6 Documentaries on the European Sovereign Debt Crisis

The European sovereign debt crisis has been a dominant force in the banking system, financial markets, and global economy over the past couple of years. Each day we have a different headline, either explaining how things are getting worse and worse, or how a big solution is imminent. But what is the cause of the crisis? How did it come about? And how will it ultimately play out? These documentaries provide a concise and engaging means of understanding the euro zone debt crisis.

1. The Great Euro Crash
This documentary starts the viewing by explaining the well intentioned ideas underpinning the Euro. Along with the history of the Euro, it also explores the present crisis and looks at how the future shape of the Euro may evolve. There's a few interesting interviews with present and past power brokers of Europe.

2. Debtocracy
The poster-child of the Euro crisis has to be Greece. Greece is a country that epitomises the crisis; it spent profligately, racking up large fiscal deficits and taking on more and more debt, all the while becoming less and less competitive with the rest of Europe. In many ways it was only a matter of time before Greece encountered a crisis. But what's next for Greece? This documentary explores the causes and potential solution to the Greek crisis.

3. Debt and Redemption
This documentary focuses on one of the many enabling factors of the crisis: derivatives and investment bankers. While ultimately it was poor economic policies, low productivity and competitiveness, and fiscal mismanagement that caused the crisis, this additional factor of mis-sold derivatives and financial contracts certainly didn't help.

4. Catastroika
In combating the debt crisis the governments of the various countries in Europe have taken on harsh austerity measures and aggressive programs to raise cash and revenues. Much of the austerity drive has been mandated by the terms of the various bailouts. This documentary looks particularly at the cash raising part - privatisations. Privatisations are often controversial, but have many potential benefits and some risks.

5. Britain's Trillion Pound Horror Story
The UK is not immune to the Euro crisis, sure it didn't join the currency union, but it's experience isn't too far removed from Ireland's. Britain has likewise accumulated a large sovereign debt load, but has recently embarked on significant austerity moves to sure up it's fiscal sustainability. 

6. The Great Euro Crisis
The last stop on the video tour of the European debt crisis is "The Great Euro Crisis". This documentary probes into what may come of the Euro - will Greece stay in, will get kicked out, or will it opt out? One thing is for sure: the Euro will not look the same in 5 years time; but it remains to be seen what will come... 

Thanks to www.financedocumentaries.com for finding all these documentaries (and others!) 

Source: http://www.alleconomists.com/2012/08/6-documentaries-on-european-sovereign.html

ECB Stays Put, Comfortable With Balance of Risks

The European Central Bank announced no change to the policy rate (at 1%); and in spite of pressure to do otherwise, also no changes to other monetary policy moves. With the fiscal problems surfacing in the EU (most notably Greece), there had been some expectations that the ECB might e.g. "go nuclear"... implementing extraordinary measures, but for now it seems the ECB doesn't see this as necessary. Before moving into the economic analysis part it's worth reviewing what they did say in this respect (given the topical nature of fiscal challenges):

"As regards fiscal policies, we call for decisive actions by governments to achieve a lasting and credible consolidation of public finances. The latest information shows that the correction of the large fiscal imbalances will, in general, require a stepping-up of current efforts. Fiscal consolidation will need to exceed substantially the annual structural adjustment of 0.5% of GDP set as a minimum requirement by the Stability and Growth Pact.

The longer the fiscal correction is postponed, the greater the adjustment needs become and the higher the risk of reputational and confidence losses. Instead, the swift implementation of frontloaded and comprehensive consolidation plans, focusing on the expenditure side and combined with structural reforms, will strengthen public confidence in the capacity of governments to regain sustainability of public finances, reduce risk premia in interest rates and thus support sustainable growth over the medium term.

In this context, the Governing Council welcomes the economic and financial adjustment programme which was approved by the Greek government following the successful conclusion of the negotiations with the European Commission, in liaison with the ECB, and the International Monetary Fund, with a view to safeguarding financial stability in the euro area as a whole."

