Economists: Greek euro exit threatens ‘deep recession’ in Malaysia

By Shannon Teoh

May 30, 2012

Supporters of the extreme-right Golden Dawn party sing the Greek national anthem during a rally in Athens May 29, 2012. — Reuters pic

KUALA LUMPUR, May 30 — A Greek departure from the euro zone would cause a second recession in as little as four years in Malaysia as the repercussions may be felt throughout the global economy, Bloomberg reported analysts and economists as saying today.

 

Economists told Bloomberg that investors are now betting on the small Mediterranean country leaving the euro zone soon.

Although Greece is only responsible for 0.4 per cent of the world economy, anxiety over the June 17 Greek elections has already helped wipe almost US$3 trillion (RM9.5 trillion) from global equities this month.

A Greek exit from the euro zone could reduce China’s expansion to 6.4 per cent this year, from 9.2 per cent in 2011, economists at China International Capital Corp (CICC) said last week.

Malaysia, along with the rest of Asia, has increased trade with China for years and the Asian giant is now its top trade partner.

But the world’s second-largest economy is cooling and a further slowdown means its consumption “cannot fill a US and EU-sized hole,” as the Wall Street Journal put it in a recent analysis of the global economy.

“A euro-region crisis would also mean a ‘renewed, deep recession would be highly likely in Hong Kong, Singapore, Malaysia, Taiwan and Korea’,” Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse, was quoted as saying by Bloomberg today.

The business wire added that “Prior-Wandesforde calculated that exports to the euro zone account for more than five per cent of total GDP in Hong Kong, Singapore, Malaysia, Thailand and Taiwan.”

Malaysia has reported a 4.7 per cent GDP growth for the first three months of the year, a third consecutive quarterly drop since it posted a 7.2 per cent increase in the second quarter of 2011.

Analysts have warned Malaysia to brace for a significant slowdown here due to rising linkages with top trade partners including China, which economists say is headed for a sixth consecutive quarterly drop in growth, with worse to come.

Chinese exports, 19 per cent of which go to the European Union, slowed unexpectedly in April. They may fall 3.9 per cent this year if Greece exits the euro, compared with a 10 per cent gain without an exit, CICC projected.

Citigroup economists, who earlier forecast chances of the departure at as much as 75 per cent, are now assuming as a “base case” that Greece will leave at the beginning of 2013, according to Bloomberg.

It also reported that Bank of America Merrill Lynch strategists estimate the euro-region’s GDP would contract at least four per cent in the recession that follows, similar to the decline after Lehman’s 2008 collapse that resulted in the global financial meltdown.

“A Greek departure from the currency would inflict ‘collateral damage,’ says Pacific Investment Management Co’s Richard Clarida, a view echoed by economists from Bank of America Merrill Lynch and JPMorgan Chase & Co.

“At worst, it could spur sovereign defaults in Europe as well as bank runs, credit crunches and recessions that may spark more euro exits,” Bloomberg reported today.

Institute of International Finance managing director Charles Dallara also told Bloomberg the cost of a Greek exit would probably exceed the €1 trillion (RM3.9 trillion) it previously estimated.

According to the financial wire, JPMorgan Chase estimates a one percentage point slump in the euro countries’ economy drags down growth elsewhere by 0.7 percentage point.

Other countries facing sovereign debt crises such as Portugal and Spain, would also incur higher borrowing costs.

“If you let Greece go you would be sending the message that being a member of the euro zone is not necessarily permanent, which could be a disaster for some countries,” Laurence Boone, chief European economist at BofA Merrill Lynch in London, was quoted as saying by Bloomberg.

The euro has dropped about five per cent in the past month against the dollar, while the cost of insuring Spanish government and financial debt reached a record high this month.

European banks alone hold US$1.2 trillion of debt issued by Spain, Portugal, Italy and Ireland, according to the Bank for International Settlements in Basel and a regional crisis would likely see them pull back the €5 trillion invested in the rest of the world.

Malaysian Insider

 

The euro crisis

The Greek run

It is not a good idea for Greece to leave the euro. But it is time to prepare for its departure

May 19th 2012 | from the print edition

“GREXIT” is an ugly term for what may soon become an even uglier reality: Greece’s departure from the euro zone. As fury in Athens runs up against frustration with Greek recalcitrance in the rest of the European Union, the EU’s most troubled economy could be heading out of the single currency within weeks. If Greek banks suffer a mass run, as depositors withdraw euros for fear they will be forcibly converted into new drachmas, Greece’s fate could be settled even sooner.

Greece’s ascendant politicians, particularly Alexis Tsipras, leader of the radical left Syriza party, want to repudiate Greece’s rescue deal with its European and IMF creditors. The creditors, particularly Germany, are standing firm, rightly making clear that they will not be blackmailed into repeatedly rewriting bail-outs. If in fresh elections on June 17th the objectors have a majority, as the polls suggest, and if they renege on Greece’s bail-out deal, then the world will cut off the supply of rescue funds. It is hard to see Greece then staying in the euro.

