Economics, Banking & Capital Markets

Grexit regional contagion watch

16 May 2012 | Posted by Nathan Collins, Euromoney Skew

Sell-side analysts have had at least two years to hypothesize the likely impact of a Greek exit from the eurozone – here's Nomura's latest take on the likely spill-over effects. [More]

Nomura have put out a series of research reports on the possible consequences of a Greek exit from the single currency – with this particular one looking at contagion effects and deposit dynamics.

One positive note touched on by Nomura’s report is that a Greek exit from the eurozone is unlikely to have too much of an effect on eurozone nation’s trade – because Greece didn’t really do much trading with them to begin with.

The big effect on the rest of the eurozone is, of course, through the banks – though these are markedly lower than if the event had occurred two years ago.

All told, eurozone banks have $65bn in remaining exposures, mainly to Greek corporations. Within this figure, by far the biggest concentration is within French banks, which have $40bn in exposure according to end-2011 BIS data (see Figure 2). These exposures have partially been provisioned for (for the most important entities, provisions are likely to be in the region of 20% of the loan book). When thinking about potential hits from Greek exposures, it is worth considering the option of abandoning Greek businesses entirely to limit hits to equity at the head office level. Nevertheless, a Greek exit could generate significant additional charges for some important eurozone banks

It’s worth noting that the conventional wisdom that Greek eurozone exit would generate massive capital flight elsewhere in the eurozone is weaker than it has been in the past:

In the past, it has been popular to argue that a Greek eurozone exit would generate uncontrollable capital flight, not only in Greece, but also in other eurozone countries with weak banking systems. But this thinking is currently shifting. Policymakers, including German policymakers, are starting to embrace the possibility of a Greek exit. The thinking is that sufficient fire-walls have been built such that the rest of the eurozone can manage a Greek exit. Time will tell whether this policy view is correct.

And, unsurprisingly, the factors outlined above aren’t positive for the euro:

With this new risk looming, it seems likely that eurozone risk premia will continue to rise in the run-up to the second round of the Greek election, scheduled for June 17.

In relation to the euro, the risk premium is the dominant variable at this juncture, and we could well continue to trade lower as a result vs USD and JPY (other crosses are a different story).

Not that that should be news to anyone.

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JPMorgan non-CIO briefer: the rise of the Treasury services unit

16 May 2012 | Posted by Euromoney Skew, Sid Verma

Thanks to international expansion and infrastructure investment, revenue growth prospects at JPMorgan's Treasury and Security Services unit are bright, said Nomura analysts. [More]

Given the recent media frenzy, you can be forgiven for thinking JPMorgan is nothing other than a prop-hedge – or prop-flow – desk, dubbed the chief investment office (CIO), serving as a genetically designed advert for the Volcker rule. But believe it or not, JPMorgan boasts other divisions. And as we have reported, brokers are still bullish on the stock, citing solid earnings capacity and the depressed valuation of the US financial sector, more generally.

On Wednesday, analysts at Nomura – which has a buy recommendation on the stock with a target price of $50-a-piece, a 39.7% upside to Monday’s closing price – lavished much ink on the bank’s margin growth story. After a meeting with Mike Cavanagh, the CEO of the bank’s Treasury and Security Services (TSS), the analysts touted the newfound importance of this division:

“While the same revenue headwinds remain in the near term (but are in the run rate), we think the TSS businesses are an important component of the overall company portfolio, with a majority of growth coming from deeper penetration of existing clients and leveraging the rest of the JPM franchise, including the investment bank, commercial bank, asset management... Importantly, returns are decent now and should improve, as the TSS businesses are capital efficient on a Basel III basis, have scale benefits and high barriers, have pretty steady revenues and earnings, and have solid secular growth trends. Putting it altogether, TSS has competitive profitability now with high-teens ROE (better than the trust banks) and mid 20’s pretax margin (about in line), with a pretty straightforward path towards a 25% ROE and a 35% margin over the next several years.”

