Category Archives: Financial Crisis

The 7-year slump: Why the global economy can’t seem to get started – The Globe and Mail

Bill Hammond has navigated a globally focused business through 37 years and a half-dozen economic cycles. But he’s never seen anything quite like the long, slow, on-again-off-again recovery that the world economy remains stuck in, years after things should have returned to normal. Frankly, he’s worried.

“It has become clear that we are really dealing with a different kind of economic recovery than anyone has experienced since World War II,” says Mr. Hammond, chief executive officer of Hammond Power Solutions Inc., a Guelph, Ont. company that makes electrical transformers for industrial clients around the world.

“This is far different from any recession I have seen.”

“I have never seen as much global instability,” says Betty Lou Pacey, who runs a Vancouver-based specialty lighting company with international suppliers and clients. She just returned from seeing a client in Argentina, where inflation is running at about 40 per cent. Even in her primary market of the United States, where so much of the world’s recovery hopes are now pinned, she senses the tremors from the nagging global woes and the lingering hangover from the recession: Big U.S. restaurant chain clients are no longer investing in renovations.

“I mean, we’ve got the euro, which has got troubles. We’ve got political issues all over the world. Where this is going, I don’t know.”

The 7-year slump: Why the global economy can’t seem to get started – The Globe and Mail

The global economy is different than it used to be. What happened?

In short, stability is what happened. During the stable times problems slowly build up. Eventually they overwhelm the everything. The only real solution is a full depression lasting at least a decade. Short of that there will be no solution.

Here’s a little background information:

A System Collapse Framework for Societies | 1913 Intel

How to Build a Better Economic Model | 1913 Intel

Analysts fear China financial crisis [in 2015] | Business | The Guardian

A credit crunch in China is “highly probable” this year as slowing economic growthprompts a surge in bad debts, Bank of America Merrill Lynch predicts.

Chinese president Xi Jinping this week trumpeted the “new normal” referring to slower growth as the government tries to rein in the credit boom – which has led to a debt pile of $26 trillion – and rebalance the economy from overly relying on exports and investment to consumer spending.

Bank of America Merrill Lynch strategists David Cui, Tracy Tian and Katherine Tai argue: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).”

The analysts believe that the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money.

They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government with the People’s Bank of China playing a central role.”

The US investment bank’s research report– “To focus on the three Ds: Deflation, Devaluation and Default” – notes that China had to pump money into the banking sector to the tune of 15% of GDP in the mid 2000s after a smaller debt surge in the late 1990s.

Analysts fear China financial crisis | Business | The Guardian

Greek expulsion from the euro would demolish EMU’s contagion firewall – Telegraph

Should EMU leaders choose to cut off liquidity support for the Greek banking system – forcing a return to the drachma – they might find that their contagion defences are a fiction.

Everybody is tired of Greece’s endless agony. It is precisely when you are most tired that your judgment fails you.

Greek expulsion from the euro would demolish EMU’s contagion firewall – Telegraph

Could a Greek Christmas Crisis Threaten the Euro? | Morningstar

From a Greek perspective, now would actually be a very good time to default on past debt. After years of savage austerity, the Greek budget is now just in surplus before accounting for debt interest or the repayment of debt. This means that Greece no longer needs to borrow money from anyone to fund itself, and so its level of debt is near a peak. Defaulting now has lots of upside and limited downside from this perspective.

The German word for debt is has very close links with the word for guilt, and Germans would regard a Eurozone country defaulting on its debt as profoundly wrong, threatening the very sanctity of the single currency. There would be a strong move to have Greece ejected from the euro, though there is no legal process for any country to leave the euro.

While the world enjoys its Christmas and New Year holidays, Greek MPs will be determining whether we return to our desks to find a new crisis threatening the Euro.

Could a Greek Christmas Crisis Threaten the Euro? | Morningstar

Russia Faces First Recession Since 2009 as Banks Add to Oil Pain – Bloomberg

Russia is entering its first recession since 2009 as sanctions over the Ukraine conflict combine with plunging oil prices and the weakening ruble to hammer the economy and force the government to prop up banks.

