The problems in Spain cannot be denied any longer. In fact, the crisis that hit the Eurozone is something that cannot be hidden.

Since the credit crisis that began in the U.S. a few years ago, countries and their banks have fallen like trees, showing black holes that had been hiding for years, as well as very bad practices that did nothing but make what was already a big problem worse.

Now that the complete rescue is about to come to Spain– the first one was only for the banks, although it counts as government debt– many authors and writers of Spanish newspapers question the competence of the European Central Bank (ECB), and wonder what prevents the ECB from saving us from total disaster by buying public debt of states that are worse off. In these writers’ speeches they explain that the ECB should act as the International Monetary Fund (IMF), and provide financial resources to those who need it.

Are they wrong asking for this? Absolutely. The answer to the question of why the ECB does not act as the IMF is this one: because they are not the same. Despite the fact that, apparently, both agencies have similarities, the truth is the objectives for which they were created are completely different in each one, and the way they respond is not the same. That is why it is advisable to make a couple of clarifications on the differences between the two entities, in order to understand why the ECB is not a “European IMF.” It was not intended to be one.

The IMF was created in a completely different context, when the consequences of the Great Depression could be still felt. Its creation reflected the attempt of several countries to avoid repeating the disastrous measures that weakened economic activity during those years.

Meanwhile, the ECB, successor to the European Monetary Institute, was created in 1998, but it did not make full use of its powers until the entry of the euro in 1999. The creation, established in the Maastricht Treaty, responded first to the oversight of the transition of member countries from their national currencies to the euro and, second,  the need for the existence of a bank for this currency.

With these completely different contexts it is logical that the objectives of both entities are not the same. Thus, the main function of the IMF is to oversee the smooth running of international economic policy, and to encourage it, acting as a fund where countries can ask for help when they need temporary financing.

However, the main objective of the ECB is to maintain the price stability in the euro area by maintaining the inflation at low levels, leaving other objectives subordinates to this first and foremost. Broadly speaking, it seems that we can define the IMF as a fund that lends money to countries who need it, and the ECB as that one who ensures the proper functioning of the Eurozone. So, the role of the first one is active, while the second one’s role is rather passive.

Now the big question is: if the euro is not working properly and there is a risk of its disappearance, can the ECB not protect it through the purchase of public debt? The answer is, again, no. Why? Because of the statutes which regulate it.

Since it was created, the ECB defined itself as completely independent from the member countries of the Eurozone– which has been questioned in recent years, especially by the suspect origin of the last directors of the ECB– and the measures should not respond to the national interests of any country. In the same way, the European institutions and national governments are required to respect this independence, and this means that there is no mechanism by which a member state may compel the ECB to act in one way or another.

This is the main reason why the ECB cannot rescue any Eurozone country. Besides this, there is another powerful reason that we forget sometimes: the conditions for being a member of the Eurozone are strict. It is not enough to wish to adopt the currency, there are steps to follow before completing the transition.

The ECB is responsible for safeguarding the proper functioning of the euro because it assumes that other institutions– created for that purpose– have been responsible for verifying that the candidates have the specific requirements for entry. If someone has not, whose fault is it then?

Image Courtesy of  eisenrah

The article European Central Bank: “European IMF?” appeared first on The Toonari Post - News, Powered by the People!.

New York, U.S.A. — Amid continued economic, financial, and political turmoil, several E.U. countries are seeing improvement in a crucial measure of competitiveness. According to a new Executive Action Report from The Conference Board, the cost of labor per unit of output has fallen significantly in a number of the hardest-hit economies, led by Ireland and Eastern Europe.

For the Euro Area, controlling unit labor cost (ULC) — defined as nominal labor compensation per unit of real output —may be key to redressing the competitive unbalance between core and periphery that has haunted a continent and fueled four years of recurring crisis.

“A drop in unit labor cost is an important sign of the beginning of adjustments in Europe’s most trouble economies,” said Bart van Ark, The Conference Board Chief Economist and co-author of the report. “For now it is mainly the reduction in wages which leads the adjustments, but once productivity begins to increase as well, it could be the key to a more sustainable recovery.”

Since states within the Euro Area cannot devalue their currencies or dictate interest rates, boosting ULC and, thus, competitiveness relative to other members of the zone can only come about through real changes in worker efficiency,” he adds.

