Daily updates on climate change and the global economy.

Economy June 4 2018

“Could it be that Europe is facing yet another existential crisis, six years after financial meltdown threatened the eurozone’s collapse?

“This week the third- and fourth-largest economies in the eurozone — Italy and Spain — experienced political earthquakes. Italy will now have a government of insurgents with little faith in the “European project.” Spain will have and odd coalition united only in ousting the unpopular conservative Prime Minister Mariano Rajoy. Spanish voters likely face their third election in three years.

“Back in 2012, Europe had its “PIGS” problem (Portugal, Ireland, Greece, Spain): toxic banks, overwhelming debt and chronic budget deficits. Now it has the “PHIGS” of 2018: Poland, Hungary, Italy, Greece and Spain.

“Today the challenges are more complex and diverse — but they have common roots in a growing popular disenchantment with the political mainstream.”


“…the long-term costs of remaining in a club [the Euro] dominated by inherently deflationary, German-dictated rules might tempt Italians to leave. That decision could come in the midst of another global financial crisis, recession, or asymmetric shock that pushes several fragile countries out of the euro at the same time.”


“A run on government bonds is particularly dangerous. Bonds are loans — IOUs — and Italy’s debts are gigantic: they amount to almost a third more than Italians produce in a year. So there are vast quantities of Italian government bonds in circulation, many held in banks. If their value falls, it can trigger a financial crisis that extends far beyond Italy’s borders.”


“German Chancellor Angela Merkel has ruled out debt relief for Italy.”


“”The good times for illegals is over — get ready to pack your bags,” he [Italy’s new Interior Minister] said Saturday at a rally in Italy’s north.”


“At least 47 people died and 68 others were rescued after their migrant boat sank off Tunisia’s southern coast, according to the country’s defence ministry.”


“”[Greek] Banks have no room for complacency, because the NPL [non-performing loan] rate has to go further down,” he added.”


“In the eight years since London began sharply curtailing support for local governments, the borough of Knowsley, a bedroom community of Liverpool, has seen its budget cut roughly in half.”


“If the US barriers continue to cause friction while at the same time achieving results, the dollar will continue to become stronger, and bring a potential crisis in emerging countries – namely the problem of high debt – to the surface. This is a problem of great concern.”


“A crisis that has hit some emerging markets risks spreading through the world economy, according to a global investment trade body. Many countries are increasingly vulnerable to economic shocks following the debt sell-off which has hit Argentina and Turkey.”


“In 2017, the largest exodus of millionaires from a nation came out of Turkey at a staggering 12 percent, signalling a looming financial crisis headed for Turkey , writes Ruchir Sharma in an article he penned for the New York Times.”


“Turkish inflation hit its highest level since November following a slump in the national currency’s value.”


“This is the eighth upward revision on petrol, diesel and kerosene prices, and third on aviation fuel [in Nepal] in the last six months.”


“”It’s not easy to ensure the macro-economy is stable and the inflation rate is below 4 percent when the oil prices in the global market are soaring,” Phuc told a government meeting.”


“Philippine inflation likely accelerated for the fifth straight month in May, a Reuters poll showed.”


““It is hard to put a precise time frame on when China will start to see the deleveraging of the real economy, but at some point it looks inevitable,” said Brian Coulton, chief economist at Fitch. “The scenario analysis we have undertaken suggests that, when it does occur, it will be a process that will be a significant drag on growth.””


Read Friday’s economy post here.

Economy 1 June 2018

wall street“The U.S. has been engaged in a trade war with China for the last two months. But now the trade war has gone global. From tomorrow, June 1st, Canada, Mexico and the EU will face 25% tariffs on steel exports to the U.S. and 10% tariffs on aluminium.
“The move caused further turmoil on markets already unsettled by Italy’s political crisis. The Dow Jones industrial average dropped 260 points, and the S&P 500 and Nasdaq also fell, by 0.7% and 0.3% respectively. Shares of companies likely to be affected by tit-for-tat responses, such as Harley-Davison, the iconic motorcycle manufacturer, and automobile manufactures on both sides of the Atlantic, also fell. The Euro, Mexican peso and Canadian dollar all dropped versus the dollar, though the Euro recovered in later trading.”

