Edward Hugh - Hilo oficial

juancarlosb

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Llevamos hablando de ello unas semanas, y me parece que ya va siendo hora de crear un hilo oficial sobre Hugh, para que la información no quede dispersa por el foro.
Si Hugh está en lo cierto, seguro que este hilo será uno de los importantes de burbuja.info, y sino, caerá en las profundidades del foro para siempre.

Primero los dos enlaces importantes para recopilar información:

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Edward.Hugh.Blog

Y una breve reseña biográfica:

Edward Hugh es un macroeconomista especializado en teoría del crecimiento y de la productividad, los procesos demográficos y su impacto en el conjunto de la economía, así como en la dinámica subyacente a los flujos migratorios. Radicado en Barcelona, desarrolla una investigación sobre envejecimiento, longevidad y migración, así como sobre el impacto de todos esos parámetros en el crecimiento económico. Actualmente, trabaja en un libro provisionalmente titulado: Población, ¿el último recurso no-renovable? Colabora regularmente en publicaciones como Euro Watch y en la página Global Macro EconoMonitor dirigida por Nouriel Roubini, y sigue de cerca las economías de India, Italia, España, Alemania y Japón.
Fuente: SIN PERMISO - artículos en la WEB

Suele postear en Facebook comentarios breves, casi siempre en inglés y alguna vez en catalán.
Es pesimista con el futuro de nuestra economía y no tiene pelos en la lengua para llamar a las cosas por su nombre, siempre manteniendo una educación exquisita.

El informe de Variant, que tanto revuelo ha ocasionado, bebe de sus opiniones.

Aquí dejo su último comentario:

This article in today's Cotizalia asks the very interesting and pertinent question - just how typical was La Caja Castilla La Mancha - since their bad debt rate has gone up from 9.23% in December (before intervention) to 17.33% in June (after th...e government auditors went through the books). 31.6% vof their loans to property developers are now in default (up from 16.77% in Dec) and 20.94% of their corporate loans.
Y el artículo al que se refiere, de McCoy:

Los "borrachos" de la CCM, ¿los únicos que dicen la verdad?

cajas de ahorro, CCM, morosidad

@S. McCoy - 07/09/2009

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aumentar tamaño letradisminuir tamaño letra

Sostiene el acervo popular que sólo los borrachos y los locos dicen la verdad. La utilización corriente de tal expresión hace referencia a dos situaciones principales: la revelación de un secreto desconocido para la gran mayoría de los que lo oyen, lo que genera estupefacción y asombro a partes iguales, o la promulgación de una verdad obvia pero inconveniente que sólo alguien que no esté en pleno dominio de sus facultades mentales se atreve a pronunciar, provocando así que la mayoría de la audiencia trate cuanto antes de someter tal salida del guión al curso corriente de las cosas. Hoy vamos a tratar de este último supuesto.

Dentro del panorama bancario español, CCM se ha convertido en ese personaje incómodo equivalente al loco o al borracho que, a través de sus cuentas trimestrales, se encarga de recordar al conjunto del sector cuál es su realidad implícita, toda vez que su cobijo bajo el paraguas de la Administración provoca que no incurra en las dudosas prácticas de la patada a seguir en las que están inmersos gran parte de sus competidores. Ni hay adjudicaciones masivas de activos inmobiliarios, ni tasaciones irreales, ni refinanciaciones imposibles, ni creación de sociedades aparcamiento fuera de balance a ver si cuela. La verdad cruda y dura, sin aderezos de ningún tipo. O, al menos, eso se supone. Y, ¿qué es lo que nos dicen los orates (pedazo de palabra de crucigrama) de la caja castellano manchega?

Pues nos cuentan, ni más ni menos, que la morosidad de la entidad ha pasado de diciembre del año pasado a junio de este año del 9,32% al 17,33%; es decir, que prácticamente ha doblado en seis meses. Que uno de cada tres créditos a promotores están en mora tras pasar en el mismo periodo del 16,77% al 31,36%; que una quinta parte de su financiación empresarial está incursa en la misma situación (del 11,27% al 20,94%), que los activos dudosos sin garantía real se han multiplicado por cuatro en 120 días (3,47% al 13,86%) y que la mora de las hipotecas sigue por debajo del 3% (del 1,5% al 3%) lo que permite que la cifra final no sea aún más escandalosa. La tasa de cobertura se encuentra ligeramente por debajo del 30%.

Es verdad que se podrá argüir, como reconocen los propios administradores, que el mix de negocio de la caja, al calor de las operaciones cuando menos dudosas acometidas por sus anteriores gestores, era especialmente malo con un peso sustancial del crédito promotor (40% del concedido) y de unas aventuras empresariales de cuestionable viabilidad. Obviamente, no voy a ser yo quien niegue la mayor. Pero ¿tanto como para que su morosidad triplique a la del conjunto del sector? Pocas entidades se libran del pecado de su contribución financiera a la burbuja inmobiliaria, en mayor o menor grado; no creo que la prudencia haya sido la máxima principal a la hora de conceder dinero a empresas ligadas al ladrillo o al ciclo infinito de crecimiento que aguardaba a nuestro país; ni pienso que la caja haya sido excesivamente agresiva en la financiación al consumo, la verdad. Aún aplicando un coeficiente corrector, resulta difícil creer que la mora real de muchas entidades, sin triquiñuelas contables y operativas, no se encuentre ya por encima del 10% al calor de las cifras que citamos en el párrafo anterior.

En la intervención de CCM ha habido muchos errores que van desde el absurdo que supone en un mercado globalizado como el actual el tratar el problema de la supervivencia de una entidad de un modo individual hasta la generación de lo que algunos directivos bancarios han dado en llamar dinámicas competitivas negativas, sobre todo por lo que a la captación del pasivo se refiere, depósitos sobrepagados y compensación del riesgo moral por la vía de las recompras a la par de participaciones preferentes. Es muy cuestionable, en efecto, que uno de los objetivos de la nueva CCM sea “la retención y captación de pasivo minorista” con la garantía estatal detrás lo que se traduce en una reducción del margen de intereses aún en el entorno actual de curva de tipos que está haciendo que la mayoría de las entidades se forren.

Pero, dicho esto, hay que reconocer que la visión sectorial que aporta es impagable. Se trata de la única sociedad capaz de proclamar, a voz en grito, que el rey está desnudo. Sin embargo, tanto gobierno como Banco de España y asociaciones sectoriales, prefieren mantenerse en su falsa inopia en la creencia de que, como el coste de financiación es, gracias a la masiva intervención de los bancos centrales, irrisorio comparado con 1993, si el ciclo repite su esquema temporal el impacto sobre sus cuentas será mucho más limitado que entonces. Sin embargo, la pregunta cuya respuesta “is blowing in the air” es ¿por qué no se aplican los criterios de CCM al resto de las firmas financieras españolas, verdadero stress test? Y, si se hiciera, ¿cuál sería el resultado? Se admiten apuestas. Buena semana a todos.
Continuará...
 

juancarlosb

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Edward posteó hace unos días una serie de gráficos sobre la evolución de la economía española. Como son temas en general bastante debatidos en el foro no los posteo, pero veamos los comentarios:

Primero este Sr., que no parece de aquí, interpreta los gráficos a su manera. Le parece que pronto vamos a ir bien. Vamos, NPI.

Balaji Viswanathan
Most of your charts show a stabilization of the fundamentals. The PMI charts show improvement and moving towards 50 (after which is indicates expansion). I think people were so afraid of a freefall that even a stabilization sounds like recovery. Also, major economies like Germany, Japan, China, India, Australia have recovered pretty much from last ... Read MoreSeptember lows, and this would have further effects on global consumption.

