Procrastination
Once again the theme of procrastination has emerged in the Eurozone crisis. This time it revolves around Spain and the tip of the iceberg is the rescue of ailing Bankia (= sum of the cajas).
Two long-standing pressure points stand out, that have consistently characterized Europe since the Greek crisis erupted.
First, lack of the proper institutional framework for dealing with crises is leading to lots of 'wasted time' and the associated escalation in uncertainty. These, in turn, have an impact on financial markets as well as the general health of economic activity.
There are calls for empowering the ESM to make direct recapitalizations and sever the existing link between banks and sovereigns to be when it comes to aid for banks in trouble.
It is worth pointing out that the ESM was conceived at the time as part of the 'solution' for tackling future crises.
Well, here we are...the future is now and now is the future, as the Greek crisis is very much alive and we are moving slowly (?) but surely to simply add more 'episodes' (e.g. Spain currently) along the way.
It is like throwing water on fire, when there is a variety of fire-fighting chemicals out there...But of course they have to be paid for. We are getting to the point when the fire is close to getting out of control and everybody is hoping that it is going to rain. The Europeans are dragging their feet once again.
Second, we continue to witness the ongoing 'clash' between different institutional sources of authority; usually it is the EU Commission vs. Germany, with the ECB standing in the middle...like an adult between two children fighting. No progress here either.
Indicative is the situation experienced around this time last year (May 2011), when Europeans were starting to warm up to the idea of a 'voluntary' agreement of Greece's private creditors on a 'haircut'. Chancellor Merkel started talking publicly about it, while France's stance was to categorically oppose the scenario of restructuring and the EU Commission half-heartedly suggested 'reprofiling' (i.e. just playing with words that essentially mean the same things) as a possibility..
Stagflation
Now, procrastination and indecision by the Europeans have been key factors depressing economic activity worldwide. Uncertainty freezes business decision-making, funding for SMEs remains scarce/unavailable, etc.
One can spot signals which suggest that the world economy may be entering a stage increasingly characterised by stagflation.
Extremely loose monetary policy in the developed world is set to persist/strengthen in the near/medium term. While not immediately translating to inflationary pressures, it is a very open question even to central bankers how there will be a successful 'mopping up' of all this liquidity without damaging growth prospects when the time comes. Authorities' profile of incentives on liquidity provision remains skewed/asymmetric, not least in order to avoid a debt-deflation spiral.
In the developing world, seeds of stagflation are becoming more evident.
India's GDP growth in Q1 2012 came in at an annualized 5.3%yoy (versus 9.2% in 2011), an eight-year low, with sharp declines in industrial production and exports being the norm recently.
Meanwhile, inflation remains elevated at 7.3%yoy despite a series of aggressive interest rate hikes by the RBI throughout 2011. The RBI has recently reversed course in order to stem the growth slowdown as the government tries to rein in its budget deficits. Foreign capital flows have all but dried out, the trade deficit has widened to a record, and the Indian Rupee has reached all-time lows versus the USD (a further fuel to inflationary pressures and expectations thereof). The RBI has tried to intervene in order to send a message to financial markets and stem the currency decline.
In fact, this is becoming a more general feature in the developing world recently, further evidence of stress in financial markets.
As Bloomberg reports:
Just three months ago, emerging nations from the Philippines to Brazil were intervening in foreign exchange markets to make exports more competitive. Now they are selling dollars to stem currency declines and quell inflation.
“Inflation is still an issue for a number of emerging- market countries,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “At the same time, growth is an increasing concern for those countries vulnerable to the European debt crisis. Policy makers have to try and strike a very careful balance.”
In Brazil, Banco Central do Brazil, with the government's 'blessings', has been slashing rates since mid 2011 in effort to boost growth (down to 2.7% in 2011 from 7.5% in 2010) and arrest the Real's strength (Brazil was among the small number of countries with positive real interest rates). Inflation is still high, but has been coming down recently.
Expectations out of Brazil are gradually converging with the reality of 'trouble' in the world, with the Bovespa index clearly reflecting this trend.
However, the stakes are getting higher, and the associated fragility harder to handle the longer such an approach remains in place.
As Beyondbrics reports:
Moody’s Latin America director Alfredo Coutiño, had this to say:
China has so far managed to contain inflation through drastic intervention in the property market. Growth has been slowing, so the tipping point for a shift in the authorities' stance may be getting closer. Also, it is interesting to think about what the effect of 'rebalancing' (towards more domestic consumption, less investment, less reliance on exports for growth and some financial system liberalization) will be on the growth/inflation mix going forward.
Anthony Boeckh puts it well in a recent note (3/5/2012):
I am not claiming that stagflation on a global scale is imminent. However, it is important to keep track of what is going on below the radar at a time that everybody is thinking about Greece, Spain, banking unions, etc. Not least because developments in Europe have been and will continue to be a key input of authorities' reaction functions in the rest of the world.
Once again the theme of procrastination has emerged in the Eurozone crisis. This time it revolves around Spain and the tip of the iceberg is the rescue of ailing Bankia (= sum of the cajas).
Two long-standing pressure points stand out, that have consistently characterized Europe since the Greek crisis erupted.
First, lack of the proper institutional framework for dealing with crises is leading to lots of 'wasted time' and the associated escalation in uncertainty. These, in turn, have an impact on financial markets as well as the general health of economic activity.
There are calls for empowering the ESM to make direct recapitalizations and sever the existing link between banks and sovereigns to be when it comes to aid for banks in trouble.
