More Malaysians are being declared bankrupt!

JOHOR BARU: Young Malaysians are being declared bankrupt because they spend more than they earn, says Minister in the Prime Minister’s Department Nancy Shukri (pic).

This trend was worrying because most of them had just started working but already had debt problems, she added.

“This younger generation are supposed to be the next leaders. Instead, we have those who are already facing financial difficulties at a very young age,’’ she told a press conference after opening an information programme for young people at the Home Ministry complex at Setia Tropika here yesterday.

Quoting figures from the Insolvency Department, she said there was an increase in the number of young Malaysians being declared bankrupts in the past five years.

She said there were nearly 22,000 cases last year, an increase from about 13,200 in 2007.

Within the first six months of this year, more than 12,300 young Malaysians had been declared bankrupt. They include 3,680 women.

“On the average, 70.22% of the cases are men,” said Nancy, adding that most of them have outstanding debts of RM30,000 or more and could not afford to settle their dues.

She said the high bankruptcy rate among Malaysians at a young age mainly resulted from defaulting on instalment payments on car, housing and personal loans.

Nancy said there had been celebrities who were also declared bankrupt but most of them declined to seek assistance from the Insolvency Department.

She added that aside from the department, those who have problems managing their finances could seek advice from the Credit Counselling and Debt Management Agency.

The Star/Asia News Network

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Consumers’ Debt trap of payday loans in UK


A third of people experienced greater financial problems as a result of taking out a payday loan, according to Which?

Payday loans are trapping increasing numbers of consumers in a downward spiral of debt caused by exorbitant penalty charges, a consumer group has warned.

More than 60pc of people who take out payday loans are using the money for household bills or buying other essentials like food, nappies and petrol, a survey by Which? found.

The figures show an “alarming” picture of people trapped in debt caused by penalty charges because they cannot afford to pay back the loan on time, the watchdog said.

A quarter (25pc) of those who had taken out loans said they had been hit with hidden charges such as high fees for reminder letters, and one in five (18pc) were not able to pay back their loan on time.

A third of people (33pc) experienced greater financial problems as a result of taking out a payday loan, and 45pc of them were hit with unexpected charges.

Which? said the debt trap was compounded with 57pc being encouraged to take out further loans and 45pc rolling over their loans at least once.

A third of people (33pc) were bombarded with unsolicited calls, texts and emails before they had even signed an agreement.

The investigation of 34 payday loans companies’ websites also found that customers could face a £150 charge by one company,, if they repaid their loan 10 days late. Most of the companies failed to show clearly their charges or charged excessive amounts for defaulting.

Consumers were also potentially being allowed to take on credit they could not afford, with eight out of 34 companies failing to carry out any credit checks as part of their approval procedure and nearly two-thirds of those surveyed not asked about any aspect of their financial situation apart from their salary.

Some websites failed to provide any terms and conditions and many of those that did had little or no information about a borrower’s rights and obligations or references to free debt advice.

Which? is calling on the Office of Fair Trading to enforce existing consumer credit and lending rules that already apply to payday loans firms and to restrict the default charges that payday loans companies can charge.

Which? executive director Richard Lloyd said: “With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques.

“At its worst, this booming £2bn industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates.

“The regulator should properly enforce the existing rules that apply to this industry, but they must go further and impose a cap on the amount that lenders can charge for defaulting.

The Government should also now explore other ways to protect hard-pressed borrowers, including Australian-style measures to cap costs and promote affordable alternatives.”

Consumer Focus director of financial services Sarah Brooks said: “This research throws up some extremely troubling findings and poses many uncomfortable questions about the growing payday loan sector.

We have long held concerns about the behaviour of some payday lenders and whether consumers are losing out because this industry is not regulated strongly enough.

“Our research in 2010 showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans. Which?’s findings suggest that problems have worsened in this industry and that more borrowers are finding themselves caught in debt traps. Millions are turning to these loans in the current economic climate and it is usually those on lower incomes that suffer most.

