Friday, July 9, 2010
Thursday, July 8, 2010
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%
References:
http://economist.com/blogs/newsbook/2010/07/imf_and_world_economy?fsrc=scn/fb/wl/bl/worldeconomy
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'
Commentary:
- Where do the boundaries of the government's responsibility towards the unemployed end?
- What was Keynes' view on government spending in times of a recession?
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.
Reference:
http://blogs.wsj.com/marketbeat/2010/07/07/is-end-of-europes-debt-crisis-near/
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.
Reference:
http://blogs.wsj.com/marketbeat/2010/07/07/is-end-of-europes-debt-crisis-near/
Sunday, June 27, 2010
FDIC Chairman Sheila Bair talks to WSJ About the Financial Regulatory Legislation
FDIC Chairman Sheila Bair talks to WSJ economics editor David Wessel about the financial-regulatory legislation pending in Congress, the current health of the banking business and what it's like to be the sole woman among a band of powerful men.
Wednesday, June 16, 2010
Government Official Warned on US Economy in 2007
QUICK VIEW
- Prior to 2007, as Head of the U.S. Government Accountability Office (GAO) David Walker said that the U.S. economy was unsustainable and made some remarkable claims regarding fiscal irresponsibility
- David Walker runs investigative arm of congress
- Walker believed that the biggest peril facing the nation was being ignored
- Walker argued that current standard of living was unsustainable
- Walker called it the dirty little secret that in Washington everyone knew
- He concluded that politicians were guilty of fiscal irresponsible
- After trying to argue his case, he gave up on elected officials and took to the streets to present the facts
- He embarked on what he called a "Fiscal Wake Up Tour"
- Walkers compares the fiscal irresponsibility to charging expenditure to a credit card and expecting our grandchildren to pay for it
- Argues that we are living in fiscal denial
- The Government has committed itself to massive entitlement programs that we cannot afford
- 78 million baby boomers reached sixty-two and started retiring in 2008
- Walkers maintains that the status quo was a tsunami ready to swamp the republic
- Biggest challenges are social care and Medicare
- Heath care problem is much more significant than social security
- When Medicare was expanded in 2005 by including prescription drug coverage, Walker regarded the move as fiscally irresponsibe
- The new legislation would extend debt to over eight trillion dollars in the near future
- The country cannot afford the promises that it has made
- The system is unsustainable
- Can expect people to disagree, but hardly anyone does except for a small group of economists that say that problem overstated
- Fed Reserve Chairman Ben Bernanke stated that growth alone is unlikely to solve the country's fiscal challenges
- Walker calls the behavior fiscally immoral
EU Parliament Approves Controversial Hedge Funds, Private Equity Rules
QUICK VIEW
- European Parliament committee has approved the European Union’s controversial hedge fund regulations in the form of a new bill
- European Parliament will seek to impose strict new reporting and custody rules on hedge funds and private equity funds, as well as possible leverage and borrowing limits
- The bill includes the so-called “passport” that would give foreign hedge funds that meet certain requirements access to all 27 EU countries
- Members of the British Conservative Party voted against the measure.
- Hedge funds accused of exacerbating the Greek debt crisis by betting on its default
- Private-equity firms accused by politicians in Germany of stripping the assets of the firms they bought.
- Measure could constrain European pension fund returns and bring about retaliatory measures against the EU from other countries
A key European Parliament committee has approved the European Union’s controversial hedge fund regulations, but appears to have have set up a battle with the bloc’s finance ministers at the same time.
The Economic and Monetary Affairs Committee gave its assent to the Alternative Investment Managers Directive, which would impose strict new reporting and custody rules on hedge funds and private equity funds, as well as possible leverage and borrowing limits. But the bill headed to the full Parliament includes the so-called “passport” that would give foreign hedge funds that meet certain requirements access to all 27 EU countries. That provision was not included in the version of the directive approved today by the EU’s finance ministers.
Members of the Parliament are claiming that reception of the proposed bill by the European Parliament does not appear to be free from resistance. Jean-Paul Gauzes, a french member of the Parliament claimed that negotiations will be fast-tracked, “but that doesn’t mean an accord at any price.”
Hedge funds have been accused of exacerbating the Greek debt crisis by betting on its default, while private-equity firms were accused by left-wing politicians in Germany of acting like "locusts," by stripping the assets of the firms they bought.
The committee passed the bill by a vote of 33 to 11. Notably, members of the British Conservative Party, which took power alongside the pro-European and pro-hedge fund regulation Liberal Democratic Party last week, voted against the measure.
“We’ve adopted protectionist, fortress Europe policy,” Syed Kamall, one of the Tory MEPs, said. He warned that the measure would both hurt European pension fund returns and bring about retaliatory measures against the EU from other countries, such as the US.
The move for further regulation follows a decision by European leaders at a summit in Berlin in February 2009. German Chancellor Angela Merkel, has been a strong supporter of increased oversight in the hedge fund industry.
The Future of the Euro
A question that needs to be assessed is whether the Euro currency, which is approximately ten years old, is sustainable.
