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09-25-2011, 06:04 PM
|  | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
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| |  European Union
Global Action for Global Recovery Global Action for Global Recovery - Christine Lagarde - Project Syndicate
Christine Lagarde Christine Lagarde is Managing Director of the International Monetary Fund. Quote:
WASHINGTON, DC – The global economy has entered a dangerous new phase. There is a path to sustained recovery, but it is narrowing. To navigate it, we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction.
One of the main problems today is too much debt in the global financial system – among sovereigns, banks, and households, and especially among the advanced economies. This is denting confidence and holding back spending, investment, and job creation. These countries face a weak and bumpy recovery, with unacceptably high unemployment. The eurozone debt crisis has worsened, and financial strains are rising. Political indecision in some quarters is making matters worse. Social tensions bubbling beneath the surface could well add fuel to the crisis of confidence.
In these circumstances, we need collective action for global recovery along four main policy lines: repair, reform, rebalancing, and rebuilding.
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Last edited by Michael Scally MD; 12-21-2012 at 08:04 AM.
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09-26-2011, 12:33 PM
| | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
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| | Re: Contagion
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09-26-2011, 07:57 PM
| | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
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| | Re: Contagion
UBS Investment Research - xrm45376 Risk case 1: Disorderly default
It may be, however, that compromise between the ‘troika’ and the Greek government becomes at some point impossible. That could occur if the Greek government (and broader socio-political backdrop) is unable to deliver compliance with the IMF program of fiscal austerity, structural adjustment and privatization.
This risk scenario could then unfold with a unilateral Greek default, which if not adequately anticipated and provisioned in the form of capital buffers in the financial sector, would lead to the default and collapse of much of the Greek banking system (given its extensive holdings of Greek government debt), which would then spread via counterparty default to the non-financial corporate and household sector in Greece, as well as to the financial counterparties elsewhere, above all in European banks, pension funds and insurance companies. Plausibly, rising risk premiums would also lead to rising bond yields and widening spreads in the government debt markets elsewhere in the Eurozone, above all in Italy and Spain. Selling pressures could easily overwhelm the modest buying-power of the EFSF (assuming its mandate to buy bonds has been approved) and could even challenge the ability or willingness of the ECB to engage in very large- scale bond purchases.
The resulting rise in risk premiums would depress economic activity, quite possibly pushing weakly-growing economies such as Italy’s into recession, exacerbating sovereign credit risk perceptions. Financial stress and heightened uncertainty would almost surely be transmitted globally, dealing another shock to the already-fragile and wobbly US recovery. Indeed, we believe it would not be an overstatement to consider disorderly Eurozone sovereign default as the chief risk to global recovery. Risk 2: Eurozone exit
In a recent paper “Euro breakup – the Consequences” we demonstrated how complex and costly expensive breaking up the Eurozone would be. The worst case scenario would be the exit of a weak country, such as Greece. Less costly, but still very expensive, would be the case of a strong country leaving the Eurozone. The ‘direct’ costs include sharp increases in risk premiums and large moves in exchange rates, which would likely result in recessions everywhere, compounded by very high inflation in weak countries that exit and issue their own currency.
But the costs extend to widespread financial stress and default. Currency mismatches between assets and liabilities could lead to very large private sector defaults. Beyond that, it would be difficult, in our opinion, to contain financial risks, including bank runs in other ‘at risk’ countries. The ensuing dislocations in economic and financial terms could even result in severe social unrest and pressures on the political fabric of the EU itself.
Elsewhere we have detailed the potential costs of Eurozone exit, either by a weak or strong country departure. We will not repeat those scenarios or calculations here—the interested reader is referred to the publications at the end of this document. However, suffice it to say, that exit represents in all likelihood the most adverse development of all, with output losses for affected Eurozone countries ranging from 20-40% of GDP (if not higher), accompanied by widespread bankruptcy and financial dislocation.
Yet that does not mean that exit can be ruled out. In the scenario of a disorderly sovereign default outlined above, political pressure might well result in exit, particularly if the defaulted government had little prospect of receiving financial assistance from the EU, ECB or IMF.
