Saturday, May 16, 2009
Is this another victim of the financial crisis. I don't think so. I have lived in California and the problems that are highlighted in the article are not new. California faced the same or similar issues in good times as well. Just stumbled upon this very interesting article. I was in California for 3 years and thank god I did not chose to be based in California after I returned to US.
The tagline of the article is "As California ceases to function like a sensible state, a new constitution looks both necessary and likely".
ON MAY 19th Californians will go to the polls to vote on six ballot measures that are as important as they are confusing. If these measures fail, America’s biggest state will enter a full-blown financial crisis that will require excruciating cuts in public services. If the measures succeed, the crisis will be only a little less acute. Recent polls suggest that voters are planning to vote most of them down.
The occasion has thus become an ugly summary of all that is wrong with California’s governance, and that list is long. This special election, the sixth in 36 years, came about because the state’s elected politicians once again—for the system virtually assures as much—could not agree on a budget in time and had to cobble together a compromise in February to fill a $42 billion gap between revenue and spending. But that compromise required extending some temporary taxes, shifting spending around and borrowing against future lottery profits. These are among the steps that voters must now approve, thanks to California’s brand of direct democracy, which is unique in extent, complexity and misuse.
A good outcome is no longer possible. California now has the worst bond rating among the 50 states. Income-tax receipts are coming in far below expectations. On May 11th Arnold Schwarzenegger, the governor, sent a letter to the legislature warning it that, by his latest estimates, the state will face a budget gap of $15.4 billion if the ballot measures pass, $21.3 billion if they fail. Prisoners will have to be released, firefighters fired, and other services cut or eliminated. One way or the other, on May 20th Californians will have to begin discussing how to fix their broken state.
Read the full article HERE.
The tagline of the article is "As California ceases to function like a sensible state, a new constitution looks both necessary and likely".
ON MAY 19th Californians will go to the polls to vote on six ballot measures that are as important as they are confusing. If these measures fail, America’s biggest state will enter a full-blown financial crisis that will require excruciating cuts in public services. If the measures succeed, the crisis will be only a little less acute. Recent polls suggest that voters are planning to vote most of them down.
The occasion has thus become an ugly summary of all that is wrong with California’s governance, and that list is long. This special election, the sixth in 36 years, came about because the state’s elected politicians once again—for the system virtually assures as much—could not agree on a budget in time and had to cobble together a compromise in February to fill a $42 billion gap between revenue and spending. But that compromise required extending some temporary taxes, shifting spending around and borrowing against future lottery profits. These are among the steps that voters must now approve, thanks to California’s brand of direct democracy, which is unique in extent, complexity and misuse.
A good outcome is no longer possible. California now has the worst bond rating among the 50 states. Income-tax receipts are coming in far below expectations. On May 11th Arnold Schwarzenegger, the governor, sent a letter to the legislature warning it that, by his latest estimates, the state will face a budget gap of $15.4 billion if the ballot measures pass, $21.3 billion if they fail. Prisoners will have to be released, firefighters fired, and other services cut or eliminated. One way or the other, on May 20th Californians will have to begin discussing how to fix their broken state.
Read the full article HERE.
Friday, May 08, 2009
The Greater Of Two Evils - Inflation Is Bad But Deflation Is Worse
0 comments Posted by PD at 3:18 PMMERLE HAZARD, an unusually satirical country and western crooner, has captured monetary confusion better than anyone else. “Inflation or deflation,” he warbles, “tell me if you can: will we become Zimbabwe or will we be Japan?”
How do you guard against both the deflationary forces of America’s worst recession since the 1930s and the vigorous response of the Federal Reserve, which has in effect cut interest rates to zero and rapidly expanded its balance-sheet? On May 4th Paul Krugman, a Nobel laureate in economics, gave warning that Japan-style deflation loomed, even as Allan Meltzer, an eminent Fed historian, foresaw a repeat of 1970s inflation—both on the same page of the New York Times.
There is something to both fears. But inflation is distant and containable, while deflation is at hand and pernicious.