Futurist conference keynote speaker and author Patrick Dixon shared his view on the future of the Euro at London Stock Exchange UK Trade and Investment - Nordic Business Awards. He asks a fundamental question. Why is it that Greece and Ireland are experiencing severe economic difficulties?
Although there have been many broader issues that have impacted these countries that relate to the global downturn, there is a fundamental truth that needs to be addressed. All these countries that are within the Eurozone, by definition have the same currency, interest rates, and cost of borrowing. The cost of borrowing is set by the European Central bank. The fundamental lever that drive most national economies in terms of driving down demand during periods of inflation, or pumping up demand during a period of recession, has disappeared because it is impossible for an individual country within the Eurozone to increase or decrease its interest rates. When there are needs that are specific to a country that require adjustment using traditional central bank mechanisms, there is very little that can be performed by an individual country, as the needs of that specific country may be very different to other countries within the Eurozone. Consequently, it will always be a victim of the policy that is set by the European Central bank. This represents a huge challenge.
In an attempt to achieve a deeper understanding of the issues that impact the Euro, the following topics need to be addressed:
- European Union trends
- Euro crisis in Greece
- Monetary union constraints in high inflation or deflation
- Role of European Central Bank in balancing needs of high growth and low growth economies
- Contrasts between Ireland, Greece, Portugal, Spain, Germany, France, Italy and countries which more recently joined
- Loss of sovereignty to Brussels
- Political issues in controlling budget deficits or imposing budget cuts on an unwilling nation
- Political unrest and threat of strikes or instability
- Challenges for the future
Monday, June 14, 2010
An Australian Perspective of the Credit Crunch
What is the global credit crunch? Simply explained it emerged when brokers and banks were offering mortgages to borrowers who had little or no income.
These mortgages were called sub-prime mortgages. The mortgages were written and structured as "non-recourse loans". If a borrower defaulted on his mortgage, he could simply return the house key to the bank and walk away. These mortgages were "bundled into packages, and re-sold to investors.
When home owners with sub-prime mortgages couldn't pay their mortgages, banks foreclosed and property prices dropped, in some cases by over fifty percent.
Trying to Understand the Credit Crunch
The Credit Crunch or the Great Recession is the most profound and significant economic event to affect global markets since the Great Depression of the 1930s. While the Great Recession was not a cause for the widespread poverty that marked the Great Depression, its impact significantly affected the wealthy. Literally billions of dollars were wiped off stock exchange boards. Victims of the Credit Crunch included the rich and famous and extended to leading investment banks on Wall Street, two of which collapsed.
The main cause of the Great Recession has been attributed to the unprecedented growth of sub-prime mortgages in U.S. markets. Real estate prices across the globe were affected. A consequence of the housing bubble and its subsequent collapse has been a move by regulators to scrutinize the provision of mortgages by Mortgage Bankers. This has invited increased regulation. The approach to apply greater levels of oversight through regulation is controversial amongst proponents of free market principle, as they argue that it merely increases inefficiency within an economy. Additionally, the role that investment banks play in the economy has also been criticized. This has resulted in several changes in regulation with limitations being placed on the scope of business in which investment banks are permitted to operate.
A consequence to the credit crunch has been a drying up of available credit in financial markets. This significantly impacted money markets, the ability of businesses to meet their commitments and constrained economic growth. The manner in which the Federal Reserve has dealt with the affect of the credit crunch, is very different to the style that their European counterparts adopted. The U.S. has sought to adopt lessons that were concluded from the Great Depression and consequently used a Keynesian approach to address incongruencies within the economy. Keynes believed that the austerity measures of the Great Depression by the Federal Reserve strengthened the negative impact of the depression. The economist concluded that it was only after the government increased spending that the economy was able to revitalize and achieve positive growth. Conversely, European Central Banks have concentrated on adopting the application of stringent austerity measures, reducing government spending and budget deficits. It is unclear and still too early to establish how these two very different approaches are working. Early indications suggest that both methods have achieved some measure of success. In the United States, there has been somewhat of a recovery and Europe is also experiencing a slight resurgence. Early economic indicators reflect improving economies in both Greece and Portugal. These are two countries within the Eurozone that were severely impacted by the credit crunch.
Another question that needs to be assessed is the sustainability of the Euro currency, which is approximately ten years old. The most difficult challenge for those countries within the Eurozone is the disparity between the individual needs of a country countries and that of centralized strategy for fiscal and monetary considerations. This incongruency begs the question, as to whether the continued functionality of the Euro currency is sustainable within its current structure.
With the goal of achieving a deeper and clearer understanding of the Credit Crunch, there are several key questions that need to be addressed:
- How did the sub-prime industry contribute to the Credit Crunch?
- What were the mechanics within the economy that contributed towards the Credit Crunch and which specific factors caused the housing bubble?
- Could the Credit Crunch have been avoided?
- Do the lessons of the Credit Crunch warrant increased regulation, as is the current trend?
- To what extent did the Federal Reserve contribute to the recession, if at all?
- What steps should Central Governments play in reducing the impact of a recession?
- What role should derivatives be allowed to play in financial markets?
Readers are invited to comment on the points discussed in these articles, to further enhance debate and discussion.
References:
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