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This crisis is far from over

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This weekend finance minister of the G-8 nations gather in the south of Italy hopefully not only to take a sunbath. While leading economists are still warning of high uncertainty regarding growth and systemic risk for financial contagion still lingers the G-8 finance ministers are already discussing a possible exit from fiscal and monetary stimulus programs.

This seems premature. The subprime fiasco seems largely over but other problems prop up in particular in Eastern Europe. This region of the former communistic Soviet Union is a going concern. While some of the worst fears are probably exaggerated systemic risk and possible contagion for some Central European banks still lingers.  Banks in Austria, Germany and Sweden have 1.6 trillion US dollar loan exposure in the region.

Of particular interest is the Baltic mini-state of Latvia. GDP of Latvia was 36 billion US dollar in 2008 but problems might spread to neighboring countries yet and get out of control. Just recently foreign exchange markets got upset by failure of Latvia’s bond auction.

Sweden is Latvia’s biggest creditor and its banks have heavy exposure to the Baltic state. Recently Sweden’s Riksbank borrowed 3 billion euros from the ECB. That shows how serious the situation is. The bank is drawing down on a 10 billion euro swap agreement.

Latvia is now in negotiations with the IMF to secure another round of funding, but first it has to implement spending cuts and restrictive fiscal measures, which could further dampen the outlook for growth and lead to even higher unemployment.

But Latvia is not the only problem. About a third of fund managers polled expect more Eastern European countries to default and about 11 percent expect a full-blown systemic meltdown. This has prompted the ECB to issue a warning for 2010 rather than 2009 if the recession lingers.

According to the European Commission 27 EU states have so far pumped 3.7 trillion Euro into rescuing the banks, that’s almost a third of European GDP. Out of that pool 311 billion have been in the form of direct capital injections, that is more than US banks received.

In the meantime the German government has agreed to implement a ‘bad-bank-model’ where large regional banks, like the German Landesbanken, will be able to transfer their bad investments worth about 600 billion euros until 2010. A similar drastic measure might be necessary for Austrian banks too. It seems to be a weird coincidence that this dumping institution for bad assets has been named after a beautiful Italian opera, AIDA.

Complicating the situation is a moldering conflict within the IMF, where funding in the US seems to be called into question. A proposal to send $108 billion is attached in a supplemental appropriations bill to fund the wars in Irak and Afghanistan. While funding for the wars is most likely to be approved the IMF has come under criticism, mainly because of lack of economic stimulus measures among European states.

Republicans and Democrats in the House of Representatives oppose the fund because they fear that the money will mainly be used to bail out Central European banks. If the administration will fail to garner sufficient votes they can pull the funding bill out and support a war-only funding bill. That’s a smoking gun for Eastern Europe and Central Europe alike.

will it cause a snowball effect?



Written by Alfred

12. June 2009 at 11:13 am

Talking about a promise!

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The Times has an interesting piece about deficit projections in the US and how they have changed over time. That’s what I would call a severe neglect.


Written by Alfred

10. June 2009 at 8:46 pm

Governments cruise in debt

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Its no secret: Federal, state and local government budgets are in trouble. Probably all OECD countries have accumulated large amounts of external debts to combat the biggest financial and economic crisis since the Great Depression.

In Germany deficits of State Governments increased by a stunning 10.2 billion to a total of 13.4 billion euro in the first three months of 2009. In the first quarter expenditures totaled 77.8 billion and total income was 64.3 billion euro. The biggest contribution to the large deficit was from the rescue of the Bayrische Landesbank.

The deficit for the Federal Government improved slightly in the 1st quarter from a year ago to 17.4 billion euro. The costs for rescuing the German banking system is not included in the budget deficit but rather situated in external funds, like the Finance Stabilization Fund (Soffin).

German government total external debt in May 09:


Written by Alfred

3. June 2009 at 4:30 pm

The myth that keeps Keynesians going

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– it is never quite the cigarette butt.

US economist and noble price winner, Paul Krugman, writes in his newest Times’ column about the "origins of the current disaster". In short lack of financial regulation that started during the Reagan administration turned us in and caused the current financial and economic crisis. The Reagan mantra and later neoconservative mantra ‘government is the problem’ becomes the focus point of criticism in the pre/post- prevention discussion.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years.

The world class economist is in trouble. Krugman is a declared disciple of Keynes and his hand is leading the cavalry of government interference against "the worst economic crisis since the Great Depression". This is Keynesianism in its purest, something German Finance Minister Steinbrück and declared Krugman villain called “crass Keynesianism”. Why is the professor in trouble, well not really in trouble but lets say academically challenged?

The followers of Keynes like Milton Friedman, Alan Greenspan, Ben Bernanke, Paul Krugmann etc. believe in the almighty power of money that flows through the pipes of the economy. It is according to their believes, that manipulation of total amount of money available in an economy determines its direction. It is mainly in this context that the Federal Reserve finds the appropriate level of interest rates. A Keynesian will always believe in the dogma of inflating one’s way out of every macroeconomic problem by lowering interest rates and devaluing the nations currency.

Why not? It worked at least till now. Though the current crisis clearly shows the limitations and flaws of this philosophy. If Keynes was right how can he explain the current economic disaster? He can’t. In the words of past time guru, Alan Greenspan, ”shocked disbelieve” takes hold among Keynesians these days.

