Behind Ukraine’s Bank Run

The emerging market Bank run has now spread to political crisis stricken Ukraine. 

From Bloomberg:

Ukraine’s deadly clashes prompted OAO Sberbank to stop offering loans to individuals in the country less than one year after it opened 50 branches there, Chief Executive Officer Herman Gref said.

Russia’s biggest bank, which closed three branches in downtown Kiev this week as violent clashes killed at least 77, has also witnessed a “run on” its automatic teller machines in the country, Gref told reporters in Moscow today. The hryvnia, which is managed by Ukraine’s central bank, plunged almost 8 percent against the dollar this year and non-deliverable forward rates show it will slump another 11 percent in three months….

Growing pressure on the currency could lead individuals to rush to pull money from Ukrainian bank accounts, Dmitri Barinov, a money manager overseeing $2.5 billion of debt at Frankfurt-based Union Investment Privatfonds, said Feb. 18.

Political instability has been blamed on the “bank run” while ignoring the fact that Ukraine has been in a recession even prior to the current political crisis. 

The World Bank during the 2nd quarter of 2013 outlook even notes of the Ukraine’s government’s spendthrift ways even during the recession. (bold mine)

Weak economic performance resulted in a significant budget shortfall in the second half of 2012. Actual revenue of the central budget was UAH 33 billion (2.5 percent GDP) lower than initial budget plan because both real GDP growth and inflation were lower than the forecast on which the budget was based. Meanwhile, expenditures remained inflated due to a hike in social spending (by over 2 percentage points of GDP) introduced in Spring 2012. Fiscal deficit (general government definition) reached 4.5 percent GDP in 2012. In addition, structural deficit of the state-owned company “Naftogaz” was not addressed.

I also pointed out that this has not just been the government, but the private sector sector has been engaged in a debt financed-borrowing spree.

Ukraine’s credit as % to gdp as of 2012 (based on World Bank Data)

Ukraine’s banking sector credit as % of gdp as of 2012.

As you can see Ukraine’s debt levels in both dimensions has more than doubled since 2005.

What the credit inflation has done? Well it has inflated two incredible stock market bubbles in a span of about 5-6 years (2007-12).

Like the first stock market bubble collapse, the second coincided with a recession. The imploding stock market bubbles has now segued into a currency meltdown.

The question unaddressed is how much of money has been lent by the banks to the private sector that had been funneled to inflate such stock market bubbles? How much had been borrowed in foreign currencies?

To what degree have Ukraine’s banks have been affected by deterioration in loan quality? 

So given Ukraine’s Wile E. Coyote moment, 'bank runs' would seem as natural consequence as bank assets deteriorate in the face of fractional reserve banking, a recession, escalating shortage of liquidity and debt deflation.

And banks can hardly rely on the public sector support because Ukraine government has been cash strapped, she desperately sealed a financing deal with Russia in December 2013

In short Ukraine’s economic crisis, primarily due to inflationism or bubble blowing policies, set stage for this political crisis. The likely ramification from the Ukraine's economic crisis is that more bank runs will occur.

I don’t deny that politics have become a factor. But this is a consequence rather than the cause. 

Ukraine’s economic crisis has only deepened the polarization of Ukraine’s fragmented society via partisan politics. Geopolitics may even have been involved here. Some have even alleged that the US has been operating behind the scenes in fomenting another Orange revolution

Because of Russia’s intensive exposure in Ukraine in terms of culture (Russian population in Ukraine) and embedded interests in the energy sector, aside from perceived threats from a supposed US ‘encirclement strategy’ of Russia, where a new US friendly government in Ukraine will be enticed to join NATO.…Russia has reportedly declared that she is “prepared to fight a war over the Ukrainian territory” using the Russian population as cover.

So Ukraine’s crisis can easily metastasize into a international geopolitical crisis. 

And while Ukraine has just signed a peace deal, this serves as no certainty that the political crisis has passed. Russia, a major influence to Ukraine's politics, didn’t join the accord.

What is likely to aggravate the political conditions will be sustained economic uncertainty brought about by Ukraine’s earlier bubble blowing policies amidst heated tensions from culture based politics inflamed by geopolitical interventions.

Anyway the above charts from the World Bank demonstrates why relative debt position seem irrelevant in the measuring of credit risks.

Ukraine’s debt in terms of nominal USD stock has been lower than many developing nations or emerging markets equivalent. This can also be seen in terms terms of % of gdp but at a much lesser scale. Yet Ukraine’s government recognized her near bankruptcy last year.

