Not just a Greek drama

The headline writers have been spoilt for choice this week: “Beware of Greeks taking gifts”; “What do the Greeks know about democracy?”; and, of course, “Another Greek tragedy”. Yet Athens’ economic woes are no laughing matter for the millions of Greeks who face a generation of hardship, debt repayment and sharply curtailed living standards. Hardly had the ink dried on the Eurozone’s latest bailout plan than Greek prime minister George Papandreou appeared to pull defeat out of the jaws of victory by calling for a referendum on the plan. Berlin and Paris promptly threatened to withhold the latest tranche of financial aid, forcing Papandreou to back down. Continue reading

A solution at last, or the last of the solutions?

European leaders finally unveiled a new package of measures to tackle the Eurozone’s debt crisis on 27 October. Support for the European Financial Stability Facility (EFSF) is to be increased from €440 billion to €1 trillion and private holders of Greek sovereign debt are to be offered 50% of their outstanding debt holdings. The markets initially welcomed the deal, with bank stocks rebounding impressively and major stock indices around the world registering 2-5% gains on the day.

While it will take at least a generation to get the Greek economy back on track, pledges to offer insurance on Eurozone members’ debt and attract greater private and public investment into the Eurozone are to be welcomed. Yet French president Nicolas Sarkozy was perhaps more prescient than he knew when he triumphantly described the agreement as “a credible and ambitious and overall response to the Greek crisis”. Continue reading

The power of the rising east

The Brazilian central bank’s decision to cut its main interest rate from 12% to 11.5% on 20 October has been cited as further evidence of the slowdown in the global economy. The argument goes that if one of the world’s biggest emerging markets is concerned about slowing growth, then the industrialised world really should sit up and take notice. Indeed, Brazilian GDP is now expected to grow by just 3.5% this year, far less than the 7.5% recorded last year, partly because of difficulties in the country’s key export markets but also because last year’s figure was buoyed by increased oil production.

There is a great deal of truth in this view but many analysts are missing the bigger picture in their relentless dash towards doom and gloom. The interest rate cut came after five successive increases and was prompted by the Banco Central’s desire to rein in the economy to dampen inflationary pressures. It is clear that Brasilia fears an economic slowdown and has now taken its eye off the perceived evil – inflation – to join in the western hemisphere’s battle against the four horsemen of the economic apocalypse: recession, stagflation, unemployment and collapsing confidence. Continue reading

Great idea; poor function

As evidenced by the meeting of G20 nations in Paris, global concern over economic instability in the Eurozone is growing. As the international political economy becomes ever more closely integrated, weak or non-existent growth in the European Union has major ramifications from Brazil to Japan, particularly given ongoing problems to kick-start the world’s second biggest economic entity, the United States. Yet as global financial institutions struggle to contain European economic decrepitude, the soft underbelly of the European project continues to creak like a ship in a storm.

Despite relatively modest public debt levels, Standard & Poor’s followed in the footsteps of Fitch by cutting Spain’s credit rating, in this instance from AA to AA-, as a result of high levels of private sector debt and weak growth. Ireland will take a generation to recover from its collapse; Greece remains as far from economic sanity as ever and traders show no let up in dragging Italy into the mix. The credit ratings on a host of major international banks have been cut, most recently on UBS, Lloyds and Royal Bank of Scotland. As long as the EU’s more prosperous states fail to provide the engine for more rapid growth, the European fringe will continue to struggle. Continue reading

The moving goal posts of international finance

It is often said that armies train to fight the last war rather than prepare for the next conflict. By the same token, governments are usually seen tackling the previous financial crisis, rather than the most likely sources of future instability. For much of the 1980s and 90s, governments considered 1970s-style inflation to be the biggest threat to financial stability and were quick to use interest rates as a break on economic overheating.

So was the Bank of England (BoE) right to launch a second round of quantitative easing (QE) on 6 October, just as other governments have sought to blow the embers of economic activity by boosting money supply? Well, as so often in such cases, it is easy to argue both in favour and against. Yes, because stagflation is currently a bigger threat than inflation; but no, because there is too little concrete evidence to show whether and how QE actually works. Continue reading

Whither the euro?