Since Keynesians cannot understand they try even harder to explain it. Krugman’s column in the NYT goes to the point. He writes about regulation and the lack thereof, taking hold during the Reagan administration. He even identifies the Garn-St. Germain Depository Institutions Act, that Ronald Reagan introduced into law in 1982, as the bill that "did it".

When Krugman blames the Reagan administration for scrapping "precautionary rules" he is absolutely right. It is just not the complete picture. To pinpoint our current problems to mortgage deregulation is part of the truth but not all of it. It is like pinpointing a bush fire to a single carelessly dropped cigarette butt when the real cause is climate change. Finding it and neglecting climate change will not prevent another fire down the road.

The idea that mere lack of regulation causes an economy and its financial infrastructure to overheat is not seeing the big picture because no matter what regulation always comes second to macroeconomic events. To Krugman’s second point, higher interest rates would have helped to improve the low savings rate of the private sector. How could regulation have helped to do the job?

At the height of the real estate bubble the whole mortgage market in the US was about 11 trillion dollar and subprime, the unregulated part Krugman writes about, was only 1.3 trillion dollar. At a delinquency rate of 40 percent and a recovery rate of 50 percent the cumulative losses should be about 200 to 300 billion dollar.

The US economy produces services and goods worth about 14 trillion dollar every year. The budget for military and defense in the US is about 500 billion dollar and that does not include the spending on the wars in Iraq and Afghanistan. The ensuing economic disruption caused by ‘mere’ lack of regulation is hard to grasp even after taking into account leverage and the Ponzi scheme of the securtitsation market in the financial industry.

In conclusion the Federal Reserve and its rate setting policies, that were guided to no small part by the ideas of Keynes, contributed substantially to the current crisis. It seems though that Krugman and his Keynesian friends are not ready to acknowledge it. How can we learn and get better, and at this point this is the best we can hope for, if our brightest do not strive to identify the root cause of the problem?

Eastern Europe showered with IMF funds

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The Raiffeisen Zentral Bank (RZB), a major Austrian bank with total assets of 156 billion euro, has issued results for the first quarter of 2009 today. While the bank is still making money profit after tax plunged to 29 million euro from 117 a year earlier, despite record revenues which increased 34 percent compared to last year.

Provisions for credit risk increased by a stunning 500 million euro to 596 million euro. RZB is one of the many European banks with heavy exposure to Eastern Europe. Devaluation of  local currencies led to a massive increase in troubled loans mainly in Ukraine, Russia, Hungary and Serbia, according to CEO Rothensteiner.

The dramatic development in Eastern Europe has caused the government of Austria, the EU and the International Monetary Fund (IMF) to intervene. Austria has already pledged 1.75 billion euro as participation capital for the RZB.

There is more concern in the region. The IMF has determined in a stress test that Romanian banks are also short of capital. They are in need of 1.7 billion euro. IMF experts think that output contraction in the region has not run its course yet.

Although due to large foreign currency reserves Russia does not need assistance from the IMF or the EU, Alexej Simanowski, head of bank supervision, urged banks to increase their capital by 12 billion euro. A necessary step to keep banks liquid if loan default would increase to 10 percent from about 4 percent today.

How precarious the situation is, becomes obvious from the plethora of assistance offered to Eastern European countries in the last 12 month. The IMF has granted Stand By Arrangements (SBA), pending SBA, Poverty Reduction and Growth Facilities (PRGF) and Flexible Credit Lines (FCL) to the tune of 80 billion US dollar. In the table below a loan of 2.1 billion USD to Iceland is also included.

Not included is Croatia. The outlook for long term credit rating has been lowered to negative from stable due to the deep recession . The country needs IMF assistance according to Fitch. 

IMF loan programs to eastern Europe:


Written by Alfred

27. May 2009 at 12:12 pm

Hochverschuldetes Europa!

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Geldausgeben scheint zu einer neuen Lieblingsbeschäftigung in Europa geworden zu sein. Da stehen wir Amerika jetzt nichts mehr nach. Man fragt was ist bloß aus dem Nulldefizit geworden?

Die Maastricht-Grenzen von drei Prozent werden in Österreich und allen anderen Europäischen Staaten (mit Ausnahme von Finnland?) 2008/09 mit Sicherheit nicht erreicht. In Österreich wird der Schuldenberg bis 2013 auf fast 80 Prozent des Bruttoinlandsproduktes anwachsen. Das bedeutet das man allein für die Zinsen in vier Jahren über 11 Milliarden Euro oder fast die Hälfte der heurigen Einnahmen aus Lohn- und Umsatzsteuer budgetieren muss. Na dann gute Nacht für die höchste Bonitätsstufe.

Die FT Deutschland berichtet über die Schuldenlast die Europas Staaten zu erdrücken droht. Die Tabelle als Erweiterung dieses Beitrags greift hauptsächlich auf Daten des Internationalen Währungsfonds (IMF) zu, die in der ‘World Economic Outlook Database, April 2009’ veröffentlicht sind. Für die Berechnung der nationalen Verschuldung der Ukraine in Prozent des GDP, wurde eine Publikation der National Bank of Ukraine verwendet, wobei die Staatsverschuldung in Milliarden US Dollar für 2008 und 2009 gleichbelassen wurde.


Written by Alfred

26. May 2009 at 4:14 pm