Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the tag “debt”

Abenomics: A burst of energy in a country lacking it


If investors had taken a punt on the Japanese stock market six months ago, they could have seen the value of their shares go up by 70%. This was roughly about the same time that Mr Sinzo Abe, the new Prime Minister, was likely to lead the country once again. He was originally in office in 2006, before resigning within a year after a combination of poor health and low popularity. The second time round has been much more of a success, with opinion polls showing a 74% approval rating in April. It’s not hard to believe; GDP growth was up at an annualised rate of 3.5% in the first quarter, far above the likes of the USA, Britain and the eurozone (which is currently fighting recession across the region). While the yen has dropped 20% in value against the dollar, boosting Japans struggling exports that have long had to live with a strong currency making their products uncompetitive. Toyota for example are expecting net profits to increase by 40% this year.

A graph showing the incredible rise of the Japanese stock market in the last few months. Found at http://www.zerohedge.com/news/2013-05-15/bank-japan-headno-bubble-here-nikkei-rises-45-2013

Much of this is down to a massive stimulus package that Mr Abe publicized in January of ¥10.3 trillion. Earmarked to improve the infrastructure of the country and boost confidence, it is in stark contrast to the policies of America and Europe, where austerity rules the roost. Coupled with this, the Central Bank of Japan’s reigns was handed to Haruhiko Kuroda, a willing experimentalist and ally of Mr Abe. He promptly announced an inflation target of 2% (after years of deflation) to be met in the next two years, a confident claim that could prove difficult. But then that could be missing the point; it’s not about reaching the target per se, it’s about inspiring confidence to the nation and changing the atmosphere of gloom that has enveloped the country. Additionally, Mr Kuroda has committed the central bank to buying up ¥7.5 trillion in long term government bonds a month, roughly equating for 70% of the Japanese bond market. Finally he announced the institution would become the only major central bank to change its target from inflation rates to a monetary base system – the amount of money pumped into the economy.

The new governor of the bank of Japan, Haruhiko Kuroda, is taking a gamble on the economy. 

Yet there are repercussions to Abenomics. Japan is already struggling with a mass of debt on its shoulders, at over ¥1,000 trillion and set to reach 240% of GDP next year. That is by far the highest debt to GDP level in the world, while in numerical terms it is only second to America, whose economy is three times that of Japans. It is also 20 times that of current government revenue and takes up half of said revenue to service it. One solution is the expected increase of consumption tax to 8% in April next year and 10% in 2015, which was set to help achieve the lofty aims of halving the primary budget deficit by 2015 to 3.2% of GDP. The fiscal stimulus has thrown this ambition out the window, with the budget deficit now believed to have increased to 8.8% of GDP this year. Adding more debt to the pile looks risky, though the actual chance of a debt crisis is low; Japan plays very little for the money it borrows mainly because the bond market is dominated by local Japanese savers and the central bank. But this is clearly a gamble by Mr Abe, a last throw of the dice, to succeed (increase growth and revenues and start to cut into the debt pile) or fail (increase the level of debt and see the economy spiral out of control).

A graph showing the increasing rise in Japans debt over the last two decades. 

To only make matters worse, Mr Abe has inherited difficult long term problems. The first is the current energy crisis. Following the Fukushima nuclear meltdown, Japan drastically shut down the majority of its other reactors, leaving it to rely on importing energy, a costly measure. Nuclear energy accounted for 30% of the sector and was set to increase to 50% in the next two decades to account for a rising demand for energy. Mr Abe and his government are now struggling to make up for that shortfall in a resource low nation, with the possibility of electricity cuts not being discarded and a U-turn on nuclear power very unpopular. The imbalance could also push the narrow current account margin (currently 1% of GDP) into the negative, adding further strain to the budget deficit and public debt.

Only a few Nuclear stations are still online in Japan, causing an energy shortage in the country.

The second long term problem is the demography issue. There are a growing number of elderly residents in Japan that will drain the states resources in the form of pensions, health care etc. In the next 90 years, the percentage of the population past retirement will grow from one fifth to nearly half. A rapidly declining birth rate coupled with a trend for smaller families means the number of pensioners living on their own will double by 2030 based on 2005’s population numbers. While the number of available workers is shrinking, resulting in less people contributing to the economy and more people taking state handouts. This may be a global problem in the rich world, with the average age of death continually rising, but Japan is a standout indicator predicted to experience the worse of the problems. In contrast India’s population is getting younger and will boast a 250 million increase in its working age population over the next decade.

Two graphs showing India’s bulging young population, found at http://www.economist.com/blogs/graphicdetail/2013/05/daily-chart-8

Encouragingly, Mr Abe is also striving for economic reform.  He is set to release his reform policy next month which is expected to include; steps to make it easier for female participation in the workforce and a deregulation and breaking up of the energy sector. More ambitious aims could include: easing barriers to investment in the farming sector, freeing up Japans rigid labour laws and increasing visa access. Though these could be held up until after the July elections for the upper house which if his Liberal Democrat party were to win a majority in (which seems likely), Mr Abe could pass legislation without hassle, a rarity in modern Japan.

