Which countries will have the next financial crisis?

Here, from Peter Levring, is a discussion of high private household debt in Sweden and Norway and Denmark, along with some remarks by Paul Krugman.  Here is an excerpt from Levring:

In Denmark, consumers owe their creditors 321 percent of disposable incomes, a world record that the Paris-based OECD said in November demands a policy response. In Sweden, debt by that measure is close to 180 percent, a level the government and central bank say can’t be allowed to rise. Norway’s central bank has struggled to find a policy mix that addresses its 200 percent private debt burden.

Here is a sustained argument, from Jesse Colombo, that Singapore is due for a crash:

This chart from Nomura shows that Singapore’s loan growth has far outpaced its nominal GDP growth in recent years, making for the worst credit-GDP growth gap in Asia…

The optimistic stance of course is to focus on Singapore’s net asset position, quality governance, and its new and enhanced role in an “Average is Over” world.  The same can be said for the Nordics as well.

Those inclined to pick on Malaysia can read the argument here, or try the Philippines.

China seems more like 2015 at this point, if that.  And the Russian bailout bought some time for Ukraine.

Or, from Alen Mattich, Canada may be the next victim:

Canadian house prices are very clearly bubbly. By one estimate Canada’s house price to rent ratio–an important metric–is the furthest from historic trends than any country in the world right now. Various estimates have Canadian house prices at between a third and two-thirds over-valued.

I am myself inclined to think Thailand and Turkey are most vulnerable over say the next year, maybe Greece too, in part because of the accompanying political dysfunctions in each case.  And is India’s recovery already over?  Indonesia still has troubles ahead.

One key question is the relative worry weights you assign to private debt vs. bad institutions.

What about the rest of the world?  The eurozone is seeing ongoing credit contraction and perhaps deflation too.  Japan just announced a surprisingly large and apparently persistent current account deficit.  And the United States?  Things look pretty good, but in fact by the standards of historical timing we are soon due for another recession.

I’ll put my money on Turkey.


In Canada a large part of the risk for recently purchased homes falls on the Federal government through CMHC. The bigger risk for Canada may lie in the fact that many boomers are counting on the value of their homes, purchased decades ago, to fund their retirement. A drop in the Canadian housing markets could destroy the retirement plans of many older Canadians.

One reason I tried (and failed) to get my mother-in-law to sell. She owns a duplex in a residential neighbourhood on Montreal Island within walking distance of the subway, renting out the upstairs. She admitted her financial asset accumulation isn't as advanced as it should have been at this stage of her life, so I don't know what else she plans to live on when she's too old to stay on the job (her son-in-law's spare room is an option, but hardly an ideal one for anyone involved). She refuses to do so. "I don't care what your models say, I'm not leaving my house!" she said.

Housing prices do not appear to be as inflated in Montreal as they are in Vancouver and Toronto. Of course, economic prospects might be much better in Vancouver and Toronto and justify higher prices in those cities. Quebec seems to be chronically held back by its politics.

If she actually owns her duplex, then her rental income should pay for the cost of her housing. This is the way many Americans invested for retirement when I grew up prior to the Reagan initiated wealth through debt era we are in now.

She owns productive capital that will remain constantly productive through stock market crashes and bubbles and eras of pillage and plunder by rent seeking bankers.

Giving up a little rent, she can probably find a mature but younger tenant who can tend to some of the minor landlord problems and look in on her.

"Reagan initiated wealth through debt era "

How do you think you'd by the house?

Umm...we just listed thirteen countries. Might as well admit no one has a clue.

"No one has a clue" is just about the only sensible, honest, down-to-earth answer to a question like this. Which is why we never see it.

We never see it because you don't get paid, or at least paid well, for simply saying I don't know.

This is one of the crucial problems of the modern world. Inability/unwillingness to accept "I do not know" as an answer without dismissing the speaker as incompetent.

That might be changed through education, though. But it would require teachers who are willing to say that.

