If you think credit default swap (CDS) spreads are informative with regard to developing pressure points and issues that policymakers should focus on (or will likely spend hectic weekends dealing with), you should look at the latest CDS spreads for European banks. The Irish story we have already flagged. I’m also concerned that developments in East-Central Europe are starting to affect the prospects for West European banks, most notably in Austria. Continue reading “Dublin (and Vienna) Calling”
One thing you can probably get 99% of economists to agree on is that a global trade war in the middle of a global recession is a bad idea. If every country increases import tariffs, hoping to protect its domestic industry from foreign competition, global trade will fall in all directions, hurting everybody. Put another way, increased tariffs are a negative-sum game.
To date, we haven’t seen much in the way of higher trade barriers during this crisis, although you could argue that some bailouts constitute subsidies favoring local over foreign companies. Instead, however, we are seeing friction over currency valuations. If you want to boost your net exports but don’t want to do the obviously unfriendly thing and increase tariffs, the other option is to devalue your currency: a weaker currency increases the price of imported goods and reduces the price of exported goods, hence reducing imports and increasing exports.
Yesterday, Tim Geithner accused China of “manipulating its currency,” something we’ve heard periodically over the last several years but not in much in the last few months. (Of course, Geithner then said that “a strong dollar is in America’s national interest,” whatever that means.) Switzerland threatened to intervene on foreign exchange markets to suppress the value of the Swiss franc. And the French finance minister criticized the U.K. for letting the pound depreciate. (Hat tip Macro Man for the last two.)
The spread between Greek government 10-year bonds and the equivalent German government securities rose sharply this week – Greek debt at this maturity now yields 6.0% vs. German debt at 3.1%. Other weaker eurozone countries appear to be on a similar trajectory (e.g., Irish 10 year government debt is yielding 5.8%) and if you don’t know who the PIIGS are, and why they are in trouble, you should find out.
We also know East-Central Europe (including Turkey) has major debt rollover problems and most of that region is in transit to the IMF, with exact arrival times determined by precise funding needs relative to the usual political desire to keep the party going through at least one more local election. Put the IMF down for another $100bn in loans over the next six months, and keep the G20 talking about providing the Fund with more resources.
But the big news of the week, with first-order implications for the US and the world, was from the UK where the prospect of further bank nationalization now looms. Continue reading “The Long Bond Yield Also Rises”
It looks like a bank aggregator for bad assets is pretty much a done deal. David Axelrod said yesterday we should expect a new approach within a few days, and leading reporters (NYT, Washington Post) have discerned that this is likely to include a “bad bank” into which troubled/toxic assets can be disposed.
We don’t yet know the details, and these matter a great deal (for the taxpayer and for the gradient of the road to recovery) but it’s not too early to think about the global implications, at least in qualitative terms. Continue reading “Global Consequences of a US “Bad Bank” Aggregator: It’s Mostly Fiscal”
According to Bloomberg (citing the RTE website), the Irish Prime Minister said in Toyko today that Ireland may need to call in the IMF if economic conditions continue to deteriorate. According to RTE (Ireland’s public broadcaster), correcting their earlier story, he said no such thing, at least in public.
The broader issue, of course, is that Ireland is not alone in facing economic difficulties – the risk of default, potential debt rollover issues, and credit ratings are likely to move together for a range of weaker countries in Europe’s eurozone. But the presumption has been that the IMF would not get involved in eurozone countries. Any change in this view would throw us back to thinking in terms of the 1970s (when the IMF lent to the UK and to Italy) or the 1930s (when IMF loans could have helped, but of course were not available). Unless you really intend to bring in the IMF for loan discussions, I would suggest it is a bad idea to use those three letters in any conversation, public or private.
Remember that in early October Ireland destabilized the eurozone by suddenly offering blanket bank deposit guarantees. The apparent lack of policy coordination within the eurozone continues to be worrying. These countries really need to start working together more closely.
I’ve had a chance, over the past 10 days, to debate the details of what’s next for the macroeconomy with leading policymakers in both the eurozone/EU and India. I’m struck by some similarities. In both places, there is little or no concern that inflation will rebound any time soon. At least for people based in Delhi, there is as a result confidence that conventional policy can now act aggressively to cushion the blows coming from the global economy. In the eurozone, all eyes are on monetary policy and the same is true for India – both places have almost the exact debate about whether fiscal policy can do much more than it is already doing, given that government debt levels are already on the high side.
The discordant note comes from people based in Mumbai. They feel that Delhi does not fully understand that the real economy is already in bad shape. Sectors such as real estate and autos are hurting badly. Small businesses, in particular, seems to be bearing the brunt of the blow. The banking picture seems more murky, but is surely not good. And of course the Satyam accounting scandal could not come at a worse time.
Overall, my strong impression is that growth forecasts will need to be marked down for India and the eurozone. Both will likely cut interest rates further quite soon (and have space for additional cuts), but we should not expect much more from the fiscal side in either place. They will both start to look beyond standard macro policies – although India may make progress on this front sooner.
I also heard strong and reassuring opposition to protectionism – although, I must say the case against any kind of trade restriction comes through more clearly in India than in the eurozone.
One leading anti-recession idea for the moment is a global fiscal stimulus amounting to 2% of the planet’s GDP. The precise math behind this calculation is still forthcoming, but it obviously assumes a big stimulus in the US and also needs to include a pretty big fiscal expansion in Europe. (Emerging markets will barely be able to make a contribution that registers on the global scale.)
What are the likely prospects for a major eurozone fiscal stimulus? My presentation yesterday on this question is here. The main points are: Continue reading “Eurozone Hard Pressed: 2% Fiscal Solution Deferred”
I had a heated discussion about our new baseline scenario yesterday with some angry European politicians. Specifically, the most agitated were from the eurozone and they find our assessment of the risks and likely futures in that region to be unacceptable. In their view, this is an American problem and that is where the impact will be felt. Continue reading “Angry Europeans”