The Great Debate UK
Rating agencies as powerful as ever
By Kathleen Brooks. The opinions expressed are her own.
Some people assumed that after the debacle over the 2008 mortgage-backed security crisis in the U.S., the credit rating agencies would be discredited. However, here we are three years later and the focus is still on the same rating agencies, waiting with bated breath to see whether they move the ratings of some of the world’s most important economies.
Within the last six months rating agencies have played a big part in shaping the direction of financial markets. First, there was Standard & Poor’s downgrading of the U.S. at the start of August, which caused a wave of risk aversion and turmoil on financial markets. Europe has also been the focus of concern.
Italy has seen its credit rating slashed to the lowest A rating you can have, while new kid on the block rating agency Egan Jones has gone one step further and on Monday cut Italy’s rating to BB from BB+. Belgium has also been cut and rumours are spreading that France isn’t going to keep its coveted triple A status for much longer.
Far from drift into the background, the focus has been on the diminishing number of countries rated triple A in the western world and what this means for borrowing costs. France has also been under the rating agencies’ microscope. It is at risk of losing its triple A credit rating due to its high public sector debt level combined with a sizeable deficit, also Paris has been slow to take steps to try and bring public sector finances under control. A false statement that France had been downgraded by Standard & Poor’s in October caused French bond yields to surge and it also enraged the French government who threatened to take steps to ban the rating agencies from commenting on France again.
from Anooja Debnath:
When it comes to recessions, 40 is the new 50
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
The QE billions should go direct to consumers
By Mark Hillary. The opinions expressed are his own.
In 1998, the Japanese government was ridiculed for giving away almost $6bn (at 1998 value) of shopping vouchers. The plan was that consumers would spend more of this ‘free money’ and help lift Japan out of the seemingly endless malaise it suffered in the nineties – as many other developed economies were enjoying a roaring decade.
One of the major faults in the Japanese plan was that the vouchers could easily replace the need to spend actual money. If my groceries cost me $100 then why would I still spend $100 of cash on groceries and buy a nice meal in a restaurant with my voucher, when I could just use the voucher for those groceries?
No excuse for inaction – BoE’s Adam Posen
By Adam Posen. The opinions expressed are his own.
It is past time for monetary policy to be doing more to support recovery. The Jackson Hole conference has come and gone, and no shortage of excuses was provided for central banks to hold their fire — even though most economists acknowledged the grim outlook for the advanced economies.
Too much attention has been paid, however, to the failings of fiscal policies and to the shortfall from effects of earlier quantitative easing. Further asset purchases by the G7 central banks are needed to check not just a downturn, but the lasting erosion of productive capacity and of debt sustainability — especially when even justified fiscal and financial consolidation is undercutting short-term recovery. Easier monetary policy will increase the odds of other policies improving, and those policies’ effectiveness when they do.
from MacroScope:
Give me liberty and give me cash!
Come back Mr Fukuyama, all is forgiven.
In his 1992 book "The End of History and the Last Man", American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.
Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.
from MacroScope:
Must we always try to grow the economy?
In one chapter of his sharp new book The Next Convergence, the economist Michael Spence asks a simple yet evocative question: Why do we want our economy to grow?
Spoiler alert: He does find a few good reasons. It’s rare, though, to hear an economist raise even theoretical doubt over such a deeply ingrained assumption in Western economies; one may as well ask why we want electricity. In the United States, we hear that economic growth should trump nearly all other social and political considerations (a position held by some on the right), or that growth should be tempered by other important values—environmental protection, health and safety, wealth redistribution—which is widely believed on the left. But almost no one anywhere on the modern political spectrum argues that we should try not to grow the economy, or that never-ending growth is impossible.
from MacroScope:
The iPod – the iCon of Chinese capitalism
Walking past Apple's sleek shop along London's Regent Street on Sunday, my wife asked me what I wanted for Father's Day.
"An iPad?" I ventured, half-jokingly.
"Are you sure you want one? Don't you care how they're made?" came her disapproving reply.
from Breakingviews:
Four reasons to hedge against Japanese equities
What was a contrarian view right after Japan's earthquake has become consensus: confidence in a V-shaped recovery has powered a 10 percent rally in Japanese stocks since March 15. That outlook still appears likely, but questions surround the speed and strength of the recovery. Investors should hedge against the risk that politics, power shortages, and nuclear troubles prompt investors to turn tail.
Amid a drumbeat of cautiously optimistic forecasts, foreign investors pumped almost $12 billion into Japanese stocks, a surge that helped stoke an unwanted spike in the yen. Even Warren Buffett joined the chorus of support for Japanese equities. The rally also turned up some reconstruction darlings such as generator-maker Denyo <6517.T>, which has climbed 44 percent since March 15; water purification company Nihon Trim <6788.T>, up 48 percent; and lighting company Iwasaki <6924.T>, up 58 percent.
from Breakingviews:
Tragic quake may add to inflation pressures
The full economic impact of the sixth most powerful earthquake ever recorded is not yet known. Many hundreds of lives have been reported lost in Japan. Aftershocks are a danger and other nations fear a tsunami running across the Pacific will spread the damage more widely. Though uncertainty is rife, the earthquake is more likely to add to global growth and attendant inflationary pressures than subtract from them. It also raises concerns about Japan's long-running fiscal dangers.
The earthquake struck close to a relatively sparsely populated area of Japan. In contrast, the Kobe earthquake in January 1995 struck one of the most populated and industrialized regions, killing 6,434 people and causing damage estimated at around $100 billion. The current quake will leave a large reconstruction bill -- but, on current indications, a smaller one than for Kobe.
from Breakingviews:
Trade should leave China and India both winners
Decades of mistrust haven't stopped China and India's trade from tripling in the past five years. Now China wants to restart free trade talks when Premier Wen Jiabao visits New Delhi later this week. India has long resisted such an agreement. Yet more open trade should leave both sides winners.
Since the two countries warred over a border dispute in 1962, China and India have had a fractious relationship. But on some issues they agree. India helped China stop an agreement over climate change in Copenhagen that both felt was too soft on rich countries. Chinese and Indian state-owned firms have bid together for oil and gas assets.