If I were forced to bet, I'd take Greece. Their political class is a disaster. So much so that even the rest of Europe would like to jettison them from the family. The Germans and French would be rid of a trouble maker and it sends a message to Italy, Spain and Portugal.

Even Paul Krugman doesn't talk as much any more about Greece getting the boot from the EZ. If Greece hasn't been expelled by now, it's not going anywhere.

By contrast, far fewer people who should have been keeping track called the Cypriot banking crisis and euro-exit-in-all-but-name. Face it---if we knew where the next financial crisis was most likely to be, we'd be calling our brokers and telling him to short the local currency and/or government paper, not shooting the bull about it here.

Oh, I agree that the opacity makes spotting the next crisis near impossible. I'm basing my pick solely on the political idiocy factor. Greece seems to offer the greatest number of people a chance to do the wrong thing.

Ummm... no. If had good information that some country was going to get into trouble, we should short their currency or government paper THEN shoot the bull right here so others will follow...

Tyler has been heralding the imminent collapse of Greece, its expulsion from the EU & various other doomsday scenarios for approximately 2 years now.

Nothing much seems to be happening.

It'll be another random European country. Montenegro or Luxembourg. Who knew Poland was all screwed up?

There is a qualitative difference between one of the largest and most populous countries in the EU (Poland) and a couple of glorified principalities or bloated private estates (Luxembourg and Montenegro).

If you are worried about them, the property market in Andorra must be keeping you awake at night.

I read something recently, though I can't remember where and can't find it, about growing dollar denominated debt in China. And then I read about further steps to liberalize their capital account. I'm not saying it's next, but I'm saying we've seen that movie before and it ends badly.

Agree ..gonna be turkey

Feel like this site is just going downhill. You linked to Jesse Colombo, someone who basically sees a bubble anywhere there is growth and has spent his years since the financial crisis pointing out bubbles in every economy he can find. Half the Forbes articles on bubbles are from him. Show him a line going up, he'll probably call it a bubble. You only need to read the Singapore article to see how poorly researched it is and how easily his arguments break down.

The incentive to fearmonger, "look like an adult", and "warn" about impending calamities is really high. The hallmark of a "serious person": look at things, furrow your brow, war, be a pessimist generally etc. In investing, we have an adage for this: the bear argument always, always sounds smarter and yet, over the long-term, most stocks go up and markets produce a positive return.

Society seems to reward people who have that stance while being wrong for years once any of their predictions come close to true. Same for bloggers -- I am sure if any of these countries actually experiences a crisis, Tyler will smugly link to this post saying he warned us. Thanks bro, you really laid it out clearly and precisely!

From your comment no one would know I am saying that Jesse is wrong.

"over the long-term, most stocks go up and markets produce a positive return."

over the long run, most company go bankrupt. Market go up over the long run because of inflation. Just like house price go up over the long run, it's because of inflation, it doesn't make you wealthier. And just because house price go up in the long run doesn't mean there can not be housing bubble.

You are simply suffering from optimism bias.


-Greece is still in a financial crisis and the worst of Eurozone has already occurred.
-India does not have enough foreign debt for finanical crisis but they are more likely for an inflation/stagflation problem the next 5 years.
-China is ~2020 at this point but it will be big!
-Thailand has a minor crisis but not a huge one.
-Canada, Singapore, Sweden, Etc. - decent enough balance sheets across the economy.

My money is on Turkey. Lots of foreign debt and next door to Syrian civil war. I expect the government goes strong fundamental Islamist and foreign investors start removing money so the government goes more fundmental. As excel says "Circular Function"

Have you actually put your money on Turkey being next, or is that a metaphor?

InTrade is dead, it should be a methaphor.

However the good judgement project will let you use play money in a prediction market. One of the current questions is about Turkey's accession to the EU which you'd figure a Turkey crash would factor into.

If only there were some other market to play...

Duh! France.

Very unlikely.

