global-economy | Andy Roberts

Spain reveals pain over cuts and unemployment

http://distributedresearch.net/blog/2011/05/21/spain-reveals-pain-over-cuts-and-unemployment

Spain protests: Young protesters in Madrid and beyond have many different demands, but they are united in opposing the Spanish governmentThis article titled “Spain reveals pain over cuts and unemployment” was written by Giles Tremlett in Madrid, for guardian.co.uk on Saturday 21st May 2011 11.59 UTCThe arrival of the table, a battered piece of formica bashed on top of four rough, oversized legs raised a cry of joy. Never mind that anyone on a normal chair would barely be able to see over the top – here was another small triumph of the new Spanish revolution, the gathering of angry Spaniards of all colours, ages and persuasions that is sweeping across the country and beyond its borders.The table that arrived in Madrid’s Puerta del Sol square was part of the swirl of creative chaos, naive enthusiasm and pent-up frustration that has transformed it into a makeshift camp for thousand of protesters who call themselves los indignados, the indignant ones.Tents and mattresses, armchairs and sofas, a canteen, portaloos and solar panels have sprung up in a remarkable display of organisational prowess. And the mass of people jostling around, each pursuing their own dream or demand, or just watching others doing the same, seemed more like something transported from the Arab spring in North Africa than from Europe.As the protests continued to swell on Friday, with 60,000 people defying authorities to obey the campaign’s “Take over the square!” slogan in dozens of Spanish cities, and with copycat demonstrations across Europe, the question was whether this was the new May 1968 – a youth-led popular revolt against an establishment deemed to have failed an entire generation.Esther Gutierréz, an elfin 26-year-old, wandered through the crowd with a battered shopping cart full of fruit.“We’ve got so much food we don’t know what to do with it. People just bring it to us for free and it’s wonderful stuff,” she said. “We want real democracy. Not just freedom for bankers. You’re not from the Spanish press, are you? We don’t speak to them.”Cynical and ingenuous by turns, the Madrid protesters and those who last week refused to obey orders to budge from the occupied city squares have torn up the rule book of Spanish public politics. The heavyweights of old – political parties, trade unions and media commentators – are not wanted here.“I was sacked when the Madrid regional government closed down a women’s centre last year when it imposed cuts,” explained Beatriz García as she bashed a small frying pan with a wooden spoon. “The unions didn’t even bother to turn up.”The political parties were worse, she said. “There is no renovation. There is nothing new or different, just two parties who take it in turn to govern because our electoral laws favour them.”Just a week ago Spain was known for the passivity of its citizens as they put up with one of the most depressing eras in recent history. Despite unemployment hitting 21%, widespread spending cuts and a socialist government bound to obey the diktats of Germany’s chancellor, Angela Merkel, and the financial markets, they had refused to show their pain. Marches, sit-ins or riots were for the French – or British students. The real drama, anyway, was in North Africa. Spaniards stayed at home.All that changed this week as demonstrations organised via Facebook and Twitter became static protests in city squares, mushrooming into something that caught politicians, unions and the media by surprise.While journalists were following the dull routine of campaigning for Sunday’s municipal and regional elections, the steam was beginning to escape from a pressure cooker of discontent.Many Spaniards had told pollsters they were tired of the same, well-known political faces – especially those who are due to be re-elected despite being mired in corruption scandals. Politicians have rarely been held in such disregard, with the prime minister, José Luis Rodríguez Zapatero, and opposition leader, Mariano Rajoy, of the conservative People’s party, rating lowest. Rajoy seems set to take over after a general election next March.When police forcibly evicted the Madrid demonstrators on Tuesday morning, they came back in even greater numbers later that day. By Friday night authorities had lost the battle to impose rules banning public politics on the day before elections. Police could only look on. “Join us, police officers!” the demonstrators shouted.By the early hours of Friday, it was already elbow-room only in the Puerta del Sol – the square which prides itself on being Spain’s “kilometre zero”, the spot from which all other distances are measured.On the statue of King Carlos III, somebody had pinned a sign that read: “We are anti-idiots, not anti-politicians.” Other placards read: “We aren’t against the system, we want to change it”, “Democracy, a daily fight”, and “Take your money out of the bank!”“We’ve brought tents, food and even Trivial Pursuit to keep us entertained,” said Pablo Cantó, a fresh-faced 23-year-old journalism student. Like many younger protesters, and the movement as a whole, he had trouble expressing exactly why he was here. “We want change,” he said. “Things just can’t carry on as they are.”The heavy clouds of cannabis smoke suggested others had brought their own form of entertainment.“I’ve been protesting for decades,” said 60-year-old school teacher Rosa Marín. “I’m glad to see so many young people here. The questions is this: Is this another May 1968, or are they just here for the party?”A gang of drunken skinheads, mindlessly chanting football terrace slogans, were there for the latter.But a neat, disciplined circle of people intently debating social reform showed many were here in earnest. They took turns to stand up and make their proposals, the audience listening and using the sign language applause of the deaf – by shaking their hands above their heads – to show approval without drowning the speakers out.The proposals, due to make their way through a laborious process of committees, working parties and general assemblies, varied from calls for less spending on the military to helping businesses. “Because it is not just money for the owners. They are the ones who give people like us jobs,” said one young man.For some younger protesters, it was a political baptism. “I don’t know what will come out of this, but it is enough just to show everyone how upset we are,” explained Javier de Coca by phone from the protest camp in Barcelona’s Plaza de Catalunya, where there was a surprising absence of the nationalist or separatist symbols of protest movements in recent years.“It’s as if they’ve realised they have more serious problems to deal with,” said one protester. One of those problems is 45% youth unemployment.On a wall beside the tarpaulin-covered command centre in what some were calling Madrid’s “Republic of Sol” – home to a press office, an infirmary and a legal centre – a list of needs had been pinned up. Toilet paper and food were scratched off the list. Bookshelves, wood, rubber gloves and bottles of cooking gas were on it. Volunteers were needed for a creche.“We process the proposals and try to turn them into something that makes legal sense,” explained a volunteer at the legal centre.However, the open assemblies are painfully slow. Some last for hours, as everybody is given their turn to speak. After almost a week of protests, the demonstrators have failed to come up with a coherent set of demands.Electoral reform to end the two-party system and action to both punish corrupt politicians and limit their luxuries and privileges were the main areas of agreement.So is the Arab spring spreading to southern Europe? “You can’t really compare us to people who were risking their lives by protesting,” said 23-year-old computer engineer Jaime Viyuela. “But yes, you can say that we are inspired by the courage of the Arab spring.” guardian.co.uk © Guardian News & Media Limited 2010Published via the Guardian News Feed plugin for WordPress.Thanks for subscribing to Andy Roberts blogSpain reveals pain over cuts and unemploymentRelated posts:Zapatero says Spain safe from bailoutProtest march against coalition cuts expected to attract 300,000Anti-cuts campaigners plan to turn Trafalgar Square into Tahrir Square

