A senior German lawmaker said euro zone states stood ready to come to the aid of financially fragile members of the currency bloc, sparking furious denials from European leaders that a specific rescue plan existed. Otto Bernhardt, a leading lawmaker in Angela Merkel's Christian Democrats (CDU), told Reuters in an interview late on Thursday: "There is a plan."
He added: "The finance ministers have agreed the procedures. The core point is: 'We won't let anyone go bust'." Speculation has grown in recent weeks that stronger members of the 16-nation euro zone, like Germany, could step in at some stage to help ailing partners. But officials have been reluctant to speak openly about how this aid would work for fear of aggravating problems in ailing euro economies like Ireland and Greece. Bernhardt's comments triggered a fierce response from political leaders around Europe.
The prime ministers of Italy, Ireland and Greece said no plan had been agreed to bail out euro zone countries and German Finance Minister Peer Steinbrueck also said he could not confirm the veracity of Bernhardt's remarks. Bernhardt also later contacted Reuters to qualify the comments he gave in the interview. He said in the conversation on Friday that although politicians were obliged to formulate a broad plan of action he knew of no blueprint to address a country in trouble now.
"My main point stands: A euro country cannot go bankrupt, because the currency would collapse," Bernhardt added.
In the Thursday interview, he said that of all the euro zone states, Ireland was in the "worst situation of all", followed by Greece. He made clear that any aid would come at a price. "We would look very closely at past sins," Bernhardt said. "We will not tolerate there being low-tax countries like Ireland for example. We will insist on a minimum corporate taxation rate."
Countries such as Ireland and Greece have been hit hard by a sharp economic downturn and are now being forced to pay hefty premiums over stronger bloc members to finance their debt, aggravating their financial troubles. Irish Prime Minister Brian Cowen dismissed the comments by Bernhardt, and Greek Prime Minister Costas Karamanlis denied the existence of such a plan. Italian Prime Minister Silvio Berlusconi said that while there was no plan to rescue weaker members, any euro zone country in trouble would be shown solidarity by other members.
Jean-Claude Juncker, Luxembourg Prime Minister and head of the Eurogroup finance ministers' forum, also said the euro zone would be able to respond immediately if one of its members risked a default. "If it ever did happen -- it won't happen -- the euro zone would be able to provide a response in a few hours," he said. Asked what the likelihood was that a euro member would need to be supported, Bernhardt had said: "It depends on how the international crisis develops. It could be that they (Ireland) can manage without getting credit." "But the chances we will need to help are greater than the chances that we will not need to help," he added.
Steinbrueck has acknowledged that Berlin stands ready to help weaker euro members but he again underlined on Friday that no euro zone country currently faced payment problems.
Bernhardt said in the Thursday interview that the danger for Germany of not helping would outweigh the cost of helping: "What is the alternative? We would otherwise lose our currency."
A senior German lawmaker said euro zone states stood ready to come to the aid of financially fragile members of the currency bloc, sparking furious denials from European leaders that a specific rescue plan existed.
Otto Bernhardt, a leading lawmaker in Angela Merkel's Christian Democrats (CDU), told Reuters in an interview late on Thursday: "There is a plan."
He added: "The finance ministers have agreed the procedures. The core point is: 'We won't let anyone go bust'."
Speculation has grown in recent weeks that stronger members of the 16-nation euro zone, like Germany, could step in at some stage to help ailing partners.
But officials have been reluctant to speak openly about how this aid would work for fear of aggravating problems in ailing euro economies like Ireland and Greece.
Bernhardt's comments triggered a fierce response from political leaders around Europe.
The prime ministers of Italy, Ireland and Greece said no plan had been agreed to bail out euro zone countries and German Finance Minister Peer Steinbrueck also said he could not confirm the veracity of Bernhardt's remarks.
Bernhardt also later contacted Reuters to qualify the comments he gave in the interview.
He said in the conversation on Friday that although politicians were obliged to formulate a broad plan of action he knew of no blueprint to address a country in trouble now.
"My main point stands: A euro country cannot go bankrupt, because the currency would collapse," Bernhardt added.
In the Thursday interview, he said that of all the euro zone states, Ireland was in the "worst situation of all", followed by Greece. He made clear that any aid would come at a price.
"We would look very closely at past sins," Bernhardt said. "We will not tolerate there being low-tax countries like Ireland for example. We will insist on a minimum corporate taxation rate."
