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Who is to blame for this mess?
Why Germany is as much cause of crisis as Greece An ugly day ahead for Sensex: Blame it on Greece So you think the euro crisis is over? Think again… Greece govt is sinking, taking your money down with it Kiss the year-end rally goodbye as Greek plan injects uncertainty till 2012 04 06 07 10 13
The referendum: What will the people of Greece decide?
If Greeks say @#$%&!^$#@ to austerity, the eurozone is over Why bankers, brokers and bet hedgers don’t like democracy 16 19
What the experts said
Saving eurozone: Devalue the euro, slash rates to zero, says Roubini 23 High rates can destabilise capital flows. Stiglitz explains why 25
The long negotiation
Welcome aboard the slow train to ‘Eurogeddon’… Saving Europe: EU, banks reach deal to lower Greek debt
India’s part – more growth than assistance
India has few coins to throw in the Euro-Greek bowl Why India is the only game in town
Who is to blame for this mess?
Why Germany is as much cause of crisis as Greece
R Jagannathan Nov 2, 2011
Global economics has a strange binary logic of heroes and villains. We worship the countries with
riches and surpluses, and disdain those with excess borrowings and budget deficits. We eulogise countries with strong, macho currencies, and despise those with weak, wimpish ones. The truth, however, lies somewhere in between. Surpluses and deficits are actually mirror images of each other. Just as you cannot borrow without someone to lend to you, it takes two (or more) to lend and borrow. If you borrow unwisely and ruin yourself, it is only because there is someone who is lending unwisely and pretends he is god. Let’s illustrate this with an example: If the Swiss franc is appreciating and the euro falling, does it mean Switzerland is doing something right and the eurozone something wrong? Actually, it means both are doing something wrong. The Swiss have to do something to depreciate their currency, and the eurozone something to strengthen the euro. If Europe has to tighten its belt, the Swiss must loosen them. If both don’t work at it jointly, the outcome can only be skewed. The Greek arrow that has been shot at the heart of the eurozone’s “rescue package” will destroy the half-false story that the Americans and the European PIIGS (Portugal, Ireland, Italy, Greece and Spain) are the villains in the current global economic crisis because they have been living beyond their means while the Germans and Chinese are saints because they are virtuous savers and investors. The markets are tumbling all over because Greek Prime Minister George Papandreou has announced that he will hold a referendum to endorse the extreme austerity package proposed by the stingy Germans to throw them a rescue line. The referendum will effectively kill the package, for two reasons. By the time it is held it will be a couple of months. Europe cannot wait for so long to get its house in order. Moreover, the chances are the Greeks will reject unending austerity. This is why the markets look at the referendum with horror. Attempts are now being made to paint Greece as the villain, but the truth is the Germans are greater villains. They seem to have learnt nothing from their own travails between the two world wars – and are now doing enormous damage.
Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state without any offsetting monetary stimulus or devaluation” Ditto for China. The solution to the world’s problem lies equally between austerity by the over-borrowers and overspenders and spending by the world’s over-savers and exporters. our markets) instead of manfully shouldering its wider responsibilities to the eurozone. Germany and China – the two big exporters to the eurozone and the world – should be seen as the new axis of economic evil. China and Japan sharing the bulk of the pains of adjustment. It is their job to solve it. The trillions of dollars they have salted away will turn to dust if they are not invested in deficit nations – including India. Germany was overburdened with World War I reparations. and it is time to spend it. If you don’t believe this. it is the biggest beneficiary of the euro project. But Germany has unfairly put the burden on the hapless Greeks – and is now facing the prospect of a disorderly default or Greek crashout from the eurozone. Does Germany want a new form of intolerance to rise in Greece and the other PIIGS? Germany’s second sin is that it is trying to think in narrow nationalistic terms (we have to protect our banks. which imports twice as much as it exports to China. After all. Both helped create the US and eurozone crises by lending unwise money to their importers (the US and the rest of the eurozone). If the US has been living beyond its means. not Greece or the rest of the PIIGS. They are nothing of the sort. The unemployment and hyperinflation of the 1930s gave rise to Hitler. The same applies to China (and Japan. It also has to buy more from the world. Berlin and Brussels speechless with rage…but at least the Greeks are stripping away the selfserving claims of the creditor-states that their ‘rescue’ loan packages are to “save Greece”. . for that matter. Despite this. Normal human logic says the strong must protect the weak – not the other way around. So who has gained most from the euro? If we accept that Germany is the prime beneficiary of the euro (over half its exports go to the eurozone). and hyperinflation. And China lent it money because it wanted to export more. If they don’t. one set of figures should explain why: even as total unemployment in the eurozone crosses double-digits (it’s over 16 percent in Greece and over 21 percent in Spain). Germany wants to burden Greece with the kind of austerity that it itself revolted against. It has salted away $3.Between the two world wars. it is because China has been lending it money – and this is well known. The US economy (or. to a lesser extent) – the world’s biggest holders of surplus dollars. As Ambrose Evans-Pritchard writes in The Telegraph: “The Greek referendum… has left officials in Paris. it has to carry the can for rescuing the currency and the zone. It did over the last two decades (1990-2010) what the Japanese did in the 30 years before that during (19601990). The key to solving the global economic crises lies with Germany. Germany’s unemployment has fallen below 6 percent. the European or Indian economies) cannot move towards better budgetary and external balances without an appreciation of the Chinese yuan and compensating Chinese investment in eurozone bonds and the US and Indian economies.2 trillion dollars in foreign exchange surpluses. Ditto for the Japanese. The burden of adjustment cannot be borne just by the weaker economies. and thus helped create the crisis.
On the other hand. but the consequences of such an event would be catastrophic for the monetary union – and for global financial markets. strap up for a rough and volatile day of trade. Here’s what happened overnight.An ugly day ahead for Sensex: Blame it on Greece Venky Vembu Nov 2. and although curiously they’re bouncing back from a low. 2011 Another brutal day coming up for the Sensex. So. As at 7. The news has the potential to accelerate the break-up of the eurozone if Greeks vote against the deal and the country is forced to default. Germany and France are in overdrive trying to avert such an outcome. Listen to the podcast . So. Stock market That’s still a lot of ifs. Greece is on a slippery slope to an inevitable default. and it’s all about faraway Greece. but so far the Greek prime minister is unyielding. and claims the whole Cabinet backs the measure. That prospect unnerved stock markets in Europe and Wall Street overnight. which could bring down the government. it’s a sea of red from Japan to Australia to Seoul to Hong Kong to Shanghai…Nifty futures are also down in early trades. they’re still under water.30 am. any way you look at it. it’s dragging down indices across the board in Asia. That could just about avert a referendum. the Greek ruling party is facing a revolt within its ranks. which is just as bad. And this morning. The Greek prime minister is standing firmly by his bombshell announcement calling for a referendum on the eurozone deal of last week. which will impose severe austerity measures on Greece to tackle its sky-high debt. but bring in political uncertainty.
