Topic: The Global Economy

[Kirkhill]

When does your "debt" become my "investment"?

If I encourage the bank to invest in me doesn't that mean that I incur a debt to the bank?

This article makes the point that that balance of investment has been skewed by the value of non-US holdings decreasing faster than the value of US holdings while concurrently foreigners have been fleeing insecure markets for the relative security of the US market.

Similarly in Canada.  Our nationalists demand freedom of action by also demanding that Canada free itself from foreign investments.

And yet it was foreign investment in the Beaver business (100 Companions, HBC and Northwest Company), the canals and railways, the lumber mills, the mines and the auto and aviation industries that created the wealthy country Canada has become - the country that can support the greedy population of a large metropolitan area in China, or a single state in the US, while laying claim to resources of land, minerals and water greater than all other Nation-States save one.

Foreign debt isn't necessarily bad.  Just like my mortgage isn't necessarily bad.  Just so long as I can service the carrying charges.

[Thucydides]

Foreign debt isn't necessarily bad.  Just like my mortgage isn't necessarily bad.  Just so long as I can service the carrying charges.

Of course the question on everyone's mind is if these carrying charges can be sustained (to give you an ides of the scale and scope, Canada spends @ $30 billion/year in our debt carrying charges). Here is the other half of the equation; what if no one is available to make new loans anymore?

http://money.ca.msn.com/investing/jim-jubak/article.aspx?cp-documentid=23629700

Is China actually bankrupt?

The nation has erected a complex system for magically making its debts disappear, but a look up China's sleeve shows that its IOUs may equal its GDP.

Jim Jubak

Is China broke?

It seems like a silly question, right? China's foreign-exchange reserves stood at $2.4 trillion at the end of 2009. Yes, China announced that its proposed annual budget for 2010 would produce a record deficit, but the deficit is just $154 billion, or 2.8% of China's gross domestic product. In contrast, the Congressional Budget Office projects the U.S. budget deficit for fiscal 2010 at $1.3 trillion. That's equal to 9.2% of GDP.

But remember the theme of my column earlier this week: All governments lie about their finances. At worst, as in Greece and the United States, the lies are bold and transparent. Everybody knows the emperor has no clothes, but no one want to say so. At best, as in Canada and China, the lies are more subtle -- more like a magician's misdirection than a viking raider's axe. Look at these great numbers, the lie goes, but don't look at those up my sleeve.

There's a good argument to be made that if you look at all the numbers, instead of just the ones the budget magicians want you to see, China is indeed broke.

More debt than meets the eye
Want to see how that could be?

If you look only at the current position of China's national government, the country is in great shape. Not only is the current budget deficit at that tiny 2.8% of GDP, but the International Monetary Fund projects the country's accumulated gross debt at just 22% of 2010 GDP. U.S gross debt, by comparison, is projected at 94% of GDP in 2010. The lowest gross-debt-to-GDP figure for any of the Group of Seven developed economies is Canada's 79%.

But China has a history of taking debt off its books and burying it, which should prompt us to poke and prod its numbers. If we go back to the last time China cooked the national books big time, during the Asian currency crisis of 1997, we can get an idea of where its debt might be hidden now.

The currency crisis started in 1997 with the collapse of the Thai baht -- and then, like dominoes, the currencies of Indonesia, South Korea, Malaysia and the Philippines collapsed.

In each case, the country had built up an export-led economy financed by foreign debt. When the hot money that had been flowing in instead flowed out, that sent currencies, stock markets and economies into a nose dive.

China escaped the first stage of the crisis because the country's tightly controlled currency and stock markets, and its economy, had kept out hot money from overseas. China had built its export-led economy on domestic bank loans instead. The majority of bank loans, then as now, went to state-owned companies -- about 70% of the total, the Congressional Research Service estimated in a 1999 examination of the period.

Those loans were all that kept the doors open at many of China's biggest state-owned companies. In its review, the Congressional Research Service estimated that about 75% of China's 100,000 largest state-owned companies lost money and needed bank loans to continue operating.

That became a problem when, in the aftermath of the currency crisis, China's exports fell. That sent revenue plunging at state-owned companies that were already losing money. Suddenly, China's banks were sitting on billions and billions of debts that anybody who'd taken Bookkeeping 1 in high school could tell were never going to be paid. This was especially a problem for China's biggest banks, all of which had ambitions to raise more capital -- and their international profile -- by going public in Hong Kong and New York. But no bank could go public with this much bad debt on its books.

What to do? Why not bury the bad debt?

The Beijing government created special-purpose asset management companies for the four largest state-owned banks, the Industrial and Commercial Bank of China (IDCBY.N), the Agricultural Bank of China, the Bank of China (BACHY.N) and China Construction Bank (CICHY.N). These asset management companies -- China Cinda, China Huarong, China Orient and China Great Wall -- would ultimately wind up buying $287 billion in bad loans from state-owned banks. The majority of those purchases were at book value.

So how did the asset management companies pay for the purchase of that $287 billion in bad loans? They certainly didn't pay cash. Instead, they issued bonds to the banks in exchange for the bad loans. The bonds, of course, were backed by the promise that the asset management companies would gradually sell off or collect on the bad loans in time to redeem the bonds. And in the meantime, they'd pay the banks interest on those bonds.

Neat, huh? In one swell foop, the state-owned banks got $287 billion in bad loans off their books and turned deadbeat loans that would never pay off into streams of income from these bonds. To read more on this neat bit of financial engineering, check out this research paper (.pdf file).

Of course, that still left the little issue of where the asset management companies were going to get the approximately $30 billion in annual interest they had promised to pay the state-owned banks. There was also the small matter of how they were going to pay off these bonds when they came due in 10 years, especially since the cash recovery rate on these bad loans would run at just 20.3% in the first five years.

Fast-forward financing

But who really cared? The Beijing government and the state-owned banks had kicked the problem 10 years down the road. (A favourite tactic of politicians, Republicans, Democrats and Communists alike, is to punt, so that today's problem becomes somebody else's problem in the future.) The bonds issued by the asset management companies didn't have an explicit government guarantee, but everybody assumed that at some future date the government would either pay up or punt again.

The 10-year punt of 1999 came to earth in 2009, and, lo and behold, there was more magic.

In some cases -- China Huarong, for example -- the asset management companies simply declared that they'd done disposing of bad debts, that profits were soaring and that they were seeking strategic partners in preparation for a public offering.

In others cases, the magic was more complex. In October 2009, for example, China Cinda said it had secured government approval for a restructuring plan that would create a company to dispose of the $30 billion in bad loans still on Cinda's books. The company said it would then look for strategic partners in preparation for a public offering.

Who in their right minds would be a strategic partner and investor in one of these asset management companies? Well, how about one of the original state-owned banks, China Construction Bank, that Cinda had bought the bad loans from in the first place. "The hardest thing," China Construction Bank Chairman Guo Shuqing said in an Oct. 17, 2009, interview, "is evaluation."

Really? When the government runs the books, does all the accounting and decides what assets to send where, I think evaluation would be very easy. Any wonder, then, that today's huge run-up in loans -- and bad loans -- by China's banks is making some critics nervous?

The bigger problem, though, isn't so much China's big banks but the country's local governments.

Thinking globally, hiding (debt) locally

By now, everyone who has a nickel in China, or a dime itching to get into China, knows that the country's banks went on a lending spree in 2009. On top of official government stimulus spending of $585 billion, banks, encouraged by the government, doubled their lending in 2009 to $1.4 trillion from the previous year.

(Please remember when judging these figures that China's economy was an estimated $4.8 trillion in GDP in 2009, according to the CIA World Factbook. Estimated U.S. GDP was about three times larger, at $14.3 trillion. So China's 2009 bank lending of $1.4 trillion would be equal to lending of $4.2 trillion in the United States, and China's $585 billion government stimulus package would equal a $1.7 trillion U.S. package, more than twice the $787 billion size of the U.S. stimulus package of February 2009.)

China's banks hit the ground running even harder in 2010, lending out an additional $309 billion in January and February. If the banks had continued at that rate, they would have passed the official lending ceiling of $1.1 trillion by August. (See my Jan. 14 column for more on the lending boom and its results.)

So China's banking regulators, spooked by the increase in bank lending, tightened the reins. For 2010, they set a lending target 20% lower than 2009 lending levels. They raised reserve requirements so banks would have less capital to lend. And they told banks to hit the capital markets to raise an estimated $90 billion through 2011. (See this blog post for more.)

It's not clear that those steps will be enough to balance the huge number of bad loans that China's banks made during the lending boom. But China's regulators have clearly learned a lot about how to address a bad loan problem in the banking system since the 1997 currency crisis.

But as the U.S. Federal Reserve has so amply demonstrated over the past decade, regulators tend to gear up to fight the last war. That leaves them vulnerable to the next crisis precisely to the degree by which it differs from the last one.

China's new debt problem is the thousands of investment companies set up by local governments to borrow money from banks and then lend it to local companies.

By law, China's local governments can't borrow directly. But the incentives for local governments to set up investment companies were huge.

By making loans to local companies, local governments could produce thousands of jobs and drive up the value of local enterprises. And by funding commercial and residential construction, they could drive up the price of land. Those results were important to local officials who often profited personally, but they were also essential to the survival of local governments. By law, those units also aren't allowed to raise their own taxes for local expenditures. To meet local demands -- and to fulfill the directives issued by Beijing -- local governments are dependent on frequently inadequate revenue transfers from Beijing and what they can collect from such transactions as local real-estate sales.