BACKUP
Countries such as Ireland and Greece have been hit hard by a sharp economic downturn and are now being forced to pay hefty premiums over stronger bloc members to finance their debt, aggravating their financial troubles.
Irish Prime Minister Brian Cowen dismissed the comments by Bernhardt, and Greek Prime Minister Costas Karamanlis denied the existence of such a plan.
Italian Prime Minister Silvio Berlusconi said that while there was no plan to rescue weaker members, any euro zone country in trouble would be shown solidarity by other members.
Jean-Claude Juncker, Luxembourg Prime Minister and head of the Eurogroup finance ministers' forum, also said the euro zone would be able to respond immediately if one of its members risked a default.
"If it ever did happen -- it won't happen -- the euro zone would be able to provide a response in a few hours," he said.
Asked what the likelihood was that a euro member would need to be supported, Bernhardt had said: "It depends on how the international crisis develops. It could be that they (Ireland) can manage without getting credit."
"But the chances we will need to help are greater than the chances that we will not need to help," he added.
Steinbrueck has acknowledged that Berlin stands ready to help weaker euro members but he again underlined on Friday that no euro zone country currently faced payment problems.
Bernhardt said in the Thursday interview that the danger for Germany of not helping would outweigh the cost of helping: "What is the alternative? We would otherwise lose our currency."
Saturday, March 21, 2009
Do They Have Parachutes In Bulgaria?
Someone was asking in comments yesterday about hard data to confirm the general impression that the economy is tanking. Well by accident I came across this little detail today: retail sales down 25.7% year on year in January. For an economy which has been driven by a consumer borrowing and lending boom, that is pretty dramatic evidence I would say.
Update
Well I am finding more data, and I will keep adding it a bit at a time.
As can be seen in the chart below, the output index is now somewhere round the level of summer 2006, and falling.
Sharp Current Account Contraction
According to the Bulgarian National Bank last week Bulgaria's current account deficit was EUR 439.7 M in January 2009, down from EUR 806.8 M in January 2008.
The current and capital account deficit was EUR 288.7 M in January compared to EUR 806.2 M recorded in the previous year.And January's trade deficit was EUR 339.3 M, narrowing from EUR 607.8 million in 2008. All this is consistent with a very sharp and rapid contraction of the economy, as imports collapse and fund flows dry up, rather than any positive news on exports.
Moody's Affirms Baa3 Rating
Credit ratings agency Moody's affirmed on March 20 Bulgaria's Baa3 local and foreign currency ratings, with a stable outlook, but said that Bulgaria's economy faced tough times this year.
"Bulgaria is likely to experience a difficult recession in 2009 as the economy suffers from shrinking exports and slowing inflows of foreign capital," Moody's sovereign risk group analyst Kenneth Orchard said in a statement. "Nevertheless, many years of prudent fiscal policy and low debt mean that the government is well positioned to cope with the situation."
Having averaged Budget surpluses of 2.7 per cent of gross domestic product (GDP) since 2004, the Cabinet has strengthened its financial position, but the main threat did not come from the Government debt, which was a very low 14 per cent of GDP.
"Many years of strong domestic demand growth have left the Bulgarian economy with heightened vulnerabilities. Domestic credit, external debt and the current account deficit all increased at rapid rates from 2005 to 2008," the ratings agency said.
Although the banking sector was in good shape, with relatively high capital adequacy and liquidity ratios by international standards, it would not take long for the situation to worsen as the global crisis takes deeper roots in Eastern Europe.
"The decline in foreign financing will probably cause a sharp downward adjustment in the current account deficit, implying declining output and weak government revenue growth," Orchard said. "However, Moody's believes that low wages and a flexible labour market will ease the adjustment and ultimately allow Bulgaria to rebound when the regional economy improves."
Bulgaria's most pressing problem was the large debt accumulated by the private sector. "Moody's believes that a greater risk comes from the large amount of private sector external debt that must be re-financed in 2009," Orchard said.
"Short-term external debt totalled around 13 billion euro at the end of 2008, which is equivalent to 40 per cent of GDP. Much of this debt is likely to be rolled over, but automatic re-financing can no longer be assumed in the current financial environment."
The low Government debt was a safety net, because it allowed Bulgaria to borrow funds to support the private sector and the currency board without threatening the government's creditworthiness. The debt-to-GDP ratio could rise and still remain well below the EU average, Moody's said.