Regarding drop in construction & retail, I think that is healthy in the long term. It will eventually reduce the importance of these two overvalued sectors, and get the world to do more productive things.
La cosa parece que no le hace mucha gracia a Edward. Le explica a nuestro ingenuo amigo que aquí no funcionan las cosas com él se cree. Le comenta como la burbuja ha distorsionado de tal manera la estructura de precios, por lo que nos espera un largo sendero de deflación para poder llegar a exportar.

Edward Hugh
Balaji, most of your arguments are sensible enough, there is a stabilistaion towards a slow and steady decline, especially as you say in retail and construction. The only sectors that can really hope to recover are industry, services (tourism), and agriculture (which I don't show here, but is obviously a potential growth area, especially soaking up... Read More some of the migrants who are surplus to requirements from construction.

But all of these activities will now need to be driven by exports, (especially with internal demand falling steadily as people pay down their debts) and this is where the true problem lies, since Spain's price structure has become horribly distorted by the bubble, and this is where the correction is needed to bring back competitiveness to exports, and generate that much needed current account surplus. But Spain cannot devalue, since it no longer has its own currency, so a long and hard road of deflation lies ahead.
Coge carrerilla y 3 minutos después sigue al ataque, explicándole sucintamente la espiral de debt-deflation en la que estamos empezado a entrar y que finalizará en una crisis financiera del estado en 2010 ó primeros de 2011.

Edward Hugh
Meanwhile, as Spain deflate employment is falling at an underlying trend rate of about 100,000 a month, and as wages and prices fall the bad debts simply mount up, which is what is leading to the problems in the banking sector.

None of this will change till we have export lead growth and a significant trade surplus, which is all at this point a ... Read Morelong way away. So the big danger is now that there is another financial crisis (this time in government finance) and the whole thing gets destabilised yet again. This is what I imagine will happen, sometime in 2010, or early 2011.
Nuestro amigo indio queda tan abrumado que se retira del debate. Después comenta otro que parece que sí que se entera. Resumiendo, ¿pero qué coj... vamos a vender fuera?

Paul Monahan
"export lead growth"?? what do we produce at a competitive price that we can export? not much apart from such niche products!!!!!
Esto parece que le gusta a Edward, y le dice que eso demuestra los disparates que hemos hecho estos años. Luego apunta que tenemos que pagar la deuda y que no cree que los alemanes nos permitan hacer default.


Edward Hugh
Well, this is the point Paul. This is a measure of how far wrong things have gone, and how long the road ahead actually is. There is no alternative now, the external debt has to be paid down, or Spain has to default, and I doubt the Germans who hold a large chunk of the debt will permit the latter.
Luego comenta otro, español (kierevelos??), que también vive en los mundos de yuppie, y que cree que somos unos fieras que en cuatro días salimos, como campeones.

Fernando Blanco Mourenza
As far as I know Spain exports things: there is a number in the trade account for that item, maybe not as big as desired. And there is also the tourism . Wages are decreasing as a direct consequence from unemployment, so the costs are going down. No need for internal devaluation.
Edward demuestra su temple y le explica con infinita paciencia que las cosas han ido demasiado lejos para corregirse así, que el déficit se ha reducido simplemente porque ha bajado el consumo interno y que si seguimos así el paro seguirá aumentando hasta que lleguemos a un punto de ruptura en que quiebre todo el sistema financiero. Y le explica que no existe otro camino, sea en el país que sea.

Edward Hugh
Unfortunately Fernando the trade deficit is just way to big for this. The CA balance is only improving because imports are falling, and along with them living standards.

Without internal devaluation unemployment will simply continue to rise at 100,00 a month, or whatever till we reach 6, 7, or 8 million - wherever the breaking point is. After that ... Read Morethe banks will simply melt with all the bad loans that will pile up.

I know you think you are arguing for the best for your country, but really, the longer we put off the inevitable the worse it will be in the end. There is no other way, after the substantial price distortion Spain has suffered. Structural corrections are just like this, in every country where they happen.
Luego sigo que todavía hay más.
 

currobena

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La siguiente ficha en caer...está en la periferia de Europa

Puesto que este es el hilo oficial, posteo aquí el nuevo artículo de Edward Hugh. Mis disculpas si ya se ha posteado en otro sitio.

There Is Another Shoe To Drop In The Global Economic and Financial Crisis - And The Focus Will Be On Europe’s Perifery
by Edward Hugh

‘As far as I am concerned, this is … the most complex crisis we’ve ever seen due to the number of factors in play’
Spanish Economy Minister Pedro Solbes speaking to the Spanish radio station Punto Radio September 2008

“‘The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.”
Director of the US president’s National Economic Council Larry Summers, speaking over lunch with the FT’s Chrystia Freeland.

Basically what we now have before us - as Pedro Solbes pointed out before being uncerimoniously defenestrated from the inner circle of the Spanish government - is an extremely complex situation and problem set. The background has evidentally been an unprecedented global financial and economic crisis, but this crisis has affected countries unequally, and it is noteworthy just how many people in what could be called the “weaker” countries have often sought refuge in the global nature of the crisis, rather than asking themselves just what it is exactly about their own particular economy that makes them “weaker”, and more vulnerable, and why the crisis has struck more severely “here” rather than “there”. Thus there is a great danger that people take refuge in the fact that the crisis is global in order to avoid thinking about the actual reality that faces them. This danger becomes even more of an issue as some countries begin timidly to return to growth, leaving others stuck in the mire - and possibly in danger of bringing the whole pack of cards tumbling down on top of them again. One such danger is evident in China (for which see the numerous warnings from Andy Xie) but others are for me somewhat nearer home, on Europe’s periphery. A number of countries in Eastern Europe immediately come to mind - not only the Baltics, but also Russia, Ukraine, Bulgaria, Romania, Hungary, Serbia and Croatia. And in Southern Europe Spain and Greece stand out as in particular need of what Jean Claude Trichet would undoubtedly call “extreme vigilance”.

If we leave out Russia (which is arguably a rather special case due to its dependence on energy revenue), then the simple fact of the matter is that what all of these countries had in common during the bubble years was that they were all running large (unrealistically large) current account deficits, which were produced to fuel strong credit driven housing and consumption booms. The crisis has struck all these countries like a shot of lightening for the simple reason that under present conditions such current account deficits are now no longer sustainable.

Now, the only way forward for such countries, as Paul Krugman points out (citing Reinhardt and Rogoff) is to export their way back to growth, and to demonstrate how this might work Krugman produced a simple chart in his Lionel Robbins lectures, which although rather rough and ready does serve the purpose adequately well.

So the central point I wish to make is that all these countries now need to run current account and trade surpluses to generate headline economic growth and to start paying down the external debt they accumulated during the heady years of the boom. Countries are no different to households in this sense. And the wider the current account deficit at the height of the boom, the bigger the correction needed. Without the much needed correction these countries simply will not recover, and we will see the famous “L” shaped recovery. If people think otherwise they are simply deluding themselves.

The situation in the US and the UK is, of course, not that different structurally from that which is to be found in some parts of Eastern and Southern Europe, but it is less extreme, in that the Current Account deficit peaked at between 5% & 6% of GDP. This is still large, and correcting it is going to be one of the very good reasons that the global economiy ISN’T going to return to any kind of strong growth anytime soon, given the strategic importance of the economies concerned.

