Eurozone to work with ECB to rescue currency: Juncker

AFP – Sun, Jul 29, 2012

• The eurozone has reached a crucial …

The eurozone has reached a crucial juncture and its leaders will work with the European Central Bank to save the single currency, Eurogroup chief Jean-Claude Juncker said in interviews published Sunday.

"We have come to a crucial point. But we have to outline the pace and scope. We will act together with the ECB...," he told France's Le Figaro daily, speaking of the European Financial Stability Facility (EFSF) bailout fund.

"There is no more time to lose," he said, adding that a review of the markets will be decided in the coming days.

In a separate interview to Germany's Sueddeutsche Zeitung Juncker said the "eurozone has come to a stage where we must clearly show through all means possible that we are firm on assuring the stability of the monetary union.

"Nobody should doubt the will of the involved forces to show their determination," he said.

His comments came after ECB chief Mario Draghi sent stock markets soaring and helped bring down Spanish borrowing costs sharply last week by saying the central bank was "ready to do whatever it takes to preserve the euro. And believe me it will be enough."

The leaders of France and Germany followed up his statement with a similar joint declaration on Saturday although they did not pledge any specific action.

Since the start of the crisis, the ECB lost no time in embarking on a series of emergency measures -- in addition to cutting rates -- to stem the turmoil.

The EFSF rescue fund currently has a little more than 200 billion euros ($245 billion) to spend, not enough to fly to the rescue of Italy should it need a full-blown Greece-style rescue, but sufficient to have an impact on the market.

Though the fund is also able to buy public debt on the secondary market, it has never yet used that power.

Current rules state the EFSF can intervene on primary markets only for countries that have signed up to an official reform programme in exchange for a financial rescue, such as Greece or Portugal.

The EFSF can also offer credit lines as a precautionary measure or loan money to recapitalise banks.

At the last European Union summit in June, the bloc agreed that the EFSF could recapitalise banks directly, rather than by channelling funds through government, which just adds to their pile of national debt.

Juncker on Sunday also brushed off a suggestion by German Finance Minister Philip Roesler of Greece's eventual exit from the eurozone.

"Those who think of resolving the problems of the eurozone in this manner by excluding Greece or letting it fall in the wayside have not identified the reasons for the crisis," he told the German newspaper.

Spain is hoping a 100 billion euro credit line agreed for its banking sector will flow directly to the banks, allowing Madrid to avoid the damaging fallout likely from a request for a full-blown bailout.

The EFSF is to be replaced next year by the European Stability Mechamism (ESM), which is expected to come into force later this year.

Who's afraid of the euro crisis?

EU leaders and heads of major institutions nervously await the outcome of fresh elections in Greece, the effects of which could determine the future of the euro. But how might the crisis in Greece spread out across Europe and what are the main fears for each economy?

Greece

Prime Minister Antonis Samaras

Took office:
June 2012

Big fear: Running out of money

 

After a second parliamentary election in as many months, Greece's centre right New Democracy party has managed to cobble together a grand coalition with former arch opponents Pasok as well as the anti-austerity Democratic Left.

New Prime Minister Antonis Samaras' big fear is the government will either fall apart, or run out of money (or both) before Christmas, which could precipitate an exit from the euro.

The coalition parties make strange bedfellows, and have agreed to push for softer terms - including slower spending cuts - from Greece's bailout lenders.

If the Greeks fail to reach a deal with Germany and other lenders, or if they fail in the coming months to fulfill promised spending cuts and reforms in any renegotiated deal, then Greece's lenders could stop sending the bailout cheques, leaving the country's government and its banks bust. 

 

The graphic shows the leaders whose decisions are considered most likely to shape the crisis in the coming months.

Malaysia most vulnerable to economic ‘perfect storm’, says Dr Doom’s consultancy

By Lee Wei Lian

July 30, 2012

 

KUALA LUMPUR, July 30 — Malaysia is one of the most vulnerable Asian economies should a “perfect storm” of a disorderly debt default in Europe, a slowdown in China and the US, and rising tensions in the Middle East materialise, Roubini Global Economics (RGE) has said in a recent report.

