Credit Rating agency Standard & Poor’s announced this morning that it was cutting Spain’s AAA long-term sovereign rating to AA+. The euro fell to a session low of $1.3217 from around $1.3278 after the news was announced, while the yield spread between 10 year Spanish bonds and German Bunds held steady around 114 basis points following the downgrade after rising earlier to a record 122.
Fuller background on all this can be found here.
This post is partly about Russia, partly about how to follow the present economic crisis on a day to day basis and partly methodological.
So Which Are The Worst Affected Countries In The Present Crisis?
Obviously the simple answer to this question is “all of them”, and in particular all those countries who are members of the OECD. Perhaps that is the feature which best defines what is happening this time round (and which separates our present problems from, say, the Asian crisis in 1998) since this is a crisis whose focus has been, and still is, in what are often termed “the advanced industrial” economies, even though some of these are now more services than manufacturing-industry driven. But, come-on, within that ever so long list – which includes each and every member of the OECD (and a goodly number of those who aren’t) – who exactly are going to be the worst affected?
Well I don’t think I have made any secret on this blog that I think the principal focus of the present crisis is now situated in what Paul Krugman call’s Europe’s periphery – by which I would mean Central and Eastern Europe, Southern Europe, Ireland and the UK. To that list I would simply add those economies who are largely export driven, and who thus suffer most directly from the sharp contraction in global trade. In particular here Germany, Japan and China. My principal guess is that China is really going to be one of the worst case scenarious, and that consensus thinking still has some way to go in catching up with events here. Hong Kong based UOBKayHian have a Q4 estimate for year on year Chinese GDP growth of 6.3% for China (see here), and I think few people other than professional macro economists and bank analysts (and far from all of these if the truth be told) really realise what this means – it means the quarter on quarter rate of expansion was very low indeed, possibly verging on the negative. I’m guessing but it must have been somewhere in an annualised 0 to 2% range. This means we may well see quarter on quarter negative growth in 2009 in China, and that the possibility of a technical recession of two consecutive quarters of negative growth must be over 50% at this point. It wasn’t so long ago that the consensus was saying that annual GDP growth which was as high as 6% would be tantamount to a recession! Continue reading
The German economy is about to suffer its deepest recession since World War II according to economics Minister Michael Glos speaking in an interview with the German newspaper Welt am Sonntag due to be published tomorrow (Sunday). Glos said growth in Europe’s largest economy is now expected to drop by as much as 2.5 percent this year (and there is still downside risk here). Earlier government estimates had been for slight positive growth (0.2 percent). This suggests that the miracle export-driven-recovery in German economic performance that so many were enthusing about in 2007 has actually been a short lived, one-off, affair, driven largely by an unsustainable lending boom in the UK, and Southern and Eastern Europe. If we take as good this year’s government estimate, it gives us average growth for the German economy over the last 10 years of 1.07%, hardly changed from the supposedly “correctional” pace attained between 1995 and 2005 (see chart below) – or is Germany’s lost decade now surreptitiously going to convert itself (like its Japanese equivalent) into the lost decade and a half?
Germany’s economy started contracting in the second quarter of 2008, and went officially into recession in third quarter. Further the Federal Statistical Office estimated this week that the economy may have shrunk quarter on quarter by as much as 2 percent in the fourth quarter (ie at an annual contraction rate of 8%), and that annual growth for 2008 may have been as low as 1.3 percent (non calendar adjusted – 1% calendar adjusted) – about half the 2007 level.
The Italian economy continued to contract sharply in the third quarter of 2008 as exports fell sharply – declining at the fastest rate in three years – under the impact of a global slump which weighed down on foreign demand for Italian products, and pushed the Italian economy into its worst recession since at least 1975. Sales of Italian goods abroad fell 1.6 percent from the previous quarter, their biggest decline since 2005.