threatened to fall apart. In a scene in the thriller flick Shock to the System. Mumbai joined the relief rally that was set off around the world. found his voice and piped up to ask Europe and other advanced economies to prevent a slide into recession. playing the ad executive who “Whoa. No commentary on even the Indian stock market was complete without a ritualistic invocation of the crisis in Europe. At that time. Over the past few weeks. Mumbai got the blues as well. playfully lays down the new ‘crisis management strategy’ at work. And on days when the entire European monetary union.So you think the euro crisis is over? Think again… Venky Vembu Oct 27. you and you panic… the rest stay calm. watching from afar. Which is why in recent weeks. it was the turn of the European economies to set off alarm bells that were heard all the way from Brussels to Bombay. “You.” Over the past three years. which had been stuck together with bubble gum and tied up with strings. even Prime Minister Manmohan Singh. 2011 kills for his promotion. On a good day. at the height of the debt ceiling showdown in Washington. shook their heads and muttered . let’s not all panic. in the run-up to this morning’s dramatic announcement in Brussels of a deal to save the world. the eurozone and the US have likewise taken it in turns to deliver shocks to the global economic system and spread panic around the world. US leaders – from Barack Obama to Tim Geithner – were wagging their fingers from across the pond and urging European leaders to act to avert a catastrophe. Heck. when there seemed the promise of something like a deal (even if it wouldn’t have amounted to much).” he says. bantering with a few colleagues. European leaders. whose own command over the Indian economy is in doubt. it was perverse politicking in the US that set off panic attacks and fears of a meltdown of the global financial markets. Michael Caine. Only in America… But barely a few months earlier.
which are based on flawed premises. The actual writedown . which can be arranged through Special Purpose Vehicles. it may be time to start worrying about the US debt crisis. in the estimation of analysts. The only count on which such a proposal fits in with China’s own needs is that it would serve China’s mercantilist mission of .” What isn’t immediately clear is where the funds for the Special Purpose Vehicle will come from: those details must await a meeting of the Eurozone finance ministers in November. which in turn would have dragged down the entire eurozone. Europe’s debt crisis is far from resolved. investing in euro bonds would be tantamount to throwing good money after bad. counting on cash-rich China to pitch in. But. should bail out rich and developed economies isn’t an easy sell in China. But the precise nature of the leveraging mechanism is a little opaque: the text of the agreement speaks of “maximising the funding arrangements of the EFSF with a combination of resources from private and public financial institutions and investors. which has enormous debt problems of its own. which would have the effect of triggering those dreaded credit default swap contracts. Stocks in Asian markets are up.) Yet. that 50 percent number is something of a mirage. particularly in a year leading up to a leadership change. Secondly. a 50 percent haircut for creditors would. it would trigger concerns on financial stability and potentially set off bank runs (since even Greek financial institutions and banks. China has thus far been unwilling to loosen its pursestrings. Considering the “dollar trap” that China finds itself in. The notion that a middle-income country. particularly since Washington is no nearer to addressing its long-term debt burden. In the absence of adequate safety nets. if one factors in all the missing pieces. A third pillar of today’s deal is on very shaky ground. French President Nicholas Sarkozy is working the hotline to Beijing today. setting off another round of social unrest. as we’ve noted earlier on Firstpost. This relates to the provision that the European bailout fund – the ESFS – would be “leveraged” up by invoking insurance tools and acquire sufficient firepower (of over 1 trillion euro) to buy bonds in the primary and secondary markets – and to recapitalise banks. is only about 28 percent – and that includes cuts for pension funds. Much of the good cheer seems to spring from three critical details of the deal. The first relates to the provision that private holders of Greek bonds (mostly European banks) will take a 50 percent “haircut” as the price for their folly – and therefore lower Greece’s unsustainable debt burden and avert the risk of a Greek default. (A few commentators have seemingly invoked the Michael Caine theory of Serial Panic Attacks to note that with European problems out of the way. be considered a “credit event” – which is code for default. and so are index futures on Wall Street. for all the short-term euphoria of markets today. which hold Greek bonds.under their breath: “Only in America…” After this morning’s deal in Brussels. the markets and analysts have been quick to proclaim the end of the eurozone crisis. would have to take the losses) and perhaps enhance the scope for contagion. The numbers mirage As commentators have been quick to point out out. The general assumption is that the funds will come from the IMF and from sovereign wealth funds and from emerging economies. which in turn will pass on the pain to pensioners.
which is one of its biggest export markets. today’s deal only serves to calm frayed nerves for the moment: it does not address the underlying structural issues that peripheral countries – including Italy and Spain – face. and today’s blockbuster deal looks a lot less like a ‘bazooka’ than it appears at first glance. The big story Lastly. Put all these together. Sure. but it could be just a matter of months before they revert to panic mode – and deliver yet more shocks to the system. No one has any idea how these economies will grow sustainably.keeping its currency undervalued relative to the euro. Nor is it clear that they will summon up the political will to even implement these difficult austerity decisions they have committed themselves to. . there’s enough in it to get markets to rally in the short term.
where he was expected to fend off demands to call a snap election. “We will not back down on . which the opposition also demanded. Papandreou needs 151 votes to enact the referendum.Greece govt is sinking. expanded to include more ministers after the referendum bombshell. 2011 Athens: The Greek government faced possible collapse on Tuesday as ruling party lawmakers demanded Prime Minister George Papandreou resign for throwing the nation’s euro membership into jeopardy with a shock call for a referendum. and several others called for a government of national unity followed by a snap election. the leaders of France and Germany summoned Papandreou to crisis talks in Cannes on Wednesday to push for a quick implementation of Greece‘s new bailout deal ahead of a summit of the G20 major world economies. Papandreou told the cabinet he believed he would both win the vote and hold the referendum as planned. angered by his decision to call a plebiscite on the 130 billion euro rescue package agreed only last week. ”We believe the government will once again win a vote of confidence in order to proceed with its plans. taking your money down with it Reuters Nov 2. narrowing Papandreou’s slim majority to 152 of 300 seats. and more here on why your investments in equity markets could be affected for the rest of the year. (More here on what the referendum means for the larger eurozone’s destiny. Caught unawares by his high-stakes gamble. it cannot be held. But his first hurdle is a vote of confidence on Friday. If any of the dissenters votes against. said Papandreou should make way for a “politically legitimate” administration.) Six senior members of Greece‘s ruling PASOK socialists.” government spokesman Angelos Tolkas told reporters. A leading PASOK lawmaker quit the party. Papandreou chaired a cabinet meeting. The euro and global stocks were pummelled on financial markets after the Greek move threw into question the survival of crucial efforts to contain the euro zone’s sovereign debt crisis.
