Greek Default And Devaluation: Would It Even Matter? [View article]
The fact the troika is going to the lengths it is in restructuring Greek debt, while avoiding a credit event which would trigger CDS an avalanche of payment obligations, underscores the importance of CDS which tend to be poorly understood, opaque and reported on a net basis.
Interlocking relationships can arise through any number of possible linkages, including inter-bank lending, holding common assets and writing of credit insurance. Simply suggesting there are interlocking financial relationships between financial institutions does not in itself adequately address the danger of CDS and counter party risk.
Had this risk been recognized and addressed in further detail, it would have improved an otherwise excellent article.
In the fourth quarter advance estimate of GDP was 2.8% with about .8 points of growth resulting from inventory accumulation.
Given current trends in business sales, many believe inventory/sales is about right and inventory build will contribute little to GDP growth in the coming months which likely means growth in the first quarter could come in around 2.2% to 2.4%, consistent with the lower bound of estimates offered by the Fed and suggesting a muddle through economy.
As I suggested in Econintersect, I do not think a muddle through economy growing at 2.0% is sustainable because it's right about at economic stall speed, growth at which the economy can easily lapse into recession. Potential catalysts include higher oil prices, the unfolding euro crisis, Iran and broader geo-political events following the Arab Spring.
"Italy is being pushed into a depression," writes Ambrose Evans-Pritchard eying up a chart of collapsing money supply in the country. Banca d'Italia says Italy's GDP shrank 0.5% in Q4 and expects a further decline of 1.5% this year, with no growth in 2013 - numbers that can only lead to a further deterioration in Italy's debt situation. [View news story]
Maybe we are reaching the end of the end game where things are so dire we can no longer paper over massive structural dislocations with "buying time" policy measures.
During our first cycle of QE, little of the added reserves found there way into the real economy through expanded lending. The monetary base increased through expansion of reserves but they (reserves) remain parked with the Fed. Because banks are part of the game, they understand the game and did not expand lending.
More recently, Richard Koo of Nomura noted , " I think the LTRO is largely a means of buying time and does little to address the underlying issues. More important, most of the funds supplied by the ECB remain with the Bank in the form of deposits and have not flowed into the real economy."
Euro And S&P 500 Correlations Revisited [View article]
Interesting.
I trade S&P futures and use the euro as one of my trading tools and as of late its usefulness has deteriorated.
Given the long history of correlation, perhaps the current divergence reflects varying views held by respective players with equity players inspired by such steps as LTRO while the currency and debt guys less convinced.
Some believe the correlation will be restored through a drop in US equities.
China's Q4 GDP grew 8.9% Y/Y, the slowest growth since mid-2009, but ahead of expectations of 8.7%. For the entire year, growth clocked in at 9.2% vs. 10.4% in 2010. After a brief pop at the open, Chinese shares are back to unchanged. Other markets are hanging on to gains: Hong Kong +1.6%, Australia +1.3%. "Risk" currencies are higher as well: Euro +0.5%, aussie +0.5%. [View news story]
There is a real estate bubble and it's reaching the stage where investment is contracting, prices are falling, sales are slowing and concerns over mounting debt are growing.
Most of the debt, though, is held by local government SPV's which may owe as much as $2 trillion with much of this stressed by poor sales, inadequate cash flows and poor maturity matches.
And while there is always the central government balance sheet supported by a $7 trillion economy, I would look for Beijing to start gradually easing some of the property market restrictions imposed in the past year in order to encourage first-time buyers into the market.
China, India: A Hard Landing Is Very Unlikely [View article]
Ben Gee when I posted the current account surplus to be 4% of GDP I was drawing upon figures offered by a major investment house based upon results through the second quarter of 2011.
Using the most current data the trade surplus in 2011 was $155 billion on GDP of $7.26 trillion, making for a trade surplus of 2.1% thereby underscoring my point that international trade would likely to be a drag on the Chinese economy.
As to future growth, 6% to 9% is the range of estimates offered by those with the most depth on the subject; nobody knows how quickly the consumer sector will develop; nobody knows what lending and investment will be in coming years; and nobody knows how the real estate bubble will play out. Moreover, statistics coming out of China are highly suspect and China could easily surprise to the upside.