So how much did these investment companies borrow and then lend?

Local-government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, estimates Victor Shih, an economist at Northwestern University and the author of "Factions and Finance in China." That's equal to about 35% of China's GDP in 2009.

In addition, banks have agreed to an additional $1.9 trillion in credit lines for local investment companies that the companies haven't yet drawn down, Shih says.

Together the debt plus the credit lines come to $3.8 trillion. That's roughly equal to 75% of China's GDP.

None of this, Shih points out, is included in the IMF calculation of China's gross-debt-to-GDP figure of 22%. If it were, the number would be closer to 100%.

Savings aplenty, but for whom?
Exactly how important is this number?

It depends on how many of those loans at local investment companies will go bad. Shih estimates that about 25% of current outstanding loans -- totalling $439 billion -- will go bad. (For comparison, remember that in the aftermath of the 1997 currency crisis, the newly established asset management companies swallowed $287 billion in bad loans.)

It also depends on how much of China's huge reserves and huge base of personal savings are available to offset the debt. So far, I've been talking about gross debt. But China, like Japan, has a huge domestic pool of savings it can use to buy debt. Economists point out that Japan has carried what looks like a crippling gross-debt-to-GDP ratio for years -- 188% in 2007, 197% in 2008, 219% (estimated) in 2009, and 227% (projected) in 2010 -- without disaster, because the country funds its debt internally from savings.

China, the argument goes, could easily do the same, so what's the problem?

The problem for both China and Japan is that it's not clear exactly how much of their huge pools of domestic savings are actually available in the long run to buy debt. Japan has a woefully underfunded retirement system, and it's by no means clear how the population of the world's most rapidly aging country is going to pay for retirement.

China has, for all intents and purposes, no public retirement system. As a result of its one-child policy, the country has also begun to age quickly, and by 2030 its population will be as old as that of the United States.

In the U.S., the national accounts may lie about the effect of the problem by putting Social Security and Medicare off-budget on the argument that, since these programs have their own dedicated revenue streams, they don't count as part of the national debt. But that lie aside, because the benefits of these programs are defined, it is possible to put a dollar figure on the government's future liabilities in this area (with all the uncertainty that comes with forecasting inflation, of course).

China isn't hiding any future liability for pensions or retiree health care off the books. The government hasn't promised future payments. In an accounting sense, then, there is no future liability that ought to be on the nation's books.

But that doesn't mean China won't have to consume some portion of its accumulated savings to pay for its post-65 population in 2030. The country, either through the government or through private citizens, will have to cover the costs of old age, however it defines that cost. And any savings it will use to pay for those costs really aren't available now to pay current debts.

I think the Chinese leadership is profoundly aware of the need today to not waste money that the country will need tomorrow. That's one reason Beijing has taken steps recently to rein in local investment companies. On March 8, the Ministry of Finance announced plans to nullify all guarantees by local governments for loans taken out by their investment company vehicles. And the national government plans to sell $29 billion in bonds for local governments this year, giving those governments an alternative to setting up local investment companies.

But the big job -- the reform of China's tax system so that local governments don't have to rely on real-estate and stock-market bubbles for funding -- didn't make it on the to-do list announced by the National People's Congress this week and last. And I don't think it's likely to with Communist Party leaders jockeying for position to replace President Hu Jintao and Premier Wen Jiabao in 2012. (For more on the effect of politics on economics in China, see this blog post.)

By the time China's leadership team has sorted itself out in 2013, China's finances will certainly look different. There's little chance they'll look better.

Jim Jubak has been writing Jubak's Journal and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, "The Jubak Picks," and writer of the Jubak Picks blog. He's also the senior markets editor at MoneyShow.com.

[Kirkhill]

On a related note - from the Daily Telegraph (a notable Left Wing rag praised world-wide by Guardianistas)
Ambrose Evans-Pritchard

....We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states - Japan, Korea, Vietnam, India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt and Europe are all irked by China's yuan-rigged export dumping.

Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.

The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.

This is catching up with China, in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars.

As America's creditor - owner of some $1.4 trillion of US Treasuries, agency bonds, and US instruments - China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?

Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped - in extremis - by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be "mutual assured destruction", as often claimed. Washington would win.

Contrary to myth, the slide to protectionism after the 1930 Smoot-Hawley Tariff Act did not cause the Depression. Trade contracted more slowly in the 1930s than this time. The Smoot-Hawley lesson is that tariffs have asymmetrical effects. They devastate surplus countries: then America. Deficit Britain did well by retreating into Imperial Preference.

Barack Obama has never exalted free trade. This orthodoxy is, in any case, under threat in the West. His top economic adviser Larry Summers let drop in Davos that free-trade arguments no longer hold when dealing with "mercantilist" powers. Adam Smith recognized this too...

[S.M.A.]

The headline above as predicted by the world's current richest man, Mexican telephone magnate and billionaire Carlos Slim.

Forbes link

(...)

Slim's bold prediction for the decade: "Latin America is close to breaking the underdevelopment barrier, of around US$12,000 of income per capita. It seems to me that this should happen in the next 10 years."

He continues: "The developing countries in Latin America have available both internal and external financial resources, better terms of trade on their exports of primary goods and competitive advantages thanks to the availability and production of commodities, tourism and a modern industrial sector."

Not everyone is as bullish. After several decades of tepid growth, Latin America's economy is expected to expand between 3% and 4.5% in 2010.

The more optimistic economists, however, argue that the region's growth will be buttressed by a multitude of factors weighing in Latin America's favor. Unlike its more developed counterparts, the region only experienced collateral damage from the credit crunch.

"Latin America has bounced back strongly," says Jerome Booth, head of research at Ashmore Investment Management. "Latin America's banks are already taking market share from U.S. and European competitors." That's more good news for Slim, who has a 55% stake in Inbursa Bank, one of Mexico's largest financial firms.

Slim says the dichotomy between the developed and emerging worlds will be amplified in the coming years, as developed economies continue to wrestle with their "financial systems, fiscal and financial deficits and their transition to a society of advanced services in which excessive imports of goods are not compensated by other revenues and have to be financed by foreign savings."
(...)

[E.R. Campbell]

A hundred years ago, or thereabouts, the same prediction was quite realistic. Argentina, Brazil and Chile were booming, by any and all standards; but the Latin American propensity for political and economic self destruction asserted itself. I remain confident it will do so again.

[Thucydides]

So far we have looked at public debt. (A lot of unfunded liabilities like pensions and benefits are not even listed in these calculations, in the US alone it is estimated that there is a 2 trillion dollar shortfall for unionized State and Municipal employee pensions and benefits). Private debt is another drag on the economy (since resources are not available for private investment or consumption). Don't think things are roses for Canada:

http://globaleconomicanalysis.blogspot.com/2010/03/canadian-credit-bubble-in-pictures.html

Canadian Credit Bubble In Pictures

Here are 4 images from Jonathan Tonge at America-Canada Blog regarding Canada, The Country of Fiscal Prudence

Credit Card Debt Up $43 Billion Since 1999



Personal Lines of Credit Up $180 Billion Since 1999



Mortgage Debt Up $566 Billion Since 1999



Household Credit Up $715 Billion Since 1999



See the above link for more details.

Think there is no credit bubble in Canada? Think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

[Thucydides]

Given the huge size and potential growth of "carbon trading", this sort of instability will have serious consequences (especially with the industries forced to "buy" carbon credits in the first place). Add the frauds being pulled on the carbon trading market (see the Global Warming superthread) and political manipulation and you have the making of a perfect storm:

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7066315.ece

Chaos on carbon market over ‘recycled’ permits
Carl Mortished: World Business Editor

    * 6 Comments

Recommend? (5)

Europe’s emissions trading system was in uproar yesterday amid a mounting scandal over “recycled” carbon permits.

Two carbon exchanges were forced to suspend trading as panic hit investors fearful that they had bought invalid permits.

BlueNext and Nord Pool, the French and Nordic exchanges, suspended trading in certificates of emission reduction (CERs) when it emerged that some had been illegally reused.

Concern that used and worthless permits were circulating caused the spot price of the certificates to collapse, from €12 per tonne of carbon to less than €1 .
Related Links

    * One burning question, no easy answers

    * European carbon trading market takes hit

The scare erupted after Hungary said last week that it had sold 2 million CERs submitted by Hungarian companies to satisfy their carbon emission allowances under the EU’s emission trading system (ETS).

Carbon permits submitted by companies every year to the national register are usually cancelled. However, Hungary exploited a loophole that allows CERs — which are issued not by European Union governments but by the United Nations under its Clean Development Mechanism — to be traded.

Investors in the carbon market took fright as it emerged that some of the Hungarian CERs had found their way back into the market, despite having been used to meet the carbon targets of Hungarian companies.

The double counting is threatening confidence in the ETS, according to staff at one energy consultancy. Icis Heren said: “For companies obliged by law to buy carbon credits ... government-led carbon credit recycling means they risk buying a worthless asset.”

The Hungarian Government said that the used CERs were sold to non-European investors, but BlueNext said that it had found some of the suspect CERs trading on its system.

The ETS, which was intended to create a market incentive for companies to reduce their carbon emissions, has suffered from repeated crises of confidence. At first, too many carbon allowances, known as EUAs, were issued by individual governments, creating a glut and a collapse in the price of carbon.

