The upcoming economic collapse of US and Europe

[AkhandBharat]

Analysis: Eurozone economic government? Nein danke!

(Reuters) - Does the euro zone need an economic government? Oui, say the French. Nein danke, say most Germans.

Beyond the immediate push for stricter budget discipline to surmount Europe's sovereign debt crisis, the struggle over the future of the single currency area revolves around the idea of a political authority to coordinate national economic policies.

To many in the outside world -- the United States, China and the International Monetary Fund -- the crisis has exposed design flaws in Europe's 11-year-old monetary union and shown the need for closer political and economic union to underpin it.

French President Nicolas Sarkozy wants leaders of the 16 nations that share the euro to hold regular summits, backed by a dedicated secretariat, which French officials say would develop common economic, social and fiscal policies.

"A few months ago, it was difficult to even pronounce the words 'economic government' inside the euro zone," Sarkozy told reporters in March. "Now the euro zone has taken this up."

German Chancellor Angela Merkel reluctantly signed up to the concept for the first time in February but insisted that an "economic government" must involve all 27 EU countries to avoid new dividing lines, and must not create any new bureaucracy.

In German eyes, the purpose would be to promote sound fiscal policy and press laggards to make structural reforms to pension systems and labor markets to make their economies competitive.

After talks in Berlin last week, European Council president Herman van Rompuy appeared to endorse Merkel's view, noting that non-euro countries such as Britain were economically and financially closely linked to the euro zone.

"We need no new institutions to meet our goals. We need more effectiveness," he said.

But since Britain, under a new government led by the Eurosceptical Conservatives, has said it would not participate in closer integration of economic policies, any such initiative is likely to be based in practice on the euro zone.

DIRIGISTE TRADITION

The French have pressed for an "economic government" since long before the birth of the single currency, seeking to standardize everything from working hours to business taxes at their levels.

Governments of both the left and right, steeped in the dirigiste economic tradition of 17th century statesman Jean-Baptiste Colbert, sought a political counterweight to the independent European Central Bank.

That is precisely the German nightmare. For Berlin, the ECB must be totally independent of governments with the sole mandate of ensuring price stability in the tradition of the Bundesbank.

"When the Germans heard the French talk about an economic government, it sounded quite dangerous because of our orthodoxy that you don't question the independence of the central bank," said Joachim Fritz-Vannahme, project manager on the European programme at Germany's Bertelsmann Foundation.

However, he said the German political establishment had come to realize in the crisis that Europe needed a more solid economic union, although they remain allergic to the idea of fiscal transfers to poorer euro zone states.

Most euro zone countries now agree on the need for stronger macroeconomic surveillance to avert future crises, going beyond public finances to address other risks such as excessive private sector borrowing, asset price bubbles and economic imbalances.

Jean-Pisani Ferry, director of the economic think-tank Bruegel, argues that by better coordinating economic policies, Europe can overcome the growing gap in competitiveness between wealthy north European states and the rest of the currency area.

That would require Berlin to modify its own export-focused policies of wage restraint and dampening domestic demand.

"The problem is that the Germans don't want to take responsibility for the stability of other economies, as the United States has done for decades," he said. "They are not yet ready to pay the price, in policy terms, of their dominance."

In some French eyes, an "economic government" should also keep the euro at a favorable exchange rate for exports and pursue an active, interventionist industrial policy.

"We need at least a minimum of harmonization of labor costs and taxes in the euro zone," said a senior French government official who is a specialist in Franco-German relations. "We will also have to address social policy one day."

Such ideas are anathema to low-tax euro zone countries such as Ireland and Slovakia, which thrive on tax competition, and to those nations that insist taxation is a national prerogative, such as Britain and the Netherlands.

They also go down badly with Germany's ruling center-right parties, especially the pro-business Free Democrats, who suspect the French of protectionism and meddling in the market economy.

A former centrist European prime minister, speaking on condition of anonymity, said an "economic government" might agree maximum and minimum levels for corporate tax rates, social charges and benefits -- as the EU now has for value added tax and fuel taxes -- to keep euro zone economies competitive.

That would imply a leveling upward for most newcomers from central and eastern Europe, which would be strongly resisted. It would hardly make the European economy more competitive against countries such as China and India.

On the other hand, an "economic government" could launch a political drive to strengthen the EU's single market in areas such as services and energy, where there are still barriers defended by vested business and trade union interests.

The trouble is that neither France nor Germany wants that.

http://uk.reuters.com/article/idUKTRE65D0TO20100614

 

[AkhandBharat]

Who Lost Europe?

Financial meltdown has been averted in Europe "• for now. But the future of the European Union and the fate of the eurozone still hang in the balance.

If Europe doesn't find a way to reactivate the continent's economy soon, it will be doomed to years of gloom and endless mutual recrimination about ``who sabotaged the European project."

Having suffered a deeper economic collapse in 2009 than the United States did, Europe's economy is poised for a much more sluggish recovery "• if one can call it that.

The International Monetary Fund expects the eurozone to expand by only 1 percent this year and 1.5 percent in 2011, compared to 3.1 and 2.6 percent for the U.S. Even Japan, in a deep slump since the 1990s, is expected to grow faster than Europe.

European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members.

As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. As Angela Merkel puts it, ``growth can't come at the price of high state budget deficits."