There are early signs that the rebalancing through unit labor cost adjustments is under way. While France, Germany, Austria, and other relatively strong continental economies have pursued social welfare policies to limit unemployment during the downturn — thereby reducing productivity and increasing unit labor costs — countries with more flexible labor markets in the “Anglo-Saxon” model have been able to make faster adjustments.

Ireland lowered its ULC by 5.3 percent between 2008 and 2011, a success only rivaled by less mature Eastern European countries such as Hungary, Latvia, and Lithuania, which still retain their own currencies. Elsewhere outside the Euro Area, ULC in the U.K. has fallen by 3.6 percent — the sharpest decline of any large economy.

In the most troubled European economies of Greece, Portugal, and Italy, a tradition of rigid labor markets kept unit labor costs rising through the early years of the crisis. Continued weakness and deepening austerity measures, however, have recently pushed them towards turning points suggesting a strong reduction in costs and faster efficiency gains compared to the Euro Area’s northern core.

In Greece, ULC rose by 4.4 percent overall between 2008 and 2011, but fell by more than 5 percent from 2010 to 2011. With its large contingent of flexible part-time workers, Spain is further along; Spanish ULC fell 4.4 percent between 2008 and 2011. Across the Euro Area, unit labor costs in manufacturing have fallen by 3.9 percent in the past two years, after rising at the outset of the crisis.

Because of the rapid shifts in unit labor cost in recent years, the German manufacturing sector has become less competitive in terms of cost per unit of output relative to the manufacturing in many other European economies — again, led by Ireland, Eastern Europe, and the United Kingdom. Dramatic reductions in workforce and compensation have propelled British firms ahead of formerly more cost-competitive French, German, and Italian rivals. Meanwhile, Ireland is now Europe’s most efficient manufacturing economy by far, ahead of even low-wage off-shoring destinations like Poland.

In contrast to manufacturing, the service sector — which is more labor-intensive with output largely composed of non-tradables — remains a weak performer across Europe. Only Spain and the United Kingdom have managed to substantially lower unit labor costs in the services sector. With output falling faster than workforce or wages can be cut, Germany, France, Greece, and Ireland all saw significant ULC increases in services. The remarkable 41.5 percent decline in Irish ULC for manufacturing was largely offset by a 26.4 percent ULC increase in services.

Given the significant private and public sacrifices needed to bring down unit labor costs against an over-strong currency, an exit from the Euro Area altogether has become a tempting option for the most troubled economies. To test the consequences of a Euro Area exit, The Conference Board modeled the impact that regaining a national currency — and independent monetary policy — would have on unit labor costs in a country like Greece compared with alternative scenarios.

“The huge devaluation following an exit from the Euro Area would certainly boost competitiveness in the first year or two,” said Bert Colijn, labor market economist for The Conference Board Europe and co-author of the report. “But these effects would quickly evaporate, as the subsequent recovery in labor compensation in the medium- to long-term outpaces GDP growth. Hollowing out labor costs can only do so much. Lasting competitiveness gains must ultimately come from the productivity side of the unit cost labor equation.”

“For this reason, we found that neither a troubled economy nor the Euro Area as a whole is likely to benefit in the long run from a unilateral exit, or a wider breakup, or the status quo of muddling through,” says Colijn. “Ultimately, the best outcome for competitiveness is achieved with greater fiscal integration, including a banking union and Eurobonds, that will encourage the sort of investment needed for productivity, innovation, and competitiveness that is substantive and sustainable.”

The article More Efficient Workers May Be Europe’s Answer to Crisis appeared first on The Toonari Post - News, Powered by the People!.

Alexandria, U.S.A. — Economic uncertainty in Europe will dramatically slow the growth of business travel in the United States through the end of the year, according to the latest GBTA BTI Outlook – United States a report from the Global Business Travel Association (GBTA) and sponsored by Visa, Inc. In addition, ongoing concern in the U.S. economy, including low job growth, falling consumer confidence and retail sales, and slowing corporate profits, have created significant headwinds for business travel in the near term. Finally, there is increasing evidence that businesses may be entering into a holding pattern as they wait for the economic environment to solidify.

GBTA has significantly downgraded its outlook for U.S.-initiated business travel since last quarter. Despite the higher prices and relatively strong demand that have led to solid growth in business travel spend in the last few quarters; growth will moderate for the remainder of the year. GBTA now expects total business travel spending to grow just 2.2% for 2012, reaching $256.5 billion by the end of the year. This represents a downgrade of 1.4% since last quarter, when GBTA estimated growth would be 3.6%.