How do you guard against both the deflationary forces of America’s worst recession since the 1930s and the vigorous response of the Federal Reserve, which has in effect cut interest rates to zero and rapidly expanded its balance-sheet? On May 4th Paul Krugman, a Nobel laureate in economics, gave warning that Japan-style deflation loomed, even as Allan Meltzer, an eminent Fed historian, foresaw a repeat of 1970s inflation—both on the same page of the New York Times.
There is something to both fears. But inflation is distant and containable, while deflation is at hand and pernicious.
Read the full Economist.com article HERE
FOR years leaders in continental Europe have been told by the Americans, the British and even this newspaper that their economies are sclerotic, overregulated and too state-dominated, and that to prosper in true Anglo-Saxon style they need a dose of free-market reform. But the global economic meltdown has given them the satisfying triple whammy of exposing the risks in deregulation, giving the state a more important role and (best of all) laying low les Anglo-Saxons.
At the April G20 summit in London, France’s Nicolas Sarkozy and Germany’s Angela Merkel stood shoulder-to-shoulder to insist pointedly that this recession was not of their making. Ms Merkel has never been a particular fan of Wall Street. But the rhetorical lead has been grabbed by Mr Sarkozy. The man who once wanted to make Paris more like London now declares laissez-faire a broken system. Jean-Baptiste Colbert once again reigns in Paris. Rather than challenge dirigisme, the British and Americans are busy following it: Gordon Brown is ushering in new financial rules and higher taxes, and Barack Obama is suggesting that America could copy some things from France, to the consternation of his more conservative countrymen. Indeed, a new European pecking order has emerged, with statist France on top, corporatist Germany in the middle and poor old liberal Britain floored.
At the April G20 summit in London, France’s Nicolas Sarkozy and Germany’s Angela Merkel stood shoulder-to-shoulder to insist pointedly that this recession was not of their making. Ms Merkel has never been a particular fan of Wall Street. But the rhetorical lead has been grabbed by Mr Sarkozy. The man who once wanted to make Paris more like London now declares laissez-faire a broken system. Jean-Baptiste Colbert once again reigns in Paris. Rather than challenge dirigisme, the British and Americans are busy following it: Gordon Brown is ushering in new financial rules and higher taxes, and Barack Obama is suggesting that America could copy some things from France, to the consternation of his more conservative countrymen. Indeed, a new European pecking order has emerged, with statist France on top, corporatist Germany in the middle and poor old liberal Britain floored.
Read the full Economist.com article HERE
As the author points out in the end of the article, I also believe that this is just short lived and we will see that in future things are going to come back where they were before the recession but with more state regulations etc. But the leaders of "state run" countries specially France can give a short term pat on their back, for the time being at least.
Sorry to disappoint you guys. I am back. I changed my job and city also. Moved from west coast of US to the southern US state of Texas. Took a long time to settle down. For the first 15 days did not have any internet connection. No connection to the outside world except for a phone. But now things looks OK and lets start from here.
Saturday, April 04, 2009
Back in the early stages of the financial crisis, wags joked that our trade with China had turned out to be fair and balanced after all: They sold us poison toys and tainted seafood; we sold them fraudulent securities.
But these days, both sides of that deal are breaking down. On one side, the world’s appetite for Chinese goods has fallen off sharply. China’s exports have plunged in recent months and are now down 26 percent from a year ago. On the other side, the Chinese are evidently getting anxious about those securities.
But China still seems to have unrealistic expectations. And that’s a problem for all of us.
The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”
The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.
Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.
Read the full article HERE
But these days, both sides of that deal are breaking down. On one side, the world’s appetite for Chinese goods has fallen off sharply. China’s exports have plunged in recent months and are now down 26 percent from a year ago. On the other side, the Chinese are evidently getting anxious about those securities.
But China still seems to have unrealistic expectations. And that’s a problem for all of us.
The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”
The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.
Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.
Read the full article HERE
Will The Global Financial Crisis Halt The Rise Of Emerging Economies?
0 comments Posted by PD at 9:32 AMNOBODY talks about “decoupling” any more. Instead, emerging economies are sinking alongside developed ones. In 2008 emerging stock markets fell by more than those in the rich world, and financial woes forced countries such as Hungary, Latvia and Pakistan to go cap in hand to the IMF. Taiwan’s exports have plunged by 42% over the past year, and South Korea’s by 17%; even China’s have shrunk. Singapore’s GDP fell by an annualised 12.5% in the fourth quarter of 2008, its biggest drop on record. Is this the end of the emerging-market boom?
