Our Changing Globe

Archive for the ‘insolvency’ Category

The Idea Is Not Nearly So Farfetched As It Sounds.

Greece

Greece is so deep in debt and its economy is in such chaos that there are now national strikes, and violent street protests and its pensions are on the verge of collapse.

Why?

Because Greece owes so much money to other countries.

Greece’s economy is now so bad that it’s governement is having to beg for even more loans at even higher interest rates just to stay afloat.

The U.S.

The U.S. government’s present financial obligations will result in a national debt of around $20 trillion by the end of this decade and taxpayers will have to pay about $1 trillion a year, just to cover the interest.

So How Bad Is $20 Billion?

Bob Greenstein who works with the liberal leaning Center on Budget and Policy Priorities says,

"Our economy is much stronger, and our financial system is much stronger, but you know even if we experienced just a fraction of the problem of Greece’s, it would really be a very painful experience for us".

"If you wait ’till the crisis hits then your options may be more constrained and you may have to take action that’s more draconian and hits the average American in painful ways".

It’s true of course that the U.S. is much stronger, but it’s also true that the U.S. is headed down the same dangerous path and The Congressional Budget Office projects U.S. interest payments on our debt will quadruple over the next decade, becoming the largest single item in the budget.
Doug Holtz-Eakin, who is a former director of the Congressional Budget Office and was a campaign adviser to the 2008 presidential nominee Sen. John McCain, R-Ariz., notes that,

"In 2010 we’ll be paying $916 billion in interest alone. So we’re really borrowing just to pay interest and we are steadily getting to the point where we’re getting a new credit card just to pay off the old one".

Is there a point where foreign lenders will become less willing to lend to us to cover our debts unless interest rates go up a lot?

The answer is "Yes".

Moody’s, credit rating agency says that all nations face credit downgrades once interest payments eat up more than 10% of total revenues and says that even though the U.S. is stronger it’s credit rating will be downgraded when the interest that it owes consumes more than 14% of its revenues.

If President Obama’s most recent budget plans are carried out then the U.S. is predicted to cross that line in 2015 when the interest on its debt will equal 14.8%.

Could Debt Cause Violent Street Protests In The U.S. ?

The Moody’s report goes on to say that,

"Keeping the U.S.’s credit rating will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion. The severity of the crisis will force governments to make painful choices that expose weaknesses in society".

The U.S. is set to go even much further over the 14% line that Moody’s sets and by 2020 its interest payments are likely to be eating up 20% of its federal revenues and by 2025, interest payments, combined with the cost of Social Security and Medicare for the baby boomers, along with other entitlements, will eat up 100% of its federal revenues and
Brian Riedl of the Heritage Foundation says that,

"Right now entitlement spending, primarily Social Security, Medicare and Medicaid is nearly half the budget and it’s growing seven and 8% a year. Over the next 10 to 20 years it’s going to swallow up the entire budget. There will be no money left for defense, education, highways, anything; because the entire federal budget will go to Social Security, Medicare and Medicaid. This is simply an unsustainable course".

What Will Happen If Interest On Debt Equals Revenue?

At that point, the only available options would be to raise taxes dramatically and to cut benefits, neither of which would be used to add any services, but would be necessary just to pay the country’s creditors the interest on its debts.

Read the rest of this entry »

General Motors Corp is hoping that a recent, but as yet uncompleted deal between Chrysler and the United Auto Workers can quickly be modified to meet its own needs, and GM’s Chief Executive Officer Fritz Henderson said yesterday on a conference call, “I would expect we’d be able to pick up the pace here in the next several weeks”.

Henderson, who became CEO after President Barack Obama caused Rick Wagoner to step down, added that he is waiting for Chrysler to settle with the United Auto Workers, “The UAW is actually negotiating with two companies today, and one company (Chrysler) has a deadline of thirty days, and one company (GM) has a deadline of sixty days”.

GM, which faces a June 1 bankruptcy deadline, has been trying since December to cut its $20.4 billion cash obligation to the health-care trust in half, and was told by the Obama administration in March that it needs to make far deeper reductions in its debts.

Chrysler and the UAW (United Auto Workers) are close to an agreement which would involve the company ceding an equity stake of about 20%, in exchange for reducing its obligations to a $10.6 billion medical fund.

Union leaders and automakers agreed in their 2007 contract talks to create the trusts, called VEBA (Voluntary Employee Beneficiary Associations), with the intention being that they would free the companies from future retiree health-care expenses, in exchange for upfront contributions.

The original VEBA agreement called for payments by GM of $32 billion, with the union assuming an estimated $47 billion in future health-care costs.

In addition, GM is trying to convince its bondholders to accept a cut in the value of their debt, and the latest plan is to make a formal offer before April 27, which would involve bondholders swapping their claims for equity.

Read the rest of this entry »