The TSS division has outperformed by a large margin during the past year, even amid weak economic activity. In 2011, the unit’s revenues grew by 12%, liability balances by 23%, assets under custody by 14% and trade finance loans by 73%. As we have reported, this division is reaping the upside of strengthening links with its emerging markets, prime brokerage and the global corporate bank – a partnership between the investment bank and treasury services – which serves as fully integrated revenue-sharing businesses.

What’s more, the bank has invested in infrastructure to cut costs and ramped up its client-servicing capabilities in the Asia-Pacific region, with revenues growing 26% year-on-year in 2011.

Still, the TSS unit is expected to represent a modest 7% of JPMorgan’s projected $21 billion net income in 2013. But its strategic importance is expected to rise, reckon Nomura analysts. “The TSS game plan will lead to a better growth story over the next three-to-five years as JPM captures a greater share of wallet and operates more efficiently.”

Just a 100-basis-point rate hike in the one-month rate could add $350 million to its annual net-interest income. But growing the corporate cash-management business will prove a structural boon for TSS earnings – though only time will tell if this will pay off, the analysts say:

“The company is adding corporate bankers aggressively to capture more business, especially in corporate cash management. While the company would like to accelerate the growth, there is only so much bandwidth available to get things done, as developing client relationships, leveraging existing JPM relationships and winning new business takes time. Brand and counterparty strength have also been a clear competitive advantage in seeking new business in these markets.”

While international growth and interest-rate hikes are key to the unit’s revenue growth prospects, the introduction of the Volcker rule might prove a tail risk for its trust services, the bank concludes:

“The trust banks have some downside if the rule was passed in its current form. In their Association of Global Custodians (which includes JPM) comment letter, as well as letters from BK, NTRS and STT, the trust banks argue that the rule could substantially limit their ability to provide certain services to their covered fund clients or asset management affiliates (eg, Bank of New York Mellon, State Street and SSGA). If that is the case, the trust banks say they would have to discontinue certain custody services and restructure their asset management and custody businesses (fyi, we don’t believe this should or will ultimately happen, but it is a risk worth noting).”

Source: Nomura

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Grexit reading list

16 May 2012 | Posted by Euromoney Skew

A focus on the key news and narratives surounding the potential Greek exit from the eurozone [More]

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How to hedge amid Grexit, Europe edition

16 May 2012 | Posted by Kanika Saigal, Euromoney Skew

While markets crumble, Credit Suisse has dished up some hedging strategies, including underweight credit - such as Bunds. [More]

Markets are crippled with fear. European stocks have plummeted. Volatility gauges have spiked. Amid a political vacuum in Greece, the future of the eurozone hangs in the balance - and investors are firmly risk-off. So how can fear-soaked investors navigate the storm - other than cash-under-the-mattress strategies? A Credit Suisse strategy report today proffers some advice:

“German CDS spreads: German CDS spreads are lower than they should be given the rise in Spanish bond spreads or the fall in German 10-year bond yields (Germany sees its bond yields and CDS spreads move in opposite directions during crisis episodes, as bond yields are pushed down by ‘safe haven’ flows, while CDS spreads move up, as markets expect that Germany will either have to commit further resources to bail out the periphery or will have to deal with the fall-out on its commercial banks’ balance sheets). We would agree with our European credit strategists who recommend buying protection on Germany and selling protection on Spain.”

“The euro should fall: Euro-area risk indicators suggest the euro has downside from current levels, with the spreads of the average Euro-area bond yields over German bond yields, for instance, pointing to a weaker euro. Similarly, the relation between the Euro TWI and the ECB balance sheet as well as that between the €/$ and Euro-area lead indicators relative to those in the US all suggest the euro should be considerably weaker.”