7 percent.” Athens Chamber of Commerce head Konstantinos Michalos told Reuters Insider television. whose own country is struggling through an EU/IMF bailout programme. said last week’s European summit was meant to have dealt with the uncertainty in the euro zone. “Legitimately there is going to be a lot of annoyance about it. European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008. “I think by late evening this saga will have come to an end because he (Papandreou) will have lost the slim majority that he has in parliament.” The chairman of euro zone finance ministers. It could also further undermine dwindling political support in northern Europe for aiding Greece.” Euro zone leaders thrashed out Greece’s second financial rescue since last year. ”This referendum will not happen.anything we have to do to save the country. “Grenade” European politicians expressed incredulity and dismay at Papandreou’s announcement on Monday evening. Dutch Prime Minister Mark Rutte told parliament in a letter that his cabinet was concerned about the risk of delay and uncertainty. Business executives in Greece expressed despair at how the country was being run and markets speculated on whether Italy will be the next euro zone country to slide into a debt crisis.” Creighton said. in the hope that it would ease uncertainty surrounding the future of the 17-nation single currency. which are today more important than ever. the full implementation in the quickest time frame. “Announcing something like this only days after the summit without consulting other euro zone members is irresponsible. Ireland’s European affairs minister. Sarkozy’s office said: “France and Germany are determined to ensure. Instead. said Greece could go bankrupt . raising Rome’s borrowing costs to levels that proved unsustainable for Ireland and Portugal. Opinion polls suggest most voters think it is a bad deal.” The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into throwing the euro zone a financial lifeline. with their European partners. with the general index shedding 7. financial markets suffered another bout of turmoil on Tuesday due to the new political uncertainty and the risk that austerity-weary Greeks could reject the bailout. “And this grenade is thrown in just a few short days later.” Slovak Finance Minister Ivan Miklos told Reuters. I’m hoping and praying for a government that will join other political forces. The euro fell nearly three US cents and the risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high. Lucinda Creighton. which took even his own finance minister by surprise. Jean-Claude Juncker. the decisions adopted at the summit. in return for yet more austerity.” In a statement after French President Nicolas Sarkozy and German Chancellor Angela Merkel conferred by telephone.
“Elections are a national necessity.” opposition New Democracy party leader Antonis Samaras told reporters. On the markets. then the point will have been reached where the money is turned off. More importantly. a government official told Reuters. Another MP. if it doesn’t fulfil the agreements. Papandreou did not even inform Finance Minister Evangelos Venizelos he was going to announce the referendum on the latest EU aid deal. players scurried for safer investments. speaking on condition of anonymity. But the conservative opposition called for a snap election. Cast adrift? One senior German parliamentarian suggested the euro zone might cast Athens adrift. floor leader for the Free Democrats. reducing Papandreou’s strength just before the vote of confidence. Lawmaker Milena Apostolaki quit the PASOK parliamentary group. cutting off its aid lifeline and allowing the nation to default on its huge debts. Hara Kefalidou. said he needed wider political backing for the budget cuts and structural reforms demanded by international lenders. asked the Greek president to work for a national unity government to ensure Athens receives the rescue funds. . hammering stocks and punishing the euro. said she also opposed the referendum but did not resign her seat.” said a senior executive of one of Greece’s biggest firms. senior PASOK lawmaker Vasso Papandreou. Defections Papandreou. followed by an early election.” Rainer Bruederle. told German radio. junior partners in Merkel’s centre-right coalition.if voters rejected the bailout package. whose party has suffered several defections as it pushes waves of austerity through parliament despite mass protests. “They must be crazy… this is no way to run a country. not related to the prime minister. “One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and.
” one Paris-based trader said. Reuters Nov 1. Furthermore. for example. hammering stocks and punishing the euro. It scotched any immediate expectations for an end-of-year stock rally.Kiss the year-end rally goodbye as Greek plan injects uncertainty till 2012 Greece‘s shock decision to hold a referendum on its euro zone bail-out package sent investors scurrying for safer investments on Tuesday. It raised the possibility of a disorderly default on its debt if Greeks vote against the plan. given that it is not clear that the euro zone’s grand compromise agreed last week will stand. the referendum— details of which have not been announced — is not expect until the . Attempts to get countries such as China and Brazil to fund an enhanced euro zone rescue fund. European stocks were down close to 3 percent and MSCI’s all-country world stock index shed 1. But more broadly it also threw into chaos the eurozone’s wider attempts to stop the debt crisis spreading to more significant economies such as Italy.7 percent. Greek Prime Minister George Papandreou’s announcement on Monday that he will put Greece‘s bailout to a referendum immediately cast doubt on the euro zone’s plan to hand Athens 130 billion euros and arrange a 50-percent write-down on its huge debt. will have hit a major barrier. “The risk is that a ‘no’ from the Greeks will completely derail the rescue efforts. 2011 An unexpected fall in PMI data for China’s manufacturers also hurt investor risk-taking sentiment as did Monday’s failure of US trading firm MF Global Holdings Ltd due to euro zone debt exposure.
head of FX strategy at BNP Paribas. Any hints that the Fed is considering further monetary easing. or signs the economy is flagging.10 yen .7 percent after tumbling 2. fearing a disorderly default. nobody saw it coming and it injects a lot of uncertainty. jobs data due on Friday. “The Greek referendum is a real curve ball. which means uncertainty is likely to continue throughout November and December. Earlier.” the trader said. EURO KNOCKED On foreign exchange markets. “We can kiss the year-end rally goodbye. Euro zone banks were hammered. could drive the greenback lower. Worries about the impact of the Greek decision on other euro zone countries sent the difference between yields on Italian and Belgian 10-year bonds and those of benchmark German counterparts to lifetime highs. the euro fell more than one percent versus the dollar and yen as investors cut exposure to the common currency.7 percent. The FTSEurofirst 300 index of top European shares was down 2.2 percent in the previous session.1 percent at 78. The dollar dipped slightly versus the yen. . with market players wary of further yen selling by the Japanese authorities.” said Steven Saywell. however. meanwhile. said investors would be wary of buying the dollar too aggressively given a two-day Federal Reserve meeting that concludes on Wednesday and key U. with Italy’s UniCredit down 8 percent and France’s Credit Agricole down 11. Some analysts.5 percent. having pulled back from a three-month high as the impact of Japan’s massive intervention on Monday faded a touch.beginning of next year.S. It last traded down 0. Japan’s Nikkei closed down 1.
Chapter 2 The referendum: What will the people of Greece decide? .
if we still think you are solvent. I will put my own accountant in your house to see that you don’t cheat on your promises. all bets on the euro are off. and generally accept a continuously declining standard of living for the next nine years. sees no other way to salvage his government but to ask for a referendum. 2011 Here’s the deal. the eurozone is over R Jagannathan Nov 1. And after nine years. if you take pay cuts. . After that. There is fear that the messy compromise solution that emerged from the eurozone summit last week will end up with a Greek thumbs down and a disorderly winding down of Greek debt – probably through default of a partial repudiation. of course. you need to pay more tax. But mind you. The odds are even that the Greeks will ask Europe to shove it up when asked for their opinion. I will forgive you half the money you owe me. This is why markets in Europe have been tanking as soon as news got around that Papandreou is planning to ask his people for their opinion on the eurozone’s bad idea. Deal? Your first response will probably be the unprintable @#$%&!^$#@. reduce the number of people you employ (maid. driver). Plus. Greek Prime Minister George Papandreou. we may welcome you back as an equal to our club and lend you money again like old times. cook.If Greeks say @#$%&!^$#@ to austerity. accept reduc- tions in pensions. And this is probably what the Greeks will say when the eurozone rescue package calling for extreme austerity from them is put to the vote. shaken by months of continuous street protests and public anger at what they are being asked to swallow.