“This work is timely given the OFT’s compliance review of payday lenders. There is clearly a continuing problem with payday loans and this should give further incentive, if any is needed, for the OFT to act quickly to protect consumers from spiralling debt.” – Telegrah

Reining in household debt by Bank Negara Malaysia

The responsible lending guidelines, among the pre-emptive measures by Bank Negara to contain surging household debt, have made a strong impact on most people. Will the guidelines be effective to control the alarming levels of household debt and put the brakes on loan growth?

THE responsible lending guidelines, which came into effect on Jan 1, created quite a stir in the banking industry with leading indicators signalling further signs of loan growth slowing in the coming months.

There is some discontent among consumers in terms of having their loans approved based on net income compared with gross income previously, in addition to which is the need for more documentation.

Some automotive players and property developers are not too happy either as they feel the move will be a dampener to their business moving forward. Loan growth for January was lower at 12.1% year-on-year (y-o-y), probably the slowest since 2010, compared with 13.6% y-o-y in December last year mainly due to slower growth in the household and business segments.

Total application and approval for loans in January was down almost 3% from a year ago although those disbursed rose by 5.6% y-o-y.

Loans in the household sector, which has a high level of indebtedness, was dragged down by slower growth in auto, mortgage and personal loans. But some quarters argue that this could be attributed to shorter working days in January due to the Lunar New Year break and other holidays.

Officials say that a loan growth in the region of 12% appears to be fine and much stronger growth may be a problem if left unchecked.

Indications are that loan growth to households, which was lower in 2011 than 2010, will normalise in February this year after the dip in January.

Whatever the arguments are, this trend, if it does continue, can be seen by some quarters as worrisome. Will loan growth then continue to slide? Some industry observers and analysts think so.

Loan growth mixed signals

Under the guidelines, banks are, among others, required to apply the net-income calculation method instead of gross income when computing the debt-service ratio for potential borrowers. The lending guidelines cover housing, personal and car loans, credit cards, receivables and loans for the purchase of securities.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says based on indicators, the rating agency feel that loan growth will likely moderate this year to a single-digit figure compared with a 13.6% growth recorded last year.

Nor Zahidi says the stricter guidelines is a step in the right direction.

This is due to the fact that some potential borrowers will no longer be eligible for certain types of loans, he says. This, he adds, is evidenced by a steep drop in the volume of passenger cars sold in January by 25% compared with the same period last year following stricter hire-purchase loan processes.

Total vehicle sales, however, rebounded by 9% in February with industry sales hitting 44,013 units from 40,387 units in February 2011.

Going forward, Zahidi says he foresees further decline in the banking sector loan growth as banks continue to be extra prudent in their lending practices, adding that there are also declines in loan applications for cars, credit card and residential properties based on latest indicators.

Loan applications for purchases of passenger cars contracted by 15.5% in January from 7.8% growth in December 2011. Another significant drop was the application for the amount given to the credit card segment which fell by 50.9% in January from a decline of 10.2% in December 2011. Applications for loans for the purpose of purchasing residential properties contracted 6.3% from a growth of 11.3% in December 2011.

Approvals for loans categorised for “personal uses” declined by 29.8% compared with a 42.4% growth in December 2011 while the amount of loans approved for the purchase of passenger cars and residential properties contracted by 18.4% and 20.9% respectively in January (December 2011: 0.3% and 1.8% respectively).

The Association of Banks in Malaysia (ABM) says the implementation of the guidelines will not have a direct relation to its member banks’ loan growth. Factors like global economic conditions and its impact on the regional economy as well as developments on the external and domestic front will be the more pertinent factors that will have an effect on loan growth, it says.

“The guidelines merely set out to better define the expectations of banks to act responsibly and transparently when lending. The policies and practices envisaged are not entirely new as they underscore the existing approach taken by our members. While it will ensure that the debt commitments of individuals and households are within their repayment capabilities, customers who can afford to repay will not be denied access to financing,” it says.

A robust retail finance market, ABM says, cannot be measured by loan growth alone as the obligations (financial and contractual) to repay, sound personal financial management skills and responsible financing practices are more important to the stability and sustainability of the market in the long run.

