We Are Still Not Better Off

Euro zone finance ministers backed a 10-billion euro bailout for Cyprus and the European Commission will try to help the island’s economy grow again with better use of EU structural funds. The first tranche of 10 billion euros will arrive into the island in mid-May. Cyprus will have to find another 13 billion euros by nationalization of deposits over 100,000 euros in banks. Cyprus will also raise taxes, cut spending and implement structural reforms to improve its public finances. It is miraculously estimated that its debt will fall to 104 percent of GDP in 2020 from a peak of above 126 percent in 2015. It is definitely too optimistic if we consider that its whole business model (as a tax haven) was practically closed down. We can expect the same scenario as in Greece: deeper recession, higher unemployment, higher levels of debt to GDP ratio than estimated caused new rescue conditions and rescue funds. In the meantime, things just got much worse again in Greece. The unemployment rate hit another record level (27.2%) and youth unemployment is close to 60%. The number of employed people in Greece (3,617,771) is now nearly as large as the entire inactive population (3,346,423). It means that one employed citizen must work to finance one inactive citizen.

Luxemburg – another tax haven – will consider measures to make its banking sector more transparent, meaning that they are considering cooperation with foreign tax authorities and exchange of information within the European Union about bank depositors in its territory. He who is without sin can cast the first stone is an old saying and it can be used in the situation within the western world. Austria was under fire because of its banking secrecy as well last week. Austria Finance Minister responded to this criticism by emphasizing the fact that Austria is not some kind of exemption, and accused London and Washington of failing to close international tax loopholes in the likes of Delaware and the Channel Islands.

The engine of Europe – Germany – will not save anybody if economy is weak. German imports and exports fell sharply in February for the third time in the last four months, which indicates some problems. On the other hand, analysts think that domestic demand is still expected to drive growth this year, helped by a strong labor market, solid wage hikes and favorable financing conditions.

Upner is not the only one who thinks that something terrible could happen in Spain or Slovenia. The EU commission has released a report on “macroeconomic imbalances” in 13 EU countries, including Britain, singling out Spain and Slovenia for warnings over “excessive” failings. Prices of Spanish housing market dropped another 9.7% YoY in Q4 2012 in the meantime. It has been one of the biggest drops on record and prices are on the 2004 levels. The only outcome will be that Spanish banking sector will have more toxic loans and more existing toxic loans will become even more toxic. A similar situation is in Slovenia. The commission also used unprecedentedly strong language to criticize France´ policy and stated that low French competitiveness and high debt could threaten the EU’s single currency.

Portugal’s constitutional court has complicated situation in Portugal. The court ruled out that planned cuts in salaries of state workers and payments to pensioners were in breach of the constitution. Portugal will have to find other measures to fulfill conditions of its bail-out plan but it could be quite problematic if some public spending cuts are unconstitutional. The question which I have in mind is what the constitutional court would decide if Portugal really went bankrupt and really had no money to pay its workers and pensioners.

China starts to be as similar as any other western world country. Their total debt – consisting of corporate debt, consumers loans, government debt and other “shadow debts” – is expected to rise to a whopping 240% GDP in 2013 and very probably will continue rising from there at an ever faster pace. And China is facing also another core western problem; rising wages and loosing competitiveness based on low labor costs. More and more companies are seeking other destinations within the region which offer better wages. One of the places of interest is Cambodia, which is being lifted out of poverty by foreign investment inflows driven by higher Chinese wages.

FED released its notes from the FOMC meeting. The most important information was that some members of the committee were reconsidering current measures and suggested stopping monthly purchases of US bonds by the end of this year. If anybody is unsure whether this means QE may be ending, the answer is, of course, no. The White House cut its forecast of GDP growth for the U.S by 0.1 % and assured that “In the 21st century, real GDP growth in the United States is likely to be permanently slower”. Plans for a whole century ahead is what I relish most.

Matus Posvanc