“Earlier this year, we created a number of shock scenarios modeling the potential impact of the European debt crisis on business travel here in the United States,” said Michael W. McCormick, GBTA executive director and COO. “In our Moderate Shock Scenario we predicted that a prolonged recession in Europe would result in a flattening of business travel spending in the U.S. Unfortunately, it now seems that this shock scenario is becoming a reality.”

“We’re entering a period of time in which many companies could overact and make significant changes to their travel budgets,” he added. “Our research has shown that businesses that slash their travel budgets end up weakening their competitive position, particularly when the economy improves.”

“Despite projected slowdowns in business travel, there is still reason to be optimistic,” said Tad Fordyce, head of global commercial solutions at Visa Inc. “U.S. travelers increased international tourism spending on their Visa accounts by nine percent in Q1 2012 with Americans increasing travel purchases on their Visa accounts by 31 percent in China. Whether for business or pleasure, Visa supports global travelers with the most widely accepted card in the world and is working with lead banks to provide consistency across card products globally.”

Looking ahead to 2013, GBTA research suggests a slight drop (-0.7%) to 435 million total person trips. On the other hand, business travel spend for 2013 is forecast to grow 4.7% to $268.5 billion. GBTA forecasts 3.6% growth in transient spend, 5.1% growth in group spend, and 7.2% growth in international outbound spend for 2013. However, if the situation in Europe worsens further, the forecast for 2013 will necessarily be downgraded, as detailed in our European Shock Scenario from earlier this year.

Avoiding the mistakes of the past

“In a challenging economy, companies may look to cut their travel spending,” continued McCormick. “But GBTA research shows that that is the exact opposite of what they should be doing. In addition to the damage that slashing travel spending will do to a company’s bottom line, cuts to travel budgets could make a bad economic situation significantly worse due to business travel’s impact on the overall economy.”

McCormick concluded: “Beginning in December 2007, we saw companies make difficult decisions with their business travel budgets to the tune of 13% from the $271 billion peak in 2007 – a peak-to-trough decline of $34.7 billion. Companies cannot afford to overreact just because there may be clouds on the horizon. Benching road warriors will only impact sales exactly when companies need to focus on growth. The return on investment for business travel is too good to pass up.”

GBTA BT — stalling

The GBTA BTI , a proprietary index of business travel activity, for Q1 2012 came in at 116, two points lower than the projected value in GBTA’s last outlook. The slightly lower value has been driven by a more rapid deterioration in Europe, slower growth in Asia, and deepening signs of weakness in the U.S. While the GBTA BTI™ is four points higher than 2011 Q1, it has been relatively flat since reaching 117 in 2011 Q3.

GBTA is now predicting the GBTA BTI to reach the pre-recession level of 120 by 2013 Q1. The revision to the forecast points to slow growth in business travel through 2013, with the GBTA BTI gaining one point per quarter over the forecast horizon.

The GBTA BTI provides a way to distill market performance and the outlook for business travel into a single metric that can be tracked over time.

International travel – growth slows in 2012, rebounds in 2013

International outbound travel will continue to drastically outpace domestic travel. GBTA projects growth of 2.9% in 2012 followed by a more significant rise of 7.2% in 2013. GBTA has continued to pull back its projections as the trouble in Europe has continued.

Business travel to the Far East, particularly China, has been a boon for international outbound travel from the U.S. for the last few years. However, falling economic growth rates in China will likely lead to less trade and hence, fewer trips from the U.S. The projected slowdown in China and the economic challenges in Europe will lead to lower levels of international growth in the near term.

GBTA expects total international outbound trip volume to reach 6.8 million trips in 2012, only 0.4% growth over 2011. Stronger growth is expected in 2013, with 7 million trips projected, which is a 3.7% increase, but represents a full percent drop over earlier GBTA projections.

Group travel spend – holding off on growth

In 2012 Q1, spending on transient business travel is up 3.7% versus 2011 Q1. GBTA expects spending growth on transient business travel to finish 2012 at 2.4% before picking up the pace in 2013 when it will rise by 3.6%.