May 21 2011, 8:54am | Comments »

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Portuguese learn price of €78bn debt bailout

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Health and education spending in Portugal to be cut by €745m, state pensions reduced and major building projects axed

This article titled “Portuguese learn price of €78bn debt bailout” was written by Giles Tremlett, for The Guardian on Wednesday 4th May 2011 15.20 UTC

Portugal woke up to the price of its €78bn (£70bn) bailout on Wednesday as new airports and high-speed rail lines were sacrificed in a package of austerity measures and the government pledged to freeze pensions and shrink the civil service. Lisbon’s new international airport, already on hold, and the building of a high-speed rail link between Lisbon and Oporto will now be put back until after 2013, according to state news agency Lusa. Health and education spending will be cut by €745m, civil service pay and pensions will be frozen, and people on state pensions above €1,500 a month will have them reduced. Civil service staffing is to be squeezed by 1% a year in central government, while regional administrations and town halls will be told to shed 2% of their employees annually. Portugal’s banks will take up to €12bn of the bailout funds to rebuild their capital ratios, according to reports. The banks would have to raise their core tier one capital ratio – a gauge of higher quality capital that mainly comprises equity and retained earnings – to 9% at the end of this year and to 10% by the end of 2012, Reuters said. The country will also carry out a fire sale of the nationalised Banco Português de Negócios (BPN) bank. “The authorities are launching a process to sell BPN on an accelerated schedule and without a minimum price,” according to a memorandum of understanding seen by the Guardian, which added that the sale should be finished in July. Portugal is expected to reduce public spending by 3.4% of its GDP this year and raise an extra 1.7% of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes. A detailed investigation of public-private partnerships (PPPs), which have been used for building hospitals, roads and rail lines, will be carried out to see if they are hiding extra government debt. New PPP projects will be suspended. José Sócrates, Portugal’s caretaker prime minister, announced the areas that would remain untouched when he explained the bailout during a television address to the nation on Tuesday night. These included pensions for the worse-off and the retirement age. But he failed to reveal what austerity measures came with the bailout package, beyond saying they would be similar to those rejected by parliament in March. The March defeat brought down his minority socialist government and a snap election was called for 5 June. Polls show the opposition Social Democrat Party (PSD), which rejected the March austerity package, may win that vote. Representatives of the International Monetary Fund, the European Union and the European Central Bank met Social Democrat leaders on Wednesday morning to seek their backing for the plan. “The PSD will give its opinion on what it has read and heard late today or early tomorrow,” said Carlos Moedas, the party’s economics advisor, after the meeting. Social Democrat leaders had already indicated they might change elements of any bailout-related austerity package if they were elected to government, although always with the aim of hitting this year’s target of reducing the budget deficit to 5.9% of GDP. The IMF said: “We have said from the start that it is important that any agreement have multi-party support and we shall continue in our efforts with opposition parties to show that this is the case.” Portugal managed to raise €1.12bn euros in three-month treasury bills today with demand almost doubling the offer, but investors insisted on a 4.65% interest rate – up from 4.05% two weeks ago. Jonathan Loynes, chief European economist at Capital Economics in London, said the bailout might not be enough to stave off restructuring: “It won’t put an end to speculation that – along with Greece and perhaps others – it will sooner or later need to undertake some form of debt restructuring.”

