Posts Tagged ‘Eurozone’

IMF Says Less Austerity, More Spending

Monday, April 22nd, 2013

For those who have stressed the need for austerity and deficit reduction, who think that fiscal cliffs and sequestration are a good corrective to reckless spending, it may be helpful to consider what the IMF is saying. Lowering the outlook for U.S. growth to 1.9% from 2%, IMF Economic Counselor Olivier Blanchard called the U.S. spending cuts, known as the sequester, “the wrong way to proceed.” The U.S., he said, should impose less belt-tightening now, when the economy is still gaining its footing, and more in the future.

Take a look at Europe where the 17 countries using the euro currency remain in recession. Many are cutting spending sharply and raising taxes to slash mountainous debt, but the austerity strategies are stifling growth. The UK is expected to grow 0.7% this year and by 1.5% in 2014 and that’s better than France or Germany. During a recent trip to Europe, U.S. Treasury Secretary Jacob Lew urged officials there to put more near-term emphasis on government spending to stimulate growth, as the U.S. did with its $800 billion stimulus from 2009 to 2011.

The IMF says next year will be better:  3% growth as the effects of the federal cutbacks fade and a housing rebound continues to bolster a strengthening private sector.

The IMF had been calling the global recovery “two-speed,” with emerging markets growing strongly and advanced economies weaker.  Now, it says, it’s a three-speed recovery, with a growing divide between a strengthening U.S. and a still floundering Eurozone.

Who Wants To Be a Millionaire?

Tuesday, July 10th, 2012

Wobbly economies that shook up markets in 2011 took their toll on the world’s rich, though fast-growing Asia for the first time had more millionaires than North America.  According to the report, the global personal wealth of people worth $1 million declined in 2011 for the second time in four years, a side effect of the Eurozone crisis and economic sluggishness in developed markets.  Several emerging markets also suffered, with the number of millionaires in India and Hong Kong falling by nearly 20 percent.  With Europe’s debt crisis bedeviling the continent, the outlook for wealth creation in 2012 remains weak, according to a report prepared by Capgemini and RBC Wealth Management.

The world’s millionaires grew by 0.8 percent to a record 11 million, according to the report, yet their collective wealth fell by 1.7 percent to $42 trillion.  Only the Middle East experienced no decline in wealth.  It was the first global decline in millionaire wealth since the 2008 financial crisis, when the ranks of the wealthy fell 15 percent and their wealth declined by 20 percent.

Families worth $30 million or more saw their collective wealth fall 4.9 percent and their ranks shrink by 2.5 percent to just 100,000 individuals.  This decline reflects holdings in higher-risk and less liquid investments like hedge funds, private equity and real estate.

“It was a challenging environment for our clients,” George Lewis, global head of wealth management at Royal Bank of Canada, said.  The Toronto banking giant began sponsoring the widely watched report in May.  Lewis pointed out that the number of high net worth individuals rose even as overall wealth fell.  “It at least suggests there continues to be upward mobility and the ability to generate wealth around the world,” he said.

Curious about how many millionaires live in nations around the world?  Read this:  Singapore toppled Hong Kong as home to Asia’s wealthiest in 2011 as declining stock markets hit the former British territory significantly harder than its Southeast Asian rival.  Hong Kong, whose stock market capitalization fell by 16.7 percent last year, saw a bigger decline in the ranks of people with more than $1 million to invest as a larger proportion of that wealth was tied up in equity.  Southeast Asia also has shown stronger signs of resilience to global turmoil than the rest of Asia as domestic spending offset struggling exports.  The number of millionaires in Hong Kong fell 17.4 percent to 83,600 last year, compared with a decline of 7.8 percent to 91,200 people in Singapore, according to RBC Wealth’s head of emerging markets Barend Janssens.  Hong Kong took the lead from Singapore in 2010 after falling behind in 2008.

China still is home to the most high net worth individuals in Asia Pacific, with a population of 562,000 millionaires.  The top five countries by population of high net worth individuals are the US (3.07 million), Japan (1.82 million), Germany (951,000), China and the United Kingdom (441,000).  According to RBC, this significant concentration of high net worth individuals is why wealth managers are attracted to Asia even if they have to contend with competition from domestic banks.

Are the troubles in the Eurozone likely to impact Asia?  Lessons learned from the 2008 financial meltdown show that while Asia tends to get hit when the world economy stumbles, the severity varies depending on which countries have the biggest trade and financial linkages, and are best-prepared with big currency reserves, overflowing government coffers and central banks with the ability to cut interest rates.  Generally speaking, Asia has more room than the West to react with interest-rate cuts and government spending.  But some things have changed since 2008, and some countries, primarily India, Vietnam and Japan, may not be in shape to survive another financial jolt.  “As we saw with Lehman, when you get a seizure in the global financial system, nobody can hide from that in the short run,” said Richard Jerram, chief economist at the Bank of Singapore.  In that type scenario — which analysts say could still occur if Greece doesn’t live up to its commitments and leaves the Euro, or Spain and Italy require a bailout that Europe can’t afford — Asian stocks and currencies would fall, shipping lanes would see less business, and lending to consumers and businesses would dry up, slowing world economies.

