The Bankwatch

Tracking the consumer evolution of financial services

The worlds economies are in a precarious position right now

When I read this from May 7th and this today it is clear that the fears outlined by Niall Ferguson are valid.

He points out that one of the classic methods of eliminating debt problems is producing an inflationary environment, and make the debt worth less through relative increases in asset valuations and incomes.

He goes on to note that the markets are smarter now, and run by professionals who know this.  The Greek yields on bonds were forced dramatically higher before any central bank action to print money occurred and the result was that the interest costs to Greece became unmanageable overnight.  The risk of default is real.

The result is quite banking 101.  Debt Service Ratio calculations are critical.

Niall uses examples of interest costs as a percentage of tax revenue as a better measurement than debt /GDP.  He rationalises that tax revenue is the first thing to fall in a recession, and more fundamentally tax revenue is the source of debt repayment.  This is a standard calculation for retail and commercial lending so why not for companies.  This ought to be the next focus – each countries ability to repay interest costs.

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Written by Colin Henderson

June 1, 2010 at 21:48

Posted in Uncategorized

2 Responses

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  1. Hi Colin. I have been following closely your recent trends and your increasingly vocal concerns, which I share. I just did a blog post on potential hyperinflation and possible impacts on the payments industry: http://aneace.blogspot.com/2010/06/hyperinflation-upcoming-black-swan-in.html

    Aneace

    June 2, 2010 at 04:52

  2. Thanks Aneace and that is an interesting post and perspective on payment cards. The fact folks are pre-disposed to by things sooner to save in an inflationary time is something we have not seen for many years in the larger western economies.

    Colin Henderson

    June 4, 2010 at 14:57


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