Financial and political uncertainty and the prospects of full-blown sovereign debt defaults now include so many countries that it is impossible to predict where and when the next crisis might come. The fears are it will be soon, as the candidates line up. Only the US with its “sovereign” international currency, which allows it to print money, is immune, but questions as to whether the greenback will be accepted are being raised.

In a stunning development overnight the Financial Times reported the Kuwait Investment Authority may be ending its relationship with the US banking giant Citibank where it has normally deposited most of its oil revenue.

Decades of close ties between the KIA and Citigroup appear to have completely broken down.

“A withdrawal of KIA funds from Citi would mark another setback for the bank as it seeks to recover from the financial crisis and pay back government bail-out funds,” the Financial Times reported.

The paper quoted KIA’s internal talks and other sources, saying Vikram Pandit, Citi’s chief executive, had failed to meet Bader al-Saad, the KIA’s chief executive, despite repeated requests from the KIA for a meeting.

Further, Michael Klein, the former Citi vice-chairman who had close ties with officials across the Middle East, has left the bank, effectively shutting another channel of communication.

On the wider front, even Germany is now concerned over the writedowns of almost euro90 billion ($A145 billion) from toxic housing mortgages bought from US banks during the housing boom. Angela Merkel is reportedly arranging for €90 billion in bailouts with taxpayers facing a €10 billion payout to sustain banks that bought the toxic housing loans in the mid-2000s. But rumours of defaults have swept Britain, Greece, the Baltic States, the so-called Club Med nations, Latin and South America as the US housing collapse continues.

Overnight RealtyTrac reported foreclosure filings in the US would reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default.

This year’s filings will surpass 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market, the California-based company said.

“We are a long way from a recovery,” John Quigley, economics professor at the University of California, Berkeley, said in an interview. “You can’t start to see improvement in the housing market until after unemployment peaks.”

Foreclosure filings exceeded 300,000 for the ninth straight month in November, RealtyTrac said. A weak labour market and tight credit are blamed as 7.2 million jobs lost since the recession began in December 2007 —  the most of any postwar economic slump, latest Labor Department data show.

And the situation is apparently worsening on the employment front with a new survey of men without jobs revealing that for US males aged 25-55 employment levels are plummeting.

The survey showed the worst employment levels since records commenced after WWII with a 10% fall in the past year. The report said the decline appears long term.

Meanwhile, Paul Volcker, who went to hell and back to clean up the Reagan mess in the ’80s, driving interest rates to 17-plus%, has stunned a business conference in Sussex with some harsh truths. More of this later.

In other economic news of substance the former Bank of England policy maker Willem Buiter said Greece may be the first major country in the European Union to default on its debts since the aftermath of World War II.

“It’s five minutes to midnight for Greece,” Buiter, who will join Citigroup as its chief economist next month, said in a Bloomberg Television interview today. “We could see our first EU 15 sovereign default since Germany had it in 1948.”

Reflecting this and dire news from Spain the Levy Economics Institute of Bard College yesterday questioned whether “Euroland” can survive.

As social unrest across Europe is growing as Euroland’s economy collapses, in tandem with certain US states, “Can Euroland Survive” is a subject based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space.

The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research associate Stephanie A. Kelton and senior scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.

Meredith Whitney, whose judicious bearishness has won her an army of supporters, told CNBC there are no more green shoots and the government is out of bullets. Not ones for Afghanistan, however. Well there are plenty of trees, although paper money is made from cotton fibre material the point is, I hope, made.

The news that might really make the news in coming weeks was that credit rating agencies downgraded the status of sovereign Spanish and Greek debt while threatening to lower their ratings on UAE debt. These downgrades will trigger hidden OTC credit default swap liabilities, and new defaults await us.

Of course those “trees” mean that the US, holding the world currency can cut them down, eat their lunch and go to the lavatree (if I might steal from Monty Python) and go to the lavatory is what will finally happen to the greenback. But with chairman Ben Bernanke’s head close to the block we are now seeing the stronger dollar campaign in all its glory.

