Sunday, April 17, 2011

Euro Zone Breaking Point

Most of the West has been fluctuating between signs of economic green shoots and the threat of impending disaster over the last few months - the situation is fragile. This is nowhere more so the case than in the Euro Zone.

The current global economic instability is best reflected in the gold price - cautious investors tend to dump their funds into precious metals like gold and silver when they feel that speculating on stock markets is far too risky. With the recent downgrade of Irish debt to one level above junk by Moody's it will be interesting to see how the economic powerhouses of Europe react.

In effect, Ireland has already started to write down its debt. What will the effect of these sovereign debt write downs be other than it being tantamount to localised inflation? Clearly the European Central Bank sees country default by any or all of Ireland, Greece and Portugal as less catastrophic than inflation - visible through their actions by allowing an interest rate increase.

This may be still manageable from the Euro Zone point of view as a whole but for the individual countries in question the damage to their reputation as well as to the external creditors may have many unforeseen knock-on effects. Will the banking systems in these countries, for example, be able to sustain the losses they incur because of it? The answer lies in how punitive the bailout terms are for these countries - no matter what though, the situation is not looking good.

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Given the relentless growth rate in India and China, at this point, it may well be wiser to try your luck with online casinos in India than taking punts on the Germany and France surviving the current raft of economic issues unscathed. I am not optimistic.

Monday, February 2, 2009

Recession sentiment in India

On a recent trip to India, it seems to be the question on most people's minds - I almost inevitably got asked the question about how I was faring with the recession and whether things are as bad as they hear on the news in the US and Europe. There is some degree of optimism there though - they expect the trend toward cutting costs and offshoring will continue - this will certainly benefit the Indian industry.

This is despite the recent setbacks with Satyam fraud debacle which will no doubt increase suspicion on dealing with the third world, particularly when handing over core corporate processes to them.

Tuesday, January 27, 2009

A not so new approach with not so new results

Robert Mugabe is apparently taking advice from World War 2 veterans and to his dismay appears to finding exactly the same as the Germans found in those days - printing more money will not take you out of a financial crisis.

Zimbabwe has been experiencing hyperinflation for at least the last year but the economic policy seems to show no signs of adapting. Notes of increasingly higher value are being printed - to the point of a trillion dollar note being introduced a couple of weeks back. Perhaps Mr Mugabe ought to read some basic macroeconomics and if that is above his station, then perhaps the cartoon on Wonkie about the Zimbabwe dollar hyperinflation cartoon may help him understand the mechanics of national finance.

Sunday, January 25, 2009

UK Interest rates

Interest rates in the UK have been on a downward trend and many homeowners are hoping the relief on their adjusted monthly mortgage payments will support them through any turbulence on the job front. The recession is no longer impending in the UK.. it has certainly arrived.

My own mortgage payment which is on a variable lifetime tracker rate with the Woolwich, came down by almost 35% since last year this time. The product is good in that it allows overpayments without penalty and I think it is sound advice to make as close to your previous mortgage payment as possible if you are able. The additional amount you pay in will contribute toward bringing down the capital you owe on the mortgage and this is much easier to do when the rates are low for obvious reasons.

I'm certainly glad that most banks have passed on the interest rate cuts from BoE to their customers. One can only hope customers use the savings wisely to reduce their debt and not go on a spending spree with the cash that's freed up.

Wednesday, January 7, 2009

New Year

Looking forward to some major reshuffles in the New Year - both personally and in the markets. Things are off to a rather rocky start but I'm sure they'll improve after Obama's inauguration on the 20th. It will be really interesting to see how he pitches the financial bailout package to the American people.. there are a number of options forward for Mr Obama and I'm certain the nationalisation one is the least preferred one. However, for the taxpayer this is probably the most effective solution.

Look forward to some interesting discussions and commentary on the economic meltdown for this year - hope your year's been off to a good start too!

Tuesday, December 16, 2008

Rating agencies

I'm going to have a bit of a rant today - it seems the rating agencies are largely the cause of this current meltdown we're in globally. If they did their jobs properly, banks and investors would have been able to make more informed decisions on the kinds of derivative products that were being traded. Particularly the toxic sub-prime mortgage assets that were being securitized and traded between banks.

I am disappointed that the regulators have not slapped the rating agencies more harshly. While the banks are not escaping blame, the advisors that directly influence the decision-makers should also be held accountable for their role in the current crisis.

Thursday, December 4, 2008

Beyond the brink and into the recession

It looks like we're heading for a rocky few years until things stabilise. As the toxic financial products unwind and their effects are felt throughout the world, we are reminded that the real world is not immune from the stupidy of man.