Retail sales revenue in Bulgaria declined by 25.7% in January from the same month of last year, the National Statistical Institute (wwwo.nsi.bg) said in a statement. The slump was attributed to a sharp decrease in retail sales of larger consumer goods, although a decline is normal for the beginning of each year. A major 31.5% drop was reported in sales of vehicles and technical maintenance. Revenue generated by non-food sales went up by 3.0% year-on-year, the data showed. Revenue from food, beverages and cigarettes sales showed a minor increase of 0.5%
Update
Well I am finding more data, and I will keep adding it a bit at a time.
Bulgaria's industrial output fell by 19% in January 2009 month-on-month, after rising by a monthly 1.7% in December, preliminary data of the National Statistics Institute (NSI) showed on Tuesday. This is the fourth drop in a row, causing the index to go below the 2006 levels. The industrial output index is mainly determined by the indicators of the processing industry, which dropped by 21,4% in January, compared to December 2008. There is a 66,5% decrease in the production of metal goods, excluding machines and appliances. In the production of non-metal goods the drop is by 42,1%, and in the food processing industry by 24,8%.
As can be seen in the chart below, the output index is now somewhere round the level of summer 2006, and falling.
Sharp Current Account Contraction
According to the Bulgarian National Bank last week Bulgaria's current account deficit was EUR 439.7 M in January 2009, down from EUR 806.8 M in January 2008.
PM Sergey Stanishev said "the country's deficit has begun rapidly shrinking which means that the economy has unsurprisingly slowed down," Bulgarian National Radio reported.
The current and capital account deficit was EUR 288.7 M in January compared to EUR 806.2 M recorded in the previous year.And January's trade deficit was EUR 339.3 M, narrowing from EUR 607.8 million in 2008. All this is consistent with a very sharp and rapid contraction of the economy, as imports collapse and fund flows dry up, rather than any positive news on exports.
Moody's Affirms Baa3 Rating
Credit ratings agency Moody's affirmed on March 20 Bulgaria's Baa3 local and foreign currency ratings, with a stable outlook, but said that Bulgaria's economy faced tough times this year.
"Bulgaria is likely to experience a difficult recession in 2009 as the economy suffers from shrinking exports and slowing inflows of foreign capital," Moody's sovereign risk group analyst Kenneth Orchard said in a statement. "Nevertheless, many years of prudent fiscal policy and low debt mean that the government is well positioned to cope with the situation."
Having averaged Budget surpluses of 2.7 per cent of gross domestic product (GDP) since 2004, the Cabinet has strengthened its financial position, but the main threat did not come from the Government debt, which was a very low 14 per cent of GDP.
"Many years of strong domestic demand growth have left the Bulgarian economy with heightened vulnerabilities. Domestic credit, external debt and the current account deficit all increased at rapid rates from 2005 to 2008," the ratings agency said.
Although the banking sector was in good shape, with relatively high capital adequacy and liquidity ratios by international standards, it would not take long for the situation to worsen as the global crisis takes deeper roots in Eastern Europe.
"The decline in foreign financing will probably cause a sharp downward adjustment in the current account deficit, implying declining output and weak government revenue growth," Orchard said. "However, Moody's believes that low wages and a flexible labour market will ease the adjustment and ultimately allow Bulgaria to rebound when the regional economy improves."
Bulgaria's most pressing problem was the large debt accumulated by the private sector. "Moody's believes that a greater risk comes from the large amount of private sector external debt that must be re-financed in 2009," Orchard said.
"Short-term external debt totalled around 13 billion euro at the end of 2008, which is equivalent to 40 per cent of GDP. Much of this debt is likely to be rolled over, but automatic re-financing can no longer be assumed in the current financial environment."
The low Government debt was a safety net, because it allowed Bulgaria to borrow funds to support the private sector and the currency board without threatening the government's creditworthiness. The debt-to-GDP ratio could rise and still remain well below the EU average, Moody's said.
Wednesday, March 18, 2009
Wednesday, March 11, 2009
The Almunia Syllogism
European Monetary Affairs Commissioner Joaquín Almunia recently, and possibly inadvertenly, recently stumbled on a very interesting argument. Here it is:
"Who is crazy enough to leave the euro area? Nobody," Almunia said. "The number of candidates to join the euro area increases. The number of candidates to leave the euro area is zero."
