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Crystal Gazing

May 5, 2010

Greece had a public debt of 113% of GDP before it went belly up. Or 552.8 billion USD of external debt. GDP estimates 342.2 billion. There was a bailout of 160billion USD to the Greek Trojan Horse. The situation is, this will cheapen Euro even more.

So, cheap euro means, your external debt will spiral. Now pushing even more teetering countries off the ledge. But the question is, who will it be next? Or will the next victim be at all from EU?

For some time, I was bearish on Switzerland. With an exceedingly high public debt of around 43.5% of GDP and external debt running 1 trillion + in a GDP of around 500billion USD. Now the possible way, a country can service its debt is by three fold ways

  • Tighten its budget;tighten its spending, pushing its govt expenditure down, stalling growth.
  • By having a more competitive and aggressive industrial base whose exports the world still loves and would pay head over heels to buy, so that it can horde the actual currency of worth/value. While at highly risky global situations its gold, at others its usually dollar.
  • Investing more.

So actually, the ways are shockingly similar for a country to come out of bankruptcy( or near bankruptcy) as it for an individual. Spend Less; Work More, Earn More and Invest More.

While, bailouts can be considered as reckless spending during recession but tends to come out as investments when things turn up, it cuts down at the roots of the second point. To have an aggressive industrial base.

Further, when you give bailouts you cheapen your own currency. So while a product designed by your industry, and in another country is both valued at 10 units of native currency today, but due to cheap euro, the foreign country’s exports are worth at 15 units of native currency. So while, the domestic industry facing less competition, will raise the price to 11.33 units. This stuff is the beginning of inflation. And stupidity.

For Switzerland, while bailout of UBS was detrimental to CHF(Swiss Franc) but well, purely because of the history of fiscal prudence Switzerland, I feel is still saved. I dont know. Maybe nobody knows.

But exports is a totally different question. Who dies for Swiss watches and chocolates  these days? I dont know.

But one thing is clear, the strong fiscal prudence and inflationary environment even in a mildly deflationary Europe(-0.8% around), just shows how strong Swiss Franc is. Oh yes, there is considerable statism involved in agriculture.

No comments. I guess, it would take its agriculture to go down in dumps, and its manufacturing to rot away and considerable bailouts to sink CHF. Well, not very far fetched, if politicians get a sudden bout of populist fever. But then, Switzerland has done a considerably good job in involving the entire nation in decision making process(using Ombudsmen), so the chances of Swiss Franc tanking might be, well remote.

Rather, than focussing on Switzerland, I think I would like to swing and pan the camera towards two very interesting countries.- Austria and Canada.

Canada has a fair bit of history of statism. And Austria, though is a far more interesting case. It was one of the sattelite countries of the Soviet bloc, but one of the most free and fair Soviet bloc.

Austria

Thinking purely in terms of a bet, a financial bet, I would like to buy the Sovereign CDS for this country. Sovereign CDS is a bet/insurance which will be profitable when the government of that sovereign faces financial duress. Basically, you might imagine this as an option but with a constant money flow from the buyer to the writer.

In essence, attacking from a 10,000 feet point of view: Austria’s GDP is falling and falling quite strongly -3.5% in 2009 itself. Plus, the external debt of this country is quite high. For a 378.8billion USD economy, having an external debt of 808.9billion USD looks huge. And it is, rightly so. There is mild, near zero inflation (0.4%).

Public Debt is 66.5% of GDP. So the debt is considerably high, the net wealth at “home” is falling, governments investments 21.2% (high otherwise), so while its good in certain senses, that investment of govt in private sector is high, but it also has a detrimental effect- inducing mismanagement and lethargy in the industries.So a possible way to mitigate default risks is to hoard currency of real value, or foreign exchange.(Austria has just 17.1billion USD of forex and gold)

The growth of a country’s forex reserves can be achieved only by a robust export base. And given the fact, that Austria has considerable exports in metal and finished metal products like machine parts, motor vehicles and parts, iron and steel and textile, its interesting to note, if they produce something so breathtakingly great that the entire world is dying to get its hands on. Well,taking a look at its export partners is informative – Germans take in 28.9% of their export,Italy at 8.4%, US and  Swiss nearly half of that.

They have huge export risks for EU. Any headwinds and turbulence in EU will derail their growth severely. Which I am tempted to believe they are already facing!

Canada to be followed

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