Group business travel has bounced back significantly from its bottom in 2009. However, GBTA expects that much like transient travel, group travel will not pick up significantly until the U.S. economy experiences more robust growth. Spending on group business travel is projected to grow 1.8% in 2012 and 5.1% in 2013.

The article Business Travel Growth to US Suffers appeared first on The Toonari Post - News, Powered by the People!.

Spain has received a 100 billion euro ($125 billion) after denying it needed it for several weeks. Although the announcement of the bailout originally had the global markets opening high, the uncertainty surrounding the details and implications of this bailout have caused the enthusiasm to disappear. Investors are still worried about spending money on Spain and they are also worried about what this bailout means for Italy.

The rating agency, Fitch downgraded Santander and BBVA – two of Spain’s largest banks – from As to BBB+s. This downgrade, in addition to uncertainty in the markets has caused investors to sit on their money rather than risk spending it. Fitch claimed the lower rating was caused by its worries that Spain will “remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery in 2013 which directly affects the banks’ volumes of activities in Spain.”

The exact amount of emergency funds for Spain are still unknown, but the amount will be announced later in June after the Spanish banks have been audited. Many Spaniards were surprised about the bailout after their government insisted it did not need the money. There were several demonstrations on June 10 against the bailout after the announcement was made.

The Spanish government insists that the banks are the ones that need the bailout and are receiving the bailout, not the government itself. However, the bailout money cannot go directly to the banks, as Spain wants it to be, and must go through the Spanish government. A troika will also be created to oversee the financial management of the money in Spain just like in the bailouts for the Republic of Ireland, Greece and Portugal.

The bailout was meant to alleviate the concerns within financial markets that Spain itself was unstable and would go down with its banks. According to Richard Hunter of Hargreaves Lansdown stockbrokers, “some much-needed time has now been bought in Spain, which will allow the market an – at least temporary – sigh of relief.” However, the bailout seems to be its own worst enemy. The uncertainty surrounding the exact amount, the outcome and the mechanism of the bailout have not led to more investing.

Most of the bailout funds will come from the newly founded European Stability Mechanism that was formed specifically to help alleviate the Eurozone crisis. The funds are considered a loan that the Spanish government will eventually have to pay back, meaning this bailout makes Spain even more in debt. However, the fund itself will be considered a “senior” creditor which means that it will be paid back first if Spain defaults on its loan. Many investors are worried that they will not get paid back if they invest in Spain by buying its government bonds because everyone would be second to the Mechanism fund. Therefore, the Spanish bonds that were over 6% previous to the bailout are now almost up to 6.5% after the bailout according to the BBC.

Spain was still unsure about receiving a bailout but European finance officials pushed Spain into receiving help for its banks.

Moody’s rating agency has also said that Spain’s banking problem, “is not likely to be a major source of contagion to other euro area countries, except for Italy.”

 Italy

Many are now worried that if Spain’s bailout does not succeed, Italy may be next to need help – if it’s not already too late. Italian bonds are up to 6%, meaning that investors see these bonds as high risk. The Italian GDP dropped 0.8% in the first quarter of this year whereas Spain’s only dropped 0.4%. Most predictions show the Italian economy shrinking at least another 1.5% this year. This is Italy’s fourth recession since 2001 and consumer spending and exports are down.

The Italian government has recently been practicing austerity measures under the government of Prime Minister Mario Monti. The Italian Economic Development Minister, Corrado Passera stated, “this great discipline that we have imposed on ourselves in terms of public finances makes us one of the countries best equipped to confront the financial turbulence that Europe finds itself in today.” Passera also claimed, “in the past months, Italy has done, from a financial point of view, everything that needed doing to save itself.”

Italy currently relies heavily on funding from the European Central Bank, which could hurt it in the long run. However, Italian banks have not suffered as much as Spanish banks because they did not suffer from the same housing bubble. Italy’s unemployment rate is also half of Spain’s and its borrowing costs are lower. Italy’s deficit for this year is lower than Spain’s but its overall debt is higher. Still, Italy is in a fragile position.

Sovereign debt expert Nicholas Spiro has warned that too many are linking Spain’s problems to Italy. “Where Spain goes, there is the perception that Italy will follow, which is terrible because it is like comparing apples and pears.” Spiro claimed that Italy’s economy was “infinitely better” than Spain’s, particularly because Italy did not have to deal with the same housing crisis as Spain.