But the US Treasury has $US2 trillion ($A2.2 trillion) in short-term Treasury debt, which has to be refinanced in the next 12 months. This does not include the net Treasury borrowing that will be required to fund the 2010 spending deficit.

Let us not even mention off-budget expenses such as  the Iraq/Afghanistan wars, the cost of running Freddie, Fannie, AIG, GM, Citi and many friends of the US Administration.

Let’s make that $US3 trillion needed.

Meanwhile, a cashed-up Treasury secretary Geithner has extended the TARP program until October 2010, which happens to coincide with mid-term elections.

Returning to the angry old man Volcker, who remains the chairman of President Obama’s Economic Recovery Advisory Board, but needs to travel to Sussex to be heard, and has been, to quote the New York Times, “marginalised” at the White House by the gang that has captured the president’s ear and attention but can’t shoot straight. At first the audience was apparently “stunned” by his speech but they soon began to warm to his dire message. One line that apparently went over well was his remark there is “little evidence innovation in financial markets has had a visible effect on the productivities of the economy”.

Louise Armistead, at the Financial Times, reported that the former US Federal Reserve chairman told an audience that included some of the world’s most senior financiers that their industry’s “single most important” contribution in the past 25 years has been automatic telling machines, which he said had at least proved “useful”.

A great stride for mankind, what!

Volcker told delegates who had been discussing how to rebuild the financial system to “wake up”. He said credit default swaps and collateralised debt obligations had taken the economy “right to the brink of disaster” and added that the economy had grown at “greater rates of speed” during the 1960s without such products.

When one stunned audience member suggested that Volcker did not really mean bond markets and securitisations had contributed “nothing at all”, he replied: “You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.”

He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and “proprietary trading should be pushed out of investment banks and to hedge funds where they belong”.

Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit but they should be “regulated on one side and protected on the other” and riskier financial activities should be limited to hedge funds to whom society could say: “If you fail, fail. I’m not going to help you. Your stock is gone, creditors are at risk, but no one else is affected.” Being businessmen, not bankers, the audience cheered.

Attention will soon fall on the European Central Bank’s ability, or inability, to bail out a member states. The ECB is practically prohibited from taking over the debts of same, though it is impossible to surmise what the ECB might do in a crisis. Nevertheless, the possibility of a (bank) run stemming from an individual member’s debt exists. And there is no central fiscal authority that has anything like the responsibility of the US Treasury.

Charles Goodhart (2006) summarises the problem: “The federal institutions in the EU have neither the ability, nor the wish, to guarantee the deficits of the subsidiary state governments. The ECB is admonished not to support failing state governments, and there is no fiscal competence at the federal level either to make inter-regional transfers in response to asymmetric shocks or to support the ECB in meeting the burden of bailing out a failing state government. So the federal government in the EU neither can, nor wants to, carry out its part in the kind of implicit bargains observed in other federal systems.

He said that once markets begin to perceive a nation as a “weak” issuer, they can effectively shut down a nation’s ability to stabilise conditions within its borders. This is the fundamental weakness of the euro zone that had been warned about since its inception. This means that bonds issued by Greece, Portugal, Ireland and Italy are perceived to be instruments with less liquidity than those issued by Germany, France or Finland. Even though the government debt of all member states is homogenous in terms of denomination, bonds issued by the smaller countries will not have the same liquidity as those of larger countries.

In the US, a social explosion is prevented by the continued extension of unemployment benefits, something most Western nations take for granted. But America is not built to for welfare of that nature. Unemployment benefits are exceedingly generous but have been extremely limited in duration.

The administration continues to extend and will doubtless go on doing so. But budgets were not built for these expenditures. More trees?

If Obama stops the payments, millions dependent on them to feed and house themselves and their families will not be able to do so. Then we will see what a depression looks like. Obama has no choice but to keep extending the benefits period, and at the same time food stamps now provide for 20% of sustenance for American families.

Declining rail and trucking freight traffic, declining imports, an airline industry that is grounded, is occurring while a new wave of housing foreclosures begins.

The world is not out of the woods yet. For the US can’t see the wood as it cuts down the metaphorical trees.

Peter Fray

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