Quoting Barclays: "We try to piece together the true picture of Chinese consumption by examining statistical data:
First, according to one major study (Wang and Woo 2011), China’s household income was underreported by 66% in 2008, which could be translated into underestimation of GDP by 10%. The underreported income was concentrated mainly in high-income households.
Second, the same study suggested that household consumption was probably underreported by 20% in the same year. These meant a much higher household saving ratio but a marginally lower national saving ratio. Therefore, according to the study, both total consumer spending and consumption share of GDP were underestimated.
Third, the widening gap between consumption growth and retail sales growth likely implies that the growth rate of consumption has also been underestimated, at least in recent years. We use a weighted average of retail sales growth and service sales growth to proxy consumption growth.
Application of the above consumption growth suggests that: 1) the consumption share of GDP declined during much of the past decade; but that 2) the consumption share actually picked up forcefully after 2008."
I have no confidence in your precision but if you are confident in your estimates, invest accordingly.
The trick is not to reduce the deficit; it's to reduce the wasteful contributors to the deficit, the ones that cause money to be created where no value is created. ______________________...
By that standard most government spending would be eliminated as it creates no known value and supports dysfunctionality. As previously published in SA Der Spiegel reported in connection with the OECD's in-depth analysis:
The need for deep structural reforms in Greece is well-known. But a new OECD report indicates that Athens may be incapable of such far-reaching changes. Ministries don't communicate, officials don't keep records and oversight is virtually nonexistent. The only thing that might help, it says, is a 'big bang.'
Going by the rather bland title "Greece: Review of the Central Administration," the 127-page report can be quickly summed up: The government apparatus in Athens is virtually unable to implement reform.
"It is not clear how existing and new entities of (the government) will work together in order to secure the leadership needed for reform, including the necessary strategic vision, accountability, strategic planning, policy coherence and collective commitment, and communication," reads the damning report.
It found that communication among the country's 14 ministries was appallingly paltry. Furthermore, the huge number of departments within ministries — many of them consisting solely of a department head and others with just one or two subordinates — results in widespread inefficiency and lack of oversight.
"Administrative work is fragmented and compartmentalized within ministries," the report writes. "Ministries are not able to prioritize … and are handicapped by coordination problems. In cases where coordination does happen, it is ad hoc, based on personal initiative and knowledge, and not supported by structures."
Were such coordination even to take place, the report indicates that administrators do not have access to the necessary data, nor does such data exist in many cases. "The administration does not have the habit of keeping records or the ability to extract information from data (where available), nor generally of managing organizational knowledge," the report found.
The problems found in Greece's central administration, says the OECD, are the result of decades of clientelism and the sheer volume of the laws and regulations that govern competencies within the ministries. The report found 17,000 such laws, decrees and edicts.
Bottom Line: The actions of the European Central Bank greatly eased the immediate financial pressures in the Eurozone. But the underlying problem of internal imbalances remain, and the European response is still not addressing those imbalances. Instead, the commitment to the fixed exchange rate combined with Germany's failure to recognize that their current account surplus must turn to deficit if they ever hope to be repaid promises to lock the Eurozone on the path of ongoing recession. ______________________...
The design of the EMU was flawed from the outset and today's events come as no surprise to those with an understanding of what is essential for a currency union to work. The optimum currency area theory emphasizes price and wage flexibility, labor mobility, and fiscal transfers as adjustment levers in the absence of a sovereign exchange and interest rates.
These prerequisites are conspicuously lacking inside of the EMU and in many instances the opposite may be found. In many of the peripheral countries, particularly Greece, unions, guilds and other labor organizations control every/most segments of the economy, leading to limited competition and higher prices. This is most visible in Greece where wages relative to Germany have increased 30% more over the last decade, accounting for the bulk of differences in relative competitiveness.
Combine this with an national income accounting identity that stipulates when government spending grows faster than tax receipts either savings must increase, investment must fall or net imports must increase. Greece' current account is one of the internal imbalances you refer to but it is the result of Greece' policies. And to make matters worse, Greece' debt binge channeled monies into real estate investment, other nontradable sectors, and household and government consumption rather than productive capacity.
Greece' dire circumstances are entirely a result of its own choices and policy responses should be guided by this incontrovertible fact and not by what is politically convenient, like providing financial assistance to support unsustainable economies and policies. The obsession over balancing budgets must be replaced by reduced spending and restoring competitiveness; the answer is not in tax cuts but in reducing government spending and large scale wage cuts.