Efforts to tighten up the market have been stymied by recession, which has reduced Europe’s overall CO2 output and kept the carbon price low.

Meanwhile, suspicion has dogged the parallel trade in CERs, which are similar to EUAs but issued by the UN to companies that invest in renewable energy projects in the developing world.

A proportion of these CERs can be used by European companies as currency within the emission-trading scheme to top up their supply of carbon permits.

However, the Hungarian Government’s exploitation of the loophole to sell on used CERs to raise cash has created confusion about supply and demand in the system and has cast further doubt on the carbon trading market.

[Thucydides]

Regulatory failure indeed:

http://www.city-journal.org/2010/eon0318gs.html

The Euro in Crisis
In Greece and elsewhere, statism proves riskier than free markets.
18 March 2010

The financial crisis of 2008, still far from over, has done severe damage to the reputation of the free market. The crisis, we are assured, was caused by the withdrawal of the state and an excess of deregulation. To get out of it will thus require a massive return to public spending and intervention, which is in fact what we see happening all over Europe and in the United States. However, what we might call the Greek affair should make us question the statist solution. We ought to consider the possibility that public management could prove even more dangerous than private—that state regulation is no less chancy than deregulation.

The duplicity and corruption of Greek public accounting was more than an error of bookkeeping. The concealment of the country’s real budget deficit necessarily involved a gigantic network of complicity that included the whole political class, the state bureaucracy, and the banks. This network was not confined to Greece: it included Greece’s European partners, Europe’s political leaders, the governors of the Eurozone, the directors of the European Central Bank, and the European Commission. It’s hard to believe that the European Commission’s Directorate General for Economic and Financial Affairs was ignorant of what was really happening in Greece; and it will come as a surprise to some but not others that Eurostat, the statistical institute of the European Commission, has for years been publishing deliberately false numbers that make the phony accounting of the ratings agencies implicated in the 2008 financial crisis pale in comparison.

What was the motive for all this deception? Obviously, to give credibility to the euro, a common currency supposed to rival the American dollar. Recall that the theoretical virtue of the euro is to bring down interest rates in Europe: the more solid the money, the lower the rates, which encourages economic development (or, in the case of Spain and Portugal, real-estate speculation). It was therefore much to Europe’s advantage to cover for Greece and protect the euro.

What’s telling is that the people who brought the hoax to light were neither the Greek nor the European authorities but private speculators. The Greek state, to its great dismay, suddenly discovered that it could no longer sell treasury bonds on financial markets at the same rate as the Germans did. The open market had decided that euros owned by Greeks were not the same as euros owned by Germans. Should we blame these private actors for exposing the truth? On the contrary: it was their professional duty to generate profits for their clients, often for their retirement accounts. The public actors, for their part, were duty-bound in principle to manage the euro through predictable and transparent rules. It is therefore inappropriate for French president Nicolas Sarkozy and Greek prime minister George Papandreou to accuse private speculators of “attacking” the euro. If the euro—at least in Greek hands—had been above suspicion, it would not have been attacked.

Beyond the Greek affair, moreover, it’s suddenly evident that the Eurozone as a whole suffers from awful public management. Not a single government in the Eurozone (Germany remaining the most virtuous, to be sure) respects the two requirements that the euro theoretically imposes on states using it: a public deficit that’s less than 3 percent of GDP and a public debt that’s less than 60 percent of the same. After Greece, the states with the largest debts are Ireland, Spain, and Italy, followed by a second group that includes France and Portugal.

How did the Eurozone become so badly managed and, in the end, so unpredictable? Adverse local traditions—the spendthrift state in France, the lying state in Greece—endured, and a Keynesian catastrophe compounded them. In the name of crisis management, Keynesian ideology led to a sort of renationalization of the European economy. Perhaps the return of statism helped prevent a deeper depression; we’ll never know for sure, because the Great Crisis never happened. But what has been proven, at least to a high degree of probability, is that the renewed energies of statism have left behind a fragile euro and unmanageable public debt. The United States should take no comfort in the euro’s problems, by the way. The leading credit-ratings agencies have just warned that they may downgrade American debt—unsurprisingly, since all Western countries that follow the Keynesian road flirt with bankruptcy. We are all Greeks now.

Economics can be a cruel science because it offers a choice between imperfect solutions. On the one hand, markets are unpredictable—and vulnerable to speculative crises and private failures—but they lead, on the whole, to general development, as history has amply demonstrated. On the other hand, public intervention offers short-term security but generates risks more serious than those of market uncertainty—namely public debt, inflation, and stagnation. The usual choice in economics is not between good and evil but between more evil and less. The path is narrow but known.

Guy Sorman, a City Journal contributing editor, is the author of numerous books, including Economics Does Not Lie.

[Thucydides]

It looks like the financial crisis is causing a political crisis in the EU:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7494718/Has-Germany-just-killed-the-dream-of-a-European-superstate.html

Has Germany just killed the dream of a European superstate?

So after weeks of Euro-bluff it looks ever more like an IMF rescue for Greece after all, and hence for any other eurozone nation driven to ruin by the wrong monetary policy.
 

By Ambrose Evans-Pritchard
Published: 7:29PM GMT 21 Mar 2010


German Chancellor Angela Merkel has little hope of selling a bail-out of Greece to German voters

German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by propping up a country that lied about its deficits, or risk court defeats by breaching the no-bail-out clause in Article 125 of the EU Treaties.

Chancellor Angela Merkel has halted at the Rubicon. So has Dutch premier Jan Peter Balkenende, as well he might in charge of a broken government facing elections in a country where far-right leader Geert Wilders is the second political force, and where the Tweede Kamer has categorically blocked loans for Greece.
 
The failure of EU leaders to cobble together a plausible bail-out – if that is what occurs at this week’s Brussels summit – is a 'game-changer' in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.

There will be no inevitable move to fiscal federalism; no EU treasury or economic government; no debt union. It is Stalingrad for the federalist camp and the institutions of the permanent EU government.

I remember hearing Joschka Fischer, then German Vice-Chancellor, telling Euro-MPs a decade ago that EMU was “a quantum leap ... creating an inexorable federal logic”. Such views were in vogue then.

Any euro crisis would force Europe to create the necessary machinery to make it work, acting as a catalyst for full-fledged union. Yet the moment of truth has come. There is no quantum leap. We have a Merkel pirouette.

Paris is watching nervously. As Le Monde put it last week, “behind the question of aid to Greece is a France-Germany match that pitches two conceptions of Europe against each other.” The game is not going well for 'Les Bleus’. The whole point of the euro for the Quai D’Orsay was to lock Germany into economic fusion. Instead we have fission.

EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast. Even Italy has slipped into the pro-IMF camp, knowing that rescue costs can be shifted on to the US, Japan, Britain, Russia, China, and the Saudis, lessening the burden for Rome.

Besides, too much has been said over the last week that cannot be unsaid. Mrs Merkel’s speech to the Bundestag was epochal, a defiant warning that henceforth Germany would pursue the German national interest in EU affairs, capped by her call for treaty changes to allow the expulsion of fiscal sinners from Euroland. Nothing seems so permanent about the euro any more.

Days later, Thilo Sarrazin from the Bundesbank blurted out that if Greece cannot pay its bills “it should do what every debtor has to do and file for insolvency. This would be a suitably frightening example for every other potentially unsound state,” he said, pointedly excluding France from the list of sound countries.

Dr Sarrazin should be locked up in a Frankfurt Sanatorium. It was such flippancy that led to the Lehman disaster, requiring state rescues of half the world’s financial system. A Greek default would alone be twice the size of the combined defaults by Argentina and Russia. Contagion across Club Med would instantly set off a second banking crisis.

Some suspect that ultra-hawks in Germany want to bring the EMU crisis to a head, deeming delay to be the greater danger. How else to interpret last week’s speech by Jürgen Stark, Germany’s man at the European Central Bank, calling for tightening to head off inflation.

This is alarming. Core inflation in Euroland was 0.9pc in February, the lowest since the data series began. It is certain to fall further as the doubling of oil prices fades from the base effect. M3 money has been contracting for a year. Business credit is shrinking at a 2.7pc rate.

So, it is not enough for the EU to impose a fiscal squeeze of 10pc of GDP on Greece, 8pc on Spain, and 6pc on Portugal, and 5pc on France over three years, we need a dose of 1930s monetary policy as well to make sure life is Hell for everybody.

Be that as it may, Greece’s George Papandreou says his country is in the worst of both worlds, suffering IMF-style austerity without receiving IMF money – which comes cheap at around 3.25pc. So why allow his country to be used as a “guinea pig” – as he put it - by EU factions pursuing conflicting agendas?

The IMF option has its limits too. The maximum ever lent by the Fund is 12 times quota, or €15bn for Greece, not enough to nurse the country through to June. The standard IMF cure of devaluation is blocked by euro membership. So Greece will have to sweat it out with a public debt spiralling to 135pc of GDP next year, stuck in slump with no exit route.

The deeper truth that few care to face is that under the current EMU structure Berlin will have to do for Greece and Club Med what it has done for East Germany, pay vast subsidies for decades. Events of the last week have made it clear that no such money will ever be forthcoming.