“Credit looks more vulnerable than equities: While we see that the performance of credit as an asset class has been supported by the low yields on government instruments (pushing investors looking for yield up the risk curve) and by the ECB’s provision of liquidity (which reduces default risks), we still think credit is likely to underperform, for the following reasons: The Euro-area is already close to a recession (with manufacturing PMI new orders consistent with minus 1% GDP growth) – but implied speculative default rates, at 4%, are considerably lower than the realised default rates during the past two recessions (10%+); The main driver of the outperformance of credit versus equities has been the fall in German bond yields – and, as we have argued above, we think bond yields have upside risk from here; Inflows into corporate credit funds, which had been strong, have now slowed, according to data provided by EPFR Global.”

Interestingly, CS reckons that Bund yields could actually rise - even in a risk-off environment. Here''s the rationale:

“But we think that three issues ultimately argue against Bunds:
■ Germany is going to have pick up some of the bill for peripheral Europe;

■ We think that there is a strong chance that ultimately we end up with some form of de facto capital controls if the crisis were to worsen (i.e. banks informally make it hard to take deposits out of bank accounts in the periphery or insurance companies are told they can only hedge local liabilities by buying their national sovereign bonds).

■ Germany looks set to enjoy a period of strong growth, making real Bund yields rather unattractive to domestic investors as inflation is set to rise.

Without the euro, we believe that appropriate short rate in Germany would be 2.5% and this in turn would imply an ex euro fair value of the Bund yield of 2.5%+."

It continued:

"We halve our underweight of Continental European equities: sentiment indicators suggest high stress (but not quite at May 2010 levels); there are signs that policy makers are willing to allow higher inflation in the core, to stimulate growth and to postpone fiscal tightening. We think there is only a 15% probability of a Greek exit by year-end. Yet, valuations remain mixed.
■ We stay underweight banks in spite of attractive valuations, not least as they tend to underperform into a weaker euro. There is potentially interesting risk/reward in non-EMU banks (domestic UK and Swedish banks).

■ Dividend swaps look attractive."

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WireTap 0900 16/05/12

16 May 2012 | Posted by Euromoney Skew

A round-up of the key stories across the specialist financial media, including news that Angela Merkel and François Hollande say they would consider measures to spur economic growth in Greece [More]

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WireTap 1400 15/05/12

15 May 2012 | Posted by Euromoney Skew

A round-up of the key stories across the specialist financial media, including news that Greece is set to repay fully a €450m bond that matures on Tuesday [More]

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WireTap 0900 15/05/12

15 May 2012 | Posted by Euromoney Skew

A round-up of the key stories across the specialist financial media, including news that German growth has far outstripped economists' estimates [More]

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Spanish (banking) bombs

14 May 2012 | Posted by Nathan Collins

As markets tumble amid the eurozone crisis, Spain's proposed reforms for the banking sector are looking more and more deficient, say Nomura analysts. [More]

With markets nose-diving this morning – the FTSE Eurofirst 300 is down 2% at time of writing – all eyes are, once again, on known unknowns in Europe: rising Greek eurozone exit risks and the looming threat of a collapse in the Spanish banking system. Here is Nomura''s dispassionate take on the ever-fattening tail risk in Spain:

“Two conditions for market confidence to be restored in the health of the Spanish banking system are 1) that a realistic assessment of any possible capital deficit in the banking system is acknowledged and 2) that a credible plan be in place for plugging the gap. While we have concerns that the first condition will be met via the current reform proposals, the second condition may prove even more problematic unless Spain draws on broader Eurozone support”

Put simply, Nomura’s view is that the Spanish government is continuing to underestimate the scale of the problem.

“For instance, Moody’s expects losses of up to €306bn across loans to small companies and corporates, and mortgages. These estimates were based on more conservative default rates than those experienced in Ireland. CEPR meanwhile has estimated losses at €380bn. Clearly there are many assumptions which affect the estimates, but these numbers are significantly larger than have been recognised by the Spanish government.

Similarly, we are sceptical that we are close to a bottom in the Spanish property market. In a recent report Fitch mentioned that, on average, sales of homes reposed by banks saw prices just 48% of the original estimated value. Even with average LTV rates on mortgages at a conservative 60%, mortgages may need higher provisioning levels. Likewise the current announced scheme allows for no additional provisions on corporate loans.”