Unquestionably this will lead to a dramatic contraction of Greece' economy but unfortunately this is the only viable policy response as most others will simply prop up Greece' economy through debt restructurings and assistance with sovereign issuance until Greece fails again. And should Greece commit and act upon a fundamental rebalancing of its economy, perhaps the EMU or the ECB could soften the hard blow with some assistance but as noted above by Michael it will take years to complete.
Unless Greece reforms its economy, which presently is neither viable nor sustainable, conditions will never improve. Greece must change, not Germany.
The ECB Is In Control And Winning The Battle Of The Euro [View article]
Your point about currency debasement is interesting and relevant as I believe this will ultimately the choice for one or more of the seventeen countries knotted together under the EMU by various treaties.
Germany, whose strength undoubtedly increased after the recent downgrades, is less than giddy about a serious devaluation of the euro because of its deeply rooted fears over inflation. More importantly, a devaluation of the euro would not change the competitive stance of, say, Greece vis-a-vis Germany; it would make the zone as whole more competitive but not change rankings of relative competitiveness. Import prices would increase though.
Thus, absent brutal internal devaluation through draconian wage cuts, one or more of the peripherals will choose (maybe with a nudge) to leave the EMU and reinstate the drachma in the case of Greece. There will be host of issues to confront for countries opting for this choice, but they will enjoy having their own depreciated currency and will be able to better coordinate monetary policy and fiscal policy.
In the early 2000's Argentina was forced to make a similar decision by devaluing the peso and renegotiating dollar denominated debts; after several years, it regained its footing. While Argentina's circumstances are not identical to those of Greece, I think it may still serve as an model for what Greece and other should expect.
The ECB Is In Control And Winning The Battle Of The Euro [View article]
The bank solvency problem is different from the sovereign solvency problem. ______________________...
Maybe but in terms of funding challenges they are much the same as there is a growing feedback loop between sovereigns and their respective national banks.
With national banks increasing their holdings of respective sovereigns, banks will become ever more exposed and vulnerable to negative developments on sovereign debt; they will act as one with the sovereigns.
During the LTRO it became apparent a number of banks were issuing debt to themselves and then securing guarantees from their respective (and possible bankrupt) sovereigns and then posting this dodgy collateral with the ECB to secure access to three year LTRO. Banks and sovereigns have morphed into one with great interdependence.
And this dependency, in turn, could produce an even greater reluctance to consider sovereign debt restructurings when they are necessary, as well as an inequitable deal on burden-sharing between the bank creditors and taxpayers if and when such restructuring becomes inevitable.
China, India: A Hard Landing Is Very Unlikely [View article]
For myriad reasons, I have invested considerable time in studying China by looking at raw data and reading analyses produced by those with keen insight into the Chinese economy....Pettis and others. Most are looking for growth to slow in the coming years with estimates ranging from 6% to 9% depending upon policy response and transition. Few see a collapse or hard landing.
And while China remains export cenctric, current account surpluses account for only around 4% of their GDP and in the current global environment of slowing global growth exports could further deteriorate and reduce current account balances thereby reducing China's GDP or rate of growth.
Investment, which currently accounts for around 45% of GDP, contributed close to 50% of China's growth in 2010 and through November of this year expanded at a rate of close to 25%. Of this amount, around 20% was directed towards investment in the highly troubled real estate sector. Based upon conflicting data, I believe the financial exposure of SPV's set up by local governments to fund residential and commercial real estate projects is vastly understated and represent a serious financial risk though one manageable at the national level.
Promising a prudent monetary policy in the year ahead, the country is expected to funnel more monetary supplies into the real economy, such as the construction of high speed rail lines, highways, irrigation facilities and other infrastructure instead of the real estate sector.
This will be a key way to prevent the speculation-prone housing market from continuing to hijack the world's second largest economy; the country is expected to remain unwavering in pressing ahead with ongoing regulations of its realty market to ensure that the still unendurably high property prices return to a reasonable level to meet the demand for accommodation.
China has already reaped all the easy growth that comes with starting from a low base, and now it needs to, among other things, encourage consumption and reduce investment, allow the renminbi to float, flatten the social structure, promote democratization, remove restrictions on labor, adopt the rule of law, and strengthen the social safety net to provide the foundation for long-term and sustainable growth.
