MacroScope

from Global Investing:

We’re all in the same boat

The withering complexity of a four-year-old global financial crisis -- in the euro zone, United States or increasingly in China and across the faster-growing developing world -- is now stretching the minds and patience of even the most clued-in experts and commentators. Unsurprisingly, the average householder is perplexed, increasingly anxious and keen on a simpler narrative they can rally around or rail against. It's fast becoming a fertile environment for half-baked conspiracy theories, apocalypse preaching and no little political opportunism. And, as ever, a tempting electoral ploy is to convince the public there's some magic national solution to problems way beyond borders.

For a populace fearful of seemingly inextricable connections to a wider world they can't control, it's not difficult to see the lure of petty nationalism, protectionism and isolationism. Just witness national debates on the crisis in Britain, Germany, Greece or Ireland and they are all starting to tilt toward some idea that everyone may be better off on their own -- outside a flawed single currency in the case of Germany, Greece and Ireland and even outside the European Union in the case of some lobby groups in Britain. But it's not just a debate about a European future, the U.S.  Senate next week plans to vote on legisation to crack down on Chinese trade due to currency pegging despite the interdependency of the two economies.  And there's no shortage of voices saying China should somehow stand aloof from the Western financial crisis, even though its spectacular economic ascent over the past decade was gained largely on the back of U.S. and European demand.

Despite all the nationalist rumbling, the crisis illustrates one thing pretty clearly - the world is massively integrated and interdependent in a way never seen before in history. And globalised trade and finance drove much of that over the past 20 years. However desireable you may think it is in the long run, unwinding that now could well be catastrophic. A financial crisis in one small part of the globe will now quickly affect another through a blizzard of systematic banking and cross-border trade links systemic links.

Just take the euro zone for a start. HSBC economists on Friday said the costs of a euro zone breakup would be "a disaster, threatening another Great Depression" and far outweighed the costs of repairing the flawed fiscal backstops to the monetary union -- especially given the wealthier creditor countries within the union tend to ignore the benefits they've reaped from the euro over the past 12 years. Aided by the "entangling effects" of the euro, it showing that cross-border holdings of capital have exploded from about 20% of world GDP in 1980 to stand at more than 100% now (global GDP was estimated by the IMF to be about $62 trillion last year). By contrast, the first wave of globalisation in the late 19th and early 20th century saw cross-border holdings peak at 20% of world GDP before WW1 reversed everything.

"A euro break-up would be a disaster, threatening another Great Depression," wrote HSBC chief economist Stephen King and economist Janet Henry. " Cross-border holdings of assets and liabilities within the eurozone have risen dramatically, leading to a tangled web of mutual financial dependency. With the re-introduction of national currencies, disentanglement would proceed at a rate of knots, undermining financial systems, generating massive currency moves, threatening hyper-inflation in the periphery and triggering economic collapse in the core."

The thin line between love and hate

The opinion on Turkey’s unorthodox monetary policy mix is turning as rapidly as global growth forecasts are being revised down.

Earlier this month, its central bank was the object of much finger-wagging after it defied market fears over an overheating economy by cutting its policy rate. It defended the move, arguing that weaker global demand posed a greater risk than inflationary pressures.

Investors were not persuaded. When I told one analyst about the Turkish rate move, he practically sputtered down the phone: “You’re not kidding?!”

Banking on a Portuguese bailout?

portgualprotest.jpgReuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.

Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.

And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.

The nuclear option for financial crises

They finally realised how serious it was. With stock markets tumbling, bond yields on vulnerable debt blowing out and the euro in danger of failing its first big stress test,  the European Union and International Monetary Fund came out with a huge rescue plan.

At 750 billion euros (500 billion from the EU; 250 billion from the IMF), the rescue package is the equivalent of taking a huge mallet to a loose tent peg.  Add to that an agreement among central banks to help out and the actual purchase of euro zone bonds by Europe’s central banks and you turn the mallet into a pile driver.

That tent is not going anywhere for now.

Does this remind anyone of anything? How about a lot of small attempts to stop the subprime/Lehman crisis failing, only to be followed by the  likes of the $700 billion Troubled Asset Relief Program in the United States?

