15 February 2009
Hotel Lawyers ask: How do we pay for this? And what happens next?
We are all in a panic to get this “crisis” over. It can’t happen too soon. We are resolved to pay “whatever it takes” to do it, but up to this point, our leaders have not given us any detail to show us what they are thinking or whether any of it will work. But with people beginning to look at other currencies to replace the dollar as reserve currency of choice, we have to wonder a bit about our direction.
Is our bailout money going to be well spent?
At the President’s first press conference, President Obama was confronted by a question purporting to quote the administration’s internal assessment that they know at least 30% of what they try won’t work. We hope “only” 30% of our trillions are wasted. When Congress and government bureaucracies administer things, that may be an optimistic assessment. .
But here are a few observations that are worth considering as we pay “whatever it takes” to solve this crisis with “government assistance.”
Some important numbers on the coming deficits
In 2008, the U.S. deficit was $459 billion. This was financed by the sale of U.S. Treasury bonds, more than $200 billion of which were purchased by foreigners, the largest of which was the government of China.
To finance our bailout, it now looks like the U.S. deficit will rise to an estimated $2.7 – 4.2 trillion of debt over the next two years.
But with foreign investment only running at a rate of $200 billion, who will pay for the extra $1.2 – 3.7 trillion?
It currently appears that domestic investors are unable to bridge the gap, and it appears that the Chinese are concerned about their current level of investment, much less taking on a lot more.
Yu Yongding, former adviser to the People’s Bank of China, recently demanded guarantees for the value of China’s $682bn of Treasury securities.
And what is a purchase of U.S. Debt going to be worth?
China worries about the dollar’s value against other currencies, particularly the yuan. With US interest rates so low, the dollar’s value may slide.
China is also worried about the value of its current U.S. Treasuries. With the proposed U.S. borrowing needs and monetary policy, if T-bond yields rose only 5% (from 1.72% on the 5-year note to 6.72%,) the value of China’s T-bonds would drop by 17.5% or $119 billion.
Limits on foreign appetite for U.S. debt?
Foreign buyers have absorbed a little over 43% or $200 billon of the recent $459 billion deficit, but $200 billion is only a modest contribution against deficits of $1.2 to $3.7 trillion for 2009 and 2010. Where does this money come from? The amount required is close to 3 times the previous record raised from both domestic and foreign investors, and our biggest investors are screaming in pain at current investment levels.
By the way, we also have to bail out the banks, but that is another story.
A legacy in the making?
I hope there is. I also think that government intervention is important, but we cannot look blindly to it as our salvation. Right now, it appears our administration has no plan, and is worried about telling us about it. That does not solve glacial freeze ups.
Even when the plan is announced, it will take time for it to be implemented and to see some effects, if any. I hope the black box is opened soon.
Other articles on the Global Financial Crisis & Recovery and Outlook & Trends
For other articles about the Global Financial Crisis and where this all takes us, here are some recent articles and links. You can also go to Global Financial Crisis & Recovery and Outlook & Trends on www.HotelLawBlog.com
- Hotel Lawyer: Stimulate this! The lighter side of political commentary from the centuries
- Hotel Lawyer: What lies ahead? What’s the bailout cost $700 billion? $3 trillion? $20 trillion? What does Dr. Doom mean by an L-shaped Depression?
- Hotel Lawyer: Stimulus Bill and financial recovery — summary of selected tax provisions
- Hotel bankruptcies, workouts and turnarounds: Hotel Lawyers on the TARP, the TALF, and the ugly. What does it mean to hotel owners and lenders?
- Hotel Lawyer: Uh Oh! Now they are using the D word
- Hotel Lawyer: New hotel data and revised predictions for 2009. Increased hotel loan stress, falling NOI and slumping values. It’s going to get worse before it gets better.
- Hotel Attorneys with the latest “updates from the field”
- Hotel Lawyers: How do we pay for this? And what happens next?
- Distressed hotel assets find no fast relief in bailout plan. Up to $1 trillion “bad bank” to take toxic assets. No critical details yet.
- Troubled Hotel Loans: Turning point or just another ledge on the cliff before we go over the edge? Bad bank rescue and RTC-2 ahead?
- Latest insights from JMBM’s Hotel Attorneys and PKF Consulting on what lies ahead for the hotel industry . . .
- Fortunes will be made . . . or lost . . . in the wake of The Financial Bailout Bill and the Panic of 2008. What happens AFTER the Bailout Bill . . .
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $50 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who’s your hotel lawyer?
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