The ECB Is In Control And Winning The Battle Of The Euro [View article]
I think immediate sentiment inside the EMU has improved under Draghi who has further opened central bank faucets to expand liquidity and suggest the promise of the ECB acting as lender of last resort.
Growth of the ECB balance sheet started in 2011 but saw a sharp increase with the introduction of LTRO, which was hoped to improve bank liquidity and channel monies towards sovereign debt purchases. This is wildly exaggerated as much of the euro 490 billion in LTRO went to satisfy maturing rollovers resulting in net lending of slightly more than euro 200 billion.
And there is no evidence that these monies have been channeled into purchases of sovereign debt while there is much greater likelihood that these monies have been simply parked at the ECB, which has seen record levels of deposits on the order of euro 490 billion. At the same time, borrowing from the ECB marginal lending facility has increased suggesting liquid/solvent banks do not want to lend to sovereigns or each other.
It’s obvious that European banks still mistrust one another; it’s less obvious what could materially change this any time soon. This is very important as the banks, as much as anybody else, understand that the EMU is suffering from massive, interlocking solvency issues which cannot be addressed through short term measures to increase liquidity. With few exceptions, solvency issues cannot be addressed or corrected through enhanced liquidity.
Increases in liquidity will not correct structural deficits, unsustainable debt loads, current account imbalances, lack of competitiveness and corrupt and craven governments unwilling to tackle the underlying causes of the current crisis: swollen government spending and wage gains out of line with increases in underlying productivity.
Greece makes for an interesting example as it is truly a basket case. During the 2000's it saw wages increase about 30% above those of Germany and some studies suggest that, absent dramatic labor market reforms and other steps to enhance productivity, Greece' wages will need to be reduced by 33% for Greece to be competitive with Germany.
This is a structural problem impervious to liquidity, unless you argue that liquidity will buy time to undertake the needed reforms. But this argument is hollow as Greece, while promising reform, has been very, very slowing in implementing reform and by the time the reforms are in place Greece' debt/GDP will have doubled to 400%.
Additional S&P ratings cuts: Italy, Spain, Portugal, and Cyprus are slashed by 2 notches. Austria, Malta, Slovakia, and Slovenia are cut one notch. Having their ratings affirmed: Germany, Belgium, Finland, Ireland, the Netherlands, Luxembourg, and Estonia. (earlier) [View news story]
Venerability, perhaps the question should be who do you trust more the leaders of the EMU or S&P?
Notwithstanding lofty speeches following a string of summits, little has been done to correct the fundamental, structural problems in side the EMU.
Reforms are behind schedule and may never be undertaken; the EFSF has not been leveraged; the second draft of the growth and stability pact has been water downed to meaningless drivel; talks with Greece on bailout II have broken down over bond holder haircuts; and the ECB has conducted a back door version of QE through massive lending to banks against dodgy collateral, hoping these funds will be used to purchase sovereign debt instead of being parked at the ECB.
Sovereign leaders and the EU Council would have us believe everything is just fine when in fact the EMU is a fast moving train wreck.
Greek Default And Devaluation: Would It Even Matter? [View article]
Interlocking relationships can arise through any number of possible linkages, including inter-bank lending, holding common assets and writing of credit insurance. Simply suggesting there are interlocking financial relationships between financial institutions does not in itself adequately address the danger of CDS and counter party risk.
Had this risk been recognized and addressed in further detail, it would have improved an otherwise excellent article.
Business Growth Is Wilting [View article]
Given current trends in business sales, many believe inventory/sales is about right and inventory build will contribute little to GDP growth in the coming months which likely means growth in the first quarter could come in around 2.2% to 2.4%, consistent with the lower bound of estimates offered by the Fed and suggesting a muddle through economy.
As I suggested in Econintersect, I do not think a muddle through economy growing at 2.0% is sustainable because it's right about at economic stall speed, growth at which the economy can easily lapse into recession. Potential catalysts include higher oil prices, the unfolding euro crisis, Iran and broader geo-political events following the Arab Spring.
"Italy is being pushed into a depression," writes Ambrose Evans-Pritchard eying up a chart of collapsing money supply in the country. Banca d'Italia says Italy's GDP shrank 0.5% in Q4 and expects a further decline of 1.5% this year, with no growth in 2013 - numbers that can only lead to a further deterioration in Italy's debt situation. [View news story]
During our first cycle of QE, little of the added reserves found there way into the real economy through expanded lending. The monetary base increased through expansion of reserves but they (reserves) remain parked with the Fed. Because banks are part of the game, they understand the game and did not expand lending.