The UK and the US do, however, have one large and significant advantage over the worst affected countries in South and East of Europe, and this lies in the fact they can issue debt in their own currency, and they can allow that currency to devalue, and that in fact is the road that both these countries are now going down. But remember, the result of this is that US and UK consumers will now play little part in facilitating headline growth in the global economy, since they themselves will now be net savers. But most of the worst affected East European economies are either locked-into currency pegs with the euro (the Baltics and Bulgaria), or cannot devalue very far due to the strong dependence on forex loans (Romania and Hungary) or both. Nor can these countries realistically expect to issue debt in their own currencies. So they are in effect in a very parlous situation, on financial life support from the EU and the IMF, while unable to make sufficient adjustments sufficiently quickly to stop unemployment rising out of hand, and non performing loans piling up in the banking sector.

Which brings us to Southern Europe. Italy is a case apart - since it is “simply” suffering from a kind of ageing-related terminal slow death “Venice style”, and thus has a different problem set - in particular, while the Italian government is heavily in debt, Italian households are strong net savers, and thus any eventual default would be largely a “home team” issue. Portugal, Greece and Spain, on the other hand, were all running large CA deficits between 2000 and 2008, and these are deficits are now being forceably closed. But of course, and here comes the rub, these countries don’t have their own currency - they have to issue debt in euros, and they can’t simply fuel inflation (like they did in the past) since they can’t print money, only the ECB can do that, and the ECB is a multi-national not a national institution.

Now people over at the ECB are well aware of this problem, and the bank is facilitating all the liquidity these countries need in the short term, but it is so very important important to understand this only aids liquidity, it does not resolve the solvency-related issues (which the individulal countries have to sort out for themselves) and in fact the short term palliative only adds to long term accumulated debt problem if the breathing space offered is not taken advantage of. And, here comes the problem, since all the available evidence suggests that the correction the ECB would like to be funding is either not taking place, or is taking place too slowly to be of much use. That is, the ECB has the funding capacity, but it does not have the necessary political clout.

Take Spain for example - Spain’s external debt is continuing to rising even as I write, while at the same time GDP is falling, and will continue to fall untill we get back to export competitiveness. Worse, nominal GDP (that is current price GDP) is now falling faster than real (inflation-adjusted) GDP, so the value of the debt remains - in money terms - where it is, while GDP shrinks in relation to this absolute reference point - both in real terms, and even more so in nominal terms. I have been following this problem in Japan for the best part of a decade now, and the solution is evidently not an easy one, since - if you take the core core price index - Japan never really came out of deflation after 1998, and land prices are now back at the levels of somewhere in the early 1980s. Needless to say, if this repeats itself in Spain, the mess will not be a pretty one, and the problem for the ENTIRE global financial system will be substantial, due to the counterparty risk element.

So we are really caught on the horns of a dilema here, Spain and other EU periphery countries have to deflate (willingly or unwillingly, they need to carry out what has now come to be known as “internal devaluation”) but so long as they fail to do this and to attract sufficient investment for new export industries to turn the economic dynamic around AND as long the rest of the global economy doesn’t recover strongly enough with some countries starting to shoulder significant deficits again, then we are all only going to plumb the bottom. Worse, unemployment will continue to mount, and bad debts pressurise the banking system, which is where the next shoe might then not only drop, but be forced right off the foot first.

The only way in which it would be possible for these countries to attract the necessary investment to be able to start to create employment employment again would be to restore competitiveness, and over the time horizon we should be thinking about this is impossible for them to do via productivity improvements alone: hence the pressing urgency for the “internal devaluation” solution.

And let’s not be fooling ourselves here - the main reason those famous government bond “spreads” have all tightened so impressively recently has been the willingness of the ECB to discount the national government bonds which are first purchased by local financial entities and then passed on for discounting at the ECB - a practice one of my Spanish friends calls the “truco del almendruco” (that is, you sell the 10,000 euro new car for 9,995 euros thus changing the key headline digit, giving everyone the impression there has been a large and significant discount, and, oh yes, first of all you need to dump a wheelbarrow load of cash on the banks - in this case on a one year financing basis).

“Between October 2008 and April 2009 MFIs’ net purchases of debt securities issued by the euro area general government sector totalled €217 billion in the context of rapidly declining short-term interest rates. This entirely reversed the net sales of €191 billion observed between December 2005 and September 2008 in the context of rising short-term interest rates.”
ECB Monthly Bulletin, June 2009

So what I am saying is that the ECB is effectively conducting expansionary fiscal policy in the Eurozone countries - by buying a large part of the new government debt, a state of affairs which is in fact equivalent to conducting Quantitative Easing via the back door, while the EU/IMF tandem is offering similar support to the key countries in the East. Anatole Kaletsky made a similar point in the Times back in June, when the ECB announced its €442 billion of new cash into the euro money markets in what was the biggest long-term lending operation in the history of central banking and roughly equivalent to half the Fed’s entire monetary expansion in the past 18 months.

The Fed has “monetised” roughly $1 trillion of US Government debt since 2007, if we combine its Treasury and agency bond buying. Meanwhile, the ECB has lent $1.5 trillion to the euro-area banks. But what have the euroland banks done with this new money? They have lent most of it straight to their governments. Indeed, the governments in Ireland, Greece, Portugal, Spain and Austria would long-since have gone bust had it not been for the willingness of the commercial banks in these struggling economies to buy unlimited quantities of government bonds with money borrowed from the ECB. And these bond purchases have, in turn, been used as collateral for more ECB borrowings, which could be used to buy more government bonds.

In effect, therefore, the ECB has been lending money by the shed-load to governments, with commercial banks acting merely as a fig leaf for what would otherwise be seen as a blatant monetisation of the most insolvent European countries’ public debt.

Now Anatole only has it half right here, the objective is not to finance dubious government debt in semi-bankrupt countries (Italy, for example), but to enbale those countries who had been running extraordinarily large current account deficits (Spain, Greece and Portugal) to close the deficits gradually (ie without precipitating a dramatic implosion in their economies) by facilitating government borrowing to fill the gap left by domestic and corporate deleveraging. The situation I am trying to describe is perhaps best illustrated by the following chart on Financial Balances prepared by PNB Paribas Chief European Economist Dominic Bryant for a recent research report on Spain.

As households and companies desperately try to save, to put some sort of order back into their balance sheets, government steps in (Krugman’s push button “G”) to help ease the transition. Such a policy is, of course, all well and good and totally justified (since there is effectively no alternative), so long as the structural transition which such support is meant to facilitate is actually carried through. And this is a big if, especially since most of the evidence we have seen to date suggests it isn’t.

And then there is the Irish case, and the proposal to create a “bad bank” (NAMA). According to Minister of Finance Brian Lenihan the Irish State plan to buy up toxic property loans with a current face value of €60 billion and investment property loans with a book value of €30 billion, all in exchange for Government bonds. And how will the Irish government finance a possible €90 billion (or two thirds of 2008 GDP) in bonds? We the government plans to pay the banks in bonds which they can then redeem for cash over at the ECB. Obviosuly there is little other way, with such a high proportion of GDP, but has anyone started to think what will happen if the Spanish exchequer is faced with an equivalent proportional sum to clean up bad loans in Spanish banks. Spain, remember is the only major country where there was a property bubble where the banks have not had a substantial capital injection.