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May 4 2011, 10:30am | Comments »

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Portugal teeters on brink of bailout

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For Portugal, a bailout request is now seen as inevitable following the Portuguese prime minister’s resignation after his failure to push through another round of austerity measures

This article titled “Portugal teeters on brink of bailout” was written by Graeme Wearden, for guardian.co.uk on Thursday 24th March 2011 13.09 UTC City experts fear Portugal will be soon be forced to apply for a bailout package worth up to €70bn (£60bn), following the Lisbon government’s failure to push through its austerity measures on Wednesday. Portugal is teetering on the brink of becoming the third member of the eurozone to seek assistance from the EU – and as with Greece and Ireland the International Monetary Fund would probably also be involved. Prime minister José Sócrates’s resignation on Wednesday night has left the country in political limbo, and piled extra pressure on European leaders who are gathering at a summit in Brussels on Thursday. “The resignation of the Portuguese prime minister adds a political crisis to a fiscal crisis, and brings a bailout a step closer,” said Kevin Dunning at the Economist Intelligence Unit. Sócrates quit after opposition parties voted down his austerity measures. European commission president José Manuel Barroso quickly warned, though, that the country must stick to the latest reforms announced this month. Britain could be forced to contribute more than £3bn to a Portugal bailout package, according to the Open Europe thinktank. It claimed on Thursday that the UK’s share of any rescue package would be between €810m and €3.7bn, via the commission’s €440bn bailout fund. “Portugal will inevitably ask for a bailout,” said Open Europe’s Raoul Ruparel. “But the cases of Ireland and Greece clearly illustrate that the EU’s strategy – to throw good money after bad – is failing. Rather than simply taking a bailout, it would be better in the long run for Portugal to restructure its debt now,” Ruparel added. Sócrates had proposed a wide-ranging plan of tax rises and spending cuts, in an attempt to cut Portugal’s deficit and retain market confidence. The yields on Portuguese government debt has reached record highs, with the 10-year bond trading hitting 7.6% – widely seen as an unsustainably high cost of borrowing. Now that the austerity programme has been rejected, economists also believe Portugal must ask for help. “Portugal moved another step closer to needing a bailout yesterday,” said Gary Jenkins, the head of fixed interest research at Evolution Securities. “Even with complete political harmony it was always going to be difficult for Portugal to persuade investors to continue to fund them and thus yields are likely to rise further from what has already been described as unsustainable levels by Portuguese officials.” George Osborne concerned The chancellor, George Osborne, tried to calm nerves, saying talk of a bailout was “speculation” at this stage, but conceded that the situation was unsettling. “What is happening in Portugal is certainly concerning. It reminds us that we are not alone in facing these challenges,” said Osborne. Portugal needs to refinance £4bn of bonds in April. It has also emerged that the new European stability mechanism – to which Britain will not sign up – will not be signed off at the two-day meeting in Brussels, as had been planned. Instead, the deadline for a final agreement has been pushed back to the end of June. “When I started working in the City I was often told to follow the old ‘under-promise and over-deliver’ formula; the EU seems to be going for the opposite strategy when it comes to dealing with the crisis,” Jenkins added. Fears that the European debt crisis may spread to Madrid were heightened on Thursday morning, when Moody’s downgraded most of the Spanish banking sector. Holger Schmieding, chief economist at Berenberg Bank, argued that Spain was in much better shape than its Iberian neighbour. “You can never say anyone is safe in these times. There is always the danger of a run on a country. But Spain is in a significantly better position than Portugal, which in every likelihood will need a bailout now,” Schmieding told Bloomberg TV. Britain’s inclusion in the €440bn temporary stabilisation mechanism is controversial because Alistair Darling signed up for the plan on 10 May 2010 – during the hiatus between the general election and the formation of the coalition government. Osborne, who replaced Darling as chancellor later that week, has insisted that he would have taken a different decision. Britain is lending a total of £7bn to Ireland, partly through the European rescue and partly as a bilateral loan. Osborne has said that he expects Britain will make a profit on the agreement, as long as the money is eventually repaid.