“With President Trump’s incredibly foolhardy decision Thursday to impose tariffs on steel and aluminum from Canada, Mexico, and the European Union, the probability grows of an economic crash this fall. When the likely crash hits (I predict late-October), this nation will be psychologically ill-equipped to handle it. Get ready for rough times. The crash is likely because both public and private-sector debt levels are too high; assets are overvalued; wage pressure soon will massively increase.”


“A stronger dollar is reviving memories of a turmoil and stress that could be triggered by huge debt obligations of emerging markets.”


turkish bonds“Turkish banks are learning that all good things come to an end. After piling on corporate loans only a few years ago, lenders are now facing a surge in demand from companies seeking to reorganize debt repayments.”


“Over the past 10 days, Brazil has sometimes seemed a country on the brink of an apocalypse. Usually traffic-clogged highways around Sao Pãulo have been deserted, gasoline stations emptied, and food supplies to supermarkets have dwindled. For lack of poultry feed, there has been a gruesome cull of 100m chickens. There has even been wild talk of a military coup.”


“The Tabung Harapan Malaysia (THM) fund – otherwise called the Hope Fund – to contribute to settling the national debt has collected RM7 million (S$2.35 million) in 24 hours, said Malaysia’s Finance Minister Lim Guan Eng. Asked whether the fund would affect confidence in the economy of the country, he told a press conference on Thursday (May 31) that “if people want to show their patriotism by donating, we welcome it”.”


“…along with China’s growing economic footprint in the world of trade has come an equally large impression in the world of investment. In other words, China has become a significant creditor nation, lending money overseas… China, like the West in the 1980s, will simply find itself counter-party to an awful lot unserviceable debt, and in no position to enforce its claims.”


“Spain’s government was on the brink of collapse Thursday as opponents of Prime Minister Mariano Rajoy appeared to have mustered enough support to oust him in a parliamentary no-confidence vote stemming from a corruption scandal.”


“Salvini and Luigi Di Maio, Five Star’s leader, are both committed to remaking the E.U.’s economic treaties and introducing expansionary tax and spending policies. Both of these things will place them on a collision course with the authorities in Brussels, Berlin, and Frankfurt. And at this stage, neither side seems likely to back down.”


italian bonds“Italian bonds may have bounced off this week’s stunning losses, but some of the biggest investors say the worst isn’t over.”


“Although Italy’s politics are a byword for crisis they still managed to rattle investors this week. But even more shocking to some was the sudden evaporation of liquidity in the country’s bond market.”


“This week, it emerged that in Europe, banks are giving up their primary dealership roles in dealing European government bonds. This issue threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money.”


“A US subsidiary of Deutsche Bank has been added to a federal list of institutions with weaknesses serious enough to threaten their survival, a black mark that threatens efforts by its new chief executive to turn around the struggling German lender.”


“Financial institutions ANZ, Deutsche Bank and Citigroup will be prosecuted on criminal cartel charges, Australia’s consumer watchdog says. The allegations concern arrangements for the sale of A$2.5bn (£1.4bn; $1.9bn) worth of ANZ shares in 2015.”


“On May 30th, I accurately measured Venezuela’s annual inflation rate, and for the first time, it breached 25,000%, and today, May 31st, it sits at 27,364% (see chart below). That’s more than double the IMF’s year-end inflation forecast, and there are still seven months left to go until year-end.”


And it’s adios, Rajoy:


Read yesterday’s economy post here.

Economy 31 May 2018

trade war“China is reportedly looking to line up other countries against the U.S. in a pending trade war after the White House took an unexpected move forward on tariffs a day earlier, the Wall Street Journal said Wednesday, citing Chinese officials.

“On Tuesday, the White House announced it would have a final list of $50 billion in imports that would be subject to 25 percent tariffs by June 15, and two weeks later would announce investment restrictions on Chinese acquisitions of U.S. technology.

“In response, China is reportedly looking to line up countries against the U.S., the Journal reported. The countries in question are mostly in Europe and Asia, where companies could benefit from China’s plans to give foreign companies more open access to its markets…”

“Pakistan’s financing needs are the highest in emerging markets.”