There is already a whiff of inevitability about an outcome once deemed impossible. Central bankers now openly discuss the possibility that Greece may leave. As the impossible lapses into the inevitable, a growing chorus is arguing that it is even desirable. Advocates of an exit say that Greece would gain from a cheaper currency, and that the politics of forging a closer fiscal and financial union between the euro zone’s remaining members would be easier without a country that should never have joined in the first place. But it is wrong to pretend that a Greek exit is an easy or desirable outcome. Before it is too late, Greek politicians need to be honest about what an exit implies. And Europe’s politicians need to act far more boldly to protect the rest of the euro zone in case the worst happens.

Eirexit, Porxit, Spaxit and Ixit
Start with the Greeks. Most of them want to ditch the hated austerity policies that they blame for their plight. Mr Tsipras and his colleagues are fuelling the belief that Greece can somehow avoid austerity and still stay in the euro. In fact Greeks cannot avoid austerity, either within the euro or outside it.

It is true that Greece can survive within the euro only with a gruelling downward adjustment of wages and prices, which demands painful budget cuts and structural reforms. Yet even stronger medicine would be required if Greece left the euro. Cut off from foreign funds, the country would be forced into still tighter fiscal austerity. It would need a disciplined monetary policy and bold structural reforms to retain the gains from its cheaper currency and avoid hyperinflation. Discipline and reform are not familiar concepts in Greek politics.
Moreover a chaotic Greek departure would devastate the country’s political life, because Greece would risk expulsion from the single market and perhaps even the EU itself. A place that shed dictatorship as recently as 1974 would find exclusion from Europe traumatic. For a taste of what might ensue you only need to look at the rising power of extremists such as the neo-Nazi Golden Dawn party.

If Greek voters deserve greater honesty about the Grexit, so do those in the rest of the euro zone. Greece may be a small economy, but a Greek departure from the euro, amid brinkmanship and bluster, would not be a small event. Most obviously, exit—and the subsequent default on its private as well as official debt—would cost European banks, firms and taxpayers a lot of money (see article). And that is without counting the danger of a general contagion in weak euro-zone economies.

There is no formal mechanism for leaving the single currency. As depositors and bondholders across the euro zone factor in the increased risk that their assets could also fall victim to a break-up, other countries would come under pressure. Today’s much-ballyhooed “firewall” is not nearly strong enough.

Explore our interactive guide to Europe's troubled economies

 

People strive to avoid disaster. Yet the scope for political miscalculation and financial panic means that the worst might still happen—it may even come soon. Deposits are fleeing Greek banks at an accelerating pace. If financial panic forced a Greek exit before the vote, it would wreck the credibility of pledges that banks across the euro zone are safe. As the Greek economy shrinks within the euro, the economic arguments will become finely balanced—because capital will have fled and the debt burden loom larger. As Greece’s politics is bankrupted, the siren call of populism may grow irresistible.

These dangers require urgent action. First, to prevent a mass run, the European Central Bank must be ready to flood the Greek banks with liquidity—raising the losses to European taxpayers if Greece does eventually leave. And second, to stop a Greek exit being followed by a cascading loss of confidence in other peripheral economies, the euro zone must undergo much faster acceleration towards fiscal and financial integration than most European politicians will admit.

To safeguard banks in Portugal or Spain from runs, European policymakers will have to set up some form of euro-wide deposit insurance. And to reassure investors in the sovereign-debt markets, there will have to be much quicker progress to some form of debt mutualisation among the single currency’s members. The Europeans should have started work on these things during the lull in the crisis earlier this year. Germany resisted that. Now these changes must be done in a rush.

A vote to rock democracy’s cradle
The Greek election is in effect a referendum on whether the country will stay in the euro. It is not completely without hope. A new Greek coalition which vowed to stick to the rescue deal would in fact gain some help from the rest of Europe. At the same time, with the promise of a common banking backstop and some form of Eurobonds, the euro would at last start to look as if it could survive and the dangers of contagion would fall away. And if Greece were an isolated problem, it would be much easier to nurse slowly back to health.

The financial re-engineering of Europe is a prerequisite for the euro to survive. Greece is bringing forward that moment of truth. And yet politicians, particularly in Germany, have still to accept the logic, let alone explain it to voters. The prospect of a Greek exit means they must begin to do so—and fast.

Europe in limbo

Europe’s weaker economies are in the grip of a worsening credit crunch

May 26th 2012 | London, Madrid and Rome

THE joke recounted by the boss of a large Italian bank is an old one, but it captures the moment. Two hikers are picnicking when a bear appears. When one laces up his boots to run, his friend scoffs that he can’t outrun a bear. The shod hiker retorts that it is not the bear he needs to outrun, merely his fellow hiker. “We’re sitting at the picnic with our boots still on,” says the bank boss.