Quoting an excellent article from the Economist last month which provides the context of the current recession:

At best, the world economy is on the brink of recession

DEPRIVE a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in. As the financial crisis has broadened and intensified, the global economy has begun to suffocate. That is why the world’s central banks have been administering emergency measures, including a round of co-ordinated interest-rate cuts on October 8th. With luck they will prevent catastrophe. They are unlikely to avert a global recession.

According to the IMF’s most recent World Economic Outlook, published on October 8th, the world economy is “entering a major downturn” in the face of “the most dangerous shock” to rich-country financial markets since the 1930s. The fund expects global growth, measured on the basis of purchasing-power parity (PPP), to come down to 3% in 2009, the slowest pace since 2002 and on the verge of what it considers to be a global recession. (The fund’s definition of global recession takes many factors into account, including the rate of population growth.) Given the scale of the financial freeze, the fund’s forecast looks optimistic. Other forecasters are convinced that a global recession is inevitable. Economists at UBS, for instance, expect global growth of only 2.2% in 2009.

The rich world’s economies were either shrinking, or close to it, long before September. Recent weeks have made a rich-world recession all but inevitable. America’s economy lost steam throughout the summer. Temporarily buoyed by fiscal stimulus and strong exports, output grew at a solid 2.8% annualised rate between April and June. But as the stimulus wore off, the job market worsened, credit tightened and consumer spending slid.

That slide became a rout in September. The economy lost 159,000 jobs, the most in a month since 2003. Car sales fell to a 16-year low as would-be buyers were unable to get credit. The economy may already have shrunk in the third quarter. The rest of the year is likely to be worse. Some economists expect consumer spending to fall at its fastest pace since the 1980 recession. Add in other gloomy evidence, such as a survey of purchasing managers that suggests manufacturing is extremely weak, and it is clear that output is now falling. America’s recession may not yet be official, but it is well under way.

In Europe the outlook is equally grim. The British economy, which stalled in the second quarter, is now unmistakably falling into recession. The IMF’s forecasts suggest that Britain will see the worst performance of any big economy in the year to the fourth quarter of 2008. The economies of the euro area, too, are struggling badly. Figures released on October 8th showed that output in the euro area fell at an annualised rate of 0.8% in the second quarter. GDP shrank in the currency zone’s three largest countries—Germany, France and Italy. The fourth largest, Spain, barely grew.

As elsewhere, the most recent figures have grown grimmer still. Business confidence has turned down and a closely watched survey of purchasing managers points to a further contraction in activity over the summer months. Even the European economies that are less directly affected by housing busts, such as Germany, have been hard hit. The big hope for the euro area was that German shoppers, relatively free of debt and with scope to save a little less, would make up for weakness in debt-laden economies such as Spain. But household spending in Germany has been falling since the end of last year.

Japan, too, is looking weak. Its economy shrank at an annualised rate of 3% in the second quarter as exports fell, investment slowed and high food and fuel prices dented consumer confidence. Japanese banks are less embroiled in the financial crisis than those in Europe and America, but with other economies falling into recession and the yen soaring, the prospects for Japan’s exports and economy are dark.

This gloomy backdrop explains why the co-ordinated rate cuts were so essential. Even without the financial seizure, the case for cheaper money was becoming abundantly clear. With commodity prices falling sharply (the price of a barrel of crude was down to $88 on October 8th) and economies suffering, inflation risks are evaporating in the rich world. If oil prices remain at around today’s levels, headline inflation will be below 1% in America by next summer. Deflation is an increasing risk. That suggests more rate cuts will be needed, particularly in Europe.

All told, the IMF expects the rich-world economies to grow by only 0.5% in 2009. Its forecast of 3% global growth depends on reasonably robust expansion in emerging economies. The fund expects developing countries, as a group, to grow by 6.1% in 2009, more slowly than their blistering 8% pace of recent years, but far from recession. That would imply an unprecedented growth gap between the rich and emerging world (see chart).

Some emerging economies, notably China, have shown remarkable resilience to the financial storm (see article). Many other markets, however, are being hit hard by the widening crisis as investors flee risk. Analysts at Morgan Stanley estimate that capital flows to emerging economies could fall to $550 billion in 2009 from around $750 billion in 2007 and 2008. Such a sharp drop would hit economies that rely heavily on foreign finance: more than 80 developing countries are likely to run current-account deficits of more than 5% of GDP this year.

The links in the real economy could also be stronger than many imagine. Exports will be hit as recession grips the rich world. Falling commodity prices bode ill for the countries that produce them, notably in Latin America. The Brazilian real has fallen by more than a quarter against the dollar in the past month. Thanks to more disciplined macroeconomic policies and large cushions of reserves, many emerging economies have strong defences against a rich-world downturn. But they will not escape unscathed. A mild global recession is the best that can be hoped for.