Joining the TPP (Trans-Pacific Partnership) would prove an important step as well, by expanding trade with some of Japans most important trade partners and providing a timely boost to GDP growth. Entering the discussions so soon was warned against by his advisers, but it has only seemed to have improved his image further, giving him foreign credibility and respect. Going head to head against the lobbyists for protectionism will be tough, but opening up its economy is one of the few major moves Mr Abe can play to increase long-term growth.

Increasing trade with the USA via the TPP could be a massive boost to Japan’s economy. 

Disappointingly, Japan has increasingly become isolated economically, not attracting much foreign direct investment due to high taxes (with a corporation tax of 38%) and a society reluctant to integrate with foreigners. If Japan is to avoid a future disaster it will have to really embrace globalisation. Immigration could be a real solution to their ageing population, as immigrants tend to be both younger and embrace bigger families, as shown in the USA. Attracting foreign investment is also key, as the government cannot hope to keep up its stimulus package in the long term and will need the private sector to invest much more than it currently does. Japanese firms could be forced into growth strategies if their sectors were fully opened up to global competition. Only then could the government start to reproach – as it will certainly have to at one point – and start to cut the government spending and lower the public debt levels.

A return to growth for the world’s third largest economy, one that is equal to France’s, Italy’s and Spain’s combined, is a feat to celebrate. But if Mr Abe doesn’t implement the long term reforms and embrace globalisation, then he might find (both metaphorically and literally) the economy running out of energy.

2013 Economic Trends


2013 is set to be a crucial year for a lot of countries, with Obama starting a tough second term at loggerheads with the Republicans over the Fiscal cliff, Europe implementing a set of reforms that could spark the end of the Euro crisis and China’s new leaders hinting at political reform in a economy that could overtake America in a few years. But some more important long term trends are also starting to take effect, which could change how the world economy works.

Hu Jintao’s new reign as the leader of China has sparked talk of political reform. 

One sector where big change is taking place is in manufacturing, where the location and tools are set to transform. For the latter the trend over the last decade has been for manufacturing jobs in the West to be outsourced to China. The Chinese labour force were willing to work for a fraction of their Western counterparts salaries, boasted colossal human capital and had a very underrated infrastructure that allowed for such goods to be transported quickly and efficiently. This helped fuel China’s lightning growth which has seen it transform from a developing country to a developed country in record time. But this has also seen a middle class emerge in China that has new demands. More emphasis now needs to be placed on the service sector for the economy to keep expanding at the same pace, as China’s grip on manufacturing is no longer as tight as it once was. Wages in the sector have been rising in the country, at around 20% a year, while China’s currency that had for so long been artificially kept weak, has been allowed to appreciate in the last few years. It now faces competition from its regional neighbours, as Vietnam and Bangladesh boast low cost workers waiting to be exploited by firms. But these countries don’t possess the same supply lines and pure number of workers as China, making them less serious rivals. Instead China’s biggest rival now lies below its biggest customer. Mexico is an attractive option for firms with its competitive costs (lower than China’s), large supply of workers and close proximity to America. The nation has come a long way, improving its infrastructure and enforcing its laws to a much higher degree than it did a decade ago. Of the $19.4 billion it gained in foreign direct investment in 2011, around half was gained in the manufacturing sector, while it has become the second largest supplier of electronic goods to the USA. HSBC even predicts that Mexico will overtake China and Canada as the biggest exporters to the USA by 2018. So next time you buy a product, you might not be surprised to see it originated in El Mexico.

Mexico’s PMI – which measures manufacturing output e.g anything over 50 is an increase and anything under is a decrease – has increased impressively over the last year. 

The second big change to the manufacturing sector which could kick off this year is the much heralded 3D printing. The ability to replicate products without fault could dramatically change the manufacturing sector just like robotic machinery once did. It could displace a lot of workers, as the need for humans to graft products would no longer be needed. Instead there would only be a need for employees who could operate the 3D printers, reducing the labour force considerably. That would have the knock on effect of reducing the need for out-sourcing (already on the wane) as the cost of manufacturing products would no longer depend on the wages of the local population. Instead it would make far more sense for 3D printing factories to be established in the home markets of the Western world, so that goods could be delivered fast and have access to modern technology far easier. The “ink” needed could also be very cheap for some products, as old products could be recycled to create the base materials for the 3D printed objects. While printing unique products for different customers would be rather easy, allowing for more artistic licence without the usual added costs. Alas, 3D printing is not yet ready for mass production, while some products would indeed remain cheaper to make from scratch rather than printing copied versions. But this could be the year it kicks off, as most of the ingredients are ready for factories to start trialing 3D printing in producing goods. 2013 might be the year where replicating products was proved to be viable and yet another nail in the coffin for the 20th century manufacturing techniques.

