April 18, 2021

News Analysis: In Rally Over Euro Deal, Relief Mixed With Wariness

The positive sentiment was reinforced by a report that the United States economy had grown at an annual rate of 2.5 percent in the third quarter, the best performance in a year, adding to confidence that the United States will not experience a double-dip recession and prompting investors to put some of their long-dormant cash to work.

But even amid the surge in stock markets worldwide, there were reservations in some quarters. The response in the European debt markets, the epicenter of the crisis, was muted, with little relief reflected in the interest rates that Spain, France and Italy must pay on their bonds. There has been concern, in particular, that Italy’s huge accumulated debt might be the next focus of a bailout effort.

The plan agreed to by European leaders in Brussels early Thursday, the subject of weeks of contentious bargaining, has three main planks: an effort to recapitalize weak euro-zone banks, an increase in the size and scope of Europe’s main rescue fund, and a proposal that banks take a 50 percent write-down on their Greek bonds.

It was the latest in a series of gatherings over the last year seeking to keep the sovereign debt problems of Greece and other vulnerable European nations from radiating through the financial system on the continent and beyond. Each meeting seemed to head off an immediate crisis, only to prove insufficient within months or weeks and prompt a new search for solutions.

And as always with the grandly presented European rescue plans, the devil with the latest one is in the details. Despite Thursday’s exuberance, many investors expressed caution as to how the plan would hold up in the coming days and weeks.

For one thing, while the agreement by banks to write down 50 percent of Greek debt was welcomed, the deal’s success is conditioned on investors’ agreeing to take such a large loss. If a large number of investors refuse to accept such a loss, then the plan loses its voluntary status and would thus become a default — creating more unease and panic in the markets.

Moreover, private investors are not obliged to take the write-down, and two big holders of Greek debt, the International Monetary Fund and the European Central Bank, are not granting debt relief. So it is not clear how much of Greece’s overall sovereign debt of 340 billion euros ($480 billion) is going to be forgiven.

And it remains to be seen whether the debt relief for Greece will prompt other countries — Spain, Italy, Portugal or Ireland — to seek similar treatment.

Investors have also questioned whether the answer to the euro zone’s debt crisis is taking on even more debt.

The main bailout fund, the European Financial Stability Facility, relies on the sterling credit of Germany and France for its borrowing power. Euro zone leaders have promised to use the fund to both provide insurance for investors looking to buy risky Italian and Spanish bonds and to increase its borrowing capacity to as high as 1 trillion euros.

But it has been criticized as being too small and cumbersome and too reliant on France, which may well see its AAA rating taken down a notch because of its own debt and deficit problems. Such a move would hurt the vehicle’s ability to issue bonds and attract capital from investors.

It also remains unclear if Europe, as it has promised to do, would be able to entice Asian and Middle East investors to put money into   vehicles that would be linked to the bailout fund.  

Europe’s 106 billion euro answer for its bank problem may also raise more questions than it answers. In contrast to bank rescue plans in the United States and  Britain, European governments are not injecting funds directly into the banks. Instead they are asking that banks significantly raise their capital level, to 9 percent by next year. 

But for banks that have been weakened from their exposure to dubious European debt, raising money from private investors will be difficult — especially as many of the likely sovereign fund candidates are the ones that suffered deep losses from investing in troubled American banks in 2007 and 2008.

All in all, despite the relief that an immediate crisis over Greece’s debt had been averted, it seemed clear that the continent’s tightly woven economic and financial systems remained fraught with risk.

The yield on Italy’s 10-year bond, which recently hit a high of 6 percent on concern over the country’s debt and commitment to fiscal reform, remained uncomfortably high at 5.8 percent. And the interest rates for Spanish and French bonds narrowed only slightly as well, reflecting a broader skepticism that this plan will provide a magic cure for Europe’s debt problems.

This article has been revised to reflect the following correction:

Correction: October 27, 2011

Because of an editing error, an earlier version of this article referred imprecisely to United States economic growth in the third quarter. The 2.5 percent figure represents an annual rate.

Article source: http://feeds.nytimes.com/click.phdo?i=e23087b7dbc38a8044d130ad21300ac9

G-7 Faces Calls for Urgent Action to Spur Growth

MARSEILLE, FRANCE — With the prospect of a drawn-out recession in the United States and Europe, officials of the Group of 7 industrialized nations faced calls Friday to act urgently to stimulate growth, even at the risk of running up deficits that have brought some countries under pressure in global financial markets.