More recently, Richard Koo of Nomura noted , " I think the LTRO is largely a means of buying time and does little to address the underlying issues. More important, most of the funds supplied by the ECB remain with the Bank in the form of deposits and have not flowed into the real economy."
Euro And S&P 500 Correlations Revisited [View article]
I trade S&P futures and use the euro as one of my trading tools and as of late its usefulness has deteriorated.
Given the long history of correlation, perhaps the current divergence reflects varying views held by respective players with equity players inspired by such steps as LTRO while the currency and debt guys less convinced.
Some believe the correlation will be restored through a drop in US equities.
China's Q4 GDP grew 8.9% Y/Y, the slowest growth since mid-2009, but ahead of expectations of 8.7%. For the entire year, growth clocked in at 9.2% vs. 10.4% in 2010. After a brief pop at the open, Chinese shares are back to unchanged. Other markets are hanging on to gains: Hong Kong +1.6%, Australia +1.3%. "Risk" currencies are higher as well: Euro +0.5%, aussie +0.5%. [View news story]
Most of the debt, though, is held by local government SPV's which may owe as much as $2 trillion with much of this stressed by poor sales, inadequate cash flows and poor maturity matches.
And while there is always the central government balance sheet supported by a $7 trillion economy, I would look for Beijing to start gradually easing some of the property market restrictions imposed in the past year in order to encourage first-time buyers into the market.
China, India: A Hard Landing Is Very Unlikely [View article]
Using the most current data the trade surplus in 2011 was $155 billion on GDP of $7.26 trillion, making for a trade surplus of 2.1% thereby underscoring my point that international trade would likely to be a drag on the Chinese economy.
As to future growth, 6% to 9% is the range of estimates offered by those with the most depth on the subject; nobody knows how quickly the consumer sector will develop; nobody knows what lending and investment will be in coming years; and nobody knows how the real estate bubble will play out. Moreover, statistics coming out of China are highly suspect and China could easily surprise to the upside.
Quoting Barclays: "We try to piece together the true picture of Chinese consumption by examining statistical data:
First, according to one major study (Wang and Woo 2011), China’s household income was underreported by 66% in 2008, which could be translated into underestimation of GDP by 10%. The underreported income was concentrated mainly in high-income households.
Second, the same study suggested that household consumption was probably underreported by 20% in the same year. These meant a much higher household saving ratio but a marginally lower national saving ratio. Therefore, according to the study, both total consumer spending and consumption share of GDP were underestimated.
Third, the widening gap between consumption growth and retail sales growth likely implies that the growth rate of consumption has also been underestimated, at least in recent years. We use a weighted average of retail sales growth and service sales growth to proxy consumption growth.
Application of the above consumption growth suggests that: 1) the consumption share of GDP declined during much of the past decade; but that 2) the consumption share actually picked up forcefully after 2008."
I have no confidence in your precision but if you are confident in your estimates, invest accordingly.
How's That Austerity Working? [View article]
How's That Austerity Working? [View article]
______________________...
By that standard most government spending would be eliminated as it creates no known value and supports dysfunctionality. As previously published in SA Der Spiegel reported in connection with the OECD's in-depth analysis:
The need for deep structural reforms in Greece is well-known. But a new OECD report indicates that Athens may be incapable of such far-reaching changes. Ministries don't communicate, officials don't keep records and oversight is virtually nonexistent. The only thing that might help, it says, is a 'big bang.'
Going by the rather bland title "Greece: Review of the Central Administration," the 127-page report can be quickly summed up: The government apparatus in Athens is virtually unable to implement reform.
"It is not clear how existing and new entities of (the government) will work together in order to secure the leadership needed for reform, including the necessary strategic vision, accountability, strategic planning, policy coherence and collective commitment, and communication," reads the damning report.
It found that communication among the country's 14 ministries was appallingly paltry. Furthermore, the huge number of departments within ministries — many of them consisting solely of a department head and others with just one or two subordinates — results in widespread inefficiency and lack of oversight.