And in my humble opinion the ECB will only be willing and able to continue with this kind of policy for a limited period of time, since they will not be in a position to keep accumulating Irish, Austrian and Southern European bonds ad infinitum, and the sovereign governments won’t be able to keep increasing their debt load for ever. Just look, for example at the kind of dynamic Spanish public finances have entered in 2009 (see the acceleration in the cash basis deficit shown for 2009 in the chart below - the evolution is almost exponential, and it still hasn’t stopped the haemorrage of jobs out of the economy).

We also need to think about the risk the ECB is running of accumulating substantial capital losses if there is a sovereign debt problem (which there most likely will be at some point if the correction is not carried out) in one of the member states as the size of the ECB position simply grows by the day, and ultimately the German and French taxpayers will have to pay the losses being steadily accumulated, something I feel they will be very reluctant if those in the worst case scenario countries continue to harp on about a global economic and financial crisis whilst effectively doing nothing to put their own house in order.

Precisely this point was raised a while back by Willem Buiter on his Mavercon Blog:

The first vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise the ECB/Eurosystem when the Eurosystem makes capital losses that threaten its capacity to implement its price stability and financial stability mandates.

The second related vacuum is that there is no single fiscal authority, facility or arrangement which can re-capitalise systemically important border-crossing financial institutions in the EU or the Euro Area, or provide them with other forms of financial support.

When the Bank of England develops an unsustainable hole in its balance sheet, Mervyn King knows he only needs to call one person: Alistair Darling, the UK Chancellor of the Exchequer. If the Fed were to become dangerously decapitalised, Ben Bernanke also needs to call just one person: Tim Geithner , the US Secretary of the Treasury. It is possible that no-one in the US Treasury will pick up the phone, as none of the senior political appointments below Geithner are in place yet, but Geithner clearly would be the man to call.

Whom does Jean-Claude Trichet call if the Eurosystem experiences a mission-threatening and mandate-threatening capital loss? Does he have to make 16 phone calls, one to each of the ministers of finance of the 16 Euro Area member states? Or 27 phone calls, one to each of the ministers of finance of the 27 EU member states whose NCBs are the shareholders of the ECB? I don’t know the answer, and I doubt whether Mr. Trichet does.

Maybe one day all those phones will be ringing, only for the caller to hear that old Elvis automated operator resonse - “no such number, no such zone”.

The G20 Needs A Real Rethink And A New Plan

So, coming back to where we started, growth in Germany and France. Such growth is unlikely to be anything like as strong as most commentators and analysts seem to be expecting. France will most likely do rather better than Germany, given that the German economy can’t really move forward till other key economies move, due to export dependence. The German economy may well even ultimately contract over 2009 as a whole by more than the Spanish economy, and I expect Germany’s problems (like Japan’s) to continue well into 2010, simply because both these countries are now very high median age societies which are completely dependent on exports to grow - which means that now that the UK, US, Eastern and Southern Europe are no longer running current account deficits, Germany and Japan are very hard pressed to get the level of trade surplus they so badly need for achieving sustainable headling GDP growth, which brings us back to Krugman’s joke about which planet is going to do the importing?

Structurally the previous drivers of growth will now fail to work, since as Krugman suggests, all the former CA surplus countries now need to export and run trade surpluses to grow and straighten out their financial imbalances , and it is not clear which countries can buy all the added output, especially when countries in general are still reducing imports, and certainly not about to open up deficits which would soak up all those new surpluses.

Essentially, I would close by emphasising that I am not a complete catastrophist, since I think there is a mid term solution out there - and that the answer lies in steadily unwinding the global demographic and wealth imbalances, through the economic development of a number of key emerging economies - in a way which would perhaps be similar to the implementation of the Marshall Plan which is what really brought the first great global depression to an end.

The problem is that I think we are still some years away from being able to get any sort of agreement on such a programme - as everyone will have noted the G20 isn’t really talking about this yet, although I think they eventually will. In the meantime we all have to stagger forward. And it is the risk of further “events” occuring in countries like Latvia and Spain that make all this staggering onwards and downwards ever so dangerous. In all the key countries involved - the Baltics, Bulgaria, Romania and Hungary in the East, and Portugal, Greece and Spain in the South - government support is simply not sufficient to arrest the contraction in Krugman terminology simply hitting the “G” button will not work, and these economies are steadily “imploding” in on themselves, with the result, as I keep stressing, that unemployment inexorably rises, and bad debts simply mount up in the banking system, and if nothing is done to change course the outcome is surely a foregone conclusion.

The principal difference between the East and the South is that in the East governments no longer have the capacity to continue to sustain large deficits, while in the South they continue to be able to do so, though even here they cannot hold out indefinitely. Sometime in late 2010 or early 2011 all of this will, with a horrid and almost deterministic inevitability, all come to a head.

And this is why, I personally take the view that the global financial and economic crisis is far from over. There is another stage yet to come, and the focus of the problem will be Southern and Eastern Europe.
There Is Another Shoe To Drop In The Global Economic and Financial Crisis - And The Focus Will Be On Europe’s Perifery | afoe | A Fistful of Euros | European Opinion
 

pacomer

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Es un tío competente, profesional y muy prudente, un economista empirico de los de la vieja escuela inglesa: todos sus juicios los basa en datos.

Eso sí, la ha cagado con lo de los bonos europeos emitidos por el BCE para acudir al rescate de paises como Espana. NI lo han hecho recibiendo la presión farolera de Irlanda, ni lo van a hacer porque no son la Reserva Federal para inyectar pasta en los Estados victimas de un shock asimétrico.

EN los últimos posts, parece que se ha caído del guindo, como dice Juancarlosb, y ya no ve ninguna opción para rescatar a Espana del desastre que le espera. Que un tío prudente como este nos coloque sin problema un 30% de paro para diciembre de 2010, da una idea de como va la cosa.

Totalmente necesario, de los pocos tíos serios a tener en cuenta.
 

ronald29780

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Basically what we now have before us - as Pedro Solbes pointed out before being uncerimoniously defenestrated from the inner circle of the Spanish government -

Malinterpretación grave de la situación aquel entonces:

Se fue, o mejor dicho, puso un últimatum sobre la mesa:

Hasta aquí gasto yo.

Y ha tenido la decencía de verificar sus palabras.

Por desgracía de todos nosotros.:eek:

PD:

Gran idea, Juanca

Recomendaciones:

Resaltar lo más importante de los tochos.
 

juancarlosb

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Basically what we now have before us - as Pedro Solbes pointed out before being uncerimoniously defenestrated from the inner circle of the Spanish government -

Malinterpretación grave de la situación aquel entonces:

Se fue, o mejor dicho, puso un últimatum sobre la mesa:

Hasta aquí gasto yo.

Y ha tenido la decencía de verificar sus palabras.

Por desgracía de todos nosotros.:eek:

PD:

Gran idea, Juanca

Recomendaciones:

Resaltar lo más importante de los tochos.
Sí, lo de resaltar es buena idea, además tengo pensado ir haciendo un resumen cuando tenga tiempo para darle más difusión.
 

nicklessss

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Es un tío competente, profesional y muy prudente, un economista empirico de los de la vieja escuela inglesa: todos sus juicios los basa en datos.

Eso sí, la ha cagado con lo de los bonos europeos emitidos por el BCE para acudir al rescate de paises como Espana. NI lo han hecho recibiendo la presión farolera de Irlanda, ni lo van a hacer porque no son la Reserva Federal para inyectar pasta en los Estados victimas de un shock asimétrico.

EN los últimos posts, parece que se ha caído del guindo, como dice Juancarlosb, y ya no ve ninguna opción para rescatar a Espana del desastre que le espera. Que un tío prudente como este nos coloque sin problema un 30% de paro para diciembre de 2010, da una idea de como va la cosa.

