Pettifor warns of GFC 2.0 approach

From The Guardian:

Ann Pettifor of Prime Economics, who foreshadowed the credit crunch in her 2003 book The Coming First World Debt Crisis, says: “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.”

…Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa Ann Pettifor Developing countries are using the UN to demand a change in the way sovereign defaults are dealt with…It calls for a once-and-for-all write-off, instead of the piecemeal Greek-style approach involving harsh terms and conditions that knock the economy off course and can ultimately make the debt even harder to repay.

However, when these proposals were put to the UN general assembly last September, a number of developed countries, including the UK and the US, voted against it, claiming the UN was the wrong forum to discuss the proposal, which is anathema to powerful financial institutions.

Pettifor shares some of the UK and US’s scepticism. “The problem for me is that the UN has no leverage here,” she says. “It can make these moralistic pronouncements but ultimately it’s the IMF and the governments that make the decisions.”

…Brazil’s economy is likely to be seriously tested as the greenback rises; Turkey, Malaysia and Chile have large dollar-denominated debts and sliding currencies; and a string of African countries face sharp rises in debt repayments. Ghana and Zambia have already had to turn to the IMF to ask for help. It’s as if, as Pettifor warns, “absolutely nothing has changed since the crisis”.

That’s not entirely true. There’s more debt. Especially here. And this is not so much a rerun of the GFC that began at the core as it is a traditional cycle-ending emerging markets bust at the periphery. This will kill commodities stone dead and will be the moment to buy for long term investors.

The reasoning of Jeremy Grantham remains most persuasive vis timing, with a positive 2017 via the US Presidential cycle followed by the bust. Two US rate hikes next year would set that up nicely! A chart from Soc Gen forecasting a shrinking Fed balance sheet is a useful illustration:

 

In the meantime Greece and China worry.

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Comments

  1. What’s stopping the emerging markets from re-financing their dollar debt? Seems to be the way the global economy works and there are a lot of willing lenders out there right now.

    • thomickersMEMBER

      CuRrency depreciation and higher rates (both on the risk free and risk premium sides)

    • Issue new bond in local currency with negative interest rate? Surely the yield chasers will buy them?

      Spain is issuing for 1.3%. They need some help from big investment bank to package it and market it well. This is where they are failing.

  2. and that forced de dollarisation of the Russian economy last year?

    looking like a strategic mistake which could see the Russians ride out the next global crisis and (provided crude demand doesnt completely vanish) see them in a position of some strength coming out.

    • Crude will be driven down hard and long by the Saudis. They have the margins to see it reach 30-40s for a couple of years. That will wipe out Russia, who will “ride out” the emerging market GFC like they always do: black bread, vodka and huddling in the cold. Great people led by mediocre leaders.
      Of more interest will be how petro-dependent Venezuela and Argentina will ride it out. When the salary cheques stop reaching the army….

      • “They have the margins to see it reach 30-40s for a couple of years. ”
        That is very true but that will be hurting many more countries friends(US ) and foes(Tehran)… I think their intervention in Yemen last week was a big mistake and also a deal with Iran in regards to its nuclear program is starting to seem very plausible so all these geo political params will have a big impact on the price of petrol and don’t think the Saudi’s will have the last say on this …

      • I think oil could surprise on the upside – the US oil shale sector will be decimated in 12-18 months. Talk about a home goal! Thats why I think Gunna is correct, Russia (and oil companies based within) could be a pleasant surprise. Yes, they have a domestic inflation problem, and the mega rich are now employing Russian servants rather than foreign ones, but… seriously?

  3. Hold on, I’m missing a few links of logic here.

    Can someone please explain how the US election effects the Fed balance sheet, and how that in turn effects emerging market debt.

    • Alex, I’m not the one to give you an in depth. But I’ll paint what I think(?) I understand.
      The smart arses have discovered they can fiddle the business cycle to fit their election desires, & to hell with any consequences – hence why we’ve had ~23 years without recession, but you can see the consequences building up like untended undergrowth. Obama will want his side back in so will do whatever it takes to keep the music playing till after their election. This in turn will affect (independent) Fed policy which in turn affects EM’s via more or less QE flowing into their economies affecting their exchange rates, commodity flows & debt loadings. – There could be a lot more to it I don’t understand……………..