Let me be clear. I do not blame Greece, Ireland, Italy, or Spain for what has happened. No central bank could have tried more heroically than the Banco d’España to counter the effects of negative real interest rates, but the macro-policy error of monetary union washed over its efforts.

Nor do I blame Germany, which generously agreed to give up the D-Mark to keep the political peace. It was the price that France demanded in exchange for tolerating reunification after the Berlin Wall came down.

I blame the EU elites that charged ahead with this project for the wrong reasons – some cynically, mostly out of Hegelian absolutism – ignoring the economic anthropology of Europe and the rules of basic common sense. They must answer for a depression.

[Thucydides]

Natural disasters have global impacts too:

http://pajamasmedia.com/instapundit/
http://www.cbsnews.com/stories/2010/04/20/world/main6414739.shtml

VOLCANO ASH CLOUD SETS OFF GLOBAL DOMINO EFFECT:

While the volcanic ash cloud covering parts of Europe continues to wreak havoc for airlines – costing the industry more than $1 billion as of Monday – grounding most of the continent’s air travel for several days has had a ripple effect extending far beyond Europe’s borders.

The following is a collection of international anecdotes demonstrating how the ash cloud has done more than hit airlines’ bottom lines and inconvenienced air travelers.

• The lack of refrigeration facilities at the airport in capital of the West African nation of Ghana has been a big blow to pineapple and pawpaw farmers who sell to Europe because of the lack of flights. As of Tuesday, no cargo flights have taken off yet. . . .

• In Kenya, thousands of day laborers are out of work because produce and flowers can’t be exported amid the flight cancellations. Kenya has thrown away 10 million flowers – mostly roses – since the volcano eruption. Asparagus, broccoli and green beans meant for European dinner tables are being fed to Kenyan cattle because storage facilities are filled to capacity.

• The U.S. Travel Association estimates that the ash cloud produced by the eruption has cost the U.S. economy $650 million, approximately $130 million per day. That kind of loss to the economy affects the cashflow to fund about 6,000 American jobs, the association said. Every international flight bound for the U.S. is worth an average of $450,000 in spending from travelers, which the association says pays for five jobs per flight.

• Nissan Motor Co.’s production at a line at its Oppama plant near Tokyo and two lines at its Kyushu factory in southern Japan will stop all day Wednesday because the planned shipment of tire pressure sensors from Ireland has not arrived, company spokeswoman Sachi Inagaki said. The suspension would affect nearly 2,000 vehicles, including the Cube compact made at the Oppama plant, and the Murano and Rogue crossover SUV models produced at the Kyushu plant as well as eight other models that are produced on the same production lines, Inagaki said.

• BMW North America spokeswoman Jan Ehlen told the Herald-Journal of Spartanburg on Monday that the automaker will likely reduce production at the BMW plant in South Carolina because of a shortage of supplies, but shouldn’t have to shut the plant down. BMW uses planes to ship transmissions and other components from its German factories to South Carolina. The Greer plant makes BMW’s X5 and X6 sport utility vehicles.


There’s more at the link but this kind of thing underscores how tightly-coupled the global economy has become. That goes with the point about “resilience” made at the end of this piece in the WSJ and in this piece, and this one, from Popular Mechanics. Bottom line is that failures in one part of the global economy can cascade throughout. Too much of our technological and economic infrastructure is designed with good times in mind, and not enough thought goes into how it will function when things are rotten. Yet, frequently, changes needed to add more resilience to the system are fairly modest, if they’re made in advance. Just a thought. . . .

Pretty amazing what is considered time sensitive; industrial production used to be shipped by sea. I would never have imagined large car parts (like transmissions) would be cost effective to send by air freight. The ripple effects will be felt here as well, although in strange and unexpected ways.

[Thucydides]

The PIIG's are getting roasted:

http://preview.bloomberg.com/news/2010-04-27/greek-debt-cut-to-junk-at-s-p.html

Greece's Debt Cut to Junk, First for Euro Member
By Emma Ross-Thomas and Andrew Davis - Apr 27, 2010 Email Share
 
Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time a euro member has lost its investment grade since the currency’s 1999 debut. The euro weakened and stock markets throughout the region plunged.

Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+.

The turmoil comes as European Union policy makers struggle to agree on measures to ease the panic over swelling budget deficits. Leaders of the 16 euro nations may hold a summit after the Greek government’s decision last week to tap a 45 billion- euro ($60 billion) emergency-aid package failed to reassure investors, a European diplomat and Spanish official said.

“The markets are demanding their pound of flesh and want everything to be signed, sealed and delivered as of yesterday,” said David Owen, chief European financial economist at Jefferies International Ltd. in London.

The euro fell 1.3 percent to $1.3215 as of 2:58 p.m. in New York. The Stoxx Europe 600 Index slid 3.1 percent to 261.65 points.

Spreads

The spread on Greek 10-year bonds over German counterparts widened 23 basis points to 675 basis points, the highest since at least 1998, as investors increased bets that Greece will restructure its debt. The Portuguese spread jumped 59 basis points to 277 basis points, and the Spanish spread rose 12 basis points to 113.

“This is no longer a problem about Greece or Portugal, but about the euro system,” Eric Fine, who manages Van’s Eck’s G- 175 Strategies emerging-market hedge fund. “My concern is the risk of coordination failure. Policy makers need to get ahead of the curve.”

The crisis worsened this week as German Chancellor Angela Merkel’s government delays a decision on whether to release funds for a Greek rescue. Merkel, who faces an election in the state of North Rhine-Westphalia on May 9, said yesterday that Greece “must do its homework” before getting aid.

Trichet Mission

European Central Bank President Jean-Claude Trichet, who is in Chicago today and declined to comment on the downgrades, travels to Berlin tomorrow to brief German lawmakers on Greece’s deficit-cutting plans. The country is struggling to convince investors it can push its deficit below the EU’s limit of 3 percent of gross domestic product from 13.6 percent last year.

“No one in Europe is suggesting” that “the total amount of financing on the table is going to cover all of Greece’s borrowing needs” over the next three years, said David Beers, Global Head of Sovereign and International Public Finance Ratings, at S&P today.

Greek bonds are still eligible as collateral at the ECB, as long as the other two rating companies don’t follow suit. Moody’s Investors Service rates Greece A3 and Fitch Ratings BBB- .

The EU’s inability to contain the Greek crisis is sparking concern that other countries will have to fend for themselves and will struggle to win support from European parliaments. Portugal’s PSI-20 benchmark dropped 5.4 percent today, the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse. Spain’s IBEX 35 Index dropped 4.2 percent.

Contagion

“There is a clear risk that contagion pressures might intensify in the coming months, perhaps after a brief respite immediately after the Greek package is finalized and money starts being disbursed,” said Marco Annunziata, chief European economist at UniCredit Group in London.

Merkel said yesterday she expects a German decision in “days.” Greece faces 8.5 billion euros of bonds maturing in May, with the first redemption due May 19.

Portuguese Finance Minister Fernando Teixeira dos Santos said today his government needs to react to “attacks by markets” and will do what’s needed to reduce its deficit.

Greek Prime Minister George Papandreou asked for emergency cash from the EU and International Monetary Fund last week to avoid defaulting on its debt. Investors in Greek bonds may get back between 30 percent and 50 percent of the value of their holdings should the government default or restructure its debt, said S&P.

“The financial package has clearly not eased market concerns,” said Colin Ellis, European economist at Daiwa Capital Europe Ltd. in London. The Greek downgrade “together with Portugal and the widening of spreads means that other euro- area countries appear to be sliding to a similar fate.”

To contact the reporter on this story: Andrew Davis in Rome at abdavis@bloomberg.net Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

[Thucydides]

Global deflation?

http://american.com/archive/2010/april/the-deflation-club

The Deflation Club

By Vincent R. Reinhart Tuesday, April 27, 2010

Filed under: Economic Policy, Boardroom, Government & Politics, Numbers
Declining inflation, veering into outright price declines (or deflation) in some countries, continues to be a major risk to the global economy.

At about every opportunity, Federal Reserve officials remind the world that they have a plan to exit from their policy of unusual monetary accommodation. Those statements might merely be reassurances directed toward those worried that inflation will ignite, given the fodder provided by $1 trillion of reserves in the banking system. But if the Fed is planning to tighten policy sometime soon, it would be well served to study the latest forecast of the International Monetary Fund (IMF). Even a quick scan shows that declining inflation, veering into outright price declines (or deflation) in some countries, continues to be a major risk to the global economy.

Twice a year, the IMF produces a comprehensive forecast for 183 countries in its World Economic Outlook (WEO). An important contribution of the WEO cycle is its updating of data on output and inflation consistently across many countries. There are economists and firms that spend more time looking at each country individually, but no one else pulls the data together on such a scale.

Two exercises with the latest WEO forecast encapsulate the risks to the global economy.

    Widespread deflation last year was worrisome. The momentum for further deflation this year suggests officials should not let down their guard.

First, the bars in the chart below plot the year-by-year share of countries in the total WEO data set posting an annual average inflation rate of 1 percent or lower. There are well-known problems with measuring price indexes, including that households shift their purchases away from items rising in price and toward cheaper goods in a manner that statisticians do not incorporate. As a consequence, a measured inflation rate of 1 percent or lower likely means that households are buying goods and services that, on average, are declining in price. A widespread decline in prices can put an economy at risk. Workers with fixed money wages look expensive to their employers as the prices of the goods and services they produce are declining. Anyone who has to repay a fixed amount of money sees the real burden, as their debt rises with deflation. Consumers might defer purchases today in favor of future bargains. Those forces restraining spending will be difficult for the national central bank to offset.