Germany 1919, Greece 2010

Greece’s decision to ask for help from its European Union partners and the International Monetary Fund has triggered a new wave of notes on where the country’s debt crisis stands and what will happen next. For the most part, they have managed to avoid groan-inducing headlines referencing marathons, tragedies, Hellas having no fury or even Big Fat Greek Defaults.

Perhaps this is because the latest reports are pointed. They focus on the need to solve the Greek debt crisis before it spreads to bring down others and even shake Europe’s monetary framework loose.

Barclays Capital reckons the 45 billion euros or so of aid Greece is being promised is a drop in the bucket and that twice that will be needed in a multi-year package. JPMorgan Asset Management, meanwhile, says that to bring its 130 percent debt to GDP ratio under control Greece will need the largest three-year fiscal adjustment in recent history.

More German misery for the Greeks

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The rescue plan put together for Greece by its European Union partners was not working anyway — at least as far as financial market speculation was concerned. But then up pops Axel Weber, Bundesbank chief and European Central Bank governing council members.

Athens, Weber is said to have told German politicians, may need up to 80 billion euros in assistance in the coming years. That’s quite a bit more than the 30-billion euro aid mechanism agreed about a week ago.

Result:  The spread between Greek and German 10-year bonds flew out to a new euro lifetime high. It might also have been helped along by the International Monetary Fund Global Financial Stability Report saying:

Confidence vs. reality on Europe’s fiscal front

What do Poland, the European Union’s brightest economic light, and Greece, its dimmest, have in common? Both have plans to cut their budget deficits to the Union’s  prescribed 3 percent level by 2012, and both of those plans depend on a lot of ifs.

I can already hear cries of protest from Poland, the only EU member to show any growth at all last year. It that has taken great pains to distance itself from more troubled EU states and is extremely proud of its growth results, with Prime Minister Donald Tusk recently telling the Financial Times: “Who would have thought we would see the day when the Polish economy is talked about with greater respect than the German economy?”

But the comparison still works, not only because Poland and Greece have promised to shrink their deficits so quickly — Greece from an expected 12.7 and Poland from around 7 percent this year — but also because they are depending on growth forecasts that may Protesters march during a rally against the government's austerity  plans in Athensnot materialise. Both stories are also emblematic of a theme sweeping across Europe — an effort by governments to build confidence over fiscal consolidation plans in an uncertain recovery.

from Global News Journal:

What flesh will be put on the bones of an EMF?

In the space of a few weeks, the idea of creating a European Monetary Fund to rescue financially troubled EU member states has gone from being a high-level brainwave from a pair of economists to a major policy initiative backed by powerbroker Germany. In EU terms, that's Formula One fast.

Yet while German Chancellor Angela Merkel appears to be behind the concept, even if she has concerns about a possible need to change the EU's treaty, no one has put much flesh on the bones of the idea apart from the original proponents -- Daniel Gros of the Centre for European Policy Studies and Thomas Mayer, the chief economist of Deutsche Bank.

Gros and Mayer set out their proposal in an academic paper and synthesised it in a column in The Economist last month. In essence the idea -- and it remains to be seen if EU policymakers take it up wholesale or develop something along different lines -- is fairly straightforward.

Time to promote the EU?

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Member states of the European Union like to think of themselves as partners, sharing in a common future. But when it comes to business, things tend to go by the board. Consider, for example, the scramble to outdo each other in attracting  investment from outside the bloc.

Jose Guimon, a lecturer in international economics at the Universidad Autonoma de Madrid, reckons this should change. In a new paper for the Vale Columbia Centre on Sustainable International Investment, Guimon says it is time for an EU Investment Promotion Agency.

What he has in mind is something along the lines of  Invest in America, the U.S. government’s attempt to coordinate promotion of the United States as a desitination for foreign direct investment.

Lack of debt Estonia’s undoing?

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Low public debt would usually be a good thing, but it might throw a spanner in the works of Estonia‘s quest to join the euro zone.

The small Baltic country has a stable currency, its deficits and inflation meet European Union rules, and its top policymakers exude confidence the country will adopt the euro next year.

But with government debt below 10 percent of gross domestic product (GDP), Estonia has not needed to issue a benchmark bond — a government bond issued in Estonian kroons for at least 10 years — which it could use to show it has low and stable interest rates, one criteria for euro candidates.