Weaker numbers

The occurance of non-performing loans and loans in arrears appear to be falling, and they are what bankers and regulators are paying close attention to. That will indicate that the responsible lending guidelines, even though they may crimp the longer-term trend, is not having an impact on the quality of existing loans.

Wong expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

CIMB Research says in one of its notes that it expects a slowdown in loan growth this year due to weaker numbers from all major loan segments including residential mortgages and auto loans.

RHB Research Institute considers that on the whole, the new guidelines will have some impact on household loan growth, but the extent of the impact remains to be seen.

As for demand for loans from the household segment, the research outfit does not think the growth will fall off the cliff, but rather will be at a more moderate pace relative to recent years.

Jupiter Securities head of research Pong Teng Siew feels that with the strict adherence to the lending guidelines, loan growth may hit 8% or less sometime later in the year but may pick up in some months.

OSK Research is maintaining its loan growth projection for this year at 9% despite the guidelines which it says will play a part in slowing loan growth. The projection was underpinned by Economic Transformation Programme (ETP) projects.

RAM Ratings head of financial institution ratings Wong Yin Ching expects loan growth to taper to 8%-9% after clocking in a strong 14% last year.

This, she says, will be supported by expectations of a real gross domestic product growth of 4.6% in 2012 (2011: 5.1%) and a more moderate household loan growth due to various prudential measures introduced since late-2010. Loans growth is said to be correleated to economic growth and with the Government seeing growth to come in at 4%-5% this year, expectations are that the pace of loans given out will accelerate at a slower pace.

Wong says the loan growth will be partly balanced by stronger financing demand from the corporate and commercial sector in anticipation of the rollout of projects under the ETP and 10th Malaysia Plan gaining momentum.

Meanwhile, Maybank IB Research, with a neutral call on the banking sector, says it expects domestic loan growth of 10.5% this year, up from its previous forecast of 9.4%, adding that mortgage lending is expected to hold up better than anticipated.

According to Bank Negara’s Financial Stability and Payment Systems Report 2011, the growth of household debt to gross domestic product (GDP) increased last year but the pace was slower with outstanding household debts expanding by 12.5% to 76.6% for the year compared to 2010 when debt grew 13.7% to 75.8%.

It adds that signs of stabilisation in household debt relative to GDP was seen from the second half of last year after a continued upward quarterly trend observed since 2009 with borrowing continuing to be concentrated on residential properties and motor vehicles, which together account for 64% of total household debt.

The report states that bank lending to individuals earning more than RM3,000 per month accounted for about 80% of total loans to households by the banking system.

Choo says the guidelines will not have any adverse impact on those with genuine capacity to repay.

It adds that bank exposure to borrowers with monthly incomes of RM3,00 or less was relatively low representing less than 13% of total banking system loans. “Based on historical experience on the level of impairment and provisioning, any impairment losses to banks are not likely to exceed RM2bil or less than 8% of pre-tax profits of commercial and Islamic banks,” it notes.

The growth in household debts had also been accompanied by a corresponding expansion in household financial assets, it says, adding that stronger growth in household deposits which expanded by 12.2% balanced the slower increase in financial assets.

Timely move?

Despite the brouhaha surrounding the pre-emptive measure, many feel the introduction of the guidelines is timely and justifiable.

RAM’s Wong views it as one of the many measures to contain the growth of household debt.

The banking system’s household financing has been rising steadily over the last five years and currently constitutes about 55% of the system’s total financing, she says, noting that the growth has stemmed mainly from home and personal loans.

As a result, she says, Malaysia’s household debt-to-GDP ratio has trended upwards from 69% in 2006 to 77% in 2011. Compared to other countries in the region, this figure is considered high especially when looked at in relation to GDP per capita, she adds.

Some of the other pre-emptive measures which Bank Negara had earlier imposed to control rising household debt include tighter criteria for residential property financing, such as a 70% loan-to-value (LTV) cap on a borrower’s third housing loan and beyond, as well as raising the income eligibility criteria for credit cards.

