Thursday 22 September 2011

It Can Always Get Worse …

The IMF recently issued its World Economic Outlook, a document that has the advantage of comparing trends across the global economy. Although the text is written in international policy bureaucrat newspeak, luckily the charts and tables more or less speak for themselves. Below I have copied some of the more salient figures to illustrate how the crisis has recently intensified in the major capitalist economies. In addition, I note some points from recent press reports that illustrate how trouble is also brewing below the surface.

Economic stagnation after the failure of stimulus policies

The first chart shows the economic cycle based on data from purchasing manager surveys. These surveys track the broad economy closely, and the reports are released more promptly than official GDP statistics. The 50 level for the index in the chart means no change in output; above 50 means growth, below means contraction. After collapsing in 2008, global output growth resumed from mid-2009, but now economies have dropped back towards stagnation. In general, the ‘advanced’ economies are doing worse than the ‘emerging’ economies, partly because the latter did not take on as much crippling debt.[1]

The basic message from this chart is that all the extreme policy measures enacted since 2008 to boost the global economy – huge budget deficits, the public sector taking on private sector liabilities, zero interest rates, etc - have failed to restore conditions for profitable capital accumulation and growth.

The latest policy innovation from the US Federal Reserve has not changed anything, and global equity prices dropped by 3-5% today.[2] The IMF itself is left asking governments that have low borrowing rates to borrow more and spend more to boost demand in the global economy. But these same countries are afraid that more borrowing may find them also on the road to financial ruin.

The view from the end of the road

That road does not look attractive. This is shown in another chart from the IMF report, depicting the extra amount of interest over Germany’s that governments in the euro area pay to borrow for two years. As can be seen from the left hand section of the chart, the curve for Greece moved towards 8000. This means the market was demanding it paid an astonishing 80% per annum more than Germany! (Today it was much lower, a mere 65% premium!) Less extreme are Portugal and Ireland, but an extra 10-15% is still catastrophic, even if it is not as surreal. On the right hand section of the chart, the scale of premium borrowing rates is far less for the stronger countries (an extra 0-5%), but Italy, Spain and Belgium stand out as under pressure from credit markets.

Germany clearly remains in the best position: the German government can borrow for 10 years at a rate of just 1.7%. However, it will be wary of spending to try and boost the global economy when it is widely seen as liable for bailing out indebted euro members.

Behind the scenes

All this looks bad, but behind the startling pictures things are actually worse. Take for example, Siemens. Last year the German industrial group set up its own bank, partly because it would then have more financial flexibility and partly because it was worried about the other (mainly European) banks with which it dealt. A few weeks ago it withdrew €500m from a French bank and added to the €4-6bn deposits that it holds directly with the European Central Bank.[3] This company’s concern is not exceptional, in fact European banks face serious problems getting cash from their counterparts in the money markets.

This is shown by the wider ‘spreads’ that European banks are paying for funds. The credit risk of lending to them has risen, so that if they can get any cash at all, they have to pay more to borrow. French banks are seen as the most at risk among the major European countries, given their exposure to Greece and other indebted countries, although they are far from being the only ones. Senior executives from BNP Paribas are currently on their way to tour the Middle East to try and drum up friendly investments from local potentates.

Safe havens?

In the latest phase of the crisis, the US dollar has strengthened against most other major currencies. This is not because the US is a ‘safe haven’ in troubled times, even though it has more weapons than anybody else, but because, for now, it may look in better shape than crisis-stricken Europe. The definition of safety in capitalist economic terms is a movable feast, depending on where next the focus of panic falls. This is difficult to forecast, especially because the cracks in the system are manifold.

Another recent IMF publication, its Global Financial Stability Report, has a useful colour-coded review of the crumbling structure of the major capitalist economies. This is shown in the next chart (you may have to increase the viewing size to see the numbers clearly) . Red means bad; amber means not good, green means OK, and possibly good, or at least better (white means no data available).

The data are percentages of 2011 GDP, except for bank leverage that is the ratio of bank assets to bank equity.[4] Most of the red boxes are on the European side, showing high levels of debt and bank leverage, principally in the suspected countries. However, disturbingly for those who think Germany is completely safe, its banks have the highest leverage in the world at 32! The US gets off relatively lightly on this assessment, with a few green boxes. But it is not clear how far the IMF ignores the huge loss potential to the government of the US Fed owning nearly a trillion dollars of mortgage assets, and its other implicit financial guarantees. Overall Germany and Canada seem to do best (though there are some gaps in the Canada assessment). Interestingly, the euro area as a whole is not so dreadful, but this is an average of a range from very bad to not bad. The UK has a mixed picture that makes it reluctant to boost spending and raise its risk level.

So, there are plenty of pressure points ready to explode as the crisis enters another phase. As the movie Airplane! might have noted, this is a bad year for capitalist policy makers to quit smoking.

Tony Norfield, 22 September 2011

[1] See the chart of the debt levels in different countries in my article ‘Debt and Austerity’, 8 August 2011, on this blog.
[2] See my article ‘Operation Twist’, 21 September 2011.
[3] See ‘Siemens shelters up to €6bn at ECB’, Financial Times, 19 September 2011.
[4] See my article ‘Bank Profits & Leverage’, 25 August 2011, for more on detail this.