The final economic trend for 2013 will be the battle between austerity and stimulus that has been building up since the financial crisis. Stimulus packages were the order of the day initially after the crisis to help economies lift themselves out of recession. But austerity then took over as governments looked to try and gain control over their inflated debts and deficits. Nowhere more than Europe has austerity been so devoutly defended, with Germany and the EU enforcing tough austerity measures upon the countries that received bailouts. This has had mixed success though, with Greece clearly in need of controlling its debts, but the likes of Spain actually rather in control of its finances until it started to implement poorly thought out austerity measures. At the end of the year, one of bailed out nations, Ireland will return to the bonds markets, after managing to return to a current account surplus and get its economy growing in 2011 and 2012. Ireland remain the model case for Austerity in Europe; after requiring a bailout in 2010, they have implemented tough austerity measures and repaired their economy (despite a still high budget deficit), so a return to the bond market would help prove austerity works when implemented well. But they remain the only working example right now, with most countries contracting badly from austerity measures, with Spain still not expected to exit recession this year. On the other hand, some countries have turned to stimulating their economy instead, banking that the resulting uplift in the economy will outweigh the debt added and help pay it off in the long run. For example Japan have recently announced a stimulus package equivalent to $116 billion, to try and lift the economy out of recession by spending government money on improving the country’s infrastructure; which provides jobs and also attracts businesses to the country. Critics suggest the money won’t be spent efficiently, while the stimulus package will only add to Japan’s considerable debt, already at 200% of GDP. But they aren’t the only country that have thought to spend their way out of their debts, with China and Brazil both launching stimulus packages last year to help reignite their economies after falling world demand for their exports. Maybe the best example to use is the USA, who largely ignored their considerable debt during Barack Obama’s first term (actually adding trillions of dollars onto it) but are now being forced to consider austerity. The looming fiscal cliff at the start of the year would have forced through considerable cuts in America budgets equal to 5% of their GDP, instead Obama and Congress were able to come to a short term solution to avoid such measures. But the debt ceiling must be re-negotiated soon and the long term problem of America’s rising medical costs must be dealt with sooner or later. This means America will be looking to implement austerity measures to help deal with their rising debt this year, probably with a mixture of spending cuts and tax increases if the democrats and republicans can ever agree. So if a conclusion is to be reached this year over Austerity or Stimulus in the battle to control countries debts, then America may be the deciding vote. If austerity can help America bring down its budget deficit and public debt, without tipping the economy into recession, then it might just snatch the win.

More talks like these are to be expected as America looks to battle its debts by enforcing austerity measures. 

 

2012 was an eventful year, containing the Olympics, the election Mr Hollande as France’s first Socialist President in decades, the election of Mr Morsi in Egypt as the Muslim Brotherhood’s first big win in an election, the re-election of Mr Obama  in the USA and the first example of a private firm venturing into space in the form of SpaceX. 2013 will have a lot to live up to, but if these trends prove correct, then it could prove just as eventful (hopefully minus an apocalypse this year).

The best man for the job?


America will decide on Tuesday the leader of their country for the next 4 years. The choice is between Barack Obama, the current President and Mitt Romney, the challenging governor. Both have run expensive campaigns on vastly different policies, yet the polls are evenly split. This is because neither candidate has particularly won over the American public and seem to be campaigning more on the criticisms of their opponents than their own positive attributes.

Barack Obama has already held the office for 4 years to mixed results. His campaign for re-election is largely going to be decided on this first term and whether the American public are happy for a continuation in current policy. So it seems best to assess how he has done is his first term.

In economic terms he has brought growth back to America (albeit very slow), reversed the mass job losses (though unemployment is still high) and saved the car industry (an important supplier of jobs). But the huge budget deficit that Mr Obama promised to cut, currently at 7% of GDP, has only increased as the Obama administration spent their way out of recession. Each of his 4 years in charge has seen trillion dollar budget deficits and it has lead to America’s public debt to GDP ratio expanding to over 100%. This has been the weak link in Barack Obama’s campaign, as many American’s worry the huge debts owed to the likes of China are weakening America’s position as the world’s strongest economy. In foreign policy, Barack Obama holds a much stronger argument. He can boast the killing of Osama Bin Laden and Colonel Gaddafi, the pulling out of Iraq and (soon) Afghanistan and in general the more peaceful and calm image he has created of America. Even with the upcoming problems facing the USA, including the Syrian civil war and Iranian Nuclear program, Mr Obama has shown a strong confidence in his decisions. He has promised to the world that Iran will not attain Nuclear weapons and has backed that up with strong economic sanctions that are only now beginning to take a real affect. In social policy Barack Obama has helped improve work conditions for women, supports gay marriage and is pro-choice (an opinion I share). While he has also brought in a new healthcare program nicknamed ObamaCare, a much needed reform that has solved America’s problem of having millions of people without any sort of healthcare.

This paints a picture of a successful Commander-in-Chief, but a weak leader of the economy. Yet this could be a harsh assessment as Barack Obama took over when the American economy was suffering one of its worst recessions in its history. Confidence was low, banks were under capitalised and large industries were falling apart. Even considering one of his main weaknesses, the large deficit and public debt, there are some mitigating circumstances. The Obama administration decided that a large stimulus was needed to get the economy growing and that deep cuts into the budget would only disrupt the recovery. In countries like Spain and Britain, where austerity has caused new recessions in their economies, it’s fair to say a delay in the much needed cuts might have been a correct decision. Barack Obama has essentially campaigned on this argument, that the economy could have been a lot worse than it has been.
But it also could have been a lot better. Barack Obama has completely failed to work alongside the Republicans during his first term in office and it has lead to the impending fiscal cliff in January, where an array of spending cuts and tax increases could cause a 5% decline in GDP and a return to recession for America if both sides can’t agree on how to cut the deficit. Mr Obama has also showed a poor understanding of private sector; continually criticizing big businesses and investment firms, strangling credit with heavy regulation and making poor choices on which firms to invest government money in. Finally, his legacy policy –ObamaCare – has failed to solve the big problem with healthcare, mainly that is unaffordable and only growing in costs.