Back to the Drawing Board for Greece

Monday, July 9th, 2012

International lenders and Greece will renegotiate the program on which the second financial bailout for Athens is based because the original has become outdated, according to a senior Eurozone official.  Greece received a €130-billion bailout in February from the European Union and the International Monetary Fund (IMF).  General elections in May and June delayed the bailout’s implementation.  The United States, the IMF’s largest member, supports discussions to review the Greek bailout program, but German Chancellor Angela Merkel countered that any relaxing of Greece’s reform promises is unacceptable.

“Anybody who would say that we need not, and cannot renegotiate the MoU (memo of understanding) is delusional, because he, or she, would be under the understanding that the whole program, the whole process, has remained completely on track ever since the weeks before the Greek first election,” the official said.  “Because the economic situation has changed, the situation of tax receipts has changed, the rhythm of implementation of the milestones has changed, the rhythm of privatization has changed — if we were not to change the MoU –it does not work.  We would be signing off on an illusion.  So we have to sit down with our Greek colleagues and say: this is where we should be in July, and this is where we are in July, and there is a delta.  Let’s find out what the delta is and then how to deal with the delta — that is a new MoU,” according to the official.

According to the official, representatives of the IMF, the European Central Bank and the European Commission will visit Greece as soon as a new government is in place to review the program’s implementation and prepare for negotiations.  “It is no secret, quite logical in fact, that due to the time passed without a functioning government in place that can take the required decisions, because of this, there have been significant delays,” the official said.  “The conclusion is that they have to engage in discussions on the memorandum of understanding and bring it back onto an even keel.”

Meanwhile at the G-20 summit in Mexico,  leaders of the world’s most powerful economies say they have produced a coordinated global plan for job creation, which it calls the top priority in fighting the effects of the European economic crisis.  The draft says “We are united in our resolve to promote growth and jobs.”

An editorial in the Australian Financial Review warns Europe not to misrepresent the issue. “The optimism that followed Greece’s election has proved to be short-lived as investors acknowledge the poll result doesn’t really change all that much in terms of Europe’s ongoing debt crisis.  Less than a day after Greece pulled back from installing anti-austerity parties in office, European bond markets were once again in meltdown on concerns that Spain, Italy, Portugal and Ireland may need more financial aid to prevent default.  The European Union’s financial ‘firewall’ is clearly not up to the task, with the yield on Spanish 10-year bonds soaring to a Euro-era high of 7.29 percent.  In Athens, talks are under way to form a pro-EU coalition government between the center-right New Democracy party and the socialist Pasok party, reducing the likelihood of a near-term Greek exit from the Eurozone.  Yet rather than insist that Athens stick to the tough conditions it agreed to as part of the EU’s €240 billion ($300 billion) rescue packages, there are signs that European leaders may again be preparing to fudge the issue.  German Chancellor Angela Merkel insists that Athens must stick to its austerity commitments and that there is no room for compromise.  But other European politicians are starting to talk about giving Greece more time to fix its problems.  This appears to confirm the Greeks will never live up to their austerity conditions and that the exercise was all about kicking the can further down the road.”

Devaluation would be the optimal way for Greece to jump start its economy.  Because that option is not on the table this time, achieving competitiveness is going to be much harder.  One of the bailout’s stipulations requires the government to cut pensions, slash the number of public servants and control costs – in other words, the “austerity” option.  Others prefer a program to stimulate growth and boost revenue, although one that would likely involve increased spending.  This is the “growth” option.  Angela Merkel favors austerity while French President Francois Hollande prefers the “growth” option.  In this debate, the Germans are in control because they are the ones that are going to cough up the money.  They have the ability to help because, contrary to most of Europe, they practice austerity and thrift.  If German taxpayers are going to have to pay higher taxes to save nations like Greece, they think their European brothers and sisters should share some of the pain.

According to a Washington Post editorial, Germany and other creditworthy E.U. governments were right to tell Greeks before the election that they could not choose both the Euro and an end to austerity and reforms, as several populist parties were promising.  Yet now that voters favored parties that supported the last bailout package, it’s time for Angela Merkel and other austerity hawks to make their own bow to reality. For Greece to stabilize, some easing of the terms of EU loans will be needed, at a minimum; an extension of deadlines for meeting government spending and deficit targets may also be necessary.  Unless it can deliver such a relaxation, there is not much chance the new administration in Athens will be able to push through the huge reforms still needed to make the economy competitive, including privatizations, deregulation and public sector layoffs.

