Some recent items of interest

May 31, 2016

China’s debt reckoning cannot be deferred indefinitely says George Magnus in the FT

Magnus concludes:

“For the foreseeable future, China’s neglect of the problem of excessive debt growth looks likely to continue. Beijing cannot afford to spark a disruptive end to the credit boom and a slump in investment, with anecdotal signs of rising labour unrest and unemployment — especially before next year’s 19th party congress, where President Xi Jinping plans to consolidate his support at the upper levels of the Communist party.
The question, then, is whether the politics of debt control will shift after the congress. With a slowing economy and rising financial instability risks, it is hard to imagine Beijing making a strong commitment to cut credit dependency and impose debt management policies such as more defaults and write-offs, the sale of national assets, and the transfer of wealth from indebted state companies and local authorities to private sector households and creditors.
Yet, without such a shift, China is likely to experience greater financial turbulence than it has seen recently, which may not happen by the end of this year but will not take three years either. The main outcome would probably be a growth hiatus of unknown duration, for which the rest of us need to be prepared.”


The always interesting Ambrose Evans-Pritchard at the Telegraph says “China’s Communist Party goes way of Qing Dynasty as debt hits limit”

“Nobody rings a bell at the top of the credit supercycle, to misuse an old adage. Except that this time somebody very powerful in China has done exactly that.

China watchers are still struggling to identify the author of an electrifying article in the People’s Daily that declares war on debt and the “fantasy” of perpetual stimulus.

Written in a imperial tone, it commands China to break its addiction to credit and take its punishment before matters spiral out of control. If that means bankruptcies must run their course, so be it.

Fifteen years ago such a mystery article would have been an arcane matter, of interest only to Sinologists. Today it is neuralgic for the entire global – and over-globalized – financial system.

China’s debt is approaching $30 trillion. The fresh credit alone created since 2007 is greater than the outstanding liabilities of the US, Japanese, German, and Indian commercial banking systems combined.

Moody’s warned this month that China’s state-owned entities (SOEs) have alone racked up debts of 115pc of GDP, and a fifth may require restructuring. The defaults are already spreading up the ladder from local SOE’s to the bigger state behemoths, once thought – wrongly – to have a sovereign guarantee.”


The slowing UK economy – and it’s not down to Brexit says Jeremy Smith

“Today’s more detailed GDP figures for Q1 of 2016, published by the Office for National Statistics, confirm that the UK economy has indeed slowed, but provide absolutely no evidence that the slowdown is due to fears of Brexit. Rather, they demonstrate – as we have been saying time and again over the last 6 months – that the economy has been decelerating for well over a year – thanks mainly to home-grown self-imposed Osbornian austerity, together with some wider international weakening.”


New IMF Paper Challenges Neoliberal Orthodoxy says Yves Smith at Naked Capitalism

“The publication of this IMF paper is a sign that the zeitgeist is, years after the crisis, finally shifting. It is becoming too hard to maintain the pretense that the policies that produced the global financial crisis, which are almost entirely still intact, are working. And the elites and their economic alchemists may also recognize that if they don’t change course pretty soon, they risk the loss of not just legitimacy but control. With Trump and Le Pen at the barricades, the IMF wake-up call may be too late.”


The IMF has also published its report on Greek debt sustainability and it is predicting a grim future for the country. It says it will take 44 years for the rate of unemployment to return to ‘normal’ levels. Meanwhile the Eurogroup is claiming Greece can maintain an annual budget surplus of 3.5% for the next several decades in order to pay of its debts.

“The contribution of labor to growth is expected to be negative. Demographic projections suggest that working age population will decline by about 10 percentage points by 2060. At the same time, Greece will continue to struggle with high unemployment rates for decades to come. Its current unemployment rate is around 25 percent, the highest in the OECD, and, after seven years of recession, its structural component is estimated at around 20 percent. Consequently, it will take significant time for unemployment to come down. Staff expects it to reach 18 percent by 2022, 12 percent by 2040, and 6 percent only by 2060”


Francis Coppola says the Eurogroup statement on the outcome of the latest debt talks with Greece confuses more than it enlightens. So she attempts at translating Eurogroup-speak into plain English in an article entitled “The Eurogroup statement on Greece, annotated”.


Lars Christensen, the well known Danish economist, has written an article entitled “When effort and outcome is not the same thing – the case of Greece”

“Greece has made yet another other deal with the EU and IMF on its debt situation. Or rather as one EU official described it to the Financial Times “If it looks like we are kicking the can down the road that is because we are”.

Said in another way, this is not really a deal to solve the fundamental problem, but rather a deal to avoid dealing with the fundamental problem.

So what is the fundamental problem? Well, at the core of this is that the Greek government simply is insolvent and can’t pay its debts, but at the same time the EU is refusing to accept this fact.

The IMF seems to understand this and probably so do the eurocrats, but politically it seems impossible to accept because that would mean the EU would have to accept that the strategy to deal with Greece’s problems has been wrong and it would mean accepting a major debt write-down on Greece sovereign debt something with likely would not be popular with voters in for example Germany or the Netherlands.”


The ECB negative interest rate policy is “Killing Us,” Wheezes Spain’s Second Biggest Bank”

“In Europe, banks are beginning to feel the side effects from the ECB’s negative interest rate policy (NIRP), which (among other things) is meant to weaken the euro, fuel inflation, force banks into riskier lending, and prevent Eurozone economies from buckling under the sheer weight of their sovereign debt.

But it doesn’t work. Inflation remains much lower than the ECB’s target headline rate of 2%, European sovereign debt continues to grow at an alarming rate, and bank lending remains anemic in most countries. And it could actually end up killing the patient, Europe’s biggest banks.

That’s what Francisco González, Executive Chairman of Spain’s number-two financial institution, BBVA, just warned in a speech at the Spring Membership Meeting of the world’s most powerful financial lobby organization, the Institute of International Finance (IIF).

“Europe is caught in a trap,” he said. “It has to do something to boost its growth potential. But expansive monetary policy has led to negative interest rates, which are killing us.”

As if to confirm González’s message of doom the Banking Crisis in Spain is Back

“Spain’s sixth largest financial institution, Banco Popular, on Wednesday evening announced that it was urgently seeking to raise €2.5 billion in capital in order to shore up its finances. The news took many of the firm’s investors by surprise given that just a month ago the bank’s CEO Francisco Gomez had breezily reported that the bank had a very comfortable core capital level above the regulatory minimum and “one of the best” leverage ratios in the sector.”


Barely mentioned in the media the global shipbuilding business has collapsed, and this hits China and South Korea very hard.

“In the first quarter, South Korean shipbuilders saw their orders collapse by 94.1% to 170,000 compensated gross tons (CGT), compared to the prior year. In terms of dollars, orders collapsed 94% from $6.5 billion in Q1 2015 to just $390 million.

Global orders for new vessels in Q1 have collapsed too, but slightly less, according to the Export-Import Bank of Korea, cited by IHS Fairplay: down 71% year-over-year to 2.32 CGT.

“Their business slump may continue throughout this year, and demand for oil tankers may improve slightly during the second half of the year,” Korea Eximbank said in the report. Current order backlog will provide work for about two years. For all of 2016, orders are expected to plunge by 85%, from $23.7 billion in 2015 to just $3.5 billion.

Chinese shipyards are in even deeper trouble.

In May so far, three shipyards went bankrupt and began liquidation: Zhong Chuan Heavy Industry, Zhong Chuan Heavy Industry Equipment, and Zhoushan Xuhua Metal Material.”


My favourite economist Steve Keen is interviewed about secular stagnation and helicopter money

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