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Staving off the cliff by giving debt haircuts to zombies…

Jessica Irvine

by Jessica Irvine

07 Jan 05:44am

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Filed under: Banks, Debt, Debt Ceiling, Economy, Fiscal Cliff, Gfc

24 comments

2013 is shaping up as the year of blockbuster economic jargon. Unless you’ve been living under a rock or relaxing on a remote beach (lucky you) you’ve heard of the fiscal cliff. Ad nauseum, no doubt.

Off the road… we're on our way to a meeting of the Central Bank… Picture: AFP

But fear not. Let me guide you safely back from the fiscal cliff; let’s bust the debt ceiling together and run hand in hand from any zombie banks we may encounter. Here is my cut-out-and-keep, economic jargon-busting guide to 2013:

FISCAL CLIFF: The name given to the hundreds of billions of dollars of tax hikes and spending cuts that were due to start from January 1 in the United States. Fiscal is the name given to the tax and spend decisions of governments. Cliff refers to the sudden nature of the change in budget settings. Tax hikes and spending cuts of $670 billion, roughly 4.3 per cent of American annual economic output, were set to knock the world’s biggest economy back into recession.

Congress has narrowly averted this outcome by passing legislation to provide shelter from tax hikes for the vast majority of Americans. But America’s budget woes are far from over…

THE SEQUESTER: In their haste to make a deal, Republicans and Democrats failed to reach a comprehensive agreement to put the US budget on a more sustainable path. In particular, they failed to reach agreement on the so-called “sequester”.

Back in August 2011, as part of the first debate about the US debt ceiling, Congress passed legislation to trigger automatic, across-the-board spending cuts to begin on January 2 this year – known as the sequester. All last week’s deal achieved was to delay this sequester – totalling $110 billion in cuts to defence and health spending - for two months. Unless something is done to delay or reduce them, they will still trigger in two months, dealing another blow to the US economy.

DEBT CEILING: The US Treasury advised last week that the US has again hit its “debt ceiling”. This is the amount the US government can borrow and is capped by legislation. The current cap is set at $US16.4 trillion.

Any increases to this borrowing limit must be approved by Congress passing new legislation. The Republican-dominated lower house is loathed to do this. Treasury says it can scrimp and save and keep paying its bills for about another two months. But at that point it will need to borrow more if it is to meet all its payments, including interest repayments on its debt.

If it cannot get this money, America could default on its debt repayments, leading to a likely downgrading of its credit rating and shaking global investor confidence again. So get ready for another Congressional showdown in late February as Republicans agitate for big spending cuts in return for agreeing to increase the debt ceiling.

DELEVERAGING: The world has woken up with a large debt hangover. Banks, governments and households borrowed against the future and the future wants it back. 2013 will be a year of continuing to pay down debts. Leveraging is when people take on debts to fund investment. Deleveraging is when they pay debts down. It means slower growth and lower employment than otherwise. Welcome to life after the global financial crisis.

ZOMBIE BANKS: The global financial crisis began as a banking crisis – banks lent too much to people who couldn’t repay it - and the crisis is far from over. A zombie bank is one where its debts exceed its assets.

They’re essentially bankrupt banks that survive on life support payments from governments. Europe is full of them, as banks struggle to offload or pay down large debts. The world’s banking system is far from out of the woods. Watch out, there’s zombie banks about.

DEBT HAIR CUTS: These could be all the rage in Europe for 2013. A debt hair cut is when a lender agrees to forgive some of the value of a borrower’s loan. The Greeks started the trend in 2011, securing a near 50 per cent reduction in the value of government debt.

Now it is cash-strapped Cyprus that may be next for the chop. Europe remains mired in its own debt trap. The size of outstanding debt in Europe, and Greece in particular, remains so high, that paying it off will take decades.

Austere budget measures aimed at closing the gap will be a continued drag on economic growth and jobs for years to come. Debt haircuts would force lenders to shoulder some of the pain.