Pressure is of course on the government to offer a fiscal reponse to the problem, but given Italy’s outstanding debt issues and the fact that a large part of the problem is long term structural and not cyclical it is hard to see much of note happening, and indeed Finance Minister Giulio Tremonti’s statement this week that additional stimulus packages were pretty pointless could be read as more of an admission of impotence than anything else. What’smore the Italian government announced this week that its budget deficit for 2008 will be 52.9 billion euros, somewhat above the government’s earlier estimate which forecast a gap of 45.2 billion euros. It is not clear yet how this deficit overrun will actually affect the final % of GDP number for the deficit, since we still do not have an accurate 2008 GDP number for Italy yet. In any event speculation is rife about the future of the Italian bond spread and the danger of a credit rating downgrade. The Italian government went to market this week and sold 6.949 billion euros of five-, 20- and 30-year bonds. The 10-year Italian BTP/Bund spread was trading at around 144 basis points after Thursdays auctions compared with 141 basis points the day before. Continue reading
Bloomberg are reporting (via Der Standard) that Austrian banks have the biggest exposure to Forex lending in Eastern Europe. This is hardly breaking news, and I have had working notes for a post on this lying around for months (here, please excuse the mess, I will append some of this to this post if time permits at the weekend). The issue is simply finding the time to do everything. Basically I would say that all this business about not devaluing currencies (and hence imposing wage cuts) in Eastern Europe is to do with this issue (also highly exposed are the Swedish banks, and Italy’s Unicredit). Der Standard cite an as yet unpublished International Monetary Fund report to the effect that Austrian banks have loans outstanding in Eastern Europe equal to about 70 percent of the country’s gross domestic product, a higher percentage exposure than any other country.
If you are in the business of liking scary quotes, you could try this one (which comes from the king of scary quotes and dreaded anthropologist’s grandson – Ambrose Evans Pritchard – but that doesn’t make it any less scary:
“This is the biggest currency crisis the world has ever seen,†said Neil Mellor, a strategist at Bank of New York Mellon. Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
The more sobre version would be this one from Paul Krugman that I keep using:
“There is a burgeoning economic crisis in the European periphery,†Krugman said on the ABC network Dec. 14. “The money has dried up. That’s the new center, the center of this crisis has moved from the U.S. housing market to the European periphery.â€
Either way, the economic meltdown in parts of Europe’s Eastern and Southern periphery is now in the process of working its way back up the pipes and to the core, to Germany in terms of the collapse in GDP growth and exports, and to Austria in terms of stress on the banking system.
Germany’s economy may have contracted the most in more than two decades in the final quarter of 2008 as the global financial crisis hurt exports and damped spending, the Federal Statistics Office said. The economy probably shrank between 1.5 percent and 2 percent in the fourth quarter from the third, Norbert Raeth, an economist at the statistics office, said at a press conference in Frankfurt today. A 2 percent drop would be the worst quarterly contraction since German reunification in 1990 and the most for West Germany since the first quarter of 1987.
Bloomberg
And while I am here, Izabella Kaminska has a timely piece on forex lending exposure in Poland over FT Alphaville. The situation in Poland is important, since the country is widely regarded as the strongest and least vulnerable of the EU10 economies (see Christoph Rosenberg, for example). So basically, I would say that rather than being just one more “meltdown” in Eastern Europe, if Poland crumbles this will be the last domino to fall, bringing all the rest down in its train – craaaash (I wrote a longish piece on Poland back in October, here). The Leu and the Forint will need to correct to levels which bring back export competitiveness, and behind them will come the pegs in the Baltics and Bulgaria, bring with them all the west european banks who funded the lending.
Ukraine’s industrial output continued its rapid decline in December, falling for a fifth consecutive month, led by steel, chemical and machine building. Output tumbled an annual 26.6 percent, following a 28.6 year on year decline in November, and a 19.8% one in October.
December steel production slumped 42.7 percent, chemical output fell 40 percent, and machine building dropped 37.1 percent. The annual contraction rate slowed slightly in December, but this may be a statistical artefact due to what is know as the “low base effect” in December 2007, since output almost certainly fell in December over November, and we can expect it to continue to fall in the coming months (Update Friday: actually my initial guesstimate was wrong. They just published the data on the stats office website, and output was up 3.2% on December over November. This could be a result of increased exports due to the sharp drop in the value of the hryvnia, but it is too early to say at this point. To be followed closely).
