Posts Tagged ‘Germany’

Is Germany’s debt position worse than United States?

Tuesday, November 29th, 2011

It is widely believed that Germany’s fiscal position is the strongest in Europe and that it is the pillar of the Euro-zone.

Then something unexpected happened last week.

The German government could not borrow all the money it needed! Well, not at the currently low interest rates, at least. What if the financial market?realizes?that Germany’s fiscal position is actually worse than the United States??Kyle Bass, the manager of a hedge fund called Hayman Capital, ?who made millions by gambling against sub-prime mortgage bond market, explains…

European politicians hammered from both sides

Tuesday, February 16th, 2010

As observers of what’s happening around the world, we find the spectacle of what’s happening in Europe as juicy as soap opera plots. With so many internal contradictions within the cast of characters, we can be sure the outcome will be unpredictable and explosive (literally). Even if the Greeks get bailed out tomorrow, you can be sure that there will be another episode in the drama that will throw a surprise twist to the story.

We will look at the first character in the cast- Germany. At the heart of the European Union is Germany. Without Germany’s economic strength under-girding the union, the euro-zone economy would only be a pointless rump. Under-girding the German economic strength is the Teutonic spirit of discipline and efficiency. The brutal efficiency of the Germans allowed their exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Reflecting the Teutonic discipline of the German people, most of them are against the idea of bailouts. As Most Germans want Greece thrown out of euro reported,

A poll for popular newspaper Bild am Sonntag found that 53pc of Germans wanted Greece to be expelled from the euro if necessary in the coming months. Two-thirds were adamantly against German money being put towards a bail-out of the troubled country, the paper also found.

Thus, any German politician contemplating a bailout on Greece will have to keep one eye on the public opinion. This is something that will be looming on the back of Angela Merkel’s mind during the negotiations for a bailout package.

German politics is only one impediment to bailouts. There are also legal impediments to bailouts. Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. Thus, for legal reasons, a bailout cannot be called a “bailout.”

Yet, despite the reluctance of the German people to save Greece, the German banking system (and by extension, the European banking system) is reportedly to be exposed to Greece. This is another dilemma faced by the German government.

Contrast the Teutonic spirit of the Germans with the profligate and undisciplined ways of the Greeks. The Greek government’s budget crisis did not arise out of the blue. It was several years in the making. As European Central Bank Chief Economist J?rgen Stark said in an interview (see European Central Bank Chief Economist: ‘Everyone Is a Sinner at the Moment’),

An economy doesn’t lose its competitiveness overnight. Greece covered it up for a long time with an extremely generous spending policy. For example, consumer spending was stimulated with pay increases in the government sector. We here at the ECB were vocally critical of this development several years ago.

Today, we even heard from a foreign news report that the Greek government, with the aid of Wall Street, used Wall Street’s dodgy tactics of using currency derivatives to disguise loans. Not only that, there were accusations of the Greek government using doctored statistics to cover up their dismal economic performance. The rot was reportedly extended to the grass-roots level- Greek citizens as a whole, tend to under-declare their tax liabilities. We have no comment on how true these allegations were, but all these are indicative of the rot in the system.

Thus, from the German perspective, any rescues will have strings attached. In fact, the strings will be very stringent. The highly disciplined German people will undoubtedly not tolerate anything less. In practice, this may mean German control of the ECB and Greek fiscal policies. Whatever the outcome of the conditions imposed on a bailout, it has to be as unpalatable as possible so as to send a signal to the other profligate PIIGS countries (see Currency crisis: first countries in the line of fire- PIIGS) not to expect any moral hazard.

If only it is that simple.

The Greek people, on the other hand, are already protesting against any austerity measures to rein in their government’s budget deficits. As this BBC news article reported,

Thousands of Greeks have rallied against deficit-cutting measures during a national public sector strike.

The unions regard the austerity programme as a declaration of war against the working and middle classes, the BBC’s Malcolm Brabant reports from the capital.

He says their resolve is strengthened by their belief that this crisis has been engineered by external forces, such as international speculators and European central bankers.

“It’s a war against workers and we will answer with war, with constant struggles until this policy is overturned,” said Christos Katsiotis, a union member affiliated to the Communist Party, at the Athens rally.

We can imagine that should there be any German-style discipline imposed on them, the entire nation will descend into flames. This is something that will be looming in the back of Greek Prime Minister George Papandreou as he enters the negotiation table. Judging from the mood of the Greek people, they are ripe for the rise of a demagogue blaming their country’s woes on international ‘speculators’ and European central bankers. So, even if the Greek government accept the stringent conditions attached to a bailout, the Greek people will not. The question is, will the Greek government collapse as a result? Investors buying into the ‘good’ news of a Greek bailout may well be confronted with such a Black Swan event within a relatively short space of time.