Over the five years to 2007, emerging economies grew by an annual average of more than 7%. But in the past three months their total output may have fallen slightly, according to JPMorgan, as the fall in exports was exacerbated by a sudden drying up in trade finance. For 2008 as a whole, average growth in emerging economies was still above 6%, but recent private-sector forecasts suggest that this could slip to less than 4% this year. That is grim compared with the recent past, though still robust set against an expected 2% decline in the GDP of the G7 countries.
Over the five years to 2007, emerging economies grew by an annual average of more than 7%. But in the past three months their total output may have fallen slightly, according to JPMorgan, as the fall in exports was exacerbated by a sudden drying up in trade finance. For 2008 as a whole, average growth in emerging economies was still above 6%, but recent private-sector forecasts suggest that this could slip to less than 4% this year. That is grim compared with the recent past, though still robust set against an expected 2% decline in the GDP of the G7 countries.
Short-term pain is only to be expected. But some economists argue that emerging markets’ longer-term prospects have been badly hurt by the global financial crisis. From Brazil to China, they claim, the boom was driven largely by exports to American consumers, easy access to cheap capital and high commodity prices. All three props have now collapsed. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates.
Read the full article HERE
Friday, April 03, 2009
Just making a bullet list of all the items that developing countries and poor nations got at the 2009 G20 summit in London.
- India and other developing nations to get a greater say in the international organizations such as IMF and World Bank.
- After 2011, the US could lose its veto power at those institutions and Western countries could find their voting rights severely reduced.
- The convention that an American heads the World Bank and a European heads the IMF will also now be abandoned, the G20 leaders say.
- The G20 also created a new Financial Stability Board, incorporating all members of the G20 for the first time, to replace the current Financial Stability Forum, which mainly consists of the central banks and finance ministries of US and European countries.
Funding Pledges:
- $500bn for the IMF to lend to struggling economies
- $250bn to boost world trade
- $250bn for a new IMF "overdraft facility" countries can draw on
- $100bn that international development banks can lend to poorest countries
- IMF will raise $6bn from selling gold reserves to increase lending for the poorest countries
If IMF have more money to lend then it means that poor countries are less reliant on Western nations when they get into trouble and need aid. Poor countries will also be less reliant on the value of the US dollar because IMF has its own accounting currency, SDR, which is a basket of major currencies such as dollar, euro, yen and pound.
Source: BBC
JAPAN developed rapidly after American gunboats opened it to trade in the late 19th century. Within 40 years, Emperor Meiji led his once-feudal country into the modern world economically (and, alas, militarily). To do so, the state bought Western technology such as factory machines, railroads and telegraph lines. But until the turn of the 20th century it did so by eschewing foreign loans, which were equated with a loss of sovereignty.
How did a poor country like Japan obtain the foreign currency to pay for such products? The answer was exports: first, of light industrial goods such as raw silk and pottery; later, of heavier materials, including steel and chemicals. It was a huge success. In the 1860s Japan’s small-scale cotton-textile industry was nearly decimated by European imports. By 1914, however, after buying automated cotton spinners, the country sold half of its yarn production abroad, which accounted for one-quarter of the world’s cotton yarn exports.
Thus the “Asian model” of export-led growth was born. The region was inspired by Japan’s lead before the second world war and its economic resurrection afterward. In the 1960s Asia’s four “tiger economies” (Singapore, Hong Kong, Taiwan and South Korea) imitated Japan and flourished. South Korea’s bureaucrats, for example, protected domestic firms and funneled them cheap loans under the condition that they exported their wares.
China also boomed after opening its economy in 1978. Its “special economic zones” were designed to attract foreign capital—initially from Chinese businessmen in Hong Kong and Taiwan—to build factories for export production. Malaysia, Thailand, Indonesia and later Vietnam all forged similar export-led paths to growth.