The fiscal cliff that America is facing.

Mitt Romney in contrast offers something completely new. He has heavy experience in the private sector and has based his campaign around creating jobs for the millions of Americans out of work. He also boasts experience of working alongside democrats during his governorship, a clear weakness of Mr Obama’s. He even chose a popular running mate in Paul Ryan, whose budget plan Mitt Romney has chosen to use in his campaign. This entails cutting taxes, transferring more responsibility to state level and shrinking the public sector to allow private industries to grow. Fundamentally he is a great candidate to run against Barack Obama.

But this would only be describing one side of Mitt Romney. The candidate has flip flopped between so many different policies it’s hard to know what he will do when in power. He has regularly adopted contradicting policies, remains vague on subjects such as abortion and has recently changed his mind completely on when to pull out of Afghanistan (copying Mr Obama’s point of view). This extends to his famous five point plan and tax plan, where he states he will cut taxes on the middle class, cut corporation tax, increase military spending and yet still manage to reduce the huge budget deficit (A great interactive game for this issue – http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/10/31/interactive-make-mitt-romneys-tax-plan-add-up/) . He smartly ducts questions on how he will actually manage to do this and vaguely states he will close loopholes, but he will clearly have to break at least some of his promises if he really wants to deal with the deficit problem. Another less attractive side of Mr Romney is his link to the extreme views of his Republican party. Though he himself rarely states his own opinion, his has yet to denounce other republicans views that abortion be made illegal even in extreme cases of rape(including his own running mate Paul Ryan) and was actually caught out on video when a gay war veteran asked him about his views on gay marriage. Then there are his plans for healthcare, where he constantly denounces ObamaCare (a plan identical to one he implemented in his own state) and plans to bring in a “voucher” based system where old aged Americans would receive vouchers that they could use for healthcare costs. The criticisms are that they wouldn’t be inflation adjusted and become too small to pay off rising costs, while the overall plan doesn’t actually seem to stop rising healthcare costs, America’s main healthcare problem.

Neither candidate therefore has much of a leg to stand on. This can be seen in the mud-slinging campaign battles that we have had to witness over the last few months. Both candidates have cut into each other, broadcasting extremely negative adverts (with it found that only around 10-15% of each candidate’s adverts being positive). Barack Obama actually started this early by producing negative adverts on Mitt Romney while he was still campaigning for Republican nomination. This was hoped to paint the picture of a rich, greedy millionaire who too distant from middle America to lead it. This ended up backfiring though when it came to the presidential debates, an important part of any presidential election. Mitt Romney had a great first debate and appeared much more likable than the Obama Campaign had made him appear. This underdog status helped him surge back up the polls, while Barack Obama appeared nervous and reluctant to challenge Mitt Romney on his policies. The next two debates saw a more even performance from both candidates, but the damage had already been done; Mitt Romney was not the evil CEO he had been made out to be. Now both candidates are neck and neck in the polls and have a decent chance of winning.

Mitt Romney convincingly wins the first debate.

So who should win?

For me it would be Barack Obama. He may not have delivered on the mass hype that surrounded him in the last election, but he has managed over a sustained recovery after being given a downward spiralling economy. He deserves a second term to really complete the promises he made about cutting the deficit and creating jobs for the American public. Internationally he is favoured heavily over Mitt Romney and has helped improve America’s image immeasurably after the destructive Bush years. With such impending foreign crisis’s like Iran gaining Nuclear weapons, Barack Obama seems a much wiser and cooler head than Mitt Romney possess. While domestically what America really needs now is continuity not change, some of Barack Obama’s policies are only starting to take effect now and his future plans are a lot clearer than those of Mitt Romney. Indeed Mitt Romney’s best policies could only work if you discount some of the other policies he has promised, making him a tough candidate to believe in. Much like the Obama campaign message, voting for Mitt Romney could see America end up a lot worse than it is now.

Daily chart: The maths behind the madness | The Economist


Daily chart: The maths behind the madness | The Economist.

A great graph by the economist showing the different debt levels of countries and what the IMF is predicting in the next few years.

The Unelected Super Mario


In November 2011, Mario Monti was invited by the Italian President to form a government after the resignation of Silvio Berlusconi; he swiftly set up a new cabinet, appointed himself the finance minister and refused any salary. Mario Monti is an incredibly intelligent individual and has performed wonders in such dire times for Italy, especially after the farce of Berlusconi’s time in power. Silvio Berlusconi was known for his scandalous private life and questionable business decisions, while his cabinet held a former calendar girl, a minister linked with the mafia and only one female with heavy responsibilities. Mario Monti was a professor of economics, a European commissioner for 10 years and before his announcement as Prime Minister he was chosen as a Senator for Life (of which there are only seven in Italy). His cabinet also holds much more respected officials including: the chairman of NATO’s military committee, the boss of Italy’s biggest retail bank, six other professors and three women in high up positions namely the Interior Minister, Justice Minister and the head of employment and welfare.