“Most Bursa Malaysia’s key index-linked stocks were down at the break as the broader market dropped 2.53 per cent, the largest one-day decline since Global Financial Crisis 2008, due to severe selling pressure.”


“During a cabinet meeting last month, PM Nguyen Xuan Phuc warned that inflation could increase further as global prices of crude oil and basic commodities rose.”


“Japan’s industrial output rose less than expected in April and inventories of electronic parts rose, a sign that the economy may be struggling to shake off a first quarter contraction.”


“The US economy’s growth in the first quarter slowed even more than previously reported, a Commerce Department report released on Wednesday showed.”


“A group of major European companies has warned the Prime Minister they may cut investment without more clarity over the terms of Britain’s EU exit. Business leaders, including from BP, BMW, Nestle, and Vodafone, told Theresa May that “time is running out”.”


“Spain’s parliament starts formal debate on Thursday over a vote of no-confidence against prime minister Mariano Rajoy. The vote, set for Friday, could see the collapse of Spain’s centre-right government after six years in power.”


“Whether by land, sea or air getting around Greece proved a challenge on Wednesday as a nationwide labor strike gripped the country. Public transportation was disrupted; some flights canceled and sea-going ships were left in their docks.”


italian politicians“After months of political deadlock following an inconclusive election, Italy is on the verge of a major political crisis with global implications.”


“Italy has sold €5.6bn of fresh debt in a sign that investors still have appetite for the country’s bonds, albeit at a notably higher borrowing cost than a previous auction.”


“European bank executives are facing the return of an all too familiar problem: political panic.”


Read yesterday’s economy post here.

Economy 30 May 2018

italian governmentLet’s see what the ECB can do today in terms of hoovering up Italian bonds and calming the markets.

“Nowadays, when sorrows come to the global economy, they would seem to come not as single spies but as battalions. First, we have a full- blown currency crisis in Turkey. Then we have another such crisis in Argentina.

“Before either of those two crises are resolved, we now have Italy plunged into a political crisis that could end up with Italy eventually being forced out of the euro.

“A key difference between Italy on the one hand and Argentina and Turkey on the other is that Italy is a country of systemic importance to the global economy. As such, it has the potential to trigger a global economic and financial market crisis.

“It has the potential to do so in much the same way as the September 2008 Lehman bankruptcy had the potential to set off the worst global economic recession in the post-war period.

“One indication of Italy’s systemic importance is the very size of its economy. Being the eurozone’s third-largest economy, it is 10 times the size of that of Greece. As such, it makes it difficult to contemplate how the euro could survive in anything like its present form were Italy forced to exit that monetary arrangement.

“Another indication of Italy’s importance to the global economy is the fact that it has the world’s third-largest sovereign debt market after that of the United States and Japan, with a total public debt of more than $2.5 trillion.

“Were Italy to default on that debt, as would almost certainly occur were its government’s borrowing cost to increase should Italy leave the euro, it is difficult to contemplate that there would not be a full-blown European banking crisis that would reach America’s shores.

“Among the reasons to fear that Italy could be heading for a full-blown economic crisis is the precarious sate of its economy. Remarkably, Italy’s per capita income is lower today than it was on the eve of the country’s euro adoption in 1999.

“Equally remarkable is the fact that over the past decade, Italy has experienced a triple-dip recession, and it is yet to regain its pre-2008 crisis output level…”


“Asian stock markets slumped Wednesday as jitters spread over Italy’s escalating political crisis and renewed US-China trade tensions.”


global stocks chart“Now Italy and The Euro are in the cross-hairs.”


“Shares in Germany’s biggest bank, Deutsche Bank, were plummeting Tuesday morning as market turmoil surrounding the Italian political crisis spread to the shares of global banks.”


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“Mark Carney said that the UK economy was as much as 2% smaller than forecasts due to Brexit and estimates British households are more than £900 worse off. The uncertainties over what form Brexit will take also suggest that figure will continue to grow.”


“The funding deficit is growing in the Greek economy, as there was a sharper credit contraction in April, data from the Bank of Greece showed on Tuesday.”


“For companies, the allure of cheap financing can trump common sense. At least that’s what seems to be happening in the speculative-grade bond market, where the debt burden for non-financial firms is now above its previous peak seen before the 2008-2009 financial crisis.”


