Wake-up time for Europe, Japan central banksgreenspun.com : LUSENET : Unk's Wild Wild West : One Thread |
http://www.ftmarketwatch.com/news/story.asp?guid={2422056C-60B0-4419-9A55-917CE2BACC51}&source=moreover1Submerging markets, emerging crisis
Comment: Wake-up time for Europe, Japan central banks
By Bill Clifford, CBS.MarketWatch.com 4:35:00 PM BST Jul 12, 2001
TOKYO (CBS.MW) -- What a drag it is, being the world's only superpower. At least that's what the United States is finding out lately.
The U.S. economic slowdown and information-technology investment collapse are dragging down East Asian economies that have spent the last two years exporting their way out of financial crisis to recovery. A new contagion is spreading: From South Korea to Singapore, exports are falling sharply, economic growth is shrinking and currencies across the region are weakening.
If the strong U.S. dollar is proving to be of little help to Asia other than Japan, it's handcuffing Argentina, a basket case whose woes are now rippling through Brazil and may yet rattle other neighbors.
Argentina pegged its peso to the dollar a decade ago to rid the economy of hyperinflation. It worked. But a spate of growth gave way to recession three years ago and growth hasn't returned. Argentine exporters have found it harder to compete as the peso tracked an appreciating dollar.
Reforms last month to ease the pain by creating a kind of dual exchange-rate mechanism have spooked foreign investors. Argentina's economy minister, Domingo Cavallo, said the currency board binding the peso to the dollar would remain in place, but new subsidies for exporters and tariffs of equivalent value on imports in effect devalued the peso by 7 percent.
Living on borrowed money
Meanwhile, Buenos Aires has remained as addicted to inflows of U.S. and other foreign capital as East Asian tigers are hooked on the U.S. market for their IT shipments.
Argentina is paying dearly for its fix. The government was forced to pay 14 percent interest on three-month Treasury bills Tuesday -- more than double the rate it coughed up at its Feb. 20 bond auction. Now Argentine stock and bond markets are plunging because investors are pricing in the risks that Buenos Aires might default on its debt or devalue the peso.
Brazilian markets have been reeling from Argentina's distress all year. The local currency, the real, tumbled into unchartered territory against the dollar this week and was trading more than 30 percent below its early January level. In contrast, Mexico's reforms have helped a strengthening Mexican peso seem immune. But a 1.5 percent dip in the currency Wednesday attuned traders to the possibility that Mexico could also get sucked into the emerging-markets turmoil.
The wrong response
As different as the economic viruses in Latin America and Asia are, the fact that they share a link to the U.S. has some people thinking about a shared solution -- namely, that a weaker dollar would take pressure off both regions. This mistaken policy shift would hold even more charm for its supporters if they see current market turbulence provoking a broader crisis.
Things could indeed spin out of control. After all, a crushing debt problem in Turkey continues to pummel the lira, and Poland's zloty recently fell to a seven-month low. If currency jitters and the global slowdown intensify, panicky investors might race to a dollar haven, in turn tightening the vise on Argentina and developing Asia.
Proponents of a weaker dollar have allies. Sir Eddie George, head of the Bank of England and chairman of the Group of 10 central banks, recently blamed the strong dollar for causing imbalances in the world economy. Many U.S. manufacturers have dispatched lobbyists to convince Washington that the dollar is biting into profits from overseas business.
The only thing right about the analysis of dollar bashers is that they've identified the problem as global. But it's not a currency problem; it's a problem of insufficient demand and excess capacity. The solution is also global, with industrialized powers in each region leading the way with coordinated monetary easing while smaller economies emphasize structural reforms.
In six cuts over six months, the Fed has lowered interest rates by 2.75 percentage points to keep U.S. consumers spending and to get companies investing again as soon as inventories built up during the tech bubble clear. A strong dollar will let the Fed cut rates further without stoking inflation. Switching to a policy of talking down the dollar, however, would rob the Fed of the best means of revving what is a lonely engine of growth in the world economy today.