The contrasting Time covers of both Italian Prime ministers.

Mr Monti needed a high class cabinet however to face Italy’s over whelming problems, namely that it is Europe’s biggest debtor, with Italy the only country along with Greece to have a debt to GDP ratio over 100%. Many in Europe fear that a Greek default could topple Europe, but it remains a small country, the real worry is Italy. If Italy were to crash it would all but end the euro, the current EU set up does not have the funds to bail it out and Italy’s combination of size and debt would be too much to handle for a fractured Europe. There are signs that Italy will have to be careful not to fall into this trap, with bond yields (borrowing costs) high in January at around the levels that saw countries like Portugal and Ireland needing a bailout (at 7%) and currently are at 6% and rising again. Yet Italy is actually running a very good budget, with the biggest primary budget surplus in Europe (budget excluding the interest payments on old debt), a low budget deficit when compared to European neighbours (targeting 2.7% this year) and a budget plan that hopes to wipe out the deficit by next year. It is rather growth that is Italy’s weakness, they are forecast to shrink this year by around 1% and have hardly grown in the last 10 years. This is mainly down to poor competitiveness by the county in comparison to countries like Germany as they have allowed wages to race upwards making Italy unpopular for industries.

The rise of Italian debt over the last few decades. 

In such a short space of time, Mario Monti is attempting to make more changes to the Italian system than Berlusconi made during his whole time in power. He has managed to push heavy reforms through parliament while keeping acceptable approval rates with the public, who have realised that changes must occur for Italy to survive. One big step he is taking is to make Italy more competitive within its economy, this is important as monopolies have existed in markets such as the gas industry for far too long. He hopes to complement this with extensive labour reforms that could change the level of difficulty for firms to sack their employees. This sounds wrong to begin with in such harsh times, but it could actually motivate employers to hire more Italians as they would have increased flexibility in staff turnover. There are also other unforeseen problems with the current labour rules; as it restricts young workers from entering the job market with the older generation so enshrined in their jobs, and encourages firms to offer short term contacts which offer less stability to employees and less tax for the government. This first point is backed by current unemployment statistics; Italy’s total unemployment stands at just under 10% (not great but better than most others in Europe) but the country fairs less favourably with Youth unemployment (under 25 years old) where 30% of young Italians are unemployed (only Spain, Portugal, Slovakia and Greece have higher percentages). Mr Monti is also applying strict austerity on his country to try and tackle the huge debt that is weighing them down. This means making unpopular cuts in public spending to try and decrease the budget deficit while also trying to balance it out with growth policies to stop Italy from sliding into a severe recession. This has only been accepted by the Italians as they have seen what could happen if they leave their debt unattended, with Greece not too dissimilar to Italy in some statistics. Mario Monti has also made important reforms to the pension schemes in the country and has campaigned fiercely against tax evasion (rife in Italy).

While Italy’s total unemployment is relatively low, their youth unemployment is disturbingly high. 

Mr Monti has finally given Italy credibility in Europe again as well (sorely missed under Berlusconi) with his sensible policies and likeable nature. He seems to get on with most other political leaders and has recently been offering advice on how to solve the Euro’s problems, notably backing the idea of “Eurobonds”. This is refreshing to see as it challenges the status quo that Germany is the only nation allowed to organise the policies of the euro. It is an idea that seems to be catching on as the recently elected French President Francois Hollande has also challenged the authority of Angela Merkel in deciding the EU’s future. He is also keen to get Britain back involved in the EU after David Cameron refused to sign the Fiscal Compact which seemed to set them apart from its fellow EU members.  He now needs help from his neighbours, to help Italy face its problems. He has called on Germany to push through reforms on their service industry to help boost European demand and he has called on the EU to help lower the interest rates Italy have to pay on their debt as a reward for the punishing reforms currently being pushed through by his government.

Prime Minister David Cameron (L) greets Italian Prime Minister Mario Monti outside Number 10 Downing Street on January 18, 2012 in London, England. In addition to meeting Mr Cameron on his visit to the UK, Mr Monti will also conduct meetings with financiers to find solutions to tackle Italy's large government debt.

Mario Monti hopes to enjoy a good relationship with David Cameron, to try and get Britain back involved in Europe. 

