Europe is on FIRE, that is, Finance, Insurance, and Real Estate. In the aftermath of financial crisis triggered by US housing bubble and financial market malfunction came sovereign debt crisis across Europe. Greece is in a deadly situation and Italy is next on the list. Italy, a byword for luxury and designer goods including Gucci, has recently made headlines of financial news worldwide again.
Bill Gross of the Pacific Investment Management Company (PIMCO) is a legendary figure in bond investment, just as Warren Buffet is in stock investment. The bond guru, who famously claimed to sell off US treasury bonds, released an investment outlook in February 2010. In the report was included an intriguing chart that marks groupings of nations ready to be on fire. : a ring of fire, which originally refers to an area where large numbers of earthquakes and vocanic eruptions occur, but here suggests a group of countries that is vulnerable on FIRE industry and near to collapse and therefore not to invest in.
The chart depicts outstanding stock of debt and current annual deficit comparing to GDP, and Greece and Ireland, at national bankruptcy, are at the bottom of the red zone and Spain and Italy are included as well. The US, the key currency country, and the quasi-key currency countries including the UK, France and Japan are inside the zone as well. However, the countries would not be burn to death as they print money.
The guru lived up to his name. With the noted chart he warned the current financial crisis across southern Europe a year ago, which broke out just by the order of closeness to the danger zone. Had investors in the US and Europe listened to the warning by the bond fund manager, they would have had a good night sleep. Insight of the expert shines through.
However, it is noted that no country filed for a bankrupt to bail out financial crisis.
The globe is going through crisis during the 'post-crisis' period. The 2008 financial crisis appears to be stabilized, then followed by 'sovereign default crisis' from Europe. US and Japanese deficit is throwing the gravest threat to the world economy.
Tsunami shock waves from Wall street seemed to go through the Real street, but then the US government spent hundreds of billions of dollars on corporate bailouts which turned 'corporate bankruptcy' into 'country bankruptcy'. Wall street had been 'the heart of global finance' for the last 50 years, but is now dubbed as 'the heart of financial instability' and 'cause of global financial hypertension and arteriosclerosis'. The US continues to print dollars to solve its financial issues, forcing excess liquidity and liquidity risk around the world.
Since 1999, 12 countries starting with Russia to Greece recently have declared country bankruptcy. It is interesting, however, to witness that no country went bust and those 12 countries recorded annual 4% growth rate on average for 5 years after declaring sovereign default. Some even makes jokes that bankruptcy has been the source of the growth. Bad economy leads into a default and it normally takes five years to complete restructuring and normalize the economy.
Against this backdrop, the Greek default does not necessarily call for war in European and global financial market. That is, currency finance system allows to print money to boost spending and extend debt with no bounds. The Greek default is to postpone debt repayment after all and Italy will receive more money printed by European Central Bank. : Not only the US but Europe can print money.
In the end, fight against financial crisis differs greatly at money printing power in the 21st century. Countries with money printing power push for fiscal stimulus package, while others pay off loans through drastic austerity measures, interest rate hike and asset disposal. Greece and Italy are having hard times while the US, the UK, France and Japan give a careless shrug.
Meanwhile, government's financial support during the financial crisis highlighted a 'Too big to fail' problem. Among other numerous ailing financial institutions, Lehman Brothers was allowed to collapse since it's 'too small to survive'. Debt crisis in Europe is similar but more complicatedly entangled and a country that spreads bigger contagion risk will survive. Greece acounts for mere 2.5% of Europe's GDP, while Italy for some 16.9%. Will Greece survive and Italy fail It is highly unlikely considering the huge aftermath anticipated.
The lender is superior to the borrower with small debt, but once the loan amount goes beyond the limit and the borrower is in no hurry for payback, it becomes contagious and lender loses its dominant position. Lenders in the US and Europe are tied up on the same boat. They bail out rather than fail each other. This explains why the ailing UK buys US bonds and the US aides European financial institutions.
Will the US roll out QE3 - It's not QE3 but balance sheet of the Federal Reserve to scrutinize.
QE1 and QE2 program boosted stock market in the US, but plunged the dollar's buying power and inflated commodity prices greatly while did little to jump-start the economy. During the QE1 and QE2, price of copper and cotton skyrocketed by 113% and 77% respectively. During QE1 and QE2 expansion, the US stock price appreciated by 37% and 21% respectively.
The US, World's most indebted country, is struggling to raise debt ceiling but still in a stalemate. US President Obama failed to coax the opposition party and started to threaten them. Greece and Italy is nothing comparing to America, with their size of economy less than that of a big American state. America is in big trouble if it failes to increase deficit ceiling by early August.
The US can no longer provide its national function if not extend loans, since its budget is on the deficit. Civil cervants would not receive their salary and all the public service will come to a halt. This explains why the US reaches for QE3 on the cards, with which it once claimed that there will be no QE3. The US is playing tough, due to housing double dip and a worsening unemployment problem.
US stock price and asset size of the US Federal Reserve are positively correlated. Buoyant stock market amid worsening economy reflects expectation for liquidity supply by the US government. Whatever you name it, perhaps as QE, the key is for the Federal Reserve to expand its balance sheet. Considering that its major bond buyers refuse to buy its bonds, the Fed has no choice but to print dollar and expand money supply.