Debt tolerance has been always based on independent valuations from creditor’s perception of the capacity and willingness of debtors to settle indentures which differs from country to country. When a critical mass of creditors begin to call on the loans, the crisis becomes apparent--one symptom "bank runs".

Going back to the bank run, again if Ukraine’s economic crisis intensifies then more bank runs should be expected.

Yet increasing accounts of emerging market bank runs such as in Thailand, Kazakhstan and now Ukraine, aside from China’s continuing bailouts of delinquent financial institutions demonstrates why the EM crisis have not been over. And as reminder, all these has transpired in a span of two weeks.

And contra the bulls, this may just be the tip of the iceberg.

This isn’t your granddaddy’s bond markets

Sovereign Man’s Simon Black puts my “grotesque mispricing of bonds via the convergence trade” into perspective: (bold mine)

This is really amazing when you think about it. Central bankers have destroyed money and interest rates to the point that near-bankrupt companies in shaky jurisdictions can borrow money for practically nothing.

It’s an utter farce. The rate of inflation is -at least- 3% in many developed countries. Central bankers will even say they are targeting 3% inflation.

This means that if investors simply want to generate enough income so that their after-tax yield keeps pace with inflation, they have to assume a ridiculous amount of risk.

This is a really important point to understand given that the global bond market is so massive– roughly $100 trillion, with nearly $1 trillion traded each day in the US alone.

This is almost twice the size of the global stock market. And even if people never invest in a bond themselves, they’re directly connected to the bond market.

Your pension fund owns bonds. The bank that is holding on to your money owns bonds. The companies listed on the stock market that you invest in own bonds.

Yet bonds are some of the worst investments out there right now. And that’s saying a lot given how overvalued stock markets are.

Here’s the bottom line: adjusting for both taxes and inflation, bondholders are losing money, even on risky issuances.

Think about it– if you make a 4% return and pay 25% in taxes, your net yield is 3%. If inflation is 3%, your entire gain is wiped out… so you have taken that risk for nothing.

If inflation rises just a bit then you are in negative territory.

There are those who suggest that deflation is a much greater risk right now than inflation… and that bonds are great investments to own in the event of deflation.

But here’s the thing– even if deflation takes hold and prices fall, anyone who is deeply in debt is going to feel LOTS of pain. Instead of their debt burden inflating away, now they’ll be scrambling to make interest payments.

So while bonds are a sensible deflationary investment in theory, in practice deflation will only increase the likelihood of default. This puts many bond investments at serious risk.

Last, if interest rates rise from these all-time lows, a bond’s value in the marketplace will plummet. So not only will you have made zero income, you would be looking at a steep loss if you try to sell.

Longer term, fixed rate bonds in weak currencies are almost guaranteed losers and should be avoided at all costs. You would be much better off setting your cash ablaze in a bonfire. It’s at least a better story to tell and will save you years of anguish watching your position erode.

Oh stagflation, which pervades in ASEAN markets, equates to weak currencies. As noted above, if there will be more inflation, bond markets will lose. And if stagflation pricks the asset bubble, bonds lose too as debtors default or see rising real costs of debt amidst weak economic growth. Also an asset bust would mean tighter credit conditions that affects growth 

The convergence trade is destined for a reversion to the mean as easy money transitions into tight money. And since pension funds, publicly listed companies and banks hold bonds, such reversion to the mean will extrapolate into financial losses. 

Central banks have altered the complexion of the bond markets to the point that this isn't your granddaddy's bond markets.

Consequences of Inflationism: Caracas (Venezuela) and Kiev (Ukraine) Burns

Sad to see of what seems as escalating political instability around the world (mostly in emerging markets).

The backlash from hyperinflation by the Venezuelan government has become apparent as rioting has been intensifying. 

First the crashing bolivar and spiraling price inflation.  

Now writes Zero Hedge (bold original)

the situation in Venezuela has once again escalated as protest leader Leopoldo Lopez' arrest (and possible 10 year jail sentence) prompted more violence overnight. However, as we warned, the government crackdown is starting to raise concerns about the stability of the government.