Reductio Ad Absurdum
Now you don't need a PhD in economics to understand what follows, although a little bit of basic logic would help. What we have here could be construed as a kind of syllogism (and from now on let's christen this one "The Almunia Syllogism"). The Almunia Syllogism has the following form:
a) Anyone leaving (or aiding and abetting the departure of someone from) the Eurozone is crazy
b) The EU Commission, The ECB and The National Leaders are not crazy
c) Therefore no one will leave, or be allowed to leave, the eurozone (at least under current conditions)
Q.E.D. We Will Have A United States Of Europe.
Well, ok, I do need to add a lettle lemma here to the effect that the only way to enforce (c) is to build the necessary architecture, and there is room for debate about this, since this lemma is neither proven, nor is it self evident, although my own opinion is that in the weeks and months to come its validity will become extraordinarily clear even to the most reticent among us. The thing about the lemma is that it focuses the debate. Those who do not agree need to be able to show how we can have (c) within the present architecture. ECB Executive Board member Lorenzo Bini Smaghi's attempt to argue that we can (for example, here)fails stupendously to convince in my opinion, and especially the extract I reproduce below(which exemplifies precisely the point those who want new achitecture are making).
For instance, for the period 2009-10, discretionary measures adopted in Germany total 3.5% of GDP, compared with 3.8%in the United States. In some European countries, such as Italy, the size of such stimulus measures is relatively limited owing to the high levels of debt, but in other countries the total fiscal stimulus is larger than in the United States.
The whole issue is that we need a mechanism to average out the stimulus, is that so hard to understand? Is this obscurantism, or simply stupidity?
A Literary Trope Not A Syllogism
The formal validity of the following statement is rather more questionable.
"Don't fear for this moment," he said. "We are equipped intellectually, politically and economically to face this crisis scenario. But by definition these kinds of things should not be explained in public."
The first phrase is an exhortation, one which I would agree with (but not for the same reasons), the second is an assertion whose truth content is, at least,questionable, while the third is an admission, one which would perhaps better not have been made, or a piece of advice, which the unfortunate Otto Bernhardt seems never to have received.
A senior German lawmaker said euro zone states stood ready to come to the aid of financially fragile members of the currency bloc, sparking furious denials from European leaders that a specific rescue plan existed. Otto Bernhardt, a leading lawmaker in Angela Merkel's Christian Democrats (CDU), told Reuters in an interview late on Thursday: "There is a plan."
and then Bloomberg let us know a bit more about the details of the plan.
The German Finance Ministry has no knowledge of a rescue fund organized by the European Central Bank for troubled euro-region members such as Ireland and Greece, spokeswoman Jeanette Schwamberger said.
Otto Bernhardt, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview with Reuters today that the ECB has a fund at its disposal to help troubled countries and can make money available at 24 hours’ notice.
Tuesday, March 10, 2009
Calls to relax eurozone rules rebuffed
From the FT this morning:
Calls to relax eurozone rules rebuffed
By Tony Barber in Brussels
Published: March 10 2009 08:48 | Last updated: March 10 2009 12:24
European Union countries hoping for milder terms on which to adopt the euro faced a rebuff on Tuesday from eurozone finance ministers, who said the credibility of Europe’s monetary union required sticking to EU rules.
“Given the current volatility of the situation, this would not be the right time to launch a debate on this,” said Jean-Claude Juncker, Luxembourg’s prime minister and head of the 16-nation eurozone finance ministers’ group.
The ministers’ decision is likely to be interpreted in some of the EU’s central and eastern European states, especially Hungary, as a sign that richer western European countries are failing to meet the challenge of helping their new democratic neighbours in the most difficult hour of their post-communist history.
Hungary last month raised the idea of shortening the two-year spell that a eurozone candidate country is obliged to spend in the EU’s exchange rate mechanism, known as ERM-2.
The proposal has won support from Thomas Mirow, president of the European Bank for Reconstruction and Development, who said last week the waiting time should be reduced on condition that a candidate country met all the EU’s rules on budgetary discipline.
The ERM-2’s purpose is to establish that a country’s currency is stable enough to justify eurozone membership.
But Hungary contends that the world financial crisis is so serious that some economically battered central and eastern European states need the protection offered by the eurozone sooner rather than later.