Read the full article HERE
How did a poor country like Japan obtain the foreign currency to pay for such products? The answer was exports: first, of light industrial goods such as raw silk and pottery; later, of heavier materials, including steel and chemicals. It was a huge success. In the 1860s Japan’s small-scale cotton-textile industry was nearly decimated by European imports. By 1914, however, after buying automated cotton spinners, the country sold half of its yarn production abroad, which accounted for one-quarter of the world’s cotton yarn exports.
Thus the “Asian model” of export-led growth was born. The region was inspired by Japan’s lead before the second world war and its economic resurrection afterward. In the 1960s Asia’s four “tiger economies” (Singapore, Hong Kong, Taiwan and South Korea) imitated Japan and flourished. South Korea’s bureaucrats, for example, protected domestic firms and funneled them cheap loans under the condition that they exported their wares.
China also boomed after opening its economy in 1978. Its “special economic zones” were designed to attract foreign capital—initially from Chinese businessmen in Hong Kong and Taiwan—to build factories for export production. Malaysia, Thailand, Indonesia and later Vietnam all forged similar export-led paths to growth.
Read the full article HERE
TO LOSE one decade may be regarded as a misfortune; to lose two looks like carelessness. Japan’s economy stagnated in the 1990s after its stockmarket and property bubbles burst, but its more recent economic performance looks even more troubling. Industrial production plunged by 38% in the year to February, to its lowest level since 1983. Real GDP fell at an annualised rate of 12% in the fourth quarter of 2008, and may have declined even faster in the first three months of this year. The OECD forecasts that Japan’s GDP will shrink by 6.6% in 2009 as a whole, wiping out all the gains from the previous five years of recovery.
If that turns out to be true, Japan’s economy will have grown at an average of 0.6% a year since it first stumbled in 1991. Thanks to deflation as well, the value of GDP in nominal terms in the first quarter of this year probably fell back to where it was in 1993. For 16 years the economy has, in effect, gone nowhere.
If that turns out to be true, Japan’s economy will have grown at an average of 0.6% a year since it first stumbled in 1991. Thanks to deflation as well, the value of GDP in nominal terms in the first quarter of this year probably fell back to where it was in 1993. For 16 years the economy has, in effect, gone nowhere.Was Japan’s seemingly strong recovery of 2003-07 an illusion? And why has the global crisis hit Japan much harder than other rich economies? Popular wisdom has it that Japan is overly dependent on exports, but the truth is a little more complicated. The share of exports in Japan’s GDP is much smaller than in Germany or China and until recently was on a par with that in America. During the ten years to 2001, net exports contributed nothing to Japan’s GDP growth. Then exports did surge, from 11% of GDP to 17% last year. If exporters’ capital spending is included, net exports accounted for almost half of Japan’s total GDP growth in the five years to 2007.
Read the full article HERE
Wednesday, April 01, 2009
A very good article on BBC.
The year 1989 reshaped the world. Its news stories - from Tiananmen Square to the fall of the Berlin Wall - are now historical marker posts. BBC Diplomatic Editor Brian Hanrahan watched many of the events at first hand, and will retrace his steps this year.
One of the paradoxes of 1989 was that communism was destroyed by its own system. I'm not thinking here of the weight of economic collapse, which hollowed out the whole Soviet Bloc.
Painful though it would have been, the countries of Eastern Europe and their Soviet overlord could have limped on for many years - their people suffering and their influence declining. They would have been marginalised but left alone until they eventually collapsed, probably with much bloodshed.
What short-circuited this process was the Stalinist power structure of the Soviet Union. The system allowed the general secretary of the Communist Party to acquire almost total control of the party and the country.
By 1989 Mikhail Gorbachev had consolidated his power base and was able to drive through his own policies regardless of the opposition among his colleagues.
Read the full article HERE.
One of the paradoxes of 1989 was that communism was destroyed by its own system. I'm not thinking here of the weight of economic collapse, which hollowed out the whole Soviet Bloc.
Painful though it would have been, the countries of Eastern Europe and their Soviet overlord could have limped on for many years - their people suffering and their influence declining. They would have been marginalised but left alone until they eventually collapsed, probably with much bloodshed.
What short-circuited this process was the Stalinist power structure of the Soviet Union. The system allowed the general secretary of the Communist Party to acquire almost total control of the party and the country.
