Monthly Archives: September 2011

Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.

Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debt at a very low cost. These steps would calm the markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.
 Read more

Martin Wolf talks to Lawrence Summers about the European crisis

European Commission president José Manuel Barroso has proposed, for the umpteenth time, a financial transactions tax. The tax would raise, he assumes, around €50bn, half of which would go back to member states, and half would end up in his own pocket at the commission.

The timing of the move is poor, but more importantly you cannot take €50bn out of the economy without a significant economic impact. James Tobin distanced himself from those who wanted to adopt his tax as a disguised revenue raiser.  Read more

Despite the Greek parliament’s support last night for an unpopular new property tax, Europe’s divisions over the terms of any new bailout give credence to talk of a looming euro exit. But such an exit would be terrible news for Greece, and equally terrible for the eurozone. The bottom line is this: Greece isn’t going anywhere.

Greece has zero interest in leaving because its economy would lose more than it gains with a euro exit, and a devaluation. The eurozone’s core countries also have ample incentive to keep Greece in the club. Why would Germany agree? German exports — the lifeblood of the eurozone — would decline as a result of the currency appreciation precipitated by a Greek exit. On a broader level, if Greece left the eurozone, it would set a very dangerous political and economic precedent for other debt-ridden countries — Italy in particular.

Don’t listen to the doom and gloom merchants. Greece’s ratio of debt to GDP may have topped 150 per cent, but its eurozone status remains 100 per cent secure. Read more

It’s the eve of Rosh Hashanah, the Jewish New Year, so in the interest of a happy one amidst the gathering global gloom can I make a request of Republican Christian evangelical politicians professing to be Friends of Israel? Next time the temptation to sound off on the best interests of the Jewish state strikes, CAN IT! Israel has enough on its plate without being exploited as campaign fodder by blowhards who, every time, they open their mouths on the subject reveal their shocking ignorance of its past history, present political reality and future security.

There are, of course, those among the most feverishly intransigent and irredentist Jewish settlers who dream and speak of nothing else and, like the Christian evangelicals, invoke the scriptural covenant promising “Judea and Samaria” to the Jews as enough of a warrant on which to base foreign and domestic policy. There is however another Israel entirely, one that’s increasingly impatient with the settlers and with the ultra-orthodox who bear none of the burdens of serving in the military, yet sustain their religious schools from public funds while the rest of Israel’s people live in increasing economic distress as the furious mass demonstrations against Benjamin Netanyahu’s government made abundantly clear.

If these were normal times and the likes of Rick Perry and Michelle Bachmann were just a pair of doctrinally-driven fundamentalists we could leave them, and rest of the evangelical tribe to their own imaginings. But they are aspiring to the presidency of the United States and are in a position, even before the campaign gets going in earnest, to do terrible harm to the people they profess to hold so close to their hearts. Read more

The world markets expected concrete steps from Washington over the weekend on how governments would resolve the European crisis. They did not get it. Instead, they were told that the “Euro-area countries will do whatever is necessary to resolve the euro-area sovereign debt crisis”. Unfortunately, this statement seems to be based more on hope and prayer than on evidence.

We now have to recognise that the eurozone’s problems are too big to leave to eurzone countries alone to deal with. The world has a stake in their resolution. And it has an institution that can channel help, the IMF. It is high time the fund started taking the lead in managing the crisis, rather than playing second fiddle. The eurozone should suppress any wounded pride, and not only acknowledge that it needs help but also provide quickly what it has already promised. The rest of the world should pitch in recognising that, unresolved, the crisis will spare no one. Read more

It’s clear that the growth assumptions on which Chancellor George Osborne’s 2010 austerity package had been based were way too optimistic. The budget numbers no longer add up, and there is a risk that British voters will go into the next election with years of falling living standards under their belts, and not much benefit to show for them. The economic and social costs would be very serious. And Mr Osborne could be thinking about a new line of work.

What the economy needs now above all is a shot of entrepreneurial dynamism – a burst of activity from those small and medium-sized companies that are essential to job creation and innovation across the land. That will not come easily at a time when confidence is so low, but making it easier for them to borrow will help. This has to be the objective that shapes Mr Osborne’s policy for the short and medium term. Read more

The showdown at the UN corral has been averted, for now. Palestinian president Mahmoud Abbas has delivered a letter seeking statehood to the UN Security Council, but has made clear that he does not expect an immediate vote, thereby at least delaying, the need for a US veto. But no one should be breathing a sigh of relief, because without swift action, the Middle East is now teetering on the edge of a new period of armed conflict.