"Administrative work is fragmented and compartmentalized within ministries," the report writes. "Ministries are not able to prioritize … and are handicapped by coordination problems. In cases where coordination does happen, it is ad hoc, based on personal initiative and knowledge, and not supported by structures."
Were such coordination even to take place, the report indicates that administrators do not have access to the necessary data, nor does such data exist in many cases. "The administration does not have the habit of keeping records or the ability to extract information from data (where available), nor generally of managing organizational knowledge," the report found.
The problems found in Greece's central administration, says the OECD, are the result of decades of clientelism and the sheer volume of the laws and regulations that govern competencies within the ministries. The report found 17,000 such laws, decrees and edicts.
How's That Austerity Working? [View article]
______________________...
Should read: the answer is not in tax increases but in reducing government spending and large scale wage cuts.
How's That Austerity Working? [View article]
______________________...
The design of the EMU was flawed from the outset and today's events come as no surprise to those with an understanding of what is essential for a currency union to work. The optimum currency area theory emphasizes price and wage flexibility, labor mobility, and fiscal transfers as adjustment levers in the absence of a sovereign exchange and interest rates.
These prerequisites are conspicuously lacking inside of the EMU and in many instances the opposite may be found. In many of the peripheral countries, particularly Greece, unions, guilds and other labor organizations control every/most segments of the economy, leading to limited competition and higher prices. This is most visible in Greece where wages relative to Germany have increased 30% more over the last decade, accounting for the bulk of differences in relative competitiveness.
Combine this with an national income accounting identity that stipulates when government spending grows faster than tax receipts either savings must increase, investment must fall or net imports must increase. Greece' current account is one of the internal imbalances you refer to but it is the result of Greece' policies. And to make matters worse, Greece' debt binge channeled monies into real estate investment, other nontradable sectors, and household and government consumption rather than productive capacity.
Greece' dire circumstances are entirely a result of its own choices and policy responses should be guided by this incontrovertible fact and not by what is politically convenient, like providing financial assistance to support unsustainable economies and policies. The obsession over balancing budgets must be replaced by reduced spending and restoring competitiveness; the answer is not in tax cuts but in reducing government spending and large scale wage cuts.
Unquestionably this will lead to a dramatic contraction of Greece' economy but unfortunately this is the only viable policy response as most others will simply prop up Greece' economy through debt restructurings and assistance with sovereign issuance until Greece fails again. And should Greece commit and act upon a fundamental rebalancing of its economy, perhaps the EMU or the ECB could soften the hard blow with some assistance but as noted above by Michael it will take years to complete.
Unless Greece reforms its economy, which presently is neither viable nor sustainable, conditions will never improve. Greece must change, not Germany.
The ECB Is In Control And Winning The Battle Of The Euro [View article]
Germany, whose strength undoubtedly increased after the recent downgrades, is less than giddy about a serious devaluation of the euro because of its deeply rooted fears over inflation. More importantly, a devaluation of the euro would not change the competitive stance of, say, Greece vis-a-vis Germany; it would make the zone as whole more competitive but not change rankings of relative competitiveness. Import prices would increase though.
Thus, absent brutal internal devaluation through draconian wage cuts, one or more of the peripherals will choose (maybe with a nudge) to leave the EMU and reinstate the drachma in the case of Greece. There will be host of issues to confront for countries opting for this choice, but they will enjoy having their own depreciated currency and will be able to better coordinate monetary policy and fiscal policy.
In the early 2000's Argentina was forced to make a similar decision by devaluing the peso and renegotiating dollar denominated debts; after several years, it regained its footing. While Argentina's circumstances are not identical to those of Greece, I think it may still serve as an model for what Greece and other should expect.
The ECB Is In Control And Winning The Battle Of The Euro [View article]
______________________...
Maybe but in terms of funding challenges they are much the same as there is a growing feedback loop between sovereigns and their respective national banks.
With national banks increasing their holdings of respective sovereigns, banks will become ever more exposed and vulnerable to negative developments on sovereign debt; they will act as one with the sovereigns.
During the LTRO it became apparent a number of banks were issuing debt to themselves and then securing guarantees from their respective (and possible bankrupt) sovereigns and then posting this dodgy collateral with the ECB to secure access to three year LTRO. Banks and sovereigns have morphed into one with great interdependence.
And this dependency, in turn, could produce an even greater reluctance to consider sovereign debt restructurings when they are necessary, as well as an inequitable deal on burden-sharing between the bank creditors and taxpayers if and when such restructuring becomes inevitable.
