Despite the huge decline in jobs, the bank bailouts, having to fund two wars, and the bottom falling out of the housing market, there has been little significant discussion of the need for real debt restructuring, either in the U.S. or in Europe.
With a shocking imbalance in terms of the benefits and the costs of our debt problems, those who didn’t create the problem are paying the price with increased taxes, and with reduced borrowing power because of the monetization of the debt. “The banks were fully bailed out and profitable, the wars are fully funded and ongoing, and instead of dealing with the $3 trillion in war or the $2 trillion from the credit crisis, our decision is to go after those with the least amount of lobbyists, the least amount of political representation, and the oldest and most vulnerable,” says Dylan.
To begin to get an accurate picture of the risk profile that exists for the United States in the global marketplace, the possibility of a restructuring, and the long-term effects that both could have on a recovery, we talked to Sean Egan, founding partner and President of Egan Jones Ratings Company, an independent credit ratings agency that has been consistently ahead of the curve of the “big three” ratings agencies on marking changes to perceived credit quality.
“I think the largest benefit [to the debt deal debate] is that it’s putting a spotlight on the country’s problems perhaps, and it was just – came out in a new story today that there’s going to be an effort to simplify the tax code and simplify – reduce the cost of doing business. That sounds good, who knows how it’s going to be translated,” says Sean.
However, much of our rebound could be contingent upon Europe stabilizing as well. American taxpayers and the Fed may be on the hook for what happens there more than most realize. Sean elaborates:
It’s our view that a number of countries in Europe are in difficulty. We said that Greece won’t be able to pay its debts. As of six months ago, that was a minority view; now that’s become a majority view… [and] the recovery on the Greek debt is going to be significantly lower than expected. The European banks don’t have the capital to absorb the hit, and the question is how exactly is the financial system going to be rescued in Europe. The ECB is more or less tapped out. It has a capital base of only 10 billion Euros, which sounds like a lot but it really isn’t, and it has on its balance sheet assets with a face value 300 billion Euros that probably are worth about 80% of that, at most. And so you could easily argue that it is significantly undercapitalized and it can’t get the capital very easily. The question is who might be able to help out, and the most logical party is probably the U.S. government.
But how would the Federal Reserve be able to “sell” America on bailing out a bankrupt Europe? Sean says they may not have to sell us on it at all:
They probably won’t sell it to the American people; they’ll probably do it in a way that they did in the last bailout and that is via the Federal Reserve whereby a number of European banks received support from the Fed and the details on that came out later… if the U.S. government is the most logical party for providing such support, without that support, there would be an even bigger problem, which is exactly the same argument that was proffered before and there’s a certain amount of truth to it.
He is, however, optimistic when it comes to a U.S. recovery in the near future:
I think that the U.S. has shown itself to be fairly resilient, that it has adjusted when it’s understood the problems, and I think that there’s a focus on this throughout the country, and I think that we’ll get it done.
For more information on Sean Egan and Egan-Jones Rating Company, visit their website here.