Totalmente necesario, de los pocos tíos serios a tener en cuenta.
Para el caso, prácticamente es lo mismo emitir bonos europeos, que darles a los bancos españoles toda la pasta que haga falta, para que éstos a su vez compren la deuda española que el tesoro emite a manos llenas. Esto de hecho es lo que está sucediendo y donde él hace hincapié precisamente, en que puede ser un peligro para el propio BCE si más adelante uno de esos paises entra en default. Al pobrecito BCE le pasaría algo parecido a lo que le ocurre a China con sus reservas en dolares, pero en vez de dólares en ese caso el BCE tendría bonos sin valor como para empapelar Groenlandia. ¿Te imaginas al BCE acudiendo al FMI?. La leche.

Y además, el sistema que están utilizando actualmente para enchufar liquidez a los estados y bancos "sedientos", es mucho más discreto que emitir bonos europeos directamente para luego prestarselo a los "necesitados". Lo de los bonos europeos, me da a mi que va a ser que a los alemanes y franchutes no les mola ni un pelo, puesto que esa nueva deuda supranacional sería competencia directa de sus propios bonos, lo que haría a su vez que su propia financiación les resultase más cara, por poco necesaria que pueda ser en este momento, debido a sus superavits en la balanza comercial.
 
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juancarlosb

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Seguimos con nuestro amigo Fernando y Edward.
El bueno de Edward cree que puede convencer al ciberpepiño, e insiste con ejemplos recientes fuera de España, como Letonia o Irlanda. Y termina lapidariamente "¿Están los economistas españoles en lo cierto, y todos los demás equivocados? Eso es lo que solían decir en Estonia y Letonia, y mira donde están ahora."

Edward Hugh
Fernando, I really don't know how to convince you, but I really do suggest you look through the debates in the Latvia and Baltic blogs since late 2007, since we have been through all this there - in fact I have been arguing actually for devaluation there, but they insist on the very painful internal devaluation procedure. But just look how painful ... Read Moreit all is, and how, basically time has justified what I was arguing all along.

But why do you think the Irish are doing what they are doing. Do you think they are badly advised by the EU Commission and by the ECB who are financing the process? Are Spain's economists right, and everyone else wrong?

This is what they used to say in Estonia and Latvia, and just look where they are now.
¡Ay! Que me da la risa floja, por no llorar.
 

juancarlosb

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Seguimos con la parte final de la argumentación de Edward.

Fernando Blanco sigue erre que erre, que si la crisis es mundial, que si Estonia y Letonia son tercera división comparados con Ejpaña, y que Francia, Alemania y Ejpaña somos todos la misma masa amorfa, que salimos todos a la vez.

The thing is that this is a worldwide crisis and there are some countries that are weaker than others. If the world crisis carry on it is possible that the meltdown happens for these countries (as it is happening now for the Baltics), among the weaker ones, Spain, On the contrary, if growth shows up in Germany and France, the Spanish trade balance will improve and there will be no meltdown. We are all in the same boat, some countries a little bit more drowned than others, but all half-way drowned.
Como no le ha parecido suficiente, cinco minutos después insiste, que es imposible hacer previsiones en economía. Vamos, que poco más y le llama tontainas a Edward, que se dedica precisamente a hacer análisis y previsión económica. Que para eso él es mucho más listo.

Regarding the economists, either Spanish or from Brussels, they do not have a good record for forecasting the long term. It is very difficult. Politics and psychology play a big role in that.
Edward, horas después responde, con su flema inglesa. A destacar cuando le dice que que cree que todos los países débiles tienen en común: "El déficit corriente". ¿Sabrá Fernando que en eso somos campeones?

Fernando, this is a complex situation. You are right it is a global financial and economic crisis, but what I do note is that in what you call the "weaker" countries there is a strong tendency to derive comfort from that fact, rather than look and see what it is exactly about the particular countries people live in that makes them weaker, and thus more vulnerable to the problem. That is people can use the fact that the crisis is global to avoid thinking about the actual reality that faces them. I am thinking especially here of a number of countries in Eastern Europe - not only the Baltics, but also Russia, Ukraine, Bulgaria, Romania, Hungary, Serbia and Croatia.

And (if we leave out Russia which is a special case due to the energy factor), do you know what all these countries had in common during the bubble years? They were all running large current account deficits, current account deficits which are now no longer sustainable.
Y sigue Edward, claramente este párrafo le supera a Fernando. En él habla de que existe un terrible problema con los países con excedente en la balanza de pagos, que necesitan exportar más para poder seguir creciendo, pero no parece fácil que vaya a haber quien les compre la producción, ya que EEUU y RU están eligiendo el camino de la devaluación, con lo que se convertirán en ahorradores netos.

Structurally such growth is now impossible, since as Paul Krugman pointed out, all the former CA surplus countries now need to export and run trade surpluses to grow, and it is not clear which countries can buy all the added output, when countries in general are still reducing imports, and certainly not about to open up deficits which would soak up the new surpluses.

The UK and the US do, however, have one advantage - they can issue debt in their own currency, and they can devalue, and that is the road these two countries are going down. But remember, the US and UK consumers will now play little part in facilitating headline growth in the global economy, since they will now be net savers.
Y sigue metiendo caña, diciendo que los países del Sur de Europa están fatal, que Italia está muriendo lentamente de senectud, y que Portugal, Grecia y España tienen enormes déficits corrientes y que eso se ha terminado. No pueden salir vía devaluación e inflación ya que no tienen moneda propia.

Which brings us to Southern Europe. Italy is simply suffering from an ageing related slow death, and has a different problem set, but Portugal, Greece and Spain all had large CA deficits, and these are now closing. The thing is, these countries don't have their own currency - they have to issue debt in euros, and they can't simply fuel inflation (like they did in the past) since they can't print money, only the ECB can do that, and the ECB is a multi-national institution.
Y para acabar de ponerse simpático, hace un rápido análisis del problema actual de España. Comenta que de momento nos estamos librando gracias a los préstamos del BCE, pero que ese dinero hay que devolverlo, por lo que sólo difiere el problema. Que la deuda está realmente aumentando en relación al PIB y que ni siquiera está claro que mediante una devaluación interna intensa consigamos salir, ya que para ello hay que atraer industria exportadora que no vendrá mientras no haya recuperación mundial y países que tengan déficits corrientes. Que hasta entonces estaremos en el hoyo más profundo.

Now the ECB is facilitating all the liquidity you want, but it is SOOO important to understand this only aids liquidity, it does not resolve the solvency related issues (which the individulal countries have to do for themselves) and in fact only adds to the accumulated debt.

So Spain's external debt is rising at this moment, even as GDP is falling. Worse, nominal GDP (that is current price) is now falling faster than real (inflation adjusted) GDP so the value of the debt remains with the value it has, while GDP shrinks in proportion to it. I have been following this problem in Japan for the best part of a decade now.

So we are really caught on the horns of a dilema here, we have to deflate (willingly or unwillingly, the so called internal devaluation) but so long as we don't attract investment for new export industries and the rest of the global economy doesn't recover and some countries start to run significant deficits, then we are only goping to plumb the bottom.
Y ahora toca el símil del submarino averiado, que estamos en el fondo esperando a que nos reparen, pero que se nos empieza a terminar el oxígeno. El estado cada vez tiene menos capacidad para evitar que la economía se hunda y el BCE parece que nos va a terminar retirando el respirador artificial.