By 1989 Mikhail Gorbachev had consolidated his power base and was able to drive through his own policies regardless of the opposition among his colleagues.
Read the full article HERE.
A McKinsey Global Institute documentary probes the opportunities and policy choices posed by the biggest urbanization wave in history.
Long Yongtu, China’s former chief trade negotiator, brokered China’s accession to the World Trade Organization in 2001. In this video from a November 2008 McKinsey conference in Beijing, Mr. Long reflects on the distance China still needs to travel in order to become a truly global player in business.
Monday, March 30, 2009
Two forces that until recently turbo-charged US consumer spending—growing household debt and a falling savings rate—have gone into reverse. In late 2008, as households started reducing their indebtedness and saving more, consumption tumbled.
New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.
The significance of any fall in consumption could be profound. US consumers have accounted for more than three-quarters of US GDP growth since 2000 and for more than one-third of global growth in private consumption since 1990. These trends were fueled by a surge in household debt, particularly after 2000 (Exhibit 1), and a decline in the personal savings rate—to a low of –0.7 percent, in 2005. From 2000 to 2007, US household debt grew as much, relative to income, as it had during the previous 25 years.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.
The significance of any fall in consumption could be profound. US consumers have accounted for more than three-quarters of US GDP growth since 2000 and for more than one-third of global growth in private consumption since 1990. These trends were fueled by a surge in household debt, particularly after 2000 (Exhibit 1), and a decline in the personal savings rate—to a low of –0.7 percent, in 2005. From 2000 to 2007, US household debt grew as much, relative to income, as it had during the previous 25 years.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
A Chinese view of governance and the financial crisis: An interview with ICBC's chairman
0 comments Posted by PD at 9:24 PMRegulators struggling to fix the world’s troubled financial institutions may take heart from the experience of China’s large state-owned banks. In the late 1990s, Chinese state lenders were all but insolvent, with nonperforming loan ratios at many banks exceeding 50 percent. A decade later, China’s state banks have found their footing—and have managed to keep it amid a global financial crisis that has their European and US counterparts reeling. The bad-loan ratio has been reduced, and this year China’s state banks expect solid profits and continued rapid growth—despite the global downturn. What’s more, top bank executives express confidence in their capacity to heed government instructions to boost lending while effectively controlling credit risk.
Industrial and Commercial Bank of China (ICBC) is generally regarded as the strongest of China’s state-owned bank giants. It is also the largest bank by market capitalization and total profits—both in China and the world—with total assets of more than $1.4 trillion. ICBC chairman Jiang Jianqing met recently with McKinsey’s Dominic Barton, Yi Wang, and Mei Ye to share his thoughts on corporate governance, risk management, and the origins of the financial crisis.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Industrial and Commercial Bank of China (ICBC) is generally regarded as the strongest of China’s state-owned bank giants. It is also the largest bank by market capitalization and total profits—both in China and the world—with total assets of more than $1.4 trillion. ICBC chairman Jiang Jianqing met recently with McKinsey’s Dominic Barton, Yi Wang, and Mei Ye to share his thoughts on corporate governance, risk management, and the origins of the financial crisis.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Prospects for a global deal on climate change: Three European views
0 comments Posted by PD at 9:01 PMWill governments negotiate an agreement on reducing carbon emissions at the December 2009 UN Climate Change Conference?
Economists Nicholas Stern and Michael Grubb, along with European Commissioner Janez Potočnik, discuss their views on prospects for a global climate deal at the United Nations Climate Change Conference, to be held in Copenhagen in December 2009. These interviews were conducted by McKinsey’s Matt Hirschland in Brussels on January 26, 2009. Watch the video, or read the transcript HERE. You may need to register at the McKinsey website. Its Free.
For the foreseeable future, the global financial-services sector will be wrestling with the grim realities of credit losses, deleveraging, and challenges to traditional business models. With dramatic industry restructuring already underway and a clear need for players to concentrate on the here and now, it would be easy to lose sight of a nascent but significant long-term opportunity: facilitating carbon trading.
By placing a value on greenhouse gas emissions, regulators have created a new asset class—carbon allowances. The European Union, for instance, issues allowances to companies in the industrial and energy sectors, stipulating that companies can emit capped levels of carbon emissions during the year. Enterprises that overshoot their allowances can buy supplementary ones from companies that have a surplus. China is discussing plans for a similar scheme, and the United States may introduce one soon as well.