Some analysts concur that the lending guidelines are vital to ensure quality loan growth and some form of control is necessary. With ringgit deposits slowing, analysts expect banks to start pulling back on lending even in the absence of the guidelines.

Zahidi says the guidelines are introduced to ensure that the consumer segment will not be overstretched for too long. While it will take a few years before Malaysia’s household debt can be reduced to below 60% of GDP, the stricter guidelines is a step in the right direction, he says.

However, he adds that this will have some adverse effects on the banking sector’s loan growth as well as on private consumption.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan says credit assessments under the guidelines are done holistically by taking into account the total debt obligations of an individual borrower and will not have any adverse impact on those with genuine capacity to repay.

At the same time, he says, it will help to deter borrowings for speculative purposes and align debt burden more closely with repayment capacity.

Cavale says the long-term impact on banks is yet to be determined.

“While the guidelines are relatively prescriptive on the lending approach, they are really complementary when viewed from the vantage of a bank with more advanced risk assessment tools and portfolio screening and early warning triggers for sustainable loan portfolio health,” Choo explains.

A banking analyst from MIDF Research, on the other hand, thinks that while the guidelines on the whole are good, some details are vague and not properly spelt out. For example, there is no mention of specific details on liability as well as on debt servicing ratio, and is left to individual banks to assess the risk appetite of loan applicants.

Citibank Bhd managing director for cards and consumer lending Anand Cavale feels that while the guidelines will strengthen the control for lending, the long-term impact on banks is yet to be determined.

Although it will help reduce the level of household debt, this will depend on the state of the economy, as household debt is directly linked to the performance of the country’s economy, he says.

While the guidelines will strengthen the overall ability to lend prudently, Cavale believes there should be proper infrastructure in place. For example, banks having accessible ways to the customer income information will help the process to implement the guidelines more smoothly, he points out.

Other areas of focus

Some analysts feel the stringent lending guidelines may cause banks to shift their focus to other areas to boost their bottomlines.

The MIDF Research analyst says banks may, for example, look to increase high net worth individuals or affluent customers for their credit cards as in the case of Malayan Banking Bhd. This, he adds, will include cross selling of cards to this segment.

For the mortgage side, banks may look into issuing more financing for landed properties in selected locations and for the auto business, they may source for stronger dealership, the analyst says.

Choo says OCBC Bank’s objective is to derive 30% of its income from non-interest income sources, noting that it is keen to diversify and strengthen its deposit base to ensure it is not overly concentrated in any one specific segment.

According to Cavale, it is likely that banks will add other products or services that will support additional streams of income to mitigate potential reductions in the lending area.

Another area which banks are aggressively pursuing currently is the small and medium enterprise (SME) segment. This segment, according to an analyst with an investment bank, will provide better margins and probably make up for the shortfall in slower loan growth from the stringent guidelines.

Those banks which were not focusing on the SME segment will now have to employ strategies to capture this growing segment, he adds.


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Malaysia’s household debt rise a concern Mar 20, 2012

Moody’s declares Greece in default of debt

Bond credit rating agency says EU member has defaulted on its repayments as it secures biggest debt deal in history.

Moody’s Investors Service has declared Greece in default on its debt after Athens carved out a deal with private creditors for a bond exchange that will write off $140 billion of its debt.

Moody’s pointed out that even as 85.8 per cent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.

Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 per cent of the investment, Moody’s said.

“According to Moody’s definitions, this exchange represents a ‘distressed exchange,’ and therefore a debt default,” the US-based rating firm said.

For one, “The exchange amounts to a diminished financial obligation relative to the original obligation.”

Secondly, it “has the effect of allowing Greece to avoid payment default in the future.”

Ahead of the debt deal, Moody’s had already slashed Greece’s credit grade to its lowest level, “C,” and so there was no impact on the rating.

Moody’s said it will revisit the rating to see how the debt writedown, and the second Eurozone bailout package, would affect its finances.

However, it added, at the beginning of March “Moody’s had said that the risk of a default, even after the debt exchange has been completed, remains high.”


