{"id":2000,"date":"2010-02-07T11:55:23","date_gmt":"2010-02-07T15:55:23","guid":{"rendered":"https:\/\/freedom24.org\/rationalpost\/?p=2000"},"modified":"2010-02-13T16:28:33","modified_gmt":"2010-02-13T20:28:33","slug":"if-piigs-could-fly","status":"publish","type":"post","link":"https:\/\/freedom24.org\/rationalpost\/if-piigs-could-fly\/","title":{"rendered":"if piigs could fly"},"content":{"rendered":"

\"\"<\/a>The markets whipsawed in volatile trading last week as war was waged over key technical levels in the Dow (10,000) and S&P (1050). The backdrop was bitter sweet: trouble among the perennial sick men of Europe (P<\/span>ortugal, I<\/span>taly, I<\/span>reland, G<\/span>reece and S<\/span>pain) on the one hand, and upbeat earnings in Corporate America on the other. With all the uncertainty over the short-term trajectory of the economy, it would be tough to fault political leaders for at least preaching that the glass is still half full. That said, it’s almost criminal for the Secretary of the Treasury to tell the American people — on their holiest of sporting days — that America’s economy was frothing at the end of last year, when most of that growth came from government spending or temporary tax incentives funded by record public borrowing. Should be an interesting week ahead in the markets… <\/em><\/p>\n

Is Tim Geithner paying attention to the Global Economy?
\nby Simon Johnson and Peter Boone <\/span><\/strong><\/p>\n

In\u00c2\u00a0an interview that will air Sunday on ABC<\/a>, Treasury Secretary Tim Geithner says, \u00e2\u20ac\u0153\u00e2\u20ac\u009dWe have much, much lower risk of\u00c2\u00a0[a double-dip recession]\u00c2\u00a0today than at any time over the last 12 months or so \u00e2\u20ac\u00a6 We are in an economy that was growing at the rate of almost 6 percent of GDP in the fourth quarter of last year.\u00c2\u00a0 The most rapid rate in six years.\u00c2\u00a0 So we are beginning the process of healing.\u00e2\u20ac\u009d<\/p>\n

The timing of this statement is remarkable because, while the US is finally showing some signs of recovery, the\u00c2\u00a0global economy is bracing for another major shock<\/a> \u00e2\u20ac\u201c this time coming from the European Union.<\/p>\n

The mounting debt and deficit problems in Greece might seem relatively small and faraway to the US Treasury \u00e2\u20ac\u201c concerned as it is with\u00c2\u00a0China\u00e2\u20ac\u2122s exchange rate<\/a> and the\u00c2\u00a0ritual of G7 meetings<\/a>, and likely distracted by the major snow storm now hitting Washington DC.<\/p>\n

But the problems now spreading from Greece to\u00c2\u00a0Spain, Portugal<\/a>, Ireland and even Italy portend serious trouble ahead for the US in the second half of this year \u00e2\u20ac\u201c particularly because our banks remain in such weak shape.<\/p>\n

Greece is a member of the eurozone, the elite club of European nations that share the euro and are supposed to maintain strong enough economic policies.\u00c2\u00a0 Greece does not control its own currency \u00e2\u20ac\u201c this is in the hands of the European Central Bank in Frankfurt.\u00c2\u00a0 In good times over the past decade, this helped keep Greek interest rates low and growth relatively strong.<\/p>\n

But under the economic pressures of the past year, the\u00c2\u00a0Greek government budget <\/a>has slipped into ever greater deficit and investors have increasingly become uncomfortable about the possibility of future default.\u00c2\u00a0 This impending doom was postponed for a while by the ability of banks \u00e2\u20ac\u201c mostly Greek \u00e2\u20ac\u201c to use these bonds as collateral for loans from the European Central Bank (so-called \u00e2\u20ac\u0153repos\u00e2\u20ac\u009d).<\/p>\n

But from the end of this year, the ECB will no longer accept bonds rated below A by major ratings agencies \u00e2\u20ac\u201c and Greek government debt no longer falls into this category.\u00c2\u00a0 The market can do this kind of math in about 20 seconds: If the ECB won\u00e2\u20ac\u2122t, indirectly, lend to the Greek government, then interest rates will go up in the future; in anticipation of this, interest rates should go up now.<\/p>\n