At an informal EU summit on March 1, Angela Merkel, Germany’s chancellor, suggested that she was open to reconsidering the ERM-2 process, but not to relaxing other tests for eurozone candidate countries on budget deficits, inflation, interest rates and public debt.
Mr Juncker said on Monday night that the eurozone finance ministers had agreed that careful adherence to the rules was essential, because the eurozone, unlike the US and other single-currency areas, lacked a central government and fiscal authority.
“We have a monetary union which doesn’t have a central state. It must be based on a set of rules. They are made up of the [EU’s governing] treaty and the stability and growth pact, and there is no question of changing the criteria or changing the amount of time that an aspirant must stay in the ERM-2, to bring it down from two years to one year,” Mr Juncker said.
“The credibility of monetary union is at stake,” he declared.
Mr Juncker was speaking after discussions during which EU policymakers confirmed that Romania was seeking a EU financial aid package similar to those arranged late last year for Hungary and Latvia, its fellow former communist member-states.
The EU recently doubled to €25bn the resources of a fund that helps non-eurozone EU countries address their balance of payments problems. Hungary and Latvia have both drawn on the fund.
But Mr Juncker made clear that eurozone finance ministers had no appetite for a much bigger, across-the-board financial aid package for central and eastern Europe, as proposed by Hungary.
“We refuse to accept that they represent one bloc. That has no longer applied since the fall of the Berlin Wall,” he said.
Calls to relax eurozone rules rebuffed
By Tony Barber in Brussels
Published: March 10 2009 08:48 | Last updated: March 10 2009 12:24
European Union countries hoping for milder terms on which to adopt the euro faced a rebuff on Tuesday from eurozone finance ministers, who said the credibility of Europe’s monetary union required sticking to EU rules.
“Given the current volatility of the situation, this would not be the right time to launch a debate on this,” said Jean-Claude Juncker, Luxembourg’s prime minister and head of the 16-nation eurozone finance ministers’ group.
The ministers’ decision is likely to be interpreted in some of the EU’s central and eastern European states, especially Hungary, as a sign that richer western European countries are failing to meet the challenge of helping their new democratic neighbours in the most difficult hour of their post-communist history.
Hungary last month raised the idea of shortening the two-year spell that a eurozone candidate country is obliged to spend in the EU’s exchange rate mechanism, known as ERM-2.
The proposal has won support from Thomas Mirow, president of the European Bank for Reconstruction and Development, who said last week the waiting time should be reduced on condition that a candidate country met all the EU’s rules on budgetary discipline.
The ERM-2’s purpose is to establish that a country’s currency is stable enough to justify eurozone membership.
But Hungary contends that the world financial crisis is so serious that some economically battered central and eastern European states need the protection offered by the eurozone sooner rather than later.
At an informal EU summit on March 1, Angela Merkel, Germany’s chancellor, suggested that she was open to reconsidering the ERM-2 process, but not to relaxing other tests for eurozone candidate countries on budget deficits, inflation, interest rates and public debt.
Mr Juncker said on Monday night that the eurozone finance ministers had agreed that careful adherence to the rules was essential, because the eurozone, unlike the US and other single-currency areas, lacked a central government and fiscal authority.
“We have a monetary union which doesn’t have a central state. It must be based on a set of rules. They are made up of the [EU’s governing] treaty and the stability and growth pact, and there is no question of changing the criteria or changing the amount of time that an aspirant must stay in the ERM-2, to bring it down from two years to one year,” Mr Juncker said.
“The credibility of monetary union is at stake,” he declared.
Mr Juncker was speaking after discussions during which EU policymakers confirmed that Romania was seeking a EU financial aid package similar to those arranged late last year for Hungary and Latvia, its fellow former communist member-states.
The EU recently doubled to €25bn the resources of a fund that helps non-eurozone EU countries address their balance of payments problems. Hungary and Latvia have both drawn on the fund.
But Mr Juncker made clear that eurozone finance ministers had no appetite for a much bigger, across-the-board financial aid package for central and eastern Europe, as proposed by Hungary.
“We refuse to accept that they represent one bloc. That has no longer applied since the fall of the Berlin Wall,” he said.
