Tag: economic crisis

[2476] Postponing the European crisis to 2013

Post author By Hafiz Noor Shams
Post date Friday, December 23 2011
No Comments on [2476] Postponing the European crisis to 2013

I am in the opinion that the expected sovereign debt and banking crises in Europe have been postponed to the end of 2012 or early 2013. There are two reasons why I think so.

The crisis in Europe is essentially two-fold. One is due to government debts. Two is the risk of default by European banks. The two sides are interrelated but it is useful to separate them.

The sovereign debt crisis has been postponed thanks to the establishment and the expansion of the European Financial Stability fund. The EFSF would not be exhausted until the end of 2012 even if all debts repayment or refinancing by the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain) is financed through facility. The potential rating downgrade of sovereign debts of stronger economies, namely Germany and France, may hurt the likelihood of success of on the EFSF front but I will wait until that actually happens.

I am taking this position because by December 2012, total principal and interest payments made by the PIIGS government is projected to be EUR700 billion. That is below the total size of the EFSF.

The following graph shows principal and interest payment obligation of all the PIIGS government cumulatively. Looking at it, without the more permanent European Stability Mechanism which is supposed to kick start in the middle of next year, trouble will come only around February or March 2013.

The banking crisis meanwhile has been postponed until next year thanks to the soft loan facility provided by the European Central Bank. It has been reportedthat banks in Europe will require EUR700 billion next year to pay up their debts. Since the facility offered by the ECB is at the moment limitless (there will be a limit because already the total loans made by the ECB attract considerable question), the problem on this front too has been postponed to 2013.

This of course says nothing of recession and economic recession is another issue altogether.

Tags bonds, default, economic crisis, European Central Bank, European Financial Stability Facility, European Union, Greece, Ireland, Italy, Portugal, Spain

Economics Politics & government

[2469] The United States of Europe, on the way

Post author By Hafiz Noor Shams
Post date Friday, December 9 2011
No Comments on [2469] The United States of Europe, on the way

There are several stages of economic integration.

Free trade agreement is probably the lowest of all integrations. It seeks just free flow of capital and labor across borders.

The next step is either custom or monetary union together with a common market. Member states surrender monetary policy to a central authority while maintaining independent fiscal policy. Trade duties are harmonized across the union.

The next stage is fiscal union where individual governments cede their power over fiscal policy to a central authority.

The European Union is on the verge of becoming a fiscal union, making history less than just two decades after adopting a monetary union in all of its sense. Today at an important summit, a majority of European leaders voted for stricter fiscal deficit rules. They believed the best way to solve the debt crisis is to integrate further. Integration will eliminate the crisis of confidence Europe currently suffers from, much like how a troubled California will not trouble the United States by much.

This integrationist logic is persistent among Europeans. When Europe suffered from a serious currency crisis long ago, the then European leaders thought the best way to eliminate volatility between currencies that adversely affected trade in Europe was to have a monetary union.

This is really a big jump. Usually, debates on exchange rate mechanism gyrates between floating or fixed regime. Europe chose to not only have a fixed regime, they chose a fixed regime by marriage. You cannot get a more fixed regime than a monetary union.

Now, the thinking is that the best way to address the debt crisis to have a fiscal union.

Yes, it is an exaggeration to call the recent development in Europe as outright fiscal union. But the new agreement is a big push towards that direction, towards the United States of Europe.

Tags economic crisis, European Union, fiscal union, monetary union

Economics

[2443] Guess who?

Nope ladies and gentlemen. It is not Germany. Despite voter backlash and political discontent, Germany went ahead. What is EUR211 billion among friends?

Nay. It is not the Netherlands. The Dutch were vocal but voted for it anyway. What is another EUR44 billion?

No, it is not Finland. For all the demand for collateral, Finnish lawmakers said “yes, let us do it.” Who cares for another EUR14 billion?

Sixteen countries passed the amendment to the European Financial Stability Facility, seeking to expand the facility from EUR440 billion to EUR780 billion.

It has to be Slovakia. Slovakia has to say no. Slovakia has to say, we have arrived.

That notwithstanding, the market is relatively pretty cool about. There was no panic. I half expected a storm. The market is probably expecting Slovakia to pass the EFSF amendment regardless.

Not that it will be enough, if Italy goes under anyway…

Tags economic crisis, European Financial Stability Facility, financial crisis

Economics

[2435] Oh the fickle markets

Post author By Hafiz Noor Shams
Post date Saturday, October 1 2011
2 Comments on [2435] Oh the fickle markets

The stock markets all around the world are on a rollercoaster ride. It is yet another proof of the interconnectedness of our world and in a time like this, such interconnectedness can be a bane. The slightest news of little relevance—never mind the more substantial developments—from the other side of the world can rally or rattle the markets. These are days of pessimism and this kind of pessimism it is a little bit unhealthy.

It is painful to observe the stock markets. If to keep an eye on it is an exercise perfectly suited for sadists, to have a direct stake in the markets makes the whole enterprise all the worse.

Each day brings a kind of consternation. Will tomorrow be better or worse? Should I buy or sell now? Will tomorrow be delightfully unexpected or depressingly expected? Is that light at the end of the tunnel? Or is that a headlight for a speeding train?

These questions and its variants have been asked increasingly frequent over the past few weeks. The answers are not always forthcoming unfortunately. Sometimes, there is none to be had.

That is partly the fickleness of the markets resulting from the markets trying to incorporate everything it could. That fickleness grants rest to none, forcing all to stand guard around the clock.

The fickleness and volatility of the market are tiring. Whatever the benefits of the markets as a leading indicator of the wider economy, all the attention it demands is tiring. It consumes too much time and energy, all just for the small satisfaction of not losing money in a blink of an eye in this kind of prevailing environment we live in.

As a graduate student once, I had to model certain relationships involving the stock market. The volatility of the market presented a challenge because too much data can lead to the wrong conclusion. The data series was too “noisy.”

A friend suggested cutting the frequency of data from daily to weekly as a solution. Others suggested logarithmic difference. There was a bunch of other novel methods aimed at doing the same: filtering out the incessant noise in hope of squeezing something tangible and real out of the data series.

The stock markets do tell something, but its fickleness neither tells everything nor is everything it tells is necessarily true or relevant.

There lies some wisdom to go beyond the mathematics and economics puzzles. I find the wisdom helpful in keeping myself from frowning yet again, sighing continuously and from suffering mood swing as wild as the market.

I have decided that I will not go mad over the market. I have applied less weight to the importance of the stock market with respect to myself. At least for now, I have decided to have less exposure to the craziness of it all.

If European politicians and bureaucrats could go on summer holidays amid a frighteningly global crisis, surely others inconsequential to world’s history can take some justifiable break of their own. The grand narrative of world’s history is unlikely to twitch for me.

I do not want to be the guy who sits in front of the screen staring in a broker house, hoping for the slightest opportunity to make money. Or that guy drawing meaningless lines trying to outsmart the market, the efficient-market hypothesis be damned.

No, I have decided to live a life more, and worry a little less.

There is money to be had, and it is always nice to have a little bit more money in the pocket. Yet, one has to asked, at what cost?

There is more to life, and the economy even, than the fickleness of the stock markets.