• *VENEZUELA PROTESTS ESCALATING INTO NATIONWIDE UNREST: IHS
• *ESCALATION OF PROTESTS PUTS STABILITY OF GOVT AT RISK: IHS
• *RISING VIOLENCE COULD LEAD TO MADURO OUSTER BY MILITARY: IHS

As opposition leader Capriles asks Venezuela's military to uphold the constitution, he exclaims that "the poor' must participate for government to change.

• *VENEZUELA HATILLO MAYOR DAVID SMOLANSKY SPEAKS IN CARACAS
• *VENEZUELA PEOPLE WON'T STAY QUIET: SMOLANSKY
• *SMOLANSKY SAYS VENEZUELA SUFFERED TERROR LAST NIGHT
• *SMOLANSKY CALLS FOR MASSIVE VENEZUELA PROTESTS SATURDAY

The opposition leader speaks:

• *VENEZUELA OFFICIALS SHOT AT PROTESTERS YDAY: CAPRILES
• *VENEZUELA ARMED FORCES SHOULD ALLOW PEACEFUL MARCHES: SMOLANSKY
• *VENEZUELA STRENGTHENING TIES WITH CUBA, RAMIREZ SAYS
• *VENEZUELA GOVT USING VIOLENCE TO HIDE ECO PROBLEMS: CAPRILES
• *CAPRILES SAYS SOME IN VENEZUELA GOVT WANT MADURO OUT
• *CAPRILES ASKS VENEZUELA ARMED FORCES TO UPHOLD CONSTITUTION
• *VENEZUELA POOR MUST PARTICIPATE FOR GOVT TO CHANGE: CAPRILES
• *CAPRILES SAYS HE WON'T BE FORCED TO TALK TO VENEZUELA GOVT

And IHS warns:

• *VENEZUELA PROTESTS ESCALATING INTO NATIONWIDE UNREST: IHS
• *ESCALATION OF PROTESTS PUTS STABILITY OF GOVT AT RISK: IHS
• *RISING VIOLENCE COULD LEAD TO MADURO OUSTER BY MILITARY: IHS

Images from last night suggest this is getting considerably worse...despite Maduro's claims of "absolute calm"

The populist government recently even put a Happiness Ministry and promoted the public’s looting of “greedy”companies to enforce price controls.

The result has been obvious: the cumulative demand (printing money) and supply side (price controls) interventions has prompted businesses to refrain from operations. Thus all money printed by the government has emptied shelves and sent prices skyrocketing. The ensuing hunger now drives people into the streets. The riots even claimed the life of a Venezuelan beauty queen. 

Nonetheless Venezuela’s stock market continues to remain buoyant amidst all the unrest as people use stocks as shield against a collapsing currency.

In Ukraine, anti-government protests seem to have turned into a civil war as the riots have now claimed 26 lives as of this counting.

One region the Lviv has even declared independence from the Ukraine’s government

It is easy to look at the riveting rivalry between areas supportive of Europe on the one hand and areas supportive of Russia as causing the current troubles.

But there may be more than meets the eye.

Ukraine’s currency the hryvnia has seen a massive devaluation in 2008 and remained at this level prior to the political upheaval. Currently the hryvnia has been sold off as rioting spread.

But there has been a sharp deterioration in external and domestic financing even prior to the unrest. 

Ukraine’s government budget deficit has been widening since 2008. Ukraine has also swelling deficits in both trade and current accounts. 

Over the same period, loans to the private sector has been exploding to the upside, which likely means both the private sector and the government contributing to broadening deficits in the merchandise trade. 

Meanwhile Ukraine’s external debt has risen by almost 3.5x from 2006…

…as forex reserves plunge by almost half.

And soaring private and public sector loans has led to a spike in M3 from 2009 onwards.

And of course, driving all the soaring debt and money supply levels has been the same zero bound rates.

So Ukraine has been financing the splurge with debt which has resulted to the current financial and economic strains

And despite the so-called low inflation rate figures, what the above data suggests is that inflationism has driven a deep chasm to Ukraine’s fragmented society that has enflamed today’s violent riots.

Amazingly Ukraine’s easy money policies inflated a stock market bubble twice which also blew up in a span of 5 years. The above is a shining example of bubble driven volatility in both directions but with a downside bias.

Ukraine is largely a commodity commodity and energy based economy. The shadow economy has been estimated to contribute to about 40%. 