Better late than sorry
It's time that central banks in Europe and Japan wake up to the fact that if they'd eased monetary policy sooner, they would have arrested deteriorating conditions in their economies. Had they signaled to international investors a commitment to strong growth, they could have turned European and Japanese markets into magnets for capital flows. This would have kept the dollar from speeding up and away from the euro and the yen.
It's not too late for the ECB and the Bank of Japan to do their part now to prevent the global economic slowdown from causing more financial instability.
The BOJ's failure to act quickly and aggressively is the more serious. The Japanese market, like the U.S., is an important destination for exports from other Asian countries, but domestic demand in Japan is collapsing in large part because the BOJ for too long ignored deflation.
Governor Masaru Hayami has occasionally remarked that he doesn't want the yen to weaken too fast because it would hurt the neighbors. Well, never mind the Asian financial crisis of 1997-98; Singapore's dollar is flirting with an 11-year low and the new Taiwan dollar has just hit a 15-year low, both against the U.S. dollar. These exchange rates are not doing much for the competitiveness of the computers, semiconductor chips and electronic gear these neighbors are trying to sell to Japan or the U.S. The reason is demand, or the lack of it.
If the BOJ would print more money and adopt inflation targets, it would help to spur growth -- for the Japanese economy and in turn the region. Once investors are convinced of Japan's growth prospects, the yen would pick up and stabilize, just like Hayami wants.
Targeting domestic demand
Other East Asian countries have to do their bit as well. In emerging from crisis two years ago, they grew much too dependent on the U.S. tech investment boom. The bust is not as bad for them as the crisis four years ago. This time they have current account surpluses and healthier foreign-exchange reserves.
But South Korea, Singapore, Taiwan, Thailand, Malaysia and Indonesia wouldn't be slashing 2001 GDP forecasts by nearly as much as they have if they'd followed through on banking reforms, debt reduction, deregulation and corporate restructuring. These policies can still expand domestic demand and lessen reliance on exports. Unfortunately, they require sacrifices that are tougher to make when the economic chips are already down.
If the U.S. economy improves in the fourth quarter, East Asia's suffering will ease. Fortunately for the Argentine and Brazilian economies, they rely far less on exports to the U.S. market for growth. But exports still count when your current-account deficit is 3-4 percent of GDP and you can't kick the habit of mainlining foreign capital.
Brazil's foreign debt amounts to more than four times the value of exports. Argentina, whose debt accounts for at least a fifth of all tradable emerging-market bonds, tops Brazil with foreign debt of more than 400 percent of exports. Higher interest rates increase these debt burdens and, in Brazil's case, so does a tumbling currency.
Argentina's economy is headed for more trouble whatever becomes of its currency peg. Three years of recession have imposed little discipline on public finances. Economic growth is likely to remain elusive with interest rates on the rise.
Economy Minister Cavallo wants to convince creditors that past addictions can be cured. He has called for eliminating the country's fiscal deficit. Spending cuts will either deepen the slowdown or, perhaps more likely, be opposed by provincial governors from rival parties as the nation gears up for congressional elections in October.
Argentina is shaping up to be a hemispheric drag for the U.S., a mounting risk for foreign creditors and a fright for investors everywhere who are worried enough already that a global recession is just around the corner. Leading central bankers and finance ministers need to get their policy act in alignment, and swiftly.
Bill Clifford is Asia bureau chief of CBS.MarketWatch.com.
-- (M@rket.trends), July 13, 2001
http://www.smh.com.au/news/0107/14/biztech/biztech1.htmlDebt crisis fears roil world markets
A wave of funds rushing to safe-haven markets sent share and bond markets roaring in the US.
By Brian Hale in New York
Escalating fears of a global financial crisis sparked turmoil across world markets yesterday.
Worries that Japan is at risk of collapse compounded fears about Latin America and emerging markets because of the Argentine debt crisis.
The rapidly growing concerns roiled equity, bond and currency markets as a wave of funds rushing to safe-haven markets sent share and bond markets roaring in the US with huge gains for the most-watched indicators.