“In the end, a Greek slide into insolvency and an exit from the euro may still be unavoidable. That’s all the more reason why EU leaders must at last agree on decisive measures to shore up the rest of the currency zone, beginning with Spain and Italy.  Measures under discussion for a summit meeting next week, including euro-area bank regulation, are positive but not sufficient.  In the end, banks and governments must be provided with sufficient liquidity to restore confidence — something that will probably require the issuance of bonds backed by all Euro-area countries, or greatly increased lending by the European Central Bank.  As German officials invariably point out, bailout measures will be wasted unless they are accompanied by significant structural reforms by debtor nations.  But without monetary liquidity, and the chance for renewed growth, the Euro cannot be rescued.”

Germany Catches Cold

Monday, June 25th, 2012

In a sign that no Eurozone nation is completely immune to the shocks of the European debt crisis, ratings agency Moody’s Investor Services has cut the credit ratings of six banks in Germany.  The largest bank to be downgraded is Commerzbank, Germany’s second-biggest lender, which was cut to A3 from A2.

“Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis,” Moody’s said. The downgrade shows that Moody’s thinks Germany could be hit if the Euro crisis becomes a catastrophe.  “It brings the crisis in Southern Europe and Ireland closer to home in Germany,” said BBC Berlin correspondent Stephen Evans.

The other affected banks DekaBank, DZ Bank, Landesbank Baden-Wuerttemberg, Landesbank Hessen-Thueringen and Norddeutsche Landesbank.  In addition to its rating cut, Commerzbank was placed on negative outlook, meaning Moody’s is considering an additional cut.  According to Moody’s that is because of the bank’s exposure to the Eurozone periphery and its concentration of loans to single sectors and borrowers.  Moody’s deferred a decision on the rating of Germany’s biggest bank, Deutsche Bank.

The downgrades are a result of Moody’s concern about the “increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity”.  Moody’s believes that German banks are likely to find themselves under less pressure than many European peers as personal and corporate debt levels are more modest than elsewhere.  The agency noted that the downgrades are less harsh than it had originally said they could be.  “Moody’s recognizes the steps Germany banks have taken to address past asset quality challenges,” the ratings agency said.

The Group of Seven nations agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 Eurozone economies into recession and damped demand for foreign goods. Policy makers at the European Central Bank meeting today face increasing pressure to lower rates and introduce more liquidity support for banks.  Moody’s decision is “a bit harsh” given the strength of the German banking system and economy, said Sandy Mehta, chief executive officer of Value Investment Principals Ltd., a Hong Kong-based investment advisory company.  “But given the events in Europe, unless the authorities and the powers that be are more decisive and take firmer action, then you do have the risk that the economic problems will engulf Germany as well.”

The rating actions were driven by “the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity,” Moody’s said.  “We wanted to identify vulnerabilities from further potential shocks from the euro area debt crisis and how this would affect investor confidence in institutions across Europe,” said Moody’s Managing Director for banking, Carola Schuler.  Moody’s agency was especially apprehensive about a potential decline in the value of banks’ portfolios of international commercial real estate, global ship financing, as well as a backlog of structured credit products, she said. “German banks have limited capacity to absorb losses out of earnings and that raises the potential that capital could diminish in a stress scenario.”  Moody’s action was anticipated.

According to Forbes, “This latest downgrade could be used by European politicians to put pressure on Angela Merkel and other policymakers.  Germany is staunchly opposed to the idea of Eurobonds, which Spanish and Italian politicians believe is one of the ways out of this mess.  Moody’s downgrade is but another sign of the extent of financial interconnectedness in the European Union, which highlights the dangers of contagion.  While some have argued that Germany would be better off leaving the monetary union, its financial sector remains in close contact to the broader European economy, making it difficult for Merkel and the rest to give up.  According to Moody’s, German banks’ major headwind is the continuation of the European sovereign debt crisis.  These banks are sitting on assets that will see their quality erode as markets tank, an effect that will be exacerbated if the global economy begins to cool at a faster pace too.”

Writing on the 247wallstreet.com website, Douglas A. McIntyre says that “Germany is assumed to be the home market of some of Europe’s most stable banks because of the relative stability of its economy.  Moody’s has undermined that view as it cut ratings of seven banks there, including Commerzbank, the second largest firm in the country.  The move was the result of worry over exposure to debt issued by some nations in the region that are now in financial trouble.  And the banks Moody’s singled out have less than adequate balance sheet to handle a major shock to the region’s credit system.”