The strategic research firm, best known for its founder “Dr Doom” Nouriel Roubini who predicted the collapse of the US housing market and the 2008 global financial crisis, said that Malaysia had the highest exposure to a pullout of capital as its eurozone and US bank claims amount to more than 25 per cent of GDP.

File photo of people buying fruit at a market in Kuala Lumpur. A consultancy said the Malaysian economy was very vulnerable and exposed to global forces. —Reuters pic

RGE added that Malaysia was the second most exposed in terms of a demand slowdown in the US, the eurozone and China, making it the most exposed Asian economy overall.

 

The report also said that the country was among the lowest ranked in terms of monetary and fiscal capacity to respond to a crisis, coming in ahead of only Thailand, Japan and Indonesia.

“Malaysia, Taiwan, South Korea and Vietnam appear to be the most exposed to a perfect storm through their trade and financial linkages, while South Korea, Australia, Vietnam and the Philippines appear to have the most policy space to offset such an external shock,” said RGE.

“Taking these two factors together, Malaysia, Taiwan, Japan and Thailand are the most vulnerable of the 10 economies considered in this analysis, while Australia, India, South Korea and the Philippines are the least.”

RGE said that while Malaysian government revenues have increased, the hole in its finances could grow due to “populist” spending and an expected cut in Petronas’ dividends.

“In the run-up to elections, the government is likely to offer more cash handouts in the 2013 Budget, leaving fewer resources for productive investment,” said the report.

“We see the debt-to-GDP ratio reaching 54.6 per cent next year, leaving little room to manoeuvre in the event of an external shock.”

RGE noted that in its most recent effort to boost its popularity ahead of an upcoming general election, the Malaysian government announced a supplementary budget of RM13.8 billion in June, some 80 per cent of which is allocated towards maintaining oil subsidies and raising civil servant wages.

It added that it expects Bank Negara to cut interest rates to 2.5 per cent by the end of 2013 to deal with slowing growth in Europe and China.

Economists and analysts had earlier said that Malaysia’s federal government debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs the country’s resilience to the increasing frequency of economic shocks.

They said that while government debt — currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia — has not significantly impacted the country and its credit standing so far, the volatile nature of global markets may cause sentiment to turn with little warning.

from the Federal Treasury’s Economic Reports show that the federal government’s domestic debt almost 

doubled in the space of less than five years — from RM247 billion in 2007 to an estimated RM421 billion in 2011 — far outpacing its revenues which only grew 31 per cent or from RM140 billion to RM183 billion during the same period.

Government-backed loans rose rapidly as well between 1985 and 2010 — from RM11 billion to RM96 billion — representing a growth of 8.7 per cent per annum.

Investors in recent weeks have reportedly shown a preference for US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.

Roubini had in May reportedly predicted that four elements — economic slowdown in the US, the debt crisis in Europe, a slowdown in China and emerging markets, and military conflict in Iran — would combine to create a storm for the global economy in 2013.

The Malaysian Insider

Citi sees 90 percent chance of Greece leaving the euro

MILAN | Thu Jul 26, 2012 
 

(Reuters) - The chances of Greece leaving the euro in the next 12-18 months have risen to about 90 percent, U.S. bank Citi said in a report on Thursday, saying Athens was most likely to quit the single currency within the next two to three quarters.

The report, dated July 25 but distributed in an email on Thursday, said the bank expected Italy and Spain to take a formal bailout from the European Union and IMF on top of the banking aid for which Madrid has already asked.
 
Citi economists had previously put the chances of a Greek exit at 50 to 75 percent.
"We remain gloomy on the euro crisis," Citi economists said.

"Over the next few years, the euro area end-game is likely to be a mix of EMU exit (Greece), a significant amount of sovereign debt and bank debt restructuring (Portugal, Ireland and, eventually, perhaps Italy, Spain and Cyprus) with only limited fiscal burden-sharing."

Citi said it expected Greece's exit from the euro coupled with economic weakness in the euro zone's periphery to trigger further sovereign downgrades in the single-currency bloc in the next two to three quarters.

