MacroScope

Netherlands at core of the crisis

The Netherlands has become the latest country to come into the firing line of the euro zone crisis.

The cost of insuring five-year Dutch debt against default jumped to its highest since January as the government’s failure to agree on budget cuts spiraled into a political crisis and cast doubt over its support for future euro zone measures.

Dutch Prime Minister Mark Rutte offered to resign on Monday, creating a political vacuum in a country which strongly backed an EU fiscal treaty.

Five-year Dutch CDS jumped 14 basis points to 133, only a whisker away from the record of 136 basis points hit on November of last year. The premium that investors require to hold 10-year Dutch bonds over their equivalent German Bunds rose to 79 basis points – its highest in 3-years.

Commerzbank’s take on Holland:

Elections could be held in September 2012 at the earliest, because the Dutch constitution prescribes a period of 80 days between the dissolution of the government and new elections. In the interim, the government would be unable to get important reforms approved by parliament. This suggests that the 3 pct (budget deficit) target will be missed in 2013 and the country’s AAA rating is at risk.

Citi solicits staff donations for its political lobby

photo

Citigroup, the third largest U.S. bank, is actively soliciting donations from its employees for its political action committee (PAC) or fundraising group. In a letter to staff obtained by Reuters, the bank stressed the importance of the upcoming presidential and Congressional elections, urging staff to give to Citi’s PAC. From the letter:

Our Government Affairs team already does a great job promoting our positions on important issues to lawmakers, but there is one thing that each of us can do to enhance their efforts: contribute to Citi’s Political Action Committee (PAC).

Citi PAC is one of the most effective tools we have to amplify the voice of the company in Washington and enhance our profile with lawmakers.  The PAC provides the resources to help suport government officials who share our views on key policy objectives and who understand the impact various policy decisions may have on overall economic investment and growth.

from Global Investing:

Moscow is not Cairo. Time to buy shares?

The speed of the backlash building against Russia's paramount leader Vladimir Putin following this week's parliamentary elections has taken investors by surprise and sent the country's shares and rouble down sharply lower.

Comparisons to the Arab Spring may be tempting, given that the demonstrations in Russia are also spearheaded by Internet-savvy youth organising via social networks.

But Russia's economic and demographic profiles suggest quite different outcomes from those in the Middle East and North Africa. The gathering unrest may, in fact, signal a reversal of fortunes for the stock market, down 18 percent this year, argue  Renaissance Capital analysts Ivan Tchakarov, Mert Yildiz and Mert Yildiz.

Gingrich’s vision for the Fed

Surging Republican presidential candidate Newt Gingrich told TheStreet in an interview on Tuesday he would commit the Federal Reserve to ensuring that the dollar would not lose value.

I would return having the Fed having an obligation to have hard money, meaning if you save a dollar this year, it should be worth a dollar 20 years from now.

Since the value of the dollar depends on many variables and is relative to other currencies around the world, it would be interesting to learn how he thinks the Fed would accomplish that.

Contagion strikes Europe’s core

Any lingering illusion that the European crisis could be contained to so-called peripheral countries with high debt levels was shattered on Wednesday. German government bonds, which had thus far been seen as a safe-haven, slumped sharply after investors shunned the country’s auction of new 10-year debt.

Germany drew significantly less bids than the amount on offer for its Bunds, with investors deterred by very low yields. There is a growing view the euro zone powerhouse will pay a high price whatever the outcome of the regional debt crisis. If the crisis spirals out of control, some fear that it could reach a magnitude that would hit Germany as well by sending it into a deep recession. On the other hand, any solution to the crisis is likely to involve a higher fiscal bill for Germany.

Marc Ostwald at Monument Securities in London describe the auction as “a complete and utter disaster.” He continued:

Euro zone crisis: It’s Germany’s fault

The reigning narrative of Europe’s financial turmoil is that profligate European states, agglomerated all too offensively by a swine-referenced acronym, are forcing the continent’s wealthy, prudent northern countries to come to their rescue. Not so, according to two policy experts who spoke this week at a conference on the euro zone crisis at the University of Austin’s Lyndon B. Johnson School of Public Affairs.

They argue that labor reforms in Germany prevented the wages of manufacturing workers from rising after monetary union had been completed, making the country more competitive at the expense of its southern peers. Joerg Bibow, a professor of economics at Skidmore College, gives his view of events:

Germany’s wage trends have been the most important cause of the euro zone crisis. Those wage trends created an asymmetric shock that destabilized Europe.

Greece’s tiny debt load

No, that is not a typo in the headline. Greece has long been the focal point of Europe’s crisis. It was the first country to reveal some cracks in a monetary union that lacks a fiscal authority to back it. Indeed, Greek politics were dominating the headlines on Friday, with news that the prime minister had survived a confidence vote in parliament restoring a momentary sense of calm to a still very dramatic situation.

However, Greece’s actual debt load is only large relative to its own small and struggling economy. In the larger context of the euro zone, the actual amount of debt being haggled over is rather puny. Matias Vernengo, a professor of economics at the University of Utah, explains:

When you look at the size of Greece’s debt, which is slightly more than $500 billion, that corresponds more or less to 3 percent of euro zone GDP. It’s a very small amount of debt. The peculiarity of the crisis is that it’s political. It has an economic basis, an imbalance that it’s unable to solve but which is technically simple to solve.

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.

Uncomfortably political

Four leading Republicans wrote to Federal Reserve Chairman Ben Bernanke before the Fed’s Sept. 20-21 policy meeting recommending the Fed stop taking steps to boost growth. Fed interventions to pull down the high unemployment rate may do more harm than good and risk inflation, the officials said.

The Fed to some extent brushed those objections aside, deciding at the end of the meeting that a deteriorating outlook warranted buying and selling $400 billion worth of Treasuries to shift its holdings to longer maturities. Doing so should push down longer interest rates and may promote mortgage refinancing, Fed officials hope.

While the Fed would likely argue that its action was not the same as expanding its balance sheet through outright bond buying – which many critics objected to – it was nevertheless taking an active step, and could draw criticism from Republican lawmakers and candidates for the presidency. How could Congress make life miserable for the Fed? Lawmakers of both parties have proposed measures that would diminish or alter the Fed’s role.

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.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually ‘immortal’ in countries with a GDP per capita above $10,000.