Sean Egan’s Gloomy European Economic Forecast

If you haven’t heard of Sean Egan, a Founding Principal of Egan-Jones ratings company, you ought to start paying attention.

Egan-Jones predicted the 2008 Great recession by downgrading housing portfolios to junk long before the three major ratings companies and was proved correct.

In addition, Egan-Jones has already downgraded the US credit rating from the perfect AAA to AA+, while the major ratings firms – Standard and Poor, Fitch, and Moody’s are still pontificating.

The reality is that at this point, the U.S. is deserving of a downgrade, not primarily because of the dispute on Capitol Hill, but for the very real problems that the country faces.

A $14.3 trillion debt that is now over 100% of GNP, having to borrow 42 cents of every dollar the government spends, a current account deficit over $1 trillion this year, and a monthly $50 billion trading deficit.  In addition the U.S is fighting two major wars (Iraq and Afghanistan) at a cost of several hundreds of millions of dollars a year.

These are all major problems that are somewhat independent of the debt ceiling debate.  However, they are problems that Sean Egan and company have recognized well before the ‘majors’.

Let’s step away from the U.S. for a second – hard as that might be at this time.  Sean Egan talks about Europe in this interview and describes how the EU and European Central Bank (ECB) are essentially bankrupt. He discusses why Greece will default (it has already partially done so), and how Potugal and Ireland will default as well.

In this extremely clear interview , Sean Egan discusses the intractable problems faced by Europe, problems he sees as more daunting that after World War II. It makes for grim reading, but it is important for us to know, as the U.S. and many individual investors, have a great deal of money tied up in Europe and at risk.

Some scary quotes from the interview, which I encourage you to spend time reading:

“This is going to be one truly big story—on the scale of the instability of Germany’s Weimar Republic after World War I—and I can’t see the political will or politicians with enough clout to forge a broad consensus.”

“The thing most people miss is how little control governments have over this economic problem. The headlines would indicate that the governments are in control. The market, however, drives them.”

“They (the ECB) know that the situations in Ireland and Portugal are not significantly better than in Greece. The Irish Republic’s debt is €200 billion, on top of which the government has guaranteed an additional €400 billion to support their banking system. Unfortunately, all this debt sits on top of a tax base that produces annual tax revenue of €34 billion … Portugal’s debt is €160 billion, while its tax-revenue base is €38 billion.”

What I take away from this is that Europe is like a pack of cards that could collapse at any time, and of course, the U.S. is not much better.

Many expected that in the banking reforms, the “pay to rate” relationships that ratings companies had with their clients and the conflicts of interest would be modified. However, they were not.

That is why when a company like Egan-Jones, which does not rate companies or countries in that way, speaks, their opinions carry much more weight to wise listeners than the larger ratings companies.

Tags: Central Bank, default, ECB, Egan-Jones, Europe, featured, financial problems, Germany, Greece, Ireland, Sean Egan, US Credit Rating

Category: News and Opinion