It saw at least a one-notch downgrade by at least one major agency for Austria, Belgium, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain.

Outside the euro area, Citi expects both the U.S. and Japan to have their ratings cut by one-notch over the next two to three years. Also Britain may lose its triple-A rating over the same period due to economic weakness and fiscal slippage.

(Reporting by Valentina Za; editing by Patrick Graham)

PIGS in Europe have too much debt

WHAT is it about PIGS that draws human attention? Last year, there was Obama’s reference to Sarah Palin as ‘putting lipstick on a pig.’ Notwithstanding the unkind metaphor, I voted for Sarah because not only did she have more sense and guts than Obama, she is a babe and I refer not to the PIG with the same name. Then, the swine flu broke out creating mass human hysteria. Certainly, PIGS can wear lipstick and PIGS can have the flu. But how can PIGS have too much debt? It’s actually PIIGS not PIGS: Portugal, Italy, Ireland, Greece and Spain. All of these European countries have one thing in common.

 They all have accumulated too much debt and will not be able to repay their loans. Sovereign bankruptcy is not something new. Mexico, Ecuador, Russian and Argentina have all declared themselves bankrupt in the past & turned their backs on the country’s debts. Foreign banks and creditors were left holding the bag unable to collect. Let’s look at the situation of Greece. Its debt to GDP (income) ratio is 113%. Its annual Gross Domestic Product or income is about E300 billion. But Greece has accumulated debt of E339 billion. About E25 billion of short term debt is about to come due. Greece doesn’t have E25 billion of cash to pay the maturing debt. This means it has to go out and borrow more money by issuing more IOU’s to get new debt to refinance maturing debt. The problem is that investors may no longer be interested to purchase Greece’s IOU’s because it’s clear that the country has too much debt compared to its income so it is certain that Greece has no ability to repay its debts. If creditors will not lend new money to Greece, it will have to declare bankruptcy because it cannot pay maturing debt. Portugal is in a slightly better position than Greece with 65% debt to GDP ratio but that is a very bad debt to income ratio. Italy is at 105% and Spain is at 50%. The United States is currently at 10% but estimated to be at 40% this year and 60% next year with Obama’s limitless spending of money that we do not have.

The alternative to Greece declaring bankruptcy is the ‘B’ word: Bail out. That means the richer countries in Europe must give money to Greece and the other PIGS so they can pay off maturing debt while the PIGS drastically cut down on spending. This is easier said than done. Germans may balk at the idea of giving money to the Greeks who created their own debt problems with undisciplined deficit spending. Germans make the luxury cars, Benzes and Beamers that the whole world wants and they don’t spend more than they make. Sure, the Germans have the money for bailing out Greece but will they want to do it? Should they be their brother’s keeper? Then again, as we have seen here in the United States, bail out is not a one stop shop. After Greece is bailed out, there is still Portugal, Italy, Ireland and Spain that may need bailing out too.

On a personal level, measure your own debt to income ratio. Unless you have a rich parent who will bail you out of accumulated debt, you will have to discipline yourself by having a lifestyle that has no debt or an acceptable debt to income ratio. You have seen in Greece that a debt to income ratio of over 100% means that you are indeed bankrupt. To illustrate, if your annual gross household income is $70,000 and have $78,000 of credit card debt, your debt to income ratio is the same as Greece. No matter what you say or how you justify yourself, the fact is, you are bankrupt. Just like Greece, you have only two alternatives. Have someone bail you out, or file for a bankruptcy discharge of your debts so you can start fresh again, without debt.

www.asianjournal.com )

Greek Debt/GDP: Only 22% In 1980

This graph shows the government debt to GDP ratio for Greece. As you see the debt was mostly accumulated in the eighties.

• In the 1980's spending as a percentage of GDP rose by 19 points from 24% in 1980 to 43% in 1988, while revenue rose by only 7 points form 20% to 27%.
• In the beginning of the 90's Greece was in recession twice (1990 and 1993). The deficit and the borrowing cost both spiked to over 10%. 
• Starting in 1993 the government started a policy of fiscal consolidation to get permission to join the Euro-Zone. The deficit shrank to 3% of GDP and the borrowing costs fell to just 6% in 2000.
• When Greece was allowed to enter the Euro-Zone the 'fiscal discipline' faded away and budget deficits began to rise again. This was not followed by higher borrowing yields though, which may had something to do with the distorting of the numbers by the Greek government.