REBALANCING: What does all this mean for Australia? The turbulent world economy and cooling Chinese growth knocked the stuffing out of Australia’s mining boom last year. With the mining boom off the boil, the Reserve Bank slashed interest rates to help fire up non-mining parts of the economy.

Expect to hear a lot more about this “rebalancing” in 2013. Growth needs to rebalance from the mining sector to the construction, retail spending and services parts of the economy. It won’t be easy as the Australian dollar stays high. But, eventually, lower interest rates should encourage construction and household spending again. But it’s a delicate balancing act.

AUTOMATIC STABALISERS: Amid all the economic drama, the Gillard government has let go of its promise to get its budget back into surplus this year. It will instead allow the budget’s “automatic stabilisers” to work.

This is the tendency of the budget to go into deficit in bad economic times, as revenue from income taxes and company profits dwindle and payments of jobless allowance and welfare increase.

If the government tried to counteract this tendency with spending cuts and tax hikes – as it has done in previous budgets - this could risk taking too much heat out of the economy. Better to keep the economy ticking along and restore the budget to balance when it is back on track. Some bottom lines were meant to blow out, a little.

Jessica Irvine is National Economics Editor. Her new years resolution is to weigh 65 kilograms by the May federal budget. Current weight: 73.7 kilograms. Weight loss this year: 1.0 kilograms.

Follow her on Twitter: @Jess_Irvine

Comments on this post will close at 8pm AEDT.

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24 comments

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    • Tubesteak says:

      07:06am | 07/01/13

      The Obe Great Big Lesson from this whole mess is:

      “Huge social welfare spending does not work. There is no point wasting money on people that don’t earn money. People are greedy and indolent and feel entitled to a lifestyle far beyond their means: don’t cater to those desires! Government needs to focus on building infrastructure where market failure or lack of profit motive exists. Trying to buy votes with hand-outs in order to enable people to live a lifestyle they couldn’t afford does not work”

      Banks lent money to people that couldn’t afford it because the government created this home loan market (cf CRA, Fannie Mae, Freddie Mac). It was a policy that created an overinflated property bubble. It was doomed to fail

      BTW You spelled “stabiliser” incorrectly

      Reply

    • Tubesteak says:

      08:07am | 07/01/13

      *One

    • Tator says:

      08:34am | 07/01/13

      Add both together and you get obe one (phonetically obi wan) bit prophetic there Tubey or just a freudian slip.  Or is it just that the force is strong in this one

    • expat says:

      08:38am | 07/01/13

      +1

      Once a handout is given, it is awfully hard to remove.

    • Shane From Melbourne says:

      11:36am | 07/01/13

      Incorrect analysis since there were no such compulsory schemes such as CRA, Fannie Mae, Freddie Mac in Europe where banks got burned by property bubbles. Banks were quite happy to highly leverage above capital holding requirements without any government compulsion in order to garner large profits in the boom period….

    • Tubesteak says:

      12:10pm | 07/01/13

      Shane
      Europe is different due to a combination of extreme social welfare, interconnected property markets, lax banking regulation, the distortion of the Euro being overvalued in some countries but not in others and the same amount of highly leveraged borrowing in a climate of extreme social welfare

      Some of the reasons might be slightly different but it’s the same cause-consequence test

      Lets not forget that they play in the same capital markets as the US

    • Shane From Melbourne says:

      01:04pm | 07/01/13

      @Tubesteak- You mentioned a factor that was common to both the United States and Europe- lax banking regulation. Possibly one of the causes?

    • PJ says:

      09:16am | 07/01/13

      The Surplus circus has showed once again the Gillard Government cannot be trusted.

      Economic data made it clear yonks ago to 60% of us with cognitive processing capability, that Labor’s much promised surplus was unachievable.

      Yet the Prime Minister and Treasurer Egotistically and rather pathetically stuck to their insistence that a Surplus would be delivered. Very scary.