But trying to redress budget deficits in the midst of a collapse in domestic demand makes problems worse, not better. A shrinking economy makes private and public debt look less sustainable, which does nothing for market confidence.

In fact, it sets in motion a vicious cycle. The poorer an economy's growth prospects, the larger the fiscal correction and deleveraging needed to convince markets of underlying solvency.

But the greater the fiscal correction and private-sector deleveraging, the worse growth prospects become. The best way to get rid of debt (short of default) is to grow out of it.

So Europe needs a short-term growth strategy to supplement its financial-support package and its plans for fiscal consolidation. The greatest obstacle to implementing such a strategy is the EU's largest economy and its putative leader: Germany.

Even though its fiscal and external accounts are strong, Germany has resisted calls for boosting its domestic demand further. Its fiscal policy has been expansionary, but nowhere near the level of the U.S.

Germany's structural fiscal deficit has increased by 3.8 percentage points of GDP since 2007, compared to 6.1 percentage points in the US.

What makes this perverse is that Germany runs a huge current-account surplus. Projected to amount to 5.5 percent of GDP in 2010, this surplus is not far behind China's 6.2 percent. So Germany has to thank deficit countries like the U.S., or Spain and Greece in Europe, for propping up its industries and preventing its unemployment rate from rising further.

For a wealthy economy that is supposed to contribute to global economic stability, Germany is not only failing to do its fair share, but is free-riding on other countries' economies.

It is Germany's partners in the eurozone, especially badly hit countries like Greece and Spain, that bear the brunt of the costs. These countries' combined current-account deficit matches Germany's surplus almost exactly. (The eurozone's aggregate current account with the rest of the world is balanced.)

The traditional remedy for countries caught in the kind of crisis that Spain, Greece, Portugal, and Ireland find themselves in is to combine fiscal retrenchment with currency depreciation.

The latter gives the economy a quick shot of competitiveness, improves the external balance, and reduces the output loss and unemployment that accompany fiscal cutbacks.

But eurozone membership deprives these countries of this powerful tool, and depreciation of the euro itself is of limited benefit since so much of their trade (around 50 percent) is with Germany and other eurozone members.

There are few other tools at hand. There is the usual call from international organizations and some economists for ``structural reforms," which in this context largely means increasing firms' ability to fire workers.

Whatever long-term benefits such reforms might bring, it is difficult to see how they would provide immediate benefits. Reducing the cost of firing workers will not increase demand for labor much when no one wants to hire new workers.

Short of dropping out of the eurozone, the only real option available to Greece, Spain, and the others to boost competitiveness is to engineer a one-time across-the-board reduction in nominal wages and prices for utilities and services.

This is a difficult task under the most favorable circumstances. The European Central Bank's low inflation target (2 percent) renders it virtually impossible, as it implies requisite downward adjustment in wages and prices of 10 percent or more.

So Germany's refusal to boost domestic demand and reduce its external surplus, along with its insistence on conservative inflation targets for the ECB, severely undercuts prospects for European prosperity and unity.

It virtually guarantees that Greece, Spain, and others with large private and public debts will be condemned to years of economic decline and high unemployment. At some point, these countries may well choose to default on their external obligations rather than endure the pain.

Germany's leaders may take comfort in lecturing other governments about their profligacy. And it is true that some, like the Greek government, ran too-high deficits during the good times and endangered their future.

But what about Spain or Ireland, where the borrowers were not the government but the private sector? If others borrowed too much, doesn't it follow that Germans lent excessively?

If Germany wants the rest of Europe to swallow the bitter pill of fiscal retrenchment, it will eventually have to recognize the implicit quid pro quo. It must pledge to boost domestic expenditures, reduce its external surplus, and accept an increase in the ECB's inflation target. The sooner Germany fulfills its side of the bargain, the better it will be for everyone.

 

[AkhandBharat]

The end game in Europe

The end game in Europe

Soon after the global financial meltdown of 2008 and the spectre of corporate bankruptcies in the US and elsewhere, the possibility of sovereign defaults, especially in some countries in southern Europe , have become all too real.

The bailout of banks, insurance and automobile companies in the developed world by massive infusion of liquidity by governments has, in effect only ended up with unsustainable corporate debt being substituted by sovereign debt that is now being increasingly seen as unsustainable.

In Europe, the underlying problem with potential sovereign defaults is essentially one of excessive borrowing during the good times that cannot be serviced during the present difficult times. Credit downgrades among southern European countries are gathering momentum and rollover of maturing sovereign obligations is becoming difficult even at increasingly higher yields.

The consequences of a sovereign default are too serious to comprehend given that the big global banks — who are themselves passing through an existential crisis — hold a significant portion of these debts.

With even the recent unprecedented $1 trillion bailout commitment from the eurozone and the IMF being increasingly seen by the market as insufficient to address the problems at hand, it is time to examine how the end game in Europe may play out.

Fear and confusion about the eventual endgame in Europe is causing the euro to steadily depreciate and is down 18% against the dollar in the last six months alone. The text book solution to a sovereign debt crisis and loss of competitiveness — as is the case with Greece, Spain, Portugal and Italy — is a substantial cut in government spending and a deep enough currency devaluation that makes the country's exports competitive.