And energy geopolitics may have played a secondary role in the growing schism. The zero hedge quotes one analyst… (bold original)

BOTH the USA and EU will now fund the rebels as Russia will fund Yanukovych. At the political level, Ukraine is the pawn on the chessboard. The propaganda war is East v West. However, those power plays are masking the core issue that began with the Orange Revolution – corruption. Yanukovych is a dictator who will NEVER leave office. It is simple as that. There will be no REAL elections again in Ukraine. This is starting to spiral down into a confrontation that the entire world cannot ignore

Political instability seem to percolate into emerging markets, as we see the same violence in Thailand, Saravejo Bosnia and Conakry Guinea, which represents troubling signs of contagion (from economic sphere to the political sphere).

Yet political problems in Thailand, Ukraine and Venezuela has a common largely "invisible"denominator: inflationism

The advocate of inflationism John Maynard Keynes saw of  the destructive capacity of inflationism on society (yet ironically he still promoted this): 

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Political instability in the above countries reveals how “Lenin was certainly right” on how inflationism destroys society.

Kazakhstan’s Devaluation Triggers Bank Runs

A few days back I wrote about Kazakhstan’s surprisingly huge devaluation despite what mainstream would see as strong statistical data. 

As one would realize, Kazakhstan’s dilemma has not been revealed by the current and trade balances but on her currency tenga, forex reserves, external debt and importantly M3. And another thing, given the 19% devaluation, this shows that the alleged low inflation figures have also been patently inaccurate.

Well my suspicion seems right, the devaluation exposed on Kazakhstan’s debt problems via a run on three banks

From EuroAsianet.org

Kazakhstan’s central bank is appealing for calm as rumors that some financial institutions are in trouble following last week’s currency devaluation have provoked a run on three banks.

On February 19 the National Bank sent text messages to the public urging people to disregard the “false information” and not succumb to panic.

“All Kazakhstani banks have sufficient funds in national and foreign currency,” the messages read; people should not submit to “provocations” and “keep calm.”

Large queues formed at some banks in the financial capital, Almaty, for a second day on February 19 as customers rush to withdraw funds, fearing a bank collapse.

Media and officials blame it on rumors.

But logic tells us that if the banking system stands on a firm ground then they wouldn’t be vulnerable to rumors. 

The reason banks are prone to runs aside from Kazakhstan’s existing debt problems has been the roots of the monetary system: central bank fractional reserve banking standard.

"The answer lies in the nature of our banking system", writes the great dean of Austrian economics Murray N. Rothbard, that’s because “they have far less cash on hand than there are demand claims to cash outstanding.”

Professor Rothbard further explains:

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

Given the recent bank run Thailand, it has been interesting to see what seems as increasing frequency of bank runs in emerging markets or failing financial institutions such as in China.

More signs that emerging markets could be the modern day version of "subprime". 

We live in very interesting times

Cracks in Malaysia’s Credit Bubble?

Malaysia’s inflation data rose faster than consensus expectations.

From the Wall Street Journal Real Time Economics Blog

Fast-rising prices in Malaysia, as the government dials back subsidies and the economy grows at a strong clip, could prompt the central bank to raise interest rates that have been on hold since mid-2011.

Data out Wednesday showed consumer prices rose 3.4% in January from a year earlier, the fifth straight month of gains and fastest pace in two and a half years. That was up from 3.2% in December and a tad above the 3.3% median forecast in a Wall Street Journal poll.

Malaysia’s price inflation seems a tad away from the 2011 highs.

In previous accounts where price inflation spiked beyond 5% levels, such has been associated with major economic turbulence, as the Asian Crisis and the the global crisis triggered by 2007-2008 US housing bust which culminated with the Lehman bankruptcy.

While 3.4% seems far from the 5% threshold, current dynamics seems to point at inflation rates headed towards such direction, unless otherwise reversed. 

Media blames inflation on supply side quirks. From the same article.

Economists say inflation will remain elevated for the rest of the year after electricity tariffs were raised in January. That follows other moves last autumn to raise prices of two widely-used fuel variants and to scrap subsidies on sugar.

Lifting of subsidies have hardly been the real forces driving Malaysia’s price inflation.

Instead the major forces driving Malaysia’s inflation has been a credit boom that has fueled a property bubble as previously discussed.

Since 2001, loans to the private sector has zoomed with the kernel of the accelerated credit boom happening from 2008 onwards. Loans to the private sector has ballooned by about 2.6x from December 2013 compared with the 2001 levels

Seen from another view, loans provided by the banks as % gdp, which dropped to a recent low of 109.4% in 2007 has regained a second wind to swell to a record 134% in 2012, based on World Bank data. 