Spain Asks the Eurozone for a Bank Bailout

Wednesday, June 20th, 2012

Spain asked the Eurozone for a bailout of up to €100-billion to rescue its banks.  This is just a short-term fix for the troubled Eurozone because it doesn’t address the underlying problems in the monetary union.  The earlier bailouts of Greece, Ireland and Portugal didn’t resolve the problems either.  “The Spanish banking bailout is big enough for some shock and awe (€100-billion vs. talk of €40-billion) but details are murky,” said Kit Juckes, the chief of foreign exchange at Société Générale.

Still unanswered are who shares the burden, and just how much will Spain be limited in terms of talks over its debt troubles.  It’s crucial to keep in mind that in Spain, it’s currently a banking crisis.  “And where is the growth coming from to make the problems go away?” Juckes said.  “The Spanish bailout doesn’t solve Europe’s woes…but maybe it allows the rest of the world to focus on something else.”  There are many other questions, said Adam Cole of RBC in London.  Which bailout will fund the rescue?  How much will the final rescue total?  What will the ratings agencies do?  What terms will be attached to the funds?  “The International Monetary Fund’s (IMF) report concluded Spanish banks would need at least €37-billion,” Cole said, noting that the maximum of €100-billion is perceived as credible.  In terms of the ratings agencies, Cole said that “the loans will add directly to the Spanish government’s liabilities and so increase the debt-to-GDP ratio by around 10 per cent, leaving further downgrades likely.”

Spain’s bailout plan is seen as a robust answer to critics who accused European Union (EU) leaders of reacting too slowly, too late and with the least possible amount of cash while the crisis is spinning out of control.  “This is a very clear signal to the markets, to the public, that the Eurozone is ready to take determined action,” Olli Rehn, the EU’s top economic official, said.  “This is pre-emptive action.”

Instead of waiting for Spain to complete stress tests on its banks later, Eurozone officials agreed to move before the market turmoil that Greece’s upcoming elections may produce.  Rather than undershooting estimates of Spanish bank needs, they have been generous: the International Monetary Fund estimated a requirement of at least €40 billion, but the Eurozone agreed to provide at least €100 billion.  “We deliberately wanted to ensure there is some additional safety margin,” Rehn said.  “This is the first time Europe is willing and able to deal confidently and overwhelmingly with (such) a large contingency,” said an unidentified Eurozone diplomat.  “And all through a straightforward telephone conference.  No all-nighters, no devising new instruments in a panic, and no penny-pinching haggling over money.”

The bad news is that Prime Minister Mariano Rajoy’s request for a bailout for Spain’s banks may undermine his political authority and credibility in financial markets.  “The emperor’s clothes are tattered,” Simon Maughan, financial strategist at Olivetree Securities Ltd., said. “Unless he uses this money to attack the regions and control the failed cajas, what threads he has left will be stripped off him.”  Rajoy has to persuade the Spanish people to accept austerity, and convince bond investors the cuts will deliver the deficit goals he has pledged.  if he fails, he may have to return for a larger rescue, potentially draining the Eurozone’s financial ammunition.

“Clearly his domestic credibility will have been hampered by this U-turn but at least he is partially recognizing the depth of the problem,” said Stuart Thomson, a fixed income fund manager at Ignis Asset Management, who predicts another bailout, this time for the government itself, within the next year and a  half.  “This bailout is predicated on a return to growth next year and we don’t think that’s possible.”

Protestors demanded to know why billions would prop up broken Spanish banks, instead of helping people who are suffering financially.  According to Moody Analytic’s Mark Zandi, the reason why Spain is in so much trouble may sound familiar to Americans.  “Spain had a bigger housing boom and bust than we had here in the United States and that means a lot of bad mortgage loans bad real estate loans that undermined the capital positions of the banks.  They are broke, they need help from the European Union,” Zandi said.  “The Spanish must be very humiliated by having to take the aid.  For them to actually have to go to the European Union for help like this, I’m sure was very difficult.”  But the pain runs deep with 25 percent of Spaniards is out of work; among the young, unemployment is upward of 50 percent.

Prime Minister Rajoy warned that Spain’s economy, Europe’s fourth-largest, will get worse before it gets better.  ‘‘This year is going to be a bad one,’’ he said.  ‘‘By no means is this a solution,’’ said Adam Parker, of Morgan Stanley.  Spain’s aid ‘‘could be a near-term positive from a trading standpoint, but you haven’t solved anything in the long term.’’

European leaders must prove to the world that they are making a credible effort to repair flaws in the Eurozone that allowed the problems in Greece to threaten the world economy.  If Greek voters elect a government that is willing to live up to the terms of its €130 billion bailout by meeting its payments and narrows its enormous budget gap, strong doubts remain whether new leadership can fulfill those obligations.  A significant amount of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country deeper in the hole.  ‘‘Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the program,’’ said Jurgen Stark, a former member of the European Central Bank’s executive board.  ‘‘Who has the competence to implement the program?  That is the key point.’’