In addition, structural reforms to address the problem of inflexible labour markets and loss of competitiveness are needed. If there is enough appetite for the country's exports in the rest of the world, fiscal consolidation and a stable economy should be the end result.

This economic prescription is difficult to follow in crisis-ridden Europe because the eurozone countries are unable to individually depreciate their currency. This robs these countries of a very potent tool to address the crisis and regaining competitiveness sans currency depreciation would be harder and more painful involving recession and deflation.

The continuing depreciation of the euro should boost European exports but it is unlikely to change the relative competitive position of say Greece — for whom tourism accounts for 70% of total exports — against the other eurozone nations.

The flip side of the euro depreciation is that it is largely aiding German competitiveness vis-a-vis the non-euro world to which 40% of German exports are directed. The net result would be a further increase in Germany's current account surplus from 5% of GDP in 2009 to probably double the number by 2011 thus accentuating imbalances within the eurozone.

The imbalances , if left unchecked, could soon become global in nature as the eurozone would convert a small current account deficit presently into a large surplus in the future at a time when other developed countries are themselves not in good economic health either. A competitive beggar-thy-neighbour policy all around may well be the end result.

Surplus countries like Germany would need to substantially expand domestic demand and help boost exports from the distressed southern eurozone countries.

Instead, austerity measures are being imposed in these very countries. If the integrity of the European Union has to be maintained, a full fiscal integration necessitating a substantial weakening of the power of national parliaments and an effective one-time wealth transfer from the surplus countries may well be required.

However, the ground reality is — far from a potential wealth transfer — the German taxpayer views the recent $1 trillion bailout package involving guarantees and soft loans as an elaborate ploy where the financially prudent are being asked to pay for the profligate. There does not appear to be much sympathy for the distressed fellow eurozone countries.

A lasting solution to the crisis would therefore require working out a new political bargain among the EU member countries to maintain support for the monetary union. Needless to say, such a political bargain would certainly require a level of statesmanship that is not visible on the horizon as yet.

The current stability and growth pact requiring EU member countries to maintain a minimum level of fiscal health has clearly not worked. Unless a new deal is forged soon enough among member countries, the risks of sovereign defaults and a possible break up of the EU are rising.

A fast weakening euro and increasingly volatile markets are the sure signs that these risks are not being ignored by the markets any more. However , markets cannot be trusted to get Europe out of the mess in which it finds itself in a non-disruptive manner.

Given that the current state of flux in Europe is clearly untenable in the medium term, a sovereign debt restructuring initiative is urgently required that would involve some sacrifice from creditors in exchange for serious economic restructuring in the distressed countries involving reforms in taxation, benefits and entitlements , labour and public spending. In addition, a credible arrangement to sustain the single currency system should be firmly put in place soon.

If there are irreconcilable differences among the EU member countries in forging a new deal, it is time to start working on arrangements for an orderly default and a planned exit of some countries from the European monetary union well before the markets assume the worst outcome and cause further disruption.

There would hardly be any winners in this case because if the weak nations exit, they are likely to have massive debts in euro to be repaid in a highly depreciated new currency and if the strong nations exit they will be far less competitive on account of their rapidly appreciating new currency. Either way it is best that some peremptory and credible action is taken to end the virtual stalemate that the markets abhor.

 

[AkhandBharat]

Asia needs to notice euro crisis

The euro crisis has caused considerable volatility in financial markets. Euro area equity markets have underperformed Asian, American and non-euro European markets (like the UK and Switzerland). Euro bond markets have had a terrifying ride, with yields swinging wildly. The euro itself has lost value against most major currencies.

What is the cause of all of this? Superficially it seems to be Greek government debt. This reached levels that have caused investors to shun Greek bonds. Portugal and Spain have become a cause for concern too. euro area economies have had to offer large sums of financial assistance to Greece specifically, and create a slush fund of assistance for any other euro area country that needs it. Even with this, Greece is still likely to have to restructure its debt at some point in the coming years.
However, the fiscal problems of Greece and others are actually symptoms of a bigger problem.

The Euro does not work.

The Euro is not what economists call an optimal currency area. The whole point about a monetary union is that the economy is supposed to be sufficiently integrated that a common interest rate and exchange rate will be equally suitable for all. If one country has growth of +3 percent and one country has growth of -3 percent, it is going to be pretty hard for the central bank to come up with a single interest rate that is equally suitable. Inevitably, monetary policy in that scenario will fail one or other of the monetary union members.

So, does the fact that the euro does not work mean that it is doomed to break up? No. Many monetary unions do not work. In a perfect world (where economists run everything) the United States would have not one, but three currencies. However, in spite of the fact that the US monetary union does not work, it holds together. It holds together because policy makers compensate for the fact that it does not work. There is a fiscal union along side the monetary union.

If a part of the monetary union is suffering weak growth (-3 percent, for instance) and monetary policy is unsuitable (interest rates are too high), then the negative economic effects can be compensated via fiscal transfers. The stronger growth area (the +3 percent economy) can pay taxes that go to fund spending in the weaker part of the monetary union.

Today, tax dollars from New York pay for unemployment benefits for out of work Californians. Both parts of the US can thus share a common monetary policy without too many ill effects. It should be noted, the government of California does not get any of the cash. The cash goes straight to the people of California. The government can sink or swim on its own.