Spain and Italy following in short order. quoting Simon Ward of Henderson Global Investors. and Spain is slashing its budgets to make ends meet. UK.The three main elements of the eurozone package for debt-ridden Greece are a 50 percent reduction in private debts with banks and pension funds taking a “haircut”. it makes more sense to default and take destiny in your own hands. Portugal’s debts are worse than Greece’s: 350 percent of GDP versus Greece’s 160 percent. While Greece is already about to go under. France is worried that any larger rescue package backed by further debt will mean a downgrade of its own AAA credit rating. in return for severe austerity measures. The eurozone leaders have used mirrors to raise the value of the €440 billion rescue fund by leveraging it and make it look like €1 trillion. Germany is fighting its last war (hyperinflation between the two world wars) and reluctant to reflate. But this is exactly what has been achieved. with Portugal. And the reason for it is that all the leaders of the eurozone are thinking country. Greece will still have 120 percent of GDP as debt – twice as much as the European Union limit. if even nine years of pain and belt-tightening is not good enough to solve the problem.” says a report in The Telegraph. Portugal is already under EU-IMF administration. By any stretch of logic. Portugal and Spain are tilting towards the precipice. when what was required was more than $2 trillion to see that the contagion does not spread beyond Greece to Portugal and Spain. . too late. not continent. and falling public confidence in a recovery. The eurozone leaders will then have to decide whether to turf it out or otherwise quarantine the Greeks in some way. the problem isn’t Greece. However. There’s a huge north-south divide in Europe – with the Germans and the French being stronger than their Mediterranean cousins. “Portugal appears to have entered a Grecian vortex and monetary trends have deteriorated sharply in Spain. It’s the south that could fall like dominoes after Greece. All of them are up to their necks in debt and headed the same way as Greece in terms of rising unemployment rates. The latest package was simply too little. a €100 billion debt reduction. Why is Europe is such bad shape? The answer is a lack of political will to really build huge firepower to tackle this mother of all financial crises. But at the end of it all. rising cost of money. And remember.
. It could arguably be mitigated by ECB (European Central Bank) reflation (easy money).If the two biggest beneficiaries of the eurozone – France and Germany – have chickened out of bolder measures.” The eurozone is in a slow-motion dance to death and disaster. As Ambrose Evans Pritchard writes in The Telegraph: “The two halves (north and south Europe) are locked together in a broken marriage. It will need a miracle to rescue the common currency. the eurozone as it now stands will be history. blighting the chances that Spain might just be able to struggle back to viability. The structural gap cannot be closed by debt-deflation in the south. But if the Greeks say screw the rescue package and austerity measures. little wonder the package is coming unstuck as the richer north forces the poorer parts of southern Europe to tighten belts and swallow bitter pills. yet the central bank has done the opposite.
it will spell the end of the euro and possibly the entire EU. 2011 Never let democracy get in the way of a good economy.” Whatever you do. The UN heritage and education agency UNESCO is already paying the price for using democratic principles. but the clashes between the represented and representers are becoming more common and disparate. it triggered American laws forcing the withdrawal of $60 million in funding. for a large number of people. When they voted overwhelmingly to give full membership to the Palestinians. everyone knows the people would reject austerity. If the Greeks are given a voice. Little wonder — the record of the EU in referendums is dreadful. in a country currently on perpetual strike. . Most significantly of all. not to mention foreign control of government departments. The Financial Times’s Gideon Rachman wrote on Tuesday that: “The Brussels authorities react to the prospect of a referendum like a vampire to garlic. The Irish and the Danes have voted several times to reject EU treaties. don’t let the people decide. a pain in the posterior. Voting is. The Greek prime minister’s decision to throw the European Union bailout to a referendum sent the market into a tailspin because. These votes really shook the European project.Why bankers. if some are to believed. the Dutch and the French voted to reject the proposed EU constitution in 2005. brokers and bet hedgers don’t like democracy Tristan Stewart-Robertson Nov 2.
but with provisos. But all those groups claim to properly represent the people. But does a vocal e-group mean that’s what the population want? None of these hesitations are reasons to scrap democracy. But there is hypocrisy over . particularly with their motto. Germans elected Nazi politicians repeatedly in the 1920s and 1930s knowing fully their anti-Semitic policies.Electing Hamas to power in the West Bank and Gaza Strip in 2006 already cost millions in aid money for the Palestinians. Just last week at the gathering of Commonwealth countries. but nobody elected them. All target largely minority populations — how do any of us know if we might someday find a majority voting against us? Some in the digital community like to talk about power being given to the people through social media and the internet more generally. democracy makes me nervous. “We are the 99 percent”. of course. The group is largely anti-corruption. limited access to abortion and forbidden sharia law being introduced. Uganda hit back at British PM David Cameron’s threats to withhold funding if they did not uphold rights for homosexuals. The same attitude emerged immediately after the Tunisians held their first free elections and the West immediately expressed concern over the choice of an Islamist party. E-petitions have allowed strong and quick support for measures such as restoring the death penalty in the UK. Do majority votes justify such moves? Sometimes. The American Tea Party movement doesn’t accept the elected President Obama and so believes they are the true voice of “the people”. Ballot initiatives in several US states have banned gay marriage. similar to the many “Occupy” groups around the world. if the press and government are correct. but the right kind. Let the people decide. The Anna Hazare team is again threatening PM Manmohan Singh that the activist will resume his hunger strike if the government fails to pass the Lokpal Bill. The people of Uganda are in favour of such moves. The West wanted democracy in the Middle East. in contrast to the government. more or less democratic than the government representatives now? Is an unelected group Democratic votes have been used by the majority to suppress minorities in various countries over the decades.
and now are essentially preventing the Greeks from voting. They decide as a collective majority what future the world has. or growing apathy. in the past few years especially. . or rather a subset of it — capital democracy. not the electors. as the leaders of St Paul’s Cathedral seem to have recognised in their confrontation with the Occupy London Stock Exchange protestors.how and when democracy is applied by those on top. whether through lack of education. They’ve repeatedly destroyed firms and government bank balances. So just maybe. Stock brokers. money lenders and bet hedgers vote with their gut to make as much money as possible. then setting up parallel institutions on the grounds they are more democratic. and a failure to recognise by campaigners on the bottom how flawed the system can be. they cannot be held accountable — you hold the elected to account. the rest of the EU still doesn’t want them exercising their votes. whipped up hysteria. We might even call that fascism in some quarters — the minority controlling the majority. And. And if the ups and repeated downs of the markets have proven anything lately. Disillusionment with democratic institutions does not excuse people from not voting. You cannot vote them out of office. I’d vote for that. like voters themselves. Both can co-exist but there should be more dialogue. or suspend their “voting” rights. we should limit the voting rights of the bankers who would rather we didn’t. Technology cannot solve any of these problems — even if you brought in e-voting in Greece. it’s that we are at the mercy of democracy. as quickly as possible. while some countries learn to build new democracies and others reassert them.