Al-Qaeda makes US Debt Downgrade?

What al-Qaeda Has to Do With Debt Downgrade

By Gary Weiss

BOSTON  — With every day of market decline and economic pain, we need to face a terribly unpalatable question, and it’s not whether Standard & Poor’s is credible or if the downgrades will send the economy into a tailspin (or, perhaps, if we are already in a tailspin).

Sure, the downgrade of U.S. long-term debt by Standard & Poor’s appears to be a cynical ploy by this tarnished credit-rating agency, perhaps trying to burnish its reputation at a time when parent McGraw-Hill is in play. But there’s no question that the content of its downgrade report is correct, even if its initial arithmetic was off. The fact is that our political processes are a mess. We don’t deserve a top credit rating.

But there is, I think, a deeper reason for the misery we’re experiencing. I’ll put it in the form of a question: Is al-Qaeda winning the economic struggle?

US propaganda leaflet used in Afghanistan.

I know, bin Laden’s dead, al-Qaeda is on the run, etc. etc. And I don’t mean that al-Qaeda has won militarily, though even that is debatable — can anyone say with confidence what will happen to Afghanistan and, of course, Iraq after a U.S. withdrawal? But I think that a strong case can be made that al-Qaeda has gone a long way toward achieving one of its primary war aims, which was to sabotage the U.S. economy. Bin Laden may be fish food, but his strategy seems to have worked. We are being bled white, thanks in large part by the war that he forced us to fight — and we have our representatives in Washington, and their ideologically driven refusal to increase taxes, to blame for this mess.

First, let’s go back to the bin Laden “we’ll bleed you” tape. This is not an urban legend, but was widely publicized at the time. In October 2004, al-Qaeda distributed a bin Laden video that contained a departure from his usual invective. Instead of inveighing against U.S. Imperialists, Jews and so on, he spent nearly 20 minutes talking not like a terrorist chieftain in a cave but the former corporate executive that he used to be, analyzing with satisfaction an objective that al-Qaeda was clearly achieving.

For every dollar al-Qaeda spent, he said, the U.S. was coughing up $1 million in war spending and economic misery. “As for the size of the economic deficit, it has reached record astronomical numbers” — over $1 trillion, bin Laden said. Actually bin Laden’s math was off — the deficit in 2004 was just over $400 billion, but his general point was correct. The deficit had reached astronomical numbers, and much of that was because of the war that he started and Congress’ stubborn refusal to pay for it by asking for sacrifice from the nation’s fat cats.

We had to fight the war in Afghanistan, but we didn’t have to mismanage the way it was financed.

Since October 2001, the war in Afghanistan has cost more than $443 billion. This year, taxpayers will pour another $118 billion into that quagmire, which is continuing to sap far too many U.S. lives, and with far too little assistance from our NATO allies. Factoring in the cost of the unnecessary war in Iraq, and the price tag of these two wars, paid for by the federal equivalent of a line of credit, has exceeded $1 trillion since 2001.

It was easy for bin Laden to ruin our economy. All he had to do was to exploit the natural tendency of the Bush administration to be incompetent. His primary Fifth Columnists are red-state congressional representatives, rock-ribbed Republicans who believe that you can fight two wars without paying for them.

Rather than raise taxes on the rich and cut loopholes to finance the war, the Bush administration let its 2001 tax cuts remain unchanged. The total cost of the tax cuts roughly approximates the cost of the Iraq and Afghanistan wars, and by some estimates is even higher — as much as $1.3 trillion.

If that estimate is correct, then simply repealing those tax cuts would have paid for the Iraq and Afghanistan wars, and we might even have had a few billion left over.

The war to destroy the economy has continued, with impressive results. Now there’s talk of cutting long-established social programs, the so-called “entitlements,” because President Obama acquiesced to a deficit-reduction program without revenue increases — and because he refused to invoke the 14th Amendment, which holds that the national debt is not to be questioned.

