Thursday, July 8, 2010

Emerging Markets Make Comeback

Ron Paul and Barney Frank Advocate Cut in Military Spending

Czec Central Banker Criticizes US Economic Policy

IMF Growth Forecasts for 2010

AT FIRST glance, all would seem well in the International Monetary Fund’s latest global forecast. It thinks the world will grow a bit faster this year than it thought in April: by 4.6%, instead of 4.2%. It puts growth next year at 4.3%, unchanged from April, reflecting a modest upgrade to the American outlook, and a tiny downgrade everywhere else, even Europe.

But beneath that placid surface the IMF sees a snake pit of threats. Among these “downside risks”: banks could curtail lending because of their exposure to impaired government debt; consumers and businesses could spend less because their confidence has been dented; deficit cutting could suppress growth; new financial regulations could damp bank lending; American property prices could fall further; and exchange rates could go haywire. And the upside risks? The IMF doesn’t proffer any.

Most of these threats stem from the rising risk of default by some countries in the euro zone and the knock-on damage to the European banks that hold their bonds. The IMF ran a scenario in which the world repeats the financial shocks it experienced in late 2008. For the world, GDP would be 1.5 points weaker–not enough to tip the world economy back into recession. However, the estimated three percentage point hit to euro-zone growth would easily do the job there.

Given that skewed balance of risks, what can policy makers do? The IMF says policy actions must be “concerted,” “rapid,” “credible,” and “swift,” especially on fiscal policy. The IMF has not joined the hair-shirt brigade; advanced countries shouldn’t actively try to trim their deficits before 2011 because that would threaten the recovery. But “they should not add further stimulus,” either and medium to long-term plans to lower deficits are, it says, “of utmost importance.” These should be designed to boost productive potential, by reforming entitlements and making taxes more growth-friendly.

The IMF notes governments face enormous refinancing needs in the coming year as short-term debts mature. Weaker euro-area governments must refinance 300 billion euros ($380 billion) maturing in the second half of 2010, at a time when other advanced countries will be rolling over $4 trillion. Banks, especially in the euro area, also face a “wall of maturities in the next few years.”

With fiscal policy constrained, the IMF recommends that monetary policy remain loose and prepare to be looser. How can it, when most major central banks have already cut interest rates to, or close to, zero? The answer, the IMF says, is more quantitative easing: “central banks may need again to rely more strongly on using their balance sheets to further ease monetary conditions.” That means buying bonds with newly printed money or making bigger loans on easier terms to banks.

This is easier said than done. The European Central Bank has reactivated some of its longer-term lending operations, but its purchases of government debt, designed to supplement the new European Financial Stability Facility, to date amount to only 59 billion euros. Doing more could make Germans unhappier than they already. The Federal Reserve faces similar internal resistance to more quantitative easing, although the hurdles are lower. Yet even if it could buy another $1.75 trillion of bonds, it would deliver less oomph than the first $1.75 trillion. Liquidity traps apply to long term as well as short term rates. With Treasurys yielding only 3%, it’s not clear how much more demand the Fed will spur by getting them down to, say, 2.5%. But it’s better than doing nothing.

The IMF remains bullish in respect to its growth forecast for 2010 for India which is predicted to achieve 9.4% and Chinia 10.5% and Brazil 7.1%


Blogger's Commentary:
Will the austerity measures in the EU eliminate it as a meaningful exporter to world markets, consequently impacting growth within the European block?

Meltzer Says U.S. Economic Programs Have Been `Foolish'


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Is End of Europe’s Debt Crisis Near?

Europe’s debt crisis sent investors spinning in the first half of 2010. Will it also dominate the headlines in the second half? If July’s first few days of trading are any indication, investors are off panic-mode but remain very much on edge.

Take a look at how some key risk-o-meters in Europe have performed since the start of the month.

Europe’s common currency, the euro, has been one of the biggest victims of Greece’s debt crisis and its fallout on other struggling Southern European economies. These days, however, analysts and investors are scratching their heads over the currency’s recent run against the U.S. dollar: The euro, which is down today, is nevertheless trading at $1.2574 compared with $1.2229 at the end of June. On May 4, one euro bought $1.1917.

The euro’s bounce suggests Europe’s political leaders have made some headway in warding off worries about a break-up of the euro currency area.

Indeed, investors kicked off the second half of 2010 by giving European governments a rest and worrying about the global economic recovery instead. A batch of disappointing reports on the U.S. economy even helped push the beleaguered euro higher. Meanwhile, the European Union’s decision to “stress-test” banks has given investors hope that market fears about banks may soon lessen. Spain, the market’s latest punching bag after Greece, successfully raised cash from the bond markets both this week and last, easing concerns about a big debt repayment due at the end of this month.

Like the euro, the British pound has risen in value against the dollar to $1.5110 from $1.4939 on June 30. It was as low as $1.4336 on May 18. Britain has surprised naysayers by forming an effective ruling coalition government that has made progress on the country’s big budget deficit. The U.K.’s important “triple-A” credit rating looks safe for now. So much for the idea that Britain is the next Greece.

The result: Some analysts are talking about the sovereign-debt story moving away from Europe in the next few months and hitting the U.S., which also has a massive budget deficit.

But it’s unclear whether Europe’s troubles can really go away that fast. Despite the euro’s gains, most currency analysts remain bearish, with some still expecting the currency to hit parity against the dollar. Analysts at Dutch bank ING put out a report today saying a euro-zone break-up remains a possible scenario.

And while Europe’s bond markets are in better shape than they were a few months ago, they’re still under considerable pressure.

As the first half of the year wound down, even stronger economies like France were starting to worry investors. Banks were growing very wary of lending to each other. Some of the pressures in European money markets are now easing. The cost to insure the debts of Greece, Spain, Portugal, Italy and Ireland is lower than it was at the end of June, according to data provider CMA DataVision. Investors are talking about the possibility of buying bonds of highly-indebted European countries.

“People are probably feeling a little bit more comfortable,” says Huw Worthington, an analyst at Barclays Capital in London. “The spreads are becoming attractive now.”

But there are still not enough signs that investor worries are actually going away. Worries about Europe are “going to stay,” Mr. Worthington says, though the news-flow may improve.

For one thing, the borrowing costs of countries along Europe’s aouthern fringe remain painfully high. The cost to insure their debts using derivatives suggests investor concern remains elevated. People seem to be waiting for a Greek government default.

What could turn things around? The results of Europe’s bank stress tests at the end of this month could help draw a line under Europe’s problems – as happened in the U.S. Stronger-than-expected readings of economic growth in Asia and the U.S. could dispel fears of a “double-dip” and make investors more confident that austerity measures taken in Europe won’t push economies into reverse. But without good news on these fronts, it’s still very possible that another market flare-up could bring fears of rolling European defaults back to the fore.