“”This kind of lending echoes the subprime mortgage boom that preceded the credit crisis of 2008… “Using a line of credit from a major bank, they would offer mortgages essentially to anyone with a pulse.””


“Venezuelan President Nicolas Maduro said on Tuesday he would postpone an overhaul of the national currency to remove three zeroes from the bolivar after banking industry leaders requested more time to ensure cash transactions may proceed.”


brazil truckers “But now, some media pundits suspect, protesters want nothing less than for Brazilian President Michel Temer to resign, and for semi-public oil company Petrobras to radically change course.”


“While official inflation is 10.9 percent, purchasing power parity allows for a calculation of inflation based on changes in the exchange rate, which is 39.2 percent, Hanke said.”


“The party’s over.”


“As Donald Trump’s tax cuts power up the American economy, rising US interest rates are driving the greenback higher and sucking liquidity from the global economy. That’s hitting emerging market economies, such as Argentina, Turkey and, to a lesser extent, Indonesia on our northern doorstep.

“At the same time, Italians are trying to cobble together a bizarre coalition government that wants to both increase public spending and cut taxes. The Mediterranean refugee crisis has devastated support for the European Union among Italian voters who once saw Brussels as a safeguard against their own unstable governments. The result is a re-emerging euro crisis…

“…did anyone mention the alarming build-up in debt in China, which now takes nearly 30 per cent of our [Australian] exports, compared to only 5 per cent in the early 2000s? Hey, Reserve Bank governor Philip Lowe did, just last week.”


“…it seems like President Trump may be gearing up to launch a trade war between the world’s two largest economies after all.”


Looks like the ECB has bought up sufficient bonds to ease the panic. For now. Obviously none of the structural and political problems Italy faces have gone away. Fingers crossed the ECB does not press on with their QE taper next year.


Read yesterday’s economy post here.

Economy 29 May 2018

“Italian bonds have witnessed one of their worst trading weeks since the euro zone sovereign debt crisis, with many traders getting a stark reminder of the volatility that once characterized markets in the region.

“On Friday, two-year Italian bond yields rose 35 basis points in one day — almost equivalent to the entire range of the year for U.S. 10-year Treasurys. This was the weakest session in five years and continued a month that’s seen these yields rise 70 basis points in total.

“Yields move inversely to a bond’s price and a spike higher is seen as investors feeling more concerned about lending to Italy’s government. More specifically, traders usually sell short-maturity paper when there are growing credit risk concerns at a sovereign level…

“Italian bonds have witnessed one of their worst trading weeks since the euro zone sovereign debt crisis, with many traders getting a stark reminder of the volatility that once characterized markets in the region.

“On Friday, two-year Italian bond yields rose 35 basis points in one day — almost equivalent to the entire range of the year for U.S. 10-year Treasurys. This was the weakest session in five years and continued a month that’s seen these yields rise 70 basis points in total.

“Yields move inversely to a bond’s price and a spike higher is seen as investors feeling more concerned about lending to Italy’s government. More specifically, traders usually sell short-maturity paper when there are growing credit risk concerns at a sovereign level.

“The original catalyst for the selling came from the populist parties hoping to take control of Italy after inconclusive elections in March. Lega and the Five Star Movement (M5S) plan to issue short-term bills to finance state activity in their economic policy proposals. Market participants were taken aback and many have interpreted that initiative as laying the foundation for a potential parallel currency in the future, further amplifying the potential new government’s collision course with the rest of Europe.

“But the fear has not been limited to short-dated paper. Ten-year Italian bonds have also came under pressure with yields topping 2.5 percent and are now trading at their widest gap with German paper in over four years.

“There is palpable anxiety in the market as Italy’s political future remains uncertain. Over the weekend, M5S and Lega looked to have failed in their bid to form a government after President Sergio Mattarella rejected their pick for economy minister due to his euroskeptic credentials. This has raised the prospect of a caretaker government to lead the country into yet another round of elections later this year…”


“Chaos ruled in Italian markets as the nation plunged deeper into political turmoil…”


“Spanish prime minister Mariano Rajoy will face a vote of confidence in his leadership on Friday, a showdown that threatens to end six years of centre-right government in Madrid and intensifies the political turmoil in southern Europe.”


