Yesterday we presented the first Part Shilling’s view on China and the problems the country s facing. The country can’t continue it’s growth path for ever. With a property bubble having developed, inflation “stubbornly” high and centrally planned Economy, China is poised for a rough ride. Below is Shilling’s part two.
China has become an economic giant because it has so many people who are producing moderate amounts. In most ways, however, China remains an underdeveloped country with political and economic policy tools that are crude by Western standards. Those tools can spur impressive growth –but they also mask some deep structural weaknesses in China’s economy.
It’s relatively easy for developing countries to grow by emulating the technology of advanced nations or, in China’s case, by forcing them to share it as the price of doing business or by simply stealing it.
And a tightly controlled economy can get results quickly. That’s what happened with China’s $586 billion stimulus program introduced in 2009. Growth in gross domestic product leaped from a 6 percent rate in early 2009 back to double digits. Most of the money was channeled through government-controlled banks, whose lending increased by $1.4 trillion, or 32 percent, over the course of 2009 after being flat since early 2006. The money supply increased by 29 percent.
Those loans financed public and industrial infrastructure and real estate. Property prices in January 2010 were up 9.5 percent from a year earlier, according to government numbers, and much more by private realistic estimates. Employment gained along with economic activity, and in the third quarter of 2009, there were 94 job openings for every 100 applicants, up from 85 in depressed 2008, and close to the pre-crisis average of 97.
The Greek people have been withdrawing their money from the banks, and among other things been buying gold. So far the withdrawals have been big, but not disastrous. Let’s see if people regain some confidence after this week’s vote. If people start withdrawing funds in a more “aggressive” way, the Greek Financial institutions might experience a Lehman situation, where we get a run on the banks. Kathimerini reports;
Greek banks have lost about 8 percent of their private-sector deposits so far this year as customers worried about Greece’s potential debt default transferred funds abroad or bought gold, Moody’s said late on Monday.
The ratings agency said in a report that about half of the decline in deposits was also because of the cash-burn effect of Greece’s recession, which caused individuals and companies to withdraw their savings to compensate for their lower income.
But «confidence-sensitive depositors concerned about local banks’ financial health have also been transferring funds abroad and converting their deposits into gold coins, while others have been placing their cash into bank safety-boxes,» Moody’s said, citing recent media reports.
Moody’s warned that Greek banks would face severe cash shortages if outflows increase to 35 percent of deposits. It called the current level of outflows «a key credit negative» for the banks.
Outflows accelerated in May and June because of political tensions and uncertainties regarding the commitment of European authorities to keep funding Greece, Moody’s said.
“The potential for further deposit outflows constitutes a major liquidity risk for banks as depositor sentiment is affected by negative political developments and Greece’s capability for timely repayment of its debt obligations,» Moody’s said in the report.
The euro initially fell about 0.1 percent against the dollar after Moody’s comments. It erased losses, trading up 0.2 percent at $1.4220, as investors await a key vote this week by the Greek parliament on austerity measures. [Reuters]
Many pundits talk about Europe, and we hear about experts on CNBC discussing the Greek situation, but have never understood what Europe is. It is not the United States of Europe. Geography, history, religion makes it very hard to integrate the different countries in Europe on the ideological front, but even harder when it comes to the Economy. Below a great summary for all those experts that don’t have a clue what Europe really is. Courtesey of Stratfor’s Papic.
It is important to understand that the crisis is not fundamentally about Greece or even about the indebtedness of the entire currency bloc. After all, Greece represents only 2.5 percent of the eurozone’s gross domestic product (GDP), and the bloc’s fiscal numbers are not that bad when looked at in the aggregate. Its overall deficit and debt figures are in a better shape than those of the United States — the U.S. budget deficit stood at 10.6 percent of GDP in 2010, compared to 6.4 percent for the European Union — yet the focus continues to be on Europe.
That is because the real crisis is the more fundamental question of how the European continent is to be ruled in the 21st century. Europe has emerged from its subservience during the Cold War, when it was the geopolitical chessboard for the Soviet Union and the United States. It won its independence by default as the superpowers retreated: Russia withdrawing to its Soviet sphere of influence and the United States switching its focus to the Middle East after 9/11. Since the 1990s, Europe has dabbled with institutional reform but has left the fundamental question of political integration off the table, even as it integrated economically. This is ultimately the source of the current sovereign debt crisis, the lack of political oversight over economic integration gone wrong.
At least we know there is a plan B. Translated by Google from the German FT Edition. Whatever outcome, expect more protests in Greece.
The European Union is working on contingency plans in case of a rejection of the Greek Parliament in Athens by the austerity package. ”Then we are preparing ourselves,” said Finance Minister Wolfgang Schäuble the “Bild am Sonntag”.
Deputies on Thursday to vote on the next savings and reform package for their bankrupt country threatened. It fails, can the EU and the International Monetary Fund (IMF) as planned by mid-July, the next aid loans of € 12 billion pay out.Greece was threatened by an acute inability to pay.
Schäuble’s statement shows that the fear is greater before a failed rescue of Greece than previously admitted officially. The CDU politician said at the same time as all other European officials and that he does not expect a no vote in Parliament in Athens.