Catalina Parada is an International, Marketing Consultant and Alter NOW’s Madrid correspondent.  She can be reached at catalinaparada@hotmail.com.

Is the Eurozone Sustainable?

Thursday, June 14th, 2012

Mario Draghi, president of the European Central Bank (ECB), has asked policymakers to focus their crisis support on solvent Eurozone banks.  “The ECB will continue lending to solvent banks and will keep the liquidity lines active and alive with solvent banks,” Draghi said.

World stock markets have lost roughly $4 trillion as European turmoil proliferated after inconclusive Greek elections and the danger of Spain’s finances being overwhelmed by its banking crisis.  The ECB has taken the lead in fighting the turmoil by infusing the banking system with more than one trillion Euros ($1.24 trillion), cutting its benchmark rate to a record low and purchasing government bonds.  When asked whether the ECB can tame financial turmoil and help cap widening bond spreads, Draghi said that “it’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” on “the structural front, and on the governance front.”

Draghi favors using the permanent bailout fund, the European Stability Mechanism (ESM), to inject capital into banks.  “People are actually working on finding ways that the ESM could be used to recapitalize banks,” he said.  “ The issue is not so much the use of ESM money to recapitalize banks but whether this could be done directly without having to go to governments.”

Despite the ECB’s efforts, Draghi admits that the setup of the 17-country euro currency union may be unsustainable.  According to Draghi, the financial crisis proved the inadequacy of the financial and economic framework set up for the Eurozone.  “That configuration that we had with us by and large for ten years which was considered sustainable,  I should add, in a perhaps myopic way, has been shown to be unsustainable unless further steps are taken,” he said.

Draghi said the next step “is for our leaders to clarify what is the vision…what is the euro going to look like a certain number of years from now.  The sooner this has been specified, the better it is.”  In 1989, European Commission President Jacques Delors issued a breakthrough report that charted the initial path to the creation and launch of the Euro 10 years later and detailed goals. “The same thing should be done now,” Draghi said.  He compared Europe’s efforts to those of someone crossing a river in thick fog while struggling against a strong current.  “He or she continues fighting but does not see the other side because it is foggy.  What we are asking is, to dispel this fog,” he said.

“Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,” Draghi told the European Parliament.

Ongoing discussions about closer Eurozone economic union have been revived by growing apprehension that Spain may need an international bailout.  June elections in Greece could see major wins by anti-bailout parties, possibly leading to the country’s departure from the Euro.  Asked about the potential for a bank run, Draghi said: “We will avoid bank runs from solvent banks.  Depositors’ money will be protected if we build this European guaranteed deposit fund.  This will assure that depositors will be protected.”

Germany is loath to risk more of its taxpayers’ money to prop up Eurozone partners and has rejected any joint deposit guarantee.  “The financial crisis has heightened risk aversion in a dramatic way,” Draghi said.  “I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little,” he said, referring to the failure of regulators to correctly assess the needs of failed Franco-Belgian bank Dexia and Spain’s Bankia.

Bank of Italy governor Ignazio Visco said political inertia and bad economic decisions had put “the entire European edifice” at risk and only a clear path to political union could save the Euro.  “There are now growing doubts among international investors about governments’ cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency,” Visco said.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Europe needs tighter budget discipline and more integrated rescue funds to forestall the Euro’s breakup.  “We need a genuine stability culture and a much upgraded common capacity to contain common contagion,” he said.  “This is the case, at least if we want to avoid a disintegration of the euro zone and instead make the euro succeed.”

Beware: Double Dip Ahead?

Thursday, May 31st, 2012

The 17-nation Eurozone is at risk of falling into a “severe recession,” the Organization for Economic Cooperation and Development (OECD) warned, as it called on governments and the European Central Bank to act quickly to keep the slowdown from becoming a drag on the global economy.  OECD Chief Economist Pier Carlo Padoan warned the euro-zone economy has the potential to shrink as much as two percent in 2012, a figure that the think tank had described as its worst-case scenario last November.  The OECD -which comprises the world’s most developed economies — said its average forecast was that the Euro-zone economy will shrink 0.1 percent in 2012 and grow a mere 0.9 percent next year.  “Today we see the situation in the Euro area close to the possible downside scenario” in the OECD’s November report, “which if materializing could lead to a severe recession in the Euro area and with spillovers in the rest of the world,” Padoan said.

The report believes that Europe will lag behind other countries, especially the United States, where the economy is expected to grow 2.4 percent this year and 2.6 percent in 2013.  “There is now a diverging trend between the euro area and the U.S., where the U.S. is picking up more strongly while the euro area is lagging behind,” Padoan said.  Europe is split between a wealthier north that is growing and the southern nations that are falling into recession, according to OECD statistics.