As policymakers and pundits try to work out the effects of a Greek exit, banks and investors have already been taking precautions. One course of action has been to pull money out of more fragile markets. Never mind the weakest economies like Greece, Ireland and Portugal; Spain and Italy have also lost foreign bank deposits of about €45 billion ($56 billion) and €100 billion respectively from their peaks. Add in things like sales of government bonds by foreigners (see chart 1), and capital flight is probably equal to about 10% of GDP in those countries, say Citigroup analysts. Such outflows are hard to stop.

The European Central Bank (ECB) has filled this funding gap by providing liquidity to the banks. But that has in turn reinforced the second precautionary tactic: matching assets and liabilities within countries as much as possible. It is a common refrain from bankers that the euro area no longer functions as a single financial market, although that has the paradoxical advantage of making a break-up less destructive. Banks have used ECB loans to borrow from the national central banks of the countries in which they have assets; that should mean that both sides of the balance-sheet would get redenominated in the event of a euro exit.

Much of that ECB liquidity is meant to find its way into the real economy, of course. But the third precautionary technique, for both lenders and borrowers, is to hang fire while uncertainty is so high. The Economist has compiled a credit-crunch index, comprising a number of measures on everything from bank lending to the cost of buying insurance against default for banks, firms and sovereigns in the euro zone. A single index disguises big differences between weaker and stronger states, but it shows that credit is crunchier now than it was at the height of the banking crisis in 2008 (see chart 2).

Much economic activity is being strangled as a result. In Spain firms have put bond issues and asset sales on hold. Volatility makes it almost impossible to value an asset, bankers say. The Catalan government failed to sell 26 buildings in Barcelona earlier this year for about €450m because one of the bidders wanted to introduce a clause that said rents would be paid in dollars in the event of a euro break-up; the other bidder pulled out because it had been told by headquarters to hold off on deals in southern Europe.

The number of Spanish companies filing for bankruptcy climbed by 21.5% in the first quarter. Nearly a third of these were in the property or construction industries, but the rot is spreading. Alestis, an aeronautical supplier to aircraft manufacturers, filed for bankruptcy earlier this month after failing to reach an agreement with banks to refinance its debts.

The sound of credit crunching can also be heard next door in Portugal, where loans to non-financial companies fell by 5% in the first quarter compared with the same period last year, and credit to households by 3.6%. One of the conditions of the country’s bail-out programme is that banks should reduce their total loans to 120% of assets. The quickest way to do that is to avoid making loans.

Conditions are little better in Italy. The province of Varese, near Milan, is a manufacturing heartland: its factories make plastics, textiles and a range of engineering products. Once firms there griped about poor infrastructure and red tape; now the credit squeeze is their main complaint. The local bosses’ association says that 40% of firms were hit by lowered borrowing ceilings between January and March, and 15% were told to pay back loans. Banks turned down 45% of requests for new funding.

Those loans that are extended carry hefty interest rates, in part because higher sovereign-borrowing costs have a knock-on effect on banks’ funding costs. Differences in sovereign rates can be self-reinforcing, especially when German firms across the border are rivals. “A marginal northern Italian company competing against an equal company in Bavaria will go bust,” says the boss of one bank. “Then the cost of risk goes up and has to be shared by all the other small companies.”

If firms cannot borrow from banks they lengthen payment terms to their suppliers, exacerbating the credit problem, says Michele Tronconi of Sistema Moda Italia, a body representing textiles and clothing firms. Fashion is Italy’s second-largest export industry, but no sector has a higher level of non-performing loans.

This credit squeeze will have tightened since Greece’s inconclusive election this month. That further dents growth prospects: estimates by Now-Casting, a forecasting firm, suggests that euro-zone GDP will contract by 0.2% in the second quarter. That in turn risks worsening the debt dynamics of the zone’s peripheral countries at just the wrong time. Policymakers keep trying to buy time to solve the crisis, but they may be only speeding the end they are trying to avoid.

Source: The Economist

America's potential GDP

Remembering when the future kept getting bigger 

May 24th 2012, 17:17 by G.I. | WASHINGTON 

HOW big can the American economy grow? This week’s Free exchange column tackles the critical question of America’s potential: the maximum output it can sustain given its endowments of capital, labour and technology.

The article notes that economic growth since the recession ended three years ago has averaged 2.5% a year. That is roughly the trend rate of an economy already at full employment. Given that America is still in a deep post-recession hole, such a rate should not be enough to reduce unemployment, and should have left so much spare capacity that inflation ought to have fallen sharply. Instead, unemployment has dropped nearly two percentage points in that time and underlying inflation, after dipping below 1%, is above 2%.