While current European rescue mechanisms simply lack the capacity to bail out the sovereign itself, Nomura considers the possibility of keeping the banks directly - but this is a political taboo

“However, currently all bank bailouts need to be routed via the sovereign and therefore will add to the national debt burden, although in theory the source of repayment would not be the tax system. Providing direct injections of capital into the banks by the bailout funds would be one way to resolve this, but this has been ruled out on a number of occasions by European policymakers.”

With Spanish banks poised on a knife-edge – spreads on Spanish bonds hit 486 basis points over Bunds this morning – negative sovereign-bank feedback loops will remain structurally embedded in the eurozone financial system. [Hide]

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WireTap 1400 14/05/12

14 May 2012 | Posted by Euromoney Skew

A round-up of the key stories across the specialist financial media, including news that uncertainty over the impact of a potential Greek exit from the euro drove a rush to safety by investors on Monday [More]

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WireTap 0900 14/05/12

14 May 2012 | Posted by Euromoney Skew

A round-up of the key stories across the specialist financial media, including news that the entire London staff of JPMorgan’s chief investment office is at risk of dismissal [More]

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Turkey's balancing act continues

11 May 2012 | Posted by Nathan Collins

Turkey's current account deficit is continuing to get better, but it's questionable how much longer that will continue. [More]

While Turkey may still be seething at its credit outlook being cut from positive to stable by Standard and Poor’s, it may be able to take some comfort from the support it has received in recent weeks from the sell-side. RBS’s Tim Ash has bemoaned the ratings agencies apparent dislike of the country, and now Capital Economics has put out a report taking a look at the drop in Turkey’s most publicised weakness: its current account deficit.

“It now looks like the economy is around half way through the rebalancing needed to bring the external deficit down to a sustainable level – but there are also signs that this process will become more difficult from now on.”

So while things may be trickier in the coming months, at least Turkey can take solace from the fact that it has won half of the battle.

“There are three reasons behind the reduction in the current account deficit. First, Turkish exports have held up well. Second, tighter monetary policy has caused domestic demand to weaken, in turn resulting in falling imports. And third, the deficit in March 2011 was particularly sizeable due to an unusually large deficit on the income account (profits being remitted out of Turkey).”

At any rate, while the current account deficit may be on the decline at the moment, Capital Economics are far from confident that this positive trend can continue at its current rate.

“For a start, Turkish exports may be running out of steam. Robust export growth in recent months has come on the back of strong demand from other emerging markets, namely in the Middle East and Asia. However, the most recent activity data from Asia has been softer. Meanwhile, the Turkish Exporters Assembly released figures that point towards a 2.9% y/y contraction in exports in April.”

It added:

“In addition, whereas previously it appeared that rebalancing was coming via reduced imports of capital and consumer goods (a result of weaker domestic demand), intermediate goods are also now falling outright. These are key inputs into Turkey’s manufacturing sector, which has been behind the mini boom in exports. However, it now seems that industry is stagnating at best and could already be in recession. And finally, the acceleration in credit growth since March points towards a rebound in domestic demand (which is consistent with a renewed rise in imports).”

Still, a change in Turkey''s outlook will, at least in the near-term, have little impact on how fixed-income investors view Turkish hard-currency sovereign debt given the issuer''s already well-established yield curve and faithful investor base.

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Are European banks poised for a rebound?

30 April 2012 | Posted by Nathan Collins

Some research from HSBC and Nomura suggests there could be room for very cautious optimism towards European banking stocks. Yes: you read that right. [More]

In an unusual twist, we came across two reports last week that are positive on European banks – particularly surprising is that HSBC notes that international investors are becoming less negative towards Italy and Spain (Not that that says much since it''s coming from a low base...)

Less negative on Italy and Spain

Many investors have questioned the high holdings we report for the Eurozone given the debt crisis but when we dig a little deeper we find that there is a clear split between an underweight position on Italy and Spain with an overweight position on the other markets (chart 4). There are signs that international funds are edging back into Italy and Spain, but they remain clearly underweight.