Chapter 3 What the experts said .
Unless Europe’s leaders enacted serious changes the Eurozone could start to crumble. more than 50 percent. potentially dragging down the world economy in the same way the collapse of US investment bank Lehman Perth: The world’s advanced economies face a more than 50 percent chance of plunging into re- . Roubini. it’s semantic. there’s a significant probability. a continuation of the first recession or a second recession doesn’t matter.” Roubini said much depended on a meeting of European Union nations this week that will seek to thrash out a deal to avoid a full-blown Greek default and limit contagion within the eurozone. Roubini said without meaningful reform by European leaders. rather than “financial engineering” that saw wealthy EU nations take on the debt burden of poorer ones. that over the next 12 months there’s going to be another recession in most advanced economies. 2011 cession in the next year as the eurozone crisis rattles markets. He said markets were looking for policies that would kickstart real economic growth in struggling eurozone countries. the eurozone could start to fall apart and lead to another financial meltdown worse than in 2008. who earned the “Dr Doom” moniker for predicting the last global economic crisis long before it hit.The severity of the downturn hinged on whether the Eurozone could avoid a messy break-up as Greece and other nations struggle with crippling debt. also warned China faced a “hard landing” and could not maintain its status as the world economy’s growth engine. “In my view. “Whether you call it a double dip recession. slash rates to zero.” he told a Commonwealth business forum in Perth. said New York University economics professor Nouriel Roubini today.Saving eurozone: Devalue the euro. says Roubini PTI Oct 25.
” Roubini said. “A recession that is severe in advanced economies. they would cut rates down to zero. with defaults by a number of countries and a resulting exit of a number of states from the eurozone and its eventual break-up. if not larger.” Roubini recommended devaluing the euro to stimulate exports from the eurozone and slashing interest rates. “In a situation where it becomes disorderly. the collateral damage even on emerging markets could be significant.Brothers did in 2008. . he said. “If they were serious about restoring growth in the short-term. the shock that could occur … could be as large. than the fall of Lehman in 2008.” he said.
unfortunately they (RBI) will have to be very careful about instruments they use to fight inflationary pressure. They were very slow to deal with the Greek crisis and now the crisis seems to be spreading. most economist found it as an extremely difficult project. The Reserve Bank. Answering questions on eurozone sovereign debt crisis.dip recession. Stiglitz explains why PTI Nov 1. In its bid to contain rising inflation. So. They have taken away interest rate and exchange rate power but did not put any mechanism in its place.72 percent for September. . Worried over the global economy slipping into double. The steps they have taken may not suffice to address the very deep problem that they face.” he told reporters on the sidelines of a public lecture at Jawaharlal Nehru University. “Raising interest rate generate flow of capital (from abroad) that could itself be destabilising. Nobel prize winning economist Joseph Stiglitz today warned that rising interest rate could result in “destabilising” capital flows from abroad. Interest rates have gone up making India attractive for foreign capital and inflation has continued to remain at near double-digit mark. the central bank has raised key policy rates 13 times since March 2010.High rates can destabilise capital flows. “When the euro currency was founded. It was 9. the G-20 leaders at their summit at Cannes in Paris on November 3 and 4 will try to come out with some solution to deal with the sovereign debt problems in Europe. 2011 New Delhi: Criticising the Reserve Bank’s tight monetary policy. he said. Stiglitz said the European Union has not dealt with problems in Greece in a timely manner.” he added. was drawing a “very delicate line” to deal with the problem of inflation by raising interest rates.
The second global crisis is looming large and several experts. and the deepening of the sovereign crisis in the euro area. G-20.” . including RBI Governor D Subbarao had emphasised that time is running out for solutions. The two big flash-points are: renewed anxiety in the US about recession.The issues concerning “destabilising” capital flows and the need to impose Tobin Tax were discussed during the meeting of G-20 Finance Ministers and Central Bank Governors. Subbarao in his intervention at an IMF meeting in Washington in September had said. “We are rapidly running out of solutions. has been at the forefront in resolving the global crisis which began in 2008 with the fall of America’s iconic investment banker Lehman Brothers. Tobin tax refers to levies on flow of cross-border capital. but no decision could be taken because of differences of opinion among member countries. a grouping of rich and developing nations.
Chapter 4 The long negotiation .
But. we are making every effort to delay our arrival at journey’s end. not the army of ‘Eurocrats’ who claim to be in control of this 17-carriage Euro-locomotive – has the faintest idea of where we are headed. dear passengers. it appears that our final destination will be Eurozone Armageddon. A colossal crashbang. the end of the line. However. the likes of which the world hasn’t seen. and by a study of our route map thus far. And we know the effect we’ve had on your nerves and on the equanimity of investors all around the world who were fol- . And now. we can deduce where we’re most likely going. welcome aboard the Eurozone Express. but beyond this stop. And since we’ve become quite adept at this can-kicking business. 2011 Dear passengers. We’ve missed several wayside stops along the way – such as Orderly Greek Default and Bankers’ Haircut – and we’ve taken a prolonged detour into Core Contagion. we reckon we can keep on doing it for a little longer – until we reach Eurogeddon. awaits us. by a process of elimination. nobody on board – not the driver. God knows it’s been a wild ride – for us as much as it has been for you. don’t panic just yet. not the station master. We’re now in Brussels for a summit of European leaders. Although we’re nominally an express train. We’ve done it so far by the simple expedient of postponing the inevitable – by kicking the can down the railway line with bailout after bailout of peripheral countries that were well and truly bankrupt.Welcome aboard the slow train to ‘Eurogeddon’… Venky Vembu Oct 23.