In fact, you could think of the "L" shaped recovery like this, as a submarine with a damaged engine that simply sinks to the bottom of the ocean, and then, untill the parts arrive to repair the engine, the submarine has not the power to head back towards the surface.

But the thing is you are up against a clock, as the oxygen starts to run out (so yes, we are all in a kind of adventure movie right now). In the case of Southern Europe the oxygen is really the ability of the government to keep supporting the economy. As the deficits rise, and debt to GDP goes up, then the ability of the government to finance goes down, as does the willingness of the ECB to keep facilitating this finance. They are completely frustrated in Frankfurt, since they are keeping the economies of Greece, Spain and Portugal on life support.
Según Edward, si la deuda soberana de los países débiles no ha aumentado (aquí creo que tiene una errata) su diferencial es porque el BCE está realizando medidas cuantitativas por la puerta de atrás, ya que la deuda de los pobretones como España se está comprando en su mayor parte de ese modo a través de la banca. Pero que en eso estamos cerca del límite, ya que si hay un problema con la deuda soberana (él lo da por seguro), habrá un problema mucho mayor con los contribuyentes alemanes o franceses, que no estarán dispuestos a asumir el coste que supondrá eso por culpa de países que no han hecho ningún sacrificio.

I mean, lets not fool ourselves, the main reason those famous government boond "spreads" have tightened is due to the willingness of the ECB to discount the bonds which are first purchased by local financial entities and then passed on - a practice one of my Spanish friends calls "truco del almendro". Effectively the ECB is doing fiscal policy by buying a large part of the new debt - this is in fact Quantitative Easing via the back door. But they will not be willing to do this for very long, since they cannot keep accumulating Iriah, Austrian and Southern European bonds ad infinitum, as the Bank of Japan does with JGBs - the risk for the ECB of taking substantial capital losses if there is a sovereign debt problem (which there will be) in one of the member states simply grows by the day, and ultimately the German and French taxpayers will have to pay these losses, but they will be very reluctant to do so if people in the worst case countries have effectively done nothing for themselves
En el siguiente comentario, habla de que Francia irá bien en 2009 pero que Alemania probablemente no, incluso peor que España, y que seguirá teniendo problemas en 2010, debido a la contracción de los déficits de RU,EEUU y Sur de Europa, de los que depende en buena medida su crecimiento.

En esto no estoy muy de acuerdo con Edward. Sí que pienso que Alemania va a registrar tasas positivas de crecimiento en 2010, ya que no es tan dependiente de EEUU, RU y España como para eso. En Julio volvieron a crecer las exportaciones un 2.3%

So, coming back to where we started, with growth in Germany and France. This is unlikely to be anything like as strong as you seem to be expecting. France will be better than Germany, but the German economy may well contract over 2009 more than the Spanish economy, and I expect Germany's problems (like Japan's) to continue well into 2010, simply because both these countries are now very high median age societies which are completely dependent on exports to grow - which means that now that the UK, US, Eastern and Southern Europe are no longer running deficits, Germany is very hard pressed to get the trade surplus she needs for headling GDP growth, which brings us back to Krugman's joke about which planet is going to do the importing?
Luego habla de que una posible solución sería una especie de Plan Marshall para los emergentes para que pudieran tirar de la demanda mundial. En esto no estoy muy de acuerdo con él, ya que pienso que la escasez de recursos frustaría ese plan.
Y luego le pregunta a Fernando si cree que la economía es una ciencia empírica y en consecuencia si estaría dispuesto a cambiar de opinión.

Essentially, I am not a complete catastrophist, since I think there is a mid term solution out there - and it lies in the unwinding of the global demographic and wealth imbalances, and the economic development of a number of key emerging economies - in a way which was perhaps similar to the implementation of the Marshall Plan which is what effectively brought the first global depression to an end.

But I think we are still some years away from being able to get an agreement on such a programme - as you will have noted the G20 isn't really talking about this yet, but they will - and meantime we all have to stagger forward.

Well, I realise you most probably still won't be ready to agree with me, but at least you now have a fuller idea of my position. But tell me, is economics at all an empirical subject for you? That is, are you willing to change your mind at some point? And if so, what would lead you to change your mind?
Luego le dice a Fernando que él cambiaría de opinión si viera a España crecer y reducir el desempleo y a la vez reducir el déficit público, pero que no lo ve. Añade que en España va a seguir aumentando el gasto y los impuestos, y que con eso sólo se logrará contraer aún más la economía.
Piensa que va a haber una segunda oleada de crisis mundial, esta vez con foco en Europa del Sur (España se entiende, ya que es el 75% del PIB de la zona) y Europa del Este.

I am clear what would change my mind, a return to positive GDP growth in Spain (ie over a number of quarters) and a steady trend reduction in seasonally adjusted unemployment even as the government deficit reduces, then I will accept, I have been wrong.

But I don't think we are going to see that. The government in Spain is already wobbling under the weight of the fiscal deficit, and they will now have to either ease back spending or raise taxes, either and both of which will only accelerate Spain's economic contraction.

So personally, my view is that the global financial and economic crisis is far from over. There is another stage to come, and the focus of the problem will be Southern and Eastern Europe.
 
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pacomer

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Kierevelos va a por lana-peseta y sale trasquileuro-ado:

Kierevelos said...

I think that Edward, indeed, does not see any hope in the final fate of the Spain Economy. Sometime ago he considered as likely that the ECB finally could have rescued us from the european oblivion by issuing some kind of European Bonuses and pumped into the spanish economic stream to put our end somewhen later off, but not honey, no money. There will be not any rescue from Europe, not even from Germany.

So, the only way out of this nightmare for Spain is getting out of the Euro. I think that Edward has also regarded this scenario as the most realistic, but he doesnt openly dare to say that, due to the fear that he might trigger some snow-ball doom with the echo of his words over the course of the spanish economy.
Edward Hugh said...
Kierevelos,

"So, the only way out of this nightmare for Spain is getting out of the Euro."

No, actually I don't think this. This is impossible, since the Germans would never permit it. The key here is the external debt. German banks hold a lot of this debt. Spain coming out of the euro would mean a huge devaluation and a large default, this would simply all get to be too much for German banks who are already struggling under losses from US sub-prime and East Europe. German pensions are obviously now not going to be what they were, in the longer term.

You are right, I earlier imagined they would try to resolve the issues by producing EU bonds, but this was evidently too complicated politically.

The ECB is lending over one year to the banks, and they are living off a sort of "carry" where they use the money - not to generate mortagages but - to buy government debt.

All of this works as long as it does, and as long as the ECB holds rates at one percent (or below), but if there really was a recovery in other parts of the eurozone (which I think there isn't really yet, but one day there will be) then, there would be big problems for Spain's banks, due to:

i) the maturity mismatch between loans at one year and government debt at say five years. They would have then to try and offload the debt rapidly, and this in istelf would send the spread shooting up.

ii) Spain's banks ahve also benefited from having euribor come down while they only do an annual "fixing" with mortgage holders. When this reverses the banks will have serious short term cahs flow problems.

Simply put, Spain can't afford to see a recovery in the rest of the eurozone first, and the rest of the eurozone can't afford to see Spain simply go to the dogs.

So everyone now has a large problem, which I imagine is concentrating the minds wonderfully in Madrid, Brussels, Berlin and Frankfurt.