What''''s more, HSBC also notes that while, in aggregate, investors are resolutely underweight European financials, within that sector they are starting to show a trend of favouring banks over other institutions. No, really:

Positive signals for banks

The impact of the eurozone crisis is plain to see in the weightings in financials. International funds are overweight in every region except for Europe (chart 5). There is no sign of an increase in holdings in European financials overall but within financials there are the first signs of a switch to banks. Holdings in banks have risen a little but other financials (insurance and real estate) have fallen back (chart 6).

Believe it not, investors may begin to make a slow creep back towards European banks. Adding to the surprising conclusion, Nomura has put out some research suggesting that while lending from banks remains weak, this is due to a lack of credit demand from solvent borrowers that want leverage rather than banks' inability to supply.

This was the first survey conducted since the LTROs, and is thus important because it shows some evidence of the operations having their desired effect in freeing up the ability of banks to lend.

Instead, the weakness lies in the demand for credit from non-financial corporations. The reduction in demand from this group was more severe than bank loan officers had expected, with a net 30% saying that demand had fallen in Q1. The weakness was driven by a marked decline in capex spend. This is in a sense a ‘normal’ occurrence at this stage in the cycle, though the reduction in capex intensions was certainly intense.

But the tide might be turning:

The other bullish conclusion that could be drawn from the survey is that a majority of loan officers now expect to see an increase in the demand for loans from corporates over the next quarter, a significant change from the contraction expected over the prior two quarters (Figure 4), they do however expect to see further contraction in loan demand from households, albeit at a lower rate.

At this stage, any crumbs of comfort with respect to European banks are worthy of note. [Hide]

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How to fail in 10 easy steps, Jerome Booth’s guide to investment

26 April 2012 | Posted by Nathan Collins

The omni-present and aggressive emerging market bull at Ashmore Investment, Jerome Booth, who serves as head of research, has penned a snarky manifesto for that old world order. [More]

Here are some select extracts: (Warning: not for the faint of heart.)

1. Driving With One’s Eyes Closed: Passive Investing
It is true that if you close your eyes this saves energy. If you do so whilst driving, this should still save you energy, but this course of action is not recommended for obvious reasons. The first job of an active manager is to reduce risk. Major sovereign problems and crises typically are well-flagged. A country does not default, or take other extreme policy action detrimental to foreign investors, out of the blue. They will typically have had highly visible macro-economic problems for months before it comes to that."

“2. Excessive Reference to DM: Use DM Skills
One aspect of what I call Core-Periphery Disease is the idea that everything in global fixed income revolves around the interest cycles and monetary policy decisions in the developed world. Yet emerging markets have very different, and many, cycles at present. Not only do they not face the deleveraging reality and deflationary pressures of the HDICs (Heavily Indebted Developed Countries), but they have very different cycles amongst themselves. There is no emerging market inflation problem: there is though a Brazilian inflation problem, an Indian one, a Turkish one, and so on. Ignoring the substantial range of domestic inflationary forces and policy choices facing emerging Central Banks is good strategy for missing opportunities."

"3. Treat EM as an Afterthought: Use a ‘Global’ Manager
A psychological support device for Core-Periphery Disease is to treat EM management as peripheral or subsidiary. I remember a conference at which a pension fund presented on the issue of whether to allow global managers to invest in EM equities tactically or to employ specialists. Their empirical conclusion was that the global managers added value (with reference to their benchmark) by tactically investing in EM, but that their portion of EM investments under-performed the EM index, unlike the portfolios of specialists. The conclusion drawn was that one should allow both. However, what was discovered were two things: tactical asset allocation works in EM, and EM specialists are better at managing EM assets than global managers (in this sample at least)."