Needless to say, however, the broad market implications of disorderly default and exit only differ by degree. In either case, surging risk premiums and falling output would lead to declines in equity prices, widening credit spreads and financial market dislocations on par with those of the immediate post-Lehman brothers market melt-down. The refuges of risk-averse investors would most likely include the usual suspects: cash, the US dollar, Swiss franc and gold. Risk 3: Recession
The latest stresses emanating from the Eurozone crisis are arriving at a time when the global economy slowed and is therefore more vulnerable to shocks. As global economist, Andy Cates, recently noted, model results suggest the probability of a global recession have risen to 15% from about nil just a few months ago. Global economic activity indicators have slumped relative to consensus estimates over the past month. And although the weakness is pronounced in sentiment and survey measures, concerns are rising that ‘hard’ activity indicators may turn sharply lower as well.
The Eurozone crisis imparts two adverse shocks to the world economy. First, heightened uncertainty erodes confidence, resulting in weaker (discretionary) outlays by households and firms alike. Second, increased financial stress and rising counter-party risk—as evidenced by Eurozone bank funding gaps— threatens to curtail credit to the real economy.
The market implications of a global ‘double-dip’ are superficially straightforward. Stocks, commodities and high-yield credit markets would slump, with safe-have bonds (Treasuries and Bunds) and currencies (Swiss franc) rallying.
But the scope of moves could be considerable. Notwithstanding the widespread observation that ‘stocks are cheap’, a global recession could send share prices 20-30% lower. That’s not just because earnings would fall. Concerns about how the world economy could extricate itself from recession, given the relative impotence of advanced economy monetary policies and the political or financial restraints on fiscal expansion, would result in more elevated risk premiums. The old adage that stocks don’t trade on trough multiples alongside trough earnings might not hold true if the world economy double-dips. |
09-27-2011, 06:25 PM
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| | Re: Contagion
BOOMERANG
Travels in the New Third World
By Michael Lewis
213 pages. W. W. Norton & Company. $25.95.
Touring the Ruins of the Old Economy
http://www.nytimes.com/2011/09/27/bo...is-review.html
September 26, 2011
By MICHIKO KAKUTANI
Michael Lewis possesses the rare storyteller’s ability to make virtually any subject both lucid and compelling. In his new book, “Boomerang,” he actually makes topics like European sovereign debt, the International Monetary Fund and the European Central Bank not only comprehensible but also fascinating — even, or especially, to readers who rarely open the business pages or watch CNBC. The book could not be more timely given the worries about Europe’s deepening debt crisis and the recent warning issued by Christine Lagarde, managing director of the I.M.F, that “the current economic situation is entering a dangerous phase.”
Combining his easy familiarity with finance and the talents of a travel writer, Mr. Lewis sets off in these pages to give the reader a guided tour through some of the disparate places hard hit by the fiscal tsunami of 2008, like Greece, Iceland and Ireland, tracing how very different people for very different reasons gorged on the cheap credit available in the prelude to that disaster. The book — based on articles Mr. Lewis wrote for Vanity Fair magazine — is a companion piece of sorts to “The Big Short: Inside the Doomsday Machine,” his bestselling 2010 book about the fiscal crisis. Like that earlier book its focus is narrow. It doesn’t aspire to provide a broad overview of the debt crisis but instead hands the reader a small but sparkling prism by which to view the problem, this time from a global perspective.
Mr. Lewis explains why the world is so worried that Greece could default: “If Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy” might easily follow, destabilizing regional and world economies further. He also explains why taxpayers in Germany — the euro zone’s largest economy, with resources critical to a rescue plan — are reluctant to keep bailing out other countries they regard as profligate, indolent and irresponsible.
This is why, Mr. Lewis writes, “European leaders have done nothing but delay the inevitable reckoning, by scrambling every few months to find cash to plug the ever growing holes in Greece, Ireland and Portugal, and praying that bigger and more alarming holes in Spain, Italy and even France do not reveal themselves.”
How did this situation develop? In “Boomerang” Mr. Lewis captures the utter folly and madness that spread across both sides of the Atlantic during the last decade, as individuals, institutions and entire nations mindlessly embraced instant gratification over long-term planning, the too good to be true over common sense.