Although it looks as though Italy may save itself, investors are still too skittish. Currently many reforms are still necessary and will have to be passed over the next year. Prime Minister Monti had the support to push through these reforms but he seems to be quickly losing it.

Monti and newly elected French President Francois Hollande are both in favor of Eurobonds, bonds that are guaranteed by all of the Eurozone. These Eurobonds would help alleviate Italy’s debt and would mean its bonds would not be as high a risk to investors. Hollande and Monti will meet on June 14 to discuss the possibility of Eurobonds. However, Merkel has already announced that she is against them and Germany’s support will be necessary for Eurobonds to be successful at all.

Image Courtesy of   European Council

The article Spain Receives Bailout, Italy may be Next appeared first on The Toonari Post - News, Powered by the People!.

German Chancellor Angela Merkel met with the English Prime Minister David Cameron to discuss the Eurozone crisis. Both leaders support a two-speed approach to the future of Europe.

Several leaders outside of the Eurozone, such as U.S. President Barack Obama, have urged Germany and the other participating nations to take immediate action on the crisis. Cameron stated, “I’m very clear that urgent action is needed to deal with the market uncertainty… [it] is about building firewalls and recapitalizing the banks.” Although Cameron has urged the Eurozone to solve this crisis, he has made it quite clear that he expects them to solve their own problems.

The United Kingdom and Denmark, although members of the European Union, negotiated agreements in 1992 to be excluded from the euro. Both countries wanted to maintain their own currency, which now appears to have been the best course of action.

Merkel has already admitted that the Eurozone crisis has been building over the last ten years and will not be solved in a day. Merkel stated, “now it will also take a few years to get things right again.”

Many economic experts have claimed that the Eurozone structure is faulty because seventeen nations are connected through a currency but are not coordinated with their budget plans. This lack of budget coordination is not a problem until a crisis such as the 2008 recession arises; now the weaker economies are dragging down the whole system. Merkel agrees that something must be done to integrate these nations better. “We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy,” she said.

European Union officials in Brussels want Germany, the strongest economy in the Union, to accept jointly guaranteed European debt and allow the European Central Bank to issue eurobonds. These eurobonds would help to regain some of the debt for the other countries as well as Germany, but Merkel worries that issuing these eurobonds would harm the German people and the German economy more. Before any kind of fiscal union is created in Europe, Merkel is insistent that there needs to be more stability from other European Union countries. Some experts claim that the integration cannot wait.

Another suggestion from the European Commission and European Central Bank is the creation of a central banking authority that would help alleviate concerns of excessive debt. Currently, Spain’s finance minister has claimed that credit markets are “effectively shut” to Spain at this time, making it impossible for them to get the billions in euros to rescue their banks. As of 6 June 2012, the European Commission has announced a plan for a “bank union” in Europe that would make it easier for countries like Spain to get credit.

Although many worry that Spain will need a bailout, Spain insists that they will not. Merkel has stated that Germany will not pressure Spain to take a bailout although the funds will be there if they are necessary.

The European Central Bank cannot provide bailouts due to the ‘no bailout’ clause of the Maastricht Treaty of 1992. However, starting in July there will be a 500 billion euro rescue fund known as the European Stability Mechanism.

Merkel has insisted on austerity measures in bailout countries such as Greece, but these measures have been met with great opposition. Many claim that what governments should be focusing on is growth. Merkel claims, “budget consolidation [aka austerity measures] and growth are two sides of one and the same coin.”

Currently a budget-discipline agreement is being discussed across Europe and has already been ratified in some countries. The Irish referendum vote in the previous week affirmed the agreement. Merkel’s coalition government in the German Parliament is working to get the two-thirds majority necessary to approve the agreement. However, the opposition party – which believes the debt crisis can only be solved by spending for growth – has also requested a financial transaction tax be added to the agreement or at least followed by Germany.

The United Kingdom, with London being the biggest financial center in Europe, is opposed to a Europe-wide financial transaction tax. Cameron stated that the tax would “simply [draw] those transactions offshore and to other places.”

On 7 June 2012 Merkel stated, “we need a political union first and foremost… step by step we must from now on give up more competences to Europe, and allow Europe more powers of control.” Although Cameron agrees that the Eurozone must become more integrated financially, his country is not a member of the Eurozone and would not have to deal with the consequences.