German Chancellor Angela Merkel has finally secured a new rescue package for the Eurozone’s struggling economies, propping up her own domestic position in the process. In the event, the Bundestag vote was more convincing than expected, with 523 votes in favour of increased German support for the European Financial Stability Facility (EFSF), with only 85 against. The ruling Christian Democratic Union and is partners did not even need the support of opposition parties, so the message was clear: Germany still fully supports the European project and will not allow the euro to fail.

Yet increasing the size of the EFSF from €440 billion to €780 billion appears to be too little too late. Greece’s economic woes show no sign of fading, while Italy moves ever closer to the precipice of economic disaster. Perhaps most importantly, the markets took little heart from Merkel’s victory and it is worth noting that stock markets within the Eurozone, including Germany’s Dax and France’s Cac 40 suffered greater losses following the German vote, than those, such as London, on the outside. Continue reading

Save Euro and Democracy

Published in The Moscow Times
By Andrey Borodin

The issue that has loomed large over the past months has been the extent to which the European Union’s institutions are willing and allowed to intervene to support individual countries and their banks.

Although Britain is outside the euro zone, an interim report from the country’s Independent Commission on Banking described the problem of bank guarantees well. “Large banking systems can threaten the perceived creditworthiness of governments, through the presence of an implicit guarantee. The social costs of sovereign default, or even the risk of it, are very large indeed,” according to the report. “So bank guarantees, by placing the creditworthiness of the government in question, can risk costs for society that would dwarf the direct cost or value of the subsidy to the banks.”

The main problem facing the euro zone is that there are a variety of governments pursuing their own policies, but there is only one monetary authority and guarantor of the whole banking system that is trying to act in the best interests of the single currency area as a whole. Continue reading

The return of stagflation?

Stagflation isn’t a word that has been used much in recent years, but, in a number of countries, there are hints that we may need to dust off the term.

One of the most explicit comments came last week from India’s Finance Secretary, Mr Gujral, who told Reuters, ‘The Indian government is concerned about high inflation and slowing growth.’ That followed a 25 basis point rise in the repo rate, to 8.25%, the 12th increase in 18 months. However, with inflation at a 13 month high of 9.78%, that still leaves the official rate in negative real territory, so analysts are expecting further rate increases over the next few months.

Growth is expected to reach 8.5% for the fiscal year to March 2012 – a rate that Western nations can only dream of – but with real wages now falling, consumers are feeling the pain of higher prices, and fuel price increases in particular are helping to make the Indian government hugely unpopular.

Amongst the other BRICS, consumer price inflation is at 7.2% in Brazil, 8.2% in Russia, 6.2% in China and 5.3% in South Africa. Continue reading

A Greek Tragedy Unfolds

The next tranche of international support for the beleaguered Greek economy is due, with Friday being the deadline for banks and other private sector holders of Greek sovereign debt to participate in the bail-out plan by agreeing to exchange or roll over their bond-holdings for up to 10 years. Without this private sector support, the €8bn of aid from the IMF and European Union will be blocked.

But investor and government concerns are mounting on whether the country can meet the conditions set to qualify for the loans, resulting in Greek one year bond yields rising to a record 82.1 per cent this week. Continue reading

Time for a new paradigm

A number of well known and respected economists, central bankers and commentators are starting to call for a complete re-think of Western economic and financial policy. The US and the Eurozone have chronic deficits and tiny interest rates, yet despite such stimulative fiscal and monetary policies, both areas are facing the very real possibility of a double dip recession.

A recent paper by Andrew Haldane, Executive Director of the Bank of England’s Financial Stability division puts it down to psychology. He says, ‘Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster. In these situations, psychological scarring is likely to result in risk appetite and risk-taking being lower than reality might suggest. Risk will be over-priced. Today, the very disaster myopia that caused the crisis may be retarding the recovery.’ Continue reading