It is worth pointing out that the ESM was conceived at the time as part of the 'solution' for tackling future crises.
Well, here we are...the future is now and now is the future, as the Greek crisis is very much alive and we are moving slowly (?) but surely to simply add more 'episodes' (e.g. Spain currently) along the way.
It is like throwing water on fire, when there is a variety of fire-fighting chemicals out there...But of course they have to be paid for. We are getting to the point when the fire is close to getting out of control and everybody is hoping that it is going to rain. The Europeans are dragging their feet once again.
Second, we continue to witness the ongoing 'clash' between different institutional sources of authority; usually it is the EU Commission vs. Germany, with the ECB standing in the middle...like an adult between two children fighting. No progress here either.
Indicative is the situation experienced around this time last year (May 2011), when Europeans were starting to warm up to the idea of a 'voluntary' agreement of Greece's private creditors on a 'haircut'. Chancellor Merkel started talking publicly about it, while France's stance was to categorically oppose the scenario of restructuring and the EU Commission half-heartedly suggested 'reprofiling' (i.e. just playing with words that essentially mean the same things) as a possibility..
Stagflation
Now, procrastination and indecision by the Europeans have been key factors depressing economic activity worldwide. Uncertainty freezes business decision-making, funding for SMEs remains scarce/unavailable, etc.
One can spot signals which suggest that the world economy may be entering a stage increasingly characterised by stagflation.
Extremely loose monetary policy in the developed world is set to persist/strengthen in the near/medium term. While not immediately translating to inflationary pressures, it is a very open question even to central bankers how there will be a successful 'mopping up' of all this liquidity without damaging growth prospects when the time comes. Authorities' profile of incentives on liquidity provision remains skewed/asymmetric, not least in order to avoid a debt-deflation spiral.
In the developing world, seeds of stagflation are becoming more evident.
India's GDP growth in Q1 2012 came in at an annualized 5.3%yoy (versus 9.2% in 2011), an eight-year low, with sharp declines in industrial production and exports being the norm recently.
Meanwhile, inflation remains elevated at 7.3%yoy despite a series of aggressive interest rate hikes by the RBI throughout 2011. The RBI has recently reversed course in order to stem the growth slowdown as the government tries to rein in its budget deficits. Foreign capital flows have all but dried out, the trade deficit has widened to a record, and the Indian Rupee has reached all-time lows versus the USD (a further fuel to inflationary pressures and expectations thereof). The RBI has tried to intervene in order to send a message to financial markets and stem the currency decline.
In fact, this is becoming a more general feature in the developing world recently, further evidence of stress in financial markets.
As Bloomberg reports:
Just three months ago, emerging nations from the Philippines to Brazil were intervening in foreign exchange markets to make exports more competitive. Now they are selling dollars to stem currency declines and quell inflation.
“Inflation is still an issue for a number of emerging- market countries,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “At the same time, growth is an increasing concern for those countries vulnerable to the European debt crisis. Policy makers have to try and strike a very careful balance.”
In Brazil, Banco Central do Brazil, with the government's 'blessings', has been slashing rates since mid 2011 in effort to boost growth (down to 2.7% in 2011 from 7.5% in 2010) and arrest the Real's strength (Brazil was among the small number of countries with positive real interest rates). Inflation is still high, but has been coming down recently.
Expectations out of Brazil are gradually converging with the reality of 'trouble' in the world, with the Bovespa index clearly reflecting this trend.
However, the stakes are getting higher, and the associated fragility harder to handle the longer such an approach remains in place.
As Beyondbrics reports:
Moody’s Latin America director Alfredo Coutiño, had this to say:
After today’s decision, monetary conditions have fallen below neutrality, since the nominal policy rate is lower than the neutral 9 per cent. If economic activity remains weak and advances slowly, monetary conditions will need to be pushed further into expansionary territory in coming months. Lower interest rates will restore the currency competitiveness and will help the national industry to quit recession.The danger lies with potential un-anchoring of inflation expectations as the economy appears to respond to stimulus. Furthermore, political 'suasion' on the central bank has been steadily rising in Brazil and could have an impact of foreign investors' confidence.
China has so far managed to contain inflation through drastic intervention in the property market. Growth has been slowing, so the tipping point for a shift in the authorities' stance may be getting closer. Also, it is interesting to think about what the effect of 'rebalancing' (towards more domestic consumption, less investment, less reliance on exports for growth and some financial system liberalization) will be on the growth/inflation mix going forward.
Anthony Boeckh puts it well in a recent note (3/5/2012):
"Price inflation has softened
recently in a number of countries. Headline price inflation in the U.S. has slipped from 4% p.a. to a little under
3%, in the eurozone from 3% to 2.7% and in the UK from over 5% to 3.4%. China’s
non-food and producer price changes have actually moved into negative
territory. India
and Russian inflation numbers show a decline from recent peaks of around 15% to
the 6%-8% range. Agricultural and industrial metal prices have dropped
about 20% from the peaks of a year or so ago. So, from a close up snapshot, one could ask, “Where is the inflation
problem?” However, that misses the point. Price inflation is all
about excessive money, credit and fiscal deficits. When they work their
way through the system, prices go up. The key variable is the
time lag."
I am not claiming that stagflation on a global scale is imminent. However, it is important to keep track of what is going on below the radar at a time that everybody is thinking about Greece, Spain, banking unions, etc. Not least because developments in Europe have been and will continue to be a key input of authorities' reaction functions in the rest of the world.
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