The Dow Jones index soared 237 points (2.3 per cent) while Nasdaq's Composite index rocketed 103 points (5.3 per cent) as "flight-to- quality" buyers accentuated buying by investors who had sold the market short ahead of the corporate earnings season.
US dollar-denominated and US Government-backed debt prices surged too as investors fled from actual or feared global financial trouble even though bond prices usually would have fallen with such a furious rally under way in equities.
The price rises cut the yield on two-year Treasury notes to 3.99 per cent while the five-year note yield dipped to 4.73 per cent, the 10- year note yield dropped to 5.23 per cent and the 30-year bond yield fell to 5.63 per cent.
The Australian dollar was stable on northern hemisphere markets, spending much of the day around US50.40c after an early fall to just above US50c in London. Traders were wary of more intervention by the Reserve Bank and cautious about the currency's proximity to the psychologically important US50c level.
Concerns about Argentina intensified earlier in the week when the Government, forced to sell bonds at yield levels not seen since 1996, ignited further concern that the nation would devalue or, more likely, default on $US128 billion ($254 billion) in outstanding debt.
Argentina's MerVal sharemarket index tumbled 13.2 per cent yesterday. The benchmark Argentine 2008 US dollar-denominated bond fell as much as 23 per cent at one point in the wake of ratings agency Fitch's downgrade of Argentina's sovereign ratings. Fitch warned that public debt dynamics imperilled the Argentine Government's capacity to meet its debt obligations.
Brazil's real yesterday fell to its lowest level against the US dollar since its introduction in 1994 and extended its dip since January to 30 per cent in the wake of worries from Argentina. On the Brazilian sharemarket, the benchmark Bovespa index fell another 1 per cent yesterday.
Mexico also began to be affected yesterday after its peso fell 1.5 per cent even though previous economic reforms had seemed to guarantee immunity.
Elsewhere, the focus was on Turkey's crushing debt problem, further pounding its currency, and Poland's zloty fell to a seven-month low.
Concern also grew about Asia. Confirmation that Singapore fell into recession in the second-quarter increased worries about its neighbours. The US slowdown and technology collapse threatens to drag down East Asian economies that have been exporting their way to health.
Some experts expect far less contagion than during the previous global financial crisis in 1998, when the US Federal Reserve feared a systemic collapse in the US financial system.
"The contagion into other markets should be more muted than in 1998 because there is much less leverage in the system," said Mr Peter Petas, an analyst with CreditSights.
"What we'll likely see is more risk aversion from fund managers and also some selling to turn paper profits into realised gains."
Other experts were not so sanguine. The Bank Credit Analyst research group warned that "the rotational currency weakness in the emerging Asian region is spreading after the Singapore dollar's fall to an 11- year low against the US dollar" and suggested that "this shift in competitiveness will act like a domino and pressure the Malaysian authorities to devalue the ringgit peg".
"While all eyes are on Argentina and the contagion from its debt crisis, Japan represents the biggest cyclical threat to the world economy. Nominal GDP has been contracting since 1997, even before the downturn in real GDP growth hit," BCA said.
"The risk is that the slow decay in Japan will escalate, triggering an economic implosion and deflationary shock waves round the globe".
As the flight to the US dollar and US securities gathered pace, the International Monetary Fund's latest analysis of global capital flows highlighted the risks posed by reliance on a single major economy.
-- (M@rket.trends), July 14, 2001.
http://home.kyodo.co.jp/all/firstp.jsp?news=stocks&an=#20010714093G-7 to step up coordinated action to spur global economy
TOKYO, July 14 Kyodo - The leaders of the Group of Seven (G-7) industrial economies will issue a joint statement in Genoa, Italy, next week that calls for enhanced coordinated action to dispel concerns about a looming global recession against the backdrop of the slowing U.S. economy, G-7 officials said Saturday.