“It’s looking more and more likely that Italy is going to have to leave the euro soon, and Italian and eurozone stocks could get clobbered. Italian banks could be hit particularly hard.”


“The need to withdraw from lax monetary policies has revived in European institutions a legitimate concern – probably 15 years too late – about the “doom loop” linking governments and banks, both held hostage by excessive debt. Over the past decade, few European governments have cut their debt burden, and with the ECB now tapering off its bond-buying program, commercial banks will now have to write down some of the government bonds held on their books.

“This could pose a real threat to the equity of some large banks. Euro area member states would find themselves in the ironic situation of offering bailouts to credit institutions that made the mistake of trusting their own governments. This devastating vicious circle is why they call it the “doom loop.””


“President Erdogan has urged Turkish citizens to convert their savings into the country’s struggling currency in an attempt to shore up the economy before next month’s elections. At a rally in the eastern city of Erzurum on Saturday, the president said: “Brothers and sisters, hiding dollars and euros under your pillow: go and invest the savings in lira. Together we will fight speculators.””


“Brazilian equities plunged more than 4 percent on Monday to their lowest level this year, as an ongoing truckers’ strike hit all sectors and state oil company Petroleo Brasileiro SA had to adopt a number of policies unpopular with traders.”


“Five years after the 2013 “taper tantrum”, the world is on the brink of yet another emerging market meltdown whose twin epicentres are now Istanbul’s Bosphorus and the Argentine pampas. I expect another 1980s-style intercontinental default wave in theemerging markets. Entire countries and banking systems will go bankrupt or, as my Chicago futures trading cronies used to put it, belly up. I predict the mother of all debt restructuring.”


“While oil traders focus on whether OPEC/Russia will offset outages in Venezuela and Iran, there are cracks forming in the economies of emerging markets, which could threaten to derail the oil market, and do more to drag down oil prices than production increases from the OPEC+ coalition.”


“The gaping holes on banks’ balance sheets are now seen to be sapping away at the vitals of the Indian economy. Of the 28 banks which reported their financial results for the quarter ended March 2018, 13 have reported losses.”


“Pakistan expects to obtain fresh Chinese loans worth $1-2 billion to help it avert a balance of payments crisis, government sources said, in another sign of Islamabad’s growing reliance on Beijing for financial support.”


“While China has started to recognise its credit problem and is addressing it, its responses are too late and too slow to avert a crisis. The main debate should be over when, and not if, a Chinese financial crisis will hit.”


“Bond default marks the third time this year that an Asian company has defaulted on its U.S. dollar debt.”


“Indonesia’s rupiah has been growing worryingly weak, and the country’s central bank has seen little success after multiple attempts to prop up the currency.”


“The Philippines’ debt affordability metrics are at risk amid currency pressures, Moody’s Investors Service said. Countries in the Asia-Pacific region, Moody’s said in a report released over the weekend, were over the past few months particularly susceptible to currency depreciation against the dollar.”


“While the on-again, off-again threat of an all-in trade war continues to grab the headlines, a more subtle shift is pointing to the brakes being applied the global economy. A number of important measures of international trade have suddenly weakened.

“As well, industrial activity as measured by purchasing managers’ index surveys have backed up the idea of the so-called synchronized growth spurt is starting to look like a synchronized slowdown, ABC online reported.”


“Gordon [Brown] and I were faced with the imminent collapse of what was then the world’s biggest bank, we were very clear that if RBS had collapsed, it would have brought down the entire system with it,” Darling told Business Insider in an interview.

“Had the government failed to bail RBS out, Darling said, it “would have had to close its doors, switch off the cash machines.”

“That in turn, Darling said, would have caused “complete panic” among the British public.”


“A deepening political crisis in Italy, the euro zone’s third biggest economy, fueled a selloff in Italian assets and the euro on Tuesday that was reminiscent of the euro zone debt crisis of 2010-2012.

“Short-term Italian bond yields were set for their biggest one-day jump since 1992, while Italian and wider euro zone banking stocks headed for their worst day since August 2016 . At an auction of six-month debt, the government had to pay investors the highest yield in more than five years.”


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