of course. a complete mess. After all. With enforced austerity measures cramping growth in the peripheral European economies. Overnight. economically and politically. from everything that’s transpired over recent months. must begin with Germany acknowledging its role. according to media accounts. who said: “We all know what to do but we don’t know how to get re-elected once we have done it. in the genesis of the Eurozone crisis. which is Europe’s most competitive economy which has benefited enormously from the artificial European monetary union (at the cost of peripheral European Union economies).” The worry now is that even if the bailout fund is enhanced – that is. as they do in France? And where else but in Greece can people retire at age 53 and enjoy welfare excesses – and pensions long after they are dead! And where the government resorts to the extraordinary device of using Google Earth satellite pictures to track down thousands of private swimming pools. It doesn’t also help that Germany. That. where even to this day peripheral economies are subsidising Germany’s export-driven economic growth. right up to the overnight squabble. and the spectacular views of the European countryside. where else in the world do workers get by on 35-hour workweeks. The mood at the meeting of European Ministers overnight. isn’t willing to do as much as it uniquely can to end the crisis.lowing our rollercoaster-like lurching for many months now. And although it’s Greece that draws much of the negative news. where we’re offering free drinks – as befits the welfare state we wanted to build in a foolish burst of socialist-minded romanticism without providing funds for any of it. And do avail of the hospitality at our Last Chance Saloon. But do enjoy the rest of the journey. And since it appears. it is now more widely accepted that the problem runs much deeper. was “grim – the worst mood I have ever seen. as passengers on board the Eurozone Express – or as investors elsewhere whose fortunes hinge on the fate of our train – you must have found it deeply distressing to overhear the very public squabble between two of our stalwart engineers on board – Germany and France – on where we should proceed next. which tax dodgers hadn’t disclosed in their tax returns. They sounded an awful lot like two engines pulling the compartments in opposite directions. the incentive for countries that are in colossal debt to default is increasing by the day. Evidently the two leaders – Angela Merkel and Nicholas Sarkozy – couldn’t agree on the precise nature of the “bazooka” needed – in the form of strengthening the European bailout fund – to avert the train wreck that many believe is inevitable. and escalating their debt burden. Eurozone states throw good money after bad – the entire 440 billion euro bailout fund would go towards keeping the Greek compartment from derailing into the abyss of insolvency and dragging other member-state railway compartments with it. that credits and debtor nations cannot agree on how the burden of the economic shock should be shared.” So much so that economic commentators who refused to contemplate a break-up of the Eurozone are increasingly acknowledging the inevitability of a default by peripheral states. The policy inertia across Europe was summed up bluntly by Luxembourg Prime Minister JeanClaude Juncker. Eurogeddon appears inevitable .
dear passengers. Enjoy the rest of the ride. Nobody believes it will work. The only saving grace. we’re fairly close to the end of the line. but do brace for some rough stuff when we reach Eurogeddon. That’s the grim reality that confronts us today.The train will be in Brussels for four days – until Wednesday. is that either way. Over and out… . There are some suggestions that EU engineers are shunting and hooting about a plan to set up a single “Treasury” to oversee tax and spending across the entire Eurozone. when the top European leaders meet again. It’s quite literally our last chance to chart out a map for the way ahead. And even those who believe it will cannot lay out the route map ahead with any certainty.
which is not a happy portent. 2011 Big news coming out of Brussels this morning. talks were suspended after the failure to reach an agreement.) The leaders are getting together in Brussels (watch the action live here).Saving Europe: EU. Late last night. banks reach deal to lower Greek debt FP Editors Oct 26. but it appears for now that we won’t see dramatic progress. the summit has averted what many considered would be a “eurogeddon” – a messy unravelling of the eurozone There are still many more milestones to cross: how Greece and other indebted eurozone countries can grow their way out of their debt mess is in doubt. citing a European Union source. the mood. Greek PM George Papandreou says Greece is making a super-human effort to get their finances in order 9pm: The latest is that the Greek bond “haircut”‘ talks have been suspended. which was buoyant. for now. The eurozone summit was largely centered on agreeing a writedown or “haircut” with private bondholders on a voluntary basis. tiations – going well past 3 am local time – eurozone leaders and banks are close to a deal on how much of a loss private bondholders should absorb on their Greek debt holdings. On Wall Street. Failure to agree on a voluntary writedown would have led to a full-scale default in Greece‘s debt. with a heavy knock-on impact on markets. Yet. the world will see this as some sort of progress. that the deal will likely see a voluntary 50 percent writedown. (Here’s why. This should effectively lower Greece‘s debt over the next 10 years. Here’s our live blog of all the overnight action… 10:30 pm: Greece is central to this drama. . Eurozone states want private investors to accept the haircut in an effort to reduce Greece‘s debt burden by about 100 billion euros. It appears that after a long night of tough negoReuters reports. To that extent. is now decidedly downbeat.
to bail it out. (h/t @AlbertoNardelli) Looking to China to rescue Europe 5. Stand by for more. with its $3 trillion in foreign exchange reserves.or bailout fund for indebted eurozone countries. This could take a while. The head of the European bailout fund.30 pm: Meanwhile. Although the upcoming visit and the talks with Chinese leaders were characterised as a “normal round of discussion with important buyers of EFSF bonds. In the meantime. you could acquaint yourself with all the acronyms and abbreviations of the eurozone debt crisis. 45 pm: Emotions are running high all across Europe. 7. The vote was largely in line with expectations. Earlier today. More here. China isn’t about to throw good money after bad by buying European sovereign bonds. that the markets didn’t want to hear. 7. Bloomberg reported. Gold still above $1.30 pm: Once again. The euro is selling off on the news. Wall Street in a buoyant mood on expectations of at least a “partial resolution” of the eurozone debt crisis. is to visit China on Friday (28 October) to meet investors in EFSF-issued debt. across the pond. The German Parliament has voted to strengthen the eurozone bailout fund through leverage. MPs in the Italian Parliament came to blows (see picture here) Not sure what it was about specifically.” the intention is evident.700/troy ounce. a heavily indebted Europe looks forlornly to China. here’s economist Nouriel Roubini with his thoughts on how the eurozone can be saved: by devaluing the euro and slashing rates to zero. It’s quite an alphabet soup out there. and four abstentions. 6. Meanwhile. But as we’ve pointed out before. Germany had too much riding on keeping the monetary union together. with negative implications for banks. that expectation is unlikely to be met.45 pm: A check on the markets. Brazil says no . And the always cheerful Marc Faber says investors should accept 90 percent Greek writedown! 7 pm: The vote is in. way higher than expected.30 pm: The German Parliament has begun voting on a leveraged ESFS . 89 against. Coming to blows in Italy 5. The focus now shifts to the action in Brussels. And that a European Union official now says “involuntary” (that is. the US reported buoyant new homes sales. The final vote: 503 in favour. which is exactly the kind of bad news.8 pm: Still waiting for some action out of Brussels.15 pm: Here comes trouble. Bloomberg is reporting that talks on how much losses investors in Greek bonds should bear (the so-called “haircut”) are deadlocked. 7. enforced) Greek haircuts cannot be ruled out. Klaus Regling.