Reinhart 4.26A

The lowest that policy makers can drive down nominal (or money) interest rates is zero, so they cannot follow inflation lower once it veers into deflation. The whole process can get truly scary if the drag on spending sends prices even lower in the future. In such circumstances, a nation could get trapped in a downward deflationary spiral.

    In 2009, about one-quarter of the economies followed by IMF staff experienced deflation. This is the second-largest membership in the deflation club in the 30-year history provided by the IMF.

In 2009, about one-quarter of the economies followed by IMF staff experienced deflation (the red bar in the figure). This is the second-largest membership in the deflation club in the 30-year history provided by the IMF. The club was at its most crowded in 1998, when financial crises in Russia and Asia roiled many economies along the Pacific Rim. In one sense, there is not much news that deflation took hold last year as the global economy was on the rocks, with fully half of the WEO economies posting declines in real GDP. But the prevalence of price declines does not just record prior stresses, it also points to future risks. Deflation can leave lasting scars on balance sheets, and distortions in relative prices do not necessarily lift overnight.

The good news is that the IMF staff does not apparently see 2009 as the start of a deflationary spiral. Fewer than 7 percent of the 183 countries in the WEO are projected to have effective declines in prices this year.

At the risk of snatching defeat from the jaws of even this small victory, however, note that the IMF forecasts for 2010, published last week but put to bed last month, rest on scant hard readings on prices for this year. It is a forecast, not a fact, and the IMF publishes some other information on inflation that raises a caution flag.

    The whole process can get truly scary if the drag on spending sends prices even lower in the future. In such circumstances, a nation could get trapped in a downward deflationary spiral.

The WEO includes readings on inflation calculated in terms of percent changes in both annual-average and end-of-period consumer prices. If the price level was falling through the year, for example, its average would be above its level at calendar's end. Even if the price level were constant thereafter, time would have to pass before the annual average came down to the end-of-period level. As a consequence, if annual-average inflation is above its end-of-period brethren, then inflation is likely poised to fall. Thus, the details of the WEO forecast can be provide some information about the momentum of inflation, or how it is likely to change in the future.

Country by country, the gap between average and end-of-period inflation helps predict future inflation. The relationship even holds using data that aggregates across countries. By way of example, the figure below compares the share of countries with average inflation above the same year's end-of-period rate (along the horizontal axis) with the momentum in the median inflation rate among all countries (along the vertical axis). (Median inflation is the value that splits the sample right down the middle, with half above and half below. The momentum in inflation is just the difference between inflation next year and this year.) A negative relationship between the two inflation measures is quite evident, formalized in the average plotted as the blue solid line.

Reinhart 4.26B

That work done, the point to notice is the circle among the squares, which corresponds to the share of countries with average above end-of-period inflation in 2009 and the IMF's forecast of the momentum in median inflation. The year 2009 closed with 60 percent of the economies covered in the WEO having average inflation above the end-of-period value. The average relationship predicts that median inflation will decline about 1.25 percentage points from 2009 to 2010. The WEO projection, in contrast, is decidedly upbeat, with inflation rising five-eighths of a percentage point. This prediction that inflation will run above the historical line, by the way, comes after it had been much weaker than that relationship in the prior year (noted by the square associated with 2009 in the figure). Thus, central to the IMF's forecast is that inflation will rebound on the global stage in a manner far at odds with the prior three decades.

Widespread deflation last year was worrisome. The momentum for further deflation this year suggests officials should not let down their guard. Deflation is costly and rightly to be avoided. The global scale and scope of price declines and the prospect that more may be in store are probably sufficient reasons for the Federal Reserve to keep policy accommodation in place for an extended period.

Vincent Reinhart is a resident scholar at the American Enterprise Institute.

[Thucydides]

Counterproductive bailouts:

http://reason.com/blog/2010/05/02/greek-bailout-already-making-s

Greek Bailout Already Making Situation Worse

Tim Cavanaugh | May 2, 2010

The $146 billion bailout package approved this weekend for Greece is advertised as a move to "stop the worst crisis in the [euro]’s 11-year history," but it is having exactly the opposite effect.

We have to keep the money flowing or these people might go commie. First, the bailout, which effectively kicks Greece's pending default forward, has not solved the problem that the cost of debt service for the PIIGS countries is increasing. That's in part because this is not actually a problem. The question is not why Greece has to pay such a high yield on its bonds but why Portugal and other on-deck defaulters have to pay so little. The bailout was supposed to put debt buyers at ease about Europe's overleveraged states, but because it only allows these countries to take on more debt, it has not.

Second, while German Chancellor Angela Merkel is taking credit for bringing in International Monetary Fund support and forcing some tougher fiscal-cleanup conditions on Greece, the bailout does not address the counterproductive elements in Greece's own so-called austerity package, including currency controls and cash-transaction limitations that will only slow the country's economy. “This is an ambitious program that contains tough savings measures and on the other hand seeks to improve the efficiency of the Greek economy,” Merkel says. That may be true, but there is no math by which you can collect more taxes while reducing private sector economic activity.

Third, the move has only irritated German and French voters who are outraged at having to pay for the wastrelsy of a country that, it is now clear, should never have been a euro participant in the first place. Elections rarely turn on foreign affairs in any country, and the Financial Times' Quentin Peel makes the case that the Greek bailout will not have a big impact on this week's vote in North Rhine-Westphalia. But if the goal of the aid package was to build confidence throughout the euro zone, it doesn't seem to have accomplished that either.

Fourth, the status of the euro itself has been undermined, not strengthened, by the bailout. No doubt some Keynesian Klown will pop up to blame this development on "speculators," "ratings agencies," or the biggest devil of all, "markets." Back on Planet Earth, futures traders, who get rewarded by guessing correctly what will happen to an asset, are hammering the euro. BusinessWeek reports:

    The euro has depreciated 7 percent this year, including last week’s 0.7 percent loss, as growing concern that the sovereign debt crisis will slow Europe’s economy reduced confidence in a region whose $13.6 trillion gross domestic product is exceeded only by the U.S.

    “Greece is a Lehman Brothers for the sovereign world,” Robin Marshall, who helps oversee $20 billion as director of fixed income at Smith & Williamson Asset Management in London, said yesterday. “A 100 billion euro package is a big amount and it might help to buy Greece some breathing space, but as an investor I’m still cautious. Policy makers can promise what they like, I still have doubts that the Greeks will have the stomach to take these tough measures.”

Fifth, Marshall's doubts are well founded. As they have shown throughout this crisis, Greece's strong and ancient socialist institutions can only respond to market discipline with violence. From the London Times:

    May Day protests in Greece turned violent yesterday as youths in gas masks and hoods set fire to vehicles, smashed shop fronts and threw molotov cocktails and rocks at police in an explosion of fury over austerity measures they claim will hurt only the poor.

    Tourists were cut off from their hotels as thousands of communists, civil servants and private-sector workers converged on a main square in Athens to vent their rage at the European Union and the International Monetary Fund (IMF).

    “No to the IMF’s junta,” they chanted as a youth in a black hood produced a hammer to try to smash windows of the luxury Grande Bretagne hotel.

    Another painted anti-capitalist slogans on the facade, and demonstrators intervened to prevent him from spraying an Australian woman with paint as she tried to get back into the hotel. Japanese tourists stood taking photographs of the mayhem with mobile phones before being forced to retreat, coughing and sneezing, under a cloud of tear gas.

So you have politicians defying the will of the voters to pour more water into a leaky bucket; transnational economic planners destroying a currency in order to save it; markets responding to those actions with predictable horror; and the few recipients of all the largesse too dumb to say "Thank you." This is apparently what EU stability looks like.

[Thucydides]

More on Greece and the possible fate of the EU:

http://pajamasmedia.com/blog/so-long-and-thanks-for-all-the-drachmae/?singlepage=true

So Long, and Thanks for all the Drachmae

Europe ought to consider giving Greece a lovely parting gift. Thanks for coming over! But the hour's late, and after your $146 billion bailout, tomorrow's hangover promises to be quite a nasty one.
May 4, 2010
- by Stephen Green

Greece has been bailed out to the tune of $146 billion — the priciest ever. But instead of a bailout, Europe ought to consider it a lovely parting gift. Greece, thanks for coming over, but the hour is late, and tomorrow’s hangover promises to be a nasty one.

Oh — and Portugal, Ireland, Italy, and Spain? Won’t you please grab your coats and hats and follow Greece outside?

The party was a fun one — at least for certain guests — but the time has come for the euro to go. Greece should be the first out, as a condition of the bailout — er, of the lovely parting gift. Then the rest of the PIIGS need to follow suit. And after that? Germany and France can turn out the lights on the eurozone.

The eurozone, as I’ve said from the start, was ill-conceived, and for a very simple reason. With few exceptions, a currency should only be as widespread as a labor force is mobile. (interpolation: Canadians and Americans have some labour mobility across the border, do we meet that condition?)

I can see this is going to take some explaining, but I’ll keep it short and simple.

The United States is a big country, in terms of area and population. But a single currency works just fine for 300-plus million people, spread out from sea to shining sea — and all the way out to Hawaii and to Alaska, too. And it works for us because anybody can be a Californian or a Texan or a North Carolinian or a South Dakotan. We’re all Americans, and there’s very little, apart from personal taste, to keep us from living anywhere we choose.