      They should have capitulated long ego. How come they did not read like the rest of us saw .... falling revenues and slowing growth?

      The Gillard Government ignorantly or egotistically ignored all warnings and in consequence has damaged consumer confidence in announcing what they should have come to terms with yonks ago: ‘No Surplus possible under a Government we lead.’

      How can we ever trust this Gillard Government after this Surplus debacle?Not just the broken promise, but how they continued to mis-read what was even possible.

      This latest broken promise follows a series of broken promises from the Gillard Government, the biggest of which is seen as the promise that their would be no carbon tax under a government Gillard led.

      For me Gillard’s promise to establish firm Border controls is her biggest broken promise. she destroyed the Coalition solution it seems out of pure Narcissistic ego.

      But still, loads of people are in shock at how the Gillard Government forcefully and continually attempted to convince voters they were delivering a Surplus and that they had control of the economy.

      Over a period of years they played the charade with voters, in an effort to convince all they could manage the economy and have full control over it.

      When they admitted what we all knew, the Surplus was imposdible, they damaged voters faith that:
      - they had a plan and strategy for the economy
      - that they were managing the economy
      - that they had control over the economy
      - that Australians and Business leaders could trust their promises on economic matters.

      The Gillard Government’s credibility is in total tatters following a stream of broken promises and deceptions.

      Many Australians have been given the impression the National Disability Insurance Scheme has been delivered, but there is no money and what we have is merely a small trial, pilot scheme. Far short of a full launch. As for the Gonski massive 9 pager report , again this remains unfunded and in ‘research mode.’ Yet both are presented to Australians as done deals deserving a round of applause?

      You’ll never know the truth of it, under a Government they lead…

      Reply

    • Achmed says:

      10:38am | 07/01/13

      Tony Tony Tony - I for one can see the problems of the current Govt.  What I don’t see is anyone telling us how good your policies are.  All I see is the standard Labor bad/Liberal good rant without any comment promoting your policies.
      And in your usual dishonest manner you blame the Gillard Govt for dismantling the Liberal asylum seeker policy when it was actually done while Rudd was PM.
      How about you tell us all how your Direct Action carbon plan to give taxpayer money to polluters is better than having to polluters give the Govt money.
      Explain how increasing business tax by 2% to pay for your maternity leave plan is better and will assist the economy.

    • Tator says:

      12:00pm | 07/01/13

      Achmed,
      Rudd/Gillard, it is all the same, the same basic core group of ministers and mp’s all serving as a government on a continual basis without another party holding power.

    • Lutoka says:

      09:31am | 07/01/13

      yawn!!

      Reply

    • St. Michael says:

      12:29pm | 07/01/13

      Your attitude sickens me.  It sickens me even more because there’s roughly 200 billion Americans who have exactly the same attitude and poor education as you, and those 200 billion Americans are the main reason the US is in the toilet it currently is.  If America’s population either educated itself financially or economically or actually cared about these issues beyond the size of their Social Security checks, their country would not be debtor to the world right now, and we would not be on the precipice of a once-in-a-generation economic catastrophe as will likely hit them, if not us.

      By the way, you might want to educate yourself on the projections of Australia’s public debt assuming current retirement age and current age pension rules remain.  Broadly speaking, they can’t be sustained any more than any of the insane spending the EU and the US have been pioneering over the past 20 years or so.

      Be complacent and a conspicuous ignoramus while you have the luxury to do so.  Your children, and your grandchildren, will not have the benefit of the level of government spending we see now.  That era is ending, and fast.

    • Lutoka says:

      12:54pm | 07/01/13

      Even bigger yawn!!!!!!!

    • St. Michael says:

      01:31pm | 07/01/13

      Keep yawning, Lutoka.  When you’re starving because your $20 represents about as much value as a million dollar Zimbabwe note, you won’t have any mouth to put in that wide gob of yours.

    • Colin says:

      02:20pm | 07/01/13

      I think I’ll second that, Lutoka…

      YAWN!!!