9:01 AM
 

currobena

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La agonía de Letonia

Adjunto enlace a artículo de Edward Hugh (el enlace a dejado de funcionar, espero que seA temporalmente, probadlo más tarde). Por si acaso dejo el artículo entero:

Latvia’s Agony Continues In The Second Quarter - With Little Relief In Sight
de A Fistful Of Euros » A Fistful Of Euros de Edward Hugh

Latvia’s economy shrank a revised 18.7 percent in the second quarter of 2009 over a year earlier in what was the second-steepest drop in the entire European Union (worsted only by Lithuania) according to detailed data released by the statistics office yesterday. The contraction, which is now the largest since quarterly records began in 1995, was revised down from a preliminary estimate of a 19.6 percent annual drop. And Latvia’s problem can easily be seen in the above charts which show the most recent movement in exports, and quarterly data for constant price imports and exports. The Latvian economy grew driven by domestic consumption and increased borrowing during 2006 and most of 2007, but then the country ran out of extra sources of cash, and so imports slumped, followed by exports as the global economy entered crisis. Now its time to pay back, which means the lines we see in 2006 and 2007 will now need to be repeated, only this time with exports on the top and imports below. Of course, really doing this will only be possible once the global economy recovers. But the key question is, will Latvian export capacity be ready when that critical moment comes, or will Latvia’s agony continue, stuck in a horrid “L” shaped “non-recovery”? The most recent data on foreign trade, which saw exports fall and the trade deficit once more widen suggest that the latter danger is far from being a mere theoretical one.

And I am not the only one to be raising it, since according to the latest report out from Nordea Bank, Estonia, Latvia and Lithuania, may well suffer deeper economic contractions than previously estimated as government austerity measures simply serves to sap domestic demand while export growth remains muted.

So well done Nordea! But please permit me to say that this discovery does come as a bit rich from analysts who have persistently remained in denial that the key to Latvia’s recovery was a substantial reduction in the price level in order to facilitate exports (on my view better achieved by formal devaluation, but by the express desire of the elected political leaders of the Latvian people now being carried out via a convoluted and painful process known as “internal devlauation”).

Still, it is interesting to see mainstream analysts starting to question the current orthodoxy that fiscal prudency will (due to the impact on investor confidence) lead to recovery in Eastern Europe, while here in the West our leaders have just re-affirmed the need to maintain fiscal stimulus, given the fragility of even those earliest signs of recovery.

In the following monthly report I will examine just what evidence there is for the idea that Latvia’s economy has actually bottomed out.

The Fall In GDP Continues


Latvia’s economy shrank an annual 18.7 percent last quarter, following a drop in gross domestic product of 18 percent in the first quarter. The charge downwards was lead by a decrease in private final consumption which fell an annual 23.21% (year on year - see chart). Government final consumption dropped bya mere 6.9%, but expenditure on gross capital formation (which includes the critical investment item) crashed by 38.1% - with construction (which forms part) down 29.5% (see chart below). Goods exports (63.6% of total exports) was down by 19.1% and the export of services by 15.7%. The slump in imports was, of course) even worse with the volume of goods imports (78.8% of total imports) down 39.4%, and the volume of services imports by 38.2%.

But Slows On A Quarterly Basis

Quarter on quarter, however, the rate of contraction did slow slowed substantially, from an 11% rate in the first quarter to a 1.6% rate in the second quarter. But even though the rate of contraction is now much, much slower, the economy is still contracting, so I think it is not quite accurate to say we have hit bottom yet. And hitting bottom is not the same as recovering, since there is unlikely to be any rapid bounce back, and any “recovery” is likely to have an “L” shape with a slight upward slope.

Meanwhile, and hardly surprisingly, during the month Latvia’s credit rating was lowered by Standard & Poor’s, with the long-term foreign currency rating being lowered to BB, two notches below investment grade, from BB+, with a negative outlook. According to S&P’s:

“The rating action reflects our view of the political and economic challenges as a result of rapidly contracting nominal and real incomes and the associated pressures on public finances, as the country struggles to improve its growth prospects while maintaining a fixed exchange rate regime…..The outlook for growth beyond that remains highly uncertain, not least due to highly leveraged household balance sheets.”

S&P’s estimate that Latvia’s general government debt, which stood at 19 percent of GDP last year, will grow to over 80 percent in 2011, an estime which is broadly in line with current EU Comission forecasts.

The International Monetary Fund also agreed on August 27 to disburse the second installment (of around 200 million euros) of the 1.7 billion-euro credit line approved last December. The decision followed a long period of uncretainty. Latvia’s government is trying to cut spending/or raise revenue by 500 million lati ($1 billion) a year between now and 2012, in a bid to get the budget deficit below 3 percent of GDP as part of an attempt to meet euro adoption criteria.

The IMF said in their statement that the program had been adjusted to reflect:

- a significant increase in the program’s fiscal deficit ceiling in 2009 (up to
13 percent of GDP, compared with 5 percent in the original program) to avoid
measures that would harm the most vulnerable, and

- an allowance of 1
percent of GDP in additional resources for social safety nets.

The statement which Moody’s following the IMF decision asserting that Latvia’s Baa3 government bond rating - the lowest investment grade, - was being kept at stable was hardly surprising, although the justification they gave - that the bond issuance was supported by “significant, extraordinary fiscal assistance” from international lenders - surely was significant, and very much to the point. The EU Commission and the IMF are now guaranteeing and in order to do this have effectively assumed sovereign responsibility fo the country (see Appendix below).

Moody’s were also a little more optimistic than S&Ps on government debt, since they estimated it would only rise to about 60 percent of gross domestic product in 2010 and fluctuate from about 60 percent to 65 percent over the medium term. I think this is too optimistic, basically for the sort of reasons S&Ps are giving. On the other hand they did also state that a currency devaluation, while not being their central scenario, “was a clear risk, along with additional problems in the banking sector”.

Little Sign Of Any Recovery In Main Indicators

If we now come to the future, we have to note there is little hard evidence at this point for any real recovery - nor should we expect to see any. Industrial output is still falling, and was down 1.4 percent in July over June, and 17.7% year-on-year (over July 2008). This compared with a 18.5% annual fall in the previous month.

Latvia’s industrial output started falling in February 2008, and has now fallen 22.4% from it peak.

Retail sales were down 1% in July over June, and 29.5% over July 2008.

Retail sales have now been falling since April 2008, and are now 31.18% below their peak.

The Trade Defict Widens in July As Exports Drop Back

Latvia’s July trade deficit was 95.2 million Lati up from 67 million Lati in June. This was the first increase since December 2008. Latvian foreign trade turnover came in at 613.3 mln lats in July, down by 3.8% or 24.5 mln lats in current price terms than a month earlier and and down by 41.1% over July last year.

In the January – July 2009 period foreign trade turnover was 4517.6 mln lats – down by 36.1% or 2547.5 mln lats over the same period in 2008.

In July exports were down by 32.6% over July 2008 and imports down 46%. Over January to July exports were down by 27.2% or 705.4 mln lats, while imports were down by 41.2% or 1842.1 mln lats over the same period a year ago.

Unemployment Continues To Rise, And As It Does Bad Loans Pile Up In the Banking Sector

Latvia’s unemployment rate hit 17.4% in July according to Eurostat data, and again this was the second highest level in the European Union (after Spain). Naturally with unemployment rising to such levels the number of distressed loans continues to rise and bad debt provisions in the banking sector wnet up again - to 6.6 percent of the total credit portfolio in July from 6.1 percent the month before, according to credit supervisor FKTK.

The FKTK also said in a statement that bank losses by the end of the first seven months had hit 400 million lats ($817.6 million), up from 346.8 million lats at the end of the first half.

Lending was again down, and the total credit portfolio fell by 0.7 percent in July. The level of debts with delayed payments of more than 90 days rose to 13 percent of the credit portfolio from 12 percent at the end of June.

