The Financial Crisis 2008 - 2011 : repetitions

We have exhausted our recourse to borrowing. Other ways must be found if we want to avoid general bankruptcy

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The financial crisis whose warning signs started in July 2007 with the debacle on sub- primes, was unleashed in 2008 and spread to the entire economy,with a sharp rise in unemployment, and an historic downgrading of social and public accounts. The corollary of that is now soaring public debt.

Between the end of 2007 and the end of 2010, France’s sovereign debt went from 1211.6 billion euros to 1591.2 billion - an increase of 31.33%. It now stands at 1630 billion euros. We are now in the middle of a new financial crisis linked to sovereign debt. We have exhausted our recourse to borrowing. Other ways must be found if we want to avoid general bankruptcy.

1) Financial crisis linked to sovereign debt.

With regards to Greece and the Euro zone, Greece represents 3.10% of the Eurozone population, 4% of its GDP and 4% of its total debt. Things need to be put back into fair proportions. The proposed write-off of debt form 21 to 60% of capital is ridiculous. Part of the Greek debt, as that of Italy, Spain Portugal and France, (etc..) is, of course found in the Banks, but it is also found in the obligatory SICAV, a collective investment scheme under the title of life insurance contracts. This will have negative effects on an individual’s savings and create a precedent which will have catastrophic effects on all future public debt issues.

As far as sovereign debt is concerned, it is time to use what is known as highly-rated annuity or perpetual bonds. to prevent governments, at most risk, from going bankrupt. In order to do this, one would have to make a gigantic public offer to buy listed companies for outstanding government bonds with a 5 - 10 year maturity date for example, in order to establish a multi-annual recovery of public finances - the EFSF (The European Financial Stability Fund only involvement being that of guarantor of interest payments.

In this case, without increasing its effective capacity, its fire power goes from 440 billion euros to 11000 billion based on an interest rate of 4%. Remember that the EFSF does not have 440 billion euros, only performance bonds from Eurozone countries to issue loans for States and now, apparently, banks who can no longer finance themselves or who will have to suffer more losses.

Creating a supranational debt as a substitute for outstanding debts will not solve the problems. This system has only been invented because performance bonds discharge certificates have not been accounted for in public debt. For France performance bonds discharge certificates can reach as high as 159 billion euros, amounting to nearly 10% of the national debt.

2) Regulation of financial markets

It is now time to end the over the counter market of CDS ( Credit default Swaps). The CDS is a contract between two parties: the purchaser of capital protection for a loan or debt incurred and the seller of this protection for the loan or debt incurred. The buyer pays the premiums and the seller pays out. If the debtor defaults, the seller compensates the buyer for the amount of capital loss.

Let’s look at an example. The buyer insures, a loan that X has made of 1000 euros at an interest rate of 5%. In order to protect his capital, the buyer pays a premium of 2% to a protection seller. X defaults on his loan and cannot pay back more than 600 euros towards the 1000 euro loan. It is now up to the protection seller to pay in the difference of 400 euros. Up till now, there has been no regulation in this type of market; no political regulation, or financial regulation has been established to verify the solvency of these protection sellers.

Regulation would give the right to intervene in this market, it would ensure capital requirements and sufficient liquidity to meet such commitments.

This market has to be changed to a regulated market with the introduction of a clearing house thus ensuring intervention in the market with daily margin calls. I remember that at the end of 2007 (last figures that I have), use of this unregulated market was valued at 62,2 billion dollars equivalent to the highest GDP of the planet.

The write-off of debt previously envisaged, will provoke another financial crisis within this market. The buyers of the assurance for CDS are the banks and Insurance companies. The near failure in 2008 of the Insurance company AIG, because of its indiscriminate use of these markets has not served as a lesson.

3) Rating Agencies

The continual revisions of ratings creates a detrimental instability. The level reached by public debt was expected after all the different recovery plans. Clearly, everyone is feeling the heat. As far as they are concerned, there should be, even be imposed, different rating scales between public and private debt.

4) Foreign exchange policies

It is in the Eurozone, where politics has not mastered this situation. Politics must re-establish preeminence in this domain. As far as this is concerned, German Monetary Imperialism must come to an end. I remind you that a devaluation of the currency will act like an import tax and and export subsidy. A drawback is inflation, if it’s use is abused, however this is not the primary issue right now. Thanks to this political change, we are allowing for the creation of existing and future goods - presently imported - and we are helping to reduce unemployment and improve public and corporate finances as a result of new revenue from social security contributions and taxes. The rise in petroleum imports which will follow will allow a return to solvency and the development of renewable energy sources.

5) Statistical tools

The ridiculous approach by the statitciens - unquestioned by politicians - of comparing debt stock with inflow (GDP) and not with assets is nonsense. One compares an asset to a liability and one compares the cost of a debt (capital included) to income. As an example of this, at the end of 2009 (last known statistics), Pubic Administration assets amounted to 2258 billion euros with a debt of 1582 billion; equivalent to 70% of the assets.

Christian Capmas October 2011

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