China, India: A Hard Landing Is Very Unlikely [View article]
And while China remains export cenctric, current account surpluses account for only around 4% of their GDP and in the current global environment of slowing global growth exports could further deteriorate and reduce current account balances thereby reducing China's GDP or rate of growth.
Investment, which currently accounts for around 45% of GDP, contributed close to 50% of China's growth in 2010 and through November of this year expanded at a rate of close to 25%. Of this amount, around 20% was directed towards investment in the highly troubled real estate sector. Based upon conflicting data, I believe the financial exposure of SPV's set up by local governments to fund residential and commercial real estate projects is vastly understated and represent a serious financial risk though one manageable at the national level.
Promising a prudent monetary policy in the year ahead, the country is expected to funnel more monetary supplies into the real economy, such as the construction of high speed rail lines, highways, irrigation facilities and other infrastructure instead of the real estate sector.
This will be a key way to prevent the speculation-prone housing market from continuing to hijack the world's second largest economy; the country is expected to remain unwavering in pressing ahead with ongoing regulations of its realty market to ensure that the still unendurably high property prices return to a reasonable level to meet the demand for accommodation.
China has already reaped all the easy growth that comes with starting from a low base, and now it needs to, among other things, encourage consumption and reduce investment, allow the renminbi to float, flatten the social structure, promote democratization, remove restrictions on labor, adopt the rule of law, and strengthen the social safety net to provide the foundation for long-term and sustainable growth.
The ECB Is In Control And Winning The Battle Of The Euro [View article]
Growth of the ECB balance sheet started in 2011 but saw a sharp increase with the introduction of LTRO, which was hoped to improve bank liquidity and channel monies towards sovereign debt purchases. This is wildly exaggerated as much of the euro 490 billion in LTRO went to satisfy maturing rollovers resulting in net lending of slightly more than euro 200 billion.
And there is no evidence that these monies have been channeled into purchases of sovereign debt while there is much greater likelihood that these monies have been simply parked at the ECB, which has seen record levels of deposits on the order of euro 490 billion. At the same time, borrowing from the ECB marginal lending facility has increased suggesting liquid/solvent banks do not want to lend to sovereigns or each other.
It’s obvious that European banks still mistrust one another; it’s less obvious what could materially change this any time soon. This is very important as the banks, as much as anybody else, understand that the EMU is suffering from massive, interlocking solvency issues which cannot be addressed through short term measures to increase liquidity. With few exceptions, solvency issues cannot be addressed or corrected through enhanced liquidity.
Increases in liquidity will not correct structural deficits, unsustainable debt loads, current account imbalances, lack of competitiveness and corrupt and craven governments unwilling to tackle the underlying causes of the current crisis: swollen government spending and wage gains out of line with increases in underlying productivity.
Greece makes for an interesting example as it is truly a basket case. During the 2000's it saw wages increase about 30% above those of Germany and some studies suggest that, absent dramatic labor market reforms and other steps to enhance productivity, Greece' wages will need to be reduced by 33% for Greece to be competitive with Germany.
This is a structural problem impervious to liquidity, unless you argue that liquidity will buy time to undertake the needed reforms. But this argument is hollow as Greece, while promising reform, has been very, very slowing in implementing reform and by the time the reforms are in place Greece' debt/GDP will have doubled to 400%.
Additional S&P ratings cuts: Italy, Spain, Portugal, and Cyprus are slashed by 2 notches. Austria, Malta, Slovakia, and Slovenia are cut one notch. Having their ratings affirmed: Germany, Belgium, Finland, Ireland, the Netherlands, Luxembourg, and Estonia. (earlier) [View news story]
Notwithstanding lofty speeches following a string of summits, little has been done to correct the fundamental, structural problems in side the EMU.
Reforms are behind schedule and may never be undertaken; the EFSF has not been leveraged; the second draft of the growth and stability pact has been water downed to meaningless drivel; talks with Greece on bailout II have broken down over bond holder haircuts; and the ECB has conducted a back door version of QE through massive lending to banks against dodgy collateral, hoping these funds will be used to purchase sovereign debt instead of being parked at the ECB.
Sovereign leaders and the EU Council would have us believe everything is just fine when in fact the EMU is a fast moving train wreck.