The global economic outlook is still cloudy,” said Angel Gurria, OECD Secretary General. “At first sight the prospects for the global economy are somewhat brighter than six months ago.  At closer inspection, the global economic recovery is weak, considerable downside risks remain and sizable imbalances remain to be addressed.”

Germany, Europe’s largest economy, will grow two percent next year after expanding 1.2 percent in 2012.  France, the Eurozone’s second-biggest economy, will grow 1.2 percent next year after expanding 0.6 percent this year, the OECD said.  By contrast, Italy’s economy is expected to shrink 1.7 percent this year and 0.4 percent in 2013.  Spain will remain mired in recession, with contraction of 1.6 percent this year and 0.8 percent in 2013.  Padoan has asked Eurozone leaders to enter into a “growth compact” to promote expansion while cutting deficits.  French President Francois Hollande has made achieving this type of pact the focus of his European diplomacy.

The OECD is chiefly concerned that problems with European sovereign debt are a significant threat to growth around the world. “The crisis in the Eurozone remains the single biggest downside risk facing the global outlook,” Padoan said.  “This is a global crisis which is largely a debt crisis.  It is a result of excessive debt accumulation in both the private and public sectors.  One can not safely say we’re out of the crisis until debt comes down to more manageable levels.”

To protect its economic recovery, the OECD urged the American government to move very gradually to tighten its budget.  A wave of U.S. spending cuts and tax hikes – known as the “fiscal cliff” — are set to take effect in January unless politicians agree to delay at least some of them.  Bush-era tax cuts and benefits for the long-term jobless are both expected to expire.  Another $1.2 trillion in spending cuts on federal programs would take effect as a result of Congress’ failure last year to find a comprehensive deal to cut the budget deficit.  The OECD said these actions would be the wrong fiscal policy given the still-fragile condition of world’s largest economy.  “The programmed expiration of tax cuts and emergency unemployment benefits, together with automatic federal spending cuts, would result in a sharp fiscal retrenchment in 2013 that might derail the recovery,” according to the OECD.

Wall Street economists say that fiscal policy could tighten by about $600 billion in 2013, or about four percent of GDP, if lawmakers cannot agree on what programs to cut.  Goldman Sachs estimates the “fiscal cliff” could trim approximately four percent from GDP in the first half of 2013.  The majority of economists, however, expect lawmakers to act before that particular hammer has an opportunity to fall.

Eurodammerung?

Wednesday, May 23rd, 2012

Despite Germany’s strong manufacturing output in March, it was not enough to compensate for a slump across the rest of the Eurozone with declining production, a signal that an expected recession may not be as mild as policymakers hope.  Industrial production in the 17 Eurozone countries declined 0.3 percent in March when compared with February, according to the European Union’s (EU) statistics office Eurostat.  Economists had expected a 0.4 percent increase.

The figures stood in stark contrast with German data showing output in the Eurozone’s largest economy rose 1.3 percent in March, according to Eurostat, 2.8 percent when energy and construction are taken into account.  “With the debt crisis, rising unemployment and inflation, household demand is weak and globally economic conditions are sluggish, so that is making people very reluctant to spend and invest,” said Joost Beaumont, a senior economist at ABN Amro.

According to Eurostat, output declined 1.8 percent in Spain; in France — the Eurozone’s second largest economy after Germany — output fell 0.9 percent in March.  Many economists expect Eurostat to announce that the Eurozone went into its second recession in just three years at the end of March, with households suffering the effects of austerity programs designed to slash debt and deficits.

“Industrial production is a timely reminder that first-quarter GDP will likely show a contraction,” said Martin van Vliet, an economist at ING.  “With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest.”  European officials believe that the slump will be mild, with recovery in the 2nd half of this year.  The strong economic data seen in January has unexpectedly faded point to a deeper downturn, with the drag coming from a debt-laden south, particularly Greece, Spain and Italy.

Economists polled by Reuters estimated the Eurozone economy contracted 0.2 percent in the 1st quarter, after shrinking 0.3 percent in the 4th quarter of 2011.  “We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter,” said Ben May, an economist at Capital Economics.  “What’s more, April’s disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter.”

“It is evident that Eurozone manufacturers are currently finding life very difficult amid challenging conditions,” said Howard Archer at IHS Global Insight. “Domestic demand is being handicapped by tighter fiscal policy in many Eurozone countries, still squeezed consumer purchasing power, and rising unemployment.”  Eurozone governments have introduced broad austerity measures in order to cut debt, and these have undermined economic growth.

European watchers also expect to see Greece exit the Eurozone.  Writing for Forbes, Tim Worstall says that “As Paul Krugman points out, the odds on Greece leaving the Eurozone are shortening by the day.  In and of itself this shouldn’t be all that much of a problem for anyone. Greece is only two percent of Eurozone GDP and it will be a blessed relief for the Greeks themselves.  However, the thing about the unraveling of such political plans as the Euro is that once they do start to unravel they tend not to stop.”