What About The Internal Devaluation, Is It Working?

Well, prices have started falling, and the consumer price level was down in August by 1.0% compared to July. The average prices of goods fell by 1.3%, and of services by 0.4%. But if we compared to August 2008 we find that consumer prices (as measured on the Latvian national index) have incredibly still increased by 1.8% (down admitdely from the 2.5% rate of increase in July), which leads me to ask, given the pain that all of this is evidently causing, are prices still falling too little and too late to do any real good.

The central bank seems to think the process is working, since they point out on their website that the real effective exchange rate of the lat, which is one measure of the price competitiveness of Latvian goods versus those of the country’s major trading partners, improved between April and July, marking the first four-month gain since the beginning of 2005. We need to remember howvere that the REER index showed prices developing far faster than trading partners all the way from 2006 through to April 2009 (see comparative chart with Finland below) so there really is a long long way back down to go. And if we look at the chart immmediately below, we will see that while the gap is closing Latvian prices are still in a worse position in August 2009 (as compared to other Eurozone countries) than they were in August 2008 - that is over the last year as a whole the position has even deteriorated.


A similar picture can be found in producer (factory gate) prices, which have only recently moved into negative territory on an annual basis. To get a comparison, German producer prices were down 7.8% year on year in July, while

In fact, while export prices are dropping substantially, import prices are also falling (see chart), and thus the real rate of price correction is still quite small.

I therefore contend that this weeks statement from Unicredit Group Chief Economist Marco Annunziata to the effect that, “For the region as a whole and for Latvia, we have gone through the worst,” is way too premature. Conditions are not improving, and as Moody’s suggested pressures in the banking system are still building up. It is an open empirical question at this point whether we have the worst behind us. Even over a longer term horizon it is hard to see the grounds for optimism, since there are certainly no “green sprouts” to be seen on the new babies front, with year on year three month moving average being stuck around the 8% drop level. This depression is going to cast a long shadow over the future of the Latvian people, let’s hope for everyone’s sake that all those responsible (the government, the IMF, and the EU Commission) are fully aware of their hsitoric responsibilities here.

Appendix: IMF and EU Conditions from the respective Letters of Intent.

According to the letter of intent signed by the Latvian Government, The Central Bank and the IMF, a number of new reporting obligations were agreed to. These include:

* Consolidated central (basic and special budgets), local and general government operations based on the IMF fiscal template
* Detailed information on revenues from EU funds at the general government level, and EU-related spending by the central government, including transfers to local governments for EU-related spending
* Consolidated central and general government bank restructuring operations
* Privatization receipts received by the general government budget (in lats and foreign exchange, and payments in governments bonds)
* Information on debt stocks and flows, domestic and external (concessional and non concessional), by currency, and guarantees issued by the (i) consolidated central, local and general governments and (ii) public enterprises (including the Latvian guarantee agency and
the Rural guarantee fund), including amounts and beneficiaries
* Information on new contingent liabilities, domestic and external, of the consolidated central, local and general governments
* Data on general government arrears, including to suppliers
* Data on operations of extrabudgetary funds
* Data on the stock of the general government system external arrears
* Balance sheet of the BoL, including (at actual exchange rate) (i) data on components of program NIR; (ii) government balances at the BoL, broken into foreign exchange balances—distinguishing various program partner sub-accounts for program financing—and balances in lats.
* Balance sheet of the BoL (in program and actual exchange rates) (i) data on components of program NIR; (ii) government balances at the BoL, broken into foreign exchange balances—distinguishing various program partner sub-accounts for program financing—and balances in lats.
* Consolidated accounts of the commercial banks
* Monetary survey
* Currency operations, including government foreign receipts and payments and breakdown of interbank market operations by currencies (interventions)
* Aggregated data on free collateral—available, unpledged collateral held at the Bank of Latvia
* Daily data with banks’ current accounts, minimum reserve requirements, stock of repos and fx swaps
* Foreign exchange rate data
* Volume of foreign exchange lats trades
* Projections for external payments of the banking sector falling due in the next four quarters, interest and amortization (for medium and long-term loans)
* Projections for external payments of the corporate sector falling due in the next four quarters interest and amortization (for medium and long-term loans)
* The stock of external debt for both public and private sector

The Letter of Intent follows the earlier signing of a Supplementary Memorandum of Understanding between the Latvian government and the European Union. The terms of this understanding contained the following Monitoring and Reporting protocols.

Monitoring fiscal developments

• Monthly revenue and expenditure break-down of social budget, including data on social
benefits’ hand-outs (unemployment, family, etc).
• Monthly state basic budget expenditure breakdown per type of expenditure for each
ministry or other relevant budget entity.
• Monthly revenue and expenditure break-down of local governments, including data on
GMI hand-outs and other benefits included in category “other social support”.
• Monthly information on debt stocks and flows and guarantees given on new debt,
contracted by the (i) consolidated central, local and general governments and (ii) public
enterprises.
• Monthly data on new contingent liabilities of the consolidated central, local and general
governments.
• Monthly data on state budget loans and PPP projects.
• Monthly information on central government (i.e., ministries and agencies) and state
owned companies’ staff and remuneration levels, institution-by-institution, showing last
months’/years’ trends.
• Monthly data on general government arrears, including to suppliers.
• Bi-weekly Treasury cash-flow assessment of central government financing needs.

Monitoring financial developments

• Monthly statements of the operations on the special account.
• Monthly report on the amount of mortgage loans converted from EUR to LVL.
• Monthly report on outstanding loans split by currency and detailed to households
(housing, consumer, other) and non-financial corporations (by sector).
• Notify DG ECFIN whenever there is a consultation process with DG COMP related to
financial sector stabilization (i.e., Parex).
• Monthly report on banking sector stabilization measures.

Monitoring structural reforms

• Monthly data on budget allocations to and appropriations of line ministries for financing
of EU Structural funds and Cohesion fund projects (including which programming
period they are related to).
• Monthly data on the amounts disbursed to final beneficiaries for project
implementation, by ministry and by EU Structural funds and Cohesion fund projects
(including which programming period they are related to).
• Monthly data on the amounts spent by state budget financed entities as final
beneficiaries on EU Structural funds and Cohesion fund project implementation, by
ministry and by EU fund (including which programming period they are related to).
• Monthly financial reports on reaching the Structural Funds and Cohesion Fund
expenditure targets by the Managing Authority.
• Quarterly qualitative assessment reports on reaching the Structural Funds and Cohesion
Fund expenditure targets by the Managing Authority.
• Quarterly assessment of policy options taken by the government regarding poverty,
health and pensions.
Hace un breve repaso a la situación económica de Letonia, con su devaluación encubierta, de la que considera que, de momento, no está funcionando, aunque aún es pronto para estar seguro, a pesar de que otros organismos digan que lo peor ha pasado...también allí.

Para los entusiastas de la Champions League, menciona que la tasa de paro de Letonia es la segunda de la UE..detrás de España, la campeona de Europa...también en parados.

Al final, menciona un acuerdo de intenciones entre el gobierno letón y el FMI para mejorar sus estadísticas.

Edito: añado el enlace por si funciona más tarde.

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Madmaxista
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Os pongo un link a un articulo con el que me tropecé ayer, que hace un resumen de los últimos posts de Edward Hugh y realiza un diagnóstico sombrío de la situación económica española. En el apartado de comentarios se apuntan algunas ideas en torno a una reforma laboral y fiscal.

¿Plan de ajuste español?