Global Economic Watch


Recent Posts



  • Christine Lagarde on Progress in Greece

    International Monetary Fund Managing Director Christine Lagarde tells Charlie Rose that, while a lot of hard work has been done by Greece's politicians and citizens, and Europe's policy leaders, there is much work to be done. And to avoid a deepening crisis the European partners, the private sector, and the Greek authorities have to work together. Here is an excerpt of Rose's interview with Lagarde: Watch the full interview here .
  • Rogoff on Greece's Future in the EU

    Following the announcement of the €130 billion ($171 billion) bailout of Greece, Der Spiegel interviewed Harvard economist Kenneth Rogoff . Like many economists, Rogoff believes Greece's leaders have a lot of work still to do. And he is firmly in the more austerity camp. He told Der Spiegel that he would recommend "The government in Athens should be granted a kind of sabbatical from the euro." In Rogoff's plan, Greece would still be in the EU, but out of the monetary union--at least until the country can lower its debt burden. Otherwise, he is not particularly optimistic that Greece will be able to remain in the EU. SPIEGEL: If Greece were to leave the euro zone, a wave of panic might engulf other countries struggling with debt, such as Portugal. How can we prevent the contagion from spreading? Rogoff: If Greece leaves the euro, the markets will demand sensible answers to two questions. First, which countries should definitely keep the euro? And second, what price is Europe prepared to pay for that? The problem is that the Europeans don't have convincing answers to those questions. SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart? Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s. SPIEGEL: Does that mean the whole idea of the euro was a mistake? Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically. SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled. Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union. Read the full interview here .
  • Terence Roth on the Bailout of Greece

    After twelve hours of meetings in Brussels, European Union leaders have agreed to a 130 billion euro ($170 billion) bailout of Greece . This was seen as a last minute deal to stave off Greek default. But there is much work to be done. As Dow Jones 's Terence Roth tells his colleague Nick Hastings , this agreement was essential because it gives Greece's leadership just enough time to do all it must do to avoid collapse.
  • Feldstein on Europe's Reluctance to Let Greece Default

    Martin Feldstein calls Greece's mix of overwhelming government debt and a free-falling economy an "otherwise impossible situation." Greece will default, as Feldstein argues that is the only way out. But after it defaults, will it leave the euro zone? Having its own currency just might open more options. Feldstein argues there are two reasons that the key influencers in the Euro zone (Germany and France) do not want Greece to leave. At least not just yet. From Project Syndicate : First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank. The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s. A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks. Read Europe’s High-Risk Gamble here .
  • EU/IMF Panel: Greece's Reform Effort Off to a 'Strong Start'

    Some rare good news out of Greece today, as a review panel made up of staffers from the IMF , the EU , and the European Central Bank gave a tentative thumbs-up to the country's economic reform efforts. As part of the IMF/EU relief program, Greece will be going through quarterly review processes. The panel's visit was the first such review, and, according to the IMF press release, "the overall assessment is that the program has made a strong start." In the fiscal area , the authorities have kept spending significantly below budget limits at the state level. This has offset slippages caused by problems in controlling expenditures at the sub-national level (local governments, hospitals, social security funds), and the overall deficit target for end-June was met. Going forward, to address potential risks to fiscal targets, it is critical to tighten expenditure control and monitoring, in particular at sub-national levels. Another key challenge is to further strengthen tax administration, including to reduce tax evasion by high-income and wealthy individuals. This is essential to secure tax revenues and to promote the overall fairness of the adjustment program. In the financial sector , there has been a moderate deterioration in capital adequacy as nonperforming loans have increased in line with expectations. Recently, the CEBS stress tests covered more than 90 percent of Greek banking system assets and all but one state-owned bank passed, thus helping to reduce market volatility. We welcome that the government has commissioned a strategic review for the banking sector and a due diligence for state banks. The Financial Stability Fund (FSF), which is soon to become operational, will provide an important backstop to deal with potential capital shortfalls. In our view, the 10 billion euro earmarked for the FSF under the program remains adequate. Continued close monitoring of the financial sector will be important in the period ahead. Impressive progress is being made on structural reforms . The mission welcomes Parliament's approval of the landmark pension reform, which is far-reaching by international standards. Substantive labor market reform is also well underway. Implementation of recent tax reform and budget reform is key in order to consolidate fiscal consolidation. Other reforms that are scheduled for early implementation are transportation, where important progress has already been made with liberalization of road haulage, and energy. Restoring competitiveness and boosting potential growth remains critical to the program's success. The challenge facing the government in this regard will be to overcome resistance from entrenched vested interests to opening-up of closed professions, deregulation, implementation of the services directive, and elimination of barriers to development of tourism and retail. Read the release here .
  • Calculated Risk's 'Really Bad Scenario' and Debt Defaults

