Moving the economic crisis forward.

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This topic contains 8 replies, has 5 voices, and was last updated by Profile photo of logan logan 4 years, 10 months ago.

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  • #56501
    Profile photo of logan
    logan
    Participant

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9031478/America-overcomes-the-debt-crisis-as-Britain-sinks-deeper-into-the-swamp.html

    In the second half of this interesting Prichard article it deals with the extent European banks are exposed to debt in the EU crisis economies.
    Prichard makes a valid point that America has dealt with the housing crash far better than Europe in part because US debtors have the ability to simply give up on their mortgages and walk away sans risque.. That has helped the US return their economy back to modest growth.
    The burden of public and private debt in Europe is instrumental in prolonging the crisis and pushing the entire European Union states towards recession. It’s a log jam which nobody seems to have any inspirational idea how to fix.

    Personally I have come to the conclusion EU banks need to take a substantial haircut on these debts and then be recapitalised by the ECB and BOE. People struggling with mortgages they cannot afford should have them written off and the properties sold for their real worth.

    Lenders in the future should be regulated regarding the level of debt they can lend. As Pritchard says mortgages should then be eventually limited to 60% of loan to value. We all then might be able to return investment to a property market in Europe which is stable for the future and does not produce ‘Mickey Mouse’ inflationary price increases and chronic over supply.
    Property would then actually return to a position where value was sustained and confidence in the market returned.

  • #107682
    Profile photo of Chopera
    Chopera
    Participant

    I remember having a conversation with a German friend back in 1994 about the fallout after the ERM break up. She couldn’t understand why the British got upset when Germany kept increasing interest rates when the ERM was in place. She couldn’t see why the UK couldn’t just keep increasing interest rates as well to ensure the pound tracked the Deutschmark.

    I explained that in the UK most people have mortgages and are therefore very sensitive to large swings in interest rates – especially when they reach 15%! She said that in Germany most people are happy to live in rented accommodation, and keep their savings as cash, so they don’t mind high interest rates, especailly when they keep inflation down. I said that in the UK most people view their house as their main asset and that while people also have some cash savings, they tend to hold a lot more debt as well, and are therefore less sensitive to inflation.

    We agreed that until these fundamental differences in the way people manage their money and store their wealth in these countries was removed, then any future monetary union could not work.

  • #107695
    Profile photo of Anonymous
    Anonymous
    Participant

    This goes to the heart of the problem.

    Germany/the North are savers and Spain/the South are borrowers. They have lent us too much ,we have borrowed too much. We can’t pay them back. What next?

    1) default
    2) inflation
    3) endless bailout

    Either way, the German saver pays.

  • #107704
    Profile photo of logan
    logan
    Participant

    The principal problem of a ‘wealth store’, (love that phrase) in cash is it devalues. Even given a current return of 4-5% if you can get it, is only really just keeping pace with inflation. Cash is not an effective wealth producing asset. It may make you feel better knowing a cash supply exists in times of stress but it’s a long term dead end.
    Germans are really risk averse, don’t understand financial services and prefer unsexy solid engineering. Perhaps they are right

    Traditionally property was a far better wealth store and also one of the principal reasons things have gone so wrong. So many people piled into it leveraged to the hilt in the pursuit of easy riches. Entrepreneurs and developers did they same. The bubble had to burst.
    We now have a situation where that investment model is toxic. I personally doubt that in my lifetime property will ever really return to being that traditional safe haven which makes decent returns.

    I believe residential property anywhere is now simply just a place to live and perhaps a means of boosting a pension pot for the young who have years ahead of them. Holiday homes that are leveraged have become a mill stone round the necks of owners and probably the worst investment they ever made. 1.5million properties in Spain cannot be sold and likely some will have to be bulldozed. Unraveling all that will take a very long time.

    I have begun to notice however a new phenomena in Spain which is starting to take hold. Cash strapped banks encouraged by the government are letting off unwanted repossessed properties to poorer Spanish immigrants with families who can prove their income is very low.
    The rent payable is less than €200 a month. Whilst this may be an excellent move in humanitarian terms it will do nothing to assist the cash strapped investor despairingly trying to dispose of their assets.

  • #107707
    Profile photo of Fuengi (Andrew)
    Fuengi (Andrew)
    Participant

    @mark wrote:

    This goes to the heart of the problem.

    Germany/the North are savers and Spain/the South are borrowers. They have lent us too much ,we have borrowed too much. We can’t pay them back. What next?

    1) default
    2) inflation
    3) endless bailout

    Either way, the German saver pays.

    more household debt in germany than many believe
    http://blogs.telegraph.co.uk/finance/edmundconway/100006253/can-you-guess-which-is-the-most-indebted-country-in-europe/

  • #107708
    Profile photo of logan
    logan
    Participant

    Those are surprising figures Fuengi but makes even worse reading for Spain. Household debt includes mortgages and property values are higher in UK & Germany and have not suffered a huge devaluation. If you then balance the higher populations as the articles says, Spain statistically is in a far worse place.

  • #107710
    Profile photo of Chopera
    Chopera
    Participant

    @fuengi wrote:

    more household debt in germany than many believe
    http://blogs.telegraph.co.uk/finance/edmundconway/100006253/can-you-guess-which-is-the-most-indebted-country-in-europe/

    Oddly enough I remember seeing those figures at the time (and also being surprised). However this article claims that Germany has a home ownership rate of 42% compared to 70% in the UK, and also that the majority of German mortgages are fixed rate:

    http://www.economywatch.com/mortgage/germany.html

    Also this article shows German household savings rates as being significantly higher than the UK:

    http://www.newsneconomics.com/2010/08/household-saving-rates-in-us-uk-and.html

    So in theory this still makes Germany less sensitive to interest rate rises.

    However I’d love to know what the hell the Germans are holding household debt against though. If not houses then what? Or maybe it’s houses outside of Germany? And I can’t work out how Germany can have both the highest household debt and the highest household saving rates (relative to income). I guess that’s just statistics for you.

  • #107713
    Profile photo of Anonymous
    Anonymous
    Participant

    Spain, like UK includes mortgage debt in its figures for household debt. The US is showing a nice reduction in household debt and one of the main reasons is that home owners can just walk away from their mortgage debt and hand their keys to the mortgage lender. Not so easy in UK and Spain to escape the mortgage debt!

  • #107714
    Profile photo of logan
    logan
    Participant

    @Ruefguet wrote:

    Spain, like UK includes mortgage debt in its figures for household debt. The US is showing a nice reduction in household debt and one of the main reasons is that home owners can just walk away from their mortgage debt and hand their keys to the mortgage lender. Not so easy in UK and Spain to escape the mortgage debt!

    You obviously did not read my opening post Ruefguet. I agree these household debt figures include mortgages which rather alters the picture somewhat. All debt is not the same. Property generally in Germany and UK is very expensive relative to most parts of Spain, so household debt is higher in real terms. However so are incomes from which to service it. That’s what really matters, disposable income.

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