In a speech to Parliament. had ironed out a “secret pact” under which he had secured support from a coalition partner for critical pension reforms – in return for which he would step down in December. Merkel says that while Germany is economically the strongest economy in Europe.15 pm: Welcome to the live blog of the summit of European leaders to address one of the biggest concerns weighing on the minds of people around the world: a plan to save the global economy from sinking. the “secret deal” was sealed with these immortal words from Berlusconi to Bossi: ”Don’t make a fool of me in Brussels. had secured critical support from Umberto Bossi. it was not the “centre of the world. Berlusconi. and is trading at a one-month high. Concedes that Germany cannot prosper without a prosperous Europe. dollar weak 5. Berlusconi? (Not so fast!) 4. Gold strong.Overnight.45 pm: Earlier in the day.” she says. and I promise that we’ll go to elections in March. has been on a tear since yesterday. however. According to one Italian newspaper. the embattled Prime Minister of heavily indebted Italy. markets are essentially flat. Brazil is not considering it… They have to find solutions to the European problems within Europe.” says Merkel. The Prime Minister was to present the pension reform plan to the European Union at today’s meeting in Brussels.30 pm: All eyes are on German Chancellor Angela Merkel. Merkel gives a sense of exactly what is at stake. who faces a crucial vote in the German parliament today on the plan that she and French President Nicholas Sarkozy claim they have pieced together. The US dollar is weak against most major currencies. reports Reuters Brazilian Finance Minister Guido Mantega said: ”I believe that European countries do not need funds from Brazil to buy bonds. Whoa! “We are facing a tough test of monetary union. above $1. Gold. leader of the Northern League. 15 pm: As the world waits for word from the European summit. there were reports (subsequently denied) that Silvio Berlusconi. But in the same breath.” Whoa! Did Merkel actually say that? 4. . gold has behaved unlike any safe-haven the world has know.. who is under enormous pressure to fix the pensions sytem and extend retirement age.” 4.700 to a troy ounce (see chart). “No one should take another 50 years of peace in Europe for granted. According to unconfirmed reports in Italian newspapers. Bye-bye. Brazil rejected the idea that it would buy European bonds.” The Reuters report quoted a “high ranking official from an emerging market country” as saying that India and Russia too were not interested in offering more funds to help Europe and that there was no evidence that China planned to chip in. Analysts are reading this as a rush to a safe haven – even though in recent weeks.
What makes a deal? What would constitute a satisfactory outcome? 1. Summit leaders. Plans for an orderly writedown of Greece‘s debt.This is the 14th emergency summit of European leaders. so that it can acquire additional lending power – of at least €1 trillion 4. A realistic timetable to deliver on these commitments. quoting an EU official. What are the odds that they will be met? Reuters reported. that the numbers had not been yet finalised. And expectations running up to it were quite high. are now lowering expectations. The initial hope was that Wednesday’s summit would start with a gathering of all 27 European Union leaders. Not until November Reuters reported. there would be detailed figures on how the debt crisis will be overcome. followed by the meeting of the euro zone heads of state. the European bailout fund. and that it still needed “a lot of technical work”. An agreement to leverage the €440 billion European Financial Stability Facility (EFSF). But that hope now rests on slippery ground. It cites “deep disagreement” remaining on critical aspects of a potential agreement. US Treasury Secretary Tim Geithner had urged European leaders to heed the world’s calls to avert the “catastrophic risk” of the debt crisis. a short while ago. A confirmation from leaders that plans for recapitalisation of banks worth at least 108 billion euros ($150 billion) 3. who had been promising a “bazooka” at the summit. Yet. when European Union and eurozone finance ministers are to meet. there is little sense of urgency about finding a definitive resolution of the sovereign debt crisis that has Europe on edge. . and that by the end of it all. It now looks like a final resolution might have to wait until the first week of November. which would require private investors to take a 60 percent “bondholder haircut” 2. that prospects for a comprehensive deal to resolve the crisis look dim.
Chapter 5 India’s part – more growth than assistance .
” This is. thanks. The message from India to Europe. speaking at Cannes on the sidelines of the G-20 summit.000 crore more than budgeted and scraping the bottom of the barrel to pay his bills. thus. Rs 65. was quick to disabuse anyone of the idea that we are going to do anything of the kind. the right approach.India has few coins to throw in the Euro-Greek bowl R Jagannathan Nov 3. and we will put in a good word for you. this means we can toss a few coins in the Greek bowl for friendship’s sake? A token of regard from the world’s largest democracy to the world’s oldest? I .000 crore of oil companies’ losses that have to be made good. 2011 ndia. of course. Surely. say new reports. Domestically.” So is India going to throw some of its own money in the bottomless Greek pit? Planning Commission Deputy Chairman Montek Singh Ahluwalia. Externally. Pranab Mukherjee is borrowing money hand over fist in a worsening fiscal situation where 70 per cent of the budget deficit target for 2011-12 has been used up in six months. but please do ask the IMF. Among them. the situation looks more robust with foreign exchange reserves currently standing at $318 billion. for India does not have spare cash – either at home or abroad in terms of foreign exchange reserves – to throw in the pot. And he is borrowing Rs 53. is a polite ‘no. We are looking at it more from a multilateral point of view. it will be done through multilateral institutions like the International Monetary Fund (IMF). of course. I think a lot has to be done to handle the eurozone crisis (and it) has to be done by the eurozone countries. “We have not received any request for bilateral assistance (for Greece). is willing to help the eurozone find money to emerge from its Greek tragedy.” Ahluwalia said. In a guarded statement. He said if any help is given. Pranab Mukherjee is quoted by Hindustan Times as saying that if the eurozone leaders “make a credible assessment of the solvency issue” then “supplementary financing could be considered.
we may. Even though the ability to invest our reserves in any kind of debt.200 billion) in reserves. At last count. have to draw down our reserves. They represent money that has to be managed. in future.2 trillion (Rs 3. India can offer sympathy and hope. is the next best candidate for Greek munificence.Actually. But China is showing no great eagerness to lend money. India’s $318 billion in reserves is matched almost equally by an external debt of $317 billion. does not depend on our external liabilities. Moreover.2 trillion in reserves. no. Japan. including Greek debt.1 percent of GDP – which is unsustainable unless we have equivalent capital inflows. with nearly $1. but not spare cash that can be gifted away. That hasn’t been happening of late. India’s current account deficit (the gap between external earnings and expenses) was 3. To pay our rising import bills. as its trade and current account deficits are worsening. of which external debt is only $546 billion – that still leaves over $2. It is money owed. not money owned. by the people of India. as the fall in the rupee shows. Hard cash is out of the question.7 trillion in terms of a treasure chest that can be invested. the point is our reserves are really external borrowings in another form. . The country that really has spare cash is China – which had $3. India needs all the dollars it can hold.