Why does this matter? It matters because, if the euro is a dysfunctional monetary union, the solution to this problem is not going to happen overnight. As the euro area gropes towards a solution, it will continue to experience volatility and crises. The euro area probably will achieve a fiscal union, but not overnight (it took the US around 150 years to get it right).

While we are waiting for the euro to sort itself out, there are several consequences. The euro as a currency is likely to remain weak. There is likely to be a flight to quality within the euro area. Risk premia are likely to rise. Finally, pressure for fiscal tightening is unlikely to abate.

This results in a double divergence. Strong economies benefit. The German economy is export-led, and gains from the weak euro. The flight to quality keeps bond yields low, lowering the funding cost for the German government. Weak economies, meanwhile suffer. Risk premiums raise funding costs. Economies that are uncompetitive have smaller export sectors, and benefit less from the lower euro. The need to tighten fiscal policy is more acute.

As well as the strong versus weak divergence (which roughly corresponds to north versus south), there is the domestic versus export divergence. Domestic economies (wherever they are in the euro area) are likely to suffer more as a consequence of this crisis. Fiscal tightening means less domestic demand. exports benefit from the weaker euro, however.

The tendency for the euro area's economy to diverge means Asia can not ignore the euro crisis. The euro area consumes Asian exports. In some fields, euro economies compete with Asian economies for market share. euro domestic demand is likely to be slower in the coming years. The weaker euro makes Euro area exports relatively cheaper. Asia is going to have to struggle harder to sell to the euro area, and to sell in other markets where it competes against euro area companies.

This is not a remote crisis, but a challenge for Asia to meet. It is also a challenge that Asia will have to endure for some time.

http://www.thejakartapost.com/news/2010/06/14/asia-needs-notice-euro-crisis.html

 

[AkhandBharat]

Eurozone debt fears force France to pay higher rates

Eurozone debt fears force France to pay higher rates

Fears that the eurozone debt crisis could hit even the stronger member countries means that France has been forced to pay higher rates to raise fresh funds in the financial markets, analysts said.

They said that investors buying government bonds want to see France make the extra effort to get its public finances under control, like Germany, Europe's powerhouse economy which has just announced an unpopular austerity programme.

Apart from a spending freeze, Paris has so far not adopted an austerity plan per se. Instead, it has prided itself on supporting the economy through the worst of the global slump despite the cost -- a budget deficit blowout to eight percent of Gross Domestic Product.

In contrast, German cuts of 86 billion euros (100 billion dollars) by 2014 will put the country on course for zero deficit -- beating the three percent limit that eurozone members have so conspicuously failed to observe up to now.

Such moves have only bolstered Germany's gold-plated reputation for financial probity and put the market spotlight on other countries, such as France, challenging them to follow suit.
In the marketplace, benchmark German 10-year government bonds currently yield 2.560 percent while the French equivalent pays investors 3.015 percent.

The yield spread -- the difference in return on the two bonds -- is the widest since 2009, reflecting how investors will pay more for the perceived lower risk of German assets in the fallout from the Greek debt crisis.

"The markets began by going over the last in the (eurozone) class, Greece, and then have gone up the pecking order, so even if you are well ranked, it finally gets to you," said Bruno Cavalier, chief economist at Oddo Securities.

Analysts said that while Germany always enjoyed a premium ranking over its European peers, Berlin's readiness to wield the budget knife has only made it a more attractive investment in troubled times.
For the markets, the "German plan is more serious, more rigorous," said Philippe Martin, professor at Sciences Po university in Paris.

France may be getting the message as Prime Minister Francois Fillon Saturday announced the state would slash spending by 45 billion euros (54.5 billion dollars) over the next three years to get the country's public deficit under the European Union's limit of three percent of GDP.

"We've made a commitment to bring down our deficit from eight to three percent by 2013 and we will concentrate all of our efforts on it," Fillon said at a meeting of new members of his UMP party.

At the same time, the French finance ministry is mindful that the growth outlook for 2011 is uncertain, so the government has to be careful not to take any measures that could undercut the current modest recovery, analysts say.

But the markets want to see action and have been fretting over what has appeared to be a lack of political will in Paris to take the stiff medicine adopted in Germany.
It is a problem that may get worse in the run-up to the 2012 presidential elections.

"To say, 'it will be better tomorrow,' as France has done for the last 10 years is no longer possible," said Cavalier of Oddo Securities. "Investors just won't have the patience to wait until 2012," he added.
Besides deficit reductions, the markets will be looking carefully at key French pension reform plans to be announced next week, analysts said.

Professor Martin believes the government "will try to do the minimum," coming back to the issue again if that fails to do the trick.

France still enjoys the support of international investors -- even if at a higher price than Germany -- and its bond yields are historically low while its top credit rating does not seem in any immediate danger.

"For the moment, there is no risk of a ratings downgrade but the pressure could increase," said Nordine Naam, bond strategist at French investment bank Natixis.

 

[AkhandBharat]

Moody's downgrades Greece's debt to junk status

Moody's Investors Service slashed Greece's credit rating to junk status on Monday in a new blow to the debt-ridden country that is under intense international scrutiny after narrowly avoiding default last month.

