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Is this sustainable?

It is safe to conclude that the governments' balance-sheet is under extreme pressure and probably close to CRITICAL LEVELS. Some
governments in the CEE area might already be broke! There is no doubt that bigger nations in the EU will have to carry them.

The governments are probably expecting the economy to turn around quickly and hoping that banks (especially in the developed world) won't throw any nasty surprises going forward. Makes you wonder if they have concluded that the worst is over and the economy could be on the ascending course soon?

Well, we hope not! In spite of the recently announced bank bail-out packages by the governments in the UK, US and in the EU, it will be ill-advised to assume that the crisis in the banking sector is now over. Some analysts would argue that by agreeing to insure the assets of RBS and possibly Lloyds Banking Group, the UK Government has managed to draw a line in the sand. Well, we will have to wait and see. The exercise is risky to say the least. Any additional losses (which is expected) on the insured assets would take the government's balance-sheet further in the RED. There is a very strong possibility that banks will have to raise more money to keep afloat and might need additional government support. The recent announcement by HSBC to raise over US $ 17.7 billion to bolster its capital is a testament that banks would need more capital to keep afloat.

Will the government (especially the US & UK) be able to provide additional support to the banks?

To answer this question, we need to get a good understanding of the financial strength of the governments. By looking at the numbers, we should be able to get a good sense of the fiscal position of some of the major economies. Let's just look at the US and UK, shall we? According to the 'US Treasury, Financial Report of the United States, 2002-2008', the total Federal Government Deficit now stands at over US $ 65.5 trillion (under GAAP accounting). This US $ 65.5 trillion deficit exceeds the world's total GDP. Shocking, right! Well, that's why US is considered too big to fail. Now let's get a UK perspective too, shall we? Looking at UK government's getting out of crisis spending so far, the government has spent over two trillion in funding its stimulus programs and various bank bail-outs. This is on top of close to a trillion committed in the form of loan guarantees. According to the Centre for Policy Studies, UK's national debt could be over 103% of the GDP (based on last year's numbers).

Numbers don't look pretty, do they? The balance-sheets are indeed at critical levels. There is a big question mark over the government's ability to provide additional bail-outs to the banks without seriously undermining their currencies and credit worthiness.

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Sanjeev Kumar is Chief Executive Officer of Delamore & Owl Group of Companies (Website: www.delamoregroup.com), Toronto, Ontario, Canada. He holds dual Master's Degrees - one in Business Administration and another in International Finance. He has been the recipient of the "Southeast Asia Young Achiever's Award" for Year 2002.
Article posted on March 14, 2009.