So if jobs disappear in California, for example, people can and will go to Texas.

And that means that a single monetary policy can and will work for the entire nation. Each state’s economy and employment don’t need to rise and fall together, because millions of people maintain the balance themselves — by moving around. And Americans move around a lot, more than any other people in the world.

So Texas and California can get away with having a uniform monetary policy, even when California has taxed and spent and regulated itself into looking like Greece, while the Texas economy is stronger than, say, Germany’s.

Now let’s look at those same two eurozone examples: Germany and Greece. Just like Texas and California, they use a single currency and have a uniform monetary policy set for them by others.

We’ll go way out on a limb here, and pretend that Greece has just taxed and spent and regulated itself into oblivion, while the German government has acted more-or-less responsibly. OK, maybe we’re not so far out on that limb.

The normal course for a country in Greece’s situation would be to devalue the currency — to make Greek labor and exports and, most importantly, Greek debt, much cheaper vis-à-vis Germany’s. And Greece could slash interest rates to get the economy churning again, or boost them to attract foreign capital.

But Greece can’t do any of those things, because Athens surrendered the drachma, and its monetary policy, to its new overlords at the European Central Bank. And the ECB won’t do any of those things, lest it destroy Germany’s economy — and France’s and Holland’s and Norway’s, too.

In our American example above, when Sacramento screws the pooch, a lá Athens, then Californians head east and make new lives. But are Greeks going to give up their ancestral homelands to find work in Germany? By and large, no. And if they did, eventually Berlin would close the border to any more jobless Greeks. Which is a real shame, because it’s so hard to find good gyros in Frankfurt.

Americans are Americans anywhere in America. But despite decades of effort in Brussels on the whole “European Project,” there’s still no such thing as a “European.” If there were, if Europeans were happy to move about like Americans do, then the eurozone might just work.

But so long as Germans are Germans and Greeks are Greeks, then never the twain shall meet. And to pretend otherwise is to court a disaster where the recklessness of one tiny country can risk bringing down an entire continent — as Europe is learning right this very minute. And at $146 billion, that’s one expensive lesson.

So it’s probably necessary that the EU bail out Greece, before the contagion spreads any farther. But the only way to stop the rot once and for all requires something more drastic: amputation. And that means abandoning the euro, in as orderly a fashion as is possible.

It’s last call. The party’s over. And it’s long past time for the rowdier guests do the walk of shame back home.

Stephen Green writes, broadcasts, and enjoys the occasional lovely adult beverage at the home he shares with his wife and son in Monument, Colorado.

[2010newbie]

Pretty amazing what is considered time sensitive; industrial production used to be shipped by sea. I would never have imagined large car parts (like transmissions) would be cost effective to send by air freight. The ripple effects will be felt here as well, although in strange and unexpected ways.

I worked on a project in 2008 for GM Europe Powertrain managing a couple dozen of their worst performing suppliers (from a production perspective). Mainly it was due to increased production requirements in Europe after years of Opel declines. One supplier made transmission gears and were transferring their production from Germany to the US. The German factory couldn't make the gears fast enough and we couldn't wait for the US factory to make parts using US steel (due to the length of time required to validate the new steel source). We had to airship tonnes of German steel to the US for them to forge the gears and then airship the gears back to Austria for assembly into the transmission. If I remember correctly it was over $250,000 USD. Generally of course they want to send everything by sea, but it's cheaper to send by air than shutdown an assembly plant (supposedly). I know that a supplier in Mexico was shipping aluminum heads globally by air daily - Australia, Asia, Europe, and it lasted for over a year. It cost them millions. There were two other projects I've worked on in the past where we had to use helicopters to transport from the airport to the factory - landing in the parking lot to delivery the material because a truck was too slow.

[Thucydides]

Greece responds to the bailout, but in a way which pretty much garuntees there will be no help forthcoming in the future. The outlook seems pretty bleak right now:

Greek Default Averted . . . For Now
May 5 2010, 3:41 PM ET |  Comment

Can a Greek bailout work?  If by work, we mean prevent the country from defaulting when it's time to roll over its debt this month, then yes, it can and will work.  But over the long run?  I don't see how it can, barring some sort of miraculous global boom in olives and Greek cruises. 

As others have pointed out, Greece has a primary deficit of over 8%.  Which is to say that even if you make the debt payments go away, the country is only taking in enough tax revenue to cover 91% of its spending.  Given how poor Greek tax compliance is, this means that austerity plans will literally have to be on the table no matter what happens:  if they default, they won't be able to borrow any more money, and will have to run at least neutral; and if they don't default, they will have to cut deeply in order to make their debt payments.

And the Greek population is, to put it mildly, not down with that. 

A nationwide general strike paralyzed Greece on Wednesday as protests against the government's recently announced austerity measures turned violent, with an apparent firebomb attack on a central Athens bank killing three people.

Wednesday's 24-hour strike is seen as a key test of the government's ability to shepherd through tough austerity measures in exchange for a €110 billion ($143 billion) bailout loan from the European Union and the International Monetary Fund.

The strike coincided with protests that brought out tens of thousands of Greeks, one of the country's largest protests in years. Angry youths rampaged through the center of Athens, torching several businesses and smashing shop windows.

So default doesn't fix their problems, and a small but enthusiastic minority of the population apparently thinks violence prevents budget cuts.  Where does that leave Greece?

Withdrawal from the euro, that's where.  This too will not be painless--it's simply default by a different name.  Which means no more borrowing.  But withdrawal from the euro at least allows the government to make its exports (and tourist industry) competitive again, and frees the country from an excessively tight monetary policy designed for richer countries that aren't mired in recession.  Default or not, staying in the euro almost certainly means slow growth, which will make the pain of fiscal adjustment even more painful.

Obviously, this could be prevented with sufficient transfers--but I don't see sufficient transfers forthcoming.  Even if the other eurozone nations wanted to, it's not clear that they have the money.  And they sure as hell don't have the money to bail out Greece . . . and Portugal . . . and Spain . . . and maybe Italy and Ireland too . . . which is where this path is heading.

What this seems to be showing is that you cannot layer rich-world monetary policy on top of countries that don't have the social, political or economic institutions to support it.  The experiment failed in Argentina, and it's failing just as spectacularly here.  Importing monetary policy from another country temporarily gives you more credibility with the marketplace--but it also puts you in grave danger of this kind of dramatic mismatch between your needs and those of wealthier countries with more robust economic institutions.

[E.R. Campbell]

The problem we are seeing is not confined to Greece, nor just to the PIIGS,* nor even to Europe. Too much of the world, including the USA, is living on borrowed money and, consequently, borrowed time. Savings rates in most Western countries (and most third world countries, too) are too low because most people and the governments they elect are spending too much too fast on non-essentials. We have moved beyond being happy to have our votes bought with our own money to expecting our votes to be bought with someone else's money - Chinese money, mainly.

There is essential spending - including essential public spending, which includes but is not limited to defence and a few others.  Sometimes some essential services must be provided by the government, sometimes essential services are best provided by government, sometimes governments should contract out some essential services. The key point is that we should fund only essential services. The problem is that the people get very, even violently unhappy when they learn that 'free' public pensions and 'universal' and 'free' health care are not essential services but the national defence and paying the interest on the debt are.

Blood on the streets, as in Athens, will become more and more normal in more and more cities as the economic chickens come home to roost - not just in Greece, either.


--------------------
* Portugal, Italy, Ireland, Greece and Spain

[PMedMoe]

Apparently, a good economy can lead to bad things:

China has world's fastest-growing syphilis epidemic; fuelled by economic growth

Written by: Margie Mason, The Associated Press  May 5, 2010

Every hour a baby is born in China with syphilis, as the world's fastest-growing epidemic of the disease is fuelled by men with new money from the nation's booming economy, researchers say.

The easy-to-cure bacterial infection, which was nearly wiped out in China five decades ago, is now the most commonly reported sexually transmitted disease in its largest city, Shanghai.

Prostitutes along with gay and bisexual men, many of whom are married with families, are driving the epidemic, according to a commentary published Thursday in the New England Journal of Medicine.

The increase reflects the country's staggering economic growth, providing both businessmen and migrant labourers more cash and opportunity to pay for unsafe sex while away from home.

More on link

[Thucydides]

Without comment:

http://blogs.the-american-interest.com/wrm/2010/05/07/its-a-crisis-of-faith-not-a-crisis-of-stocks/

It’s A Crisis of Faith Not A Crisis of Stocks
 
Posted In: Economics, History, Middle East, Religion


From my hotel balcony here in West Jerusalem, I can see the walls of the Old City, and behind them the steeples and minarets of this city that haunts the imagination of the world.  The religions of Jerusalem have been around a long time, and in their separate ways the faiths and the religious establishments of the Jewish, Christian and Islamic worlds today face a variety of challenges.

But with the world’s financial markets gyrating wildly and the threat of a true depression looming over the still fragile economic recovery, the faith today that seems under the heaviest assault is more modern: the faith that natural and social science would lead humanity to an era of progress, security and peace.  The religion of Enlightenment, born in Europe and North America in the 18th century, swept through the world faster than any of the faiths of the old prophets.  Barely two hundred years after its birth the faith in progressive modernity had conquered the world.

