral.

    Still, there is a lack of clarity to me here, and I would still welcime some clarification.

  8. Drew Avatar
    Drew

    Bernard –

    I’m trying really, really hard not to do the snark/LOL/”snicker” thing, but this is the oldest concept in the book. Where is your lack of understanding?

    You have “operating cash flow (or deficit),” you have current contractual amortization requirements of debt, you have current maturities of principal (the “reinvestment requirement.”) In total, that’s called the “debt service requirement.”

    Operating cash flow plus re-financing capability is what you use to service the debt.

    All Durden is saying is that, especially in light of the re-pricing reality of the current maturities given the PIIGS credit profile, that a negative OCF plus refinancing problems looks like a train wreck. The IMF just doesn’t have the horsepower to cover the gap. And I agree. It ain’t rocket science.

    What the hell do you think guys like me have been squawking about in our various debates over time??

  9. Drew Avatar
    Drew

    “Nice deal if they can get it… but, and I am not an expert, I don’t think this is common practice is it? To fund continued deficit spending while buying down debt?

    That said, if their ability to sell bonds is poor enough, I guess this might be the only way to avoid a death spiral.”

    BINGO!!

    Think of the PIIGS as a busted LBO, a workout. In fact it is very common for anyone providing fresh capital to desire that “the deal get better.” That is, nobody wants to put good money after bad.

    If you got a phone call: “Bernard? Hey, I’ve got an opportunity: I’d like you to put money into a deal. Well, yeah, its a busted over-leveraged deal. Well, no, we aren’t getting its leverage ratios fixed…the balance sheet still sucks….it could still fail…..but……”

    Your correct response would be: “click.”

    And that’s how deals go into the death spiral.

  10. Bernard Finel Avatar
    Bernard Finel

    Drew:

    Right, I get that part. What I don’t still completely get is this:

    “Operating cash flow plus re-financing capability is what you use to service the debt.”

    plus

    “The IMF just doesn’t have the horsepower to cover the gap.”

    I don’t see why the total of deficits and debt maturity is what constitutes the gap. This argument assumes that these government can no longer borrow at all, no? They can neither finance their deficits through debt, nor can they roll-over existing debt as it matures.

    I guess I had not realized things were that dire and that essentially they had lost the ability to sell bonds altogether.

    I understand the issue, I just didn’t understand I guess the depth of their problem. It still is not 100% clear to me, since their bonds do still have some value.

    The yield on Greek 10 year bonds is 11%. Seems like would be a pretty decent incentive to buy em. I mean, that is the risk premium. And as long as the rate is not infinite, that means they have some capacity to sell bonds. Even a partial bailout should bring those rates down and significantly ease the challenge, though I admit, I don’t know even about what their debt profile looks like to know how badly the increase in yield would impact their fiscal position in the short, medium, and long-run.

  11. PD Shaw Avatar
    PD Shaw

    Bernard, I believe Durden is using a non-default assumption. If you’re wondering whether the IMF can condition its funds on the lender’s restructuring their debt (lowering interests rates, spreading out payments), the answer is yes, but these are defaults and they will effect the credit availability going forward.

    When cities like New York and Cleveland defaulted (or even Philadelphia, which was a near-default), they did not borrow for years. The PIIGS don’t appear to be in a position to do that, so you can’t simply screw over past lenders and give these countries a fresh start, they’ll collapse.

  12. PD Shaw Avatar
    PD Shaw

    Bernard, I believe the Greek bonds are trading on the assumption of a likely bail out. That would make this somewhat thorny. If there is a strong signal of no bailout, the situation will deteriorate as interest rates skyrocket. If there is a bailout, and the lenders get a 20-40% haircut, which is what I’ve heard is likely, the lenders will build that into their risk assessments going forward in Greece and in the other PIIGS.

  13. john personna Avatar
    john personna

    I don’t see why the total of deficits and debt maturity is what constitutes the gap. This argument assumes that these government can no longer borrow at all, no? They can neither finance their deficits through debt, nor can they roll-over existing debt as it matures.

    The bonds can trade at a price that makes roll-over self-defeating.

    The yield on 10-year Greek bonds surged to 11.24% early Wednesday from 9.68% on Tuesday. The yield is the highest for the 10-year since the introduction of the euro in 2002.

    I’m not sure if that is enough to do it, but it seems like a lot.

  14. Drew Avatar
    Drew

    Bernard –

    “Operating cash flow plus re-financing capability is what you use to service the debt.”

    Simple: you can service debt with cash flow, or additional debt.

    Now this isn’t my usual snarkatola and slinging sxit just for sport.

    Unlike a leveraged corporation, governments run chronic deficits. Hence, their ability to refinance maturing debts is soley based upon concepts of ability to raise future cash flow through GDP growth and taxation, and as part of that equation, assessments of increasing debt to GDP capability. (In the private context “total leverage.) Credit 101. Greece has pressed the edge of the envelope, as have the other “PIIGS.”

    Hint: the reason I go berserk at your assertions (and guys like Michael Reynolds) that “all the US has to do is raise taxes to pay for what we voted for” is that it all has limits. Taxes come with a 3x negative multiplier. See: Roemer, Christine. That will kill GDP, one side of the ratio. And debt to GDP has absolute limits. In a private setting, a leverage ratio for a corporation of 6-7 defines most of them to be insolvent. Government debt to GDP ratios differ, but the PIIGS are basically now insolvent. Fresh money is bad money.