There have been problems for the Italian Prime Minister however, as disagreements over his reforms, political squabbles and the impact of a weak eurozone have damaged his recovery of the Italian economy. His labour reforms have been fiercely criticised by the Trade Unions of Italy, as they argue it will just the give the big employers more power to sack Italians. Mario Monti should have reason to fear as the past two individuals who attempted labour reforms were both assassinated for their efforts. His reforms now seem to have been watered down to appease the trade unions, but there are worries they will become useless and that more weakening of Monti’s resolution to change Italy’s labour market could occur. Originally in the reforms companies would be able to fire employees for economic reasons, Mr Monti has had to back down slightly by allowing courts to reverse these situations, though he hopes to speed up the whole process. The point of the reforms are to free up the labour market and give more freedom both to employers and employees, if this watered down reform doesn’t have the same effect, then Italy would have wasted a great opportunity. Another worry with his labour reforms are that they are long term in nature, so many Italians might not have the patience to keep supporting such changes while future governments could be inclined to scrap the ideas altogether if public cries become loud enough. Public turmoil over politics is also damaging the Mario Monti’s government, as local elections showed a decline in turnout and a rise in protest parties like 5-star movement, a party headed by a comedian who rejects the current Italian set up. This doesn’t bode well for Mr Monti as faith in the government wears thin, while his backing has also taken a hit after a controversial tax on property was released by the government (disliked in a country with 70% homeownership). Then there is the ever raging Euro Crisis, as problems in Greece and Spain reverberate around Europe and cause panic in the markets, effecting Italy’s economy. If the EU was in fine order, then Italy would currently be doing a lot better, with increased demand for its exports and more money available for external investment in Italy, instead the opposite is happening as Italy’s exports are struggling and FDI in Italy is almost nonexistent. This leaves Mario Monti facing an uphill struggle to lead Italy into a recovery, with outside and inside forces both working against him.

Beppe Grillo’s 5-star movement party gained seats in the recent local elections, showing Italian distrust of the current political set up. 

The real question is what will happen when Mario Monti has to step down next Easter; the Italian political scene is a disaster with no parties able to boast a clear backing from the public. Many want him to continue as despite the harsh austerity measures he has implemented, he still has the majority of the public’s backing and no-one else can boast that right now. But Mario Monti has always stated he will not continue after next year, plus it would mean him heading a political party, which would negate the neutrality he brings to the current parliament. If he were to be kept in power in any other way it would be democratically questionable as he would remain unelected by the Italian people, a quality that too closely resembles that of a dictatorship. Yet Mr Monti has arguably been Italy’s best leader in years, and has gone about the task of fixing Italy’s problems with integrity and commitment.

Next year will probably bring back the shady Italian politics of old with underhand deals, bribes and deceit. We should value the steady and articulate leadership of Italy while we still can, it’s just a shame that it has come about from an unelected professor being handed the job.

How similar are the Greeks situation to the Argentina of 2001?


In 2001, Argentina suffered a severe economic crisis which saw GDP drop and unemployment reach 18%. The crisis originated back in 1989, when democracy was re-established (after a military dictatorship) and a new currency was created – Austral. This new currency needed loans, of which the state couldn’t pay the interest on, this destabilised the currency and saw inflation (already high at between 10-20%) give into hyperinflation. Inflation topped 5,000% for the year, real wages almost halved and riots spread throughout the country. Hyperinflation struck once again in 1990 so the government decided to fix the currency against the American dollar and provided dollars at banks for converting if requested (which required a high amount of dollar reserves). This couldn’t sort all their problems out though; they still had high amounts of debt, dollars moving out of the country due to cheap imports and high unemployment.

In the next decade Argentina continued to borrow far beyond their means and faced massive corruption issues as the rich could easily avoid taxes with little difficulty. In 1999, Argentina officially entered a recession as their GDP dropped by 4%, which lasted a miserable three years before collapse.  Argentina’s debt to GDP ratio exceeded 50%, so the government embarked on tightening fiscal policy with around $2 billion in spending cuts and $2 billion in tax increases, so that it could comply with the international bodies that were lending it money (IMF, World bank etc).  But they couldn’t keep up with the targets and by the end of 2001, the IMF froze loan payments and demanded a further 10% cut in the federal budget. Then as an increasing amount of people started to withdraw money and move it abroad, the government decided to freeze bank accounts, with only a limited amount allowed to be taken out. This is when the riots really began to start, with the public visibly outraged at having their money restricted and increasingly poor living conditions. The government fell apart, declaring a “state of emergency” with the president fleeing the country, and a newly formed government having to make the difficult decision to default on their debt, which equalled $132 billion (a new record at the time).

http://news.bbc.co.uk/1/hi/business/1721103.stm

So how similar is this to Greece’s situation, where they are faced with high amounts of debt and questions of whether they will default. There is an eerie similarity between Greece and the Argentina of 2001, both suffering deep recessions, public riots and having to agree to stimulus packages they simply cannot afford to pay back. In the previous paragraph, I explained that for a while Argentina managed to fix their inflation problem by fixing their currency to the Dollar, and in essence that is exactly what Greece did when they joined the Euro, leading to temporary better times for the country. Both countries eventually suffered from these fixed exchange rates, as it meant they couldn’t export their goods very effectively, which created a situation of importing far more than they were exporting and a reliance on foreign loans to survive.  The difference is that whereas Argentina managed to rebound thanks to a commodity boom which saw it reverse the trade balance into a surplus (exporting more than importing), Greece doesn’t produce enough goods to rebound in a similar way.