the rupee at Rs 50 to the dollar. accelerated mortgage payments and cut off credit lines that during the good times were used like a bottomless piggybank. millions of Americans have ditched their credit cards. The US is the economy most likely to recover fast – though it still has a few years of painful wealth reduction to contend with. Many have resorted to a practice once thought old-fashioned—delaying purchases until they have the cash. The question is not whether. One is reduce debt at the consumer level – which is why the American recovery has been so slow. Put the following facts together – higher interest rates in India versus near-zero or low rates in the US.Why India is the only game in town R Jagannathan Oct 28. The Americans – government and people – are doing two things to correct the overconsumption of the past. or all three. Europe and Japan. People are beginning to reduce debts. and 7-8 percent growth rates. Our markets will be on fire. mad. Says the WSJ: “Since the financial crisis erupted.” W . and our growth story will resume – but with high inflation as a corollary. A world awash with state-powered liquidity can only lead to one of the following three. mad money – a period of ultra cheap credit financed by ultra high government debts to finance growth and jobs. outcomes: higher general inflation. and the prospect of even higher growth in 2012-13 and beyond – and there is only one conclusion: India is where the smart money should head. as a Wall Street Journal report notes. and massive cross-border movements of money from low-growth to high-growth regions. This is where India ought to gain in the year (or years?) ahead. 2011 e are in completely uncharted territory again. mad. higher asset prices. but when. The rich world is entering a period of mad. I think it will. Here’s the underlying logic of this prophecy.
no economy of the size of China can ever become a permanent factory to the world without destroying the world economy itself for the simple reason that the world market is not big enough for such a huge exporter to monopolise it. This is America’s revenge against China. But China is too big to succeed permanently by being a persistent net exporter. most of it in dollars. Big economies like China and India have to find growth within – and this is what China has avoided doing all along. China’s economy is a stunted domestic consumer – and the lessons of the 20th century are very. China’s going to have to write off its $3 trillion. the Fed’s near-zero rate policy has unleashed an ocean of cash that will have the net result of debasing the dollar’s intrinsic value. from mid-2008 through the first half of 2011. China tried extending this dream run by lending money to the US – just like a bartender .” Let’s hear what Satyajit Das. a Singapore can be one. The reason why China will hit a speedbreaker stems from two incongruities. very clear on this: sooner or later the party ends. and so can a Taiwan or a Thailand. A Korea can be an export tiger. and not China. Either choice erodes China’s wage advantage. The entry of the Chinese T-Rex in the exports game changed the rules of the world economy. They all had to change gears and slow down. Das told Bloomberg in a recent interview that the primary “axiomatic law” of making a bad loan is that you have to write it off.6 percent. where should investors head once the panic over the global financial meltdown ebbs? The answer is India and other emerging markets. That’s the lesson we should have learned from 2007. We instead shovelled everything under the carpet. China is hurting from US actions – and how. or 8.1 trillion. China is screaming blue murder about the way the US handled its recent debt crisis which finally resulted in a sovereign downgrade by S&P. America’s cheap money policy will have two consequences. With investment rates as high as 50 percent of GDP. It will speed up the American recovery at the cost of inflation and destroy a part of the Chinese advantage and dollar surpluses through the same route. Japan after the world war.” Little wonder the US is not seeing an early recovery. a derivatives expert and author of “Traders. and it’s going to come back to haunt us. and this means it will have to write off a big chunk of its $3. The Soviet Union in the first half of the last century. It could go on only as long as the world’s largest consumer was willing to offer a willing market endlessly. At the government level. or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. First. and the Asian tigers in the last four decades built their growth stories around high investment rates and low domestic consumption. If US consumption and growth are slowing. The Communist Party chose inflation. Guns and Money” and “Extreme Money” says on China. Says Das: “It’s unsustainable. the Journal says that “total household debt – through payment or default – fell by $1.2 trillion reserves. It is also wary about US legislation to curb Chinese exports using yuan undervaluation as excuse.Quoting figures from the Federal Reserve Bank of New York. Says Ambrose Evans-Pritchard in The Telegraph: “Fed actions confronted Beijing with a Morton’s Fork of ugly choices: revalue the yuan.” This will happen primarily through the American flood of cheap money which will dent the value of the dollar and reduce Chinese wealth held primarily as dollar-assets. By implication he suggests that China made bad loans to the US which brought on the financial crisis.
In 2014. Just as China can’t be factory to the world. China now has to build a market within.” The reason: the large size of their domestic markets. the bar ends up with bad debts. A word about Japan is also worthwhile. the yen has been strengthening against the dollar to such an extent that the Bank of Japan will periodically unleash a flood of yen to buy dollars and keep the exchange rate below 75 to the dollar. This means it has to become the engine of world growth by consuming more. E&Y pegs “India’s real GDP growth rate to be the highest among all the RGMs starting in calendar year 2013. But India will do better than China. India will grow faster than China as early as calendar 2013. But Japan will be part of the US-Europe tsunami of liquidity for its own reasons. India is expected to grow at 9 percent and China at 8.sells booze on credit to the drunkard who’s run out of cash. That’s just about a year away. when the economy is expected to grow 9. the truth is somewhere else. Says E&Y: “India and China are expected to be relatively less impacted among the 25 rapid growth markets (RGMs) in case of a deterioration of the eurozone debt crisis. Germany will have to do so with the PIIGS.6 percent. . The bottomline is that Germany and German banks have to bail out Europe. not by producing more. Everyone knows that Japan has been a no-growth story for the last two decades. Just as China has to write off a part of its US debts. If they don’t. Who benefits as the Chinese growth engine sputters? According to Ernst & Young. The worry is that Europe is now entering its own decade of slow or no growth when it grapples with its own demographic issues of an aging population.5 percent. Germany is the eurozone’s biggest export economy and creditor. and Spain. It is Germany’s reluctance to see this reality that is at the root of the eurozone crisis. and slower jobs growth as costs and lower export growth work their way through the system. Beyond this. followed by China at 9 percent. The crisis has. and buy more from its trading partners.” The eurozone crisis is another trigger for this power shift towards India. This is exactly why it has no option but to bail out the PIIGS. excess welfare costs. which lends money to the rest of the eurozone to create an export market for its goods. and absence of structural reforms in the labour market which has resulted in high unemployment. But when the music stops. The low-consumption-high-investment-high-exports growth model is as dated as T-Rex. Within the eurozone. been wrongly played out as the story of a frugal Germany trying to foil the overspending PIIGS – Portugal. Greece. Germany can’t be the eurozone’s biggest exporter forever because someone has to pay for what it sells. In recent months. Japan will slow down even further as its export machine will come to a grinding halt. Italy. This involves a massive shift of resources from investment to consumption – which means higher wage inflation (how else do you consume more?). However. Germany will be the biggest loser in the crisis. Ireland. Germany plays the exact role that China plays in the US-China context: it is a huge exporter. So let’s ask ourselves again: If the eurozone and Germany have to slow down to deal with their internal debt crisis. thus far. who benefits? India and emerging markets.
but will pay the price with high inflation. given the growing scale of our own money printing operations to fund social security schemes – we will still benefit. India and some of the smaller emerging markets will benefit from that.The upshot: the US. If we screw up – which we probably will. If we don’t screw up on reform. and retail. we can get most of the inflows where we want them – in infrastructure. The only question is when. telecom. insurance. banking. . Japan and Europe (not to speak of the UK and Switzerland) are collectively unleashing a flood of money that will raise inflation all around and – once the panic ends – will make investors move to the high growth zones of the world.
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