So the ECB does see fiscal challenges as a problem, but it's comfortable limiting its official monetary policy stance as verbal for now (other than the moves announced earlier this week). So the name of the game is holding the rounds in the clip - the ECB still maintains the capacity to act if need be. For instance it could drop the rate from 1% to parity with the Fed's 0 to 0.25%, and it could also take the 'nuclear option' of an aggressive "quantitative easing" financial market intervention program. So it is comforting to know that 1. they have the capacity to act; and 2. they don't see a need to act (yet).


Now, onto the usual concerns; inflation is currently viewed as being "contained" in the EU. On the inflationary side there's upward pressure from commodity prices and faster growing (mostly developing) economies. But meanwhile the EU economy is broadly still struggling along (albeit recording some growth in some regions) so on balance the view is that inflation is not a near term problem in the EU:

"Taking into account all new information since our meeting on 8 April 2010, we expect price developments to remain moderate over the policy-relevant horizon. Global inflationary pressures – driven mainly by price developments in commodity markets and in fast-growing economic regions of the world – are still being counteracted by low domestic price pressures. The latest information has also confirmed that the economic recovery in the euro area continued in the early months of 2010. We expect the euro area economy to expand at a moderate pace in 2010, but growth patterns could be uneven in an environment of high uncertainty.

Our monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Inflation expectations remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations remains of the essence."

So for now, no move is probably the right move. Growth will, in aggregate, continue in the Euro Area, but as noted previously it will be fragile, gradual and uneven. The usual risks of faster than expected increases in commodity prices, protectionist pressures and disorderly unwinding of global imbalances remain. So the outlook for the EU is, if muted, at least mildly positive; and as far as fiscal challenges go, one can only hope the ECB doesn't have do anything more.

Sources
Econ Grapher Analytics www.econgrapher.com
European Central Bank www.ecb.int
Trading Economics www.tradingeconomics.com

Article Source: http://www.econgrapher.com/7may-ecb.html

IMF: Recovery Is Stronger than Expected, but Speed Varies

The IMF just released its April 2010 World Economic Outlook; upgrading world output growth projections for 2010 to 4.2% and 4.3% for 2011 (up by about 1% since the 2009 report). The split shows emerging markets very much as the drivers of global growth with forecasts for 6.3% in 2010 and 6.5% in 2011; while the comparable figures for Advanced economies are 2.3% and 2.4% respectively:

"The global recovery has evolved better than expected, but in many economies the strength of the rebound has been moderate given the severity of the recession."

The IMF noted the great rebound in activity indicators; notably in accelerating world trade (a critical aspect for a sustainable recovery - but a risk area as protectionism rhetoric grows). The IMF has picked world trade to grow at 7% in 2010 and 6.1% in 2011 (having contracted -10.7% in 2009):

"Global activity has rebounded, as evidenced by accelerating world trade, industrial production, and retail sales. Employment continues to contract in advanced economies but is expanding again in emerging economies, helped by strong potential growth. Industrial confidence has returned to precrisis levels, but household confidence in advanced economies continues to lag, reflecting subdued employment."

The IMF is reasonably relaxed about inflationary pressures, noting that it sees low levels of capacity utilisation, and well-anchored inflation expectations. That said the IMF view was that inflation in developed economies did not drop-off as drastically as growth did. It also pointed to higher inflation risks in emerging economies (6.2% in 2010 vs 1.5% for advanced economies):

"Inflation pressures are projected to remain low, held down by high unemployment rates and excess capacity. Inflation has been higher and more volatile in emerging economies, and inflation pressures could resurface more easily there than in advanced economies."

The IMF also cited repeatedly throughout the report that high unemployment remains a significant risk to a recovery in global demand, and broader economic growth, and noted it expected unemployment (which it also noted could actually be worse than expected) to remain high in advanced economies:

"High unemployment poses major social problems. In advanced economies, unemployment is projected to stay close to 8.5% through 2011 and then to decline only slowly. Moreover, the problem is even larger than the statistics suggest. Many of the employed are working shortened hours or in temporary jobs with few benefi ts. Others would like to find work but have given up searching and are thus no longer recorded as unemployed in the statistics. There is no single measure for broader unemployment or underemployment, but available data suggest that it can often be higher by 25-50% than headline unemployment rates."