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March 24 2011, 11:02am | Comments »

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Portugal bailout fears rise as credit rating cut

http://distributedresearch.net/blog/2011/03/16/portugal-bailout-fears-rise-as-credit-rating-cut

Portugal is being lined up as the next victim for the IMF treatment. So far the only country that has managed to resist has been Iceland.

This article titled “Portugal bailout fears rise as credit rating cut” was written by Graeme Wearden, for guardian.co.uk on Wednesday 16th March 2011 10.11 UTC City analysts warned on Wednesday that Portugal is moving closer to the brink of seeking financial help, after Moody’s cut the country’s credit rating by two notches. The ratings agency concluded a review of Europe’s weaker economies by warning that Portugal’s growth prospects are poor, and questioning whether it can keep borrowing from the financial markets for much longer. The downgrade, from A1 to A3, leaves Portugal with Moody’s seventh highest credit rating, just four notches above “junk”. It brings Moody’s into line with the other ratings agencies, and piles more pressures on Portugal ahead of its next debt auction. Moody’s said that Portugal faces “subdued growth prospects and productivity gains” over the next few years until its structural reforms kick in. It also warned that the Lisbon government could fail to implement its austerity measures, which are opposed by other political parties, and might also have to pump more money into its banking system. It also maintained a negative outlook on Portugal’s sovereign debt, saying there is more chance of a further downgrade than an upgrade in the next two years. Portugal’s treasury secretary, Carlos Pina, said that Moody’s decision was “hasty”. Arturo de Frias, head of banks research at Evolution Securities, warned that Portugal’s banks are still relying on €42bn (£36.5bn) of lending from the European Central Bank. “The Portuguese government has given an April 30 deadline to the banks to strengthen their capital,” said de Frias. “It seems increasingly likely that they will fail to do so, and the government will eventually end up having to provide capital. This might trigger the sovereign bailout,” he added, Challenging path ahead Portugal is resisting pressure to seek a bailout from the European Financial Stability Fund (EFSF), insisting it can cut its deficit and reduce its borrowing needs independently. Last week it announced a new swathe of cutbacks and reforms in an effort to boost market confidence. It is scheduled to auction up to €1bn of 12-month debt on Wednesday morning. But the interest rates on Portugal’s debt remain at levels that are widely seen as unsustainable. The yield on five-year Portuguese bonds rose to almost 7.5% on Wednesday morning. “The cost of market funding is likely to remain high until the deficit has been reduced to a sustainable level and the prospects for economic growth have improved,” Moody’s warned. “If the government seeks funds from the EFSF rather than capital markets, Portugal would likely gain access to liquidity at lower cost than it currently faces in the capital markets and limit some of the potential increase in its debt servicing costs, but the path to regaining market access at favourable terms would remain challenging,” Moody’s cautioned. Portugal’s opposition parties have blasted the latest austerity package, and vowed to oppose it. Jane Foley, senior currency strategist at Rabobank, warned that this could thwart the Lisbon government’s efforts to avert the need for a bailout.

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March 16 2011, 6:01am | Comments »

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Fukushima factor adds pressure to economic fallout from Japan’s crisis

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Natural disasters are normally followed by v-shaped economic recessions, but the Japanese nuclear power plant explosions have complicated risk assessments.