Monday, March 9, 2009
Trade and Shrinkage
From the FT this morning:
Explanation for trade plunge proves elusive
By Alan Beattie in Washington
Published: March 8 2009 23:31 | Last updated: March 8 2009 23:31
As world trade plunges, governments are looking for an explanation. Is it a fall in demand, a shortage of trade finance or protectionism? On the answer hangs the response they need to stop globalisation going into reverse.
International trade has long been more volatile than overall economic growth, partly because it is largely made up of manufactured goods that are subject to big swings in inventories and because imported consumer goods are often the first to be cut in a downturn.
But even allowing for the descent into recession, the speed of the collapse in trade has caused surprise. Trade has grown two to three times more quickly than the world economy in recent years, but countries with trade data for January show on average a 31 per cent fall over January 2008.
Protectionism is the easiest to eliminate. In spite of fears of another era of economic nationalism and a rise in emergency so-called anti-dumping duties, the use of such tariffs is low.
But there is confusion about the other possibilities.
The cost of trade credit, which finances goods while in transit, has surged in the past year. Participants say financing a shipment might have cost 60 basis points more than the London interbank offered rate a couple of years ago but now costs 400bp. Some developments, such as countries being unable to ship grain or resorting to barter, have been blamed on such shortages.
In particular, while some of the big providers of trade finance are still active, the smaller banks that used to buy trade finance assets from them in a secondary market have pulled in their horns. John Ahearn, head of trade finance at Citigroup, says: “Demand for finance has risen as a result of perceptions of higher risk at a time when a lot of capacity in the trade credit world has come offline and the secondary market has shrunk dramatically.” The World Bank, along with national export credit agencies, has announced programmes of subsidy to trade finance.
But as the bank admits, the policy response has to contend with a lack of reliable figures. Data from Dealogic, the consultancy, suggest global trade finance shrank by 40 per cent in the last quarter of 2008, but those figures do not cover the bulk of such credit.
While commerce in low-value bulk commodities may have been hit by a shortage of trade finance, business that does not rely on such credit has also fallen.
About a third of global trade involves intra-company transfers. Simeon Djankov, chief economist for finance and the private sector at the World Bank, says research shows trade falling across the board. “The problems with demand swamp those of supply,” he says.
A general reassessment of risk among financial institutions and companies may have hurt smaller and poorer countries now cut out of global supply chains, but bank lending in trade finance has held up well compared with their activities elsewhere, he says. It might be easier politically to justify targeting government support on trade finance rather than boosting bank liquidity but the effect of such subsidy is unclear.
Mr Ahearn says an advantage of direct official support for liquidity in trade finance as opposed to pumping money into the financial system generally is that the result can be monitored.
“If governments come in and help recreate the secondary market and there is no demand for it, at least we will have ruled it out as one of the main reasons for the fall in trade,” he adds.
Explanation for trade plunge proves elusive
By Alan Beattie in Washington
Published: March 8 2009 23:31 | Last updated: March 8 2009 23:31
As world trade plunges, governments are looking for an explanation. Is it a fall in demand, a shortage of trade finance or protectionism? On the answer hangs the response they need to stop globalisation going into reverse.
International trade has long been more volatile than overall economic growth, partly because it is largely made up of manufactured goods that are subject to big swings in inventories and because imported consumer goods are often the first to be cut in a downturn.
But even allowing for the descent into recession, the speed of the collapse in trade has caused surprise. Trade has grown two to three times more quickly than the world economy in recent years, but countries with trade data for January show on average a 31 per cent fall over January 2008.
Protectionism is the easiest to eliminate. In spite of fears of another era of economic nationalism and a rise in emergency so-called anti-dumping duties, the use of such tariffs is low.
But there is confusion about the other possibilities.
The cost of trade credit, which finances goods while in transit, has surged in the past year. Participants say financing a shipment might have cost 60 basis points more than the London interbank offered rate a couple of years ago but now costs 400bp. Some developments, such as countries being unable to ship grain or resorting to barter, have been blamed on such shortages.
In particular, while some of the big providers of trade finance are still active, the smaller banks that used to buy trade finance assets from them in a secondary market have pulled in their horns. John Ahearn, head of trade finance at Citigroup, says: “Demand for finance has risen as a result of perceptions of higher risk at a time when a lot of capacity in the trade credit world has come offline and the secondary market has shrunk dramatically.” The World Bank, along with national export credit agencies, has announced programmes of subsidy to trade finance.