Greece, Mr. Lewis writes, ran up astonishing debts — from high-paying government jobs and generous pensions, as well as waste, bribery and theft — that came to “about $1.2 trillion, or more than a quarter-million dollars for every working Greek.” In just the last 12 years, he says, “the wage bill of the Greek public sector has doubled, in real terms” with the average government job now paying almost three times the average private sector job. Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; more than 600 Greek professions have somehow managed “to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”
In the prelude to the 2008 economic meltdown, Mr. Lewis reports, British investors, lured by the prospect of 14 percent annual returns, “forked over $30 billion” to dubious Icelandic banks (“$28 billion from companies and individuals and the rest from pension funds, hospitals, universities and other public institutions” including Oxford University which “alone lost $50 million”). And property-related bank losses in Ireland, according to one Irish economist cited by Mr. Lewis, now come to roughly 106 billion euros; and since, Mr. Lewis says, a “handful of Irish politicians and bankers had decided to guarantee all the debts of the biggest Irish banks,” those losses “alone would absorb every penny of Irish taxes for the next four years.”
At times Mr. Lewis can sound a lot like Evelyn Waugh: shrewd, observant and savagely judgmental, dispensing crude generalizations about other countries, even as he pokes fun at himself as a disaster tourist. He asserts that Icelanders “have a feral streak in them, like a horse that’s just pretending to be broken” and suggests that Germans are “obsessed with cleanliness and order yet harbor a secret fascination with filth and chaos” which is bound to result in “some kind of trouble.” He is perhaps toughest on his fellow Americans, concluding that the 2008 economic meltdown stemmed in large part from “people taking what they can, just because they can, without regard to the larger social consequences.”
“It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans,” he says, noting that states like California with ballooning pension obligations and employment costs face deficit problems not unlike those faced by Greece.
“Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom,” he goes on. “They’d been conditioned to grab as much as they could without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans.”
In “The Big Short” Mr. Lewis focused around a handful of investors who were aghast at how the dangers of the subprime mortgage market were being ignored by bank executives and government regulators, and who used their prescience to make a fortune betting against the stability of the system. One of them — left “on the cutting-room floor” of that earlier book — was a hedge-fund manager named Kyle Bass, who by the end of 2008 had already moved on to a “new all-consuming interest, governments.”
Mr. Bass reasoned that the financial crisis wasn’t over, that, in Mr. Lewis’s words, “the bad loans made by highly paid financiers working in the private sector were being eaten by national treasuries and central banks everywhere,” which meant that entire countries could collapse. Months later, when entire countries did indeed start to go bust, Mr. Lewis asked himself, “How did a hedge fund manager in Dallas even think to imagine this strange world?”
In the course of “Boomerang” Mr. Lewis introduces us to other, “disturbingly prescient” people, like Morgan Kelly, a professor of economics at University College Dublin, who began noticing in 2006 that something seemed seriously out of whack with the Irish housing market. He also foresaw the collapse of Irish banks, which had lent staggering amounts of money to property developers during the Irish real estate bubble.
Among the other intriguing individuals in this volume there’s Stefan Alfsson, an Icelandic fisherman who in 2005 quit fishing and joined the stream of young people becoming bankers, setting himself up as “an adviser to companies on currency risk hedging” — without a day of training. And there are some canny Greek monks who built a vast real estate empire that set off a scandal that Mr. Lewis says helped bring down the government of Prime Minister Kostas Karamanlis in October 2009. When a new government took over, it “found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean”; those revelations panicked investors, and the new higher interest rates the country was forced to pay, Mr. Lewis says, “left the country — which needed to borrow vast sums to fund its operations — more or less bankrupt.”
Mr. Lewis’s ability to find people who can see what is obvious to others only in retrospect or who somehow embody something larger going on in the financial world is uncanny. And in this book he weaves their stories into a sharp-edged narrative that leaves readers with a visceral understanding of the fiscal recklessness that lies behind today’s headlines about Europe’s growing debt problems and the risk of contagion they now pose to the world.
Last edited by Michael Scally MD; 09-27-2011 at 06:29 PM.
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09-28-2011, 10:05 AM
| | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
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| | Re: Contagion
You really need to read just the first paragraph (below). The full-text is at the link below. I feel that the EU will do all it can to stay unified/together. The driving concern is the debt and how this is spread across the populace! If what he says is true, the volatility play is best. And dry powder to take advantage of any great downturn.