Many banks, including Barclays, Merrill Lynch, and Deutsche Bank, already profit from trade in this new asset class, which had a market value of about €65 billion in 2007. By participating in those transactions, banks earned around €500 million in revenues last year. Trading volume could grow to €2 trillion by 2020—more than double the size of the global commodities derivatives market...
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
By placing a value on greenhouse gas emissions, regulators have created a new asset class—carbon allowances. The European Union, for instance, issues allowances to companies in the industrial and energy sectors, stipulating that companies can emit capped levels of carbon emissions during the year. Enterprises that overshoot their allowances can buy supplementary ones from companies that have a surplus. China is discussing plans for a similar scheme, and the United States may introduce one soon as well.
Many banks, including Barclays, Merrill Lynch, and Deutsche Bank, already profit from trade in this new asset class, which had a market value of about €65 billion in 2007. By participating in those transactions, banks earned around €500 million in revenues last year. Trading volume could grow to €2 trillion by 2020—more than double the size of the global commodities derivatives market...
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Climate change has businesses, governments, and nonprofits examining how to stabilize atmospheric greenhouse gases while still maintaining economic growth. In plotting the course to a low-carbon economy, they will weigh a number of methods for addressing the various risks and opportunities. Carbon capture and storage (CCS)—or more accurately, the sequestration of carbon dioxide—is an important topic in the emerging field of climate change. It represents one possible approach for stabilizing atmospheric greenhouse gases—although there are many economic, technical, and legal barriers to its implementation. As background for informed discussion, McKinsey offer an interactive depiction of the technologies involved in CCS.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Sunday, March 29, 2009
The recent bailout of Romania by the International Monetary Fund puts the spotlight back on the East European block of countries and what it means for the Western European banking sector. If evidence is anything to go by, things are turning for the worse. In fact, if a block of countries could be termed 'sub-prime', Eastern Europe seems to qualify as the countries seem to have been battered and bruised big time by the ongoing global financial turmoil.
With the financial contagion going beyond the developed West, few countries seem to be as hard hit as these are. These are the countries that had earlier benefited tremendously from the cheap global credit which helped them finance the consumption and investment boom.
They ratcheted up large external debts to fund their ambitious growth. And now they are feeling the pain. The freezing of money markets in the United States and Western Europe, followed by a sharp increase in credit risk subsequent to the Lehman Brothers bankruptcy, drove investors into a liquidity scramble.
In Eastern Europe, these events translated into capital repatriations, lower foreign investment and higher risk premiums. The slowdown in the developed economies and, finally, the onset of the recession in the second part of last year brought a fall in Eastern European exports, which further exacerbated the downfall.
This is amply evident from the fact that for most of these economies, current account balance has deteriorated like nobody's business over the last few years.
In fact, IMF data shows that, on an average, the current account deficit for this region more than doubled between 2003 and 2008.
With the financial contagion going beyond the developed West, few countries seem to be as hard hit as these are. These are the countries that had earlier benefited tremendously from the cheap global credit which helped them finance the consumption and investment boom.
They ratcheted up large external debts to fund their ambitious growth. And now they are feeling the pain. The freezing of money markets in the United States and Western Europe, followed by a sharp increase in credit risk subsequent to the Lehman Brothers bankruptcy, drove investors into a liquidity scramble.
In Eastern Europe, these events translated into capital repatriations, lower foreign investment and higher risk premiums. The slowdown in the developed economies and, finally, the onset of the recession in the second part of last year brought a fall in Eastern European exports, which further exacerbated the downfall.
This is amply evident from the fact that for most of these economies, current account balance has deteriorated like nobody's business over the last few years.
In fact, IMF data shows that, on an average, the current account deficit for this region more than doubled between 2003 and 2008.
Current account deficit as percentage of GDP
Consequently, the region's currencies also plummeted. Banks in Hungary and the Baltic states fueled consumer boom in recent years by lending heavily in foreign currency, most notably Euro and the Swiss Franc. Sometime, more than 50 per cent of a local bank's loan portfolio was in foreign currency.
