This financial crisis is now truly global

[CrackSmokeRepublican]

This financial crisis is now truly global
The financial crisis has moved from Wall Street to all streets, as the economic shock causes strains and suffering in every part of the world economy.

By Adrian Michaels
Last Updated: 9:11PM GMT 20 Feb 2009
French demonstrators strike on Jan 29
Troubled times: demonstrations in France during the first major strike triggered by the financial crisis Photo: AFP/GETTY

In Florida, a state devastated by tumbling house prices and repossessions, the inhabitants are arming themselves against recession, with requests for concealed weapon permits up 42 per cent in the past 45 days. In Moscow, the murder rate has climbed by 16 per cent. At Tetsuya's – the most exclusive and expensive restaurant in Sydney – the waiting list has shrunk from three months to 24 hours.

Over the past few months, we were told that we were caught in the worst economic crisis for 20 years, then 30, then 80, then 100. It can't be long before someone points out that really, all things considered, the Black Death was comparatively pleasant. But beyond the hyperbole, one thing is clear: what began as a financial problem in certain debt-soaked nations is battering the economies of dozens of others, as well as millions of people working in almost every trade. It will change behaviour and alter the pecking order of the world's economies. There will be social unrest and changes of regime. Received wisdom, whether about the benefits of free trade, globalisation or European integration, may be cast on to a bonfire of recrimination. Estimates of how long the pain will last range from a year to a decade. Bring out your dead.

Among the most significant developments has been the realisation that the most prudent countries – such as Germany, Japan and China – will suffer as badly as the spendthrifts, or even worse. Despite the whiff of hubris that wafted from Berlin when the banks of Britain and America went into meltdown, Germany's economy contracted by two per cent in the last quarter of 2008, compared with 1.5 per cent for Britain's. The problem was that the Chinese and Germans were too thrifty: their countries' growth was reliant on sales of goods to countries that were borrowing. Now that Americans can't afford its products, China's exports have collapsed, down 17.5 per cent in January from a year earlier.

Americans can't spend because their house prices have crumpled, their shares have plummeted and their banks will not – or cannot – lend them any money. Insecurity is also forcing cutbacks: January saw the highest monthly jump in unemployment in 34 years. The equally worried Chinese seem to want to save still more: imports into China fell 43 per cent in January compared with the year before. Yet if no one at home or abroad wants to buy their goods, the result will be massive unemployment: some 20 million people are already said to have lost their jobs. As they head home from the coastal manufacturing belt, their government is trying to force-feed them consumer goods; 80 per cent of all white goods sold in December were subsidised.

As demand dries up, the arteries of global trade are hardening. Lufthansa's air freight division is putting 2,600 staff on short-time working, while cargo ships have so many empty containers that shipping rates are a tenth of what they were at last year's peak. The knock-on effects are complex, but painful. "For Rent" signs dot empty storefronts on the once sought-after stretch of New York's Madison Avenue, where the vacancy rate rose by 50 per cent in 2008. Rents have dropped by a third as the ladies who lunch think twice about coffee at Barneys, or frocks from Versace. This falling appetite for luxury goods helps explain why half of India's 400,000 diamond workers have lost their jobs. More than 40 have committed suicide.

Or take car sales, which Carlos Ghosn, the chief executive of Renault-Nissan, estimates could fall by 21 per cent across the world this year. Car companies are begging governments for handouts – but that won't shift their products from showrooms. Among other things, lower car sales mean fewer catalytic converters, which means that platinum does not need to be mined so intensively. The price of platinum has fallen by half, and the world's largest producer, Anglo Platinum, which operates mostly in South Africa, is axing 10,000 jobs.

