China took the entire world by surprise in the pre-crisis world economy, recording gigantic exports, consistently gigantic capital inflows, and imbalances in both stocks and real assets that could prove to be extremely harmful to the international economic stability in the short term and devastating to China in the long term. Some voices that called for restructuring were never heard in Beijing, simply because of the apparent success of high growth and low inflation economic dichotomy. However, China might have a very difficult time keeping inflation at its 2010 target of about 3 percent, after banks flooded the Chinese financial system with money in 2009. According to the median forecast of 14 economists, inflation may reach 4.4 percent this year. China’s GDP growth quickened to 10.7 percent in the fourth quarter, the fastest pace since 2007. The Chinese authorities affirmed a target of 8 percent growth for 2010, the same goal that the government has set and surpassed in each of the past five years. Nouriel Roubini said “this strong economic recovery implies that the super-loose monetary, fiscal and credit policy followed by China has to reverse itself or otherwise there is a risk of overheating and inflation”. Continue reading ‘China – The Wonderland’
The recent recession in UK, which ended in the final quarter of 2009, has lasted for 18 months, the longest period on record. In order to avoid an utterly economic collapse, the Bank of England (BoE) kept cutting interest rates down to a historical level of 0.5 percentage points. In early February, central bank officials decided to temporary halt the bond-buying program, mainly because the inflation rate rose to 3.5 percent in January. The actual inflation rate surpassed the 2% target rate due to a rise in the value-added tax back to 17.5% after the expiration of a temporary cut to 15%, a 70% increase in the oil prices and the weakness of the pound. The general consensus is that the United Kingdom’s economy is still struggling and the Bank of England will have to continue its quantitative easing program worth nearly GBP 200 billion. BoE Governor Mervyn King said that it is “far too soon” to say the bond purchasing plan will not be expanded. Continue reading ‘UK – Behind The Curve’
Wim Kösters – professor at Ruhr University in Bochum, was one of the 155 German-speaking economists who, in 1998, asked for a postponement of the introduction of the common currency. The purpose of the request was twofold: first, the EU had to ensure the reliability of the government agencies across the region and two, the local governments had to have a good track record of their fiscal policies. Ten years later, the sovereign debt crisis is sending panic waves amongst investors while the European Union is mulling a rescue plan for Greece. On one side, if EU decides to help all these deficit-plagued economies, including those of Spain, Portugal, and Italy, markets expect dear consequences for the European wobbly banking system. On the other side, if Greece leaves Eurozone, the EU credibility will suffer and that could create a snow-ball effect across the European countries. Either way, the EUR is in big trouble. Continue reading ‘Deutschland Uber Alles’
At a time of relative confidence in Japan’s economy, Toyota mishap is the last thing in the world investors were looking for. Since the story broke, Toyota Motor [TM] shares have dropped in excess of 22 percentage points – equivalent with the entire market capitalization of Ford. For years, Toyota has been regarded as the symbol of Japanese technological advance, especially since it became the world’s biggest carmaker. The initial problems with the unintended acceleration emerged in late January and they have triggered the recall of an astonishing 8 million vehicles, worldwide. The compounded effect came in February, when Toyota decided to recall 440,000 hybrid vehicles, to fix a problem with their brakes. In US, the recall includes 2.3 million cars and trucks that are affected by the faulty gas pedals and 5.5 million vehicles that have defective floor mats, in addition to the November recall of 4.2 million vehicles. In Europe, the number of involved units may reach up to 1.8 million vehicles. Continue reading ‘To(yo)tal Recall’