The result was a deal to cut spending in the middle of a looming recession and two wars. It’s nothing short of crazy. Nobody could have done a better job of mismanaging the economy — not even bin Laden himself if he had been the leader of the Congressional Tea Party Caucus, holding America hostage on behalf of an extremist ideology. Sen. John Kerry has correctly described the S&P downgrade as a product of the Tea Party movement and its allies in Congress. Do you really think that S&P would have piled on with its downgrade if Washington hadn’t gone haywire? I have a lot of respect for S&P’s integrity — I worked for another McGraw Hill subsidiary for 18 years — but I doubt it very much.

One can question the appropriateness of a credit-rating agency — any credit-rating agency — having the gall to take an action so disruptive to the markets, when one considers their squalid role in the subprime scandals. But there is no question that the U.S. government deserved the downgrade. Our legislative branch just isn’t working, that affects the creditworthiness of the nation, much as private companies run with weak corporate governance would be hard-pressed to win an AAA rating.

The events of the past few weeks have demonstrated what we’ve known for decades: that you don’t negotiate with terrorists, whether they are al-Qaeda thugs or extremist Congressmen who utilized the phony, artificial, unconstitutional “debt limit” to force their ideological agenda on an unwilling American people.

It’s sad, but true: The terrorists are winning.

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British loan sharks up 40% !

Number using loan sharks in Wales up 40% in four years

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Loan sharks often target vulnerable people such as single parents on low incomes, according to the Wales Illegal Money Lending Unit

Continue reading the main story

The number of people in Wales turning to loan sharks has risen by 40% in the last four years.

The Wales Illegal Money Lending Unit (IMLU) said the figure has jumped from 15,000 to 25,000 since 2007.

The most vulnerable areas include Swansea, Newport, Cardiff, south Wales valleys and the north Wales coast.

Steven Hay, head of the unit, said victims were usually debt-ridden individuals trying to provide for their families.

He said loan sharks targeted vulnerable people like those on low incomes.

Funded by the UK government, but acting on behalf of Wales’ 22 councils, the Cardiff-based IMLU has a mix of trading standards officers and former police detectives for its investigations.

Gambling debts

Mr Hay told BBC Wales: “In other parts of the UK, it can exist around drugs, gambling debts or alcohol but we found that more than anything the people in Wales want to provide for their families and sometimes that drives them to go to a loan shark for money.”

Continue reading the main story

Case Study

“Katie” is a single mother with two small children who got into trouble after borrowing £3,000 from a loan shark.

She had to pay back £5,500 – an interest rate of more than 100%.

“He was a very big man and I had heard what he had done to other people and what he was capable of,” she said.

“I wasn’t sleeping, I was suicidal and I was always worried that my kids would be better off with somebody else and that I should end it all for them to have a better life.

“It really was horrendous.”

The loan shark lending money to Katie was eventually arrested and jailed.

He said that since its inception in 2007, the unit had identified loan books held by illegal money lenders totalling around £2.5m, and had managed to eradicate around £1m of illegal debt in Wales.

The team has also worked with 1,700 victims and brought 32 people to trial, but the figures are “just the tip of the iceberg”, according to Mr Hay and his team.

Claire Smith of Swansea’s LASA Credit Union, one of the areas identified as vulnerable by the team, advised people to use their services instead of turning to loan sharks.

She told BBC Wales: “If an illegal money lender is taken out of an area, the issue you have is if somebody has been using that as a source of credit and that credit is taken away, no matter how bad it is, and they think that there is nowhere else to go, another illegal money lender will just come in and take over the patch.”

Steven Hay of the Wales Illegal Money Lending Unit Steven Hay said the figures were just the “tip of the iceberg” and more victims are out there

Mr Hay added that loan sharks targeted communities with vulnerable people, such as families or single people on a low income, often reliant on welfare benefits.

Unlawful imprisonment

Anyone who makes money from lending must have a consumer credit licence from the Office of Fair Trading.

The unit has uncovered many cases of people charged extortionate rates of interest, often with no paperwork.

As well as the threat and use of violence, loan shark criminality can extend to blackmail, money laundering, fraud and unlawful imprisonment or kidnap.