Which Country Has the Worst Sovereign Debt-to-GDP Ratio? Read more: http://www.minyanville.com/mvpremium/which-country-has-the-worst/#ixzz21iksKFCS

A quick at-a-glance map via Bloomberg shows global debt-to-GDP ratios. According to Bloomberg figures, the U.S. debt-to-GDP ratio is 58.2 percent, compared to 70 percent for the European Union as a whole, while a PIIGS member, like Greece, checks in at 126.8 percent. As you may have guessed, the highest debt-to-GDP ratio is in Japan, 196.4 percent.

Ironically, the European Financial Stability Facility (EFSF) issued 5 billion euros of five-year, 2.75 percent notes this morning, more than 20 percent of which was purchased by the Japanese government.

Debt Levels Relative to GDP of PIIGS and Some Other Major Countries

For some perspective on the European sovereign debt crisis, this chart illustrates the forecasted 2012 debt to GDP ratio for each of the PIIGS (red bars) plus a handful of today's major economies (blue bars).

 
While the PIIGS are currently enduring relatively high debt loads, it is noteworthy how some of the relatively safe nations/bond markets (e.g. United State and Germany) are not far behind.

These relatively high debt loads are of concern as they could lead to higher taxes sometime in the future and can risk fiscal crises if bond holders sense an increasing risk of default.

The current crisis in Europe provides a clear example of the bond market's reaction (i.e. higher bond yields) to increased default fears.

This leads to a very interesting case study that is Japan. With a debt to GDP ratio of over 200%, the Japanese 10-year bond yield is a relatively low 0.83%. Why? At the moment, the bond market feels that the Japanese have the ability to repay their debts -- in part due to Japan's perceived ability to raise taxes.

PIIGS - Portugal, Ireland, Italy, Greece and Spain

Due to the economic recession which started in 2008, several members of the European Union became historically known as PIIGS. These states include Portugal, Italy, Ireland, Greece and Spain and if combined together, they form the acronym PIIGS. The reason why these countries were grouped together is the substantial instability of their economies, which was an evident problem in 2009. 

The reason why the five countries gained popularity is a serious concern within the EU, with regard to their national debts, especially for Greece. The latter country was involved in a controversial affair after allegedly falsifying its public financial data. In the year 2010, it was evident that the five states were in need of corrective action in order to regain their former financial stability. 

Because of the dirty farm animal associated with the acronym, several country leaders from the financially troubled countries have voiced out disagreement with the use of the term. However, there are quite a number of reporters and columnists who still refer to it when talking about the widespread economic crisis within the European Union. Although some prominent politicians have criticized the practice, the use of the word is very hard to shake off.

The Cause of the Trouble 

Looking back at economic developments, several members of PIIGS were in serious financial trouble in view of sovereign debt: the debt obtained from other nations using the lenders currency. The reason why countries request sovereign funds is to raise funding when their own currencies are weak and unstable. The problem with this type of debt is the risk of defaulting. 

Sovereign debt is a form of external debt and can be a huge risk when the borrowing country has a weak economy. Although some countries like the United States have larger external debt than the PIIGS, this debt can be regarded low risk as long as the country shows signs of a strong and vibrant economy. The problem with the external debt of PIIGS members is that their economies were considered the EUs weakest links. 

 

Comparing the PIIGS Nations 

In the European Union, the economy of Portugal ranks 17th in size. Although the debt of the country is less than that of the United States, its level of indebtedness has risen to nearly 20 percent in the past years. In addition, its unemployment stands at the alarming 10.4 percent. 

While the Italian economy ranks fourth within the EU, in 2009, it went down by about 4.8 percent. The debt to GDP ratio of the country stands at 115.5 percent and its unemployment rate exceeds 7.5 percent. 