Banking loans includes “all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net”

Also domestic credit provided to the private sector in the category of “loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment” has increased from a recent low of 96.7% in 2008 to a record 117.8% in 2012 again from the World Bank data

Three facets of credit data depict on the same picture.

 

Yet all these fractional reserve based money creation has led to soaring money supply.

Malaysia’s M3 has accelerated along with the ramping up of credit over the same period.

Seen in terms of % growth, Malaysia’s M2 spiked to 14.6% in 2011 before retracing back to the 7-8% levels in 2013.

Malaysia’s average annualized growth has been at 4.65% from 2000-2013 according to tradingeconomics. This means that M2 has been running about more than double the growth of the economy

And interestingly, Malaysia’s banking credit profile looks almost exactly like the Philippines in terms of supply side distribution. The gist of credit growth has been in finance, real estate and trade! This is according to a report from RHB.

The difference is that Malaysia’s household has also been massively acquiring credit. And that’s the reason why private sector credit or banking sector loans have been above the 100% level in terms of gdp. 

This also means Malaysians have more financial depth than the Philippines for them to partly offset the adverse effects from credit inflation via productivity growth.

Unfortunately, artificial booms will eventually come to an end.

Behind the scenes, Malaysia’s credit boom has been driven by zero bound official rates. Or if measured from 10 year Malaysia’s local currency denominated treasuries, yields have been in a decline since 2009 as credit soared.

However, this picture seems to have been reversed as yields have been on an upside streak in late 2013 to reach 2009 levels. This means that the easy money environment that has stoked the boom has come under pressure from the bond vigilantes 

Even the Malaysian currency, the ringgit, has been showing signs of pressure. Since Abenomics-Bernanke taper in May-June2013, the ringgit has been in a major downtrend interspersed with short term rallies.

And such bond market-currency weakness should come as a surprise to the mainstream because Malaysia’s external façade looks solid; current and trade accounts remain in surpluses, government external debt has been in decline and Malaysia has $140.4 billion of forex currency reserves as of December. 

Malaysia’s forex reserves peaked in August 2011 at $155 billion, but perhaps, due to the latest EM turmoil, the Malaysian central bank may have used her surpluses to counter foreign outflows. 

The bond-currency weakness hasn’t been shared yet by the other markets...yet

Malaysia’s default risk as measured by the 5 year CDS spiked in August 2013, fell back to October lows and surged again in January (but only halfway) from the August highs. Recently the 5 year CDS has returned to October lows

Interestingly Malaysian stocks, as measured by the KLSE, which has also been hammered in June 2013, bounced backed strongly to even carve new highs at the close of 2013. 

This seems as signs of the growing desperation by those addicted to easy money climate to resist the ongoing shift in the economy by forcibly bidding up stocks in the hope of a return of the boom days. 

Yet the divergence in signals means that eventually something will have to give. Will bond yields reverse that should power stocks higher and bring about the next wave of credit boom? Or will stocks adjust to reflect on rising rates?

All these will depend on how rates will ultimately affect debt.

Let me post again ASEAN’s debt chart from the World Bank.

Malaysia’s overall debt runs at about 200% of gdp, mostly due to household debt. Malaysia’s economy in 2012 has been at a nominal US $307.2 billion. This makes her credit exposure which has been largely dependent on low rates at about $600 billion. Again forex reserves are only 23% of Malaysia's total debt stock.

This brings us back to the earlier article who rightly points to the danger of rising inflation amidst growing debts.

Caught in the middle are Malaysia’s consumers, who are facing growing debts just as rising prices erode their disposable income. Consumer borrowing in Malaysia has risen some 12% a year for the past five years, with household debt climbing to 80.5% of GDP by the end of 2012 from 50.4% in 2008, one of the highest levels in Southeast Asia.

The debt and inflation dynamic surely contributed to December’s weak consumer confidence reading, the lowest since June 2009.

Missing in the article is how inflation would mean higher rates and how higher rates would impact the cost of debt servicing in the face of slowing demand that subsequently should raise credit quality issues.  Or differently put, how will highly indebted Malaysians be able to pay back the debt which servicing costs has been rising, if growth slows aggravated by higher inflation? Will these not increase Malaysia's credit risks?

At the end of the day, like the Philippines Malaysia appears now confronted with a stagflationary setting (even unemployment rates have increased in November 2013 which broke out of 3.3% resistance levels), whose rising rates threaten to serve as a pin that could prick on Malaysia’s credit bubbles.