Mars! The whole water thing was just a mirage waiting to evaporate in thin air (or lack thereof)

Re: "by the standards of historical timing we are soon due for another recession."

Oh, that damned calendar of historical timing,

Destining us to another recession.

Hickory, Dickory, Dock--

We are owen,

Says Cowen.

Puerto Rico is next.

How is CRA and Fannie and Freddie forcing the bankers of Sweden, Denmark, and Norway to make bad loans that can't possibly be repaid??

After all, bankers would never make bad loans using other people's money unless forced to by Clinton crony capitalists. Must be Clinton's Global Initiative world government forcing all those bankers to make bad loans....

"How is CRA and Fannie and Freddie forcing the bankers of Sweden, Denmark, and Norway to make bad loans that can’t possibly be repaid??"

Their not, it's a silly argument. For that matter they aren't even bad loans.

Wait how has that Vox article about Turkey being the next sudden stop not come up?

In Sweden, debt by that measure is close to 180 percent, a level the government and central bank say can’t be allowed to rise. Norway’s central bank has struggled to find a policy mix that addresses its 200 percent private debt burden.

This type of reasoning always seems like 'reasoning by magic numbers' to me. Gov't debt 90% of GDP, 100%, 200%, always some magic number which just happens to be nice and even (not, say 105.234%) is a problem.

But what exactly makes it a problem? Shouldn't the optimal amount of debt to GDP for a country be a moving target that changes as conditions change? If interest rates are nearly 0% shouldn't the optimal amount of debt be higher than if they are around 10%?

I'm not sure I'm reading this correctly, but it sounds like almost all of the Danish and Swedish debt are related to mortgages. I worked in Denmark for a while, they aren't really profligate spenders. They have very high taxes on property and vehicles (literally, they have a 180% tax on cars before other fees for registering and insuring the vehicle). I'm wondering if the a good chunk of the debt is really just money borrowed to cover taxes.

And also, as a reminder, you commented on Denmark's mortgages before: http://marginalrevolution.com/marginalrevolution/2009/09/the-danish-mortgage-model.html

Mostly it's because pension savings are also very high. So the net debt isnt anything out of the usual iirc. That get's missed by many of the commentators tho.

(I'm Danish)
What's weird about the linked article is that Denmark already is in a severe financial crises, the housing bubble already burst, consumers have been deleveraging since 2008, and GDP is still 4 percent below the 2008 peak. The disaster foreign observers talk about already happened, only the PIIGS have worse numbers.

Now, can it get worse? The biggest risk is probably a default in a particularly insane mortgage category, "installment-free", where for the first ten years, you pay no installments on the mortgage. The mortgage was introduced with admirably bad timing in 2003-2004, as the bubble was inflating, and became really popular (partly through an arms race effect). Meaning that first repayments start right around now, and people's revenues are much lower than expected due to crisis. Yikes. (But common belief is that most mortgage institutions will be willing to restructure loans to prevent a new housing disaster).

Question: You have people in Toronto who are renting a place for 2,000/month. To buy the unit would run $4,000/month in PITI. After witnessing a global economic calamity brought about by a housing bubble, what possible rationale makes buying look like a good idea?

Not to mention pay in the Toronto area isn't so fantastic, even for professional level jobs. You don't earn anywhere near what you can in say New York for similar work and the cost of living is getting up to similar levels.

What about Australia and it's bubbly real estate and consumer goods markets?

How about Venezuela?

Yes, Venezuela or Argentina. Both of them have trade deficits and governments pushing a fake exchange rate.........wait, Venezuela is no prediction. They had 56% inflation rate for 2013 and a black market exchange rate 5-10 times above the official one.

The interesting estimate for an economist would be "if the oil barrel trades below X for a certain Y period" Venezuela collapses.

Is debt as a percent of disposable income in those countries even meaningful? Since the government pays for your rent, food, electricity, health care and practically everything else, you don't need so spend your money on things you need. 100% of disposable income can be used on interest payments since the nanny state will prop you up from cradle to grave.