Who drives the Greeks into bankruptcy?
The federal government
The EU Commission
Nobody. They created it.
All results for surveys
Experts from the EU Commission, the Euro Group and the European Central Bank, but now play through the scenario that Prime Minister Giorgos Papandreou, this time can not prevail. Of the 155 deputies of his Socialist party Pasok have two already indicated that they would not agree to the proposed legislation.
Particularly the privatization of state enterprises, which assure a livelihood for many officials, meets with resistance. Deputy Prime Minister Theodoros Pangalos warned his party colleagues strongly to risk bankruptcy. ”The army would protect the financial institutions with tanks. Across the country there would be riots,” he told the Spanish newspaper “El Mundo”.
Should fail the austerity package, the EU would try to FTD information initially, to gain time to persuade the conservative opposition to an agreement. A lost vote itself was still no national bankruptcy, it was said from the Union. The government in Athens, but would have to scrape together their last billion, expiring in July to repay bonds.
If the failure can not be avoided, would be EU member states and the ECB focus on avoiding a spreading to the rest of the euro zone. Because Portugal and Ireland currently receive help and not even credit the bond market, we would focus on details of the Irish Finance Minister Michael Noonan while on Spain.
Schäuble said: ”We need rapidly to ensure that the infection risk for the financial system and other EU countries would be contained.” Even Federal Reserve Chairman Jens Weidmann had previously declared a bankrupt Greece would notendanger the euro’s existence. ”The euro will also remain stable in this case,” thecentral banker.
Debt crisis in Europe, provides for Greek bust
EU summit afraid of the Greek word “Pandora’s box of”
More and more debt crisis, banks want to help Greeks
Infographic What does the increase of €-screen
EU offers new debt crisis Greeks billion loan
More about: Greece
Skepticism expressed by the Bank for International Settlements (BIS). The currentturmoil around Greece, Ireland and Portugal are only a foretaste of what lay aheadif the investors would their confidence in the sustainability of public finances, losinga large economy, says the new BIS Annual Report.
The financing of the next, around € 120 billion comprehensive aid program to the end of 2014 remains unclear. The euro-zone countries are currently negotiatingwith banks and insurance companies regarding their participation. In addition,Finland threatens to FTD information, not to participate. The country demands for its loans to be covered by securitized assets. The Finns want to incorporate thatinto the new Greek government fund of 140 billion euros – and not just as planned €50 billion.
We have argued for the Spanish Property Sector to further detoriate. With over 1 million empty homes and local Cajas holding “hidden” debt we have a huge Elephant in the EU room, not many talk about. While the Troica is trying to save Greece, Spain is enjoying the hot summer months. We advice to keep track of those Spanish rates, still trading rather calmly. Below, Shiller on the Spanish Economy. (El Economista)
Robert Shiller is an economist, academic, and best-selling author. He is ranked among the 100 most influential economists of the world and currently serves as the Arthur M. Okun Professor of Economics at Yale. Professor Shiller shared with elEconomista some of his insights on the US and European economies during a phone interview. He recognized “is kind of chronic illness in Spanish economy”.
Would you consider the US economic environment a double dip or just a slowdown?
I don´t know if I´d qualified it as a double dip cause it´s already been two years since the end of the last recession. The econonometric forecast don´t see another recession happening. All of the ones I talked to are pretty optimistic, so I respect their judgment, but I´ve some worries about a double dip because of the decline in home prices, the decline of confidence as reflected in the stock markets, the crisis in Greece and other European nations, including Spain, by the way. All these are leading people to wonder about the underlining of our prosperity. That´s not in the included in economic models, but it seems to be very real. I think there is a substantial probability of a recession soon. Recessions have been spaced 10 years in the recent history, but I suspect we will see another one well before 10 years.
So, it?s the US suffering a lost decade as Japan did?
1,9 percent growth is in the upper range of the lost decade in Japan. I´ve been worrying about that, and the thing is that I believe that the economic changes are reflections of the deep sociological changes that unfold over decades. For example, the home price decline in Japan, when prices peak in 1991, was followed by a decline until 2006. Immediately after, the prices went up for one year and then started to go down again, so they have 20 years of price declines in Japan. In the US we had basically five years of price declines and there was also a period where we registered a slight increase. Now they´re going down again, so it?s plausible that there will be more years of home prices declines.
When will the home prices hit a bottom in the US, then?
That might not happen for years, it could be around five more years. The other question is if it could happen sooner. I think in some cities the prices will boom but I guess what I´m doubtful is that there will be the big national and international boom in housing that we saw in the early 2000´s. We will not have the colossal proportions of booms like the one in the US or Spain.
Under these circumstances, some people are already talking about the fall of the US Empire, do you agree?
There used to be European economic hegemony in centuries past. Then we had two World Wars and a Spanish Civil War that interrupted the momentum for Europe. There is no much difference between the US and Europe. Actually I think the differences between those two are exaggerated. China, India, and other emerging countries are developing faster and people already talks about the Chinese century. That said is going to take a while, but it´s true that Asian economies are showing a lot of signs of brilliance. Maybe there will not be a clear winner.
