Economy watch

Some food for thought about our dollars and cents.  Click each link to go to the article concerned.

1.  Is this the graveyard of the world’s economy?

These dramatic images show more than a dozen retired oil rigs parked off the coast of Scotland – hauled into the harbour as stock markets across the world crash and barrel prices tumble, forcing firms to cancel off-shore explorations.

The Cromarty Firth, north of Inverness, is currently packed with more unused rigs than it has been at any point in the last decade.

Crude oil prices have collapsed of late – falling from more than $115 a barrel in summer 2014 to less than $28 now – which has had a crippling effect on jobs, housing and revenue in Aberdeen and wider Aberdeenshire.

Because of this – and a number of other worrying factors – more than £50 billion was wiped off the value of Britain’s leading companies yesterday as fresh worries about the global economy set off panic on financial markets around the world.

2.  Europe’s ‘doom-loop’ returns as credit markets seize up

Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago.

“People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca.

“We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said.

. . .

Mr Guglielmi said a key cause of the latest credit seizure is the imposition of a tough new “bail-in” regime for eurozone bank bonds without the crucial elements of an EMU banking union needed make it viable.

“The markets are taking their revenge. They have been over-regulated and now are demanding a sacrificial lamb from the politicians,” he said.

Mr Guglielmi said there is a gnawing fear among global investors that these draconian “bail-ins” may be crystallised as European banks grapple with €1 trillion of non-performing loans. Declared bad debts make up 6.4pc of total loans, compared with 3pc in the US and 2.8pc in the UK.

The bail-in rules were first imposed in Cyprus after the island’s debt crisis, stripping European bank debt of its hallowed status as a pillar of financial stability, and of its implicit guarantee by states. The regime came into force for the whole currency bloc in January. Both senior and junior debt must now face wipeout before taxpayers have to contribute money.

. . .

Mr Guglielmi said the mood is starting to feel like the panic in the summer of 2012 … “We all know that QE2 is not really going to work but the feeling in the market is ‘I’m a smoker, I know it kills me, but so long as I can get cigarettes, I’m happy,’” he said.

3.  Creditors must brace for a tsunami of losses in a world awash with debt

Most people will agree that the global financial crisis of eight years ago was as a result of too much debt. Yet since then, the world has if anything taken on even more of the stuff.

In advanced economies, private sector deleveraging has been modest to non existent. Government debt, on the other hand, has taken off like a rocket. On one level this is perfectly logical. As everyone knows, when a car is skidding out of control, the instinctive thing to do is to turn the wheel against the skid. This will only make things worse. Instead you must turn into it, which has been broadly the strategy adopted by governments and central banks since the crisis. A crisis caused by excessive debt has been fought by encouraging the world to borrow even more.

How much debt is too much? Nobody really knows, but in any credit cycle there will come a point when creditors begin to question whether they are ever likely to get their money back, and that’s when crisis hits.

If you think we have already had that crisis, think again. The best way of looking at the Lehman Brothers meltdown is as a mere staging post in a global credit super-cycle. Where Western economies left off, China and other emerging markets have taken up the chase. Data compiled by McKinsey Global Institute suggest that between 2007 and 2014, global debt, public as well as private, has far outstripped economic growth, rising from $142 trillion to $199 trillion, or from 269pc of global GDP to 286pc. If this is not too much, it’s hard to know what would be.

. . .

The world has taken on far more debt than can ever be repaid. As the European banking sell-off is already signalling, creditors are in for a brutal awakening. Get ready for debt restructuring mayhem.

The last paragraph above says it all as far as debt is concerned, which is why I’ve drawn attention to it with bold, underlined text.  I’ve written many times before, most recently last month, about debt’s effects on us as individuals.  Those effects are already making themselves felt – and this is just the start.  Brace yourselves.

Peter