After meeting with Cameron, Merkel announced that she is tolerant of a ‘two-speed’ Europe, meaning that while the current Eurozone countries become more integrated fiscally and politically, other countries such as Denmark and the United Kingdom that use their own currency would still be a part of the Union but relegated to the edges. Merkel claims, “we have to be open. We always have to make it possible for everyone [to join]… but we must not stop because one or the other don’t want to come along just yet.”

Merkel says that one of the greatest aids for the European Union countries is to become more competitive. She claims that the economies will improve when they begin producing more on the global market.

An EU summit is planned for later in June and the leaders will discuss plans for a political union. However, according to Merkel, the decision and the arrangements will not be completed in one summit and more meetings will have to be planned.

The article Merkel Calls for Political and Fiscal European Union appeared first on The Toonari Post - News, Powered by the People!.

In recent weeks Spain’s banking crisis has gone from bad to worse. Spain’s credit rating has recently been downgraded from an A to BBB+ by Standard & Poor’s because of the debt it will most likely take on from its banks and regional government failures. Spain is the fifth largest economy in the Eurozone, leaving many worrying about the ramifications of these recent developments on the rest of Europe.

Currently Spain’s deficit is too high for the Eurozone. The European Commission says that Spain can be given more time to reduce their deficit from the 8.9% of the GDP – as it stands currently – by 2013. However, the high deficit in Spain is causing fewer individuals and countries to risk investing in the country.

Bond yields in Spain are up to 6.7% meaning that they are high risk. Yields on bonds are higher when they are riskier because investors want a higher return if they are putting money into something that is unstable. In contrast the German and US bond yield is at 1.28% and 1.64% respectively. Therefore, instead of investing in Spain’s government bonds more people are investing in the US and Germany. However, this high bond yield also means that Spain will accumulate more debt and have to pay a higher interest when borrowing money.

Despite all recent efforts the Spanish economy is expected to shrink 1.8% this year alone and another 0.3% next year. However, Prime Minister Mariano Rajoy insists that Spain will not require a bailout like Portugal, the Republic of Ireland, and Greece have needed; Spanish banks, on the other hand, have already asked for bailout money.

Bankia, a recently formed banking group of seven banks, asked for a 19 billion Euro bailout. Bankia originally reported a 309 million Euro profit for the year of 2011 when it actually had lost 2.98 billion euros. It is unknown as of yet how Spain will get the bailout money when it is already struggling under its own deficit.

The President of the European Commission, José Manuel Barroso, has suggested that they use the Eurozone’s new 500 billion euro stability mechanism to inject some capital into the banks, but Germany, Europe’s largest economy, has already rejected the plan. Another option is for Spain to give Bankia government bonds to then trade with the European Central Bank (ECB) for money.

Although it has been reported that the ECB has already rejected this plan a recent article by the BBC claims that these reports are false and that the solution is not yet off the table. The European Commission has also suggested creating a “banking union” to monitor all Eurozone banks in the future.

In addition to struggling with the mounting bank debts, Spain is also forced to rescue several regional governments who are no longer capable of borrowing money. Several regional governments have gone bankrupt and rating agencies, such as Standard & Poor’s, have put these regions at junk status. Most recently Catalonia, the wealthiest autonomous region in Spain, has asked for help from the central government; Catalonia accounts for one-fifth of the Spanish economy.

Spain is giving these regions government-backed bonds which they can then use to borrow money. However, as stated previously, these bonds are at a high yield which makes this solution temporary. A Spanish economy ministry spokesperson stated, “the goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not ale to borrow on the market.”

Regional banks have tried to strengthen each other through mergers. Ibercaja, Liberbank, and Caja3 merged in late May to become more resilient. This merger created the seventh biggest lender in Spain with 120 billion euros in assets. Liberbank and Caja3 were previously mergers of four and three regional banks respectively.

Spain’s unemployment as of April is at 24.3%, the worst in the Eurozone – even worse than Greece. It is expected to climb to 25.1% by 2013 even with the recent precautions taken by the newly elected center-right government. Prime Minister Rajoy has made several labor market cuts including cutting back on severance pay and restricting inflation-linked increases in salary; these decisions have been unpopular with unions and workers. Spain’s high unemployment also means that there are fewer people who are paying higher tax rates or even paying taxes.