Mr Hay urged those experiencing problems with loan sharks to contact the team’s 24- hour hotline on 0300 123 3311.

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What’s left to trust in the world of money? Stop fooling around Govermnt Debts!

Jeremy Warner

What’s left to trust in the world of money?

America’s inability to address its fiscal challenges – Sunday night’s “bipartisan debt deal” offers only a temporary, sticking plaster solution – has raised afresh an old conundrum.

America's inability to address its fiscal challenges – Sunday night's

Relative to GDP, US sovereign debt has been far higher than it is today, but in the past America has been able to rely on fast growth and demilitarisation to return borrowing to tolerable levels. Neither of these things seem likely to come to the rescue this time around. Photo: REUTERS

If even US Treasuries are now regarded as a credit risk, is there anything left at all in the world of money that can be trusted?

The answer to this question is almost certainly no, but far from being a calamitous conclusion to reach, this might be viewed as a positive development which will in time restore market disciplines to a global monetary system which became based on make believe.

In fact, the idea of the sovereign as a “risk free asset” is a comparatively recent development which has no basis in historical experience. Even in a country such as Britain with no history of default (we’ll ignore the case of war loans, which is arguable), government bonds have hardly proved a reliable form of investment.

True enough, coupons have been paid and maturities honoured, but the currency and inflation risks have proved extreme. On any medium to long term view, you would have done much better out of property and equities.

Among members of the eurozone, the concept of the sovereign as a safe haven asset is an even shorter lived phenomenon. The widening of spreads we’ve seen in the past year and a half of financial crisis is as nothing compared to the way it was before the single currency was launched.

Those countries with weak governance were punished for their lack of competitiveness with high interest rates and repeated currency crises. It was a brutal, but reasonably effective form of discipline.

But once the euro had been established, all countries, bad as well as good, came to enjoy the same low interest rates that Germany had earned from years of hair shirted fiscal rectitude. Bond yields converged not because anyone believed the single currency’s fiscal rules would make all countries like Germany, but because markets expected that countries which got themselves into difficulties would be bailed out. They have so far been proved entirely correct in this assumption.

Peer group pressure The abolition of sovereign currencies removed the pressures that markets normally exert on governments to take unpopular, austerity measures. Market disciplines were replaced by peer group pressure from European finance ministers, only a few of whom were in any position to lecture their colleagues on sound financial policies. Once even Germany started to break the rules, the game was up.

All this was brilliantly predicted by Norman Lamont, a former UK Chancellor in the chapter Why I am Against the Single Currency from his book In Office, published nearly twelve years ago.

Increasingly tortuous attempts to prevent wide scale default fail to acknowledge the underlying reality; membership of the single currency has allowed some countries to borrow far in excess of their ability ever to repay.

But it is not all the fault of the euro. Risk compression was a worldwide phenomenon during the boom. In the hunt for yield, investors became oblivious to the dangers. By the end, almost everything was regarded as entirely risk free. Credit rating agencies were corrupted into the process by giving top notch ratings to fundamentally unsafe assets. These judgements then became embedded in regulatory requirements and central bank collateral rules, making everything seem safer than it really was.

 Sovereign downgrades

Today, the rating agencies are accused of deepening the debt crisis with repeated sovereign downgrades, but if anything, their pronouncements understate the reality. Their discomfort is nowhere more apparent than with US sovereign debt. Even assuming the latest settlement – which envisages a $2.1trillion (£1.3 trillion) fiscal consolidation over ten years – is ratified, it’s not enough to put public debt back on a sustainable trajectory.

It’s perfectly true that relative to GDP, US sovereign debt has been far higher than it is today, but in the past America has been able to rely on fast growth and demilitarisation to return borrowing to tolerable levels. Neither of these things seem likely to come to the rescue this time around.

When Standard & Poor’s placed the US on negative watch last month, it suggested that a consolidation of perhaps as much as $4 trillion would be required to safeguard the nation’s triple A rating.