Arguably this shows how Greece has come to be in the position they are, by surrendering all monetary powers to the Euro and relying too heavily on cheap loans to cover up the market deficiencies in Greece. Greece hasn’t produced enough over the last decade to cover the costs of their imports and high standard of living, and instead have used the Euro to buy cut-price loans to induce growth. By joining the Euro, Greece can no longer change the value of their currency anymore as they cannot just print more money; they belong to a larger monetary state where they have to abide by rules. This is a useful tactic that the UK and USA for example have used to help try and stimulate growth. But Greece knew this when they joined the Euro and instead should have instated tighter fiscal regulation. Criticism should also go the international organisations which continued to provide Greece with money, despite knowing it was country with a poor history for fiscal discipline that couldn’t possibly pay the money back. So Greece do not have a lot of options right now apart from implementing tighter fiscal policies, which seems too little too late.

So Greece is faced with the same issue that Argentina had all those years back, do they dare default on their debt? Greece would have to drop out of the Euro, which would cause massive unrest to Greece and the rest of the Euro. They would have to start again with a new currency which would be of so low value against the rest of the market, that any imports would become very expensive. There would be the problem that they don’t have a new currency waiting in their banks, they would need to print notes and coins which would take time and money that Greece don’t have. A default would also mean a complete lack of faith their market for foreign investors, and they would lose any help from the international organisations that are currently loaning them billions of Euros. But there could be some positives; the money they are being loaned from other countries is just saddling them with more debt which they can’t afford, the new low valued currency would boost exports as they would become cheaper in the foreign markets (though Greece don’t export enough to rely on this strategy) and it could help Greece to just accept their situation and look to the future instead (aka getting the bad stuff out of the way sooner rather than later).

But there could be a vital difference between Greece and Argentina. Both countries followed a similar path to recession (fixed exchange rate and reliance on debt) but the difference between the two is that Greece lives in a world far more connected that the one Argentina lived in. Greece is part of the Euro, which would face massive repercussions from a Greek default, giving them motivation to help Greece out much more effectively than the IMF did with Argentina. A Greek default would also affect America and China heavily, with a big share of their exports to the Euro region, while the big multinationals of the world are heavily linked in different countries of the world. If Greece can hang onto one difference from the Argentina of 2001, it is that if they are forced to default, it could have a much bigger impact on the world than Argentina did, which gives an added incentive to the rest of the world to react.

The meaning behind the AAA Credit Rating


A credit rating is supposed to assess the chances of a firm or country defaulting on its debt. These are decided by credit rating agencies, of which the biggest three are Standard & Poor’s, Moody’s investor service and Fitch ratings, of which most people would have heard of at some point in the news. The credit rating of a country can have an impact on who buys their debt, which is sold using government bonds (Glorified I.O.U’s). The top rated countries belong to North America and Europe, while countries in Africa, South America and Asia are downgraded due to political instability and lack of modern infrastructure (i.e. transport, healthcare etc).File:World countries Standard & Poor's ratings.pngStandard & Poor ratings

So what does the AAA credit rating (the highest rating a country can be awarded) actually bring to a country? The rating means it is believed this country can pay its debts (aka is reliable), which means the country has a better chance of borrowing money (through bonds)and also borrowing it cheaply with vice versa for badly rated countries. Each credit rating agency can disagree though, with Standard & Poor choosing to downgrade USA to AA rating, but the other two agencies deciding against it.  Surprisingly, some might say, China and Japan do not have AAA rating. Japan lost theirs in 2001 after poor economic growth and an ongoing problem with deflation, which is ironic because Japan as the biggest net creditors are rated lower than the world’s biggest net debtors, USA. With China, the world’s second largest economy, it is harder to see why they do not have the top ranking. But the fact is China hold a lot of debt and though debt to GDP ratio looks a comfortable 20% this climbs much higher to around 80% when local government debt is included. Local governments borrowed money from banks during the financial crisis, with the knowledge that the national government could bail them out, but there is uncertainty over the amount of debt and whether the national government can do as they say, which leads the rating agencies to decide against giving out AAA credit ratings.

Showing China’s hidden debt, which when other factors are considered rises to around 70-80%

There has been recent rating changes in Europe, with France downgraded by Standard & Poor (though they kept their AAA rating with the other two agencies). This was followed by downgrades for Spain, Cyprus, Portugal, Austria, Slovakia, Slovenia and Malta by Standard & Poor. The UK was also warned recently by Moody’s that they could face a downgrade in the near future due to poor growth, rising debt and exposure to the Euro crisis. The USA lost its AAA credit rating by Standard and Poor because of rising debt and an inability to decide on future action to lower their deficit. Are these countries now less reliable?

File:Notation financière des Etats européens par Standard & Poor's.svg

Japan lost its AAA credit rating and was hardly affected; the government borrows mostly from the public, so the rating did nothing to harm the economy. The same thing happened to the USA, but more was expected to happen, they rely heavily on selling their treasury bonds to the World, which before the downgrade was basically known as risk free, with prices even going up during the financial crisis as markets looked to invest in something rock solid. But even after the downgrade, markets still believe in the US, and still believe there is little risk in buying their debt. This is because, the sheer size of the USA means if they were to ever really default, it would topple the capitalist market, as each country is inter-connected. The Euro zone could only just about survive Greece defaulting, so it is hard to imagine the enormous impact a US default would bring. This fact keeps the USA safe from the effects of downgrading, with many criticizing Standard & Poor for merely pulling a publicity stunt, as in reality the US debt is still seen as risk free as it ever was before.