And what about Europe? Is Greece heading to a default on its debt?
It seems to me that underlying conditions in Greece are still there. It reminds me of the problems in the housing market where they bailout homeowners who cant pay out their mortgage and then they find that they´ve to bailout them again. It´s a question whether the world economy goes into another recession and if it does that I expect Greece to be in even more trouble.
What´s your take on Spain, the pink elephant in the room?
Is kind of chronic illness in Spanish economy. Spain is kind of similar to the US, since they´ve similar problems. I wish I could be more positive about the future of Spain but, in this case, I tend to be on the pessimistic side.
PIMCO’s Mihir on commodities, inflation and the goldilocks of the 90´s gone.
- We expect commodity prices to be generally rising going forward, though with volatility and differentiation among commodities.
- Emerging markets going through a particularly commodity and energy intensive phase of growth may affect what developed-world consumers pay for commodities.
- Currencies are another factor. If developed-world policymakers attempt to make their economies more competitive via a cheaper currency, that could lead to higher inflation for those that are net importers.
For all those naive China permabulls, there seems to be some differences in measuring those Local Government Debts. On the other hand, who believes the Chinese accounting practices where the Economy has a constant close to 10% “perfect” growth? Stratfor reports;
Conclusion; It has been said that China’s rapid growth makes this debt manageable; this assumption is inaccurate. Though China has maintained an average of 10 percent growth per year for 30 years, and a correction is coming sooner rather than later, worrying signs in the export sector point to the fact that the current economic model is expiring. China may be able to delay debt payments, reshuffle among government entities and bail out indebted entities for a period of time, but ultimately the financial burdens on the system will further delay the process of building up household wealth and increasing household consumption. The result will be that rebalancing the economy will be further away than ever and growth rates will fall.
China’s National Audit Office (NAO) has completed a long-awaited review of local government debt and submitted it to the National People’s Congress, Xinhua reported June 27. The report claims that total local government debt amounted to 10.72 trillion yuan ($1.7 trillion) by the end of 2010. This sum is close to the 10 trillion yuan estimate leaked in late May. The NAO’s 10.7 trillion yuan total is lower than the 14.4 trillion yuan estimated by the People’s Bank of China (PBOC) earlier in June. (The PBOC claimed its estimate covered only the “local government financing vehicles,” or LGFVs, that were set up to handle investment projects for local governments, which are, with a few exceptions, forbidden by law to run deficits and issue bonds.)
The NAO report is obviously politicized and has been used to argue that the local government debt problem is not as bad as many had assumed — indeed, the report downplays China’s local government debt problem. However, the report provides insight into China’s systemically risky practices, and it calls into question the assumption that China can manage its debt.
As Greek parliamentarians get ready to vote on the new set of austerity measures, Athenscontinues to be in the focus of the global markets. The problem is that Italy and Spain are slowly coming into focus as well.
The debate on a new set of austerity measures has started in the Greek parliament. The vote in the midterm plan is set to take place on June 29. The application law on how to actually implement the plan will take place on June 30. STRATFOR’s forecast has thus far been that the Greek government would hold and win the confidence vote, which already happened, and that the austerity measures would ultimately be passed. Greek Prime Minister George Papandreou has 155 members of parliament. Two of his 155 have said that they would not support austerity measures. Seeing as Papandreou needs 151 votes to pass the austerity measures, this makes the situation highly volatile. Adding to this volatility is the fact that the Greeks are planning for a two-day strike on June 28 and 29. If the protest and the strike become considerably violent, it could have an effect on how the members of Parliament see the situation.
It is important to understand that for Greece, the EU is not just about prosperity and a quality of living. Greece has a strategic issue on its peninsula, and that has to do with its continuous rivalry against Turkey. In the 1970s and ’80s, Athens could balance Turkey on its own. However, as Turkey has grown into a regional power in the 21st century, the balancing act for Athens has become more difficult. Therefore, for the Greeks, being part of the eurozone and the EU is not just about social welfare or about quality of life; it is also about strategic imperatives. As such, they may be willing to undergo a considerable amount of pain before they break. Furthermore, considering the growth of Greek wages over the last 20 years and considering the improvements in the economic situation, the actual austerity measures are not really sliding the Greeks into an unknown economic collapse. Nonetheless, if the new austerity measures are implemented, and particularly privatization of public assets, there could be considerable pain because a lot of people would be looking at necessary layoffs.
As such our annual forecast was correct in pointing out that in 2012, we do not see a fundamental shift in the Athenian policy towards austerity measures, both because the public angst would not be overwhelming and also because there doesn’t seem to be a political alternative to the current center-right/center-left choice of governments, and would follow most eurozone directives. In the short term, therefore, we do not see the Greek situation as critical. It could develop into a very critical political situation underground. However, what is very dangerous is the fact that the contagion seems to be already spreading to Spain and Italy, with the markets punishing both in today’s trading, and that is something that the eurozone would have a very difficult time containing because Italian and Spanish economies together are too great for any bill or funds to take care of.