When we compare the GDP growth rate of the US and the Eurozone (EU-16), the US average rate over the past decade is about 1.2 percentage points higher than that of the EU-16. According to Eurostat, in Q4 of 2009, the Eurozone grew 0.1% from the previous quarter, when the economy managed to pull out of recession by growing 0.4% quarter-over-quarter (QoQ). The figure was primarily held down by continuing contractions in Greece (-0.8%), Italy (-0.2%) and Spain (-0.1%), as well as the stagnation in Germany where the growth rate was flat. In Italy, the strong rebound in Q3 GDP at 0.6% was somewhat given back in the form of a 0.2% contraction in Q4. Moreover, EU-16 contracted 2.1% year-over-year (YoY), with Germany, Greece, France, Spain, and Italy contracting 2.4%, 1.8%, 3.1%, 0.2% and 2.8% respectively. The main problem with the Eurozone is that consumers are not spending enough and its strong currency is making the exports very expensive in the rest of the world. Continue reading ‘Old World vs. New World’
If 2009 was the year of the stellar markets rebound, 2010 might be dubbed the year of the sovereign debt crisis. Since the beginning of the twenty-first century, we have witnessed few corporate defaults (e.g., Enron, WorldCom, Parmalat, Lehman Brothers, and General Motors) that shocked the world. After a period of high number of defaults across the private sector, this year, we are seeing a significant increase in the perceived risk associated with the public sector. Since not all countries are created equal, some governments are clearly better placed to cope with the sovereign debt problem than others. While UK, Japan and the US all have the luxury of issuing debt in their own currency, the sixteen countries that share the common currency do not have the same degree of freedom. Not surprisingly, at the heart of the current fiscal crisis we find Europe, and particularly its southern region. The PIIGS – that is Portugal, Ireland, Italy, Greece and Spain, and the other 11 European nations have debt denominated in EUR. They cannot print more euros to repay the debt or they cannot devalue the currency without exiting the euro-zone. Continue reading ‘PIIGS Sacrifice’
At its peak, financial industry earned a staggering 40 percent of all US corporate profits, four times what they earned in 1980, while the average Wall Street paycheck doubled, and top bonuses sextupled. Not surprisingly, the finance lobby is the strongest campaign contributor in Washington, with an astonishing $475 million during the 2008 election cycle, almost $60 million more than two decades ago. The finance lobby is known as the FIRE lobby—Finance, Insurance, and Real Estate, and it includes basically anyone who makes money by handling money. That includes big money-center banks, small community banks, Wall Street investment banks, insurance companies, mortgage brokers, hedge funds, credit card issuers, trade groups (ISDA), private equity firms, credit unions, and more. To understand just how extravagant the finance lobby’s power is, we need to understand some history first. Continue reading ‘The Power Of Money’
Last Friday, President Barack Obama proposed massive tax credits estimated at $33 billion to encourage small businesses to hire workers and raise current employees’ wages. According to the plan, employers would receive a payroll tax credit of up to $5,000 for every net new employee they hire in 2010. The proposal also allows businesses to claim tax credits for pay raises, such that they will receive a bonus 6.2 percent tax credits on aggregate wage increases in excess of inflation. Via the new plan, the Obama administration is simultaneously seeking to stimulate employment by reducing payroll taxes and to regain some political capital after recent Democrats’ mishaps. The new initiative came hours after the authorities announced that the real gross domestic product in the United States increased at an annual rate of 5.7 percent in the fourth quarter of 2009. Continue reading ‘Growth Without Jobs’
CDS – The Usual Suspect
Credit Default Swaps (CDS) are plain-vanilla financial contracts that allow hedging a credit exposure or betting on whether or not an underlying credit instrument (e.g., a bond, a loan) does experience a specified credit event (typically a default) within a given period of time. In plain English, the CDS buyers make money if the underlying credit name does default, whereas the CDS sellers pocket the profit otherwise. With a total notional amount exceeding $60 trillion, the credit derivatives market has gained notoriety over the last ten years but it quickly became the scapegoat for the subprime debacle, Lehman Brothers bankruptcy and the collapse of the insurance giant AIG. Nevertheless, the CDS market is back on top again, sending shockwaves in the credit world and making it harder for troubled companies or debt-strapped countries to borrow money. Continue reading ‘CDS – The Usual Suspect’