“Fiscal Fears Mount”

Key News

  • Greece and Ireland had much larger budget deficits last year than initially expected, and the Greek data is still unreliable and may be revised further, the European Union’s statistics office said on Thursday.
  • Greece, now negotiating the terms of a three-year emergency loan package with the European Commission, the European Central Bank and the International Monetary Fund, had a deficit of 13.6 percent of gross domestic product in 2009, rather than 12.7 percent as reported earlier, Eurostat said.

    But the gap may turn out to be even higher. (Reuters)

  • Germany’s manufacturing sector expanded at a record pace in April, a survey showed on Thursday, driving a quickening in private sector growth in Europe’s largest economy.
  • The survey showed that Germany was outpacing its European peers but the surge in manufacturing was leading to supply chain pressures and putting upwards pressure on costs.

    Greek debt rose to 115.1 percent of GDP in 2009 from 99.2 percent in 2008, Eurostat data showed. (Reuters)

  • The yuan rose against the dollar in onshore forwards as expectations for yuan appreciation strengthened on Thursday, with traders saying hedging demand by Chinese companies prompted more selling of dollar/yuan forwards.
  • The one-year dollar/yuan onshore forward contract fell to its lowest since mid-2008 as Chinese firms borrowed dollars to exchange into the yuan for both actual demand and speculation. (Reuters)

Quotable – On Greek debt

“Illness is the doctor to whom we pay most heed; to kindness, to knowledge we make promise only; pain we obey.”

                           Marcel Proust

FX Trading – “Fiscal Fears Mount”

At least that’s how part of a Reuters headline reads this morning, referencing the latest IMF report released this week.

Among the notables is the situation in Euroland; Greece, of course, then the other PIIGS we’ve talked about so often. Turns out it’s even worse for Greece than originally imagined, and GDP could be hit even harder … leading to more desperate measures.

But I’ll try to leave that euro stuff alone … as I’m sure you could go get it anywhere today.

Let’s build out with this “fiscal fears” thing …

First of all, fiscal fears have been mounting for many, many months now … just not by anyone who’s got a say in fiscal matters – the taxpayer. Sure, in theory the taxpayer dictates foreign policy, but realistically we all know that’s a load of bunk.

All this talk of “recovery is here”, “the green shoots have sprouted into thick sod”, “the world is good again” has brushed away one of the risks that people like us began talking about a year ago:

What happens when the stimulus money runs out?

Turns out, that may not be the most specific way of posing the question. Let’s put it this way:

What happens when stimulus money has been exhausted and public finances are left in shambles?

Here’s some from Reuters …

But as the world economy slowly makes its way out of recession, IMF chief economist Olivier Blanchard warned that "new, and no less formidable, challenges" have already appeared.

He said fiscal consolidation must become a priority for heavily-indebted advanced economies but that is likely to further weigh on demand, and thus on economic growth — a dilemma given many economies are still struggling.

Reuters continued comment on Mr. Blanchard saying …

To offset the drag on demand, advanced countries as a whole may need to weaken their currencies to boost exports, Blanchard said. On the other hand, emerging economies need to allow their currencies to rise, curbing exports.

Hmmm … weighing in directly on the currency market, are we?

Maybe the IMF feels they could do a better job managing the foreign exchange market themselves; I mean, nobody likes these pesky imbalances.

Though, if we got to a point where the IMF was managing a global reserve currency that sought to eliminate FX fluctuations and promoted smooth trade between nations, we’d probably be at a point when free trade isn’t an issue anymore and managing some concocted SDR-type thing would be pretty easy.

But under the guise of “free” trade, the IMF is right that currencies need to adjust to market forces, i.e. they need to be allowed to adjust to market forces.

As these “emerging” economies become serious players, as the flow of capital and resources into these “developing” economies continues to increase because of their inherent growth stories, these burgeoning economies need to play by the same rules as everyone else (and that means you too, China.)

China, of course, is an extreme example of currency and capital controls; but their adherence to, or even a gesture of moving towards, real free trade would help in overcoming distortions that exist in other economies, in other currencies.

So Mr. Blanchard, which currencies need to go up? Which currencies need to go down? This imbalance idea is not new; perhaps though people listen to you.

Of those developed economies who might need weaker currencies to promote exports, you lump the eurozone, the UK, Japan and the US into that bunch?

Again, I’m not going to discuss the eurozone – you know where we stand on the euro. I’m not going to discuss the pound – greater exports sure can’t hurt. I’ve argued before that the US might do better worrying about attracting capital onto its shores with a stronger dollar than it would by doing anything to further pressure the buck for the sake of exports.

But what about Japan?

There’s no shortage of bright forecasts coming from Japan, despite the fact that the weather there is still very cloudy, at best. Deflation looms. And while the latest trade numbers show strong exports, specifically to China and the rest of Asia, Japan’s domestic economy is still struggling.

While the domestic recovery tries to find some footing, Japanese policy-makers will probably do whatever they can to keep the export train going. Just as Germany is the only thing keeping the Eurozone from all-out collapse, Japan’s export sector continues to hold up the rest of the economy just enough.

That’s becoming even more important as the government probably doesn’t have much left to squeeze.

Japan: Foreign Trade/Exports Total

Japan: Government Deficit