A Moody's statement said it was cutting Greece's government bond ratings by four notches to Ba1 from A3, with a stable outlook for the next 12-18 months. It was the second of the three major agencies to accord Greek bonds junk status. Standard & Poor's did the same in late April.

The downgrades reflect concern that the country could fail to meet its obligations to cut its deficit and pay down its debt — which the Greek government says is out of the question.

Finance Ministry officials in Athens had no immediate reaction to the rating cut, which came as a delegation from the International Monetary Fund and the European Union started an interim review of the country's efforts to pull itself out of a major debt crisis.

After amassing a vast public debt and overspending that sent its budget deficit spiraling to 13.6 percent of gross domestic product in 2009, Greece was saved from defaulting on its loans in May by the first installment of a joint EU and IMF euro110 billion bailout. It is to receive the second in September, pending implementation of a major austerity program that has sparked strong union reaction and a series of damaging strikes.

"The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone/IMF support package," said Moody's lead analyst for Greece Sarah Carlson.

"The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible, and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels."
"Nevertheless, the macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating."

Despite the downgrade, the gap, technically known as a spread, between Greek 10-year bond yields and their benchmark German equivalents dipped only slightly late Monday. The difference was at 5.91 percent, down from 6.12 percent earlier in the day.

That means that Greece would have to pay a rate of around 9 percent were it to raise cash through bond issues. However, bolstered by the rescue loans, Athens says it has no plans to try selling its bonds to the markets soon — except for short-term treasury bill issues in July.

In return for the bailout, Prime Minister George Papandreou's center-left government announced painful austerity measures, slashing pensions and salaries while increasing indirect taxes, seeking to gradually bring the deficit down to 2.6 percent in 2014. The continued flow of EU and IMF funds is conditional on Greece meeting its targets, which will remain under constant scrutiny.

Athens says it has exceeded deficit-cutting targets in the first five months of 2010, as a lower-than-expected increase in revenues was offset by higher spending cuts.

The finance ministry says the January-May deficit stood at euro8.97 billion ($10.77 billion), compared to euro14.65 billion in the first five months of 2009. The drop translates into a 38.8 percent reduction, more than the planned 35.1 percent cut.

Papandreou said late last week that Greece was back on track to "a normal financial and fiscal situation, having left the major dangers behind."
Monday's Moody's statement said the austerity package was "very ambitious."
"There is considerable uncertainty surrounding the timing and impact of these measures on the country's economic growth, particularly in a less supportive global economic environment," Carlson said.

The EU/IMF delegation, which will stay in Athens for the week, was holding meetings at the finance ministry and was expected to also meet with officials at the labor ministry in coming days to review reforms to the social security system.

Moody's downgrades Greece's debt to junk status

 

[AkhandBharat]

Euro Falls Versus Yen on Speculation Europe Recovery Will Stall

The euro fell for the first time in four days against the yen on speculation the 16-nation region's economic recovery will stall as governments cut spending to tackle the debt crisis.

The single currency also dropped against the dollar before a German report forecast to show investor confidence in Europe's largest economy declined to the lowest in almost a year. The Australian dollar fell after the nation's central bank said the European situation would weigh on the global growth outlook. Malaysia's ringgit led Asian currencies lower on concern investors will shun higher-yielding assets.

"We remain bearish on the euro given that the euro-zone debt crisis is unlikely to be resolved anytime soon," said Gareth Berry, a currency strategist in Singapore at UBS AG, the world's second-biggest foreign-exchange trader. "The austerity measures which are designed to deal with the crisis will likely act as a drag on future growth. We continue to forecast the euro at $1.15 in three months."

The euro dropped to 111.48 yen as of 7:09 a.m. in London from 111.92 yesterday, when it climbed to 112.87, the highest level since June 4. The euro bought $1.2219 from $1.2221. The yen gained to 91.37 per dollar from 91.58.
Australia's dollar slid 0.4 percent to 85.55 U.S. cents, the first drop in six days, and lost 0.6 percent to 78.16 yen.

BOJ Meeting
Japan's currency was little changed after the central bank kept its benchmark interest rate at 0.1 percent at the end of its two-day meeting today. The Bank of Japan said it will offer as much as 3 trillion yen ($33 billion) for a new program aimed at expanding credit available to companies.
German investor and analyst expectations fell to 42 in June, the least since July 2009, from 45.8 in May, according to a Bloomberg survey before the ZEW Center for European Economic Research releases the index today. The gauge aims to predict developments six months ahead.

"The debt crisis will slowly impact on Germany," said Alexander Koch, an economist at UniCredit Group in Munich. "The ZEW is forward-looking, and toward the end of the year Europe's austerity measures will be hurting both exports and domestic demand."

Moody's Investors Service yesterday cut Greece's credit rating to junk, citing "substantial" risks to the nation's economic growth from the austerity measures tied to a 110 billion-euro ($134 billion) aid package from the European Union and the International Monetary Fund.

RBA Minutes
The Australian dollar weakened versus most of its counterparts after the central bank said "the situation in Europe had deteriorated significantly over the previous month," fueling speculation it may keep interest rates unchanged until at least the fourth quarter.

Reserve Bank of Australia Governor Glenn Stevens left borrowing costs at 4.50 percent at the most recent policy meeting on June 1. Policy makers said today in minutes from the meeting that previous rate increases gave them "flexibility" to examine the impact of European events.

