The debt burden of the world has increased enormously in the past five years as governments have tried to tackle the economic vice of the banking credit crisis – only to get themselves in a tangle. But isn’t the crisis more about passing the buck from one part of the economy to another – and then back again?
It may have started as debt carried by households, when mortgage foreclosures became an issue in the mid-2000s. But it quickly became the problem of banks in 2007 when CDOs appeared to carry worthless AAA ratings and things started to go wrong when it was discovered that so much debt was carried by individuals who had no chance to pay it back.
The problem became one for governments as banks started to struggle and in the so-called Inter-bank market they didn’t trust one another anymore to lend to each other. That led to the “credit crunch” which then US president George W Bush reportedly joked he thought was a breakfast cereal.
But it was no breakfast for governments who nationalised and in other ways tried to protect their banks from collapse. So to discover today from the Institutional Investor semi-annual country credit survey that the average rating of 179 sovereigns has declined by 0.6% to 43.9 on a scale of zero to 100 is humbling indeed. After recent progress, governments globally are struggling again.
The peak creditworthiness of sovereigns recorded by the poll was in September 2008 – as UK lenders Northern Rock and Bradford & Bingley were nationalised and just as Lehman Brothers was about to spectacularly collapse.
Since then so many institutions have been taken into state ownership in Europe, including RBS, Lloyds TSB, Dexia, Fortis, and Ireland tried to save Anglo-Irish and others.
The burden this has placed on the governments has been enormous.
Now governments are trying to claw this back. While Britain maintains that interest rates are at a record-low, UK consumers are not feeling wealthy. A survey this week from uSwitch.com suggested Britons worry more about the rising cost of living than their health.
Since 2008, the survey says, food prices have risen 17%, gas fuel 52% and car insurance 67%. Rent, the biggest portion of spend, has taken an even larger chunk as it rose 24% by 2013.
The only two things which have dropped are broadband by 68% and content insurance by 9%. Total outgoings are estimated to have risen by 25% over five years.
Governments are looking at a possible Mansion Tax in some form in the future. This property tax will be a possible Labour Party manifesto pledge but last night at least the draconian tax was defeated in Westminster.
Already consumers are borrowing in order to make ends meet and they fear this month’s UK Budget will make living in the UK near impossible.
One way or another the debt burden will get passed back to consumers and so the merry-go-round begins again.
What is also disturbing is that, record-low interest rates, rather than stimulating lending to Main Street, have instead caused investors to take…more risks.
Many of them are flocking back to buying bonds backed by pizza revenues, movie royalties or other oddball returns. The Bowie Bonds, made famous by the rock star in the 1990s as his back catalogue was used as collateral, are still the inspiration for the new wave of bonds now re-emerging.
I say risky, because some have already lost their investors’ money and because their heyday was a very different financial market backdrop – the early 2000s before the credit crunch set in.
Are we setting people up for more disappointment? Anyone else for the Magic Roundabout? Step into crisis. The admission is free.