Staving off the cliff by giving debt haircuts to zombies…
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.
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.
Read all about it
Up to the minute Twitter chatter
The latest and greatest
Good morning Punchers. After four years of excellent fun and great conversation, this is the final post…
I have had some close calls, one that involved what looked to me like an AK47 pointed my way, followed…
In a world in which there are still people who subscribe to the vile notion that certain victims of sexual…