"The bank will be on hold for at least another month or two and the Aussie has taken a bit of a step back," said Derek Mumford, a Sydney-based senior consultant at HiFX, a foreign exchange risk management firm. "We haven't seen the last of the risk aversion in the market."

There's a more than 70 percent chance the RBA will maintain rates at 4.5 percent through to the end of September, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

Malaysia's ringgit declined for the first time in five days after Moody's yesterday cut Greece's sovereign rating by four levels to Ba1 from A3.

"There is a lot of pessimism priced into the market, and the latest downgrade of Greece" has revived it, said Sim Moh Siong, a Singapore-based currency strategist at Bank of Singapore Ltd.
The ringgit dropped 0.5 percent to 3.2640 per dollar, according to data compiled by Bloomberg.

http://www.businessweek.com/news/2010-06-15/euro-falls-versus-yen-on-speculation-europe-recovery-will-stall.html

 

[Parashuram1]

Well I do thank my stars now that we aren't a part of European Union officially. As if the swill of refugees and immigrants from extremist countries wasn't enough burden for our small economy, we'd have been expected to contribute millions to pull out other Euro states.

 

[Armand2REP]

Well I do thank my stars now that we aren't a part of European Union officially. As if the swill of refugees and immigrants from extremist countries wasn't enough burden for our small economy, we'd have been expected to contribute millions to pull out other Euro states.

Switzerland is a good example of what EU states need to do. In the 1990s they were running high deficits but the parliament got smart and started cuts. As revenue rose they made sure not to exceed that with spending. Now the Suisse have a small budget surplus and 40% debt. This will be the model for the rest of the EU. Just goes to show huge stimulus spending is not always the answer.

 

[AkhandBharat]

I agree, Euro was a bad idea, simply because Euro is not a reserve currency, and the ECB cannot print money out of thin air, just like the US Fed can do. That, coupled with the fact that Eurozone countries are at various levels of economic development, and the deficit states put a huge impact on strong economies. Switzerland did good by not joining.

 

[AkhandBharat]

Fears of renewed economic crisis to dominate G20 summit

WASHINGTON DC, United States—Fears that the global economy is skidding back into recession and a simmering transatlantic spat over how to respond are set to dominate two summits of world leaders in Canada later this week.

Amid rising US anger that Europe could strangle the fragile recovery by cutting government spending too quickly, leaders from the G8 and G20 clutch of top economies will meet in Muskoka, Ontario and Toronto from Friday.

After spending around a trillion dollars to jump-start the recovery—and staking his presidency on the results—US President Barack Obama will travel north with a stern warning that Europe must not put the effort at risk.

"Our highest priority in Toronto must be to safeguard and strengthen the recovery," he told fellow G20 leaders in a letter sent ahead of the summit.

"We worked exceptionally hard to restore growth; we cannot falter or lose strength now... It is critical that the timing and pace of the consolidation in each economy suit the needs of the global economy."

Obama fears spending cuts could kick away a key crutch propping up the global economy, according to Fred Bergsten, a former Treasury official and now director of the Washington-based Peterson Institute.

"The US government worries that Europe is overdoing the early exit," he said. "The danger would be that Europe slips into a double-dip recession and/or deflation."

Some fear the United States could follow.

But chastened by a debt crisis that has pummeled Greece and Spain and called into question the future of the eurozone, Germany and France have announced moves to curb their spending dramatically.

Germany, Europe's biggest economy, is working on a multibillion-euro package of spending cuts designed to bolster government finances and recoup market confidence.

But many see the spat as part of broader tensions because of the world's dependence on over-extended US consumers for growth, something Washington is keen to end after the terror of the financial crisis.

"It is really a frustration that there isn't another locomotive for the global economy other than the US consumer," said one European diplomat, insisting that European structural reforms need to be given time to produce growth.

"The US response to the crisis has been to throw the kitchen sink at the problem and hope the consumer does not retrench so much, and that has worked, but that will be counter-productive for rebalancing."

But there are signs this stalled reform of the global economy is fueling tensions between the United States and China, particularly over the issue of the currency rates.

Washington has long argued that Beijing must let the yuan rise, making exports to China cheaper and stimulating Chinese domestic consumption—long-seen as a potential motor of world growth.

The G20 meeting is being seen as a deadline for Beijing to show it is willing to help out and let the yuan strengthen.

China on Saturday sought to fend off a potential showdown in Toronto by announcing it would make its yuan exchange rate more flexible, although few details were given.

Obama is likely to remain under fierce pressure to win concrete concessions, as his allies in Congress threaten sanctions that could spark a trade war.

US lawmakers say China deliberately undervalues the yuan, giving exporters an unfair trade advantage and sparking job losses in the United States.

"The European crisis may provide the trigger for escalating tension between the US and China, that is the real risk," said Domenico Lombardi, formerly of the IMF's Executive Board and now the Brookings Institution.

In Toronto, leaders will also discuss proposals to slap taxes on banks to help pay for any future global financial crises.

The United States and allies among European powers have argued that the tax could also help curb excessive risk taking.

But they face opposition from other leading economies, such as Canada and Australia, which were protected from the financial maelstrom, and emerging economic powers Brazil and India are reluctant to pay for the mistakes made by foreign banks.