And so the rural Chinese are not the only ones heading home. Thanks largely to a construction boom, Spain was responsible for a third of the new jobs created in the eurozone in 2006 and 2007, but is now losing 40,000 a week, and is offering subsidies for migrants to leave (some immigrants are instead digging in, selling home-cooked food at illegal markets around Madrid). Thai factories and farms used to rely on Burmese expats; aid workers report that thousands of them are now being rounded up and sent home. Malaysia has banned the hiring of foreigners in certain sectors, while the Philippines, which has 10 per cent of its population working abroad, is braced for family incomes to tumble. Remittances from overseas are a lifeline for the world's poorest: Africans working in the developed world have been sending back $40 billion a year to support their impoverished relatives, but the World Bank predicts that this could drop substantially this year.

Even when the crisis is not causing outright misery, it is transforming behaviour. In Britain, employers seem to be choosing to fire women rather than men – but in America, more than 80 per cent of those losing their jobs have been male; as a result, women are making up an increasing percentage of the workforce. Of course, not every extraordinary trend or statistic can be blamed on the economic crisis – but it is certainly true that cheap, home-based pursuits are making a comeback, and frippery is out. Australians spent 13 per cent less on eating out in the last quarter of 2008, while a Manhattan dentist is pitching his teeth-whitening services with the phrase "Make me an offer".

The challenge is to come up with a political response that does not make things worse. Western countries used to preach openness, free movement of people, the breaking down of barriers. Now the instinct is to raise the shutters and protect voters' livelihoods. Social unrest is spreading; particularly at risk are the nations of central and eastern Europe, which fervently embraced the free market after the Berlin Wall came down. As their workers headed west, their businesses loaded up on debt to fuel breakneck expansion; now, they can't meet their obligations, especially as the region's biggest banks were sold to Italians and Austrians, who might repatriate cash to focus on domestic demands. "The mess in central and eastern Europe is a clear result of globalisation," says Hans Redeker, a strategist at European bank BNP Paribas. "It should be no surprise to see [Western] banks acting increasingly locally while trying to please domestic governments."

The world's leaders promise to stop protectionism, but their actions speak differently. A joint statement this week from Gordon Brown and Silvio Berlusconi, Italy's prime minister, said: "Protectionist measures reduce worldwide growth, deny us the benefits of global trade and confine millions to poverty." Yet both countries are propping up their car industries. Congress wants to protect the American steel industry; the French government is spending more on newspaper advertising.

However restless they are, electorates need to remember that a lack of protectionism lay behind a huge increase in prosperity for millions of people. That is not easy when jobs are being lost. A cleaned-up banking system is a top priority – but the debate has only just started about how our banks are to look, who will run them and how they will be regulated. "The history of financial crises," warns Michael Pettis, professor of finance at Peking University, "shows a mismanagement of the regulatory framework that comes out of them."

Above all, consumers are somehow going to have to change their behaviour. Americans are certain to be more prudent during the immediate crisis, but they need to maintain that more hostile attitude to debt when it is over. It will be just as hard to persuade the Chinese, Japanese and Germans to start spending, in order to supplement export-led growth with domestic demand. "The world doesn't need more stuff to sell," explains Prof Pettis. "It needs more buyers."

As they mature, Asian economies will in time have better pension and health systems, which will help persuade people that there is a safety net for hard times, and tease money out from under the mattress. "Surplus countries have to spend their income and enjoy themselves," says Charles Dumas, an analyst at Lombard Street Research. "The purpose of an economy is to consume." Right now, though, the main objective is survival.

http://www.telegraph.co.uk/finance/fina ... lobal.html

[veritasvincit]

This writer mentions that the IMF may have to print money for the world.  Who knows? this may their agenda.

http://news.goldseek.com/MillenniumWave ... 315243.php

Posted Sunday, 22 February 2009 | Digg This ArticleDigg It! | Source: GoldSeek.com

The Risk in Europe
The Euro Back to Parity? Really?
Back to the Basics

The Risk in Europe

I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.

In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.

But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.

Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)

The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.

Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.

Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.

However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:

"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need e400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (e155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.

"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"

While Rome Burns

I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.

Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (http://www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.

This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?

We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.

However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.

As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.

As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.

"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.

It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.