The European Commission hopes Greece will remain part of the Eurozone but Athens must respect its obligations, the European Unions executive Commission said.  “We don’t want Greece to leave the Euro, quite the contrary – we are doing our utmost to support Greece,” European Commission spokeswoman Pia Ahrenkilde Hansen said.  Greece is likely to face new elections next month after three failed attempts to form a government that would support the terms of an EU/IMF bailout.  Opinion polls show most Greeks want to stay in the Eurozone, but oppose the harsh austerity imposed by the emergency lending program.  “We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” according to Ahrenkilde.  “The Commission position remains completely unchanged: we want Greece to be able to stay in the Euro.  This is the best thing for Greece, for the Greek people and for Europe as a whole,” she said.

European Central Bank (ECB) policymakers Luc Coene and Patrick Honohan voiced the possibility that Greece might leave the currency bloc and reached the conclusion that it will not be fatal for the Eurozone.  According to Luxembourg’s Finance Minister Luc Frieden “If Greece needs help from outside, the conditions have to be met.  All political parties in Greece know that.”  There are powerful incentives for keeping Greece stable, one of which is that the ECB and Eurozone governments are major holders of Greek government debt.  A hard default could mean heavy losses for them; if the ECB needed recapitalizing as a result, that debt would fall on its members’ governments, with Germany first in line.  “If Greece moves towards exiting the Euro…the EU would then need to enlarge its bailout funds and prepare other emergency measures,” said Charles Grant, director of the Centre for European Reform think-tank.

Meanwhile, Britain’s Deputy Prime Minister Nick Clegg warned euro skeptics to avoid gloating over the state of the Eurozone as Greece tries to assemble a workable government.  According to Clegg, “We as a country depend massively on the prosperity of the Eurozone for our own prosperity, which is why I can never understand people who engage in schadenfreude – handwringing satisfaction that things are going wrong in the euro.  We have an overwhelming interest – whatever your views are on Brussels and the EU – in seeing a healthy Eurozone.  That’s why I very much hope, buffeted by these latest scares and crises in Greece and elsewhere, that the Eurozone moves as fast as possible to a sustainable solution because if the Eurozone is not growing and the Eurozone is not prosperous it will be much more difficult for the United Kingdom economy to gather momentum.”

Britain Slides Into Double-Dip Recession

Monday, April 30th, 2012

Europe’s financial woes have spread across the English Channel as the United Kingdom slid into its first double-dip recession since the 1970s. Britain’s GDP fell 0.2 percent from the 4th quarter of 2011, when it declined 0.3 percent, according to the Office for National Statistics (ONS).

As anti-austerity backlash grows on the Continent, Prime Minister David Cameron said the data was “disappointing” and promised to shore up growth without backtracking on the UK’s biggest fiscal squeeze since World War II.  “I don’t seek to excuse them, I don’t seek to try to explain them away,” Cameron said.  “There is no complacency at all in this government in dealing with what is a very tough situation, which frankly has just got tougher.”  Cameron said “We have got to rebalance our economy.  We need a bigger private sector.  We need more exports, more investment.  This is painstaking, difficult work but we will stick to our plans, stick with low interest rates and do everything we can to boost growth, competitiveness and jobs in our country.”

Opposition leader Ed Miliband said the figures are “catastrophic” and asked Cameron why this had happened.  “This is a recession made by him and the chancellor in Downing Street.  It is his catastrophic economic policy that has landed us back in recession,” Miliband said.

The Bank of England is in the last month of economic stimulus and the fall-off in output comes as prospects dim in the Eurozone, Britain’s biggest export market.  “This isn’t supportive of the fiscal consolidation program, so the government is likely to be concerned about that,” said Philip Rush, an economist at Nomura International in London.  “The data were bad, and that supports the view that the Bank of England will do a final £25 billion of quantitative easing in May.”

According to ONS, output in the production industries decreased by 0.4 percent; construction fell by three percent.  Output of the services sector, which includes retail, increased by 0.1 percent.  The decline in government spending contributed to the particularly large fall in the construction sector.  “The huge cuts to public spending – 25 percent in public sector housing and 24 percent in public non-housing and further 10 percent cuts to both anticipated for 2013 — have left a hole too big for other sectors to fill,” said Judy Lowe, deputy chairman of industry body CITB-ConstructionSkills, said.