Few expect a deal to be completed on this or other moves to harmonize financial reforms before G20 leaders meet again later in the year.

The Group of Eight leading economies will meet in Muskoka, just outside Toronto, on Friday. The G20, which includes key emerging markets, gathers in the Canadian metropolis on Saturday and Sunday.

Following Toronto, a G20 Summit will be held November 11-12 in the South Korean capital.

Fears of renewed economic crisis to dominate G20 summit

 

[AkhandBharat]

Greece warns debt restructuring would be 'catastrophic'

ATHENS: Greece's finance minister warned Sunday that restructuring the country's debt would be "catastrophic" for its economy, in an interview published in the weekly Proto Thema.

"We have fought to avoid... a default on payments and restructuring of the debt, and we have avoided it thanks to the support mechanism" from the European Union and International Monetary Fund, George Papaconstantinou said.

Restructuring the debt "would be catastrophic for our economy, which continues to need loans", the minister said. "For as long as the recovery plan for the economy is applied, the possibilities for refinancing the debt increase."

On Thursday, a team of European and IMF experts gave Greece a stamp of approval, declaring the country's recovery program to be on track.

Austerity measures were adopted by the Socialist government in exchange for the release of a first installment of loans from a three-year 110-billion-euro (136-billion-dollar) EU-IMF bailout package.

Papaconstantinou ruled out any return to Greece's national currency.

"No such outcome exists. Every country in the eurozone continues to act to protect the single currency and strengthen the framework in which the eurozone operates," he said.

Russian Finance Minister Alexei Kudrin on Saturday bluntly dissented from Europe's insistence that Greece should avoid default, saying the Mediterranean country will require a restructuring of debts by creditors.

Greece warns debt restructuring would be 'catastrophic'

 

[AkhandBharat]

U.S. Debt and the Greece Analogy

An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

The roots of the apparent debt market calm are clear enough. The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy. The very large contraction of private financing demand freed private saving to finance the explosion of federal debt. Although our financial institutions have recovered perceptibly and returned to a degree of solvency, banks, pending a significant increase in capital, remain reluctant to lend.

Beneath the calm, there are market signals that do not bode well for the future. For generations there had been a large buffer between the borrowing capacity of the U.S. government and the level of its debt to the public. But in the aftermath of the Lehman Brothers collapse, that gap began to narrow rapidly. Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008. How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.

The U.S. government can create dollars at will to meet any obligation, and it will doubtless continue to do so. U.S. Treasurys are thus free of credit risk. But they are not free of interest rate risk. If Treasury net debt issuance were to double overnight, for example, newly issued Treasury securities would continue free of credit risk, but the Treasury would have to pay much higher interest rates to market its newly issued securities.

In the wake of recent massive budget deficits, the difference between the 10-year swap rate and 10-year Treasury note yield (the swap spread) declined to an unprecedented negative 13 basis points this March from a positive 77 basis points in September 2008. This indicated that investors were requiring the U.S. Treasury to pay an interest rate higher than rates that prevailed on comparable maturity private swaps.

(A private swap rate is the fixed interest rate required of a private bank or corporation to be exchanged for a series of cash flow payments, based on floating interest rates, for a particular length of time. A dollar swap spread is the swap rate less the interest rate on U.S. Treasury debt of the same maturity.)

At the height of budget surplus euphoria in 2000, the Office of Management and Budget, the Congressional Budget Office and the Federal Reserve foresaw an elimination of marketable federal debt securities outstanding. The 10-year swap spread in August 2000 reached a record 130 basis points. As the projected surplus disappeared and deficits mounted, the 10-year swap spread progressively declined, turning negative this March, and continued to deteriorate until the unexpected euro-zone crisis granted a reprieve to the U.S.

The 10-year swap spread quickly regained positive territory and by June 14 stood at a plus 12 basis points. The sharp decline in the euro-dollar exchange rate since March reflects a large, but temporary, swing in the intermediate demand for U.S. Treasury securities at the expense of euro issues.

The 10-year swap spread understandably has emerged as a sensitive proxy of Treasury borrowing capacity: a so-called canary in the coal mine.

I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

In the 1950s, as I remember them, U.S. federal budget deficits were no more politically acceptable than households spending beyond their means. Regrettably, that now quaint notion gave way over the decades, such that today it is the rare politician who doesn't run on seemingly costless spending increases or tax cuts with borrowed money. A low tax burden is essential to maintain America's global competitiveness. But tax cuts need to be funded by permanent outlay reductions.

The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs in the last year and a half, it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent. The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms. This is not new. For at least a quarter century analysts have been aware of the pending surge in baby boomer retirees.

We cannot grow out of these fiscal pressures. The modest-sized post-baby-boom labor force, if history is any guide, will not be able to consistently increase output per hour by more than 3% annually. The product of a slowly growing labor force and limited productivity growth will not provide the real resources necessary to meet existing commitments. (We must avoid persistent borrowing from abroad. We cannot count on foreigners to finance our current account deficit indefinitely.)

Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.

With huge deficits currently having no evident effect on either inflation or long-term interest rates, the budget constraints of the past are missing. It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.

The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate. In the past decade the U.S. has been unable to cut any federal spending programs of significance.