Although Ireland used to be on the 15th place in terms of economic size, its indicators suddenly dropped down by 7.5 percent in 2009. In the past 3 years, its debt has tripled from 25.4 percent while unemployment rate reached 13.3 percent. Thus, the country joined the team of PIIGS nations. 

Greece is the most controversial case of all. Although its economy ranks 13th in terms of economic size, its debt-to-GDP ratio is at the startling 125 percent. Since 2010, the government of Greece has started making budget cuts equaling 10 percent of its GDP. 

Finally, Spain is the fifth largest economy in the European Union, with the lowest debt-to-GDP ratio of all PIIGS countries. However, its gross domestic product is at the low 66.3 percent, while unemployment stands at 20 percent. At present, the authorities in the country are about to implement some tough fiscal restrains.

Spain Heading for Highest Debt Level in 22 Years

Spain's public debt will jump to its highest level since at least 1990 this year as the economy sinks into recession, the government said in its budget on Tuesday, worrying investors who sold Spanish bonds.

Spain is under intense pressure from the European Union and investors to drastically cut its deficit and prove it will be able to repay its debt without asking for outside help.

Analysts say it will struggle to meet this year's deficit target despite new budget cuts.

Investors are worried the euro zone's debt problems are returning, sending the premium they demand to hold Spanish and Italian bonds higher on Tuesday.

Spain's debt-to-gross domestic product ratio will soar to 79.8 percent in 2012, below the European average but a big rise from 68.5 percent last year, the budget documents showed.

Final parliamentary adoption of the budget could be delayed until June but a senior European central banker said this was too late, reflecting growing concern among policymakers.

"I understand that everyone's in a hurry. We are too," Treasury Minister Cristobal Montoro said as he presented the plan to parliament.

He said many of the measures in the budget, which aims to save 27 billion euros ($35.91 billion), are already in place.

European Central Bank board member Joerg Asmussen said on Friday the government must speed up the parliamentary process.

"The aim is that the budget can have an impact over as much of the current year as possible," he told journalists on the sidelines of a meeting of EU finance ministers and central bankers in Copenhagen, expressing a view widely shared among top EU officials.

Confidence 

Spaniards have been fairly tolerant of his austerity but thousands turned out for a general strike last Thursday in a sign patience may be wearing thin.

"The challenge of this budget is to recover the confidence of our European partners, of European institutions, of investors in Spain," Montoro said.

The government said the rising debt-to-GDP ratio was due to high borrowing costs as well as the cost of the bank rescue fund, the power tariff deficit fund, the fund to help regions pay service providers and Spain's payment to the Greek bailout.

Investor confidence in Spain has improved since the height of the euro zone debt crisis last summer as a second rescue package for Greece was approved.

But the premium investors demand to hold Spanish over German debt has started to climb again in recent weeks.

Spanish and Italian 10-year yield spreads over Bunds widened by up to 8 basis points on Tuesday.

"We have deteriorating news from the (euro zone) periphery. I don't think the market like the Spanish budget too much...Some of the data there is pretty weak," said one trader.

Spain must reduce its deficit to 5.3 percent of GDP this year and to the EU limit of 3 percent of GDP in 2013 from 8.5 percent last year.

Regions Under Pressure

The government said the country's 17 autonomous regions, which together with local authorities account for around half of all spending, must keep cutting costs.

"Given that a large part of the (deficit) deviation has been produced by the regions, these must, as much as the central administration, adopt the necessary measures without delay to correct this situation," the budget documents said.

The central government has said it will punish regions which overspend.

"We have all the weapons needed for the regions to meet the deficit targets," Montoro said.

Some economists say the outlook for Spain is so uncertain that it may eventually have to turn to outside financial assistance like Greece or neighbouring Portugal, to help pay its debts or keep the banking system afloat.

Spain's banks were badly hit by the 2008 collapse of the real estate market and are struggling through a consolidation process to rebuild battered balance sheets.

The budget said debt issuance would focus on shorter- rather than longer-term, 15 to 30-year paper, reducing the average maturity of the country's bonds in circulation to between 6.2 to 6.4 years.