Like the other religions, the Enlightenment faith comes in several flavors.  Its two main denominations were Marxist and Liberal.  By 1960 about one third of the world’s people lived under governments who claimed to believe that Marxist social science and modern technology would usher in a golden age of global peace and abundance.  Most of the rest of the world lived under one or another form of Liberalism, believing that free markets plus liberal political institutions and modern technology would bring in the golden age.

The religion of the Enlightenment spread so far and so fast because it worked.  That is, modern science and technology really did heal the sick, feed the hungry, and bring light and life to the poor.  More and more people reached unprecedented levels of personal affluence, even as lifespans grew longer and medical progress made life less unpredictable and tragic as fewer women died in childbirth and fewer children died before growing up.

Over time, Liberalism beat Marxism as the failures of Marxism became blindingly evident.  By 1990 the Soviet Union was crumbling and it appeared that the ideas of the liberal enlightenment had all the answers humanity needs.

That faith is now facing a set of challenges that are far starker and more difficult to overcome than those facing the traditional religions.

Most urgently, there is the question of the economy.  No group of intellectuals in the last twenty years was more dogmatic, more smug, more confident that they had the answers than the world’s professionally trained economists.  Yet the twenty years since the fall of the Soviet Union have seen a series of escalating economic crises that has culminated in the present three years of upheaval and turmoil.  The IMF, the World Bank, the central banks of the leading economies, have never been so well staffed with so many well trained economists.  The Federal Reserve and its peers have never had so much information, so much autonomy, and such powerful tools of analysis.

The economics departments of the world’s leading universities have never searched so hard for the best talent and given that talent so many opportunities and facilities for study as now.  Economic theory has never been as highly developed, the peer-review process never been so vigorous or so well supported, the rewards of success in the field have never been so great.

And yet, still, somehow, the global economy seems not to be working particularly well; more than that, the world’s economists don’t seem particularly good at either predicting economic behavior or preventing disasters.

I don’t mean this as a Luddite screed against knowledge and science.  Not only the economists, but their colleagues across the fields of learning and knowledge, have hugely expanded the possibilities of human life and helped us organize ourselves in ways that are far more productive and effective than anything our ancestors knew.  And I don’t think that the way out of our present difficulties involves burning the books, forgetting what we know, and going back to some primitive or fundamentalist view of the world.

But I think it points to an important truth, one that somehow seems especially clear here in Jerusalem: while liberal modernity has succeeded as a way of organizing human society for greater productivity and power, it has failed as a religion.  The rational, liberal enlightenment has helped us master the forces of nature (though events like the oil spill in the Gulf remind us that we still have much to learn in this respect), but it has not done much to help us master ourselves or to shape our destiny.

We do not fear natural disasters quite as much as we used to, but we are, if anything, more exposed to social and historical disaster than ever before.  The crops don’t fail as frequently as they used to, leaving us exposed to famine and starvation.  But stock markets and national economies burn out and threaten us with social consequences that can be even more devastating.

For the last generation, we have been acting on the assumption that the great problems have been solved, the great questions answered, and that all that remains is the application of our correct general principles to particular cases.  In other words, we have assumed that we are living in an Age of Technique.

I think that is wrong.  I think even the experts don’t have the solutions to many of our problems.  The twenty-first century is a time of uncertainty, risk, revolution and explosion and unfortunately we are heading into it with some assumptions that look less and less likely.

There is for example the assumption that social science can yield reliable techniques for political action.  Economics is far and away the best developed and most intellectually rigorous of the social sciences, and it is clearly a useful discipline that generates valuable insights.  Yet it seems less and less likely that we will ever have the kind of economics of which we all dream: a set of ideas and formulae that when followed yield automatic and growing prosperity.  Human beings are too cranky and too unpredictable; our social interactions are too complex and shift too quickly; culture, history and institutions are too deeply embedded in our lives to eradicate for our behavior to be pinned down by equations and computer regressions like butterflies in a display case.

It’s clear for one thing that our economists and central bankers, sage and wise though they are, don’t know how to steer national and regional economies through the kinds of challenges we face.  Looking at Europe, it’s clear that political elites can’t bridge the cultural divides between Greece and Germany.  Given that, it is next to impossible to imagine how they will create a framework of global governance that suits Saudi Arabia, India, China, Russia, the United States and Brazil anytime soon.

Economic policy and more generally governance and social policy are going to remain arts and not sciences.  Politics is going to be a matter of inspired (and frequently uninspired) guesswork.  Things will sometimes go massively wrong.  It’s not just that Wall Street computer glitches at critical moments will cause the stock market to dive; much larger historical events depend on unknown, unknowable risks. Nobody knows what China should do to avoid social and economic explosions as its massive transformation continues; at some point the Chinese are almost certain to get it disastrously wrong.  There is no surefire strategy in peace that can prevent war; there is no surefire strategy in war that can lead to a guaranteed victory; there is no surefire strategy to make money in stocks.

This doesn’t just mean that world stock markets are going to stay as risky as they were when Mark Twain wrote Pudd’nhead Wilson’s calendar:

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.

It also means that another one of our operating assumptions is wrong.  We like to assume that history is getting calmer, more settled, safer and more predictable.  It ain’t.  history is going to remain radically risky, radically unknowable, and scarier than anything Stephen King ever wrote.

Liberal democratic capitalism is not a strategy for making God unnecessary by creating a stable and predictable world.  Liberal democratic capitalism is a revolutionary force that brings us face to face with the haunting uncertainties and big questions that since the dawn of time have driven people to God in search of answers.

Jerusalem is a good city in which to contemplate the crisis of humanity’s faith that enlightened reason can solve our problems and make us safe.  The constant efforts to find a way for Jerusalem’s religious and tribal groups to divide the city and reach some kind of peaceful solution have frustrated the efforts of some of the world’s greatest statesmen and leaders.

Sometimes as I watch diplomats toil to bring peace to Jerusalem, and European elites struggle to build a new kind of political architecture to give Europe a better future, or watch economists everywhere trying to develop the policy and regulatory frameworks that can give us the kind of steady growth we all yearn for, I feel as if I’m watching Sisyphus struggling to push his rock up the slope — or watching the ancient Middle Easterners try to build a tower in Babel that would reach up to the sky.

The Tower of Babel fell; the global system fell in 1914 and then crashed repeatedly through the twentieth century. Worst case, something like that could be looming just ahead.

If it is, we will need Jerusalem more than ever.  This city points to the fragility and failure of human striving; but it also points to an enduring hope.  The domes, steeples and minarets of Jerusalem point to our undiminished capacity to recover, to rebuild, to rediscover faith in the ruins of broken dreams.  The Middle East is littered with the ruins of fallen towers, but people keep building.

There is still a better than even chance that the world economy will recover its footing, and that the Greek mess is a stumble rather than a fall.  But sooner or later the unthinkable will happen, the bottom really will fall out of things, and we will all be left groping for some way to understand what is happening around us.

When that day comes, it will be to Jerusalem that most of us turn; the gods of Brussels are letting us down.

[Kirkhill]

I see four options.

Blame the world's ills on:

No One
Me
My Neighbour
God

I find it disconcerting to exist in an environment where random chance rules and I have nothing beyond this existence.  It makes it difficult to get up in the morning.

Blaming myself is even more debilitating.  If everything I do has negative consequences then better I should do nothing.

Blaming my neighbour?  Well neighbours tend to take exception to that and I spend a fair bit of time ducking and jabbing.  Not much time left to be productive.

What does that leave?  I figure he/she/it is probably big enough to suck it up for both of us.

Cheers.
 

[Thucydides]

Once the foundation cracks, the entire structure will shift or collapse:

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=532490

U.S. Debt Shock May Hit In 2018, Maybe As Soon As 2013: Moody's

By JED GRAHAM, INVESTOR'S BUSINESS DAILY Posted 05/05/2010 07:56 PM ET
 
Spiraling debt is Uncle Sam's shock collar, and its jolt may await like an invisible pet fence.

"Nobody knows when you bump up against the limit, but you know when it happens it will really hurt," said fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget.

The great uncertainty about how much debt is too much has tended to make fiscal discipline seem less urgent, rather than more. There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America's 'AAA' status haven't added much clarity — until recently.

In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

But under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4% of revenue by 2013.

"While we see limited risk of a U.S. sovereign debt downgrade in the next 2-3 years, beyond that we cannot be so certain," wrote Societe Generale's economics team in a recent report.

The Moody's ratings framework is one that could have a significant influence on policy — particularly in a crisis.

Because debt levels and interest rates can't be lowered overnight, the obvious way of staying within the AAA limits set by Moody's would be to raise revenue.

"It would bias the remedy in favor of tax increases for countries that want to improve their bond rating," said Brian Riedl, budget analyst at the conservative Heritage Foundation.

Because economic growth is a key to fiscal health, Riedl argues that a ratings agency concerned about whether bondholders are repaid should bias spending cuts over tax increases.

Moody's says that its framework focuses on debt affordability rather than debt levels as a percentage of GDP. "The higher this ratio (interest/revenue), the more public debt constrains the formulation and delivery of other policies," Moody's analysts wrote in March.

As implied by the adverse scenario, a financial market shock from higher interest rates could precede the threat of a downgrade. In other words, investors might be less forgiving of U.S. fiscal policy than Moody's.