The head of Unicredit Global Securities and former chief of the Hungarian Stock Exchange pens a remarkable essay (for someone in his position), calling the euro "virtually dead," saying it is only a matter of time before Greece defaults, and that the action will trigger an immediate magnitude 10 earthquake across Europe. Google Translate "Europe's common currency is virtually dead. The euro's doomed situation. The only open question now is, that European governments and the European Central Bank's desperate rearguard action even number of days to keep the spirit in Greece. For the moment, when Athens is declared bankrupt, a ten earthquake shakes the very Europe, which will be the overture to a whole new era in the life of the old continent." |
09-28-2011, 05:40 PM
| | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
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| | Re: Contagion
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09-28-2011, 06:12 PM
| | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
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European Economics & Strategy
A Panorama of the European Debt System
"In this primer, we have compiled the key background information and statistics relevant to the context in which the European debt markets operate, encompassing Europe’s Institutional Framework, the ECB and the banking system, as well as sovereign, corporate and household debt, both in aggregate and by country. The compilation reflects the most frequently asked questions our economics and strategy teams receive from clients globally." |
09-28-2011, 06:40 PM
| | Doctor of Medicine Points: 58,248, Level: 100 | | | Join Date: Mar 2006 Location: Texas; Italy
Posts: 10,056
| | Re: Contagion
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09-29-2011, 08:52 AM
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| | Re: Contagion
As if EU, Greece, is not a worry, the real 800 POUND Gorilla is China. Dr. Copper Issues a Warning The metal with "PhD in economics" has been setting lows, which should be a warning. Copper's Plunge Portends Drops in Stocks and Global Economy - Barrons.com
Dr. Copper says the outlook for the global economy isn't good and his colleagues concur. Commodities prices are in full retreat, signaling weakness around the world, even as policy-makers pull out all the stops to keep their economies from faltering further.
Notwithstanding the best efforts of policy-makers on both sides of the Atlantic, commodities markets are pointing to weakening economies in the U.S. and abroad. Copper, which is ubiquitous in a broad range of consumer and capital goods as well as construction, is the ultimate harbinger of trends in goods-producing industries. So acute is the red metal's sensitivity to business trends that it has been dubbed Dr. Copper, in recognition that it is the commodity with a PhD in economics. That's a misnomer since copper can call economic turning points better than most academics, many of whom prefer to dissect the past rather than try to figure out the present, let alone where we're headed.
What is incontrovertible is that copper traded at its lowest price of 2011 Thursday, and much of the commodity complex followed suit. The Standard & Poor's GSCI commodities index was down 9.8% for the third quarter with a day to go, according to Bloomberg. That would be the most severe decline since the fourth quarter of 2008 in the grips of the near-meltdown in financial markets and a freefall in global economies.
The fall in copper to its lows of the year is a "sobering omen for global growth expectations," writes Michael Darda, chief economist and market strategist at MKM Partners. For those of you playing at home, the iPath-UBS Copper exchange-traded note (ticker: JJC) plunged more than 7% Wednesday and is down by nearly a third from just the beginning of August.
"Copper is a bellwether for global demand and has been highly correlated to the S&P 500 over the last two years. That it's cracking to new lows for the year [Wednesday] (along with Chinese equities) is noteworthy, Darda writes in research note.
"Why is this happening? It looks like some kind of liquidity squeeze is under way in China," he continues. The sharp widening in credit spreads for China implies as much. Spreads have gapped to the widest levels since the fall of 2008 and the summer of 1998, ahead of the credit crisis that began in Asia the previous year and culminated in the Russian debt default and the Long Term Capital Markets collapse.
While the plunge in copper and other industrial goods portends poorly for the world economy, the outlook for all commodities isn't dire. F. Mark Turner, chief investment officer for Pentagram Investment Partners, draws a sharp distinction between "soft commodities," such as agricultural goods, and "hard" industrial commodities. 2008.
"In the soft-commodity area, notwithstanding some bumper harvests, ending stocks remain at critical levels. China is no longer self-sufficient in food production and relentlessly pursues deals to secure access to food production. We favor a strategy of being long soft commodities and being short industrial metals against them," Turner writes in a letter to clients.
In isolation, the slide in commodities might be ignored. What do a bunch of guys in smocks screaming in the futures pits know about the course of the global economy? (Forgive the stereotype. Most price discovery goes on computer screens.)
More than it might be supposed. Prices of commodities are highly sensitive to changes in demand. Supply is relatively fixed in the short-term; you don't just open and close a mining operation based on the latest futures market report. So, prices can drop relatively sharply in reaction to weaker demand. That's why copper is watched by investors who aren't interested in the metal per se.
But, as Darda points out, copper has been highly correlated with the S&P500. That should be sufficient reason for investors to pay attention to the metal with a PhD in economics. | | |
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