In recent months the existing order in the Middle East and north Africa has been upended; new powers are jockeying for position and old ones (including Israel) have many reasons to deflect attention from internal unrest by magnifying external threats. Avoiding a vote on the current proposal for Palestinian statehood is the right short-term expedient for all concerned, but a new international strategy to move the peace process forward is now a regional and global imperative. Read more

Conventional wisdom may now be only half right when it comes to solving Europe’s mess. Fixing the sovereign debt problem is still necessary, but longer be sufficient. Europe must also move quickly to stabilise the banks at its core in ways that go far beyond what the European Central Bank announced on Wednesday. As senior BNP Paribas executives prepare to tour the Middle East in an attempt to raise fresh funds and shore up confidence, other banks must also show greater urgency and seriousness in dealing with capital and asset quality shortfalls if a bigger economic crisis is to be averted.

There are worrying signs of an institutional run on French banks. Credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Europe would then be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy. So far neither the authorities nor the banks have done, or are doing enough to stop – let alone reverse – this worrisome trend. As a result, Europe is on the verge of losing control of orderly solutions to its debt crisis. Read more

Interest rates on US, German and UK government bonds have fallen to all-time lows. Yields on 10-year US Treasury securities are the lowest since the Federal Reserve began publishing market data in 1953. Only the anticipation of negligible demand for capital and negligible inflation – both hallmarks of recession – could drive rates this low.

The debilitating sovereign debt crisis in Europe is pushing it and America back towards the brink. It is causing credit conditions to tighten again for sovereign credits, weaker borrowers and small and mid-sized business. The crisis was avoidable but Europe’s leaders chose to delay, take the tiniest steps possible and generally avert their eyes to the elephants in the room. America’s leaders have also spent too much time on partisan bickering. It must stop. One last round of fiscal stimulus should be enacted immediately.

Another recession would be profoundly damaging to labour markets and public confidence. It would take years to fully overcome. We must try to avoid such an outcome at all costs. That requires the type of far-sighted leadership that we haven’t seen much of lately. Read more

The expectation that China might swoop down and rescue the euro in its hour of need is running high. But those expecting China to offer anything more than symbolic assistance will soon be disappointed.

China knows that greater eurozone stability is in its national interest yet anything more than notional support for the eurozone would come with significant political risks. China isn’t stupid: it can see that the deadlock over Greece is less about money, and more about political will. While Beijing may buy some small symbolic quantity of southern European bonds, as an ersatz commitment to the future of the EU, it sees the euro as a European affair. And the Europeans will have to make right their own mistakes. Read more

Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.

Of course, this process will be traumatic. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and firms would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933 when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral “drachmatization” of euro debts would be necessary and unavoidable. Read more

Lawrence Summers is right to point out that instead of acting promptly with overwhelming force, Europe has consistently been one day late and one euro short. The Greek crisis was after all a very small problem when it emerged. Denial, procrastination and parsimony have now led to contagion to the core.

But the only question that matters is, what to do now? Mr Summers advocates a bold view of the future, a swift recapitalisation of banks and a reversal of the macroeconomic policy stance. All three are necessary, with the important caveat that most eurozone countries cannot afford further fiscal stimulus. Read more

At every stage of this crisis, Europe’s leaders have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter. But a continuation of the grudging incrementalism of the past two years now risks catastrophe. What was a task of defining the parameters of “too big to fail” has become the challenge of figuring out what to do when important insolvent debtors are too large to save. 

There are many differences between the environment today and the environment in the autumn of 2008, or indeed at any other historical moment. But any student of recent financial history should know that breakdowns that seemed inconceivable at one moment can seem inevitable at the next. There can be no return to the pre-crisis status quo. All nations now have an obligation to insist that Europe find a viable way forward. Read more

The FT’s A-List returns today with a week of debate on the future of Europe’s troubled single currency. Visit the site to read new contributions from Lawrence Summers, Nouriel Roubini, Jean Pisani-Ferry, Mario Monti, Yang Yao and others. Read more