Heading for a downgrade

Implicitly, then, America is heading for a downgrade regardless of the fact that the immediate threat of default has been removed. Will S&P have the guts to go through with its threat? I’ll believe it when I see it. Already S&P has appeared to backtrack in evidence to Congress.

The major rating agencies enjoy an unhealthily cosy relationship with the major sovereigns, and can usually be persuaded to do the “right thing” in the interests of financial stability. As ever, sweeping the issue under the carpet will only make the eventual crisis even worse.

But perhaps oddly, the immediate blow to America if the big agencies do decide to downgrade is likely to be more psychological than real; it may not matter too much for bond yields.

Despite loss of its triple A rating and central government debt in excess of 200pc of GDP, Japan continues to enjoy the lowest sovereign bond yields anywhere in the world.

This apparent paradox is explained by the fact that when there is generalised risk aversion, where consumers are reluctant to spend and companies won’t invest, the consequent savings surplus tends to flow into the only place it can – government debt.

Some of the same phenomenon is occurring in the US right now. Much as China threatens to withdraw its support for the US dollar in protest at policies which it thinks debase the currency, it really has no option but to continue buying US Treasuries as long as it maintains such a big trade surplus with the US. The capital surplus is merely the mirror image of the trade surplus.

Dominant reserve currency status in any case gives the US unrivalled access to international borrowing. Dollar hegemony may not last for much longer, but for the time being there are no viable alternatives.

This is both a blessing and a curse for the US – a blessing because it allows the country to keep borrowing at reasonable rates almost regardless of underlying public debt dynamics, and a curse because it maintains the addiction to debt.

If nothing is done, the façade will eventually break; that’s the point at which to run for the hills. Food, property, energy – these are the things that retain value when money dies.- Telegraph

Govt debts – it’s time to stop fooling around

Plain Speaking – By Yap Leng Kuen

INDEBTEDNESS has become an unsavoury word, especially when an important economy like the United States faces potential default if its US$14.3 trillion debt ceiling is not raised in time.

As at press time, an agreement was reached on raising the debt limit; however, the uncertainty created during the stalemate prior to the agreement had cast an element of doubt in the markets over the long term viability of US Treasuries and a possible downgrade of US’ credit rating.

The debt ceiling has been raised before; however, the severity of the problems faced by Greece and other countries with high debt levels has caused the US situation to be viewed with concern.

In fact, post-2008 financial crisis, government debt has become a major issue. In a research update, McKinsey Global Institute said while global debt and equity hit new highs, more than a third of growth last year was government debt.

According to McKinsey, the overall amount of global debt grew by US$5 trillion last year, with global debt to gross domestic product (GDP) increasing from 218% in 2000 to 266% in 2010.

Government bonds outstanding rose by US$4 trillion in 2010 while other forms of debt had mixed growth, said McKinsey.

The move to downsize debt needs to be backed up by a concrete and consistent plan that shows not just commitment but also conviction of all parties involved.

Countries with high levels of debt must show that they are not only able to save others but also themselves.

Part of a government’s credibility lies in its ability to manage its finances. Simply put, this involves lowering or containing its costs while increasing revenue.

Much effort should be spent on plugging the leakages while taking pains that taxpayers, who usually bear the brunt of others’ mistakes, are not disadvantaged.

Postponing the problem by merely raising the limit for another time just makes matters worse; the issue of indebtedness becomes more serious and future governments end up inheriting the problem rather than spending productive hours on new areas of growth.

To get the cooperation of taxpayers to sacrifice for another round of austerity drive will probably not be easy. They may question why they have to pay for the excesses when they had already paid on previous bailouts for the big boys.

It is therefore time to stop “fooling around” with the finances and really get down to work on solid improvements. A transparent approach with proper timelines that can be accessed by all will certainly help.

Once people see something concrete coming up, they will be more convinced and committed towards the common goal.

Moreover, money allocated in a fair and equitable manner will result in better support from taxpayers.

Associate editor Yap Leng Kuen recognises that managing a country is far more complex than a family although the same dose of common sense is required.


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