"quality governance"

Singapore is like capitalist north korea

I'm always reminded of DeSoto's book about frozen capital in poor countries.

Debt can be a house of cards or a foundation of reinforced concrete, and it's often hard to tell which.

I’ll put my money on Turkey

Would you? "Financial crisis" within a year?

It all depends on the odds, no? At 1/50 odds, I will take this bet.

Second call for the good judgment project... Anyone who wants to put their (play) money where their mouths are should consider it. There is also the american civics exchange for US related questions.

I'd be very surprised if Tyler ever took an even odds bet on any of the non-trivial predictions he made. That's why he keeps them as vague as possible.

It surprises me to hear Norway has an impending crisis. What do they spend all those petrodollars on? I'd have thought that country should be one riding this energy wave real high! Even in per capita GDP etc. don't they come way way ahead of the rest of the world?

What gives? Are Norwegians living a profligate lifestyle? I doubt it. They aren't fighting any wars, no natural disasters either. What's going wrong there.

'What do they spend all those petrodollars on?'

This -

'The Government Pension Fund of Norway comprises two entirely separate sovereign wealth funds owned by the Government of Norway:

- The Government Pension Fund – Global (formerly The Government Petroleum Fund)
- The Government Pension Fund – Norway (formerly The National Insurance Scheme Fund)

The Government Pension Fund – Global (Norwegian: Statens pensjonsfond – Utland, SPU) is a fund into which the surplus wealth produced by Norwegian petroleum income is deposited. The fund changed name in January 2006 from its previous name, The Petroleum Fund of Norway. The fund is commonly referred to as The Oil Fund (Norwegian: Oljefondet). As of the valuation in June 2011, it was the largest pension fund in the world, although it is not actually a pension fund as it derives its financial backing from oil profits and not pension contributions. As of September 30th 2013 its total value is NOK 4.714 trillion[1] ($783.3 billion), holding one percent of global equity markets.[2] With 1.78 percent of European stocks,[2] it is said to be the largest stock owner in Europe.[3]

The purpose of the petroleum fund is to invest parts of the large surplus generated by the Norwegian petroleum sector, generated mainly from taxes of companies, but also payment for license to explore as well as the State's Direct Financial Interest and dividends from partly state-owned Statoil. Current revenue from the petroleum sector is estimated to be at its peak period and to decline over the next decades. The Petroleum Fund was established in 1990 after a decision by the country's legislature to counter the effects of the forthcoming decline in income and to smooth out the disruptive effects of highly fluctuating oil prices.' http://en.wikipedia.org/wiki/The_Government_Pension_Fund_of_Norway

Do note its size - $783.3 billion

Norway is a very special case - particularly if Bloomberg and Wikipedia are both to be believed, Norwary has increased its SWF by about 40 billion dollars in about 3 months.

Considering that Norway has a population of 5 million, they just 'earned' about $8,000 dollars in three months. With the average Norwegian having an income of around $56,000, it would is not as the Norwegians need to be all that concerned at their bookkeeping.

Well, apart from that ever so present worry that the Mercatus Center and friends has about finding some other way to talk about debt than using discredited research (wonder how that project to correct their flawed work is going - though previously, just mentioning it was considered unseemly).

One country that has been booming for a decade or so and almost completely avoided a turndown past 2008 is Israel. We are told that it was the sheer genius of Stanley Fischer that has kept Israel upright, but now they have to share him with the U.S.

Turkey's growth story is outdated and current Islamist government's political instability that has been brewing on back of over $200 billion money laundering for Iranian oil money and major political crisis make Turkey a perfect candidate, imho, as well for 2014.

How can we short Turkey?

And the United States? Things look pretty good, but in fact by the standards of historical timing we are soon due for another recession.

How are why looking good? Why? By what metrics? What happened to multiple equilibria?


I linked to this back when you posted it about two weeks ago. You are looking prescient and prophetic right now!!

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