This article titled “Fukushima factor adds pressure to economic fallout from Japan’s crisis” was written by Larry Elliott, for The Guardian on Tuesday 15th March 2011 20.16 UTC The three explosions at the Fukushima Daiichi nuclear plant in Japan have made the economic impact of last week’s natural disaster far more difficult to assess than the two templates used by analysts – the Kyoto earthquake in 1995 and Hurricane Katrina a decade later – would suggest. Normally, natural disasters are followed by v-shaped recessions. Output is badly affected in the short term, as infrastructure is knocked out and people can’t work or shop. Output falls sharply for three to six months, but then rebounds as the reconstruction starts. Government money is poured into the affected areas, leading to a mini-construction boom as homes, roads and power supplies are rebuilt. Pent-up spending from the period immediately after the crisis is unleashed. Despite Japan’s weak public finances, analysts would expect Tokyo to come up with the money to rebuild the north-eastern parts of the country affected by last week’s earthquake and tsunami. What makes this crisis different is the nuclear dimension. The three explosions at the Fukushima Daiichi plant puts this incident into a different category from either Kyoto or Katrina. There has been disruption to power supplies and people have been evacuated from a 12-mile exclusion zone around the plant, but it could potentially become far more widespread unless the Japanese can shut the plant down safely and quickly. Some analysts were last night starting to imagine what might happen in the event Tokyo, with 13 million people in its metropolitan district, had to be evacuated because of a radiation cloud heading its way. The economic costs of such an event would be astronomic. In Europe Japan’s crisis is already having an impact. Angela Merkel has ordered a temporary shutdown of Germany’s pre-1980s nuclear stations, which according to estimates account for 7% of the country’s power. That is a significant energy loss for a country that is growing robustly. The second factor is the impact the Sendai earthquake will have on consumer and business confidence. At present the global economy is characterised by a high degree of uncertainty, over the situation in north Africa and the Middle East and now over Japan. Economists think they have a way of quantifying this uncertainty, but they don’t. So while, in theory, it should be possible to do a full-scale risk assessment of the impact of Japan on, say, the UK, that is not really possible. In theory, the effects should be limited, because Japan is not a major trading partner for the UK and the days of intensive Japanese inward investment are over. The complexity of global supply chains for the goods in which Japan is world leader could mean delays and disruptions in some sectors, – such as consumer electronics and cars – depending on how badly the major Japanese multinationals are affected by shortages of power and materials. One big unknown for the UK is the oil price, which has been adding to inflationary pressure in recent months but has fallen since late last week because traders believe the paralysis in Japan will lead to a drop in global demand. That trend may not last. If it does have a v-shaped recovery Japan will quickly return to more normal levels of oil usage. Meanwhile, the unrest in Bahrain is evidence that the problems for governments in the Middle East are far from over. So estimates that Japan’s crisis will shave perhaps 0.1% or 0.2% off global growth this year, with a similar rebound in 2012, are little more than guesswork. It could be a lot worse than that.

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March 15 2011, 3:26pm | Comments »

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Radiation fears prompt Tokyo exodus

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International companies are pulling staff out of Japan and airlines are cancelling flights after two more explosions at the stricken Fukushima nuclear power plant

This article titled “Radiation fears prompt Tokyo exodus” was written by Justin McCurry in Osaka, for The Guardian on Tuesday 15th March 2011 19.39 UTC Airlines from Asia and Europe have halted flights into Tokyo, while multinational firms made plans to relocate employees as anxiety continued to grip Japan over the continuing nuclear crisis. Despite official reassurances that radiation levels in the capital posed no threat to health, a steady stream of tourists, residents and expatriates left the city by plane and bullet train. Austria said it was moving its embassy out of Tokyo to the western city of Osaka. Setbacks in the struggle to avert disaster at an atomic power plant in the north-east of the country also sparked a fresh round of panic buying in the Japanese capital, where tiny amounts of radioactivity registered for the first time since last Friday’s earthquake and subsequent tsunami. People in Tokyo endured another day of anxiety as they heard that the plant had been rocked by two more explosions and evidence emerged that water in a pool storing spent fuel rods may be boiling. Tokyo is already experiencing serious disruption to its transport network after the Tepco, the city’s electricity supplier, decided to implement rolling power cuts triggered by widespread disruption to power generation by the disaster. “I’m not that worried about another earthquake – it’s the radiation that scares me,” said Masashi Yoshida, who was waiting for a flight out of Haneda airport with his five-year-old daughter. Those among Tokyo’s 12 million people who decided to stay snapped up batteries, torches, candles and sleeping bags, and stripped shelves of bread, bottled water, instant noodles and canned food. The hoarding frenzy, partly prompted by the prospect of regular power cuts over the next six weeks, threatens to hamper efforts to divert supplies to the quake zone, where millions are suffering food and water shortages. Scientists said higher radiation levels near the Fukushima Daiichi nuclear plant, where more than 200,000 people have been evacuated or told to stay inside, posed no immediate threat to the capital, which is 150 miles to the south. Naoto Kan, the prime minister, urged 140,00 people living within 19 miles of the plant to remain indoors. About 70,000 people living within 12 miles have already been evacuated. “I know that people are very worried, but I would like to ask you to stay calm,” Kan said. “Radioactive material will reach Tokyo but it is not harmful to humans, because it will be dissipated by the time it gets there,” said Koji Yamazaki, a professor of environmental science at Hokkaido University on Japan’s main north island. Prolonged fears of a serious accident could weaken Tokyo’s role as an international financial hub. Several firms said they were pulling staff out, including 350 Indian employees of the software services exporter Infosys Systems. But major financial firms in Japan were going about their “business as usual,” said the International Bankers Association, which represents firms such as Goldman Sachs and Bank of America. The French embassy advised its citizens to leave and the German embassy advised people with families to do the same. China is poised to evacuate its nationals from badly affected areas of north-east Japan. Several international airlines said they would avoid Tokyo until they were certain the danger had passed. Lufthansa became the first European airline to announce its daily flights to Tokyo would switch to Osaka and Nagoya at least until the weekend, and Air China cancelled flights from Beijing and Shanghai. Taiwan’s EVA Airways said it would not fly to Tokyo and Sapporo for the rest of the month. British Airways and Virgin Atlantic said services to Narita and Haneda, Tokyo’s main airports, were not affected.