But as the bank admits, the policy response has to contend with a lack of reliable figures. Data from Dealogic, the consultancy, suggest global trade finance shrank by 40 per cent in the last quarter of 2008, but those figures do not cover the bulk of such credit.
While commerce in low-value bulk commodities may have been hit by a shortage of trade finance, business that does not rely on such credit has also fallen.
About a third of global trade involves intra-company transfers. Simeon Djankov, chief economist for finance and the private sector at the World Bank, says research shows trade falling across the board. “The problems with demand swamp those of supply,” he says.
A general reassessment of risk among financial institutions and companies may have hurt smaller and poorer countries now cut out of global supply chains, but bank lending in trade finance has held up well compared with their activities elsewhere, he says. It might be easier politically to justify targeting government support on trade finance rather than boosting bank liquidity but the effect of such subsidy is unclear.
Mr Ahearn says an advantage of direct official support for liquidity in trade finance as opposed to pumping money into the financial system generally is that the result can be monitored.
“If governments come in and help recreate the secondary market and there is no demand for it, at least we will have ruled it out as one of the main reasons for the fall in trade,” he adds.
An L Of A Recession
Wolfgang Munchau in the FT:
An L of a recession – reform is the way out
By Wolfgang Münchau
Published: March 8 2009 18:15 | Last updated: March 8 2009 18:15
The US is dragging its feet over the financial sector. The European Union is doing the same, as well as failing to adopt policies that could shield it from an increasingly probable speculative attack. And judging by the state of preparations, the forthcoming Group of 20 summit is going to be a disaster.
So it looks like it is going to be an L – not a V or a U. I mean an L-shaped recession, one that starts with a steep decline, followed by very low growth for many years. In a V-type recession, the recovery is instant. In a U-type, it comes eventually. My guess is that we are currently somewhere in the middle of the vertical bit of the L, but it is the horizontal bit that is the scariest. History never repeats itself exactly, but we know from economic history that financial crises are surprisingly similar. This looks like Japan all over. Without financial restructuring, the economy is not going to recover. And Japan was lucky. It was surrounded by a booming global economy.
The best way to fight such a disaster is to restructure the banking system and provide short-term economic stimulus through monetary and fiscal policy. Speaking at a recent Aspen Italia conference in Rome, Martin Feldstein, a former economic adviser to Ronald Reagan and president of the National Bureau of Economic Research, estimated that US consumer spending would fall by $500bn (€395m, £355bn) annually, and construction spending by $250bn. Against this combined annual $750bn shortfall, the current stimulus package is woefully inadequate. In other words: we are looking at an L.
An L-shaped recession will make the adjustment of balance sheets even more painful. Unemployment will continue to rise. House prices will keep on falling. US consumers and banks will spend the next five or more years deleveraging, getting their respective balance sheets back in order. In that period, the US current-account deficit will fall sharply, as will that of the UK, Spain and several central and eastern European countries. This process can take a long time, and in an L-shaped recession it takes longer.
But the effect is also brutal on the rest of the world. The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan. Globally, current-account deficits and surpluses add up to zero – minus some statistical reporting errors. You can do the maths. If the US stops buying German cars, Germany will eventually stop making them.
If we had a simple U-shaped recession, we would still have a painful recession in Germany and Japan, for example. But under a U-shaped scenario, both countries would be among the first to benefit from the recovery.
In an L-shaped recession, however, recession gives way to depression, despite the fact that both countries thought they had done their “homework”. If nobody can afford to run a large deficit for a long time – which is what an L recession effectively implies – the economic models of Germany and Japan will no longer work. Germany had a current-account surplus of more than 7 per cent last year. It is the world’s largest exporter. Exports constitute about 41 per cent of national gross domestic product – an extraordinary number, given the size of the country.
So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradable goods. These are not the same type of structural reforms as those of the past, involving cost-cutting and improving competitiveness. This is about flexibility and mobility.
Unfortunately, the opposite is happening. Germany is clinging to its export model like a drug addict. An example is the debate about the future of Opel, the European car manufacturing subsidiary of General Motors. Opel is unlikely to survive without help from the government. The proponents of a state bail-out of Opel argue that the company is systemically relevant. This argument is obviously wrong. There can be systemically relevant banks, but there can be no systemically relevant carmakers. But the answer is also revealing. What it means is that Opel is systemically relevant for the country’s export-oriented model. The bail-out adherents are clinging to an industrial structure that has no hope of survival in an L-shaped world.