That is trouble enough for an economy like Greece \u00e2\u20ac\u201c or any of the weaker eurozone countries that have been known, for some time and not in an endearing way as the \u00e2\u20ac\u0153PIIGS<\/a>\u00e2\u20ac\u009d.\u00c2\u00a0 But paying higher interest rates on government debt also implies a worsening of the budget; this is exactly the sort of debt dynamics that used to get countries like Brazil into big trouble.<\/p>\n

The right approach would be to promise credible budget tightening down the road and to obtain sufficient resources \u00e2\u20ac\u201c from within the eurozone (the IMF is irrelevant in the case of such a currency union) \u00e2\u20ac\u201c to tide the country over in the interim.<\/p>\n

But the Germans have decided to play hardball with their weaker and \u00e2\u20ac\u201c it must be said \u00e2\u20ac\u201c somewhat annoying neighbors.\u00c2\u00a0 As we entered the weekend, markets rallied on the expectation that there might be a bailout for Greece (and all the others under pressure).\u00c2\u00a0 But, honestly, this seems unlikely.\u00c2\u00a0 The Germans hate bailouts \u00e2\u20ac\u201c unless it\u00e2\u20ac\u2122s their own banks and auto companies on the line.\u00c2\u00a0 And the Europeans policy elite loves rules; in this kind of situation, their political process will grind on at a late 20th<\/sup> century pace.<\/p>\n

In contrast, markets now move\u00c2\u00a0at a 21st<\/sup> century global network pace.\u00c2\u00a0 This is a full-scale speculative attack on sovereign credits in the eurozone.\u00c2\u00a0 Brought on by weak fundamentals \u00e2\u20ac\u201c it\u00e2\u20ac\u2122s the budget deficit, stupid \u00e2\u20ac\u201c such attacks take on a life of their own.\u00c2\u00a0 Remember the spread of pressure from Thailand to Malaysia and Indonesia, and then the big jump to Korea all in the space of two months during fall 1997.<\/p>\n

Tim Geithner and the White House may feel they must stand aloof, waiting for the Europeans to get their act together.\u00c2\u00a0 This is a mistake \u00e2\u20ac\u201c the need for US leadership has never been greater, particularly as our banks are really not in good enough shape to withstand a major international adverse event (e.g., Greece defaults, Greece leaves the eurozone, Germany leaves the eurozone, etc).<\/p>\n

Yes, we subjected our banks to a\u00c2\u00a0stress test in spring 2009<\/a> \u00e2\u20ac\u201c but the stress scenario was mild and more appropriate as a baseline.\u00c2\u00a0 Many of our banks \u00e2\u20ac\u201c big, medium, and small \u00e2\u20ac\u201c simply do not have enough capital to withstand further serious losses (think commercial real estate).<\/p>\n

As the international situation deteriorates \u00e2\u20ac\u201c or even if it remains at this level of volatility \u00e2\u20ac\u201c banks will hunker down and credit conditions will tighten around the US.<\/p>\n

And if the European situation spins seriously out of control, as it may well do early next week, the likelihood of a double-dip recession (or significant slowdown in the second half of 2010) increases dramatically.<\/p>\n

By Peter Boone and Simon Johnson<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

The markets whipsawed in volatile trading last week as war was waged over key technical levels in the Dow (10,000) and S&P (1050). The backdrop was bitter sweet: trouble among the perennial sick men of Europe (Portugal, Italy, Ireland, Greece and Spain) on the one hand, and upbeat earnings in Corporate America on the other. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_s2mail":"","footnotes":""},"categories":[21,1],"tags":[73,106,203,298,279,131,281,280,276,245],"class_list":["post-2000","post","type-post","status-publish","format-standard","hentry","category-financial-crisis","category-other","tag-bailout","tag-capital-markets","tag-europe","tag-financial-crisis","tag-geithner","tag-investment","tag-piigs","tag-recession","tag-recovery","tag-treasury"],"yoast_head":"\nif piigs could fly - The Rational Post<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/freedom24.org\/rationalpost\/if-piigs-could-fly\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"if piigs could fly - The Rational Post\" \/>\n<meta property=\"og:description\" content=\"The markets whipsawed in volatile trading last week as war was waged over key technical levels in the Dow (10,000) and S&P (1050). The backdrop was bitter sweet: trouble among the perennial sick men of Europe (Portugal, Italy, Ireland, Greece and Spain) on the one hand, and upbeat earnings in Corporate America on the other. 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