“4. Hedge Out ‘Currency Risk’: Increase DM FX Risk
Money illusion is the illusion that a currency is not a price like any other, but fixed. The pattern of volatility of EM currencies against the Dollar is now very similar to that of developed currencies versus the Dollar. In other words, it is the Dollar which is volatile. Investing in 30 currencies, and ones which have huge reserves, is arguably safer than investing in one."

“5. Outsource thinking: Use a Rating Agency
Also,in that we are facing financial repression (see ‘The Emerging View’, October 2011) ratings are increasingly a tool by regulators to capture investors’ savings to finance governments. Such behaviour suppresses investment grade yields further, and increases investor homogeneity and so systemic risks. Those investors not so constrained would do well to think about sovereign risk for themselves."

“6. Follow the Crowd: Miss the Really Big Risks
Investors needs to be constantly asking themselves whether there are possible scenarios and structural shifts ahead which could damage or outwit all their peers. If so they should consider doing things differently."

“7. Ignore HIDC Macro-Risk: Buy Multinationals instead
If one is investing in EM in part to reduce risk from the worst scenarios, investing in such multinationals is an inferior approach to investing directly in EM companies. Any excuse not to invest is EM is often sought, and the idea of investing in Western multinationals with EM income streams is one refuge for those persuaded of the benefits of EM but still constrained by their prejudices."

“8. Ignore the Unfamiliar: Deny the Existence of Whole Asset Classes
With the sovereign EM local currency debt market already larger than the US Treasury market for example (see ‘The Emerging View’, February 2012), how is it that some investors are concerned about whether it is significant enough to constitute an ‘asset class’."

“9. Believe What you Want to Believe: that EM is Risky and DM is Not."

“10. Extrapolate & Ignore Factors Difficult to Quantify"

Not much to add here except to say given high management fees and historically poor performance of many active managers, dismiss the virtues of passive management at your peril. And let’s hope investors don’t confuse apples with oranges. Or rather, apples and bushels of apples: don’t perform a quantitative comparison of one type of developed market debt with every type of emerging market debt. The EM local currency debt market, though nascent, is far from an homogenous asset class.

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Sub-Saharan African corporates: more transparency needed

26 April 2012 | Posted by Kanika Saigal

A lack of corporate disclosure tempers the bullish sentiment towards Sub-Saharan African companies. [More]

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Taiwan’s Chinatrust Commercial Bank’s great leap forward

26 April 2012 | Posted by Kanika Saigal

The bank's entry into the mainland this month comes as competition for Taiwanese customers in China is heating up. [More]

This month is supposed to herald an historic shift in Taiwan’s Chinatrust Commercial Bank’s regional footprint. In mid-April, the family-run private bank finally made the great leap forward onto the mainland.

From the press release:

“Chinatrust Financial Holding Company, its main subsidiary, Chinatrust Commercial Bank, officially opened its new branch in Shanghai, as part of its overseas business expansion. It is the seventh Taiwanese bank to set up a branch in mainland China, Chinatrust plans to set up 90 operations in next ten years.”

But how realistic are these ambitions?

Firstly, as the seventh Taiwanese bank to open up shop on the mainland, is it behind the curve? Some of its competitors like Land Bank of Taiwan, Taiwan Cooperative Bank and Chang Hwa Bank have already had representative offices in China when the ECFA (Economic Cooperation Framework Agreement) was signed, and were approved in September and October 2010 to upgrade to foreign bank branches.

Secondly, at this late stage in the game, can banks like Chinatrust compete with those on the mainland?

As previously reported by Euromoney:

Questions remain over the ability of Taiwanese banks to steal back Taiwanese companies that have long been established on the mainland. Although tech company Hon Hai has its headquarters in Taipei, it has been present in mainland China for the past 20 years and is well established there. “A company like this would easily gain support from Chinese or international banks,” says Pandora Lee, Taiwan analyst at UBS. What will motivate them to turn to Taiwanese banks?