Quote of the Day: Robots should say a prayer to central bankers

Slaves – human or robotic – are a form of capital. After the cost of maintenance, the profits from their work go to their owners.

Wolf does not mention it, but the robots should say a prayer to central bankers. By reducing interest rates, they also reduce the cost of capital.

At zero rate of interest, for example, the real cost of a robot is zero. And if that robot can replace an average, marginally competent employee with a bad attitude, the employer makes a profit of $42,000 (or whatever he would have paid the human)… not counting health insurance and the parking place.

The lower the cost of capital, the more robots take their place in the labor force… and the more labor costs drop.

This is an excerpt from Agora Publishing’s Bill Bonner (published at Bonner & Partners) who takes a swipe at the neo-luddites. This shows just how blind the mainstream have been to the theory of capital to embrace age old discredited fallacies

Quote of the Day: People of the Lie

Do you really believe the teller of The Big Lie is going to respond to your presentation of the facts by saying, “Gee, I hadn’t really thought about it that way before. I guess I was wrong.” Forget it. People of the Lie thrive on telling The Big Lie; it’s what they live for. 

This quote is from self development author Robert Ringer at his website.

The IMF Hearts Debt

In the implied promotion of debt by the IMF, Sovereign Man’s Simon Black caustically asks, what are these people smoking? 

You may recall the case of Harvard professors Ken Rogoff and Carmen Reinhart who wrote the seminal work: “This Time is Different: Eight Centuries of Financial Folly”.

The book highlighted dozens of shocking historical patterns where once powerful nations accumulated too much debt and entered into terminal decline.

Spain, for example, defaulted on its debt six times between 1500 and 1800, then another seven times in the 19th century alone.

France defaulted on its debt EIGHT times between 1500 and 1800, including on the eve of the French Revolution in 1788. And Greece has defaulted five times since 1800.

The premise of their book was very simple: debt is bad. And when nations rack up too much of it, they get into serious trouble.

This message was not terribly convenient for governments that have racked up unprecedented levels of debt. So critics found some calculation errors in their Excel formulas, and the two professors were very publicly discredited.

Afterwards, it was as if the entire idea of debt being bad simply vanished.

Not to worry, though, the IMF has now stepped up with a work of its own to fill the void.

And surprise, surprise, their new paper “[does] not identify any clear debt threshold above which medium-term growth prospects are dramatically compromised.”

Translation: Keep racking up that debt, boys and girls, it’s nothing but smooth sailing ahead.

But that’s not all. They go much further, suggesting that once a nation reaches VERY HIGH levels of debt, there is even LESS of a correlation between debt and growth.

Clearly this is the problem for Europe and the US: $17 trillion? Pish posh. The economy will really be on fire once the debt hits $20 trillion.

There’s just one minor caveat. The IMF admits that they had to invent a completely different method to arrive to their conclusions, and that “caution should be used in the interpretation of our empirical results.”

But such details are not important.

What is important is that the economic high priests have proven once and for all that there are absolutely no consequences for countries who are deeply in debt.

And rather than pontificate what these people are smoking, we should all fall in line with unquestionable belief and devotion to their supreme wisdom.

Well, who has benefited from debt?

The McKinsey & Company diagram above reveals of the distribution of the US $225 trillion capital market as of the second Quarter of 2012.

The biggest beneficiaries in terms of growth rate from 2000-2012 (red rectangles) has been the government bonds and non-securitized banking loans. A close third are corporate bonds.

Add to the above the recent dynamic where central banks accepts various bonds from banks and financial institutions as collateral in exchange for loans to buy government debt meant to push down bond yields...plus where the IMF gets their funding...we can deduce on 'whose pipes these people have been smoking on'.

EM Crisis Over? Thailand Hit by a Bank Run

The emerging market turmoil is over eh?  

Well, one of Thailand’s state owned bank just experienced a bank run. Yes you read it right…state owned.

From the Wall Street Journal (bold mine)

Depositors have withdrawn nearly $1 billion from a bank linked to a foundering rice-subsidy program, the bank said Monday, in one of the first signs that Thailand's months-old political stalemate is starting to affect the economy.

Adding to the pressure on Prime Minister Yingluck Shinawatra, a government agency Monday forecast economic growth rates would slow in the months to come because of the unrest. The prime minister has faced street protests since November calling on her to resign.