Consumers were demanding loan in foreign currency simply because these carried lower interest rates. Things were fine as long as the currency remained stable or even appreciating. But a sharp depreciation in the values of the local currency over the past year has increased the loan burden substantially, leading to deeper recessions and the banks facing heavy loss. Not surprisingly these economies are skating downhill.
Hungary and Ukraine has already turned to the IMF for multi-billion-dollar bailouts, and Romania turned out to be third in the list as IMF said on Wednesday (March 25, 2009) that it would come to the rescue of Romania as part of a Euro 20 billion financing package to help it weather the financial crisis.
Next in line seem to be the Baltic countries which are suffering one of the most severe recessions of any region. Estonia and Latvia are expected to have seen their economy recording negative growth in 2009, while for Latvia the growth rate was down by nearly 60 per cent.
This is a frightening development indeed. As mentioned earlier, we are virtually staring at a group of countries that are looking increasingly like sub-prime.
Recently, Credit Suisse released a scorecard which is called Vulnerability Scorecard for countries. This scorecard ranks a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. The same is produced below.
Consumers were demanding loan in foreign currency simply because these carried lower interest rates. Things were fine as long as the currency remained stable or even appreciating. But a sharp depreciation in the values of the local currency over the past year has increased the loan burden substantially, leading to deeper recessions and the banks facing heavy loss. Not surprisingly these economies are skating downhill.
Hungary and Ukraine has already turned to the IMF for multi-billion-dollar bailouts, and Romania turned out to be third in the list as IMF said on Wednesday (March 25, 2009) that it would come to the rescue of Romania as part of a Euro 20 billion financing package to help it weather the financial crisis.
Next in line seem to be the Baltic countries which are suffering one of the most severe recessions of any region. Estonia and Latvia are expected to have seen their economy recording negative growth in 2009, while for Latvia the growth rate was down by nearly 60 per cent.
This is a frightening development indeed. As mentioned earlier, we are virtually staring at a group of countries that are looking increasingly like sub-prime.
Recently, Credit Suisse released a scorecard which is called Vulnerability Scorecard for countries. This scorecard ranks a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. The same is produced below.
Country Vulnerability Scorecard
Country Vulnerability Scorecard
Not surprisingly Iceland is at the top. This country has become a poster boy of doom invited by reckless policies. But what is more important to note is that in the top 14 countries in the above lists, eight are from Eastern Europe. Fortunately for us Indians, we are in a much better position at 25.
This brings to fore, the question of the likely implication of the deteriorating condition in Eastern Europe on the Western European financial sector.
Before we go into this, a brief recounting of history is in order. In Eastern Europe, banks were privatised during the 1990s and early 2000s. The preferred method of privatization was the sale of a majority stake in a local state-owned bank to a big foreign banking group, deemed capable of restructuring it and making it profitable.
Consequently, nowadays most banks in the region -- and especially in those countries that are now members of the European Union -- are owned by big Western Europe groups. The Eastern European subsidiaries of all of these banks, often among the largest in their home countries, form a significant share of their assets.
What also led to this scenario is the European regulation which has allowed European banks to take on much more leverage than their American counterparts.
In Europe, unlike in the United States, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets.
This is what they have been doing. Problem is, what was AAA couple of years earlier is possibly a junk now. And, clearly that's a problem.
Data from Bank for International Settlements (BIS) puts things in perspective.
This brings to fore, the question of the likely implication of the deteriorating condition in Eastern Europe on the Western European financial sector.
Before we go into this, a brief recounting of history is in order. In Eastern Europe, banks were privatised during the 1990s and early 2000s. The preferred method of privatization was the sale of a majority stake in a local state-owned bank to a big foreign banking group, deemed capable of restructuring it and making it profitable.
Consequently, nowadays most banks in the region -- and especially in those countries that are now members of the European Union -- are owned by big Western Europe groups. The Eastern European subsidiaries of all of these banks, often among the largest in their home countries, form a significant share of their assets.
What also led to this scenario is the European regulation which has allowed European banks to take on much more leverage than their American counterparts.
In Europe, unlike in the United States, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets.
This is what they have been doing. Problem is, what was AAA couple of years earlier is possibly a junk now. And, clearly that's a problem.