It did not change its gross issuance plan.

Spain has completed 44 percent of its bond issuance programme for this year, with auctions supported by a flood of liquidity from two exceptional European Central Bank loan operations.

Copyright 2012 Thomson Reuters

Debt to GDP ratios for EU countries

Politics in Malaysia:The racial question

Harassment of pro-democracy activists in Malaysia reveals a worrying undercurrent of racism

Jul 14th 2012 | KUALA LUMPUR

THE house of Ambiga Sreenevasan in a leafy neighbourhood of Kuala Lumpur looks ordinary enough. Getting into it, though, betrays a different reality. A security guard greets visitors, who are then scrutinised by newly installed surveillance cameras. A bodyguard hovers somewhere inside the house.

The precautions are revealing. Ms Ambiga has become the target of what she describes as “relentless attacks”, including death threats. They have thrust a middle-class lawyer (she is a former president of the Malaysian Bar Council) into the centre of politics in the run-up to what could be a pivotal general election.

Ms Ambiga is co-leader of the Bersih movement, a coalition of NGOs campaigning for free and fair elections. To her supporters, Bersih, which means “clean” in Malay, is dedicated to strengthening democracy in Malaysia, where the system is heavily skewed in favour of the ruling United Malays National Organisation (UMNO). The party has been in power continuously since independence in 1957; it governs in a coalition known as the Barisan Nasional (BN) mainly with two minority parties, one ethnic Chinese and the other Indian, reflecting the racial composition of the country. To many within UMNO, Ms Ambiga is a grave threat, the more so because Najib Razak, the prime minister, has to go to the polls by the second quarter of next year, but appears to be reluctant to call the election. Though his personal support rating is high, the coalition is less popular.

A mass rally called by Bersih in the capital in April (protesters are pictured above) attracted tens of thousands of people, including many opposition leaders. The event ended in riots and violence. Ever since, UMNO and its underlings have been demonising the leaders of Bersih, which may have cheered some from the majority Malay population but could also backfire against the government.

When it started in May, the harassment of Ms Ambiga was almost farcical. A posse of traders turned up outside her door frying burgers to protest about their lost earnings on the day of the rally; silly stuff, though still offensive to a Hindu vegetarian. Sillier still, a group of ex-soldiers marched on her house and shook their buttocks at it, calling her a subversive.

Then things turned nasty. Several hundred men handed over a petition saying that she was anti-Islamic (in a Muslim-majority country) and should leave Malaysia. Ms Ambiga says that these protests were “either sanctioned or supported by the state”. Finally, on June 26th, a veteran UMNO politician, Mohamad Aziz, said in parliament: “Can we not consider Ambiga a traitor…and sentence her to hang”.

This has caused a storm. Quite apart from the overt threat, the MP lit the touchpaper of Malaysia’s highly flammable racial politics; this was a Malay MP insulting a prominent member of the Indian community. The country’s 2m Indians are normally a divided lot, but they quickly rallied behind Ms Ambiga. Even the leaders of the BN-aligned Malaysian Indian Congress party denounced the MP, ostensibly their political ally. Mr Mohamad issued a limited apology to Indians in general, but not to Ms Ambiga personally.

Ms Ambiga believes the attacks on her, all by Malay men, are racist. She points out that her Malay co-leader of Bersih, a famous writer called A. Samad Said, has never been targeted.

It is as yet unclear whether the souring climate could turn Malaysia’s Indians against the BN. They make up only 8% of the population. Traditionally they have mostly voted for the BN, but some may now change their minds, especially in urban areas where Ms Ambiga is respected. After the BN’s Indian vote fell at the last election in 2008, Mr Najib worked hard to court Indians. Now, that may have been to little avail.

Mr Najib may also be personally tarnished. He portrays himself as a liberally minded champion of multiracial politics, yet critics say he has done little to rein in the racist attacks. When under pressure, the “warlords” of UMNO who constitute its nationalist backbone have often drawn on racial politics, playing up to Malay voters the supposed threats that Chinese and Indians pose to their institutionalised privileges in jobs and education. Under Mr Najib people had hoped for something better. Ms Ambiga accuses him of being “wet” for failing to take a stronger stand. His belated rebuttal to Mr Mohamad merely urged MPs not to say things that might “hurt the feelings of other races”.