For a full analysis of what is happening in Ukraine, see my As The Politicians Battle It Out Ukraine’s Economy Tunnels South In Search Of Australia
This is very reassuring news. I slept a lot better last night after reading it.
The International Monetary Fund said on Wednesday there was no reason to think that Ireland will need IMF financing, after an Irish broadcaster reported that the country may need IMF help if its economic prospects worsened. Irish Prime Minister Brian Cowen, on a visit to Japan, quickly denied the report by broadcaster RTE which was picked up by other media outlets, sending the euro falling more than a cent against the dollar.”The authorities have been clear today. We agree. There is no reason to think that IMF financing will be needed,” an IMF spokesman said in a statement.
Unfortunately, this article in the Financial Times quickly undid all the calming effects of eight hours solid sleep.
Irish credit default swaps, which measure the market’s view of the probability a country will default on its sovereign debt, jumped close to record highs before Dublin’s denial. The government calculates that, if it sticks to the pay deal agreed with unions in September, the deficit will rise from 6.5 per cent of gross domestic product in 2008 to 10.5 per cent this year, and remain at 11-12 per cent up until 2013…….The Irish government, in a submission to the European Commission last week, said it was aiming to bring the deficit to less than 3 per cent in 2013.
And of course Ireland’s is far from being one of the worst case situations here. The rumpus we are witnessing seems to have been caused by a veiled threat – strongly denied – from Brian Cowen that if unions failed to agree to a proposed 5% cut in public sector salaries there would be no alternative to calling in the IMF. Come on everyone, tidy up the living room, daddy will soon be home from work!
Well, there doesn’t seem to much room for doubt at this point does there, the Baltic Economies are in the van of the European economic slowdown for 2009, just as they were leading the charge up in 2007, and all that debate about whether we were going to get a hard landing or a soft one seems now so out of date and and old hat as we watch how Estonia’s economy contracts almost faster than the body of the incredible shrinking man (by an annual 3.5% in the third quarter of 2008), while Latvia’s seems to be rivalling Harry Houdini in the expert art of staged disappearance (dropping as it did by an annual 4.6% in Q3). Even Lithuania’s economy – which like a half drunken man still manages to stagger forward before it finally gets to fall over – is now expected by IMF regional representative Christoph Rosenberg to be set to contract an annual 2% in 2009. As Rosenberg so pointedly says “Latvia had the highest growth rate in the EU for several years, but it was a bubble.”
Spain yesterday became the third euro zone country within a week to be warned by rating agency Standard & Poor’s that its credit rating (currently the highest – AAA) is under threat from the deterioration in public finances being produced by the government’s attempt to support the banking system and put a brake on the dramatic decline in the domestic economy. As in the case of Ireland and Greece last Friday, S&P said Spain faces a painful process of rebalancing of its economy and a consequent marked deterioration in its public finances. Continue reading
“Art has a function of teaching about the human condition. We live in hope, hope is fundamental” – Manoel de Oliveira
Manoel de Oliveira (photo and quote above) is a living example for the Portuguese people of how to force their way out of the low growth/low per capita income trap into which they have steadily stuck their neck. Oliveira celebrated his 100th birthday last December – and how did he celebrate it: by starting work on a new film. Traditional productivity theory suggests most people slow down with age, but Oliveira seems to have done just the opposite – and since 1990, he has made at least one film a year. His secret for longevity, work much and rest little (oh yes, and also remember that living in hope is fundamental, it’s funny, but my father who lived to be 84 and worked to 80 gave me the same sort of message). Indeed far from implementing a 35 hour week he seems to only stop on Saturdays – “This is the only day of the week that I rest,” he told journalists back in December when he interrupted shooting on his latest film to give them a rare press conference. So in a country where the average age of leaving the labour force is currently 63, and where raising employment participation rates is a national priority, what better example of a “local hero” than Manoel. What follows will be an attempt to reveal just what it was he was so meticulously trying to capture with his camera in the photo above. Just call me an inveterate “peeping tom”, lookout Portugal all is now going to be revealed! Continue reading