Spain’s economy is heavily tied to the economy of Italy, the fourth largest economy in Europe. These close ties lead investors to worry that if there is a run on the Spanish banks there will also be a run on the Italian banks, throwing both countries into a deeper crisis. Italy is now borrowing at a rate over 5.66%; borrowing at a consistent 7% rate is considered unstable and has triggered the bailouts for Greece, Portugal, and the Republic of Ireland in the past.

The Spanish debt crisis was not caused by irresponsible government spending such as in Greece. Spain ran a balanced budget every year until the recession hit in 2008. The problems were planted when Spain joined the euro in 1999 and interest rates fell because Spain’s economy was good and other economies, such as the German economy, were not.

Investors wanted to invest in Spain which is what drove the interest rates lower. While the Spanish government resisted taking out more loans because of the cheaper interest rate the Spanish people did not. The country experienced a long housing boom that also affected the construction sector. When the recession hit, the housing and credit bubbles burst leaving many banks with toxic debt – debt that was unlikely to be repaid.

Image Courtesy of  Alberto Carrasco Casado

The article Spain’s Banking Woes Worsen Eurozone Crisis appeared first on The Toonari Post - News, Powered by the People!.

Paul Krugman, one of the most famous economists in the world, recently claimed in an interview with the BBC that Greece’s best option is to leave the Euro. Krugman stated, “Greece was seriously, seriously irresponsible even during the good years.” He compared Greece’s spending to those of the US and other European nations and claimed that the irresponsible spending was “not to the same extent.”

Krugman explained that the problem for Greece is that it cannot print its own money which gives it an “enormous vulnerability.” Therefore Greece has two options: accept the demands that Germany is imposing on them in regards to lending or to leave the Euro. Krugman declared, “Greece must and will leave the Euro.”

However, Krugman also points out that it is difficult for any Greek politician to say that Greece should leave. In fact, Krugman believes “whoever says, ‘that’s it’ will have ended his career.” According to Krugman, Greece leaving the Euro could happen in a couple of weeks depending on the outcome of the Greek elections. The other option is that the European banks will eventually refuse to lend to Greece which will force it to create its own currency again.

Ultimately Krugman claims that this is the most desirable thing for the Greeks and for everyone else in the Eurozone. He believes that the main ramification will be the fact that the Euro membership is reversible. The greatest worry is that there will be a run on the Spanish and Italian banks. However, as long as the European Central Bank is willing to supply the Euros for this run there should not be a major problem.

In another interview with the Independent, Krugman also went more in depth as to who should be blamed for the Eurozone crisis. Krugman believes that the Maastricht Treaty of 1992 is what originally caused this crisis because it led the way for the use of a single currency in Europe.

Michalis Sarris, chairman of the Cyprus Popular Bank also commented on the possibility of Greece leaving the Euro on 17 May 2012. Sarris claimed that Greece leaving the Euro was not “inevitable” but was a “clear possibility.”

 Ultimately Cyprus hopes that Greece will recover without leaving the Euro because many of its finances are tied up in Greek investments. Sarris reported that the Cyprus Popular Bank suffered a loss of about 2 billion Euro do to the financial crisis in Greece. Sarris is hopeful and remains positive that Greece will be able to find a way out of this crisis without having to leave the Euro.

Paul Krugman is winner of the Sveriges Riksbank Prize in Economic Sciences (informally the Nobel Prize in Economics), Princeton professor, and a columnist/blogger for the New York Times. His books include End This Depression Now! and The Return of Depression Economics and the Crisis of 2008.

Image Courtesy of  Portokalis / Shutterstock.com

The article Nobel Laureate in Economy Says Greece Has to Leave Euro appeared first on The Toonari Post - News, Powered by the People!.

From the year 2007 to 2011, the global economic system as a whole learned some of its toughest lessons and faced the hardest of times since the great depression of the 1930s. All of this started with irregularities in the US housing market and following credit crunch; then came the demise of Lehman and the chaos in the financial markets which triggered the global downfall in the growth rate, literally acting as fuel for a global recession.

This crisis was transported through various channels across the globe, creating a situation very close to the great depression where the pace of growth actually faded dramatically, where trade stumbled, financial markets dried out, and of course global unemployment bloomed.

A conceptual analysis of the empirical evidence from the period between 2007 to 2011 presents two broad cases of distinction. In the first case we were struggling to put the US economy back on track with the help of financial bailouts to corporations and financial institutions. In the second case we found that international institutions are providing a series of bailouts, creating a firewall against default by some countries in the Eurozone.