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March 15 2011, 3:22pm | Comments »

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Cost of insuring Japanese government debt jumps

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It now costs $122,000 to insure $10m of Japanese debt against default, and borrowing costs could rise at a time when it must spend billions on rebuilding

This article titled “Cost of insuring Japanese government debt jumps” was written by Graeme Wearden, for guardian.co.uk on Tuesday 15th March 2011 11.13 UTC The cost of insuring Japanese government debt against default spiked on Tuesday as world stock markets tumbled. Investors have calculated that the chance of a Japanese default has risen significantly since Friday’s earthquake. As Japan battled to prevent a major nuclear crisis, the country’s five-year credit default swap rose 28 basis points to 122bp. That means it would cost $122,000 to insure $10m of Japanese debt against default. “Risk aversion is dominant this morning as the disaster in Japan has taken on a whole new dimension,” said Gavan Nolan of Markit, which provided the CDS data. “Further explosions at the Fukushima nuclear plant have raised the real prospect of widespread radioactive contamination.” Last Thursday, the Japanese CDS was trading at 79bp. The markets are now placing the world’s third-largest economy on a similar risk level as Saudi Arabia (132bp), and not much safer than Belgium (147bp) – seen a potential casualty if the eurozone debt crisis spreads. In comparison, the CDS contracts for Germany, the US and the UK are all around 50bp, while Greece was trading at 980bp and Ireland at 610bp. “Japan is now trading significantly wider than the other major economies,” said Nolan. Japan currently has a national debt around 200% of its GDP, and only the fourth-highest credit rating with Standard & Poor’s following a downgrade in late January. However, analysts point out that most of Japan’s debt is owned by its own banks and corporations, rather than foreign investors. This leaves the country less vulnerable to the vagaries of the international markets. On Monday, ratings agency Moody’s said that Japan’s economy could absorb the impact of the shock, but warned that it might reach a “tipping point” if the financial markets demand a risk premium on its government debt. That would push up the cost of Japan’s borrowing, at a time when it must spend huge amounts of money rebuilding its infrastructure. Earlier on Tuesday Japan’s Nikkei 225 fell by 10.6% after panic selling, taking total losses so far this week to more than 16%. The FTSE 100 fell sharply in London, extending its loss to more than 180 points at one stage mid-morning, at 5,592, down more than 3%. “It would not be a surprise if the significant price moves of the last couple of days led to problems elsewhere in the financial system,” warned Gary Jenkins, head of fixed income research at Evolution Securities.

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March 15 2011, 6:28am | Comments »

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Mervyn King: rebalance global economy or risk a trade war

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Funny the way nobody seems to ever listen to the governor of The Bank of England.