For instance, markets began pricing in a Greek default as a real possibility well before Standard & Poor's downgraded that nation's debt rating to junk last week.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, says "the occasional missives about this problem (from ratings agencies) could put some pressure on rates" in advance of any ratings change.

Bethune is among economists who see CBO projections as "wishful thinking."

The budget scorekeeper's outlook assumes discretionary spending restraint, broad-based tax hikes and well-behaved interest rates. Nevertheless, it sees debt reaching 90% of GDP in 2020, up from 53% at the end of 2009.

In the new Milken Institute Review, Len Burman, former director of the Tax Policy Center and now a professor at Syracuse University, calls CBO projections "wildly optimistic."

"They presuppose that interest rates on government securities will remain historically low, and that the economy will grow at a historically healthy clip," Burman wrote.

Treasury yields have been dropping in recent weeks as investors seek safety amid Europe's growing financial crisis, but some see risks emerging.

"The Chinese have been big buyers" of Treasuries but are no longer running surpluses, said Societe Generale senior U.S. economist Aneta Markowska. "They just don't have the marginal dollars to recycle back into the Treasury market," she said.

Raising taxes to stem the tide will be counterproductive, we are already seeing a reduction in tax revenue in the US in advance of the expiration of the Bush administration's tax cuts and implementation of Obamacare, and people and investors are pulling in their horns even further in expectation of VAT and "Cap and Trade" tax schemes.

No, the only sure way to safety lies in massive spending cuts; the end of subsidies and "entitlements". We have seen the reaction in Greece to the realization of this truth (riots, firebombings and even death), and you can imagine the political and economic elites, bureaucrats, members of the academy and every other taxpayer funded institution fighting desperately to the last taxpayer to retain their powers and privileges even as everything collapses around them.

What happens after you draw the sign of the dollar in the air?

[E.R. Campbell]

It appears, to me that the main American tactic (I don't think there is a strategy worth the name in DC or on Wall Street), is to inflate their way out of debt. Debasing the currency might be a good useful, short term fix but it has deleterious long term consequences. See e.g. Thomas Gresham and the reform of England's debased currency in Elizabethan England.

The solution to America's problems are the same as the solutions to the problems facing Greece, Portugal, Italy, Spain, France and Britain: stop spending more than you earn. In America's case it is defence + social spending that will, left alone, drive the country to destruction - bankruptcy. America is not rich enough and cannot continue to borrow enough to be powerful and fat at the same time.

Despite the pain it inflicts upon Ontario's manufacturing (export) sector, the high value Canada's currency is reflecting the (relatively) sound state of the economy (relative that is to the PIIGS, Britain, Japan and America). But we, Canada, will be badly hurt when, not if, America must face fiscal and monetary reality. The Americans will try debase their currency enough to settle their foreign debts at pennies to the dollar and, in the process, drive us out of their markets; they will fail - at least at lowering the value of the Chinese debt. When, again not if, the Chinese choose to assert their important position in maintaining America's internal, social harmony they will have demands, including, I'm guessing, America's strategic withdrawal from Asia.

[Kirkhill]

The Americans will try debase their currency enough to settle their foreign debts at pennies to the dollar and, in the process, drive us out of their markets; they will fail - at least at lowering the value of the Chinese debt.

¸

Debasing the currency drives down the value of your debt but increasess the cost of imports.  So the cost of servicing old debt is increased but the tendency to aquire new debt is also increased.......Only solution, stop buying new clothes and knit your own sweaters.

And that would be truly unfortunate.

[Kirkhill]

Coincidentally found while scanning through the Sunday commentary.

This chap says, with much more precision, clarity and authority, what I have been skating around for a while:  15 barrels to the ounce.

...As the late Warren Brookes wrote in his 1982 book, The Economy In Mind, "In 1970 an ounce of gold ($35) would buy 15 barrels OPEC oil ($2.30/bbl). In May 1981 an ounce of gold ($480) still bought 15 barrels of Saudi oil ($32/bbl)......

....Considering oil's aforementioned spike to $147/barrel in 2008, an ounce of gold then only bought 6.8 barrels of oil. What this meant at the time was that oil was due for a major correction as its price fell back to historical ratios.....

.....Right now gold trades in the $1176 range, and the price of oil is roughly $79 per barrel. That an ounce of gold buys 15 barrels of oil signals yet again that the real price of oil has hardly changed at all over the last 10 years of allegedly costly crude. Still, $79 oil ensures $3/gallon gasoline as far as the eye can see, and it's a fair bet that the price will stay there so long as gold continues to test all-time highs.........

[E.R. Campbell]

Here are some reputable Canadian economists’ views on the global economy, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the CTV web site:

http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20100509/EU-financial-rescue-plan-100509/20100509?hub=TopStoriesV2

Euro crisis could drag world into recession: economists

CTV.ca News Staff
Date: Sunday May. 9, 2010

Some economists are predicting that the Greek financial crisis could drag the rest of Europe, the United States and possibly the entire global economy back into recession.

Ian Lee, of Carleton University's Sprott School of Business, told CTV's Question Period Sunday that crushing government deficits and debt loads in Greece and other nations are threatening to quash the still-fragile recovery.

"We are going to be running into serious problems," he said. "I think we are risking going back into recession because there's no serious effort to confront these problems in the United States or in Europe."

Lee said that European governments have failed miserably in their attempts to manage Greece's financial meltdown and that failure could have dire consequences for the rest of the world economy.

"The European leaders are just delusional, because they are denying the fundamental problem … (that) these debts are completely unsustainable," he said. "The markets realize that Greece is insolvent, but the leadership of Europe have been running behind on this issue."

Economist Jeff Rubin said the Greek and other European governments aren't the only ones facing possible bankruptcy.

"The problem is not about Portugal, Italy, Greece or Spain. The problem is we're all pigs (at the trough) now, and in particular the United States," he said. "That poses a much greater systemic risk to capital markets than Greek debt.

"The U.S. has a deficit that is in double-digit territory in relationship to its GDP: usually that would bring an IMF swat team to the table."

He said Greece and possibly other struggling EU nations will be forced to leave the euro, the European common currency, and their economic problems will have far-reaching consequences.

"People are looking at the problems in Greece; looking at the problems in Portugal and Spain and extrapolating that and saying those problems are coming to an economy close to you."

IMF approves $40-billion bailout

The board of the International Monetary Fund voted Sunday to approve a $40-billion loan to Greece over the next three years -- its share of a $140-billion rescue package.

Earlier in the day, the euro-zone leaders gave final approval for a $100-billion rescue package of loans to Greece over the same time period, to keep the country's economy from imploding.

Meanwhile, the chair of a meeting of EU finance ministers promised on Sunday to "defend the euro" with a rescue plan for the embattled currency that will be in place before markets open.

But Spanish Finance Minister Elena Salgado did not disclose any details of what's in store.

Salgado, who presided over the emergency ministerial meeting, said the finance ministers would use it to work out plans to improve the stability of the euro after the currency was rocked over the past weeks by the Greek financial meltdown.

"We have to give more stability to our currency ... We will do whatever is necessary," he said.

But so far, the finance ministers have been tightlipped what the measures will be.

They could involve balance of payment support that has already been available to some EU nations outside of the euro-zone. There is also talk about specific loan guarantees, which countries like Britain may oppose since it could be seen as a bailout fund.

Specific measures will have to be approved by the time markets open Monday because vague promises have been unable to calm markets over the past weeks.

"We need to make progress today because in the night, when the markets are opening, we cannot afford disappointments," said Swedish Foreign Minister Anders Borg.

Some nations blamed fragile governments and a lack of European co-operation for the crisis.

"I'm against putting all the blame on speculation," said Austrian Finance Minister Josef Proell. "Speculation is only successful against countries that have mismanaged their finances for years."

Rubin warned against bailout packages may only delay the inevitable, because eventually the money has to be repaid.

"Yesterday's bailout is tomorrow's spending cut," he said. "We've now put ourselves in the situation where there's no longer any room for fiscal stimulus in the future."

When the bills for any bailouts come due, he said it will be "akin to the government having floored the accelerator all of a sudden hitting the breaks. And it just won't be in Greece or Spain that they're hitting the brakes, they're soon going to be hitting the breaks in the American economy too."

Financial markets have continued to sell off the euro and Greek bonds even as EU leaders have insisted for days that the Greek financial implosion is a unique combination of bad management, free spending and statistical cheating that doesn't apply to other euro-zone nations.

Many economists think Greece will eventually default anyway, which could deal a sharp blow to the euro and lead to sharply higher borrowing costs for other indebted countries in Europe.

Default could lead to panic, intimidating consumers from spending and making banks fearful to lend money to businesses and consumers.

Lee said the Canadian economy should be at least partially insulated from any global economic mayhem, but we won't be entirely immune.

"I don't think we can avoid the outside world ... but if we do go into another recession, following Europe and the U.S. -- if they do -- I don't think it will be as painful here because of the resilience of this economy."

With files from The Associated Press

Greece is not the only problem; it’s not even the real problem. The USA is, in most respects, more profligate and less  honest than Greece – it is living on borrowed money and borrowed time because the American people – Tea Partiers included – are unwilling to make the direct, personal sacrifices necessary to restore some balance in their economy.

The Chinese are willing to sustain them for a long, long time but, eventually, China will demand to be paid and Americans will be very, very unhappy. So unhappy, I fear that some many, including some politicians, may be willing to risk a war that American cannot win.