A day after President Barack Obama pressed the Congress to enact a $447 billion package of tax cuts and new government spending to try to create jobs in the United States, Treasury Secretary Timothy Geithner insisted that such an economic stimulus would reduce the odds of America slipping into a double-dip recession.

But he warned that headwinds from Europe’s deepening debt crisis risked hitting the United States at a time when it is still weak. In remarks that indicated Washington considers Europe’s problems to be a major threat, he admonished European leaders in a letter published in the Financial Times to take “more forceful action” to show they are committed to resolving their problems.

“Europe is still under enormous pressure,” Mr. Geithner said in an interview at the G-7 with Bloomberg Television. The crisis on the continent has been a “significant” factor in the U.S. slowdown, he added.

Concerns about Europe’s ability to contain the crisis deepened Friday when Jürgen Stark, a German who sits on the executive board of the European Central Bank and has opposed the bank policy of buying bonds from Greece and other troubled countries to support them, abruptly announced his resignation. European and U.S. stocks were off sharply Friday and the euro lost more than 2 cents against the dollar.

Europe’s leaders have struggled to prevent a crisis that started in Greece nearly two years ago from contaminating larger countries like Italy and Spain, as worries about high debt and deficit levels, and the health of European banks that hold the bonds of governments hit by the crisis, spread. Even France — which, together with Germany is footing most of the bill for the crisis — has came under attack as investors grow more nervous about the state of its banks.

Of course, the United States is not blameless. As the world’s largest economy, its slowdown, ignited by the global financial crisis that blew up on Wall Street in 2008, has ricocheted through other economies, none of which has ever really recovered since then.

The downgrade to the United States’s AAA rating by Standard and Poor’s ratings agency last month also did more damage to financial companies than initially thought, for instance by forcing banks to re-price the risks of what was once considered a totally risk-free asset — U.S. Treasury securities.

That event sparked particular angst in China, the world’s largest holder of U.S. Treasuries. Although China is one of the few locomotives of global growth, Beijing is facing the twin danger of seeing its two largest customers — the United States and Europe — slowing simultaneously while it struggles to encourage growth in its own domestic demand.

China has already stepped in, albeit mildly, to help support the euro by buying the debt of Spain and Greece, two of the countries hit hardest by the crisis.

Premier Wen Jiabao and other senior Chinese officials have talked for many months about their intention to buy more euro-denominated bonds with the country’s $3.2 trillion in foreign exchange reserves, portraying this as a way to cement ties to Europe.

But bankers and economists say that while China wants to be helpful and appears to have poured tens of billions of dollars worth of foreign reserves into euro-denominated investments already this year, Chinese officials are still cautious about taking big risks with the country’s nest egg.

Washington is also ready to help ensure that Europe’s problems do not taint the United States, Mr. Geithner said. But he did not specify how, other than allowing that he is in regular consultation with his European counterparts.

“What well see in coming months is the Americans and Asians will become more open in their expression of concern about way the Europeans are handling the crisis, because unless they do address key problems, including the banks, there is a risk this is going to trigger a Lehman 2,” said Simon Tilford, the chief economist of the Center for European Reform in London. “So far they have kept their counsel publicly. But now they recognize Europe’s strategy is not working, and they are starting to panic.”

The G-7 ministers themselves, however, were not expected to announce any coordinated action or new initiatives to shore up growth in the advanced world, which the Organization for Economic Cooperation and Development Economic said Thursday is near stagnation and set to remain limp through the rest of the year, although a downturn on the scale of the last one appears unlikely.

Christine Lagarde, the chief of the International Monetary Fund, also urged Europe’s policymakers Friday to take bold and unified action to see the global economy through what she described as a “dangerous phase.”

In a speech delivered in London before she headed to join G-7 finance ministers under a blazing sun at the Palais du Pharon, a Napoleonic-era building perched by the azure waters of Marseille’s Vieux Port, Ms. Lagarde emphasized that governments with surpluses or the flexibility to use more direct fiscal action should do so.

The world is “collectively suffering from a crisis of confidence in the face of a deteriorating economic outlook,” she said. “Countries must act now and act boldly to steer their economies through this dangerous phase of the recovery.”

Ms. Lagarde also reiterated the fund’s concern about the health of Europe’s banks. Much to the irritation of European Union officials, she recently suggested that the euro zone’s bailout fund should be used to provide a big injection of capital into European banks.

On Friday, she did not back away from that position. “Some banks need additional capital,” she said, warning of the possibility of “a debilitating liquidity crisis.”

