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David Thompson Posted:
So very, very true. It beggars belief that we consider ourselves to be a developed nation when so much of our economy is based on selling milk powder or logs. BTW, I own a Plinius amplifier (my second) that drives a set of Theophany speakers.
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David Thompson Posted:
A robust but sobering report. It concerns me that confidence is rising, yet sales and exports are down and "manufacturers and exporters are still lagging behind other sectors". Surely we should wait until we're earning more money before we start spending more?
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siemens Posted:
Yes true! The only thing that will never die in this world is the nature and its science behind it. Great post.
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Kieran Ormandy Posted:
Thanks for the question Steven, Germany has seen increases in manufacturing employment since 2009, and Switzerland has had stable manufacturing employment between 2006 – 2011, even in the face of ongoing Euro-zone issues. Korea has seen increases in manufacturing employment since 2008 and Israel experienced large increases since 1998, while being stable over the last 4 years. Singapore has had increases in manufacturing employment over the last two years. These countries all value their manufacturing sectors and work to protect them, this is reflected in the above numbers and their performance through the GFC. Note data around the above examples was sourced from OECD labour market stats.
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John Walley Posted:
Point one: you should have no doubt what our Association says publically represent the views of our members. Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above. Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known. Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.
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22/11/11

Neville Bennett: European Debt


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World markets do not know how to evaluate the European debt problem. In a classic fight or flight dilemma, they rise euphorically one day and then panic another. The under-lying trend is in terms of index numbers on stock markets is quite positive, but its nature is that of a bear market (two consecutive bear quarters) and a global recession is looming. It is a moment for buyers to beware, especially as the European debt crisis is remote from resolution.

Investors might remember one simple fact before getting bullish merely because Berlusconi has gone: Europe has too much debt. Many of its nations and many of its banks are choking on debt. There will be defaults and these will bring down several banks, and their fall will hurt share markets. The austerity policy imposed on most nations will also lower growth, possibly on a global scale. Think, for example, of China: Europe is its biggest market.

Greece. Avalanche poised

Greece has been informed that it can write off 50% of its debt held by private entities but not that owed to the IMF, ECB and other public entities. That is a 20% haircut and it is insufficient. I suspect Greece can service only about 20% of its debt as austerity measures are shrinking its economy and removing any opportunity to repay. The market expects default yet a default will wreak havoc.

A bankrupt Greece would be unable to pay its pensions and employ its army of civil servants. No one would lend to Greece for three years, so expenditure would be limited to its export revenue. Its banks would collapse as people rushed to withdraw Euros rather than wait for an issue of drachmas. Many people would have debts in euros but would be paid in devalued drachmas, so personal defaults would be high. IMF assistance is already conditional on a degree of barely acceptable austerity, and continued assistance would come at additional cost.

Meanwhile, there would be dire consequences for bond-holders and insurers. If Greece defaulted on all bonds, the capital of some banks would be wiped out, pending uncertain insurance claims. Interbank lending would freeze as other banks would be uncertain of their counterparty’s solvency. Credit would tighten and markets panic. The economy would hit a cliff.

If Greece defaults, investors will fear that other defaults will follow. Italy is under pressure partly because as Greek default has been mooted.

Italy

Greece is a basket case: Italy is not. Its debt is 118% of GDP but unlike Kiwis, Irish and Spaniards etc, Italians have not run up large mortgages: Italy has little private debt. Moreover, Italy’s sovereign debt is fairly stable and slow growing: it has been over 100% of GDP since 1991 and has only recently become a worry.

Italy has been prudent in that its government has not run large fiscal deficits. Its debt has grown because the Government did not take it seriously and allowed debt to grow by putting interest and capital payments on tick.

Its problems are lack of political cohesion and endemic slow economic growth: it has grown by only 0.75% p.a. over the last 15 years. Its debt has increased faster than economic growth. The outlook for increased growth is abysmal as its industry is largely uncompetitive and its wages higher than Germany’s.

Italy must now pay more to borrow money and that increases its uncompetitiveness. And if it cannot repay its debts, no one will lend to it. Italy could still need a bail-out or access to cheaper credit but as the third largest bond-issuer in the world, Italy may be too big to save. There is hope that markets will be satisfied with a new government, committed to a new policy of austerity: bond yields have retreated since Berlusconi resigned. But confidence is not deep, and a new attack on Italy cannot be discounted.

There is a honeymoon period which may be brief when the market digs a little deeper and becomes more aware of Italy’s large current account deficit. The market has also swallowed the notion that Italy has to roll over only about 750 billion euros of its 1,900 billion euros bond issue. Der Spiegel said that Italy would be paying 7% on new issues but only 4.66% overall as late as 2015. This misses the point that bond-vigilantes may soon want much more than 7% as Italy has no growth, and cannot print money.

Bond safety a chimera

When banks realised in 2008 that packaged subprime mortgages etc were toxic, they switched to bonds. Sovereign bonds are now a distressed asset. Even France is now looking indisposed. European banks are gorged on bonds because regulators said they were safe and allowed leverage up to 450 to 1. They liked Greek bonds because the yield was higher than Germany’s. They risked their future for a slightly higher profit.
If Greece defaults, banks with “only” 8% or more exposure to Greek bonds will have their capital wiped out, and need emergency support. They could also be sweating over exposure to Portugal and Spain too.

Regulators allowed banks to hold “risk-free” sovereign bonds and did not require they set aside capital for defaults. In 2006 this was partially addressed in Basel 2 but the EU never enforced a tougher regime. Banks put their liquid assets into high yielding shaky debt and are taking huge losses in getting it off their books.

According to the Bank of International Settlements, European banks now have exposure of US$ 643 billion to Spain and $837 bn. to Italy. US banks have $47 billion exposure to Greece alone. The risks were illustrated last week in the bankruptcy of MF Global after its stupid $6.3 billion bet on European debt.



tags: european debt, neville bennett

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