While various idiosyncratic factors can explain this behaviour, it could also be a sign that the crisis has significantly eroded potential GDP, and the output gap is much smaller than generally realised. (This is a topic on which I’ve blogged before, here, here and here.) Since 2005 the Congressional Budget Office has revised down its estimate of potential GDP in the year 2012 by 5%.

Doing this exercise for the late 1990s, a completely different picture emerges. As the accompanying chart shows, in 1997, the CBO estimated potential in early 2001 would be $8.3 trillion (in constant 1996 dollars). By 2001, it had revised that up a whopping 12%, to $9.3 trillion, a figure that looks more reasonable given what we now know GDP actually did.

The CBO’s shifting estimates of potential illustrate two things. One is that potential is almost impossible to pin down in real time since the economy’s equilibrium long-run stock of capital and labour are so difficult to estimate with precision; so we look at what GDP actually did as a hint of what it can do. 

Second, and more important, is that supply (i.e. potential) is itself affected by demand. Potential output is the product of capital, labour and innovation. Since economic booms bring more investment, more risk-taking, and higher labour force participation, they push up measures of potential. The opposite is true of busts. If overall spending is depressed long enough, many workers will experience prolonged unemployment that degrades their skills, making them unemployable; they may eventually quit the labour force altogether. 

Depressed sales also discourage investment in new technology and research, which can degrade productivity and efficiency for years to come. (A counter argument is that depressions may hasten the migration of capital and labour from dying, low-productivity sectors to growing, high-productivity ones. Apparently, scholars are still arguing over whether this happened in the 1930s.) Powerful evidence for this phenomenon comes in a paper that my colleague A.C.S. discussed Monday which found most structural unemployment begins during recessions.

It follows that efforts to preserve demand can also preserve the economy’s supply-side potential. That, too, seems to be one of the lessons of international experience. It is not too late for America to limit most of the long-run damage of its crisis; but it may soon be.

(Note: special thanks to Brent Moulton of the Commerce Department’s Bureau of Economic Analysis for technical advice on how to convert real GDP figures to a common base year.)

Source:  The Economist

U.S. space tourism set for takeoff by 2014, FAA says

By Irene Klotz | Reuters – 

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CAPE CANAVERAL, Florida (Reuters) - The Obama administration is preparing for a space tourism industry that is expected to be worth $1 billion in 10 years, the head of the Federal Aviation Administration's commercial space office said on Tuesday.

Rocket planes and spaceships to carry passengers beyond the atmosphere, similar to the suborbital hops taken by Mercury astronauts Alan Shepard and Virgil "Gus" Grissom in 1961, are being built and tested, with commercial flight services targeted to begin in 2013 or 2014.

"Based on market studies, we expect to see this type of activity result in a $1 billion industry within the next 10 years," George Nield, associate administrator for the FAA's Office of Commercial Space Transportation testified before the House Subcommittee on Space and Aeronautics.

"This is a new and growing industry. If you look at the last 25 years, almost all the launches were for the same basic purposes - to launch a satellite, such as a telecommunications satellite, to orbit - and that level of business for that part of the industry is continuing today. But there are several new segments that we see just on the horizon," Nield said.

The boom in launch business is expected to begin this year, he said in the hearing, which was carried via webcast.

NASA has hired two companies, privately owned Space Exploration Technologies and Orbital Sciences Corp., to fly cargo to the International Space Station, a $100 billion research complex orbiting 240 miles above Earth. The contracts are worth a combined $3.5 billion.

"We know that's going to start soon, probably this year," Nield said.

Space Exploration Technologies, which is known as SpaceX and owned and operated by entrepreneur Elon Musk, is preparing for a trial run to the station on April 30.

"We need to be careful not to assume that the success or failure of commercial spaceflight is going to hang in the balance of a single flight," NASA space station program manager Mike Suffredini told reporters during a separate news conference.

"If they have problems along the way, it's the kind of thing you experience in this difficult process of not only trying to launch into low-Earth orbit, but do the next-hardest thing which is to try to rendezvous safely with another spacecraft in orbit," Suffredini said.

Also on the horizon are commercial flights that reach at least 62 miles above the planet, an altitude that exposes passengers to a few minutes of weightlessness and a view of Earth juxtaposed against the black sky of space.

In addition to tourism, suborbital spaceflights are being marketed and sold to research organizations, educational institutes and businesses that want to conduct experiments and fly payloads in space.

One company, Virgin Galactic, an offshoot of London-based Richard Branson's Virgin Group, already has collected about $60 million in deposits for rides that cost $200,000 per person.

"Exactly when those launches will start is hard to predict, but it looks very very clear it's going to be in the next one or two years," Nield said.

(Reporting By Irene Klotz)

Source: Yahoo News 

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