This article titled “Mervyn King: rebalance global economy or risk a trade war” was written by Larry Elliott, economics editor, for The Guardian on Monday 14th March 2011 07.05 UTC Mervyn King will be able to see for himself the devastation wrought by the natural disaster in Japan when he gives a speech in Tokyo today* stressing the need to rebalance the global economy and to head off protectionist pressures. Like the rest of us, the governor of the Bank of England could be forgiven for thinking that the gods continue to punish us mortals for the greed and stupidity of the bubble years. The first obstacle thrown in the way of recovery from the Great Recession was the ruinous cost of the crisis to sovereign states. Then, violent political unrest rippled across the world’s most significant oil-producing region, sending the cost of crude rocketing. Now, Japan has been laid low by one of the biggest earthquakes of the past 100 years at a time when its public finances are in a parlous state. In a sense, the obstacle-strewn road to redemption should come as no surprise. This was no ordinary crisis and it is proving to be no ordinary recovery. The debts that caused the global system to self-destruct back in the summer of 2007 have not gone away, they have merely been passed on to the public sector. This was always a solvency crisis, because it was clear four years ago that many banks were bust and would have gone under without the aid of governments. It is still a solvency crisis, because some countries – Greece, Ireland and soon perhaps Portugal – are struggling with the enormous cost of paying off their debts. But it is not just the small fry who are financially impaired. Japan already has a debt-to-GDP ratio of getting on for 200%, while the US national debt is now in excess of $13tn (£8tn), up from $1tn 30 years ago. This, of course, is before anything like the full impact of the ageing of the baby boomer generation has been felt. Here, then, are some predictions. Contrary to the knee-jerk reaction in the oil market on Friday, the earthquake and tsunami in Japan will be positive for growth, at least given the somewhat bizarre way statisticians calculate gross domestic product. There will be a massive reconstruction effort in Japan, which will be funded by a mixture of quantitative and fiscal easing. The rest of Asia will continue to expand briskly, leading to higher demand for oil. Crude prices will continue to rise, with Brent hitting $130 a barrel in the spring if speculation about turmoil spreading from Libya to Saudi Arabia continues. City analysts who travel to Asia and Latin America return with tales of how the emerging world is booming. It is certainly true that the big developing economies have been crucial to the recovery of the global economy since the spring of 2009. But the warning signs, flashing amber a few months ago, are now flashing red. Commodity prices, especially oil, were on a sharp upward trend before the unrest began in north Africa. Higher oil prices mean higher inflation, which in the four previous oil shocks has tended to mean higher interest rates. The European Central Bank will be the first to move, having signalled that it feels the time is right to start unwinding the ultra-expansionary policy stance of the past two years. In the UK, there will be intense pressure on the Bank of England to follow suit, not least because the ECB’s action will result in a weaker pound, making imported goods more expensive. Dearer borrowing will be a double whammy for the weak countries on the fringes of the eurozone. It will slow their growth and make the cost of paying their ruinous debts more expensive. Europe provided itself with some additional firepower to tackle a sovereign debt crisis late last week, but this will deliver only short-term relief from a problem that will eventually ensnare Spain and Belgium as well as Greece, Ireland and Portugal. The position of these developed countries is little different from that of poor countries in the 1990s: they are burdened with excessively high debts. Yet there is no Jubilee 2000 for Greece, and nor is there a bankruptcy mechanism for sovereign states. It is infra dig to suggest that bankers and bondholders should “take a haircut” for their duff decisions, and since they have declined, ordinary taxpayers will have to do so. The fundamental problem for countries such as Greece, Ireland and Portugal is that they need growth to pay off their enormous debts, yet are unable to do so because of the deflationary policies inflicted on them by the European Union and the IMF. The widening of bond spreads suggests that something is going to give sooner or later. This can either be in an orderly manner if policymakers get their act together or in a chaotic fashion if there are attempts to get through the crisis with a mixture of bluster and confusion. The debt crisis, tighter borrowing conditions and the squeeze on incomes and profits caused by higher energy costs will mean that global activity will start to cool over the coming months. Indeed, we could be quite close to the point where the main cause for concern ceases to be inflation and becomes growth. Interest rates will rise but not by nearly as much as the markets expect. In the UK, inflation will hit 5%, intensifying the policy debate at the Bank of England. If the Bank does act, a combination of tighter monetary policy and fiscal austerity will push the economy back into recession. Watch out for the second quarter of 2011: it is not going to be pleasant. Elsewhere, a deep and long recession will be followed by an unusually weak and shallow upturn, particularly given the size of the stimulus provided by central banks and finance ministries. The realisation that there will be no easy return to pre-2007 business as usual will trigger a wave of bankruptcies among firms that have been kept on life support in expectation of better times. Banks will have to own up to some of their hidden losses, resulting in a second phase of the financial crisis. This will be a bitter-sweet outcome for people like King, who have been warning that there will be no permanent solution to the crisis without addressing the global imbalances and to rein in the activities of big finance. Who knows, if things get really bad, his warnings may be acted upon? * The text of the speech was released ahead of Mervyn King’s visit, which was cancelled in the light of the earthquake.

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March 15 2011, 6:25am | Comments »

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Bank of England governor blames spending cuts on bank bailouts

http://distributedresearch.net/blog/2011/03/05/bank-of-england-governor-blames-spending-cuts-on-bank-bailouts

A few days old now but some are wondering why no one is making more of this.