    Calculated Risk is doing a series of blog entries describing the Really Bad Scenario . This is not, as the author is quick to point out, an exercise in examining what will happen in the "worst case scenrio," but rather to look at historical precedents for the current global economic picture to get, well, really bad. And the latest analysis is on sovereign debt (see Ireland's latest problems in that department below). Calculated Risk poses the possibility of nearly half (45%) of all countries that have "large outstanding sovereign debt" default in the next 2-3 years. So, who defaults? A simple method is to choose the 45% of countries with large sovereign debts (over $50 billion) that currently have the highest cumulative probability of default. They are assumed to default in the same order as implied by their cumulative probability of default at 6/30/10 from CMA: Greece, Argentina (again), Portugal, Ireland, Spain, Italy, Turkey, Indonesia, Belgium, South Africa, Thailand, South Korea, Poland, Brazil, Mexico and Malaysia. This involves about $5.6 trillion of debt in default, about 16% of all sovereign debt. If historic trends repeat themselves, it all happens within about two years of the first default (Greece), and 11 home currencies are involved. At the low end recovery rate of 31% of face value, there are about $3.8 trillion of losses. This is about 2-3 times the amount currently embodied in credit default swap pricing which we calculated in Part 4 ($1.3-1.8 trillion). But then, since this is a really bad scenario, Japan defaults too. This might occur because of a global economic slowdown, a rise in general risk premiums and interest rates raising Japan’s debt service (this could take longer, Japan’s average maturity is 5-6 years), Japan’s banking system being affected by defaults elsewhere in the world, lack of political will to make reforms, or several other mechanisms. This is a scenario that must make policymakers' stomachs turn. But the argument from the author is that this is what could happen, because it has happened in the past. Read the post here .
  • Interactive Map from Radio Netherlands: Debt Risks for 6 EU Countries

    Following the earlier post today on the European Central Bank's concerns over debt in the Euro-zone, we thought we'd direct your attention to a simple but helpful interactive map from Radio Netherlands . The map shows the relative debt worries of countries Radio Netherlands places in the "danger" category. Click here to use the map and scroll over each country for information on possible debt reduction measures.
  • Financial Stability Concerns in the Euro-zone

    The debt problems of Euro zone countries continue to cause concern for central bankers across the globe. On Friday, Spain lost its AAA credit rating . And late yesterday the European Central Bank warned that banks on the continent have more write-downs coming. In the ECB's Financial Stability Report , debt is a central theme--public debt, household debt, and the impact of financial and non-financial institutions going into bankruptcy. And while President Obama and others have raised concern over the potentially dangerous effect of EU problems as a contagion on global markets, the ECB is stressing risks from one Euro zone country to another. From ECB Vice President Lucas Papademos 's speech last night introducing the report: A main risk to the euro area financial stability is the possibility that concerns about the sustainability of the public finances persist, or even increase, with an associated crowding out of private investment (slide 5). The progressive intensification of market concerns about sovereign credit risks among industrialised economies in the early months of 2010 opened up a number of hazardous contagion channels and adverse feedback loops between financial systems and public finances, in particular in the euro area. The main reason for the severe deterioration of public finances was the activation of automatic stabilisers as a result of the marked contraction of economic activity which followed the collapse of Lehman Brothers. At the same time, because the structural fiscal deficits of a number of euro area countries were sizeable before the financial crisis erupted, fiscal deficits in those countries rose to very high levels. Added to this were the discretionary fiscal measures taken by many countries to stimulate their economies, following the adoption in December 2008 of the European Economic Recovery Plan. By early May this year, adverse market dynamics had taken hold across a range of asset markets in an environment of diminishing market liquidity. Ultimately, the functioning of some markets, such as the government bond markets in countries with a very negative fiscal outlook, became impaired, thereby triggering a significant widening of government bond yield spreads in these countries, as shown on Chart 1 on slide 5. Here's the chart referenced: Read the full report here .
  • Roubini: Lesson from Greece on Debt and Inflation