If America were to ever default…

So is the AAA credit rating flawed? The answer is yes in many ways. The three biggest credit rating agencies are all US based, with accusations over the fact that USA kept their AAA credit rating for years despite having an unsustainable deficit. Another criticism thrown at the credit agencies is that their downgrades can become a self-fulfilling prophecy, with Greece, Portugal and Ireland’s debt crises accelerated after being downgraded. This gives the agencies a lot of power over markets; their mistakes can lead to some very negative outcomes and the fact that the big three agencies rarely agree means there must be errors in their decisions. Another criticism is that the bad debt that helped crash the markets in 2007 (sub-prime mortgages) was given AAA rating when it was pooled together, leading many investors to buy into it. The fact they are paid for their services means they can’t be impartial, especially when they are paid by the firms they are investigating.  Europe has been critical during the euro crisis, stating the agencies have been too quick to downgrade countries with Greece, Portugal and Ireland given “junk” statuses in 2010. This argument flared up again in 2011 when Standard & Poor announced any restructuring of Greek debt would be classified as a default.

To conclude, maybe one day we won’t have to be so reliant on a few credit rating agencies to rule the markets, maybe investors could decide for themselves whether particular debt had too much risk and maybe… maybe one day our markets won’t be too reliant on debt in the first place, though that day seems a long while off.

When will the football bubble burst?


There have been a lot of economic bubbles, the most famous including at the turn of the century the dotcom bubble which promptly burst, and also the recent housing bubble which burst was a major contributor to the credit crunch. An economic bubble is where a certain market experiences increased sales at prices that are increasingly inflated. Some suggest that there is a current higher education bubble with tuition fees showing a steep increase over the last few years. But surely the most obvious example of a current economic bubble is the Football market.

Football enjoys a worldwide audience with demand for European football (and especially the English Premier league) high in Asia, Africa and South America. The missing continent of America have never been hooked like their counterparts, with some suggesting the lack of adverts mean there isn’t enough money in it for them. This sort of demand has seen incredible amounts of money flood into football, with the combined revenue of clubs in England, Germany, Italy and Spain reaching €6,896 million in 2010. The incredible thing is that it didn’t burst when the world was experiencing a global recession; it has resisted the pulls of the market and is still receiving millions from fans who can ill afford it. Leading the football leagues in revenue is the UK’s Premier league, who acted smartly to share TV rights equally between each team which has seen the league as a whole gain global attention. The same can’t be said in Spain, where teams are allowed to negotiate TV deals themselves and inevitably Real Madrid and Barcelona receive the lion share.

a graph found on http://swissramble.blogspot.com/2011/10/revolution-will-be-televised.html shows how Spanish TV rights are based purely on popularity (Biased towards Real Madrid and Barcelona)

So going back to the definition of an economic bubble, is the football market experiencing inflated values? The answer is emphatically yes, with clubs exchanging millions in deals for players. Three years ago, Cristiano Ronaldo transferred from Manchester United to Real Madrid in an astonishing £80 million deal, somehow valuing him as an employee at that incredible amount. This is clearly an inflated fee and Sir Alex Ferguson even commented on the current market: “In any case, I think the transfer market prices have been terribly inflated over the last year”.  But that’s not where the inflation stops, with wages for the top players reaching £250,000 a week, which works out at £13.5 million a year and this is without add-ons like sponsorship and bonuses. Even taking out the top salaries, the average salary for a premier league player is around £30,000 a week, working out at £1.6 million a year, which when you consider a club generally has up to 30 players in a squad that is a enormous wage bill.

So the question remains, when will the bubble burst? Well, that actually doesn’t seem too far off. Taking a look at the premier league, Wolves are the only club to remain debt free, with total debt owed around £2.5 billion. Another damming statistic is that most of the clubs wage bills are higher than 50% of their respective turnover, which isn’t a healthy way to run a business. Returning to revenue, clubs outside the top echelons of the premier league rely heavily on TV deals to supplement their revenue, ranging from 50-80% of revenue. This means clubs revenue could become very volatile if TV deals were to ever drop. This is a big dilemma for clubs that are relegated, as the drop in TV income is huge and parachute payments aimed to help only last a few years.

Showing the reliance on TV income during 2009/2010, again found at http://swissramble.blogspot.co.uk/

There is current evidence that the football market is slowing down, with clubs like Portsmouth and Rangers (of Scotland) entering administration (in the case of Portsmouth for the second time). This shows the danger for clubs of living beyond their means and it remains probable there will be even more casualties. The fear of administration (with cases around Europe) has seemed to have an effect, with Clubs visibly tightening their belt and UEFA (regulators of this market) soon enforcing tight financial restrictions. This can be seen by looking at the amount spent in the last two January Transfer windows in the UK (Usual leaders in spending): In 2011, £225 million was spent, while this year the figure was only £60 million which is a 70% decrease.

So is the football bubble set to burst? It seems like the fear of administration and tighter financial regulation means clubs are tightening their budgets. But we have yet to see a visible decrease in the values of transfer fees or wages from their inflated numbers and until that happens it can’t be decided whether the bubble has burst. But signs are pointing that way and with high amounts of debt and reliance on TV prices, we could see a very messy explosion.

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