Woravit Chailimpamontri, chief executive at Government Savings Bank, said that depositors withdrew 30 billion baht, or $930 million, over the past three days after the bank extended a 5 billion-baht loan to a financial cooperative involved in a state-subsidy program.

The cooperative, which buys rice from farmers at up to 50% above market prices, has been singled out by the antigovernment protesters as representative of the kind of damaging populist policies pursued by the prime minister to build rural support, which has translated into large parliamentary majorities.

As the withdrawals at Government Savings Bank worsened, Mr. Woravit said it wouldn't extend any further loans to the Bank for Agriculture and Agricultural Cooperatives, which manages the rice subsidy program.

In recent weeks, the Yingluck administration has struggled to secure loans from commercial banks to pay the rice farmers, who are demanding payment for grain they already handed over to the government.

This is a prime of example of the realism of UK Prime Minister’s popular quote “The problem with socialism is that eventually you run out of other people's money”. 

Thai’s government extended subsidies to farmers at the expense of the rest of the society in order to buy popular votes via state sponsored loans. However economic reality eventually exposed on the mirage of such free lunch policies. 

Now the foolishness and resource draining activities by the government has been seen by the financial institutions. So they withhold from further extending loans to Thai’s Government Savings Bank. In short, other financial institutions have become aware of the risks of potential financial losses. So depositors stampede out from the bank, while other banks withhold provision of financing.  The mass withdrawals in the face of unbacked or insufficient reserves now extrapolates to a classic bank run.

Naturally, the Thai central bank will step in to bail out the Government Savings Bank. But of course the question is how will the bailout be done? Loans in exchange for what? Another question: what will be the real effects of such bailout? Intensifying consumer price inflation? 

And there is also the issue of which banks or financial institutions have significant exposure in the government bank. Will there be a contagion? Or will Thailand’s central bank, the Bank of Thailand, like China’s PBOC, do a “whack a mole” approach of bailing out any delinquent debt burdened entities that surface? 

Remember, Thailand like any ASEAN has been a bubble economy, whom has largely depended on credit inflation that has bolstered asset prices to generate statistical growth.

Nevertheless it’s been a don’t worry be happy for Thai’s financial markets.

Yields of Thai’s 10 year sovereign has declined (bond rallied) even in the face of the 3 day mass bank withdrawal.

The Thai baht which has been bludgeoned since Abenomics-Taper seems to be having an oversold bounce.

And Thai stocks as benchmarked by the SET has been having a field day. Like the Philippines, they are in a denial rally mode.

But some segments of the credit markets haven’t shared the same enthusiasm as with the stock market punters and treasury bulls. 

Default risks as measured by the 5 year CDS has topped the 2013 Abenomics-Taper highs. Will this bank run up the ante?

Now some harsh reality for the mainstream throng afflicted by the Aldous Huxley syndrome who keeps chanting “forex reserves”, “forex reserves”, “forex reserves”!

Realize that Thai forex reserves from a high of US $189 billion has now declined to US 167 billion (top) (most likely used to defend against tanking baht)  whereas government external debt keeps advancing (bottom). External debt has reached $139 billion and continues to grow. Thus in the context of proportionality, external debt now comprises 83% of Thai’s forex reserves. That’s a very slim cushion.

But but but…now if we reckon Thai’s overall debt levels which has been at nearly 200% of GDP according to estimates from the World Bank, with Thai’s GDP at US$ 366 billion in 2012, this means that Thai’s debt should be way above $500 billion. This means that any contagion from a credit event would render forex reserves a puny shield which seems a "laughable" alibi based on attribute substitution fallacy--because the forex defense smoke screen is a 'fugasi'.

If you fail to notice, we seem to seeing INCREASING account of debt problems surfacing in Asia. These are signs that current conditions are hardly hunky dory. And equally these are signs that the current episode of debt problems have been most likely the icing on the cake. This serves as more evidence of the periphery to core dynamic of a typical credit bubble cycle. As Doug Noland of the Credit Bubble Bulletin nicely puts it “EM is the global “subprime.”

There is no such thing as free lunch. Excessive debt will have its day of reckoning, which seems sooner rather than later.

Of course, the worst part is that when (and not if) these imbalances come unglued, the reaction should be swift and dramatic. That’s why I see the 2014-2015 window as very fertile environment for a global black swan event. 

Caveat emptor.