Death by Debt

Rapid, large scale accumulation of public debt poses a repugnant and most grievous threat to a national economy because it paralyses the eligibility of a country to secure any assistance in the future by the international community. It is nothing but financial death for a nation because it kills the natural basis of the financial system. The banking industry may collapse, lowering the value of domestic currency, causing irreparable damage to banks invested in the sovereign debt of the defaulting nation and worsening the potential global credit crunch.

Today economies, markets, and institutions are so interconnected and interwoven that any event or activity that can trigger a potential negative extreme, will have a direct and strong impact on other economies. For example, a drastic increase in public spending in China will probably increase demand for natural resources in Australia — and many more sophisticated illustrations can be easily found.

Bailouts and Future

How far can we really rely on bailouts? It all depends on how much we are prepared to mend the gaps between revenues and expenditure in government finances. In simple words, bailouts provided to any country does not mean that fiscal disparities are eliminated. In fact, bailouts often only act as the respirator of an ailing economy at its death bed.

In the case of the Eurozone debt, with the complications and assistance extended by the International Monetary Fund (IMF), it is a matter of diplomatic dynamics and not a real resolution that can be relied upon in the future.

IMF and other global economic and financial intuitions should draft a policy recommendation that virtually limits any reliance or mere assurance of a bailout by other nations in the future.

Image Courtesy of    DoraBakoyannis

The article Sovereign Debt, Bailouts and the Future appeared first on The Toonari Post - News, Powered by the People!.

Amsterdam, Netherlands - Atradius, one of the leading global credit insurance companies anticipates an increase in insolvencies across most developed markets. The Eurozone led slowdown in global growth and the tight financing conditions make it more difficult for businesses to grow.

Uncertainty over the Eurozone sovereign debt crisis and development of the economy has increased tensions in financial markets, though the latter have eased since the ECB intervention of Euro 1 trillion.

A major issue is that credit conditions in advanced markets have been tight and have shown hardly any improvement since the financial crisis in 2008. The banking sector continues to consolidate its debts and seeks additional capital to comply with new and stricter regulations. This has created a challenging environment for households and firms, especially in the Eurozone, and, to a lesser extent, in the US.

Insolvencies rise

Atradius expects the number of insolvencies to increase across most European markets as those of the US improve, as discussed in the April 2012 Atradius Economic Outlook [http://global.atradius.com/creditmanagementknowledge/publications/economic-research.html].

Increases are expected to be the highest in Southern Europe, with forecasts of double-digit growth in Italy and Greece. The insolvency situation is expected to deteriorate somewhat, even in Germany, despite its relatively benign economic conditions. Better news is coming from the United States. With the country’s moderate growth, Atradius projects a decrease in insolvencies. But the forecasted number of insolvencies over the year remains high from an historical perspective.

Downside risks

In general, insolvencies tend to track the business cycle, with economic growth below trend pushing up insolvency numbers. Therefore, there continue to be downside risks to this scenario.

Firstly, an escalation of the Eurozone crisis would hit firms and governments across the globe through financial and trade linkages. In accordance with our analysis in January, Atradius still expects the Eurozone to stay intact as the costs of a break-up would be extensive.

Secondly, the risk of a steep increase in the price of oil, as spare capacity is limited and unrest in the Middle East is high. While the dependence on oil is declining, a large price increase over a short period would increase retail prices and hurt consumer spending across the globe.

Atradius chief-economist John Lorie commented; “Whereas the US is moving on relatively well, in the Eurozone the sovereign debt crisis has moved from the financial markets to firms and households. As consumer confidence is low we see consumers unwilling to spend and banks unwilling to provide finance to firms in the Eurozone. Rates of insolvencies are likely to go up in those markets. In the US on the other hand, rates are likely to improve.”

About Atradius

The Atradius Group provides trade credit insurance, surety and collections services worldwide. With a presence through 160 offices in 45 countries, it has a market share of approximately 31% of the global trade credit insurance market. Atradius has access to credit information on 100 million companies worldwide and makes more than 20,000 trade credit limit decisions daily. Its products help protect companies throughout the world from payment risks associated with selling products and services on credit.

The article Number of Insolvencies Rises in Eurozone and Improves in US appeared first on The Toonari Post - News, Powered by the People!.