Keith Bradsher contributed reporting from Hong Kong and Landon Thomas Jr. from London.

Article source: http://www.nytimes.com/2011/09/10/business/global/g-7-faces-calls-for-urgent-action-to-spur-growth.html?partner=rss&emc=rss

Economix Blog: Laura D’Andrea Tyson: Recovering From a Balance-Sheet Recession


Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Unprecedented volatility on global capital markets and a sharp correction in global equity prices are warning signs that the United States, Europe and Japan are teetering on the brink of a double-dip recession.

Today’s Economist

Perspectives from expert contributors.

In the United States, growth in the first half of the year was far slower than predicted, and forecasts for the full year have been marked down. Even if the economy does not slip back into recession, the jobs crisis will persist, because growth will be barely enough to absorb the flow of new entrants into the labor force and certainly not enough to make a significant dent in the unemployment rate.

To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand brought on by the 2008 financial crisis that burst the debt-financed housing and spending boom preceding it.

This boom displayed all of the features of a major financial crisis in the making — asset price inflation, rising leverage, a large current account deficit and slowing growth. And the recession that followed had all of the features of what Richard Koo called a “balance-sheet” recession — a sharp decline in output and employment caused by a collapse of demand resulting from vast wealth destruction and painful de-leveraging by the private sector.

The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning.

Real per-capita net worth in the United States is back at its 1999 level. The real per-capita value of housing equity has fallen to its 1978 level, and housing prices are still slipping in many parts of the country.

Household debt has come down to about 115 percent of disposable income, largely as a result of foreclosures, 15 percentage points below its peak of 130 percent in 2007 but significantly higher than its 1970-2000 average of 75 percent. Household saving has risen to about 5 percent of disposable income, far above the 2005 low of 1.2 percent but far short of the 1970-2000 average of 8 percent.

Consumption is the major driver of aggregate demand in the United States economy, and since early 2008 it has grown at an average rate of 0.5 percent in real terms. Not since before World War II has consumption growth been this weak for such an extended period.

Despite misleading claims by Republican members of Congress and by Republican candidates on the presidential campaign trail that the size of government, regulation and excessive taxation have caused the jobs problem, business surveys repeatedly have identified weak demand as the primary constraint on job creation.

As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.” And the majority of economists agree on this diagnosis. They also agree that the recovery from a balance-sheet recession can be agonizingly long, with significantly slower growth and a significantly higher unemployment rate for at least a decade.

Recent data indicate that the United States is on such a course, and many economists are now drawing comparisons between it and Japan during the two “lost decades” following Japan’s 1989-90 financial crisis and ensuing balance-sheet recession.

A recent study by the economist Robert Gordon confirmed that the shortfall in private-sector demand, especially the demand for consumer services, residential and commercial construction, and consumer durables, is the primary cause of shortfalls in production and jobs.

He also found that strong net exports, in response to growing aggregate demand abroad, has reduced the jobs gap by about one million jobs, but these gains have been offset by cutbacks in domestic spending, including spending by state and local governments.

In other recoveries during the last 50 years, public-sector employment increased. This time it is falling: during the last year the private sector added 1.8 million jobs while the public sector cut 550,000.

What should policy makers do to combat the large and lingering job losses that result from a financial crisis and balance-sheet recession? Mr. Koo, whose book on Japan’s experience should be required reading for members of Congress, showed that when the private sector is curtailing spending, fiscal stimulus to increase growth and reduce unemployment is the most effective way to reduce the private-sector debt overhang choking private spending.

When the Japanese government tried fiscal consolidation to slow the growth of government debt in response to International Monetary Fund advice in 1997, the results were economic contraction and an increase in the government deficit. In contrast, when the Japanese government increased government spending, the pace of recovery strengthened and the deficit as a share of gross domestic product declined.

The credit rating agencies gave Japan a lower credit rating than Botswana, but this had no impact on the yield on Japanese government bonds. Contrary to the rating “experts,” investors were worried about a prolonged stagnation, not about the ability of Japan’s government to roll over its debt — and they were willing to buy this debt with their growing savings surplus. (Richard Koo, “U.S. Credit Rating Finally Downgraded,” Nomura Equity Research Report, Aug. 9, 2011)

Investors have had a similar response to the downgrade of United States government debt by Standard Poor’s. To investors, the downgrade signaled the possibility of premature austerity and heightened the risk of a double-dip recession, and this drove the yield on 10-year government debt to levels not seen since the 1950s.