Data from Bank for International Settlements (BIS) puts things in perspective.
Exposure of West European banks to East European Countries (As on Sept'08)
Source: BIS (Figures denote US dollars in millions)
And because of this huge exposure, the growing crisis in Eastern Europe is now proving critical to their financial health. Furthermore, a fall of any one of these banks due to losses on their operations in Eastern Europe will add a new threat to the stability of the European financial system.
The next chart produced, identifies the Western European countries that have more exposure to East Europe.
The next chart produced, identifies the Western European countries that have more exposure to East Europe.
Exposure of West European banks to East European Countries (As on Sept'08)
Source: BIS (Figures denote US dollars in millions)
Going by this, Austria is the country most at risk. It is followed by Germany and Italy. However, to understand the real problem, it is important to bring the size of the economy to focus which will give the extent of risk at relative level. Doing so brings about an interesting situation.
Exposure of Western European banks to Eastern Europe as percentage of GDP (2008)
Source: GDP data from IMF (2008 estimate), banking sector exposure data from BIS
Clearly, Austria is the country that is at maximum risk with exposure topping 60 per cent. Their top four exposures are in Czech Republic, Romania, Hungary and Slovakia. Of these, Romania and Hungary are already facing problems.
Banks of other Western European countries are at relatively less risk. However, at 20 per cent plus, Belgium and Sweden are still at high risk. Sweden, in particular, is at more risk because they have maximum exposure to Baltic countries which has been impacted the most by the recent turmoil.
To conclude, it turns out that Eastern Europe has now become the sub-prime borrower of Western Europe. As was the case with the US mortgage borrowers, both the public and private sector in Eastern European countries are highly leveraged while falling currencies and declining output mean lower income in the immediate future.
Because of the deepening recession in the United States and Western Europe, the Eastern European countries are moving quickly into negative growth rates as well. And with them comes the increased risk of default on debts. Seemingly, there is a long way to go before all the risk plays out in Europe.
Banks of other Western European countries are at relatively less risk. However, at 20 per cent plus, Belgium and Sweden are still at high risk. Sweden, in particular, is at more risk because they have maximum exposure to Baltic countries which has been impacted the most by the recent turmoil.
To conclude, it turns out that Eastern Europe has now become the sub-prime borrower of Western Europe. As was the case with the US mortgage borrowers, both the public and private sector in Eastern European countries are highly leveraged while falling currencies and declining output mean lower income in the immediate future.
Because of the deepening recession in the United States and Western Europe, the Eastern European countries are moving quickly into negative growth rates as well. And with them comes the increased risk of default on debts. Seemingly, there is a long way to go before all the risk plays out in Europe.
Saturday, March 28, 2009
I found this great article from the Pepperdine University's website. This article lists the top 10 (Not in the order of importance) issues that may erode the economy of United States. Here they are:
- Government Expenditures and Deficits
- Social Security
- Concentration of Wealth
- Median Family Income
- The Savings Rate
- Consumption Binge
- No Retirement Funds
- High Family Debt
- Healthcare
- The Current Account Deficit
Very Good Explanations of Finance Basics Related to Current Crisis
0 comments Posted by PD at 2:40 PMHere are some of the good videos explaining the finance fundamentals and most of these explanations are related to the financial crisis that started in 2007.
Why "Fallout" for the financial crisis
Write-downs
Leveraging and de-leveraging
Toxic assets
Crisis explainer
Mark to market
Quantitative easing
Untangling credit default swaps (CDS)
Why "bad banks" might be a good thing
How credit cards became asset backed bonds
Over the counter over the top
Margin calls and the financial market's decline
A look inside hedge funds
Friday, March 27, 2009
This story almost certainly force us think that is the building more debt ridden society over last few decades a disaster in making for the future? May be or may be not. At least a columnist of Reuters, John Kemp, thinks that it is a disaster in making.
Here is the snapshot of the data the author talks about. Just look at the table below and draw your own conclusions or read the full story HERE.
Table: United States Public and Private Debt
Here is the snapshot of the data the author talks about. Just look at the table below and draw your own conclusions or read the full story HERE.
Table: United States Public and Private Debt
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