This article titled “Bank of England governor blames spending cuts on bank bailouts” was written by Phillip Inman, for The Guardian on Tuesday 1st March 2011 21.25 UTC Mervyn King has risked reopening the bitter argument over blame for the financial crisis by saying that government spending cuts are the fault of the City and expressing surprise there has not been more public anger. The governor of the Bank of England said that people made unemployed and businesses bankrupted during the crisis had every reason to be resentful and voice their protest. He told the Treasury select committee that the billions spent bailing out the banks and the need for public spending cuts were the fault of the financial services sector. “The price of this financial crisis is being borne by people who absolutely did not cause it,” he said. “Now is the period when the cost is being paid, I’m surprised that the degree of public anger has not been greater than it has.” King has repeatedly pointed the finger at the City since the crisis erupted in 2007, but this was the first time he blamed bankers for the coalition’s spending cuts. It became clear during the hearing that King and his fellow members of the Bank’s monetary policy committee, which sets interest rates, believe the crisis will have a lasting impact on the economy. Asked when living standards enjoyed before the crisis would return, King said: “The research makes it clear that the impact of these crises lasts for many years. It is not like an ordinary recession, where you lose output and get it back quickly. We may not get the lost output back for very many years, if ever.” King faced tough questions from Labour MPs who believe the Bank should not have supported the Treasury’s cuts programme. Accused by Andy Love, the Labour MP for Edmonton, of giving George Osborne cover for spending cuts, King denied that meetings with the chancellor resulted in a cosy agreement to keep interest rates low to support austerity measures. He said: “There has never been any attempt on any occasion to influence the monetary policy committee on what decisions it should take.” In a further provocation to the financial sector, King set out plans for an overhaul of City regulation and oversight that would allow banks to fail when they get into trouble. He told MPs it was necessary to move away from rules designed to prevent banks failing, with a safety net provided by taxpayers, to a system that allowed banks to fail in an orderly way.

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March 4 2011, 6:03pm | Comments »

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Oil price surge risking global recovery, says IEA chief

http://distributedresearch.net/blog/2011/02/22/oil-price-surge-risking-global-recovery-says-iea-chief

The combination of approaching Peak Oil and the Arab Spring regional revolution is likely to become the single biggest factor in global economics. This article titled “Oil price surge risking global recovery, says IEA chief” was written by Julia Kollewe, for guardian.co.uk on Tuesday 22nd February 2011 08.34 UTC The surge in oil prices caused by the Libyan crisis could derail the global economic recovery, the International Energy Agency’s chief economist warned on Tuesday. Fatih Birol said high oil prices could weaken trade balances, add to inflation and put pressure on central banks to raise interest rates at a time when economic growth remains lacklustre in many countries, including the UK. “Oil prices are a serious risk for the global economic recovery,” he said. “The global economic recovery is very fragile – especially in OECD countries.” Birol said IEA members would consider a coordinated release of oil from their emergency stocks to tackle any supply disruption if the turmoil continues in the Middle East and North Africa. The agency’s members – the OECD countries, which are mostly western economies – hold 1.6bn barrels of emergency oil stocks. He added that Saudi Arabia stood ready to pump more oil if necessary. Oil ministers from top consuming and producing countries are meeting at a scheduled energy conference in Riyadh on Tuesday. The FTSE 100 index in London was down more than 60 points in early trading at 5953.95 as the market took fright at the escalating Libyan crisis. Overnight, shares in Japan tumbled almost 2%, falling 192.83 points to 10,664.70. Stocks on Wall Street are expected to open sharply lower following Monday’s closure for President’s Day. The price of oil and grains jumped again this morning amid fears that growing violence in oil-rich Libya could spill over into other oil-producing countries in the region. Libya is the first major oil exporter to be engulfed by the crisis – it exports 1.6m barrels a day – and the first to see significant disruption to oil production. Brent crude oil rose nearly $2.83 to $108.57 a barrel after hitting $108.70 on Monday, the highest since the onset of the financial crisis. US crude for March delivery, which expires on Tuesday, also touched a two-and-a-half-year high, rising to $94.49. “The market is very nervous over news of violence in Libya, and that’s driving prices,” said Yinxi Yu, a commodities analyst at Barclays Capital. “The situation threatens to blow out in the next few days, and it looks like the uncertainty in the region is not going to be resolved anytime soon.” Prices are still a long way from the all-time high of $147.02 reached in July 2008 for Brent crude. Prices then slumped as the recession in the west led to a sharp fall in demand. One international oil firm has shut down as much as 100,000 barrels a day of output, about 6% of Libya’s production. Other big oil firms are evacuating their staff from the country as Libyan leader Muammar Gaddafi fought to hang on to power and dozens were reported killed in the capital, Tripoli. However, Julian Jessop at Capital Economics said: “There are two reasons not to press the panic button just yet. First, although Libya is an Opec member, it is still a relatively small player. Libya’s usual daily production of 1.6m barrels ranks the country at around number nine of the 12 members. In principle, any shortfall on global markets could easily be offset by an increase in output from Saudi Arabia, which is currently producing some 3m barrels per day less than its estimated capacity (though this additional supply cannot be turned on overnight).” Gold slipped from its seven-week high, to $1,400.95 from $1,410.65, while silver leapt to its highest price since 1980, above $34 an ounce. Grain prices were also higher, with US corn futures up by 0.6% and soy and wheat both 0.5% higher.

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February 22 2011, 2:51am | Comments »

Andy Roberts

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Mervyn King: rebalance global economy or risk a trade war

Bank of England governor blames spending cuts on bank bailouts

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