The UK’s last double-dip recession, defined as consecutive quarterly drops in GDP, was in 1975. At that time, Labour Prime Minister Harold Wilson was in office and Margaret Thatcher was elected leader of the opposition Conservatives.  UK Treasury forecasters and the International Monetary Fund (IMF) believe the economy will grow 0.8 percent this year, the same as last year.  According to Chancellor of the Exchequer George Osborne, the UK’s economic situation is “very tough” and the government should stick to its plans of eliminating a majority of the deficit by 2017.  “The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.  It’s taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime,” Osborne said. “The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt.”

Chris Williamson, chief economist at Markit, said: “The underlying strength of the economy is probably much more robust than these data suggest.  The danger is that these gloomy data deliver a fatal blow to the fragile revival of consumer and business confidence seen so far this year, harming the recovery and even sending the country back into a real recession.”

Not everyone agrees that the data indicates a double-dip recession.  Writing in the Telegraph, Philip Aldrick says that “Economists have been questioning the reliability of the ONS numbers for a while now, but the latest data drew the debate sharply into focus.  At -0.2 percent, the GDP reading was considerably worse than the consensus of 0.1 percent growth.  The ‘discrepancy’, as Goldman Sachs’ Kevin Daly described it, was ‘unbelievable’ because much of the recent survey data – from the Bank of England’s agents’ reports to the purchasing managers’ indices – have been encouraging.  Andrew Goodwin of the Ernst & Young ITEM Club agreed.  ‘Our reaction is one of disbelief,’ he said.  ‘The divergence is virtually unprecedented and must raise significant question marks over the quality of the data.’  They are not alone.  No lesser institution than the Bank of England has queried the ONS data.  Last week, minutes to the Monetary Policy Committee meeting damningly noted: ‘The sharp falls in construction output in December and January were perplexing, and the Committee was minded not to place much weight on them.”

Is Greece Headed Towards a Third Bailout?

Monday, April 23rd, 2012

Lucas Papademos, Greece’s prime minister, said that his crisis-plagued country could require a third bailout just weeks after it secured a second round of rescue funds after much discussion in Brussels. Athens may have received the biggest bailout in history but another lifeline could not be ruled out, according to Papademos.  To date, the European Union (EU) and International Monetary Fund (IMF) have committed a total €240 billion to the nearly bankrupt nation.  “Some form of financial assistance might be necessary but we have to work intensely to avoid such an event,” Papademos said, noting that additional spending cuts are inevitable.  Whatever government emerges after the upcoming general election, it is vital that is it prepared for the measures.  “In 2013 – 2014, a reduction in state spending of about €12 billion is required under the new economic program,” Papademos said.  “Every effort must be made to limit wasteful spending and not to further burden salaries of civil servants.”

Greece’s new government will have “about 60 days” to enact long-overdue structural reforms and agree on ways of reining in public debt before officials make a decisive inspection tour in June.  “It is very important that there is no let up in the pace of reforms after elections,” said a senior Papademos aide.  The chiefs of both the EU and IMF missions to Greece said while progress is being made in meeting deficit-reducing targets, a lot of work remains to be done.  “There are still many measures to be taken, painful ones too.  I believe we’ll be able to see in the second half of the year in which direction we’re going, whether we’re on the right path or not,” said Matthias Mors, head EU monitor.

Papademos reiterated that Greece will do everything necessary to remain in the Eurozone, saying the cost of an exit would be “devastating.  More than 70 percent of the Greek people support the country’s continuing participation in the euro area,” he said.  “They realize, despite the sacrifices made, that the long-term benefits from remaining in the Eurozone outweigh the short-term costs.  Greece will do everything possible to make a third adjustment program unnecessary,” Papademos said.  “Having said that, markets may not be accessible by Greece even if it has implemented fully all measures agreed on.  It cannot be excluded that some financial support may be necessary, but we must try hard to avoid such an outcome.”

Private investors in Greek debt wrote down the value of their investment by 53.5 percent, or risk losing everything in a possible default.  Public-sector jobs are being slashed, workers ‘ wages are being frozen, welfare payments are being slashed, and taxes are being raised.  Greece’s official unemployment rate is currently more than 20 percent.  If Greece does default, it could start a domino effect that would drag down other ailing European economies — possibly plunging the Eurozone into recession.

According to Papademos, “The real economy is still weak, and high unemployment is likely to persist in the near future.  The challenging period ahead of us needs to be addressed with great care.  If we do things right, implementing all measures agreed upon in a timely, effective and equitable manner, and if we explain our policy objectives and strategy convincingly, public support will be sustained.  An improvement in confidence would have a positive multiplier effect on economic activity and employment.”

When asked if Greece might return to its old currency, Papademos said “The consequences would be devastating.  A return to the drachma would cause high inflation, unstable exchange rate, and a loss of real value of bank deposits.  Real incomes would drop sharply, the banking system would be severely destabilized, there would be many bankruptcies, and unemployment would increase.  A return to the drachma would increase social inequalities, favoring those who have money abroad.”