    • St. Michael says:

      02:43pm | 07/01/13

      Colin, thanks for demonstrating how people who happily rant on about their god-given rights not to vote or how it’s evil to go to war are usually shiny happy sheeple when it comes to the government doing stuff that can actually affect them personally in an economic sense.  It comes from your innumeracy - not that I hate you for it, because you can’t hate a toddler for its immaturity.

      Fact is, government can and does a hell of a lot more damage to your existence with reckless spending, financial repression or other measures to take the value of your money off you than it can by conscription or “forcing” you to vote.  That’s what inflation - and, in worst-case scenarios, hyperinflation - is about.  That’s what heavy regulation of free markets is about.  Ask any small business owner what they think of government loading more and more regulatory burdens onto them. 

      The stupid part is that people like you scream about market monopolies by the likes of Coles and Woolworths, and yet you scream just as loud against the sorts of ideas and measures which would break those monopolies.

      Read a book, Colin.  You might learn something.

    • P-TRAIN says:

      03:18pm | 07/01/13

      @St. Michael

      Innumeracy?

      “there’s roughly 200 billion Americans who have exactly the same attitude and poor education as you, and those 200 billion Americans”

      .......

    • Moffat Beech says:

      10:05am | 07/01/13

      Don’t Punch journos learn Latin any more?  First Laurie Oakes, now Jessica Irvine; ad nauseum’s been going on ad nauseam.

      Reply

    • St. Michael says:

      12:24pm | 07/01/13

      Jessica, this bit on the debt ceiling…

      “If it cannot get this money, America could default on its debt repayments, leading to a likely downgrading of its credit rating and shaking global investor confidence again. So get ready for another Congressional showdown in late February as Republicans agitate for big spending cuts in return for agreeing to increase the debt ceiling.”

      Couple of things here:

      (1) You are incorrectly describing America as “getting” this money.  What you really mean is if America cannot borrow this money.  The US Federal government, which for your article’s purposes counts as “America”, collects about 2 trillion in tax per year to pay for all of its employees, Social Security, everything—and as you say has an outstanding debt of 16 trillion and rising.  The remainder—the other 14 trillion—has to be borrowed from other people: notably, overseas investors and US institutional investors.  America’s debt-to-GDP ratio is 105% and rising.  If you’d like to be freaked out, see here for how the numbers are rising in real time, based off the US government’s own statistics: http://www.usdebtclock.org/

      (2) The debt ceiling will be raised again, so there will be no “showdown” as you say.  For all their histrionics, neither the Republicans or the Democrat in the White House want to be blamed for what would amount to a shutdown of the Federal government and all its money-paying industries including Social Security.  The only way to stop the debt ceiling being raised is to stop acquiring more debt—which the US has proven, over the past 30 years, it cannot or will not do.

      (3) I like how you say America “could” default on its debts.  Wise phraseology, because neither Congress or Obama will allow that to happen.  Like I said, neither wants to get blamed for it.  All that will happen, ultimately, is another compromise that makes no real difference to the coming avalanche.  Whether America’s politicians like it or not, there is a given level beyond which sane people wll not lend their government money, following which they either print the money (which is an implicit default on the debt, often leading to hyperinflation) or cut spending by 50% or more so they can fund government activity out of taxation alone (which they’ll have to do eventually anyway, or watch as America turns into Argentina).

      Greece found that level to be when their debt-to-GDP ratio hit 140%.  On present spending, the US will hit that same 140% level in roughly 2019.  That’s only six years away, and it might be sooner if some market event causes a panic on the bond market and therefore a run on the US dollar.

      You might also remind your readers of something: Greece’s financial crisis only avoided destroying the EU because the ECB and IMF stepped in and injected literally billions of dollars to avoid Greece completely reneging on its debt.  The ECB and the IMF simply do not have the money to bail out the US.  Nobody does: the debt is too big.