Meanwhile, Ms Ambiga and other Bersih co-leaders (not the Malay one) have been issued with a bewildering demand for compensation from the Kuala Lumpur city council for costs incurred during the April rally. This includes a claim for “damage to trees” ($5,246) and “food and drink” for staff. The government has also brought charges against Anwar Ibrahim, the leader of the opposition, and several of his colleagues for a variety of offences arising from their participation in the April rally. Their cases go to court in the next few months; if they are convicted, they could be banned from standing in the election.

Political analysts argue that such tactics are a sign of nervousness—though the BN is very unlikely to lose the election. Since May, surveys suggest his support among Chinese and Indian voters has fallen, though that of Malays has increased a bit. It is all likely to make for a more acrimonious election when one is at last called.

The Economist

Malaysia’s debts a potential time bomb, say economists

By Lee Wei Lian

July 18, 2012

 Malaysia’s debt levels may limit Najib’s ability to respond to financial crises. — File pic

KUALA LUMPUR, July 19 ― The government’s debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs Malaysia’s resilience to economic shocks, analysts and economists have said.

They say that while government debt ― currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia ― has not significantly impacted the country and its credit standing yet, the volatile nature of global markets may manifest such a risk at any time.

While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure rose to about 65 per cent of GDP last year ― above the comfort level for many analysts.

RAM Ratings chief economist Yeah Kim Leng said that while Malaysia’s debt levels are currently considered moderate, it should still be vigilant against the possibility of debt levels hitting the “tipping point” whereby it could be punished with higher borrowing costs.

“The threshold at which the market sentiment can turn against you is unknown,” said Yeah. “If market sentiment does turn against Malaysia, it could result in very high borrowing costs and capital pull-out.”

The reason we have not had a higher debt burden is because we have a piggy bank called Petronas. — Cheong Kee Cheok, senior research fellow at University of Malaya’s Economics and Administration Faculty.

He added that careful management of debt levels could inject greater resiliency into the economy, which was desirable given the increasing frequency of economic shocks that characterises the global economy today.

“It’s not just about economic growth but also the country’s ability to withstand shocks,” he said.

Figures from the Federal Treasury’s Economic Reports shows that the federal government’s domestic debt almost doubled in the space of less than five years ― from RM247 billion in 2007 to an estimated RM421 billion in 2011 ― far outpacing its revenues which only grew 31 per cent or from RM140 billion to  RM183 billion during the same period.

In contrast, 2001 to 2005 saw domestic debt level growing from RM121.4 billion to RM189 billion, or just 56 per cent.

Government-backed loans rose rapidly as well between 1985 to 2010 ― from RM11 billion to RM96 billion ― representing a growth of 8.7 per cent per annum.

Cheong Kee Cheok, a senior research fellow at University of Malaya’s Economics and Administration faculty, said that while Malaysia’s debt level of 55 per cent of GDP is “not an outright disaster” when compared to countries like Greece, he expects the level of debt to continue to rise.

“The rise in this debt level over the past few years is worrying though, and so far, I have not seen any effort to try to rein in spending given that revenue sources have not expanded,” he said. “The reason we have not had a higher debt burden is because we have a piggy bank called Petronas.”

Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs (Ideas) said that politics played a role in why Malaysia is grappling with debt.

He said that while deficit spending was “completely wrong”, as long as governments could roll over their debt, there was little urgency to address the issue as politicians rarely look beyond the next election.

Wan Saiful blamed the government’s deficit on pork-barrel politics. — File pic

“Politicians will spend what they need to win elections,” he noted.

He added that his was not a criticism only of the Najib administration as he found Pakatan Rakyat’s many promises even “more reckless”.

“Pakatan Rakyat say that they can pay for spending by removing corruption but if you want to be responsible, you should plug the hole and pay the debts not plug the hole and spend the money,” he said.

