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Eurozone 'pigs' are leading us all to slaughter
The financial crisis is coming to a new, potentially more deadly phase, says Jeremy Warner.
Are we about to enter a third, and this time fatal, leg of the financial crisis? The problems of euroland which have so unsettled markets this week – and in particular those of Portugal, Ireland, Greece and Spain (the "pigs", as they have become known in financial circles) – are worrying enough in themselves.
But they are also a proxy for much wider concern about how national governments extract themselves from the fiscal and monetary mire they have created in fighting the downturn. It's proving messy, though, and they are running the risk of provoking an even worse crisis in the process.
Think of the three phases of the economic implosion like this. The first was a fairly conventional, if extreme, banking crisis where a cyclical overexpansion of credit and lending suddenly, and violently, corrects itself in a great outpouring of risk aversion.
In the second phase, governments and central banks attempt to counter the economic consequences of this crunch with unprecedented levels of fiscal and monetary support. Temporarily, at least, it seemed to work.
Until now, investors have been happy to finance the resulting deficits, in part because government bonds have seemed the only safe place to put your funds, but also because central banks have, in effect, been creating money to compensate for the paucity of private-sector credit. The mechanism varies from region to region, but much of this new money has found its way into deficit financing.
We are now entering the third, inevitable phase of the crisis where markets question the ability of even sovereign nations to repay their debts. Unnerved by this loss of fiscal and monetary credibility, governments and central banks are being forced, much sooner than they would have wished, to start withdrawing their support.
I say earlier than they would have wished because the recovery is not yet assured. Private demand and credit provision remain subdued. Policy-makers knew they would eventually have to abandon their fiscal and monetary support, but the timing of it may no longer be a matter of choice.
The first tremors around these so-called "exit strategies" occurred in Dubai a few months back when the emirate, fearing for its own solvency, shocked markets by announcing that it no longer stood behind the debts of its financially stretched state-owned enterprises. In this case, Dubai's fellow and richer emirate, Abu Dhabi, eventually came to the rescue.
It is much less clear that Greece, Spain, Portugal and Ireland can rely on similar support, either from richer members of the euro area or the European Central Bank.
For the "pigs", membership of the euro excludes the easy option, which is to devalue and turn on the printing presses according to local needs. Instead, monetary policy, and increasingly fiscal policy too, are dictated by Germany and France, the core euro nations.
Whether the fiscal consolidation demanded is politically feasible looks questionable. And even if these countries do succeed in making the necessary adjustments, they may face a classic deflationary debt spiral, where slashing the deficit causes the economy to shrink further which, in turn, increases the deficit.
Little surprise, then, that one of the big bets in markets right now is that these distressed members of the euro will be forced either into default, or rather like Britain with the ERM in the early 1990s, out of the single currency altogether. Serious knock-on consequences for creditor economies would follow.
Yet to true believers in the doomsday scenario, even an outcome as extreme as this would not be the end of the crisis. Fiscal ruin is not confined to the southern European nations. The hors d'oeuvre consumed, it would be on to the main course – the default of one or more of the big, triple-A rated sovereigns. Financial and economic chaos would follow quickly in its wake.
There's a world of worry out there, fed by self-interested speculators, which is proving hard to counter. Yet things rarely work out as predicted, and though nobody should be in any doubt about the scale of the economic adjustment still to be made in Western economies, more benign outcomes are still possible. Bigger, advanced economies with their own currencies are better placed to manage their exits than the "pigs".
However, right now, both Washington and London seem gripped by the sort of political paralysis that can indeed prove lethal. We should not assume that the sudden loss of market confidence that has afflicted Greece – essentially a developing market economy that should never have been in the euro in the first place – will be confined to the "pigs". The burgeoning size of public indebtedness the world over makes all economies vulnerable.
Even so, this week's tremors should be seen as more of a warning than the beginning of a fatal endgame. The austerity of tighter fiscal and monetary conditions is coming to all of us. With or without the compliance of policy-makers, the markets will impose it. But it doesn't have to be a rout.
i kinda know what your implying but could you fill me in on it?
Peter Schiff, an Austrian school economist and author, commented about the economic outlook expressed by President Obama in his State of the Union speech:
The President spoke optimistically about the future, but in reality there is little evidence to support such an upbeat outlook. He began his speech by assuring us that the worst of the storm had passed. General Custer may have said something similar when the first wave of Indian attacks ebbed at Little Big Horn.
Bank of America charged with fraud over Merrill purchase
The office of the New York attorney general, Andrew Cuomo, has charged Bank of America, its former chief executive Kenneth Lewis and ex-chief financial officer Joe Price with fraud for allegedly misleading shareholders over its acquisition of Merrill Lynch.
Cuomo alleged that later the defendants misled federal government in claiming a "surprise" increase in Merrill's losses would allow BoA to back out of the merger if it did not get massive taxpayer help.
BoA ultimately received $20bn (£12.7bn) of federal bailout money from the Troubled Asset Relief Program, which it has since repaid.
Feb. 7 (Bloomberg) -- Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010.
“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast today whether a downgrade is a concern. “That will never happen to this country.”
Greek civil servants warned on Monday they could call more strikes if the Socialist government unveils tough austerity measures to cut its deficit and ballooning public debt.
The ADEDY public sector union already plans a 24-hour strike on Wednesday
ADEDY said it would decide on Thursday after the government makes public the bills whether to call another strike in early March or join one on Feb. 24 by the GSEE private sector union. Together the two group half Greece's 5 million workers.