Click on image to explode – not kidding – it works.
Yes – yes – my thoughts were that history would repeat – a la’ 1931 with an Austrian Government collapse.
These articles were posted on and after 23 April 2015,
“Yes, The Nut Cruncher” which was a follow up to my post “Depression is Coming” that an Austrian Government default would lead the way again.
A recap on 1st June “When it blows it will not be a pretty picture” (1)
A brief recap on my articles – my reasoning was simple in that this was due to Austrian banks going guts up – one being Heta, the ‘bad bank’ of Hypo Alpe-Adria bank which is being liquidated – the debt of €1.5 billion guaranteed by the Austrian State of Carinthia.
Carinthia, a small State has no money, so technically it would fall on the Austrian Government …well that is what I thought would happen – as what transpired was that the Austrian Government ‘stated’ that they will not cover any shortfall in the Banks debt.
The European Central Bank (ECB) stepped in and stated that Bondholders should accept a 50% reduction in bond value.
I did state that I doubted whether the State of Carinthia will meet its guarantee, so the Bondholders must await the conclusion of the wind up of the Bank and the legal action in process.
Well it seems to go a tad deeper than I expected as Austria is breaking bad – not in the financial sense (not yet anyway) – but in the legal sense .
Now bear with me – know it is hard – but the Austria’s Constitutional Court overturned an Austrian law that wiped out 800 million euros ($885 million) of junior debt owed by “bad bank” Heta Asset Resolution AG – saying some creditors were treated unfairly.
An attempt was made by Austria to slash the cost to taxpayers of Hypo Alpe Adria bank, a high-profile European casualty of the financial crisis – by imposing losses on some bondholders – has been thrown out by the country’s top judges.
In other words the Austrian Government is liable for the full debt – and the bottom line is that the taxpayers are liable. Reported by Bloomberg and FT (2).
I am not so concerned about Austria ‘at this point’ – as their time will come in 2016.
What I really – really – really – like (am I stressing ‘really’ too much?) – is the fact that the guarantee of a State and / or sub-ordinated loans – and the off balance sheet loans – are no longer noise – something that can be dismissed.
In each case these ‘debts’ were classified as a ‘basic note’ to history in the accounts of each State.
Technically now the Rating Agencies (the interest rate rating whores) have to reassess each Countries direct and indirect liabilities – in determining the ‘creditworthiness’ and ‘capacity’ of all sovereign states.
This is HUGE in that countries can no longer dismiss guarantees – or off balance sheet funding held by the Government’s Treasuries.
Omission by the Rating Agencies will be an abject failure of their due diligence in light of the Austrian Courts ruling.
If anyone does not know – the credit ratings agencies played an enormous role in creating the 2008 financial crisis – these whores – willfully and knowingly misrepresented junk investment products as triple A (AAA) an absolutely secure investment.
They caused, with others, the collapse of the financial system in 2008.
This Austrian Constitutional Court decision is profound in that Governments must be held accountable for all debt – as stated by Karl Sevelda, chief executive of Austria’s Raiffeisen
“This discussion is not helpful for the market, this is clear,”
Now what Mr Sevelda was alluding too – was that it is not helpful for Governments borrowing funds in the International market – Rating Agencies must now consider all debts – and in so doing reassess their Sovereign ratings – which may (will) affect those interest rates that Governments have to pay Bondholders.
The question is though – will the Rating Agencies perform these unpleasant tasks now – or in typical fashion procrastinate. Me feels the latter – they do not want to unnecessarily want to bite the hand that feeds them.
Click on image to read – doesn’t get any better.
Now – my prediction was that the ‘rot’ for the sovereign debt collapse would start in Austria – it has with this court ruling.
Taxpayers are liable for the Banks collapse not the Bondholders – countries cannot discriminate through legislation and allow creditors to suffer.
Therefore Credit Rating Agencies can no longer ignore Government Indemnities – Third Party Liabilities – Sub-ordinated Loans – Off Balance Sheet funding.
All debt must be brought to account.
Credit: opherworld.wordpress.com (Click on image to hyperinflate)
Breaking Bad for the United Kingdom?
Looking at the United Kingdom – debt – and the ‘off balance sheet debt/loans’ – the total debt to GDP is in excess of the magical milestone of 95 percent – majority of economists believe this is the tipping point – point of no return.
Now economists know sweet F.A. right?
So we will look at a hypothetical situation.
As an example assuming annual growth rate of 3.5 percent – a country that starts with a debt of 95 percent of GDP – will need around 35 years to achieve an objective of loans at say 60 percent (using the EU average here) reducing debt by 0.5 percent annually.
Please note this means growth of 3.5 percent on GDP annually – yes – god forbid if the growth is lower or comes in negative – as it is on paper – 35 years of austerity – whilst it would not mean continuous austerity – the constraints on the counter cyclical use of the ‘fiscal’ policy instrument are severely blunted.
Credit: Fleet-street-letter.com (click on image to read – like the UK increase in GDP)
Therefore any exogenous shock will rupture the economic recovery model.
An exogenous shock being a change is one that comes from outside the economic model – a black swan event – or a Credit Rating Agency revaluation of the country’s ‘rating’ – lose your rating or being downgraded can have a fatal effect on your country’s ability to borrow money on the markets.
That countries ability to borrow funds at a low interest rate is diminished.
This therefore presents a problem on the countries ability to pay debt.
Will the Credit Rating Agencies act?
History shows us that these Rating Agencies are always late to the party – their ratings on Treasury gilts – their assessment of a fair price to charge – is dictated by their need for monies and the higher rating for any country means money – in other words they prostitute their services to seek to assist a country in selling the debts at the lowest possible interest rates.
Some call them whores – they are not independent – nor are they conflict free – they are licensed to provide a service which can make them money.
Credit: thisismoney.com (click on to emblazon)
Time will tell – I am breaking bad now – time to go.
Update: yes broke bad – felt good afterwards though.
On Austria and the Constitutional Court Ruling – Heta’s wind-down is also a test case for the new European bank resolution directive, which is supposed to prevent taxpayer – financed bail-outs of banks.
Normally, this would pose no problem, but in this case the guarantees issued by the province have created a unique situation. Note that such state guarantees for financial and state-related companies exist all over Europe and are extremely large in many cases. No-one expected that such guarantees would ever be triggered – their only purpose was to (unfairly) lower financing costs. And as you can see, governments will try to wriggle out from such guarantees if they can get away with it.