      Reply

    • PJ says:

      12:51pm | 07/01/13

      We’ve had 200 VOWS to deliver a Surplus given to us over the period 2010 to 2012 from the Gillard Government.

      All the economic factors were known yet still the vows and promises of a Surplus were given by the Gillard Government, right up to the week they said errm actually we cannot deliver.

      ** Quotes over the 2010 to 2012 period Promising of a Surplus**
      1 “Today, I can assure every Australian that their Budget will be in Surplus in 2013.” - Julia Gillard
      2 “Moving Forward means bringing the Budget into Surplus by 2013.”
      3 “Brining us back to Surplus 3 years earlier.” - Swan
      4 “(a Surplus is) important to our future and economic strength.”  - Swan
      5 ..“it is achievable,” - Swan
      6 “The Australian economy is in great shape and we are on track for a Surplus.
      Outside of the Asia Pac those economies are in bad shape.” - Swan
      7 “We are on track for a Surplus in 2013, on time and as promised.” - Swan
      8 “We will bring the Budget to Surplus in 2013 exactly as promised.”
      - Gillard
      9 “It is in the interests of the Australian people to bring the Budget to Surplus.” - Gillard
      10 ..“the Surplus is a buffer against Global uncertainty.” - Swan
      11 “This 2012 Budget delivers a Surplus this coming year, on time.” - Swan Budget Speech May 2012.
      12 “It is a modest Surplus, but one that is easily achievable given the economy we’ve got.” - Swan
      13 “THE FOUR (4) YEARS OF SURPLUS I ANNOUNCED TONIGHT….”
      - Swan Budget Speech May 2012.

      Using the Gilard Government’s own statements, in not delivering a Surplus as solemnly promised this Government has:
      1. not been able to deliver on it’s assurances.
      2. is not able to ‘Move Us Forward’ now.
      3. Cannot ‘bring us Back to Surplus’.
      4. has threatened our ‘Future and Economic strength’.
      5. Cannot deliver what it said was ‘achievable’.
      6. has misread the economy and not been able to bring in a Surplus despite being in a stable economic sound Asia Pac region.
      7. Lied when it said we were ‘on track’ and has failed on it’s promise.
      8. is unable to bring in it’s promises.
      9. Has jeopardised the ‘Interests of the Australian people.
      10. has failed to provide the promised ‘Buffer’ against Global forces.
      11. Cannot put together a deliverable Budget.
      12.has broken the promise it made for Surplus over the next 3 years as well.

      In summary, using the Gillard Governments own words, in not delivering on its promise it has reneged on its assurances, is no longer able to move us forward from here, has threatened our future and economic strength in not delivering what it said was achievable in the sound economic Asia Pac Region.

      If you cannot make a Surplus in the Asia Pac when you also had an enviable Mining boom, they your a bloody idiot surely?

      Reply

    • Achmed says:

      01:05pm | 07/01/13

      Still unable to tell us how great Abbott’s policues are?  Still only got “them bad us good” mantra.
      How about you explain how Abbotts plan to give taxpayer money to the polluters is better.
      How about you explain how increasing business tax by 2% to pay for Abbotts maternity leave plan is a good thing for the cost of living and business confidence.

    • Lutoka says:

      01:28pm | 07/01/13

      yawn!!!!!

    • Smashmellows says:

      03:25pm | 07/01/13

      And therin is the lie Jessica.  In Australia since the begining of the GFC tax recipts have been good, profits have been reasonable and unemployment on a historical average.  Federal governement income has actually increased over the period since the Howard government was removed.  This recent period is a time when there should have been a very tight fiscal environment becaus the real crash is yet to come.  In that time Labor, that cluess bunch of lazy socialists has spent like a drunk in a brewery.  They have left us very vulnerable to the impending world recession.

      Reply

    • 108 degrees celsius says:

      06:17pm | 07/01/13

      obama wants to sidestep congress over guns controls issues and all issues in 2013

      Reply
 
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