I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced. The current spending momentum is so pressing that it is highly unlikely that any politically feasible fiscal constraint will unleash new deflationary forces. I do not believe that our lawmakers or others are aware of the degree of impairment of our fiscal brakes. If we contained the amount of issuance of Treasury securities, pressures on private capital markets would be eased.

Fortunately, the very severity of the pending crisis and growing analogies to Greece set the stage for a serious response. That response needs to recognize that the range of error of long-term U.S. budget forecasts (especially of Medicare) is, in historic perspective, exceptionally wide. Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis. Our policy focus must therefore err significantly on the side of restraint.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

http://online.wsj.com/article/SB10001424052748704198004575310962247772540.html

 

[AkhandBharat]

McCullough Says U.S. `Debt Balloon Is Massive'

 

[AkhandBharat]

Meltup Update Video

 

[AkhandBharat]

EU credit rating agency can stick AAA ratings to Eurozone junk bonds - Godfrey Bloom

 

[AkhandBharat]

CNN Money: Is the Fed out of bullets?

Economists are more nervous about the chances of another recession. And one of biggest fears is that the Federal Reserve may have run out of bullets to fight another downturn.

"They do have some ammunition left, but it's not going to pack a lot of punch," said Mark Zandi, chief economist with Moody's Economy.com.

Most economists aren't yet predicting that a double dip recession is imminent. But financial problems in Europe led to a sell-off in U.S. stocks in the past six weeks. Weaker-than-expected readings on job growth and retail sales have added to concerns that the recovery is stalling out.

"Whenever the next recession comes, it is very important that policymakers have had the opportunity to reload their gun to fight the downturn," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. "Today it's not clear that there's a lot more policymakers can do."

The typical first step to spur a faltering economy is for the Fed to cut the cost of borrowing money in order to encourage spending.

But the federal funds rate, its key interest rate used as a benchmark for a wide range of consumer and business borrowing, is already near 0%. Fed policymakers are widely expected to leave rates near zero at the conclusion of their two-day meeting on Wednesday.

Longer-term rates set by the market, such as Treasury yields and mortgage rates, are also nearing historic lows. So the Fed can't make money much cheaper.

Achuthan said he is worried that neither the Fed nor Congress have the resources and political will necessary to stimulate the economy if that's needed.

He said the situation harkens back to Fed Chairman Ben Bernanke's facetious suggestion back in 2002 that the Fed might one day need to drop large bundles of cash from helicopters in order to spur spending when it exhausted other options.

"I wonder if it's coming back on the table," Achuthan joked.

But even cheaper money might not be enough to encourage increased borrowing and spending in the current uncertain economic climate.

Paul Ashworth, senior US economist for Capital Economics, said weak demand for credit from businesses and consumers, rather than tight supply, is what is causing borrowing to continue to fall.

"It's hard to do know what [the Fed] can do to encourage spending at this point other than flooding the economy and banking systems with money," said Ashworth.

The Fed pumped trillions into the economy over the past two years through the purchases of non-traditional assets, such as long-term treasuries and mortgage-backed securities.

Some look at the Fed's balance sheet and worry that it could be leading to asset bubbles and inflation down the road. Kansas City Fed President Thomas Hoenig has been pushing for the Fed to start raising rates and reduce the size of its balance sheet.

Even if other Fed policymakers aren't echoing Hoenig's calls, there are enough inflation hawks at the Fed to keep the central bank from resuming those asset purchases, said Lyle Gramley, a former Fed governor, a consulting economist with the Potomac Research Group.

"Unless the economy is facing utter disaster, getting the Fed to reactivate that program will be a very tough sell," he said.

And despite the growing worries about the economy, Fed officials have to be careful not to raise too many alarms. Too much attention to problems that have arisen since the Fed's last meeting on May 9 could be more dangerous than ignoring the growing threats, according to experts.

Zandi said if the Fed were to hint it is even considering another round of asset purchases, "it would be counterproductive."

"It'd spook the hell out of the market," he said.

 

[AkhandBharat]

Soros says Germany could cause euro collapse

"German policy is a danger for Europe, it could destroy the European project," he told German weekly Die Zeit.

Soros, who earned $1 billion in 1992 by betting against the British pound, added that he "could not rule out a collapse of the euro."

"If the Germans don't change their policy, their exit from the currency union would be helpful for the rest of Europe," he said.

Chancellor AngelaMerkel unveiled plans earlier this month for 80 billion euros ($107 billion) in budget cuts over the next four years -- a package she hopes will bring Germany's structural deficit within European Union limits by 2013.

"Right now the Germans are dragging their neighbors into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk," he said.

"Germany is globally isolated ... Why don't they let their salaries rise? That would help other EU states to pick up."

Merkel on Monday defended her budget cut plans after U.S. President Barack Obama preached patience in clamping down on public spending. A German government official said on Tuesday Berlin did not expect to come under pressure at a G20 summit in Toronto this weekend to provide fresh stimulus measures.

http://www.reuters.com/article/idUSTRE65M1C920100623

France and Germany clearly are in a lockdown. Euro is biting dust.

 

[Armand2REP]

Cutting public spending is exactly what is needed. To increase capital more small business loans need to be extended instead of the banks tightening up.

 

[AkhandBharat]

austerity measures are good in the long run, but it could push europe into a double-dip in the short term.