The economy is succumbing to penalties imposed over Ukraine as the plummeting ruble stokes inflation and a 30 percent drop in oil prices erodes export revenue. As economic ties with the EU deteriorate, President Vladimir Putin yesterday said Russia scrapped a proposed $45 billion Black Sea pipeline to carry gas to Europe by bypassing Ukraine.

Russia Faces First Recession Since 2009 as Banks Add to Oil Pain – Bloomberg

Capital controls feared as Russian rouble collapses – Telegraph

‘Funding problems are increasing dramatically. We think Russia is now flirting with systemic problems,’ said Danske Bank

The Russian rouble has suffered its steepest one-day drop since the default crisis in 1998 as capital flight accelerates, raising the risk of emergency exchange controls and tightening the noose on Russian companies and bodies with more than $680bn (£432bn) of external debt.

The currency has been in freefall since Saudi Arabia and the Gulf states vetoed calls by weaker Opec members for a cut in crude oil output, a move viewed by the Kremlin as a strategic attack on Russia.

A fresh plunge in Brent prices to a five-year low of $67.50 a barrel on Monday caused the dam to break, triggering a 9pc slide in the rouble in a matter of hours.

Capital controls feared as Russian rouble collapses – Telegraph

Russia is closer to crisis than the West or Vladimir Putin realise

In fact, a crisis could happen a lot sooner. Russia’s defences are weaker than they first appear and they could be tested by any one of a succession of possibilities—another dip in the oil price, a bungled debt rescheduling by Russian firms, further Western sanctions. When economies are on an unsustainable course, international finance often acts as a fast-forward button, pushing countries over the edge more quickly than politicians or investors expect.

Russia’s biggest recent economic crisis, in 1998, led to a government default. This time a string of bank failures, corporate defaults and a deep recession look likelier. Even so the pain from these could spread abroad quickly, both to countries that rely on Russian trade (exports to Russia account for fully 5% of GDP in the Baltics and Belarus) and through financial ripple effects. Banks in both Austria and Sweden are exposed. And if firms in one badly run commodity-driven country start to default on their dollar debts, then investors will worry about others—such as Brazil.

Russia: A wounded economy | The Economist

Spreading deflation across East Asia threatens fresh debt crisis – Telegraph

“Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order.”

Asia’s currency skirmishes are happening in a region of festering grievances and territorial disputes, with no Nato-style security structure to dampen down fires

Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82pc of the items in the producer price basket are deflating in China. The figures is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities.

Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147pc to 207pc of GDP in six years.

Spreading deflation across East Asia threatens fresh debt crisis – Telegraph

Putin’s created an economic crisis and left Moscow no easy way out

Western sanctions have left Russia in dire financial circumstances — stuck somewhere between recession and stagnation. Though proven solutions exist for what now ails Russia, President Vladimir Putin’s geo-strategic and political choices have rendered these traditional economic approaches unworkable.

Under normal market conditions, for example, the recent collapse of the Russian ruble should have spurred exports, domestic manufacturing and foreign investment because a weaker currency makes Russian business more competitive both domestically and internationally. Yet a dramatic rebound in any of those economic arenas remains unlikely not just due to sanctions but also because of the entrenched structural weaknesses of Putin’s system.

In particular, Russia lacks a diversified economy, a vibrant entrepreneurial class, the rule of law and a stable business environment that can support a fast economic turnaround. In addition, this crisis has sparked Russian anti-Western and isolationist rhetoric that makes Moscow’s road to recovery significantly more difficult.

Putin’s created an economic crisis and left Moscow no easy way out

Wharton’s Allen: Why the Next Financial Crisis Will Be Different

Governments and central banks may be ill-prepared for the next financial crisis, warns a Wharton finance professor.

Predicting what will cause a financial crisis is extremely difficult. Because systemic risk is complex and can come from many sources, the next crisis will be different, predicts Wharton finance professor Franklin Allen.

“As we saw in the financial crisis, most governments, most central banks, just missed it,” Allen tells Knowledge@Wharton, the school’s online publication. “One of the big worries that I think many people have is whether they’ll miss the next one, too, or whether now everything is under control.”

Governments and central banks typically conduct fiscal and monetary policies separately. However, the crisis showed that system didn’t work properly.

Wharton’s Allen: Why the Next Financial Crisis Will Be Different