The country’s fiscal track record has apparently already affected investor confidence, as evidenced by the weakness in the country’s currency and relatively high yields on government bonds.

Despite Malaysian government securities offering higher yields than either Singapore or the US, investors last week still flocked to the two perceived safe havens over places like Malaysia, sending the ringgit markedly lower in recent weeks.

Countries with strong credit ratings such as Switzerland can even afford to offer negative yields to investors due to their perceived comfort factor while weaker countries, such as Italy and Spain, have a harder time raising funds even when offering vastly superior yields due to the perceived higher risks involved.

While Malaysia is not yet in the category of Spain or Italy, it is notable that investors prefer to switch their money to US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent as compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.

This generally means that investors harbour stronger doubts over Malaysia’s ability to pay back its debts, and outflow of funds led to the ringgit slumping to a 14-year low against the Singapore dollar and also saw the currency lose ground to the greenback.

With both its debt and budget deficit among the highest in Asia as a percentage of GDP, it would be difficult for the government to pare down debts without it either raising taxes or cutting spending, both options which are likely to make it unpopular with the public at large.

The saving grace for the government is that it can tap into the vast savings pool of Malaysians instead of going outside the country and the revenue it gains from oil and gas.

Hydrocarbon income, however, could be under threat this year as petroleum prices have weakened significantly due to the economic uncertainty.

Should another global economic crisis hit, it is unclear how much fiscal space the Najib administration has left to implement stimulus measures given its commitments to reduce its budget deficit and keep a lid on debt.

Another issue is that the RM96 billion in government-backed debts is likely to grow even more in light of an expected raft of rail and road infrastructure projects, which some reports have estimated will cost as much as nearly RM100 billion over the next few years.

Even Malaysia’s National Higher Education Fund Corporation (PTPTN) is going down the route of government-backed debt, recently selling RM2.5 billion of federally-guaranteed Islamic debt as it looks for financing to provide more loans to a growing number of eligible students entering university.

The PTPTN scheme, however, has been a source of controversy as only 84 per cent of students are reported to be repaying their loans as at February this year.

For the moment, investors are still willing to buy Malaysian government bonds used to raise money for the country’s development.

The question is whether falling petroleum prices, stubborn fiscal deficits or rising contingent liabilities could one day shake their confidence.

The Malaysian Insider

Greece's crisis

The parable of the four-engined planes

Jul 18th 2012

AN OLD friend in the aviation business, with years of experience with Greek clients, told me a story that serves as a parable for how the country got into its current state. It concerns the sale of four Airbus long-haul planes after the national flag carrier, Olympic Airways, went bust. In 2007 an American valuation consultancy, Avitas, put a value of $45m on each of the A340-300 planes, which were then eight years old and still airworthy. Offers by outside firms to handle the sale were turned down. Instead a special state-owned firm with hundreds of employees was established, just to flog the four surplus planes.

In 2010 a small German airline called Cirrus offered $23m each for them. But the Greeks rejected this because of a rule that state assets could not be sold for less than 75% of their declared value. They then called for another expert valuation on the planes, which by then had been grounded for a year: the valuers marked them down to just $18m each.

By then, this tiny part of the secondhand airliner market was becoming flooded with this type of four-engined aircraft, which had been made uneconomic by high fuel prices. This, and the deteriorating state of the grounded planes, pushed their value steadily lower. By 2012, after three years sitting unused and un-serviced in the humid atmosphere of Athens, the only offer was from Apollo Aviation in Miami, which wanted the planes for scrap. The Greek trade unions kicked up a fuss about state assets being flogged cheaply abroad. But the deal was eventually sealed by the new government earlier this month, with the planes being sold for just $10m each.

So, a sale of surplus state assets that might have strengthened Greece's coffers by $180m in 2009 ends up raising just $40m, three years and two international bail-outs later. In part the most recent slump in value is because the buyer will have to spend up to $20m on repairs to make the planes fit enough to be ferried across the Atlantic with no passengers (which is cheaper than full restoration). At these prices it might have even been better to break them up for scrap in Athens: at least that would have provided a bit of work for jobless Greeks.

The Economist