Thus the overall message is that the recovery is indeed underway, albeit uneven. However "activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as room for countercyclical policy maneuvers has sharply diminished and fiscal fragilities have come to the fore." Thus the same challenges remain in macroeconomic policy exit strategies (not least of all sustaining the recovery), and the example of Greece shows on the fiscal front that a clear and credible plan for fiscal sustainability is not just 'nice', but necessary.

Sources:
Econ Grapher Analytics www.econgrapher.com
International Monetary Fund www.imf.org

Article source: http://www.econgrapher.com/april2010-imfweo.html

BIS Economists on "The Future of Public Debt"

Public debt and spending has become a particularly hot topic recently. The key driver is a ballooning of fiscal deficits on the back of the crisis. Governments around the world have transferred troubled assets from the private sector to the public sector in order to prevent a major meltdown, they have also taken large moves to stimulate demand. But this has worsened existing vulnerabilities in terms of fiscal sustainability. Hot spots have flared up like Greece and Dubai. The worse may still be yet to come.

In these times it is prudent to soak up new information and insights to position yourself to not only avoid loss but, if possible, make gains. This is a review of a BIS (Bank for International Settlements) conference paper entitled "The Future of Public Debt: Prospects and Implications", by Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli. This new resource should provide some insights and warnings about the future of government balances and debt positions for investors and strategists. The paper can be found here.

There are a few good charts and tables in the paper which outline current and projected positions under various scenarios e.g. interest expense as a fraction of GDP, inflation expectations, industrial economies' gross public debt and primary fiscal balances, projected population structure and age related expenditure, CDS spread regressions against various fiscal indicators. I've taken two visuals from the report to discuss in this review:

The first one shows projected public debt to GDP, the red dotted line is the baseline scenario, green is a small gradual adjustment, and blue is a small gradual adjustment with age-related spending held constant. There are charts like this for 12 countries, I picked out these two in particular because they're traditionally seen as solid and safe countries/markets. But if you look at the UK in particular, if things do indeed unfold like this there will be implications (mention these soon), and remember in markets things tend to get priced in earlier than expected...

It's also worth noting that they found in studying CDS market data that CDS (default risk) spreads were reliably correlated with debt to GDP ratios (whereas previous studies, prior to CDS data coming available, had identified that "For each percentage point of additional public debt, researchers estimate a risk premium increase of between 1.6 and 1.2 basis points.").

I also thought the above table would be interesting to include as it shows the magnitude of just how hard it will be to solve the problem in the near term. The standouts are the UK, Japan, and Ireland - who would each need to run primary balance surpluses of at least 10% over the next 5 years. Not only would this be politically difficult to do, but it would also adversely impact economic growth (as decreased spending and higher taxes obviously would have the reverse impact of stimulus measures).

But then who would expect the politicians to take the hard road? It's interesting to see their discussion of issues around fiscal challenges and monetary policy: "two channels through which unstable debt dynamics could lead to higher inflation – direct debt monetisation and the temptation to reduce the real value of government debt through higher inflation." It seems to me that there is a non-zero probability risk of this sort of 'approach' going on at some point.

The other key risks or warnings they discuss, to briefly mention, include:

"In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult. But, unless action is taken to place fiscal policy on a sustainable footing, these costs could easily rise sharply and suddenly."

"large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk."

"the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth potential."

Summary
It's well worth reading the entire paper, as a lot of detail is missed in this brief review - but hinted at. A key theme of the paper is that prior to the crisis a lot of industrialized nations faced existing structural deficit problems such as the future liability of unfunded aging population related expenses (e.g. pensions, rising health care costs etc). Of course when you add crises to the mix - which tend to increase government deficits and debt (as noted in a study they cited) - the existing problems of structural imbalances only become harder to deal with.

As we're seeing some of the potential problems unfold in places like Greece, it is therefore necessary to be vigilantly mindful of trends in government spending to set intelligent investment strategy. At the end of the day as an individual you're probably powerless to alter the course of government policy, but you can and should alter the course of your own personal policies...

Source:
"The Future of Public Debt: Prospects and Implications" http://www.bis.org/publ/othp09.pdf?noframes=1
Bank for International Settlements http://www.bis.org

Article Source: http://econgrapher.site1.net.nz/bisfiscal.html