    Skip the usual rosey bullshit about how we account for our liabilities. Acknowledge SS and Medicare. Now add in Obamacare. The US is not that different from some PIIGS. Obama is playing with fire.

  15. PD Shaw Avatar
    PD Shaw

    Yields on two-year bonds hit something like 38% earlier this week before heading back to around 16%. The volatility is on the two-year notes.

  16. Drew Avatar
    Drew

    “The yield on Greek 10 year bonds is 11%. Seems like would be a pretty decent incentive to buy em. I mean, that is the risk premium.”

    Bernard, do me a favor. Don’t. Don’t and don’t.

    What happens with ultra-risky assets is that the yields increase, become seductive……….and then they go to zero really fast. You may have heard of mortgage backed securities?

    Zero Hedge is a bunch of traders. That’s their world. I know you are a smart and savvy guy. But don’t be like doctors and dentists and other smart people who think they are so smart they get into venues foreign to them. I’ve spent the last 20 years in private equity/investment banking/credit etc. And I wouldn’t even dream of trading in PIIGS bonds.

    If you own some PIMCO (etc), and have some exposure, fine, but let them do it for you.

  17. PD Shaw Avatar
    PD Shaw

    Shorter Drew: Beware Greeks bearing gifts!

  18. Drew Avatar
    Drew

    By the way, Bernard, PD at 3:17 has it right. I skipped that part of your query.

    These countries simply have reached the point of no more credit availability. And it really could happen here. It really could.

    See why I fire arrows at you?

  19. Drew Avatar
    Drew

    “Shorter Drew: Beware Greeks bearing gifts!”

    Cruder: Beware the showers.

    Sorry…..

  20. john personna Avatar
    john personna

    These countries simply have reached the point of no more credit availability. And it really could happen here. It really could.

    Of course it could, but there is the old problem that if you sell X, you’ve got to buy something.

    A stock blog got a lot of attention this week for pointing that out, that if you sell stocks, you have to buy something.

    IMO a PIIGS meltdown brings two countering forces: 1) a flight to quality, 2) a flight from government bonds.

    If you give up on Treasuries as your “safety” where do you go? Gold a few thousand dollars an ounce?

  21. Drew Avatar
    Drew

    odo-

    Are you drunk?

  22. Bernard Finel Avatar
    Bernard Finel

    See why I fire arrows at you?

    Um, no?

    I’m a deficit hawk. Always have been. I’ve always argued we need to pay for what we spend. And being a realist, I’ve advocated higher taxes to cover the costs of politically untouchable programs. I bashed Bush for running unnecessary deficits, and I’ve been extremely critical of Obama’s budgets as unsustainable. I have been 100% consistent that running deficits — except in emergencies — is both bad policy and unethical.

    Meanwhile, you have essentially advocate the Grover Norquist strategy of high deficits in order to “starve the beast.”

    So, yeah, no, I don’t know what you are talking about.

    –BF

  23. john personna Avatar
    john personna

    No Drew, I’m not the one who said I was afraid to go to restaurants because of the DUIs.

    I asked you a serious question, even if the market wanted to lose confidence in Treasuries, where would those trillions go? Farm land? That’s an old standby, but not very practical or liquid.

  24. john personna Avatar
    john personna

    BTW, it is clear that this strength that Treasuries have, that they are where everyone flees to in crisis, is a dual edged sword. Yes, it allows the Treasury to lend at low cost, and reduce cost of debt service, but on the other hand it might lead to some complacency. The question is if the Treasury actually risks a breakdown to that balance in the near term. Say, before tax revenues return and counter-cyclical spending is reduced.

  25. steve Avatar
    steve

    “See: Roemer, Christine.”

    Her paper also showed that taxes used to pay off debt, or that at least had that appearance, had little effect on GDP.

    Steve

  26. Duracomm Avatar
    Duracomm

    Bernard Finel said,

    And being a realist, I’ve advocated higher taxes to cover the costs of politically untouchable programs.

    There are two fundamental problems with increasing taxes to solve fiscal problems.

    1. The big entitlement programs are demographically unsustainable. I’m not sure it is possible to raise taxes high enough to pay what the politicians have promised.

    2. Politicians never use additional tax revenue responsibly. During times of fiscal surplus they always increase spending either by adding new programs, or increasing benefits.

    Inevitably the economic cycle enters a down period and tax revenues decrease.

    At that point the politicians scream for more taxes to pay for the irresponsible spending they did when times were good.

  27. Duracomm Avatar
    Duracomm

    California shows why government deficits are caused by excess spending not insufficient taxes.

    If Only California Could Just Raise Taxes

    The California budget “emergency” isn’t a tax problem, it’s a spending problem.

    State spending in the past two decades has increased 5.37 percent a year (and nearly 7 percent for the past decade), compared to a population-plus-inflation growth rate of 4.38 percent.

    If the budget growth rate had been limited to the population-inflation growth rate, the state would be sitting on a $15 billion surplus right now.

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