The market understands that the most important driver of the fiscal deficit in the short to medium run is weak tax revenues, reflecting slow growth and high unemployment, and that additional fiscal measures to put people back to work are the most effective way to reduce the deficit.

Every one percentage point of growth adds about $2.5 trillion in government revenue. An extra percentage point of growth over the next five years would do more to reduce the deficit during that period than any of the spending cuts currently under discussion. And faster growth would make it easier for the private sector to reduce its debt burden.

But what about the growth of public-sector debt that would result from more fiscal stimulus? Some economists worry that the growing government debt will itself become a constraint on growth. But that certainly is not the case now — with weak private-sector demand and a huge output gap, spending and borrowing by the government are not crowding out spending and borrowing by the private sector.

What about the fact that by some estimates the debt-to-gross domestic product ratio is approaching the 90 percent threshold identified by Carmen Reinhart and Kenneth Rogoff as likely to reduce growth by a percentage point a year? As Robert Shiller has pointed out, the causality between this ratio and growth runs in reverse when the economy has lots of slack as it has now.

Under these conditions, slow growth leads to a higher debt ratio, not vice versa.

The United States government can currently borrow funds and repay less than it borrows in constant dollars. Surely there are many job-creating investment projects in education, research and infrastructure that would earn a higher rate of return. I argued in favor of more government spending on such projects and the introduction of a capital budget in my previous Economix post.

Even Professor Rogoff acknowledged in a recent interview that he would support more government spending on infrastructure, and there is widespread bipartisan support for infrastructure investment in the Congress and in the business and labor communities.

Unfortunately, the current extension of the highway trust fund and surface transportation bill expires on Sept. 30, as does the authorization of the federal gasoline tax and highway user fees to finance them. Now there are signs that Republicans in Congress, egged on by Tea Party attacks on the size of government, may block both measures, precipitating more than 100,000 job losses a month.

In a balance-sheet recession caused by too much private-sector debt, the government should also use its resources to catalyze debt workouts and debt reductions.

In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabilize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending.

This would translate into stronger private-sector demand and more jobs. Many economists, including me, warned in 2008 that the economy would not recover until the housing market recovered, and the housing market won’t recover until the debt overhang from the housing bubble is reduced through programs that shift some of the burden to creditors from debtors.

Increases in public spending along with housing relief and expansionary monetary policy helped the economy recover from the Great Depression in the 1930s. The same combination of policies can help the United States recover from the Great Recession now.

At the end of World War II, the federal debt-to-G.D.P. ratio was 109 percent, one and a half times what it is today. Yet after the war the economy thrived, and no one questioned the government’s ability to pay its debt over time.

We should now be fighting a war against unemployment and the waste of resources, poverty, inequality and the hopelessness it causes.

Government debt may rise as a result of this war effort, but no one will question the government’s ability to pay its debt provided Congress and the president commit now to a balanced multiyear plan to reduce the long-run deficit once the war against unemployment has been won and Americans are back at work.

Article source: http://feeds.nytimes.com/click.phdo?i=0dd3aad8b31d8779aaf704a3da0fbf3c

Room For Debate: A Chance to Reshape the Economy


shopping frenzySpencer Platt/Getty Images

With all the volatility last week, it can feel as if the economy is collapsing around us. Maybe it is. Maybe we’re on the second downhill slide of a double-dip recession. But eventually the worst will be behind us, and we’ll face the question: What’s ahead?

Is this dragged-out downturn a chance for big changes in our economy, like Warren Buffett’s proposal to narrow the rich-poor divide through higher taxes on the very rich? As the U.S. recovers, should it be less dependent on consumer spending? Or could unemployment push the American work force toward shorter workweeks, like the European norms?

 Read the Discussion »


Topics: Economy, recession, unemployment


Article source: http://feeds.nytimes.com/click.phdo?i=f0458860ae46aa5ddc8c6bbc0a28138f

You’re the Boss Blog: Are You Prepared for a Double-Dip Recession?

Elizabeth Lunney, co-founder of ABC Language Exchange, is watching sales and preparing to make cuts.Ángel Franco/The New York TimesElizabeth Lunney, co-founder of ABC Language Exchange, is watching sales and preparing to make cuts.

She Owns It

Portraits of women entrepreneurs.