-- (M@rket.trends), July 14, 2001.
http://www.miami.com/herald/content/business/digdocs/092230.htmPublished Saturday, July 14, 2001
Global troubles test U.S. economy
By KEN MORITSUGU, MICHAEL ZIELENZIGER AND KEVIN G. HALL
Herald World Staff
Just as the U.S. economy seems poised to bounce back, a Latin American financial crisis and a deepening global economic slowdown raise new risks that could substantially slow and even derail any recovery.
While most analysts believe that the United States will weather the world's economic woes, the weakened U.S. economy is more vulnerable than usual to an overseas crisis.
``I'm basically optimistic, but I don't like what I see in the world outside of us,'' said Martin Baily, who was chairman of President Clinton's Council of Economic Advisors.
Argentina is close to defaulting on its $128 billion in foreign debt. Its problems, along with a major electricity shortage, have triggered a currency crisis in neighboring Brazil, Latin America's largest economy.
Japan, the world's second-largest economy after the United States, appears to be stumbling back into recession, and the rest of Asia has been battered by a plunge in high-tech exports to the United States.
Europe, though somewhat healthier, has slumped more than anticipated, led by a sharp slowdown in Germany.
``There's no economy I can think of that's doing better today than a year ago,'' said Mark Zandi, chief economist at Economy.com, a consulting firm in West Chester, Pa. ``It's just a question of how badly economies are performing.''
With economies everywhere slowing, the downturn is self-reinforcing. The U.S. slowdown, for example, reduces demand in the United States for exports from other countries, causing slower growth overseas. Those countries, in turn, are less able to buy goods from the United States, causing the United States to slow further.
The dangers to the U.S. economy are twofold.
One is that exports, which account for 11 percent of the U.S. economy, have dropped since last fall, slumping to $86.9 billion in April, the lowest level since March 2000.
Zandi estimates that the decline in exports trimmed overall economic growth from a 1.6 percent annual rate to 1.2 percent in the six-month period from October through March of this year.
The other potentially larger impact is through the stock market. Slowing overseas economies erode profits for U.S. companies that operate internationally. Lower profits depress stock prices, and a further drop in stocks could drag the economy with it.
In Brazil, for example, U.S. automakers, computer manufacturers and numerous other U.S. multinationals have built factories in the past decade hoping to grow as the country of 170 million grows.
These factors are less weighty than domestic considerations, such as how much American consumers buy and whether U.S. firms invest in new factories and equipment.
But the U.S. economy is in much worse shape than at the time of the last major global financial crisis in 1997-98, when many Asian economies crashed and then Russia defaulted on its foreign debt.
``At this point, any straw could break the camel's back,'' said David Wyss, chief economist at Standard & Poor's, the bond-rating agency in New York.
At the least, a global slowdown means the U.S. recovery will be delayed and more gradual than otherwise.
``It's a harder hill to climb for the U.S.,'' said Bruce Kasman, head of U.S. economic forecasting at J.P. Morgan.
Asia climbed out of financial crisis in 1998 on a strong surge of high-tech exports to the United States, but is now hit hard by the rapid slowdown in America's high-tech spending.
``Asian economic growth is screeching to a standstill,'' Stephen Roach, economist for Morgan Stanley Dean Witter, warned in a report issued last week.
Japan contributes to the gloom on its own. Consumers there are refusing to spend, the currency is weakening, and its popular new Prime Minister Junichiro Koizumi is promising more pain before gain, suggesting a weak economy for an extended period.
Morgan Stanley has cut its estimate for growth in Asia, outside of Japan, to 5.4 percent for 2001 from its previous estimate of 6.1 percent.
Argentine President Fernando de la Rua, aware that his nation's problems could bring down the region and affect emerging markets across the globe, met Friday with political leaders to forge a consensus for tough budget-slashing measures.
``The key question on everybody's mind is have the politicians in Argentina become scared enough'' to follow through on needed reforms, said Jorge Mariscal, director of the emerging market research division at Goldman, Sachs & Co. in New York.
-- (M@rket.trends), July 14, 2001.