To her credit, Angela Merkel, the German chancellor, seems reluctant to agree to the bail-out, as is her party. But pre-election politics will make a bail-out of some sort likely. It is terrible economics. The problem is not even the waste of taxpayers’ money. Combined with French car subsidies, such a decision will contribute to massive overcapacity in the sector and will slow down the economy’s adjustment to the export shock.
We are nowhere near a solution to the crisis. After committing errors of omission, global leaders are now producing errors of commission. The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.
An L of a recession – reform is the way out
By Wolfgang Münchau
Published: March 8 2009 18:15 | Last updated: March 8 2009 18:15
The US is dragging its feet over the financial sector. The European Union is doing the same, as well as failing to adopt policies that could shield it from an increasingly probable speculative attack. And judging by the state of preparations, the forthcoming Group of 20 summit is going to be a disaster.
So it looks like it is going to be an L – not a V or a U. I mean an L-shaped recession, one that starts with a steep decline, followed by very low growth for many years. In a V-type recession, the recovery is instant. In a U-type, it comes eventually. My guess is that we are currently somewhere in the middle of the vertical bit of the L, but it is the horizontal bit that is the scariest. History never repeats itself exactly, but we know from economic history that financial crises are surprisingly similar. This looks like Japan all over. Without financial restructuring, the economy is not going to recover. And Japan was lucky. It was surrounded by a booming global economy.
The best way to fight such a disaster is to restructure the banking system and provide short-term economic stimulus through monetary and fiscal policy. Speaking at a recent Aspen Italia conference in Rome, Martin Feldstein, a former economic adviser to Ronald Reagan and president of the National Bureau of Economic Research, estimated that US consumer spending would fall by $500bn (€395m, £355bn) annually, and construction spending by $250bn. Against this combined annual $750bn shortfall, the current stimulus package is woefully inadequate. In other words: we are looking at an L.
An L-shaped recession will make the adjustment of balance sheets even more painful. Unemployment will continue to rise. House prices will keep on falling. US consumers and banks will spend the next five or more years deleveraging, getting their respective balance sheets back in order. In that period, the US current-account deficit will fall sharply, as will that of the UK, Spain and several central and eastern European countries. This process can take a long time, and in an L-shaped recession it takes longer.
But the effect is also brutal on the rest of the world. The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan. Globally, current-account deficits and surpluses add up to zero – minus some statistical reporting errors. You can do the maths. If the US stops buying German cars, Germany will eventually stop making them.
If we had a simple U-shaped recession, we would still have a painful recession in Germany and Japan, for example. But under a U-shaped scenario, both countries would be among the first to benefit from the recovery.
In an L-shaped recession, however, recession gives way to depression, despite the fact that both countries thought they had done their “homework”. If nobody can afford to run a large deficit for a long time – which is what an L recession effectively implies – the economic models of Germany and Japan will no longer work. Germany had a current-account surplus of more than 7 per cent last year. It is the world’s largest exporter. Exports constitute about 41 per cent of national gross domestic product – an extraordinary number, given the size of the country.
So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradable goods. These are not the same type of structural reforms as those of the past, involving cost-cutting and improving competitiveness. This is about flexibility and mobility.
Unfortunately, the opposite is happening. Germany is clinging to its export model like a drug addict. An example is the debate about the future of Opel, the European car manufacturing subsidiary of General Motors. Opel is unlikely to survive without help from the government. The proponents of a state bail-out of Opel argue that the company is systemically relevant. This argument is obviously wrong. There can be systemically relevant banks, but there can be no systemically relevant carmakers. But the answer is also revealing. What it means is that Opel is systemically relevant for the country’s export-oriented model. The bail-out adherents are clinging to an industrial structure that has no hope of survival in an L-shaped world.
To her credit, Angela Merkel, the German chancellor, seems reluctant to agree to the bail-out, as is her party. But pre-election politics will make a bail-out of some sort likely. It is terrible economics. The problem is not even the waste of taxpayers’ money. Combined with French car subsidies, such a decision will contribute to massive overcapacity in the sector and will slow down the economy’s adjustment to the export shock.
We are nowhere near a solution to the crisis. After committing errors of omission, global leaders are now producing errors of commission. The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.
Subscribe to:
Posts (Atom)