China's Soft-landing
Skeptics in the west have accused that China will face a hard economic landing due to the municipal debt bubble, over-heated property market and uncontrollable inflation and bubble will burst to incur drastic fallout in world economy. In response, the Chinese government released a report on its municipal debt.
The report reads that China's municipal debt amounts to 10.7 trillion RMB, among which 6.7 trillion issued and 2.3 trillion collateralized by the local governments. Principal and interest payment accounts for 21% of annual municipal tax revenue in 2011 and is expected to fall to 4% in 5 years. By 2015, 7 to 10% of local government loan is anticipated to go bad and loss ratio for overall financial institutions is to be 1.4~1.5% in China.
China has released its GDP of 9.5% in the second quarter, 0.2%P decrease from 9.7% of the first quarter and a decrease for 5 consecutive quarters since 2010 1Q. Chinese government has tightened its monetary policy with concern for inflation.
Though many warned that China is heading for a hard landing, the world's most populous nation achieved a soft landing in all indexes except in consumer prices. Currency increase rate is kept as low as 15% and industrial production rate and consumption rate are raised by 14% and 17% respectively. Investment in fixed asset is growing by as high as 25% this year
Chinese consumer price hitted its highest record of 6.4%, with 4% growth for non-food products and 14% for food products. Reduced number of pig farms amid natural disaster is the main culprit for the price hike of pork and vegetables and price increase is seen to slow down starting July.
While QE3 is the subject of a heated debate and 2% growth rate is regarded as an achievement in America, 9% growth is called as a soft landing in China. It may differ by viewpoint but while the US is seemingly raising voice on the global stage but China seems to be the one that actually gaining more power.
Dr. Tang Min, deputy secretary general of People's Bank of China, B.A. from Fudan university, Ph.D from Johns Hopkins and professor at Fudan university, is mentioned as deputy se
cretary general of IMF, an intergovernment organization for which the US took initiatives in establishment. Money does talk, it seems.
European crisis makes Asia look fresher
Stock market in Asis panicked after series of sell off by the entrenched European investors. Even people in Asia who cannot afford luxury goods from southern Europe worried about European crisis.
Does European crisis lead into crisis in Asia
It is intriquing to witness that the plumetting stock price is contained beyond certain level. What is the driving force behind The more Europe staggers, the more Asia shines and looks fresher.
In the US and Europe, industrial structure is transferred to tertiary industry and manufacturing industry was phased out. Financial difficulties ruined the middle class who could afford luxury goods. No country with tertiary industry switched its industrial structure backwards to secondary industry. Employment takes forever to recover and so is consumption. Against this backdrop, it is not surprising that Prada, an European luxury brand, enlisted its stock not in Europe or the US but in Hong Kong, with aims to trigger comsuption by chinese and asian, or Volvo, an European classic automobile brand, is sold to a chinese firm.
Amid global economic downturn, the world's factory China continues to export at double digits. In June alone, its trade surplus hit record high with 22.2 million dollar even with continuously increasing import. The west is through economic depression and asks for cheaper goods to help Chinese exports ralkly. As corporates do, Europe, laden with budget deficit and government debt, is busy paying back interest as 88% of its revenue is debt.
Asian economy is seemingly hit hard by stringent economy in the US and Europe, but not exactly so. Asian manufacturing industry is stil strong since it supplies necessary goods and durable goods to the developed countries : more demand at booming economy and more demand for cheaper goods at sluggish economy. At the hint of economic downturn or crisis, more money is printed to supply liquidity and the liquidity floods into Asia, where growth is still visible. This explains why Asian stock did not nosedive at financial difficulties from the developed countries.
Crisis in the advanced countries and financial instability and downturn in Asia are a different story. Temporary cash flow may fluctuate stock price but does not lead to a dead-end situation in Asia. Market does not collapse with strong manufacturing industry and dollar liquidity surplus.
Though Asia is suffering from inflation, Asian governments exercise firm control on price after going through two different credit crunches. It boldly exerts both 'visible hand' and 'invisible hand' for price control.
One example is China which raises its reserve ratio monthly and interest rate bi-monthly in an attempt to offset currency increse effect due to influx of hot money and trade surplus. The US or European countries never adopted such measures. Korea is no exception ; as shown in the example of oil price and telecommunications fee, Korean government has long dropped its neo-liberal capitallistic attitude and mobilized all the possible means to achieve its policy goals.
It is Asia that buys automobile, IT and other commodities today, not Europe or the US. It is Asia's demand for import that needs to study to understand the trend of global agicultural or nonferrous metal market. It is in China where 10 million houses are under construction and price of nonferrous metal is settled. Consumption persists not in the west but in Asia. Financial institutions in a country with on-going consumption are relatively more sound and solvent. : Or, apple is less likely to go rotten. Economic slump triggered by debt problem from the west is inevitable, but in turn it relatively makes Asia more attractive. The outlook around Asian market including Korean does not look bad despite crisis from Europe.