We just published an article that surveyed small-business owners on the impact of recent financial news, and their coping strategies for a possible double-dip recession. “We’ve been through this before,” said Elizabeth Lunney, who is co-founder and chief executive of the language school ABC Language Exchange and who shared her experiences with daily deal Web sites in a previous post. Here’s what she had to say:

“I’m looking at my numbers every single day and going through the list figuring out what I’d get rid of first. So far, we’re having our best year ever, but if I see that sales start to drop 10 to 15 percent in a week and see that it’s a trend over the next two or three weeks, I’ll start cutting. The water cooler, and other extras like employee lunches, will be the first to go. After that, I’ll consider asking the staff to take pay cuts, which I prefer to layoffs. Last time, I was the first to take a pay cut. I brought my salary down to what I needed to pay rent and eat bologna.”

How have you been coping with recent economic turmoil? Please share your experiences and survival tips.

You can follow Adriana Gardella on Twitter.

Article source: http://feeds.nytimes.com/click.phdo?i=fc4e8ab883190ccd7ff589e672bfc772

U.S. Posts Stronger Job Growth in July

The July gain, of 117,000, is hardly robust enough to produce a substantial change in the employment picture. Still, it is better than the previous months, whose job gains were revised slightly upward to 46,000 in June and 53,000 in May.

After the early morning announcement, stocks see-sawed throughout the day, with investors vacillating between encouragement that the jobs number was not worse and disappointment that the world’s economies are not on firmer footing.

Europe, in particular, is struggling to control a debt crisis that began in its smaller countries and now threatens the much bigger economies of Italy and Spain. A flurry of phone calls among European leaders led to announcements in Italy and elsewhere that reforms would be speeded up. Those who have been waiting for the United States economy to kick into high gear took little comfort in Friday’s jobs report from the Labor Department. Companies added 154,000 jobs in July, but state and local governments continued to backslide, shedding 39,000 jobs. The unemployment rate slipped a notch to 9.1 percent, from 9.2 percent in June, but that was mainly because some people had simply given up looking for work.

The news tempered, but did not silence, talk of a double-dip recession. “It gives us some temporary relief,” said Nigel Gault, chief United States economist at IHS Global Insight. “I suspect, though, that relief will probably not last too long as people refocus on what they think will happen in the future.”

Indeed, economists are now worried about the reduction in government spending outlined in the Congressional deal earlier this week to raise the country’s debt ceiling. Deep divisions remain between the two political parties on how to cut spending further at a time when many analysts worry that the economy can ill afford it.Speaking at the Washington Navy Yard as he announced new programs for returning veterans of the Afghanistan and Iraq wars, President Obama called for Congress to extend the payroll tax credit and emergency unemployment insurance, measures that are scheduled to expire at the end of this year.

“There’s no contradiction between us taking some steps to put people to work right now and getting our long-term fiscal house in order,” Mr. Obama said. “In fact, the more we grow, the easier it will be to reduce our deficits.”

Other signs that the recovery has slowed to a crawl are mounting. The Commerce Department reported earlier this week that consumer spending, which accounts for up to 70 percent of economic activity, actually declined in June for the first time in nearly two years. A closely watched survey of manufacturers showed that employment in July grew at a slower rate than in June and that new orders of factory goods actually fell. Companies like Merck, Cisco and Boston Scientific have all announced layoffs in recent weeks. Housing prices are still extremely weak.

Jan Kokes, president of Kokes Family Home Builders, which creates residential communities for 55-and-over buyers in Ocean County, N.J., said that his staff had shrunk from a peak of 220 in 2007 to 87 now. With average home sales down from 200 a year to just 30, he said, he has no plans to hire. “There really aren’t any jobs in the construction industry right now,” he said.

The typical precursors to increased hiring remained sluggish. Average weekly hours worked, which tend to rise as a sign that employers are maximizing their current staff, were flat in the latest month, and average weekly earnings nudged up only slightly.

In temporary work, which often ticks up as employers prepare to expand, there were no job addition in July.

Tig Gilliam, chief executive of the Adecco Group North America, said that while information technology, engineering and some other industry sectors were seeking more temporary workers, some others, like government and the mortgage industry, were not. “It’s the story of growers and shrinkers,” Mr. Gilliam said.

Article source: http://www.nytimes.com/2011/08/06/business/economy/us-posts-solid-job-gains-amid-fears.html?partner=rss&emc=rss

DealBook: Optimism Is Back, Says Top Private Equity Deal-Maker

Scott M. Sperling, co-president of Thomas H. Lee Partners, says the threat of a double-dip recession has lessened, and that crucial credit markets are “as robust as we’ve seen” since the financial crisis.

Article source: http://feeds.nytimes.com/click.phdo?i=089888774250c4375c50eb7d40504875