Lee argues that Taiwanese branches abroad have accomplished little. “Most Taiwanese banks have branches in places like the Philippines and Vietnam but these branches do not perform as well as domestic branches," she says. "They are only doing business with overseas Taiwanese people in the region. Doing business with a limited amount of people prevents Taiwanese banks from gaining any meaningful presence in Southeast Asia.” Could the same be said for branches in China?

At least the company employees that couldn’t make it are still feeling the love:

“Though not all staff could join the opening, Chinatrust staff from worldwide sent 80,000 hand-made origami stars to give their best wishes, and the stars were used in the following kick-off ceremony."

They are family

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The blind leading the bulls

25 April 2012 | Posted by Nathan Collins

Nomura's Richard Koo explains why - whatever the bulls might like to pretend - the promised cures for the eurozone crisis were never really going to work. [More]

Nomura economist and notorious bear Richard Koo has put out a nice note explaining why the situation in the eurozone doesn’t seem to be improving appreciably. Put simply, European decision-makers have struggled to work out exactly why things are in such a mess, and as such have invested a dispiriting amount of confidence into measures that weren't necessarily going to solve the problems – most notably the LTROs. In his words:

“At first, the vast majority of market participants and policymakers appeared unable to distinguish between a financial crisis, which is a lender issue, and a balance sheet recession, which is a borrower issue. As a result, they overestimated the impact of the LTROs and assumed the ECB’s actions would solve the eurozone’s economic problems.

A senior financial official I spoke with two months ago emphasized that the worst was over and went so far as to say that ‘there is no problem that €1trn cannot solve.’”

Koo neatly explains why the ECB hurling money at the problem while demanding fiscal cuts just isn’t going to cut it:

“First, the experiences of Japan, the US, and the UK show that monetary accommodation cannot stimulate the real economy when the private sector is seeking to minimize debt in spite of ultra-low interest rates during a balance sheet recession.

Second, fiscal stimulus is the only tool a government has for maintaining aggregate demand when monetary policy has lost its effectiveness. Yet Germany and other countries of the eurozone are actively pursuing fiscal retrenchment.

Third, eurozone members hope that structural reforms will lead to growth, but the examples of Japan and the US show that such policies will not have a positive impact on growth for at least five to ten years.”

All this talk of structural reforms may remind you of Japan under Junichiro Koizumi. How did that work out again?

“The Koizumi administration completely ignored the fact that Japan was in a balance sheet recession and pushed ahead with structural reforms, insisting that there could be no economic recovery without them. But the economy failed to improve, and ultimately the only thing that grew was, in the words of one newspaper, the salaries of directors at the newly privatized Japan Highway Public Corporation.."

Oh, that's right...

At any rate, the really interesting idea here is that a Germany-driven penchant for using a blunt instrument to try and immediately solve the eurozone’s problems, may actually have made the problem worse.

“Some believe that senior German officials understand that rescues will ultimately be needed but feel that unless EU authorities take advantage of the crisis to whip the less competitive periphery nations into shape, they will only face a bigger problem down the road. Hence they are delaying rescue efforts as long as possible while the periphery nations undertake structural reforms.

According to this view, eurozone authorities should take this opportunity to force periphery nations to enhance their future competitiveness by, for example, delaying pension eligibility until the standard German age of 67.

While there is something to be said for this argument, if true, it means that Germany’s insistence on structural reforms has postponed a solution and allowed a problem that was initially limited to the small nation of Greece to develop into a major crisis threatening the entire eurozone.

This is a direct result of the authorities’ attempt to use a single tool (rescue) to resolve two fundamentally separate problems— the debt crisis and the need for structural reforms in periphery nations—that should have been addressed with separate policy responses."

Koo has apparently had some success in convincing people to come around to his way of thinking...

“My recent trip to Europe began with a conference held on the shores of Lake Como in northern Italy. There I had the opportunity to debate these issues with Jürgen Stark, former Bundesbank Vice President and a leader of German economic opinion.”

...

Many of the seminar participants said afterwards they found my arguments to be more persuasive than those of Dr. Stark.”

“Even if I do say so myself...” [Hide]