So, would the path of least resistance be an excommunication of Greece from the euro?

Again, there are complications. Firstly, there is no clear-cut legal mechanism to ‘expel’ a nation. Next, the question will be what to do with the debt owed by the Greek government? Also, should that happen, what will the other PIIGS nations (that are next in the line of fire) think?

There are many twists and turn in this drama. That’s why, up till now, the only progress so far are announcements of solidarity and intention.

An economy doesn’t lose its competitiveness overnight. Greece covered it up for a long time with an extremely generous spending policy. For example, consumer spending was stimulated with pay increases in the government sector. We here at the ECB were vocally critical of this development several years ago.

Nations will rise against nations

Sunday, March 15th, 2009

A few days, as reported widely in the news media, Chinese Premier Wen Jiabao said at a press conference that

We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets.

To be honest, I am a little bit worried and I would like to … call on the United States to honour its word and remain a credible nation and ensure the safety of Chinese assets.

Those words, when translated into English in writing, sound bland. But if you watch what he said in full video in the original language, then you will be able to appreciate the immense gravity of the situation from the tone of his voice.

But dear readers, you must understand that Premier Wen was just stating the obvious. There’s nothing new in what he said. All you have to do is to turn back to what we wrote in December 2006 and read Will the US dollar collapse? and Awash with cash?what to do with it? to see the big picture of what’s going on for years. As we wrote back then,

Lately, we are again hearing that central bankers are murmuring about diversifying their foreign reserves away from the US dollar. Does it mean that there is an imminent liquidation of their US dollar reserves? Well, this is not the first time they murmured about it and it is definitely not in their (including the Federal Reserve?s) interest to see a collapse of the US dollar. The Chinese, with their US$1 trillion of reserves, would not want to see their stockpile of US dollars to lose significant value.

That paragraph was written in the final days of 2006. Today, China’s US dollar reserve had doubled from they had more than 2 years ago. The major difference between today and back then is the emergence of the Global Financial Crisis (GFC).

Thanks to the GFC, the status quo, which had been running for decades, is stressed towards a breaking point (but who knows, perhaps that inevitable  breaking point could still be delayed for longer before an almighty snap happens). There are far too many contradictory and conflicting interests among nations.

For the US, as we said before in How is the US going to repay its national debt?, is facing a situation in the coming decades of having to pay a colossal amount of public debt. The public sector is facing a massive debt many times its GDP from the unfunded Medicare and social security liabilities. With the GFC, the US government is transferring more and more private debt to the public sector through bailouts, handouts and stimulus. It is either the US mobilise its monetary printing press to massively inflate away (i.e. print copious amount of money) all these debts or they face up to the reality that they are bankrupt and go through the cold turkey of an almighty deflationary collapse (read: almighty depression). If the US chooses the former, China will be furious because that will be doing the very opposite of what Premier Wen called on the US to do, namely to “honour its word and remain a credible nation and ensure the safety of Chinese assets.”

Unfortunately, the big problem is that the US (along with countries like Australia and UK) has been de-industrialising and hollowing out its economy for a very long time, while the China has been doing the opposite. To put it simply, the US is consuming more and more while China produces more and more. This gross imbalance has been playing out for too long. With the GFC, the US consumers are effectively bankrupt and cannot borrow any more to buy from China. China has lost its biggest customer and is in trouble too.

The coming G20 Summit will be filled with countries with conflicting agendas. The US (and UK) wants more stimulus (and of course, bailouts when required), which can only happen if they print money (i.e. devalue the US dollar), which is as good as spitting on China’s face. Europe (headed by Germany and France) wants the focus to be on regulations and prevention, which means they are less keen on stimulus and bailouts. This is because the latter will involve the tax-payers of countries like Germany rescuing the tax-payers of other EU nations. China, on the other hand, wants an overhaul of the current world order so that they can have more power and say to better reflect their status as America’s creditor. Obviously, the US will not like that because that will mean they have to voluntarily descend for an ascending China.

There are plenty of temptations to take the easy way out. For example, if the Chinese expect the US to inflate away their debts by printing money and thereby, devaluing the US dollar, they will be likely to devalue their RMB in order to continue the process of hollowing out the US economy. The US (and the Europeans), in response, could impose trade barriers on Chinese imports. The Chinese could retaliate by dumping their holdings of US Treasuries. Remember, these are just examples of what may happen and they are by no means predictions. But we trust that you get the idea here.

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.