    Nouriel Roubini warns us not to look at what is happening in Greece as a far-off event, but rather a lesson in what typically happens after a major financial crisis. The pattern: Crisis brings recovery efforts. Recovery efforts require government spending. Government debt rises. And "deficits grow to unsustainable levels that can lead to default or inflation if not corrected." Roubini: While the markets these days are worrying about Greece, it is only the tip of the iceberg, or the canary in the coal mine of a much broader range of fiscal crises. Today it is Greece. Tomorrow it will be Spain, Portugal, Ireland and Iceland. Sooner or later Japan and the US will be at the core of the problem, shaking the global economy. We need to recognize that we are in the next stage of financial crisis. The coming issue is not private-sector liabilities, but public-sector liabilities. Revived economic growth alone will not generate enough tax revenue to relieve this sovereign debt crisis. Fiscal deficits are huge and structural. They are not due solely to a cyclical downturn in growth but to long-term commitments such as pensions, social security and health care. To avoid default or high inflation, the advanced economies will require some combination of raising revenues through taxes and cutting government spending. In Europe, where tax rates are already very high, the right adjustment is cutting spending instead of raising taxes further. In the US, the average tax burden as a share of GDP is much lower than in other advanced economies. The right adjustment for the US would be to phase in revenue increases gradually over time so that you don't kill the recovery while controlling the growth of government spending. Read US faces inflation or default here . (H/t Economist's View )
  • IMF Managing Director Commends Greece's 'Ambitious Policy Package'

    The Greek government's plan for repairing its debt-ridden economy got the okay from the European Central Bank and the International Monetary Fund this weekend. As a result, Greece will be the recipient of a $146 billion financing package . While this has not exactly been cause for celebration in Greece or throughout the EU, IMF Managing Director Dominique Strauss-Kahn praised Greece's "ambitious policy package" yesterday. In an official IMF statement, he said the government recognized that reform needed to be based on the two strong "pillars" of "fiscal policy and pro-growth measures": A combination of spending cuts and revenue increases amounting to 11 percent of GDP—on top of the measures already taken earlier this year—are designed to achieve a turnaround in the public debt-to-GDP ratio beginning in 2013 and will reduce the fiscal deficit to below 3 percent of GDP by 2014. Measures for 2010 involve a reduction of public sector wages and pension outlays —which are unavoidable given that those two elements alone constitute some 75 percent of total (non-interest) public spending in Greece. “Pro-growth measures will be aimed at modernizing the economy and boosting its competitiveness so that it can emerge from the crisis as quickly as possible. Steps include strengthening income and labor markets policies; better managing and investing in state enterprises and improving the business environment. Reforms to fight waste and corruption—eliminating non-transparent procurement practices, for example--are also being undertaken. You can find several helpful resources for understanding the IMF's work with the Greek government here .
  • Spain's Crisis Response Efforts

    Spain's government has passed a bill that aims to overhaul its economy. With the largest unemployment rate in the Eurozone, Prime Minister Luis Rodriguez Zapatero says the bill is necessary to move his nation's economy from what RTT News refers to as "over-reliance on the construction sector." Mauro Guillen , professor of Management at the Wharton School , says that Spain's economic problems today are, in large part, the result of a construction boom. He recently discussed Spain's challenges, and how being a part of the EU affects the way the country can respond to those challenges, with Wharton's Stephen Sherretta :